Foreign investment screening: the new kid on the block in Europe

The European Union is preparing legislation that will increase scrutiny of foreign company takeovers. The move comes in response to a surge in investments from state-backed Chinese firms into ‘strategic’ sectors in Europe. What are the implications for Britain as it draws up its own new investment screening rules and leaves the EU? Clelia Imperiali and Aitor Ortiz explain.

2016 was a boom year for Chinese investment in Europe. During the first half of that year alone, Chinese companies acquired over 160 EU firms, investing more than US $ 70 billion (£ 52 billion). Major transactions were made in robotics, energy infrastructure, automation and comparable industries. France and Germany, along with the UK, are the top EU destinations for Chinese investments.

Chinese investments into those sectors are increasingly perceived as a targeted predatory strategy by China aimed at acquiring trade partners’ strategic assets and know-how. What is more, China itself is not open to European investments to the same extent as EU countries are to Chinese investors.

The Organisation for Economic Cooperation and Development’s ‘FDI Regulatory Restrictiveness Index’, which measures statutory restrictions to foreign FDI, shows that in China’s restrictions are much higher than those of countries such as France and Germany, in particular in sectors such as transport, high tech, media and maritime and air transport infrastructure.

China furthermore supports its national industrial strategy with policies that force foreign companies investing in China to transfer their technology if they want to access the Chinese market. Channels for such transfers include licencing requirements and the obligation to enter into joint ventures with local firms (which then benefit from the foreign investor’s intellectual property).

Several European governments fear that these two factors could lead to a dangerous concentration of technological know-how in China’s hands.

Chinese ownership of key European assets such as ports and other infrastructure could jeopardise the independence of Europe’s policy-making, some also fear. For example, the acquisition in 2017 of the majority of the shares of Greece’s Piraeus Port by a Chinese state-owned enterprise has been associated with Athens opposing some policies in Brussels that would have negatively impacted Beijing.

In such a context, the idea of refocusing EU-China relations on reciprocity and a ‘level playing field’ has become increasingly popular. In 2017, France, Germany and Italy prompted the European Commission to come up with a legislative proposal introducing foreign direct investment controls at EU-level in some areas, and the coordination of existing national foreign direct investment screening activities among member states.

Legislation underway in Brussels

The issue is very controversial. EU capitals are split between those that wish to avoid any slow-down of vital foreign direct investment inflows into their economies and those fearing a Chinese “buyout” of domestic firms. According to EU treaties, national security issues are an exclusive member state competence – no member state really likes the idea of EU-level interference in such sensitive decisions. At the same time, foreign firms invested in the EU to take advantage of the EU’s single market to expand their influence, justifying, so proponents say, some EU-level oversight.

The central tenet of the European Commission’s regulatory proposal of September 2017 is the establishment of a cooperation mechanism between member states and EU regulators to share information on foreign investments decisions in each member state and raise concerns over takeovers in another member state. The European Commission is expected to  have a direct role in scrutinising foreign investments in projects and programs of EU interests or with EU funding support.

Twelve EU countries already have legislation and mechanisms in place that allow them to screen and potentially block foreign takeovers based on national security or public interest grounds. But the design, scope and implementation of these rules vary significantly across states.

In the United States, the Committee of Foreign Investment reviews transactions that could result in the control of a US business by a foreign person. The President can block such transactions if they raise national security concerns.

The EU would not replicate this system.

While the decision to approve an investment would still be taken by each member state individually, the current legislative draft proposal foresees that the European Commission would be able to issue opinions and question takeover approvals if an investment in one country may affect the security or public order in another.

The EU’s new rules would not only apply to Chinese investments but to any international investor in a non-discriminatory manner.

The draft legislation is currently under scrutiny by the European Parliament and the representatives of the member states. Some of them, chiefly Emmanuel Macron’s France, would like to see its approval by the end of this year, or before the 2019 European elections, at the latest.

Implications for investors

The EU’s proposal to screen foreign investments may delay merger reviews in Europe. If the legislation is enacted, companies from outside the EU will probably need additional regulatory approvals and face longer reviews when bidding for certain EU companies.

EU member states will still make the decision on whether to approve an investment or not, but only after comments from other countries and EU regulators have been taken into consideration. Mergers and acquisitions are more likely to undergo increased scrutiny if they may affect critical infrastructure, digital and other high technology, space, transport, or energy..

On the other hand, an EU-wide investment-screening rule may give buyers more certainty than existing national measures currently do within the bloc. Although 12 EU countries can already screen and block deals based on national security or public interests, the design, scope and implementation of these rules vary significantly across states. An EU framework could help make these rules more consistent.

And Britain in all this

The UK will have to implement the new EU FDI screening scheme for as long as it remains a member of the EU and during any status-quo transition period agreed after Brexit date – if the piece of legislation gets approved before or during that period.

Interestingly, despite having been often critical in Brussels about restrictive trade and investment policies, London is working in parallel on its own new national rules on foreign acquisitions.

As of June 11, it will be harder to invest in military products, computer hardware and quantum technology in the UK. In May 2018, the UK parliament approved new merger thresholds to allow the government greater intervention in transactions raising national securities concerns. The Government will now be able to intervene in deals where the target’s UK turnover exceeds £1 million, up from an existing £70 million threshold or where the target alone has a 25% share of the supply of any goods or services in the sectors abovementioned.

The push for new rules follows on the attempted takeover of Unilever by Kraft Heinz in 2017, which triggered concerns among politicians regarding the vulnerability of UK firms and the long-term effects of intellectual property right changes. Additionally, the government aims to introduce in mandatory notification requirements for foreign investments in the civil nuclear, energy, telecommunication and transport sectors.

This legislation is likely to have a greater impact on foreign companies investing in the UK than the proposed EU legislation – regardless the outcome of the Brexit process. While the UK law may increase scrutiny over the deal and the UK government may eventually oppose it on national security concerns, the EU law might just add another extra procedural steps to any foreign investment transaction.


Clelia Imperiali is Bloomberg Intelligence’s Trade Policy Analyst, and Aitor Ortiz is Bloomberg Intelligence’s Competition Law Analyst.

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