Explainer: What does the EU’s FDI screening regulation mean?

1 Oct 2020

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A framework for screening FDI will apply in the EU from 11 October. But what exactly does that framework entail?

In March 2019, an EU regulation to establish a framework for screening foreign direct investment (FDI) into the EU was approved. The FDI screening regulation aims to better scrutinise direct investments coming from third countries on the grounds of security or public order.

On 13 September 2020, Ireland announced that it was introducing primary legislation to provide for an Irish screening mechanism under the European FDI regulation. This new legislation will give practical effect to the FDI regulation, which will officially apply from 11 October 2020. But what does all this mean for the future of FDI?

What is the EU looking for in the screening process?

The EU regulation includes an indicative list of factors that may be taken into account when assessing a foreign direct investment. A European Commission official told Siliconrepublic.com that these include the effects on critical infrastructure, technologies and inputs.

“Effects of FDI relating to access to sensitive information, including personal data, or the ability to control such information, or the freedom and pluralism of the media may also be taken into account when assessing whether a foreign direct investment is likely to affect security or public order,” they said.

The commission may also take into account additional circumstances, such as whether a foreign investor is controlled directly or indirectly by the government of a third country, for example through funding. According to the European Commission, the assessment will be undertaken on a case-by-case basis.

While the screening of foreign direct investment is important across all industries, the commission has deemed it particularly important for the healthcare industry in the context of the Covid-19 pandemic.

In guidance released to member states earlier this year, the commission said there could be an “increased risk of attempts to acquire healthcare capacities” via foreign direct investment, such as productions of medical or protective equipment, as well as related industries such as research establishments. “Vigilance is required to ensure that any such FDI does not have a harmful impact on the EU’s capacity to cover the health needs of its citizens,” the guidance document said.

Even in the internal market, critical technology or infrastructure in one country may also be critical for its neighbours or even the EU as a whole. For example, acquisitions in strategic sectors may also have impacts on EU-funded projects, such as the Horizon 2020 research and innovation programme.

What exactly do member states have to do?

While the EU regulation does not require member states to set up their own screening mechanism at a national level, the commission has recommended that all member states do so.

If a particular investment is being screened at a national level, the host member state is obliged to notify the commission and the other member states by providing information on that transaction.

Then, the European Commission can issue an opinion if it believes the investment is likely to affect security or public order in more than one member state. Other member states may also issue a comment on the FDI if they believe it’s likely to affect security or public order.

However, even if a member state does not have a screening mechanism in place, the commission said they are still required to provide “a minimum level of information” regarding the transaction in case there are questions from the commission or other member states.

Will every foreign direct investment be screened?

Because the design and scope of national screening mechanisms will be the sole responsibility of each member state, whether or not every FDI will be screened will depend on each country’s process. However, under the cooperation mechanism set up by the European Commission, the regulation covers any foreign direct investments without exception.

This means “an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the target company in order to carry out an economic activity in a member state” could be subject to being screened or reviewed.

The cooperation is mandatory to the extent that member states have to notify the commission and other member states of any foreign direct investment in their territory that is undergoing screening and have to share certain information through confidential channels.

When an investment is not subject to screening at national level, the cooperation mechanism may be initiated within 15 months after the investment has been completed.

Does the regulation mean the EU can block certain FDI?

While the European Commission can raise concerns regarding investments, it cannot block or unwind the investment in question. The final decision on whether FDI is authorised remains with the host member state.

However, the European Commission official said that when a member state receives comments from other member states or an opinion from the commission itself, it should give them “due consideration” through measures available under national law where appropriate, in line with “its duty of sincere cooperation”.

Jenny Darmody is the editor of Silicon Republic