Three learnings from the EU’s Foreign Investment Control Report

The European Commission has published its Second Annual Report on the screening of foreign direct investments into the EU. The report provides an overview of the current status of foreign investment control, and is accompanied by a (data heavy) Staff Working Document. Here are three learnings from both documents.

Just as a reminder: In the EU, foreign investment control is handled by the Member States, and the European Commission does not have the power to review cases. But the EU has its own “Foreign Direct Investment Screening Regulation”, which basically sets out a cooperation mechanism between Member States and the European Commission regarding foreign investment control reviews.

The Commission’s Annual Report covers a range of topics, from the origin of investments to the duration of responses to information requests. Three key learnings from the report are:

  • Importance of foreign investment control: There remain only two out of 27 Member States that do not have a foreign investment control regime or are planning to introduce one.
  • Most investments come from “western” countries: About half of foreign investment cases concern acquirers from the US and the UK.
  • Concerns are not uncommon: More than 25% of cases that were formally screened ended with remedies, withdrawal by the parties or prohibitions.

Importance of foreign investment control

No news on this front: If anything, foreign investment control will only become more important. Even though the value of foreign investment in the EU dropped by 31% in 2021 compared to the previous year, the number of acquisitions increased by 32% (suggesting a smaller average transaction value). Germany was the top destination for foreign acquisitions in 2021, followed by Spain, France and the Netherlands.

Bulgaria and Cyprus remain the only EU Member States left that do not have a foreign investment control regime or are planning to introduce one. The most important upcoming change on national level might be the introduction of a new general foreign investment control regime in the Netherlands, which is expected to enter into force next year. And the outcome of the election in Italy might apparently also have an effect on how foreign investment reviews are conducted there.

Most investments come from “western” countries

Investors from the US and the UK represent about half of foreign investment into the EU and about half of the cases notified to the European Commission as part of the cooperation mechanism. Investors from China follow in third place, with about 7% of notified cases.

Some might conclude that this indicates that foreign investment control regimes are too broad and capture investments they are not meant to capture. While that might be true for a number of transactions, this does not necessarily hinge on the origin of the investor: From practical experience, regulators can also be critical towards investors from “western” countries and demand remedies, even though most prohibitions in the EU these days seem to concern investors from China and Russia.

Concerns are not uncommon

Of all foreign investment review cases reported to the European Commission (1,563 overall), approx. 29% were formally screened, meaning that the broad majority of cases did not have to undergo enhanced scrutiny.

And of those cases that were formally screened, 73% were cleared unconditionally. Investors could consider this good news. However, the number also means that over a quarter of formally screened cases were only cleared subject to remedies (23%), were withdrawn by the parties (3%) or were even prohibited (1%). So, investors finding their transaction in a formal screening procedure (what exactly that is varies between Member States) should at least consider the risk of having to offer remedies.

Outlook – and the elephant in the room

It remains to be seen what the uncertainty the world currently faces will lead to in terms of foreign investment. There seems to a strong protectionist tendency and an objective to become less dependent on other countries, as well as more self-sufficient. At the same time, foreign investment might be critical to achieve these goals, and initiatives like the European Chips Act are even meant to encourage such investment (more on that here).

Interestingly, neither the Second Annual Report nor the accompanying press release seem to mention what could have the largest effect on foreign investment in the EU: The Foreign Subsidies Regulation. We have blogged about it previously, so I will spare you the details, but in essence the regulation will introduce an additional review regime for transactions of a certain size that involve a “foreign financial contribution” (admittedly a very broad term) above a certain threshold.

Not all cases will have to face foreign investment control and foreign subsidies review, but the interplay between both might ultimately become one of the most important factors in transactions involving foreign investors.

[Photo by Porapak Apichodilok]