EU Institutions Reach Political Agreement on New Foreign Direct Investment Screening Regulation

The Council's presidency and the European Parliament's representatives have today reached a provisional political agreement on the revision of the foreign direct investment (FDI) screening regulation.

While the full text of the agreement is not yet available, certain preliminary points can be drawn from the press release.

Mandatory Screening of Critical Technologies and Sectors

To ensure a greater degree of harmonisation across the EU, the co-legislators agreed that all Member States will establish screening mechanisms covering a targeted and clearly defined set of sensitive areas where they must screen foreign investments. This marks a fundamental shift from the current voluntary approach, which only included a non-binding list of suggested areas.

The minimum scope that Member States will be required to screen includes:

• Dual-use items and military equipment
• Hypercritical technologies, such as artificial intelligence (aligned with EU AI Act definitions and focusing on general-purpose AI with relevance to space or defence), quantum technologies and semiconductors
• Critical raw materials
• Critical entities in energy, transport and digital infrastructure, based on a risk-based assessment by the Member State where the EU target is established
• Electoral infrastructures (e.g. voter databases, voting systems, electoral management systems)
• A limited list of financial system entities, narrowed down to include only central counterparties, central securities depositories, operators of regulated markets, operators of payment systems (excluding central banks) and systemically important institutions

It should, however, be noted that Member States remain free to expand their screening mechanisms to other sensitive areas and sectors.

Enhanced Coordination Mechanism

The agreement also significantly strengthens the cooperation mechanism between Member States and the European Commission whilst preserving Member States’ national sovereignty over final decisions.

According to the press release, a notable change will be the level of consideration that a screening Member State must give to comments from the Commission or other Member States. Currently, the Member State must give “due consideration” to those comments. Under the new rules, the screening Member State will have to explain how the comments were considered, including reasons for any disagreement, without prejudice to sensitive national security considerations. According to the agreement, the Commission may assist the host member state in gathering information.

The agreement also includes a number of operational improvements. For example, it provides for an optional single portal for the electronic filing of foreign investments, which can be set up if at least 9 Member States request it.

The co-legislators also agreed on measures to prevent circumvention, such as setting up a new shared database between authorities.

Next Steps and Timeline

The provisional agreement will now be endorsed by the Council and the Parliament before being formally adopted. The new rules will start applying 18 months after the entry into force of the regulation.

Implications for Investors

The increased consistency across national mechanisms is to be welcomed, as it will reduce the administrative burden for investors. The further clarifications of risk factors for assessing foreign investments will also assist investors in understanding the elements which authorities may consider in their screening exercise. 

Nevertheless, national differences will persist and a carefully considered FDI strategy will remain essential for cross-border transactions.

Parties should therefore keep the following in mind for M&A transactions:

• Undertake a thorough assessment to ascertain which FDI regimes apply
• Where one or more regimes are applicable, ensure that contracts should include a condition precedent that regulatory approval should be obtained before closing
• Include a provision to require non-notifying parties to cooperate with the process and provide the necessary information within a reasonable timeframe
• Include long-stop dates, ensuring these are sufficiently far in the future to accommodate for any clearance delays

• Include provisions for remediation options and the implications of potential refusal by the screening authority should be included

   

For further information or guidance, please contact Baptist Vleeshouwers or Tialda Beetstra.