Since the implementation of the EU Foreign Direct Investment (FDI) Screening Regulation, and the entry into force of national FDI regimes, dealmakers and advisors have been adapting to a "new (regulatory) normal".
Having gathered data for another complete year (2022), the European Commission (EC) has now published its Third Annual Report on EU FDI screening.
Our thoughts and key takeaways from the Report are as follows:
1. Global FDI into the EU is decreasing. In 2022, FDI into the EU decreased by 14.3% compared to 2021. There are multiple reasons:
- A general decline in dealmaking from economic slowdown, rising cost of financing, inflationary trends (worsened by geo-political conflicts), pressure on energy and commodity prices, and generalised supply chain disruptions.
- The US, the UK and China reduced their investment into the EU, with China remaining the investor jurisdiction most heavily impacted by FDI screening regimes.
- The EC's sanctions against Russia and Belarus.
2. More deals are subject to formal screening, but there remain several "fail-safe" filings. In 2022, the number of applications accepted for formal review by EU national authorities increased by 26% compared to 2021. However, of the 1,444 authorisation requests and ex-officio cases in 2022, a significant 45% were deemed ineligible or did not require formal screening because of an evident lack of impact on security and public order. This suggests that dealmakers are still taking a conservative view, and filing applications on a cautionary basis.
3. There has been a decrease in the number of commitments imposed. In 2022, 86% of transaction reviewed formally were authorised without conditions. Only 9% of cases involved an approval subject to conditions or mitigating measures, which constitutes a sharp (and somewhat surprising) 14% decrease from 2021. Only 1% of all decided cases were blocked, and a further 4% were withdrawn by the parties.
4. Manufacturing remains the most scrutinised sector in Phase II cases. Within manufacturing, the spotlight on energy, aerospace and defence is quickly expanding to capture other sub-sectors, such as communications, data processing or storage, semiconductors, cybersecurity, and health. Information and Communications Technology (including computer programming, software publishing, data processing and hosting, wireless telecommunication activities, etc.) is the second most scrutinised sector, followed by Transport and Storage.
5. Discrepancies among Member States' FDI regimes. The report acknowledged that, while the EU FDI Regulation aimed to set minimum standards for national FDI regimes, there remain discrepancies between Member States, notably on what constitutes a formal screening of an FDI, timelines, sectoral coverage, and notification requirements. As FDI regulation is a national prerogative, this is not surprising (albeit inconvenient in the context of multi-jurisdictional deals).
6. Incoming FDI regimes and the revised EU FDI Regulation. At the time of writing, the following EU Member States have not yet fully implemented a formal FDI screening regime:
- Bulgaria proposed a FDI screening bill to be reviewed by Parliament committees, with a final vote expected by year-end. The regime is likely to become fully effective by Q4 2024.
- Croatia established a National Contact Point and the Interdepartmental Commission, which will act as competent authorities for a coordination mechanism under the EU FDI Regulation (but has no formal filing requirement yet).
- Cyprus introduced draft legislation in 2022, which must be reviewed and approved by the House of Representatives.
- Greece introduced a proposal for an FDI screening regime which is currently undergoing the legislative process.
- Ireland published draft legislation in 2022, which is being considered by its Parliament. The screening mechanism is expected to come into force in Q1 2024.
- Sweden enacted new investment screening rules that are due to enter into force on 01 December 2023.
Finally, following its 2022 study on the FDI cooperation mechanism, and a consultation closed in July 2023, the EC is evaluating the current framework, and is expected to propose a revision of the EU FDI Screening Regulation before the end of 2023.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
