The European Commission’s newly proposed Industrial Accelerator Act (IAA) marks a significant add-on to the EU’s approach to regulating foreign investments. For foreign investors – and the advisers who counsel them – the proposal introduces a novel layer of mandatory conditions that must be satisfied before investments in emerging strategic sectors can proceed. These requirements would operate alongside the existing framework of EU merger control, national foreign investment control regimes, and the EU’s Foreign Subsidies Regulation (FSR), creating a more complex and demanding regulatory environment.
Strategic sectors
Last week, the European Commission published its proposal for the IAA, a regulation designed to strengthen the EU’s industrial base and safeguard economic security in strategic sectors. One of its most significant and far-reaching “innovations” is the introduction of mandatory conditions on foreign direct investments in what the Commission terms “emerging strategic sectors”.
For foreign investors already navigating the complex landscape of merger control, “traditional” foreign investment control screening, and the FSR, the IAA introduces yet another regulatory layer. Unlike the existing foreign investment control screening framework – which focuses on national security threats and in which Member States take all decisions – the IAA establishes harmonized, binding conditions which foreign investors must satisfy before their investments can proceed. This new regime would apply alongside, not in place of, existing instruments, creating a(nother) layered regulatory architecture that will require careful coordination and compliance planning.
Which investments are caught?
The IAA’s foreign investment conditions would apply to investments exceeding EUR 100 million in specified “emerging strategic sectors”, where more than 40% of global manufacturing capacity is held by the foreign country from which the foreign investor originates. The covered sectors are:
- battery technologies and their value chain for battery energy storage systems;
- pure electric vehicles, off-vehicle charging hybrid electric vehicles and fuel-cell electric vehicles, including related electrification and digitalisation components;
- solar PV technologies;
- extraction, processing and recycling of critical raw materials.
The scope is broad: Both greenfield and brownfield investments that involve the acquisition of control over an EU target company shall fall within the regulation’s remit. “Control” is deemed to exist where a foreign investor acquires 30% or more of the share capital or voting rights in an EU company – so this differs from the approach under merger control rules. To prevent circumvention through fragmented or indirect acquisitions, interests held through affiliates, ownership chains or investors acting in concert must be aggregated.
The six conditions for clearance
At the heart of the new regime is a set of six harmonized conditions, of which foreign investors must satisfy at least four. These conditions are designed to ensure that large foreign investments contribute genuine added value to the EU’s economy, rather than exploiting market access without corresponding benefits:
- Foreign investors may not acquire, hold, or exercise ownership interests exceeding 49% of the share capital, voting rights, or equivalent interests in any EU target company.
- The foreign investor must undertake the investment through a joint venture with one or more EU entities, in which the foreign investor holds no more than 49% of the share capital, voting rights, or other rights conferring control. Such joint ventures must be structured to ensure effective participation of EU partners in management, technology transfer, and capacity building.
- Foreign investors must enter into agreements licensing their intellectual property rights and know-how to the EU target company, which enable it to carry out its economic activities in the context of the investment. Critically, all intellectual property developed by the EU target prior to the investment, or without the collaboration of the foreign investor, must remain fully and exclusively under EU ownership. Intellectual property developed collaboratively, or by a joint venture, shall be jointly owned.
- The foreign investor must direct at least 1% of the gross annual revenue of the EU target annually to research and development spending within the EU.
- Further, the only mandatory condition requires that at least 50% of the workforce employed in the context of the investment, at the time of its implementation and continuously throughout its operation, shall be EU workers, across all categories including operational, technical, supervisory, and managerial positions. Respectively, EU worker is defined as a “natural person who has an employment contract or employment relationship as defined by law, a collective agreement or practice in force in a [EU] Member State and is either a citizen of the [EU] or a third country national legally residing in a [EU] Member State with a valid work permit at the moment of recruitment” (emphasis added).
- Last, the foreign investor must prepare and publish a strategy for enhancing EU value chains, prioritizing the sourcing of inputs from the EU, with the stated aim of sourcing a minimum of 30% of inputs used for products placed on the EU market from within the EU.
Review monitoring and enforcement
Each EU Member State must designate an Investment Authority responsible for reviewing foreign direct investments and implementing the IAA’s provisions. Foreign investors would have to notify planned investments to the Investment Authority of the Member State in which the EU target is located. If targets are in several Member States, each Member State will require a filing. Filings must be submitted to the respective Investment Authorities on the same day and coordination between the Member States and the Commission shall take place. Investments may not be implemented without explicit approval.
The Investment Authority must decide on the admissibility of the notification within 30 days (extendable by 15 days) and, if deemed admissible, immediately notify the Commission of the investment. The Commission may then, within 30 days after receiving the notification, issue a written opinion on whether the investment satisfies the required conditions and shall provide it to the Investment Authority. Within 60 (or 75 days if the deadline was extended by 15 days when determining the notification’s admissibility), the Investment Authority must then issue a reasoned decision approving or declining the investment. If the Investment Authority intends to diverge from the Commission’s opinion, the approval process may be extended by an additional two months.
The Commission may also, on its own initiative or at the request of a Member State, undertake its own assessment of an investment, particularly where the investment exceeds EUR 1 billion, has significant cross-border impact, or is of strategic importance to the internal market.
Ongoing compliance monitoring: Investment Authorities must regularly monitor whether investments continue to fulfil the prescribed conditions, with foreign investors obliged to report on compliance. Penalties for non-compliance – including failure to notify, breach of conditions, or failure to comply with monitoring obligations – must not be less than 5% of the average daily aggregate turnover of the foreign investor.
Implications: A new regulatory layer
The IAA’s FDI provisions are expressly stated to apply “notwithstanding” the existing foreign investment control mechanisms and “without prejudice” to EU competition law. A single transaction may thus, in principle, be subject to review under all four regimes – EU merger control, traditional foreign investment control screening, FSR review, and the new IAA conditions – each with its own substantive standards, procedural timelines, and potential for remedies or prohibition.
The rationale of the IAA is to harmonize and simplify business conditions, preventing regulatory arbitrage and a “race to the bottom” among Member States competing for foreign investment. In practice, however, the new regime represents a significant expansion of the EU’s regulatory toolkit with potentially substantial implications for deal certainty, transaction timelines, and the structuring of investments.
As the European Commission’s proposal for the IAA is still to be negotiated in European Parliament and by the Council of the European Union it will remain to be seen whether the proposal will remain in its current form or whether, as is often the case with such drafts, it will undergo further (substantive) changes.
Photo by Hasan Almasi on Unsplash
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