EU Commission takes cautious steps towards Screening of Outbound Investments

Inbound FDI screening has been in the spotlight for several years now, in particular following the adoption of the FDI Regulation in March 2019 and the development of national FDI regimes (noting that FDI clearance is a matter of national sovereignty and unlike merger control there is no EU clearance). However, the focus on outbound investments from the EU has been less prominent until recently. That changed in October 2022, when the European Commission (Commission) announced its intention to explore the need for additional tools to control outbound strategic investments. By January 2024, the Commission unveiled a series of new initiatives aimed at bolstering the EU’s economic security, including a White Paper and the launch of a consultation “to identify potential risks stemming from outbound investments in a narrow set of technologies”.  

The screening of outbound investments aligns with the global trend towards greater scrutiny of cross-border investments. Some countries, like Japan[1] and China,[2] already have control regimes in place, while others, like the United States,[3] are in the process of developing them. In Europe, Italy’s so-called “Golden Power” regime and the UK’s NSIA can (indirectly) affect outbound investment as a result of the FDI screening regime.[4]

While the discussion is still in its early stages, the fact-finding and risk-assessment exercise that the Commission intends to launch may already affect EU businesses engaging in outbound investments, particularly those in the advanced semiconductors, artificial intelligence, quantum technologies and biotechnologies sectors. 

What is the issue? 

The EU is increasingly concerned about the security risks associated with outbound investments, particularly in advanced technologies. The Commission fears that these investments could lead to the leakage of sensitive technologies and knowhow, posing a threat to international stability and security by enhancing the military and intelligence capabilities of potentially harmful actors. Notably, while the EU already restricts the export of dual-use technologies and has growing frameworks on FDI screening that allow Member States to prevent the export of sensitive technologies or restrict risky inbound investments, neither of these EU regulatory regimes involves screening investments by EU companies into third-country entities.

Information gathering stage 

The Commission however admits that it is not entirely clear, at this stage, which outbound investments could pose a risk to the common EU security, due to a lack of detailed data at national level. To overcome this knowledge gap, the Commission has identified the following next steps:

1. Consulting stakeholders on the proposed monitoring and review of certain outbound investments.
2. Conducting a 12-month monitoring period of outbound investments by Member States to assess the risks to EU security.
3. Publishing the Commission’s assessment on whether a policy response is warranted, including potential measures.

The Commission published the responses to the targeted consultation in July 2024. The responses are currently being assessed with a view to developing a Commission recommendation to EU Member States to launch the proposed monitoring and review.

Proposed contours of outbound investment monitoring and risk assessment 

Which transactions would be covered? – The Commission argues that a broad range of transactions should be monitored, including acquisitions, mergers, asset transfers, greenfield investments, joint ventures and venture capital deals. In the consultation, both public and business respondents questioned the necessity of including mergers and greenfield operations, given the low risk involved in these types of transactions.

The Commission also wants Member States to review indirect investments, channeled through third-country entities, subsidiaries or joint ventures. However, monitoring of portfolio investments is carved out in the Commission’s White Paper.

Additionally, the Commission is assessing whether the monitoring phase should include other critical activities, such as R&D cooperation or practices to attract highly specialised personnel, due to concerns that these could allow foreign entities to gain access to knowhow or IP. This proposal was largely opposed by business respondents in the consultation, who emphasised the need for mobility of highly skilled workers as a condition to innovate and remain competitive. Respondents were concerned that any form of restriction, even by a mere monitoring requirement, would have a negative chilling effect. 

Finally, the Commission invites Member States to pay close attention to license applications for the export of dual-use items linked to outbound investments. 

Which sectors would be targeted? – The Commission proposes to focus initially on the sectors which it considers “highly likely to present the most sensitive and immediate risks related to technology security and technology leakage”. These include advanced semiconductors, artificial intelligence, quantum technologies and biotechnologies, mirroring the proposals introduced in the U.S. Following the consultation, certain public authorities suggested to eventually extend the scope of outbound investment screening to all ten technologies listed in the Commission’s recommendation on critical technology areas.[5]

Which destination countries would be caught? – While the monitoring exercise should not exclude any investment destinations, the Commission suggests initially focusing on high-risk countries. This risk assessment should consider the past behaviour of the country concerned, including violations of the UN Charter, and the potential use of technologies or items in war or conflict situations, breaches of human rights or the proliferation of weapons of mass destruction.

Time period – The monitoring will be conducted for a period of 12 months. However, the Commission suggested that Member States should assess transactions in selected technology areas completed since 1 January 2019. The idea to assess transactions retroactively was, however, dismissed by several public authorities who responded to the consultation, as practically impossible. 

What information will be gathered? – The Commission argues that Member States should be able to gather all information required to conduct their risk assessment. This should at least include: 

• Information on the parties and their ultimate beneficial owners (UBOs) or individuals involved in the critical activities.
• Details on the investment, including the type, timing, and approximate value, or an exact description of the activities.
• Information on the critical technologies concerned by the investment or activity.
• Information on previous, planned, or contemplated future transactions by the same parties.

During the consultation, businesses raised concerns about data protection, confidentiality, and the immense volume of data that might need to be provided. They therefore urged that data collection be limited to what is strictly necessary.

How will the information be gathered? – The Commission remains relatively vague about how Member States should collect information on outbound investments. Suggestions include using or adapting reporting obligations to central banks or national statistical offices and similar institutions for statistical and balance of payment purposes, notification requirements to national export control authorities for the export, brokering, technical assistance, transit, and transfer of dual-use items, as well as any investment transactions.

During the consultation, businesses unsurprisingly expressed concerns about the added administrative burden posed by another reporting obligation. They strongly urged the Commission to ensure that monitoring remains strictly voluntary. 

Risk assessment – Based on the results of the monitoring exercise, Member States must carry out a risk assessment to identify and analyse vulnerabilities that may impact EU or Member States’ security and the likelihood of these risks materialising. A common methodology will be developed later. 

Some concluding thoughts 

The current developments primarily focus on gathering information, monitoring, and analysis rather than presenting concrete proposals on screening outbound investments. However, the Commission’s proposals regarding the fact-finding and risk-assessment exercise indicate that this effort could already impact EU businesses involved in outbound investments:

1. Retroactive scrutiny of transactions already closed – While the White Paper only covers the monitoring of such transactions and not their actual screening, it cannot be excluded that this exercise will attract more regulatory attention to certain transactions that were implemented several years ago. This could lead to increased scrutiny and potential regulatory challenges for businesses. However, it remains to be seen whether the proposal to cover all transactions completed since 1 January 2019 will be adopted, given the strong opposition from certain public respondents in the consultation. 
2. Information gathering efforts – While details remain to be defined, especially regarding the compulsory or voluntary nature of the monitoring process, companies may be required to respond to requests for information as part of this monitoring exercise. Confidentiality and data security should be fundamental aspects of this initiative. This could impose additional administrative burdens and necessitate the allocation of resources to comply with these requests.
3. Identification of high-risk countries – The proposed criteria for identifying high-risk countries are relatively broad, referring to “risks” and “potentiality”, which could result in significant differences as to how Member States conduct the monitoring. For the Commission to effectively analyse the results, a uniform approach across Member States is required. The lack of clarity may create uncertainty for EU businesses with investments in countries potentially defined as “high-risk”.

Overall, the Commission remains cautious, and many aspects of the preliminary exercise are not yet clear. Currently this leads to uncertainty for businesses of what to expect and to what extent there will be an obligation to cooperate. It remains to be seen how the new Commission will deal with this in the coming legislature. 

If you need more information or further guidance in this area, please contact Baptist Vleeshouwers and Tialda Beetstra.

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[1] https://www.mof.go.jp/english/policy/international_policy/fdi/Laws_and_Regulations/FEFTA.pdf. 

[2] https://www.gov.cn/gongbao/content/2018/content_5280579.htm; https://www.gov.cn/zhengce/content/2017-08/18/content_5218665.htm. 

[3] https://home.treasury.gov/system/files/206/Executive%20Order%2014105%20August%209%2C%202023.pdf. 

[4] Decree Law 15 March 2012 No. 21 concerning provisions on special powers on corporate structures in the defense and national security sectors, as well as for activities of strategic importance in the energy, transport and communications sectors; UK’s National Security and Investment Act 2021 which allows the government to scrutinise and intervene in certain acquisitions made by anyone, including businesses and investors, that could harm the UK’s national security.

[5] The ten technologies are: advanced semiconductor technologies; AI technologies; quantum technologies; biotechnologies; advanced connectivity, navigation and digital technologies; advanced sensing technologies; space and propulsion technologies; energy technologies; robotics and autonomous systems; and advanced materials, manufacturing and recycling technologies.