The European Union is considering changes to its process for reviewing foreign direct investments in the region for potential national security concerns, with the European Commission recently putting out a proposal to coordinate reviews across its member states.
Here, Law360 outlines three things to know about the potential changes.
Different From CFIUS
The European Commission proposed a framework in September that would provide for the screening of foreign direct investment in EU member states, but the proposal would not establish a regulatory body with powers on par with the Committee on Foreign Investment in the United States.
“It’s mostly about trying to harmonize the way member states do their foreign investment review at home. And it’s also about sharing information, so the commission and other member states would like to know what’s happening,” said Bogdan Evtimov, a Dentons antitrust and competition partner.
The European Commission would be able to issue its opinion or share concerns on a certain transaction. However, as proposed, the framework would leave the final say on foreign investment in the hands of the relevant member state and would not require any of the member states to change their current level of scrutiny for foreign direct investments.
The goal, according to the European Commission, is to create a European framework for screening of foreign direct investments, establishing a “cooperation mechanism” between member states and the EU, and provide for European Commission screening of foreign direct investments in programs of interest to the EU, such as those involving research, space, transportation, energy and telecommunications.
The proposed framework would be a far cry from what exists in the U.S. under CFIUS, which has the power to require remedies to proposed inbound control transactions, recommend proposed deals be blocked, or unwind deals that were not noticed to the interagency committee but it feels would pose a national security risk.
“It’s not going to impose an EU-type CFIUS regime where the commission will investigate, but rather put in place a mechanism where member states have to consult with the commission, and other member states can comment on whether a deal might raise certain national security concerns,” said Marc Israel, a White & Case LLP antitrust and competition partner.
Alongside the proposed framework, the European Commission is also looking to set up a group chaired by the commission and including representatives from all of the EU member states that would cover issues brought up by the proposed screening framework and establish an in-depth analysis of foreign direct investment in the EU.
Drastic Changes Still Possible
The proposed framework is just that, a proposal by the commission about what it thinks would work for the EU. It’s still early in the process and there could be wide-ranging changes, no changes, or the proposal could be scrapped in its entirety.
“It’s the initial attempt by the commission to propose something,” Evtimov said. “So it’s too early to say what is going to survive from this initial proposal and not going to survive.”
Now that the European Commission has put forward a proposal, it will be evaluated and decided on by the European Parliament, and the European Council will also get the opportunity to weigh in. If the three bodies don’t come to an agreement, each will put forward a representative negotiator and they will have discussions to try to reach an agreement.
“There are a lot of diverging interests. There’s no guarantee that this will pass in the way that it’s being proposed. And also given the nature of the legislative process here, if it’s going to get through, it’s likely to take several years,” Israel said.
The commission’s work on the proposed framework is not an initiative it took up on its own. In a statement announcing that it had established a proposed framework, the commission noted that it recognized increased concerns about foreign investors’ strategic investments in European companies holding key technologies in a May reflection paper.
The following month, the European Council “welcomed” its efforts to analyze investments in strategic sectors. The European Parliament also asked the commission to work with member states "to screen third country foreign direct investments in the EU in strategic industries, infrastructure and key future technologies, or other assets that are important in the interests of security and protection of access to them.”
Growing Protectionism Highlighted
The proposal for a more harmonized and transparent overview of foreign investment in the European Union highlights the growing emphasis on protectionism that is being seen not only in the region.
“You could almost think of it as a step in the trend toward more protectionism around the world,” Israel said.
The emphasis on protectionism is clear in remarks made by EU President Jean-Claude Juncker the day before the commission released its proposed framework. In his annual State of the Union address, Juncker noted that it's the EU’s “political responsibility” to know who is investing in what so it can “protect our collective security if needed.”
That sentiment was reflected in the European Commission’s own remarks in the release accompanying the proposed framework, with EU Trade Commissioner Cecilia Malmström saying in a statement that the aim is to create a “nondiscriminatory, transparent and predictable framework” that would allow the governing body to “respond collectively and defend our European strategic interests when they are at risk.”
“There is a sense that Europe, as a continental economy, and the EU, as a political body, is moving in a direction where it’s starting to question certain foreign investment. Some of this skepticism seems to be related to populist undercurrents, but more of it, especially at the political level, relates to strategic concerns," said Mario Mancuso, leader of Kirkland & Ellis LLP’s international trade and national security practice.
The changing sentiment has been particularly evident in Germany, amid backlash over China-based Midea’s takeover of German industrial robotics company Kuka in 2016.
While that deal was allowed to move through, it sparked debate about what Germany should be doing in order to evaluate foreign investment into the country. Germany ultimately ended up tightening its review process for foreign investment, including broadening which deals it can review.
“It’s the first 'blinking yellow light' in an economy that has otherwise been very open and encouraging to investment, including Chinese investment,” Mancuso said.
And Germany isn't the only European country reevaluating foreign investment. The U.K., which is in the process of separating from the EU, is also working on its own set of proposals to tighten the rules surrounding outside investment in the country.
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