As of 11 October 2020, the FDI Screening Regulation will apply to foreign direct investments coming from third countries into the EU. Due to the current COVID-19 pandemic, the European Commission  has recently published a Communication giving “Guidance” to Member States concerning the ‘protection of Europe’s strategic assets’, ahead of the application of the Regulation. The Commission’s Guidelines call for EU Member States to set up or increase their use of FDI screening mechanisms and recalls under which circumstances the free movement of capital may be restricted. In this blog we will discuss the Guidelines and the response of Member States to these European initiatives.

The power of Member States to screen FDI exists on the basis of Art. 65(1)(b) TFEU, allowing restrictions on the free movement of capital between Member States and third countries in the interest of public policy or security. Notwithstanding this possibility, some Member States have called for coordinated action on the EU level, out of concern for strategic investments in ‘vital’ sectors such as energy, ICT/Telecom and (drinking) water by investors from third countries (mainly China). This has resulted in the adoption of the FDI Screening Regulation, which has entered into force but will not be applicable until 11 October 2020. It provides a cooperation mechanism between Member States and the Commission, without imposing any obligation to screen FDI. Under the Regulation, the Commission can issue non-binding opinions, and Member States can provide comments if an investment is “likely to affect security or public order in more than one Member State”. The recipient Member State retains the exclusive competence to screen FDI and to block, reverse or curtail investments on grounds of public security, in accordance with article 4 TEU.

National screening mechanisms have been established by fourteen Member States, including France, Germany, Italy, and Spain. The Netherlands has imposed several sectoral restrictions on FDI, while a legislative proposal containing a general FDI screening mechanism is expected by the end of 2020.

The Communication

Due to the current COVID-19 crisis, the Commission has issued guidelines to ensure a strong EU-wide approach to FDI screening. According to the Commission, the current crisis may increase the “risk of attempts to acquire healthcare capacities (for example for the productions of medical or protective equipment) or related industries such as research establishments (for instance developing vaccines).” This risk is exemplified by the recent controversy surrounding an (alleged) US bid for the exclusive rights to a COVID-19 vaccine developed by German-based pharmaceutical company CureVac AG. In response, the Commission has approved a financial support package of € 80 million to CureVac to promote the development and production of a vaccine in Europe. In its Communication, the Commission does not focus exclusively on healthcare and related sectors, since other vital sectors could also be at risk of the “predatory buying” of strategic assets due to the volatility of European stock markets.

The Commission calls on Member States to make full use of their existing screening mechanisms, taking into account the impact of investments on critical infrastructures and supplies, not only on the national level but also on the European level. Member States who have not established a national screening mechanism are called upon to do so. The recommendations are not formally binding, since Member States have exclusive competence in matters of national security.

National Measures

Several Member States have already announced adjustments of their screening mechanisms in response to the pandemic and the resulting economic turmoil. For example:

• The French government has announced that it will consider nationalisations if necessary, while its FDI screening regime has been expanded;
• The Italian government has amended its FDI screening regime by broadening the scope of its information requirements and extending the timeframe for screening procedures;
• The Hungarian government has sent Defence Force management groups to 140 strategic enterprises to coordinate operations;
• The Spanish government has suspended the liberalisation of FDI while requiring prior authorisation for extra-EU investments in several vital sectors;
• The Polish government has announced measures to prevent devalued Polish companies from being taken over by foreign private equity funds.

In the Netherlands, an amendment to the Dutch Telecom Act is pending. The proposal, which has received wide support in Dutch Parliament, would allow the Dutch government to block or reverse investments in the telecommunications sector. In addition, there has been a call by both government and opposition parties to protect Dutch companies in strategic sectors.

It is hard to predict how individual Member States will react to the current crisis and the Commission’s Communications. Prospective investors should therefore closely monitor developments at the European and national level.

For more information please contact Johannes Fahner or Lex Gasseling.