On 24 January 2024, the European Commission published its proposal for a new regulation on the screening of Foreign Direct Investments (FDI). More than a year later, the International Trade Committee of the European Parliament has recently adopted these revised rules (see press release). As the full Parliament prepares to cast its vote on the proposal in an upcoming plenary session, the new EU FDI Screening Regulation is one big step closer to implementation. I would like to take this as an opportunity to examine the multiple layers of this legislative development, including the legal, the political and the practical implications.
The evolution of the European FDI screening framework is not merely an administrative update; it also marks a shift in how the EU balances open market dynamics with the protection of its interests in times of changes in the geopolitical environment, driven by events such as the COVID-19 pandemic and Russia’s war against Ukraine. The updated rules aim to reinforce the guard against potential security risks and protect public order while simultaneously streamlining a Member State-based system.
A new regulatory framework
The current FDI Screening Regulation (EU Regulation 2019/452) came into full effect in October 2020. The new proposal tries to consolidate certain rules that differentiate between Member States:
Firstly, every Member State must establish a screening mechanism. As it stands, Croatia (currently in preparation), Cyprus and Greece do not yet have one.
Secondly, the proposal also mandates the harmonization of (existing) national screening rules. Foreign investments in certain sensitive sectors relevant to the EU’s security and public order – such as semiconductors, artificial intelligence, critical medicines, dual-use and military items – must be subject to national foreign investment control review. Moreover, if the target company is part of or participates in “projects and programmes of Union interest,” a mandatory screening is also required.
Thirdly, the new regulation proposes harmonisation of national rules, including mandatory criteria which Member States and the Commission need to use to determine whether an investment is likely to negatively affect security or public order. These criteria include the effects of the investment on:
- critical infrastructure,
- critical technologies,
- the supply of critical inputs,
- the protection of sensitive information, or
- the freedom and pluralism of the media.
On top of that, Member States and the Commission must also consider risks related to the foreign investor.
Extended scope to intra-EU investments
One other significant change is the extended scope of the regulation. Previously, the scope of the regulation was limited to direct investments from non-EU investors. Under the revised regulation, intra-EU transactions executed through foreign-controlled subsidiaries will also trigger screening. This means that if an EU-based company – controlled by a non-EU investor – acquires a significant stake in another EU entity active in a covered sector, the deal will come under regulatory review. This measure strategically closes loopholes that potentially allowed investors to bypass national controls simply by routing their investments through established EU subsidiaries. It reflects the EU’s commitment to safeguarding its internal market by ensuring that all investments, regardless of their apparent origin, align with the Union’s security and public order objectives.
Implications for M&A transactions
For M&A deals, the revised regulation could mean that deals in certain sectors will have to undergo more review procedures in more Member States. In certain Member States (namely those in which this is not already mandatory today), the regulation will also lead to acquirers having to provide in-depth disclosures regarding ownership structures. Consequently, the new screening framework could potentially lead to longer transaction timelines and necessitate even earlier engagement with legal advisors.
Outlook and next steps
With a 15-month transition period following its entry into force, the regulation will not be fully operational until – at least – the end of 2026. Ultimately, the pace and final scope of the regulatory overhaul will be determined by the negotiations with the Member States following the Parliament’s vote.
Photo by Henri Buenen on Unsplash
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