Search for a report, a publication, an expert...
Institut Montaigne features a platform of Expressions dedicated to debate and current affairs. The platform provides a space for decryption and dialogue to encourage discussion and the emergence of new voices.

The New Landscape of Investment Screening in Europe

The New Landscape of Investment Screening in Europe
 Mathieu Duchâtel
Resident Senior Fellow and Director of International Studies

The EU’s framework for screening foreign investment (Regulation 2019/452) has been operational for 8 months now. This means that the European Commission has a powerful tool at its disposal for defending European interests. It’s also a tool that can be improved with time and experience. What are the early lessons to be learned? The number of transactions screened under the new mechanism is not public. But according to a leak, the Commission had been notified of 47 transactions between October 2020 and January 2021. Linklaters estimates this to be at an average of 200 screened transactions per year. This is a sizable number and even if the Commission does not communicate on specific cases: enough is already known to allow for some observations. 

The good news is that the mechanism works and is a rather efficient communication system between the Commission and Member States. The regulation has created a legal obligation for all Member States to notify the Commission when a transaction is being screened by national authorities. This is a major achievement in terms of access to information: whenever a transaction is screened, the regulation authorizes the Commission and EU Member States to request additional information. The Commission is finally getting on top of the big picture of problematic deals.

On that basis, the Commission issues opinions which reflect information collected from within the Member State where the transaction is occurring, but also from other Member States with stakes in the deal - for example when the company being purchased has subsidiaries or R&D units elsewhere in Europe. The national government remains the ultimate decision maker, but the EU regulation makes it clear that states must give due consideration to the comments of other Member States and to the opinion of the Commission. 

In typical EU fashion, the best screening practices from the most advanced Member States are progressively diffused to the rest of Europe.

But what if they don’t? This is still a big unknown. The answer lies in the new politics of investment screening in continental Europe. When screening a particular transaction, the balance of power between the Commission and Member States will never be a given. Intelligence and analysis capacities, and human resources can provide a decisive advantage. We could see situations emerge where the Commission has a better understanding of the multiple dimensions of a deal than the Member State where the deal is actually taking place.

The Commission has set up a new unit in DG Trade, that coordinates intra-European communication and carries out the bulk of the work that forms the basis of the Commission’s opinions on particular transactions. We could also see situations where Member States exert pressure on other Member States.

In typical EU fashion, the best screening practices from the most advanced Member States are progressively diffused to the rest of Europe, thanks to the pivotal role of the Commission. At the end of May 2021, 18 Member States had notified the Commission about their screening mechanisms, in line with the regulation requirements. The Czech Republic and Slovakia are the latest countries to have adopted screening legislation in early 2021. The Commission expects 23 EU Member States to have investment screening systems in place by 2022 - Belgium, Estonia, Greece, Ireland and Sweden are next on the list. Others have amended their regulations to tighten their screening procedures, sometimes to better mirror the EU terminology regarding security and public order risks. Germany, for example, has added mandatory screening for satellite systems, artificial intelligence, robots, autonomous driving/unmanned aircrafts, quantum mechanics, and critical raw materials, during a May 2021 amendment of its Foreign Trade and Payments Ordinance.

Progress is real, but uneven across the EU. Some deals may well fall through the cracks of the system. Not all Member States have a screening mechanism in place yet, and there are variations in scope and in criteria between legislations across Europe. Some states with new legislation and administrative capacities in place face a lack of well-trained human resources - due diligence can be an extremely challenging task. But overall, screening is becoming a natural reflex in Europe. The French Treasury recently announced that it had screened 275 transactions in 2020, a 27% increase compared to 2019 and 50% compared to 2018. Germany (159 in transaction in 2020) and Italy (69 in 2020) are also screening on a regular basis.

In March 2021, the Italian Council of Ministers blocked the sale of 70% of Milan-based LPE to the Chinese company Shenzhen Investment Holdings Co. LPE produces epitaxy reactors for the semiconductor industry. The decision highlights three elements of the EU investment screening system. First, it is a reminder that the Commission is under no legal obligation to publish its opinions. Its opinions are for the use of Member States only and have to remain confidential. If someone in Italy had not leaked the case to the media, it would most likely have gone under the radar. Thankfully for the Commission, its particular opinion of the case was not leaked.

Second, the leak revealed that Sweden and the Netherlands had to comment on the case, even though in the case of Sweden, there is no screening legislation in place yet. This practice of intra-European communication underlines the key coordination role of the Commission alongside the Member State performing the screening. 

It is interesting that the first screening case leaked to the public concerns high technology.

And third, while Chinese investment in European critical infrastructure has traditionally received most of the attention, with risks of excessive leverage sometimes mentioned, it is interesting that the first screening case leaked to the public concerns high technology, and the semiconductor sector. It underlines a more vigilant and defensive Europe, determined to protect its technological assets.

The EU regulation also encourages cooperation with third countries on policies and practices related to investment screening. Investment screening was highlighted as an area of cooperation in the final statements of the recently concluded G7 summit and EU-US summit. As the EU improves its toolbox of defensive measures to address asymmetries in EU-China relations, it is in the EU’s interest to cooperate with the screening authorities of other countries. However, it is still not clear how or under which modalities this will be done. This is a practical question for the EU’s relations with the United States and the United Kingdom, for different reasons.

The Biden Administration wants to create a link between the United States’ Committee on Foreign Investment (CFIUS) and the European Commission’s screening authorities, to ensure regular intelligence sharing. This reflects a recommendation recently advocated by a group of scholars at the Yale Law School.

Investment screening was highlighted as an area of cooperation in the final statements of the recently concluded G7 summit and EU-US summit.

The announcement at this week’s EU-US summit of the creation of a Trade and Technology Council specifically mentions investment screening as an area of cooperation, but without specific modalities of how this will work. Each side will keep its ongoing cases confidential. But one can imagine that from the perspective of the Commission, information sharing could be useful on aggregate FDIs and problematic transactions trends. At a next level, much more difficult to reach, the two sides could share information on sources of foreign investment - specific companies - without revealing their targets and the considerations at play when screening. This is a delicate, but not impossible exercise, especially if the EU and the US are committed to deepening policy coordination vis-à-vis China.

The UK would appear to be a natural partner on investment screening matters for the EU. In April, it adopted a National Security and Investment Act. The act creates a screening system for transactions that pose risks to national security, and an administrative unit within the Department for Business, Energy and Investment Strategy, the Investment Security Unit, to coordinate the screening procedure. The system will be operational by the end of 2021. 

Some notable differences exist with the EU system however: the clear listing of 17 sectors "most likely to give rise to security risks"; the distinction between acquisition of "entities" (companies) and "assets", such as databases, software, source code and algorithm, with both entities and assets falling within the scope of the legislation. These differences are in no way an obstacle to EU-UK information sharing. But what about politics? At this stage of development of its screening system, the UK’s cooperation priority appears to be with the US and other Five-Eyes partners, such as Australia. But on matters of technology transfers, national security and the integrity of critical infrastructure, EU-UK cooperation may prove useful for both parties regardless of the political atmosphere across the Channel. 


Copyright: Kenzo TRIBOUILLARD / AFP

Receive Institut Montaigne’s monthly newsletter in English