COVID-19: European Commission calls for closer scrutiny of FDIThursday, 09 April 2020
On 25 March 2020 the European Commission (the “Commission”) published a guidance to the Member States concerning the application of the foreign direct investments (“FDI”) Screening Regulation 2019/452 (the “Screening Regulation”) in the context of the free movement of capital from third countries and the protection of Europe’s strategic assets (the “Guidance”). The Guidance is available to view here.
The Screening Regulation entered into force on 11 April 2019, however, the provisions of the Screening Regulation will only apply 18 months after its entry into force i.e. 11 October 2020. The Screening Regulation does not require EU Member States to implement an FDI screening mechanism - where such a mechanism exists or is to be adopted, it must meet certain basic screening requirements, such as judicial review of decisions, non-discrimination between different third countries, and transparency. The EU investment screening framework is set out in further detail in this factsheet.
The Guidance highlights that:
- critical EU industries, particularly the healthcare industry, are subject to an increased threat of foreign takeover in the current pandemic; and
- the importance of ensuring that businesses involved in such strategic industries retain sufficient resources to be able to respond to the needs of all EU citizens during the COVID-19 pandemic.
The Commission emphasises that Member States should be “vigilant” and use available legal tools to avoid the EU and its Member State losing control over assets and technologies that are crucial for public health, noting that “there could be an increased risk of attempts to acquire healthcare capacities (for example for the production of medical or protective equipment) or related industries such as research establishment (for instance developing vaccines) via foreign direct investment."
The Guidance publicly calls on Member States that currently do not have any FDI screening mechanism procedure (which includes Ireland) to establish “a full-fledged screening mechanism and in the meantime to use all other available options to address cases where the acquisition or control of a particular business, infrastructure or technology would create a risk to security or public order in the EU, including a risk to critical health infrastructures and supply of critical inputs”. This is substantial as the Screening Regulation does not specifically require EU Member States to implement a screening mechanism.
The Guidance additionally specifies that foreign acquisitions likely to affect projects of EU interest i.e. undertakings that have received funding under the EU Research and Innovation programme Horizon 2020, particularly those relating to the health sector, will be subject to heightened scrutiny by the Commission itself. This also includes future projects in response to the COVID-19 pandemic.
Finally, the Guidance outlines that under Article 63 of the Treaty on the Functioning of the European Union, Member States are empowered to review investments to ensure the protection of legitimate public policy objectives (i.e. on grounds of national security or public order). This applies to all sectors and is not subject to any value thresholds. Member States may “in the analysis of justification and proportionality” take such measures as it deems necessary and impose restrictions on transactions involving third countries, whereby "additional grounds of justification may be acceptable", and where the "permissible grounds of justification may also be interpreted more broadly" i.e. predatory buying, investments which may lead to an over-reliance on foreign investors from third countries for the provision of essential supplies/services. Public health has been recognised by the Court of Justice of the European Union as an overriding reason in the general interest.
The Guidance will have significant practical effects on Member States’ approach to FDI, which is likely to impact on negotiations and the timeline of transactions relating to the investment in and/or acquisition of undertakings in strategic sectors, in particular healthcare related industries. Early considerations of the expected impact of rigid FDI screening and prolonged approval procedures on the transaction process will go some way to overcome these hurdles and mitigate the risk of delay or failed transactions.
Please note that the content of this summary does not amount to professional advice. Legal and tax advice should be sought in respect of specific queries. The COVID-19 situationis evolving rapidly and this update is provided on the basis of information available as at 9 April 2020.