COVID-19: Impact on the screening of foreign direct investments into the European Union

In the context of the COVID-19 crisis, the European Commission published a Communication, on 25 March 2020, on guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe's strategic assets, ahead of the application of Regulation (EU) 2019/452 (FDI Screening Regulation) (the "Communication").

The Commission considers that the EU's openness to foreign investments needs to be balanced by appropriate screening tools.

The FDI Screening Regulation  provides a framework for the screening by Member States of foreign direct investments (FDI) into the European Union on the grounds of security or public order. It offers a mechanism for cooperation between Member States and the Commission in this regard. The FDI Screening Regulation has already entered into force but will apply from 11 October 2020. 

Under existing EU rules, protection of public health is recognised as an overriding reason in the general interest. As a result, Member States can impose mitigating measures (such as supply commitments to meet national and EU vital needs) or prevent a foreign investor from acquiring or taking control over a company. 

Under the FDI Screening Regulation, the final decision regarding the adoption of protective measures in this regard remains the sole responsibility of the Member States. According to the list of screening mechanisms  notified by Member States¹ , national FDI screening mechanisms are currently in place in 14 Member States only. Luxembourg has not established such a system.

Taking into account the current public health crisis and related economic vulnerability, including volatility or undervaluation of European stock markets, the Commission calls upon Member States that already have an existing screening mechanism in place to make full use of tools available to them under EU and national law. In addition, the Commission calls on the remaining Member States to set up a fully-fledged screening mechanism and, in the meantime, to consider all options, in compliance with EU law and international obligations, to address potential cases where the acquisition or control by a foreign investor of a particular business, infrastructure or technology would create a risk to security or public order in the EU.

Moreover, the Commission encourages cooperation between Member States regarding FDI screening of investments which could have an effect on the single market. Foreign acquisitions taking place now already fall under the FDI Screening Regulation and could be reviewed under its cooperation mechanism, which will be fully operational from October 2020.

Concerning the restriction of capital movements, the Commission recalls under which specific circumstances free movement of capital, notably from third countries, linked to acquisitions may be restricted. In particular, in case of FDI in companies with valuations considered well below their true or intrinsic value, the possibility to introduce restrictions could be considered taking into account the actual or potential impact of those investments on the safeguard of the public interests mentioned above (for instance whether they may lead to over-reliance on foreign investors from third countries for the provision of essential supplies or essential services). In terms of appropriateness of those measures, their potentially adverse impact on companies and the economy at large should also be considered and possibly mitigated.