Foreign investments from third countries. A change in the European optics?
30.04.2020 – Author: Ada Butnaru
The Covid-19 pandemic situation has emerged as more than just a healthcare crisis. Accordingly, the focus is to address and anticipate at the same time the economic and social implications which are still at an early stage. What we are rapidly starting to acknowledge is that the circumstances created by the pandemic have revealed legislative gaps and vulnerabilities, which need to be addressed in order to avoid further negative impacts to the extent possible.
At European level, Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 (“FDI Regulation”) establishing a framework for the screening of foreign direct investments into the Union sets forth the framework in which member states of the European Union can screen foreign investments in their countries and decide even to prohibit them if such is likely to affect security or public order. FDI Regulation is to be applicable starting with October 11, 2020.
In an attempt to strengthen the protection of European strategic assets, the European Commission has issued Guidelines regarding the use of the FDI Regulation. The Guidelines, issued on March 25, aim to offer guidance for the Member States within the framework of the FDI Regulation.
In a nutshell, the FDI Regulation’s main purpose is to create a systematic mechanism engaging all Member States capable of coordinating the screening of FDIs (i.e., investments made by investors based outside the EU/EFTA), with a high risk of altering public order in the European Union. It is worth mentioning that although the screening process is intended to take place at the level of each Member State, the Commission has in its powers the ability to raise concerns about a specific investment even though the Member State has not taken any action. The same applies to other Member States which can issue recommendations about an acquisition of a particular strategic business or infrastructure in the other Member States if such would pose risks for the overall public order of the EU.
By this date, only 14 Member States have implemented a national mechanism for screening foreign investments, which varies to a great extent from state to state. While some are limited to certain sectors such as artificial intelligence, infrastructure, health, and energy, others apply to all investments that may present risks for national security.
It is precisely this kind of inconsistency that has urged a number of European leaders to address the screening of FDI to the President of the European Council in the midst of the pandemic. In a joint letter nine heads of state have expressed their requests for a coordinated response at the level of the internal market in order “to make sure that no strategic assets fall prey of hostile takeovers during this phase of economic difficulties”.
In Romania, the mechanism notified to the European Commission consists of Article. 47 (9) – (12) from the competition law no. 21/1996. According to those provisions, in case of takeover of control over companies or assets, which present risks for national security, the Government, at the proposal of the Supreme Council for National Defense, will issue a decision prohibiting the respective operation. The Supreme Council for National Defense further on approved through a decision the areas in which it will scrutinize any investments in order to assess if such may pose risks for national security. Moreover, recently, the Romanian Parliament approved an emergency government ordinance amending the petroleum law, which allows the Government the possibility to scrutinize share deals involving titleholders of petroleum agreements on grounds of national security. Hence, the Romanian state seems to have in place-required measures in order to scrutinize acquisitions on grounds of national security, however, regulations are not yet addressing a mechanism for scrutinizing new businesses.
In an effort to create a safeguarded net for the assets which are critical in the fight against the Covid-19 outbreak and to ease the growing concerns of Member States, the Guidelines emphasize the collective need of Member States to use the mechanisms already in place in order to: (i) “take fully into account the risks to critical health infrastructures, a supply of critical inputs, and other critical sectors“ or (ii) “for those currently without a screening mechanism, or whose screening mechanisms do not cover all relevant transactions, to set up a full-fledged screening mechanism and in the meantime to use all other available options”, in order to protect those assets and technology which could potentially create a breach in the security or public order in the EU.
The Guidelines also show that all sectors of the economy are equally vital for our wellbeing and no thresholds should apply when weighting in the need to screen a transaction, but rather the strategic importance it might have.
If the overall intent of the Guidelines is to create a uniform message of strength and resilience amid the undisputable hardships that we, as Europeans, are living through, there is one particular aspect that seems to be directly intended to put pressure on foreign investors and the Member States alike, and warn them against a lack of proper screening of FDIs. To this end, the Guidelines note that, although the FDI Regulation will come into effect as of October 2020, ex post comments and opinions may be provided by the European Commission and the Member States “within 15 months after the foreign investment has been completed”. As an example, an FDI that occurred during March 2020 could be subject to opinions and comments submitted by the European Commission and the Member States until June 2021, meaning 15 months after the completion of the investment.
Lastly, the Guidelines make a final attempt to encourage the Member States to focus their energy in screening investments coming from third countries and use different measures when dealing with non-EU investments, as opposed to when considering those pertaining to the other Member States, highlighting that stricter restrictions may apply on transactions involving third countries.
It is no doubt that the COVID-19 outbreak has exposed dormant concerns across not only Europe, but the entire world, but it has also offered us the opportunity to acknowledge what we should value most going forward. Although the Guidelines come at a time of uncertainty for the internal market, they only pave the way for the FDI Regulation, and it remains to be seen how the other Member States will understand to protect their assets while also being open to foreign capital.
It is worth mentioning also that in the context of the pandemic crisis, Romania has suspended transactions concerning the acquisition/sale of majority stakes in companies in the National Energy System during the emergency state. It is not clear whether this action was adopted considering the Guidelines but one must not forget that the Guidelines relate to foreign investments made by entities from third countries and not by European Union based companies while the measures imposed by the Romanian state apply independently of the identity of the potential seller/buyer in the respective transactions.
 The full list of national screening mechanisms and links to national legislation, is available at http://trade.ec.europa.eu/doclib/html/157946.htm
 Letter to European Council President Charles Michel, 25.03.2020, available at: http://www.governo.it/sites/new.governo.it/files/letter_michel_20200325_eng.pdf