New EU framework for screening direct foreign investments within the Union territory

On 10 April 2019, Regulation (EU) 2019/452 of the European Parliament and of the Council for the screening of foreign investments into the Union entered into effect. The Regulation creates a new legal framework to help Member States defend their strategic interests and safeguard security and public order in relation to direct foreign investments within the Union territory.

Following the trend in countries such as the United States (which recently signed into law the FIRRMA act, on 13 August 2018, strengthening the CFIUS (Committee on Foreign Investment in the US) prerogatives), China, Australia, Japan, India, and Canada, the European Parliament and the Council have approved, in record time (less than 18 months), a Regulation that seeks to create a new legal framework for cooperation among Member States, helping them to screen direct foreign investments made in the Union's strategic sectors that could affect security or public order within the European territory.

In general terms, the most significant aspects of the Regulation are:

• the creation of a framework for Member States to screen, on the grounds of security or public order, direct foreign investments within the Union, as well as a cooperation mechanism among Member States, and also between the Commission and the Member States; where Member States keep the last word whether a specific investment operation should be allowed or amended in their territory;
• certain requirements are set out for those Member States wishing to maintain or adopt a screening mechanism at national level:
  • short business-friendly screening deadlines will have to be implemented;
  • foreign investors concerned shall have the possibility to seek recourse against screening decisions of the national authorities;
  • rules and proceedings related to screening mechanisms must be transparent and not discriminate between third countries; and
  • confidential information made available to the Member State undertaking the screening shall be protected in order to protect commercially-sensitive information of the concerned parties;
• a cooperation mechanism is created allowing the exchange of information between the Commission and the different Member States, as well as the communication of any concerns arising from specific investments. The new Regulation also encourages international cooperation in investment screening related matters;
• the Commission is allowed to issue an opinion when an investment is likely to affect security or public order in more than one Member State, or if said investment is likely to affect projects or programs of Union interest;
• a series of factors are listed below that should be taken into account by Member States or the Commission in order to determine if a direct foreign investment may affect the Union on the grounds of security or public order:
  • possible effects of an investment on critical infrastructures and technologies as well as dual use items, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies, along with nanotechnologies and biotechnologies; supply of crucial inputs and food security; access to sensitive information, such as personal data, and the ability of controlling said data; media freedom and diversity; and
  • shareholding structure of foreign investors, whether they are directly or indirectly controlled by a foreign government.

As of 10 April 2019, Member States will have to notify the Commission of their national mechanisms to screen investments. Currently, 14 Member States have some type of screening measures in place, Spain among them.

Until 11 October 2020, it is expected that both the Commission and the Member States will implement a set of measures in order to ensure that the Union will be able to apply the Regulation (e.g. appointing contact officials in each State and in the Commission in order to exchange information, or creating secure channels to exchange information about direct foreign investment transactions).