One year on - The Commission takes stock of the EU foreign investment screening mechanism

The EU FI screening mechanism has undoubtedly changed the landscape for European M&A execution. Our recent blog post looked at our experiences during its inaugural year. The EC has now published its own assessment, containing some interesting reflections and thoughts for the future. Here are some of the main takeaways.

Comfort in the numbers?

The report contains some interesting statistics that highlight the procedural impact of the new rules. But, at the same time, they offer some comfort that the ultimate impact - in terms of mitigation, or worse, prohibitions - is relatively exceptional. 

• From 11 October 2020 to 30 June 2021, a total of 265 notifications were submitted under the EU FI screening regime by 11 Member States. Since then, the number of screened transactions has grown to over 400. 
• 14% (26 cases) of the filings were subject to an in-depth investigation by the European Commission, with the additional data requested in order to undertake that Phase 2 review varying depending on the sector and the concern. This happened most in manufacturing (50%), ICT (17%) and financial services (10%).
• Less than 3% of these 265 cases resulted in the EC issuing an opinion recommending mitigation measures. Note that, even where an opinion is issued, it is for the Member State to decide whether mitigation is ultimately imposed. The report does not reveal which types of mitigation were recommended by the EC, nor how the EC conducted proportionality assessments under the EU principle of a free movement of capital.

The report also highlights the significant level of activity at Member State level, with 2020 seeing a total of 1,793 cases being reviewed. However, it does not reveal whether those cases refer to separate transactions or whether several filings for one single transaction in a range of Member States were each counted towards that number.

• 80% of these cases were not formally screened by the EC because of an “evident lack of impact on security or public order, or because they fell outside the scope of the national screening mechanism” and were therefore assessed in the initial EC review period of 15 days.
• 20% (362 cases) were subject to formal screening by the EC. Of these, approximately 40 cases (12%) were ultimately authorised by the respective Member State with conditions and approximately 30 cases (8%) were aborted or prohibited (stated as being only 2% of cases). However, these statistics need to be read with a grain of caution. For example, it is unclear whether cases which were subject to upfront mitigation and then cleared unconditionally (which is the predominant way to address public interest concerns in, e.g., Germany) were counted towards the 12% of conditional clearances.

Looking ahead: here to stay no doubt - but some improvements are warranted

Our recent blog post commented that the remaining Member States without foreign investment screening mechanisms can be expected to swiftly follow suit. The report certainly confirms this - the EC notes its “strong expectation that all 27 EU Member States will put national FDI screening mechanisms in place” and that it is “merely a question of time before all 27 Member States” have such mechanisms. Indeed, the report identifies only three Member States with no publicly reported FI regulatory initiative underway (i.e. no ongoing process expected to result in new legislation) – Bulgaria, Croatia and Cyprus.

Such enthusiasm for screening tools is highlighted in the report, which notes that all Member States consider that the cooperation mechanism has had a positive impact on FI screening in Europe. Awareness of transactions that have not been notified (but should have been) and early detection of potential risks were also cited as positive outcomes from a Member State perspective.

Despite its positive reception, the report recognises that the differences between the various national regimes pose significant procedural issues. These include variations in terms of what constitutes formal screening, applicable timelines, coverage and notification requirements. The report flags in particular Member State comments regarding the timelines under the EU FI screening regime being too short and not corresponding well with national regimes’ timelines. 

The report also notes recommendations from Member States which would likely sit well with merging parties, e.g., that a single joint notification be submitted where a transaction needs to be approved in more than one Member State. Others flagged concerns relating to transactions being notified under the mechanism that do not have a cross-border element; or ensuring that information requests made under the mechanism are proportionate and justified (to limit the burden on the reviewing Member State – but indirectly also on the transaction parties).

In terms of what to expect, the report confirms a need to improve significantly the predictability of the regimes and address the difficulties in co-ordinating multi-jurisdictional foreign investment filings. The EC acknowledges that - as 29% of the 265 transactions notified are multi-jurisdictional – closer informal coordination between Member States and the EC is required in the future. It also confirms that the EC will “carefully consider ways to streamline procedures” - this will include consideration of how to handle transactions which require notification by two or more Member States.

To this end, the EC will launch a study to examine the variations between the national regimes and the impact of this on the effectiveness and efficiency of the EU FDI screening regime – looking at things like the significant problems raised by concurrent regimes and ensuring the burden on investors is proportionate. The report also states that the EC will, in due course, also consider whether to publish guidelines for the benefit of Member State authorities and investors. Transaction parties can, at least, look forward to improvements over time in relation to the procedural challenges they have experienced since the regime came into operation a year ago.