Recent Developments in EU Foreign Investment Screening
April 19, 2021
By Sarah Erickson
The evolution of the European Union’s foreign direct investment (FDI) regulatory regime is a meaningful backdrop on the stage of U.S.-China technological competition. While the EU has historically maintained an open mindset towards Chinese investors, the last year has provoked questions about whether these attitudes will be preserved, particularly in light of concerns surrounding China’s increasing technology prominence. Reports indicate that in 2020, the Chinese tech sector’s investment in the European market was actually on par with investment in the U.S., prompting concerns over the implications of China’s increased interest. As the EU has moved towards greater restriction in response, it is worth evaluating the state of its regulatory regimes, and whether these regimes indicate gradual alignment with U.S. protections (such as CFIUS).
Restrictions were tightened with the EU’s most recent FDI regulation update, which came into full force in October 2020, following the regulatory framework laid out in March 2019. Since each member state determines their own regulations at the national level, the EU-wide regulation does not enable the EU to block FDI on behalf of its member states. Instead, it creates an apparatus for information-sharing between the Commission and member states, and raises the minimal core requirements by which member states’ screening mechanisms should operate. This formalizes the way in which the EU can issue commentary or opinions on transactions approved by member states.
At the time of the regulation update’s enactment, only about half of EU member states had a national screening mechanism in place, many of which differ greatly in practice. For those states without, COVID-19 has presented an opportune window to adopt formal FDI regulations, as member states reconsider the security implications of foreign investment in critical health infrastructure. For member states without formal screening mechanisms, many anticipate the circumstances of the pandemic will continue to catalyze the adoption of EU-aligned regulations throughout 2021. Both Germany and the Netherlands are incredibly attractive destinations for foreign investors, particularly in the technology sector, and offer insightful glimpses into the operational diversity of FDI screening across the EU.
In an effort to realign with the recent EU update, Germany promptly expanded their FDI regulatory regime in October 2020, and is currently considering a new amendment that would broaden the number of covered sectors. Germany organizes all FDI screening into two categories: sector-specific and cross-sectoral. Sector-specific filings are required for transactions involving defense or IT security, whereas cross-sectoral filings are required for transactions involving companies in critical infrastructure. Critical infrastructure includes several sectors: health, energy, information technology (IT), telecommunications, transportation, health, water and food supply, finance, and insurance.
In either case, the threshold which triggers a mandatory notification is a non-EU foreign investor agreeing to purchase 10% or more stake in the relevant company, at which point the investor must notify the German Ministry for Economic Affairs and Energy (BMWi). Following the notification, the BMWi has a two-month window to initiate an investigation, and if no investigation is triggered, the transaction is considered to be cleared. After this point, the BMWi has no way to intervene or block the transaction. If an investigation is triggered, the BMWi has four months to discern whether the relevant transaction is “likely to affect” public order or security of Germany or another EU member state.
If passed, a new amendment would further expand the number of investments that would be required to undergo review. Most notably, the amendment would broaden the scope of what is included in “critical infrastructure,” adding 16 sensitive activities to the current list of 11 subject to cross-sectoral examination. These additional 16 activities are focused on capturing firms working on the development of critical technologies like AI, quantum, autonomous vehicles, semiconductors, and aerospace. Further, the amendment would broaden defense-related sector-specific review to include investments in “companies that develop, manufacture, or are in possession of goods that are contained in the Export List or fall into the scope of classified IP rights.”
While Germany has actively worked to match its FDI regime with the guidance of the EU, the Netherlands has been hesitant to enact FDI regulations. The Netherlands is a popular destination for foreign investment, receiving an inflow of $84 billion, making it the third largest recipient behind the U.S. and China in 2019. Its FDI reputation has historically been associated with Dutch advocacy for free and open trade. Yet, in the wake of COVID-19 and EU protectionist trends, the Netherlands is considering two major pieces of legislation which would create a formal FDI screening mechanism, with a specific focus on the technology sector.
The Economy and National Security Screening Act is expected to enter into full force this summer but will retroactively require the review of investments made after June 2, 2020. This legislation will require filings for transactions which are (a) considered to be of interest for the continuity and resilience of vital processes or (b) in the field of sensitive technologies. Unlike the German system, there is no stake threshold for the involvement of the foreign investor other than changes of “control,” which is understood as the capacity to exercise decisive influence over business activities, or significant acquisitions. As this legislation is meant to be supplemented by sector-specific regulation, it is possible that future legislation will clarify a specific control threshold for sensitive sectors. Once the filing is submitted to the Minister of Economic Affairs, the Minister has eight weeks to provide a national security assessment, which could be extended to six months if further review is needed. Until clearance is given, the transaction is not valid. If the Minister finds that the transaction poses a threat to national security, the Minister has the right to block the transaction entirely. Notably, the Minister is also permitted to reevaluate the transaction even after it is cleared in the case that new information arises or circumstances substantially change.
This broader national security review should be considered in tandem with existing legislation screening the telecommunications sector, the only formal sector-specific screening to be rolled out so far. Since October 2020, both foreign and domestic investments in the telecom industry have been subject to pre-closing review by the Minister. The threshold for notification is based on whether the investor has “predominant control” of a telecommunications entity that would “result in a relevant influence in the telecommunications sector.” In this case, “predominant control” is defined as 30% of voting rights, the capacity to dismiss half of board members, or the capacity to exercise control in reserved matters. Similar to the broader screening act, the Minister has eight weeks to determine whether the transaction presents national security risk, barring the transaction if necessary. It is reported that this year, similar legislation affecting the defense industry will be debated and considered.
Across the EU, member states are taking steps towards greater scrutiny and restriction of FDI. By expanding the list of sectors categorized as “critical infrastructure” and raising minimum standards for the length and rigor of the screening process, the EU is collectively signaling their new multi-faceted security standard to the rest of the international community. Although its regulatory posture is still much less restrictive than that of the United States under CFIUS, it is remarkable how staunchly free-market countries, such as Germany and the Netherlands, have already chosen to embrace this EU initiative. This surely signals a new era for FDI as the EU continues to embrace industrial policy as a means of advancing the bloc’s collective interest. It will be vital to watch how the EU navigates these regulatory reforms moving forward; if the Commission shifts from merely setting the standard to enforcing bloc-wide uniformity for all member states, this will present major roadblocks for future Chinese acquisitions, and create an opportunity to further align the U.S.-EU partnership.
Sarah Erickson is a research intern with the Strategic Technologies Program at the Center for Strategic and International Studies in Washington, DC.
The Technology Policy Blog is produced by the Strategic Technologies Program at the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).