Three years on: The Commission reports a big rise in foreign investment screening, so what can we expect next?

The European Commission (EC) has published its third annual assessment of the EU FI screening mechanism, reporting a “significant increase” in formally reviewed cases, as well as a further expansion of EU Member States with investment screening regimes, echoing observations made by the OECD earlier this year.

The report also contains some interesting reflections and thoughts about what the future might hold, with all Member States ultimately expected to implement foreign investment screening mechanisms, but with divergences likely to remain for the foreseeable future.

The numbers offer some comfort, but also highlight uncertainties 

The report highlights the effects of stronger foreign investment regimes across a larger number of Member States, paired with an economic climate that sees investment tightening across Europe. The statistics do offer some comfort, however, with instances of mitigation decreasing, and prohibitions remaining the exception. 

• Despite a notable fall in deal-making and foreign investment into Europe in 2022, there has been a significant increase in the proportion of formally screened cases. Out of the 1,444 authorisation requests and ex officio cases handled in 2022, roughly 55% of cases were formally screened, compared to 29% in 2021 and 20% the prior year. 
• The vast majority of cases (86%) were authorised without any conditions and only 1% were prohibited. Mitigation has decreased, with Member States requiring remedial measures in 9% of transactions, compared to 23% in 2021. And in a further 4% of cases, the transaction was withdrawn by the parties.
• The report suggests that these numbers confirm that the European Union remains open to foreign direct investments – but it might also be argued that a significant proportion of these reviews were unnecessary. This would be consistent with the theme that regimes are broadly crafted and often catch transactions without any apparent sensitivity. That is all the more apparent in light of the statistics showing that 45% of requests for authorisation were not formally screened. This might suggest that, due to vague / expansive definitions, parties felt the need to make precautionary notifications – only for the authority to determine this was not necessary. That imposes a cost on both the parties and the authorities which could be eliminated by having clearer rules on what does (and does not) need to be notified. 
• In the 11% of cases referred to Phase 2, there was a greater variation in the timing of Member States’ responses, with timing ranging from 1 to 126 days. The implication is that where cases are referred to Phase 2, timelines can be difficult to predict, particularly since the FDI Regulation does not set precise timelines – clearly it would be helpful for notifying parties to have the additional certainty that comes with fixed timelines.

• Manufacturing, Information and Communication Technologies, Professional Activities, and Wholesale and Retail were the four sectors with the highest number of notified transactions in 2022, though Transport and Financial Activities also ranked high. Of these, Manufacturing had by far the highest Phase 2 referral rate, accounting for 59% of Phase 2 cases despite only making up 27% of notified cases. This is not necessarily surprising given that Manufacturing includes Aerospace, Defence, Semiconductors, Energy, Communications and Data processing (among others). But it clearly shows that transactions involving these critical / sensitive production assets or critical infrastructure will attract higher levels of scrutiny.

There is also significant variation in the Member States that reviewed deals, highlighting the divergence in approach to foreign investment taken by different countries. Six Member States (Austria, Denmark, France, Germany, Italy, and Spain) were responsible for more than 90% of the 423 notifications submitted in 2022.

Looking ahead: new FI regimes, no current harmonization – but will possible reforms address this?

New regimes on the horizon

The EC notes it “firmly expects” that all Member States will have a comprehensive national FI screening in place in the near future. We have already seen signs of this happening, as noted in the recent podcast with Damien Levie, Head of Technology and Security Unit for FDI Screening in the Directorate-General for Trade (DG Trade) at the EC. 

Levie commented that it is expected that 23 of 27 EU Member States will have national FI regimes in place by the end of this year – with Sweden coming into force on 1 December 2023 (notably capturing all transactions not closed by that date) and Ireland also expected soon, and a further four Member States (Croatia, Cyprus, Greece, and Bulgaria) working on legislation. 

A closer look at Russian investments

The report also reiterates the EC’s call for strengthened FI defences to protect critical EU assets from investment by entities or persons connected to the Russian or Belarusian governments, and comments on the Member States (Latvia and Italy) which have updated their national FDI screening mechanisms in reaction to Russia’s war of aggression in Ukraine. 

As noted in our recent blog post, as well as new or strengthened regimes, we expect to see increased scrutiny of investments by EU-based companies with Russian or Belarussian ownership – for example, where a transaction is used as a means of “circumvention” to get around the foreign investment screening mechanism.

Possible revisions and reform

The EC’s report comments that – despite regular cooperation with Member States and moves to facilitate alignment of national screening mechanisms – the divergences between national screening mechanisms identified in the previous report remain, particularly with respect to timing, sectoral coverage, and notification requirements.

In our podcast, Levie had commented that it is too early to say whether we will see convergence between Member States, particularly as screening is relatively new in the EU, and not all Member States have mechanisms in place. 

However, the EC has been consulting on possible revisions to the Regulation. The consultation has now closed, with the EC due to present a report to the European Parliament and Council on the functioning and effectiveness of the Regulation by the end of 2023, together with revisions to its scope and operation. Alongside a recast FDI Screening Mechanism, we are also likely to see proposals relating to an EU outbound investment screening mechanism around the end of this year.