The European Commission has concluded that Hungary’s veto of an acquisition under its newly-enacted foreign investment rules infringed the EC’s exclusive competence to review mergers that have an EU-wide dimension. 

This decision highlights the potential tension between two parallel transaction screening regimes: national foreign investment regimes, which may lean towards national self-sufficiency considerations (particularly following the global pandemic), and the EU merger control regime that aims to ensure a one-stop-shop review in line with the EU single market.

Hungary’s foreign investment veto and the EC clearance decision

The background is that Vienna Insurance Group AG (VIG) planned to acquire several subsidiaries of the AEGON Group in Hungary, Poland and Romania.

In April 2021 – before the EC could clear VIG’s acquisition under the EU Merger Regulation (EUMR) – the Hungarian government blocked the acquisition of the Hungarian subsidiaries based on the temporary foreign investment rules it had introduced during the pandemic. 

The EC unconditionally cleared the acquisition in August 2021, specifically noting that its clearance was ‘without prejudice to any assessment of the Veto Decision by Hungary under Article 21(4) of the EUMR.’

Article 21 EUMR grants the EC exclusive competence to assess transactions with an EU-wide dimension. Exceptionally, the rule allows Member States to oppose a transaction in order to protect other “legitimate interests”. However, the measures taken by Member States must be

• appropriate to protect those legitimate interests; 

• compatible with EU law; and 

• communicated to the EC, except in limited instances.

It is for the EC to review the measures and determine whether these tests are met.

The EC’s concerns with the veto

The EC found the Hungarian veto infringed Article 21 EUMR for three reasons:

• Not appropriate / aimed at protecting legitimate interests: The EC noted it had reasonable doubts as to whether the veto genuinely protected Hungary’s legitimate interests within the meaning of the EUMR. Furthermore, it was unclear how the acquisition would pose a threat to a fundamental interest of Hungarian society – when the acquirer was an established EU insurer with an existing presence in Hungary.

• Breach of VIG’s fundamental freedom of establishment: The veto was incompatible with VIG’s freedom of establishment, as it prevented the company from establishing business activities in another Member State without any justification. 

• Lack of communication: Even before conducting its investigation, the EC had voiced its concerns about the Hungarian government’s failure to communicate with it. This failure to inform the EC about the veto decision prior to implementation was ultimately also found to infringe Article 21 EUMR.

The EC ordered Hungary to withdraw its veto by 18 March 2022 – and Hungary complied.

Implications of the decision

This is the first time the EC has applied Article 21 EUMR in a foreign investment context. But this case highlights the interplay between the EU merger provisions and national foreign investment rules, as well as the risk for investors of being exposed to increased legal uncertainty during the parallel review of transactions - for both merger control and foreign investment purposes – even as scrutiny under both regimes becomes ever stricter.

Although the EU has recently introduced an FDI Screening Mechanism, this mechanism only creates a framework of cooperation between Member States authorities, so each Member State still retains authority over screening FDI based on security and public order grounds (see our previous post).

For EU Member States, the decision is an important reminder that despite having sole competence over FDI, they nevertheless have to comply with EU law – such as Art 21 EUMR, and the freedom of establishment – even when applying national law, including in relation to foreign investment control. The establishment of the EU single market cannot be limited without proper justification in favour of protecting national interests.

In addition – and irrespective of the rules in Article 21 EUMR – if the acquirer is an EU company, the Member State will have to carefully balance the acquirer’s fundamental freedoms against the interests protected by its foreign investment law.

At least with respect to transactions with an EU-wide dimension and/or involving EU investors, EU law will limit the Member States’ legislative and administrative discretion. For investors, this might mean that they will be able to seek recourse under EU law (either by complaining to the Commission or by bringing a case in the national courts) if a transaction is blocked or remedies are imposed by national foreign investment authorities.