The European Commission urges member states to tighten their foreign direct investment rules

There is an increased fear that the economic consequences of the COVID-19 outbreak are making EU countries more vulnerable to foreign investments in critical companies and assets. Screening mechanisms for foreign investments were on the EU’s agenda already before the COVID-19 outbreak, but with the stock markets plummeting, there seems to be a new sense of urgency to ensure that adequate mechanisms are in place. While more comprehensive screening mechanisms increase protection for member states’ national interests, they also subject a possibly wide array of investments to screening and are likely to lead to more foreign investments being refused.

Last week, the Commission issued guidelines to ensure a strong, EU-wide approach to foreign investment screening during what is referred to as a “time of public health crisis and related economic vulnerability“. In its guidelines, the Commission calls upon EU member states that already have existing screening mechanisms in place to make full use of the tools available to them under EU and national law, to prevent investments from non-EU countries that could undermine Europe’s security or public order.

The Commission also calls on the remaining member states to set up fully-fledged screening mechanisms and, in the meantime, to consider all legally available options to address potential cases where foreign investments in a particular business, infrastructure or technology would create a risk to security or public order in the EU. The Commission also calls on the member states to actively seek advice and coordinate amongst themselves.

The Commission focuses especially on healthcare-related industries in its guidelines, highlighting companies manufacturing medical or protective equipment and research establishments, whilst also emphasizing that the increased risks by no means are limited to healthcare-related industries. Similarly, the member states are urged to be vigilant regardless of the size of the potential target companies, with the Commission highlighting that also SMEs and small start-ups may be of strategic importance.

Generally speaking, in determining whether a foreign direct investment may affect security or public order, member states and the Commission may “consider all relevant factors, including the effects on critical infrastructure, technologies (including key enabling technologies) and inputs which are essential for security or the maintenance of public order, the disruption, failure, loss or destruction of which would have a significant impact in a member state or in the Union” (Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, recital 13).

However, as will be discussed below, the Commission itself does not have powers to intervene in transactions and cannot force member states to do so. As such, whether or not a transaction is subject to any screening mechanisms will be decided based on each member state’s national legislation.

It will also remain the sole responsibility of the member state(s) subjected to the foreign direct investment to decide whether or not to intervene in a given transaction. However, given that the general trend in recent years has been for member states to tighten their screening regimes, it seems likely that more member states will adopt a stricter approach.

Member states are responsible for foreign investment screening also under the new FDI Screening Regulation

Foreign investments and the potential concerns they entail were on the EU’s agenda already before the COVID-19 outbreak. A new EU regulation (the so-called FDI Screening Regulation) establishing a framework for the screening of foreign direct investments, officially entered into force in April 2019 and will be fully applied as of 11 October 2020.

The regulation neither gives the Commission powers to intervene in transactions, nor does it oblige member states to introduce national screening mechanisms. Instead, the purpose of the regulation is to create a cooperation mechanism whereby member states and the Commission will be able to exchange information and raise concerns related to specific investments, including EU-level concerns rather than concerns pertaining to a specific member state.

The guidelines issued by the Commission last week should be read against this background. In practice, the Commission is urging member states to take measures similar to those envisaged in the FDI Screening Regulation already before the October deadline. Although the regulation leaves it up to each member state to decide on their own regimes, it is clear that the Commission wishes all member states to introduce national screening mechanisms rapidly and to actively exchange information already before the regulation enters into full effect.

Response from member states

Currently, only approximately half of the EU member states have screening mechanisms in place and the extent of these regimes vary from country to country. There are differences e.g. in the sectors that are subject to review (with some regimes having a larger scope) and how foreign investors are defined (with some screening mechanisms only applicable to investments made by investors domiciled outside the EU/EFTA, whilst others may also apply to intra-EU investments in certain sectors).

Several member states were already in the process of reforming their existing screening mechanisms prior to the COVID-19 outbreak. For example, Germany has tightened its rules through several legislative amendments during the last three years, including a further draft bill published only in January 2020. Similarly, both France and Italy have extended the scope of their screening mechanisms during the past year.

There have also been developments directly related to the COVID-19 outbreak. On 17 March 2020, the Spanish Government adopted various measures designed to deal with the economic and social impact of the COVID-19 outbreak. These measures included a new foreign investment screening mechanism that entered into force already on the next day. Foreign investors, i.e. investors resident outside the EU/EFTA, must now obtain prior authorization for certain investments in e.g. critical infrastructure, critical technology and dual-use products. It will be interesting to see whether similar initiatives will follow in other member states, especially given the Commission’s recent guidelines.

Screening mechanisms in Finland and Sweden

Finland’s current act on foreign investment screening (the Act on the Monitoring of Foreign Corporate Acquisitions in Finland) entered into force already in 2012. The Finnish regime allows the Finnish authorities to monitor and, if key national interests so require, to restrict transfer of influence to foreign owners. Depending on the type of the target company, a foreign owner is essentially defined as a natural person or a legal entity domiciled outside the EU/EFTA or, in case the target company is active in the defense sector (i.e. the company produces materials or provides services related to national defense, or produces items on the EU Common Military List or dual-use items), even outside of Finland. Key national interests mainly refer to national defense, security of supply and functions fundamental to society, such as transport infrastructure, water supply, energy production and health care services. It should be noted that the Act is currently under review.

Sweden, on the other hand, currently does not have a screening mechanism in place but is in the process of potentially introducing one. A working group appointed by the Swedish government has been tasked with assessing the need for and potential design of a foreign investment screening regime. The working group is due to publish its final report by 2 November 2021 at the latest. Given the recent developments and the clear message in the guidelines published by the Commission last week, the Government may speed up this process, or may consider interim measures in order to protect certain key assets.

Main contacts

Kristian Hugmark 
Partner
Stockholm
Toni Siimes 
Partner
Helsinki
Juhani Matinlassi 
Senior Associate
Helsinki
Mira Eklund 
Associate
Helsinki