Belgium still open for business - How the EU Regulation on foreign direct investments may affect future Chinese investments?
Katrien Vorlat
Xiufang (Ava) Tu
On April 10, 2019, the EU regulation (Regulation (EU) 2019/452 ) of March 19, 2019 establishing a framework for the screening of foreign direct investments into the Union (the “Regulation”) entered into force. The Regulation shall apply in all Member States per October 11, 2020. It is an important first step by the EU towards a coordinated approach in the screening of foreign direct investments (“FDI”) transactions.
The Regulation was adopted upon request of France, Germany and Italy following a major inflow of Chinese investments into the EU between 2015 and 2017. It is a response to the decentralized and fragmented system of monitoring FDI inflows into EU Member States.
What is the goal of the Regulation?
To date the only screening of transactions at EU level was limited to merger control ensuring that the transaction does not significantly impede effective competition in the EU or a substantial part thereof. The Regulation does not introduce some CFIUS type of blocking mechanism or suspension powers in respect to FDIs, but it aims a stronger coordinated approach to assess the impact of FDIs on security and public order while remaining an attractive place for investment.
Today in the EU there is a diverse approach in respect to scrutiny of FDIs. Half of the Member States have their own procedures. National review mechanisms vary in many respects such as sectors, competent authority, timing, filing obligation etc. The Regulation does not aim to put an end to that. Member States retain a significant degree of freedom to protect their essential interests.
Affected investments
The Regulation targets at investors from non-EU countries, such as Chinese investors. Foreign direct investment is defined broadly to encompass all types of share or asset deals, the creation of joint ventures or undertakings whereby the foreign investor has control over management or assets of the EU undertaking. Portfolio investments are in principle outside the scope of the Regulation.
The EU review framework focuses on FDI’s likely to affect security or public order of Member States or the EU. The screening will occur on a broad and non-exhaustive list of screening factors aiming to protect strategically significant sectors, such as (i) critical infrastructure (such as ports, energy, transport, data processing, communications, media, defence etc) , (ii) critical technologies ( such as AI, robotics, semiconductors, biotech, aerospace, cybersecurity etc) , (iii) supply of critical inputs including energy, raw materials and food security, (iv) access to sensitive information (access to or control of sensitive data) or (v) freedom and pluralism of the media.
In addition to these listed sectors, the Regulation recommends Member States and the Commission, to take into account investor ownership structures and in particular whether the foreign investor is controlled, directly or indirectly, by a foreign government through ownership or significant funding. This additional screening factor will allow Member States and the EU Commission to scrutinize more carefully investments of Chinese state owned enterprises (SOEs), but also private companies which are either financially, or strategically tied to the Chinese government. It is uncertain how this will be interpreted in practice, whether Chinese companies with substantial financing from Chinese State owned banks would be considered as “controlled” by the government, is unclear at this stage.
Reporting and cooperation mechanism
The Regulation does not introduce a harmonized FDI screening regime. The objective of the Regulation is to impose minimum requirements to be incorporated in the national screening processes. Member States are allowed to maintain their national FDI screening mechanisms for FDI’s, provided they comply with the following key principles: (i) transparency, (ii) non-discrimination, (iii) certainty, (iv) accountability and due process and (v) confidentiality.
The Regulation also aims to increase cooperation between Member States as well as with the EU Commission in respect to FDI’s. To that end, each Member State shall annually report on (i) the FDI transactions in their territory and (ii) the requests received from other Member States and/or the Commission under the Regulation. The Commission will issue an overall report summarizing the national reports which will be accessible to the public, including investors.
Apart from the annual reporting mechanisms, a Member State screening any FDI, must notify other Member States if the security or public order of more than one Member State is expected to be affected. In such case more information may be requested from the reviewing Member State. Both the Member State and/or Commission can issue comments or opinions which shall be taken into due consideration by the reviewing Member State. Where a project or programme of interest to the EU is concerned, the member state shall take “utmost account” and provide an explanation to the Commission if its opinion is not followed.
Finally, there is a possibility of an ex-post scrutiny of a transaction which is not reviewed in a given Member State either due to the lack of national screening system, or the transaction is simply out of national screening scope. up to 15 months after completion, a transaction may still be subject to comments of a Member State or opinions of the Commission. It is unclear what the consequences are in case the Member State would disregard the input received from another Member State or the Commission in respect to such FDI. On the other hand, on what legal basis shall the non-screening member state intervene and impose for instance conditions or require to reverse a completed transaction if required so by a Member State or the Commission.
Future outlook of the Regulation
FDI scrutiny across the EU is new and ambitious. It is most likely a first step toward a more homogeneous regime of FDI screening within the EU. At this stage the Regulation gives rise to numerous questions as to timing, procedure, confidentiality and cost impact.
Accordingly, there is a lot of uncertainty for investors as to when the clock starts ticking and when the different phases end. The post-closing scrutiny regime even more increases uncertainty for foreign investors as the Regulation is silent on how it will work in practice. Finally, in light of the multiple exchanges in respect to the affected investment, special attention needs to be paid to safeguarding confidentiality of disclosed information in respect to the investment. Principles of due process will require that the investor is given access to comments of Member States and/or EU Commission, a procedure which is currently not foreseen.
All these issues will need to be urgently addressed to give more certainty and comfort to any future Chinese investor. As a result thereof an even more complex procedural environment will be created for certain investments in the EU.
What does it mean for Belgium?
In Belgium, the good news is that there is no national security review regime and there is at this stage no intention to introduce such regime. It is Belgium’s intention to remain an open and attractive economy for foreign investors. Only time will tell how the post-closing scrutiny regime imposed by the Regulation will affect investments into Belgium in vital industries. However, Chinese investors should be conscious that the barriers resulting from the Regulation may impact their investments into Belgium.
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