The EU Regulation On Foreign Investment With A Focus On Investment Screening

The EU Regulation On Foreign Investment With A Focus On Investment Screening Presented by: Angelos Dimopoulos Date: January 17, 2022 Overview 1. What is investment screening 2. The EU legal framework 3. Member State models: France Investment Screening - - Authorization of inward investments  Part of rules on investment admission  Openness and authorization  The need to protect from security risks that FDI poses Balancing investment openness and security  Which investments pose a risk?  What amount to a security risk?  Who are the investors who may pose a risk?  In which sectors do security risks arise?  The role of new markets, new technologies, new actors in assessing security risks - - A framework for investment screening  Domestic law framework  Procedural and substantive rules on FDI authorization Different systems across different jurisdictions US (FIRRMA) 2018  China 2020  Australia 2020 International Law And Investment Screening  Admission of investment is a reserved domain for host states  BITS refer to investments made in accordance with local laws  Covered investments only those that qualify as legal investments  Offer post establishment protection IlAs And Admission Of Investment  Growing trend of investment treaties including provisions on investment admission and liberalization  Increasing understanding of importance of investment liberalization as a determinant of investment activity  EU as a key proponent of investment liberalization in IIAS  Binding commitments  Legal certainty/ openness/ investor confidence Commitments Regarding Investment Admission - Types of commitments 1. Market Access 2. National Treatment 3. Most-Favored-Nation Treatment - Form of commitments 1. Positive list approach 2. Negative list approach Investment Liberalization And Investment Screening  Greater openness and liberalization raises concerns for: 1. Host States 2. Economic 3. Competitive (Domestic Industry) 4. Security  Liberalizations in the aftermath of privatization: 1. Sectors available for private investment 2. Technology raises risks that did not previously exist EU FDI Screening As Part Of EU Investment Policy - The EU acquires competences over Foreign Direct Investment in 2009 - Guaranteeing continuity of investment regime - Setting the framework for participating in Investment Treaty making - Negotiating and concluding investment treaties with third countries - Addressing the framework for intra-EU investment liberalization and protection - Determining the conditions for admission of extra-EU FDI and increasing cooperation on investment admission Building A 'Comprehensive' EU Investment Policy According to EU institutions, future EU IIAs will... 1. Focus on both admission and protection of foreign investment 2. Cover not only FDI, but also other forms of foreign investment 3. Enhance EU competitiveness 4. Contribute to the materialization of EU external relations objectives EU FDI Screening - Part of EU investment policy  - FDI screening as part of a comprehensive EU investment policy Addressing a proper balancing between openness and control (security and public order) Need for clear, EU wide approaches to balancing  Need for cooperation regarding FDI in sectors that has potential effects beyond national borders (critical infrastructure)  Need for EU wide approaches to investments in more than one Member States (e.g. if a foreign investor is acquiring a holding company with subsidiaries in several Member States)  - Protect EU funded projects EU engagement in global debates on FDI screening  US (FIRRMA) 2018  China 2020  Australia 2020 Commitments Regarding Investment Admission  Types Of Commitments 1. Market Access 2. National Treatment 3. Most-Favored-Nation Treatment  Form Of Commitments 1. Positive list approach 2. Negative list approach EU FDI Inflows - 15% of global FDI inflows (excluding intra-EU) - Major Investors In The EU 1. US and Canada (30%) 2. UK (30%) 3. EFTA (12%) 4. China (3%) - Key Sectors 1. Manufacturing 2. ICT 3. Retail 4. Finance 5. Energy FDI Screening Regulation 1. Regulation (EU) 2019/452 2. Enable Member States to set their own investment screening mechanisms 3. Guidelines for Member State FDI Screening frameworks 4. EU framework for cooperation between Member States FDI Screening Mechanisms In EU Member States 1. 18 Member States with a screening mechanism (up from 11 in 2017) 2. 6 Member States in the process of adopting a framework on FDI screening 3. 3 Member States without FDI screening Guidelines For Member State FDI Screening Frameworks  Non-binding and non-exhaustive list of factors  Threat to security/ public order: FDI that has effects on: 1. critical infrastructure 2. Technologies (including dual use items) and inputs, 3. access to sensitive information, including personal data, or the ability to control such information 4. freedom and pluralism of the media  Context and circumstances of FDI 1. SOES 2. Direct or indirect control by foreign government (e.g. via subsidies) 3. Pursuance of state-led outward projects or programs  Economic reasons are not valid factors for screening  Non-discrimination of foreign investors as a cornerstone of the Regulation  Commitments preferred, refusal of authorization only when commitments are not adequate to address the risk identified  National mechanisms must ensure 1. Timeframes for decision making 2. Possibility for judicial review 3. Transparency 4. Non-discrimination 5. Confidentiality of business information Cooperation Mechanism: Procedure - MS with screening mechanisms  Obligation to notify by Member State  Possibility to proactively ask for comments by Commission/ other Member States  COM/ MS can ask for information (data on products and/or services of the target company; possible dual-use classification of any products involved; customers, competitors and market shares; the IP portfolio and R&D activities of the target company). - -  COM/ MS can submit opinion/comments  Decision lies exclusively with notifying Member States  Comments by other Member States have to be addressed MS without screening mechanism  Request for information by COM/ other Member States  Obligation to provide information by Member State concerned  Possible comments by requesting MS/ COM and other  Member State  Decision lies with MS where the investment is made Protecting confidentiality Cooperation Mechanism: Scope Of Application - Investments: 1. FDI (broad definition) 2. Excluding transactions concerning corporate restructuring 3. Any nationally screened investment 4. Any non-screened investment for up to 15 months after investment completed - Investors: 1. Applicable to non-EU investors only (direct and indirect) 2. MS screening may also apply to EU investors, (if so EU law rules are a benchmark for the application of national screening rules) 3. Anti-circumvention clause: EU entities that do not have substantial business activities in the EU are considered as foreign investors Outcomes In Practice - 2020  appr. 1800 FDI transactions notified to the Commission by 7 MS  20% formally screened. Of those:  79% approved without conditions  12% approved with conditions  2% prohibited Outcomes 1. Increased Transparency 2. Better overview for COM and Member States for extra-EU FDI flows/ investor profiles/ targeted sectors 3. Protect EU strategic interests 4. Valuable learning experience for MS without screening But 1. Effective cooperation depends on MS preferences and attitudes 2. Organizational hiccups – efficiency a. Resources required b. Exchange of information on outcomes and notification Concluding Remarks  Investment screening as a 'necessary' and 'welcome' step towards investment openness?  EU investment screening as a 'necessary' and 'welcome' step towards an effective and efficient framework in the EU