Four years with EU FDI: A wider range of sectors emerge as high-risk for foreign investment review as EU Parliament considers proposals for reform

The European Commission (EC) has published its fourth annual assessment of the EU FDI Screening Regulation, reporting an increase in notified transactions, a growing number of which relate to multi-jurisdictional deals. While the increase in notifications since last year was fairly moderate, there has been a notable widening in range when it comes to the sectors notified and referred to Phase 2 - though manufacturing remains the most important sector for screening (largely due to its connection to critical technologies in defence related activities). 

The report also summarises how the EC is seeking to revise the current FDI Screening Regulation (discussed in our earlier blog) and revisits the “blind spots” that will need to be addressed in light of further observations made in 2023.

This post looks at the key takeaways from the report, and some of the things we can expect to see from the upcoming reforms.

The numbers: Foreign investment review continues at pace, with more sectors attracting scrutiny

Strong foreign investment control is here to stay, with more notification requests submitted in 2023, but a largely similar picture to 2022 when it comes to the percentage of foreign investments being formally screened. New sectors are also attracting more scrutiny than before – including transactions in sectors involving Financial Activities, Wholesale and Retail, Professional Activities, Energy, Health and Real Estate. 

The diversification of sectors examined suggests that Member States are increasingly concerned with transactions not traditionally viewed as falling within the ambit of national security. This means that investors will need to closely consider whether a transaction is likely to raise FI concerns in a particular Member State, even if that transaction does not involve defence or critical technologies, especially in those Member States that attract the most notifications.   

• More investment in Europe and more formal screenings – but less Phase 2 referrals. Despite a global fall in deal-making and foreign investment, investment into Europe increased in 2023, with the corresponding increase in total authorisation requests at 1,808 compared to 1,444 in 2022. Of the 1,808 requests, roughly 56% were formally screened – largely on par with 55% in 2022, though a continued increase from the 29% in 2021 and 20% in 2020. Despite slightly more cases being formally screened, more cases were closed in Phase 1 (92% in 2023 compared to 81% in 2022) and only 8% of cases were closed in Phase 2 (compared to 11% in 2022). As in 2022, most cases were closed in Phase 1 within the prescribed 15 calendar days following notification by the Member States.
• Most cases authorised, but slightly more instances of remedies being required. The overwhelming majority of cases (85%) were authorised without any conditions, while only 1% were blocked, and in 4% of cases the transaction was withdrawn by the parties. This is strikingly similar to last year’s figures, where 86% of cases were authorised, 1% were blocked and 4% were withdrawn. However, the percentage of cases requiring mitigation has increased marginally, up from 9% in 2022 to 10% in 2023, accounting for the slight decrease in cases being cleared without conditions.
• Still a large percentage of (potentially) unnecessary reviews. The report suggests that: (i) the number of formally screened transactions has not resulted in a more restrictive investment climate; (ii) the EU remains open to foreign investment; and (iii) Member States only block cases that pose “very serious threats” to security and public order. However, the fact remains that 44% of requests for authorisation were not formally screened. This suggests that a significant proportion of reviews might have been unnecessary – perhaps owing to unclear rules on what should and should not be notified.
• Energy (and other sectors) emerging as higher risk for review. While Manufacturing and Information and Communication Technologies continue to attract the highest number of notified transactions, they account for a slightly smaller percentage than in 2022 (dropping to 23% and 21%, from 27% and 24%, respectively) and there has been a notable increase in Wholesale and Retail (from 9% of cases in 2022 to 14% in 2023) and in Financial (from 8% in 2022 to 11% in 2023). Energy has also emerged as a new targeted sector in 2023, accounting for 6% of notifications, indicating that it is becoming a focal point for regulators. This is in line with statements in Mario Draghi’s report on EU competitiveness, which describes the energy crisis as causing “cascading” effects throughout the whole economy, with concerns about security risks associated with third-country providers, and reiterating the goal of shoring up the security of supply.
• No such thing as a ‘safe’ sector when it comes to Phase 2. There has also been a notable change in the types of transactions being referred to Phase 2. While the Manufacturing sector accounts for a significant portion (39%) of Phase 2 cases, this is a big drop from the 59% we saw in 2022. This likely reflects other sectors’ rise in prominence, with 2023 showing a much more diverse range of cases being referred to Phase 2, including transactions involving Financial Activities, Wholesale and Retail, Professional Activities, Energy, Health and Real Estate. 
• Significant variation in Member States that reviewed deals. Seven Member States (Austria, Denmark, France, Germany, Italy, Romania and Spain) were responsible for 85% of the 488 notifications submitted in 2023. These same Member States, minus Romania, were likewise responsible for most of the 421 notifications submitted in 2022. To a certain extent, this may simply reflect that these larger EU economies are the ones attracting the largest share of overseas investment. However, where smaller economies are attracting a large portion of notifications, this could signal that they operate a broader regime than others, highlighting the divergent approaches to foreign investment taken by different Member States – something the proposed reforms tabled earlier this year may seek to address.
• Origin of investor: six jurisdictions account for a growing share of notifications. While ultimate investors originated from 43 different jurisdictions, most notifications originated with investors from the US, UK, United Arab Emirates, China (including Hong Kong), Japan and Canada, and these jurisdictions accounted for an even greater share of investment than last year (up from 33% in 2022 to 41% in 2023). Among this was a noteworthy rise of notified transactions from the United Arab Emirates (increasing from 3% in 2022 to 7% in 2023).

Looking ahead – reforms on the horizon

Alignment of multi-jurisdictional transactions

The EC’s report noted that it observed a growing number of multi-jurisdictional deals, and that these types of deals accounted for more than one-third of all foreign investment notifications in 2023. This highlights the importance of the EC’s proposal (made in January this year) for a revised FDI Screening Regulation, which is expected to see measures aimed at improving alignment in multi-jurisdictional transactions. 

However, as noted in our blog post earlier this year, it is not clear whether the proposed measures can be expected to completely address the concerns raised around the lack of synchronicity with multi-jurisdictional deals, especially timelines, without requiring material reforms to the national screening regimes of most Member States. Also, there is a delicate balance to be struck between an effective EU Screening Mechanism and transaction timetables, in particular in light of the significant over-screening that can still be observed across the EU (and that may increase considering the broadly defined list of sensitive sectors that was proposed with the initial draft of the recast Screening Regulation). 

Greater scope for intra-EU investment screening?

The EC also comments that, in light of the geopolitical developments, more needs to be done to “close any potential loopholes” and provide for greater vigilance over risky investments, including by requiring Member States to assess whether the foreign investor is owned or controlled by, or is acting on behalf of, a sanctioned person or entity – or whether the investor is likely to facilitate the development of a third country’s military capabilities. 

This is in line with the previously announced proposal to widen the scope of the EU FDI Regulation to capture investments from EU entities whose ultimate owners are non-EU investors - a reform that would go beyond what was envisaged by the Court of Justice in its Xella decision (i.e. capturing “artificial arrangements” which attempt to circumvent the filtering mechanism) and lead to screening entities legitimately established in the EU. Any such reform will trigger the question of how to navigate the justifications for intervention in light of the EU’s freedom of establishment and the free movement of capital, the latter having the broadest scope of all treaty freedoms and also including capital flows between EU countries and the rest of the world. 

Next steps

It is understood that the EC is currently working on an adjusted draft proposal which reflects the feedback it got from Member States on the first draft and - considering the potentially material impact of such recast legislation - hopefully there will be another round of consultation for the private sector to provide feedback as well.