Could FDI screening become the norm in the EU and UK?

In recent months, both the European Commission and the UK government have made proposals to reinforce national security assessments of FDI in response to increased concerns that foreign investment could provide opportunities for espionage, sabotage or undue political leverage. 

A key focus is China, which has increased investment across Europe by a factor of 15 since 2010. While this brings in much-needed funds, some critics have expressed concerns that this has already led some member states to dial back EU criticism of China’s human rights record, and that China could strengthen its military capacity through acquiring technological know-how, undermine EU competitiveness by gaining access to key intellectual property, and take control of critical national infrastructure.  

The EU 

European controls are widely considered to be among the least stringent in the developed world, well short of the system administered by the Committee of Foreign Investment in the United States (CFIUS), for example. Fifteen EU member states have a mechanism in place, but some, led by Germany, France and Italy, want to strengthen these protections and to harmonise them across the EU to protect the rules-based open trade system from abuse. Others, notably the Nordic countries and Greece, are wary that such moves could become a barrier to valuable investment and risk introducing protectionism by stealth, potentially provoking countermeasures from China, India or the US.

The EC’s proposed draft regulation does not aim to create a screening regime at the EU level, but simply a harmonised framework for member states operating national regimes. It would establish: 

• common principles of transparency, predictability and equal treatment for foreign investors;

• clear timeframes for reaching decisions; judicial review of decisions; 

• common criteria in selecting proposals to be assessed, including definitions of critical infrastructure, technologies and inputs, and access to sensitive information; and

• assessments to be conducted by the commission if FDI may affect programmes with a significant share of EU funding or critical areas of infrastructure or technology.  

Decisions would ultimately remain for member states but the commission could issue non-binding opinions that could in due course develop into de facto benchmarks for member states’ assessments.

In practical terms, the proposed regulation should eventually contribute to harmonising EU member state screening procedures and assessments. But it remains to be approved by the European Parliament and EU member states and, given the significant differences among member states, it is likely to take time and to undergo some revision before it is adopted.

The UK

In parallel, a recently published UK Green Paper proposes reforms to protect national security in a targeted and proportionate way so that public confidence in the FDI regime remains high. 

Under the Enterprise Act 2002, ministers may intervene in mergers on issues of national security, financial stability and media plurality if the acquired company has an annual turnover of more than £70m and/or the merging companies will collectively supply or acquire 25% or more of goods or services of a particular description in the UK, provided the merger results in an increment to that share. In the light of an assessment, the government may impose conditions on the deal or, in extremis, block it altogether.

In the short term, the government proposes to reduce this threshold for the highest risk sectors to an annual turnover of £1m and to drop the requirement for the merger to increase the share of supply above 25% or more. These lower thresholds would apply to enterprises that:

• design or manufacture items or hold related software and technology specified on the UK Military List, UK Dual-Use List, UK Radioactive Source List and EU Dual-Use Lists;

• own or create intellectual property rights in multi-purpose computing hardware, or design, maintain or support its secure provisioning or management; or 

• research, develop, design or manufacture goods for use in, or supply services based on, quantum computing or quantum communications technologies. 

In the longer term, the government has invited views on two main options. First, expanding the existing voluntary notification regime to allow for scrutiny of any transaction involving the acquisition of more than 25% of a company’s shares or votes, or gaining significant influence or control over a company or over its assets or businesses in the UK. These powers might be extended to cover new projects and sales of bare assets such as machinery or intellectual property. 

A second option would go further, introducing a mandatory notification regime for foreign investment in essential functions in key sectors such as civil nuclear, defence, energy, telecommunications, transport, military, dual-use and advanced technology. Other areas might include government and emergency services; new projects expected to provide essential functions; specific businesses or assets even though the wider sector in which they operate is not in scope; and plots of land or buildings in proximity to a national security-sensitive site.

Post-Brexit, UK investors in the EU may find their proposals subject to review by member state governments and possibly also by the EC, and UK businesses in key sectors seeking overseas capital may see an additional layer of scrutiny applied to their investors, particularly those from China.

Richard Tauwhare is senior director at law firm Dechert LLP