The European Commission has today published new draft legislation that would, if adopted, empower both Member State governments and the Commission to screen and block or unwind foreign investments in the European Union (EU) on the grounds of “security or public order”. Details of the proposal were outlined by Commission President Juncker in his State of the Union speech.
- Legal basis
The legal basis is Article 207(2) of the Treaty on the Functioning of the European Union (TFEU). The proposed regulation would form part of the Common Commercial Policy. Note that draft EU legislation introduced under the Common Commercial Policy is subject to review under the “ordinary legislative procedure” (which means no Member State vetoes).
- Investments in scope
The proposed regulation would apply to all investments of any kind made or proposed by a “third country” (i.e. non-EU) natural person or undertaking intended to establish or maintain “lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available to carry on an economic activity in a Member State”. Foreign investments in non-EU undertakings may also be subject to screening where the investment facilitates economic activity in the EU.
- Member State and Commission competences
Most provisions of the proposed regulation concern a common mechanism for each Member State government to screen foreign investments concerning persons established in that Member State. However, the proposed regulation would empower the Commission to screen foreign investments in any Member State “that are likely to affect projects or programmes of Union interest”. Such projects and programmes are broadly defined in the proposed regulation. An indicative list is annexed to the proposal and includes Horizon 2020, the Trans-European Networks for Energy (TEN-E), the Trans-European Networks for Transport (TEN-T) and European GNSS programmes (aka “Galileo”, the global navigation satellite system).
- Grounds of security or public order
Grounds of security and public order are defined expansively in the proposed regulation as the potential effects of the foreign investment on:
- “critical infrastructure” including energy, transport, communications, data storage, space or financial infrastructure, as well as sensitive facilities;
- “critical technologies” including artificial intelligence, robotics, semiconductors, dual-use technologies, cybersecurity, space or nuclear technology;
- “the security of supply of critical inputs” and
- “access to sensitive information or the ability to control sensitive information”.
- Chinese state-owned enterprises
The proposed regulation states that in considering whether a foreign investment is likely to affect security or public order, Member States and the Commission may take into account whether the foreign investor is “controlled by the government of a third country, including through significant funding”. This is a thinly-veiled reference to investments by Chinese state-owned enterprises. The Commission has previously raised concerns about Chinese state-owned enterprises investing in hi-tech and strategically-important sectors in Europe. The Commission is also of the view that the EU’s openness to Chinese investment is not reciprocated in China, a point which was emphasised by President Juncker without expressly referring to China.
- “Cooperation mechanism”
The proposed regulation includes provisions that would require Member State governments to report screening of foreign investments under the new mechanism to the Commission and the other Member States. The legislation would also permit a Member State government to formally raise concerns regarding a foreign investment in another Member State where it considers that foreign investment to affect security or public order in its jurisdiction. The proposed regulation would also permit the Commission, on its own initiative, to formally raise concerns where it considers a foreign investment to affect security or public order in one or more Member States. Such concerns do not constitute a Commission objection or veto but would, in practice, be difficult for a Member State to ignore.
- Merger Regulation
The proposed regulation is stated to apply without prejudice to Article 21(4) of Council Regulation (EU) No 139/2004 (“Merger Regulation”), which permits Member States to protect their “legitimate interests” in the case of a merger or acquisition reviewed by the Commission. The proposed regulation states that where the scope of the Merger Regulation and the proposed regulation overlap, the legitimate interests cited in the Merger Regulation (public security, plurality of the media and prudential rules) and the provisions of the proposed regulation should be applied in a consistent manner and in line with the general principles and other provisions of Union law.
- Big 3 political support
The French, German and Italian governments have openly called for and pushed the Commission to adopt the proposed regulation. Amongst the EU’s “Big 3” Member States, President Macron of France has been most vocal in his support for tougher reviews of foreign investments and a defined competence for the Commission. Member State governments including those of the Netherlands, Sweden, Spain and Portugal have previously expressed opposition to President Macron’s proposals. However, this opposition has mostly concerned a proposed Commission veto. The proposed regulation is carefully drafted to play up the powers of Member State governments and play down the powers of the Commission, thereby softening prospective Member State opposition in Council.
- Outlook for legislative review
The proposed regulation needs work but should be adopted by the EU’s “co-legislators” – the Council of the European Union (comprising the 28 Member State governments) and the European Parliament. In Council, the proposed regulation will be advanced firstly by the current Estonian Presidency of the Council and, from 1 January 2018, the incoming Bulgarian Presidency. Of note, neither of these Member States currently has a national screening mechanism and the Bulgarian government has come under heavy fire previously from the Commission for its perceived inattentiveness to Russian investment in strategically-sensitive sectors of the Bulgarian economy. The proposed regulation will be scrutinised by the European Parliament’s International Trade Committee. Of note, eight members of this committee were amongst 10 senior European People’s Party legislators that formally called on the Commission to bring forward legislation on the screening of foreign investments in strategic sectors in March of this year.
- Brexit and UK persons as foreign investors
The Common Commercial Policy applies to EU Member States only. Whatever the transitional arrangements that may be agreed between the EU and the UK government, UK persons would be considered “foreign investors” under the proposed regulation from 30 March 2019. If the proposed regulation is adopted, any direct investment made or planned by UK persons in or with an EU person may be subject to review on security or public order grounds.