Introduction

The current Regulation 2019/452 (“FDI-Screening Regulation”) provides a framework for screening foreign direct investments (FDI) into the European Union (EU), made by individuals or entities constituted or organised under the laws of non-EU countries (“Foreign Investors”). The European Commission (EC) has proposed on 24 January 2024 a revision of the current FDI-Screening Regulation (“Proposed FDI-Screening Regulation”). This legislative proposal is part of the broader European Economic Security Package, which seeks to enhance EU security in response to the growing global challenges and geopolitical tensions in recent years, such as the Covid-19 pandemic or the Russia-Ukraine conflict. The Proposed FDI-Screening Regulation brings several significant amendments that are noteworthy including the following key updates:

1. Dual legal basis of the Proposed FDI-Screening Regulation

The current FDI-Screening Regulation is based on art.207 of the Treaty on the Functioning of the European Union (TFEU) as FDI fall within the board scope of the Union’s Common Commercial Policy (CCP). The EC has now suggested a dual legal basis for the Proposed FDI-Screening Regulation, basing the act on(i) art.207 TFEU as well as (ii) art.114 TFEU. The dual legal basis shall be necessary due to the dual objectives of the proposed regulation: while art.207 TFEUemphasises that the CCP should not interfere with Member States’ internal market competences, the expanded scope of the Proposed FDI-Screening Regulation—which now includes indirect FDI—is not covered by this provision. Hence, a legal basis for intra-EU investments by Foreign Investors is needed. The EC sees art.114 TFEU as a relevant legal basis in this context as the provision aims to ensure the internal market objective and the harmonisation of Member States’ laws in order to eliminate competition distortions. This is also consistent with art.207(6) TFEU which states that the exercise of the CCP does not affect the delimitation of competences between the EU and Member States. That allows art.114 TFEU to serve as an additional legal basis without affecting the applicability of art.207 TFEU as the primary legal basis of the Proposed FDI-Screening Regulation.

2. Broader scope of application

One of the most significant changes in the Proposed FDI-Screening Regulation is the expanded scope of FDI screening. In its judgement as of 2023 in C-106/22 (Xella Case), the Court of Justice of the European Union (CJEU) ruled that under Hungary’s FDI Screening Regime, the objective of securing a regional supply of gravel, sand and clay for the construction industry does not justify restrictions on the freedom of establishment. The CJEU held that this objective does not constitute a fundamental public interest capable of supporting such restrictions on grounds of public policy or public security. Thus, CJEU clarified that the current legislation applies in accordance with art.2(1) of the FDI-Screening Regulationonly to FDI made by Foreign Investors (direct FDI).

However, the EC now seeks to broaden this scope to include investments by individuals or entities constituted or organised under EU law made through EU entities that are ultimately (directly or indirectly) controlled by Foreign Investors (indirect FDI). The definition in the Proposed FDI-Screening Regulation for an investment within the EU that is under foreign control is rather broad and includes the following three cumulative criteria:

  1. the execution of an investment by a foreign investor through its subsidiary in the Union;
  2. the purpose of the investment to establish/maintain lasting and direct links between the foreign investor and an EU company that exists or is to be established; and
  3. the provision of capital by a foreign investor to the EU company in order to carry out an economic activity in a Member State.

The recitals of the Proposed FDI-Screening Regulation clarify that financial investments, without the Intention to influence the management and control of the undertaking, should be excluded. However, it remainsunclear why the EC requires a direct link between the foreign investor and the Union target, when indirect control by foreign investors is deemed sufficient for screening. The recitals do not provide clarification on this point.

Further, the Proposed FDI-Screening Regulation leaves some ambiguity, particularly around investments by EU companies, which are ultimately foreign-owned, into another EU company, without the transaction being financially supported by the Foreign Investor. Based onthe wording of the Proposed FDI-Screening Regulation, no screening would be necessary in such cases. This will likely require further clarification in future legislative discussions.

3. Mandatory FDI screening and harmonisation

Under the FDI-Screening Regulation, Member States have the option to establish FDI screening mechanisms based on their national security and public order interests. This voluntary approach, however, has resulted in an inconsistent implementation of FDI screening mechanisms across Member States and thus created to vulnerabilities within the EU where critical foreign investments might go undetected. The Proposed FDI-Screening Regulation now requires that all Member States implement a FDI Screening Regime, ensuring a unified approach to FDI-Screening. The proposal further sets minimum screening standards and harmonised criteria for FDI in order to prevent a potential “race to the bottom” where Member States might lower their standards to attract foreign investors. This change is crucial to create a level playing field across the EU where regulatory standards are maintained without compromising competitiveness.

4. Minimum Requirements for national screening mechanisms

The Proposed FDI-Screening Regulation also outlines minimum requirements for national screening mechanisms of Member States. These include:

  1. Screening Authorities: Each Member State must designate an authority to screen FDI, ensure compliance with the respective provisions and screening decisions and prevent circumvention.
  2. Screening Procedures: FDI must be filed with the screening authority and reviewed before completion. As a first step, (i) an initial Phase I review is carried out; if necessary, followed by (ii) a more detailed Phase II investigation to assess whether the proposed FDI is likely to impact security or public order.
  3. Mitigating Measures: Screening authorities can impose mitigating measures, prohibit or unwind foreign investments if non-compliance occurs.
  4. Right to hearing: Applicants must be granted the right to be heard before screening authorities take any mitigating measures.
  5. Judicial recourse: Foreign Investors have the right to seek judicial recourse against screening decisions.
  6. Reporting Obligation: An annual public report must be published, detailing legislative developments in the Member State and anonymised data on the FDI screened, including, inter alia, the outcome, nationalities and sectors involved.
  7. Confidentiality and Transparency: Member States are required to protect confidential information and ensure that their Screening rules are transparent and non-discriminatory.
  8. Mandatory Screening in Sensitive Sectors: Screening is mandatory for investments in certain sensitive sectors critical to the EU’s security and public order which are listedin Annex I and II of the Proposed FDI-Screening Regulation (e.g. sectors involving dual-use goods, Military technology, AI, etc.). However, Member States are free to conduct additional FDI screenings in other sections, in alignment with their specific national security needs.

5. Cooperation mechanism and tighter deadlines for notifications

The EC shall provide a secure and encrypted system to support the exchange of information between Member States and the EC (“Cooperation Mechanism”). This aims to enhance and harmonise cooperation, Information sharing, and reporting between Member States and the EC through standardised information collection. In addition to the authorisation of FDI, Member States must, inter alia, notify the EC and other Member States of the following:

  • initiation of an in-depth Investigation (Phase II) under their national Screening procedures;
  • intention to impose mitigating measures or prohibit a transaction without conductingan in-depth investigation.

The Proposed FDI-Screening Regulation also introduces tighter deadlines for the notification and decision-making process. Member States are now required to notify the EC of any comments they intend to issue on notified FDI within a 15-calendar-day period, while the Commission has 20 calendar days to reserve it’s right to issue an opinion. Any additional information requested by Member States or the EC must be justified and limited to necessary details, ensuring that the screening process is not unduly burdensome for investors.

6. Impact on M&A transactions

Given the points outlined above, it comes as no surprise that the Proposed FDI-Screening Regulation will significantly impact M&A transactions involving Foreign Investors in the EU. In addition to the key changes mentioned, the following considerations must also be taken into account during transaction planning:

  1. Standstill Obligation: Due to the mandatory filing regime, all Member States must implement a standstill obligation (i.e. the transaction must not be closed without prior clearance of a mandatory FDI filing). In practice, this is already being enforced, as most Member States have established a FDI Screening Regime with mandatory filing requirements and thus, will likely make only a minimal difference in practice. 
  2. Timing: In multi-country-transactions (i.e. simultaneous screening in more than one Member State) the request for authorisation through the Cooperation Mechanism must be submitted to the EC and the Member States on the same day, referencing all related requests. As a result, the authority that takes the longest to process will delay the others, leading to an overall lengthening of the procedure.
  3. Own-initiative procedure (OIP): Member States may initiate reviews of foreign investments for a minimum of 15 months following the completion of an Investment that does not require prior authorisation, provided there are valid concerns about ist impact on national security or public order. The Proposed FDI-Screening Regulation permits Member States and the EC to examine transactions that were not submitted to the Cooperation Mechanism if they believe such transactions may present risks. However, while the aim is to ensure that transactions do not go unnoticed, this initiative does not provideadditional powers to Member States for screening. When national security issues are raised, Member States can only provide feedback or recommendations to the relevant Member State which may choose not to pursue an official review, though itmust provide a justification for this choice. 

Thus, investors should be mindful that unreported transactions could still be subject to screening, requiring careful consideration of the potential risks associated with call-ins in their deal strategies. Additionally, the EC may alsotrigger an Opinion Issuance Procedure (OIP—when an FDI endangers the security or public order of more than one Member State or poses a threat to Union interests. This may lead to more complex and time-consuming approval processes for cross-border M&A deals, particularly those involving dual-use technologies or critical infrastructure.

7. Timeline and future outlook

Following the EC’s proposal, the regulation is currently still in the feedback and consultation phase, with national parliaments, industry stakeholders and EU committees voicing their opinions. The Austrian Federal Economic Chamber (Wirtschaftskammer Österreich—WKO) has expressed concerns that the broader scope of application could result in increased bureaucracy for EU companies, potentially driving some businesses to relocate outside the EU.

The regulation will also have to undergo further review through the ordinary legislative procedure, with Adoption anticipated in 2025. Since the regulation shall apply 15 months after its entry into force pursuant to art.24 of the Proposed FDI-Screening Regulation, the new FDI screening regime could be fully operational by 2026.

8. Conclusion

The Proposed FDI-Screening Regulation represents a significant step towards a more harmonised and secure investment framework within the EU. Although the introduction of increased oversight and protection for critical sectors requires businesses, particularly those involved in M&A transactions, to adapt to the new requirements and the potential increase in regulatory burdens.

Overall, it can be argued that the proposal aims to balance the EU’s security interests while maintaining an open investment climate for foreign investors. However, any remaining weaknesses and the practicality of the proposal in M&A transactions will factually become evident once fully implemented.

***This article was first published by Thomson Reuters, trading as Sweet & Maxwell, 5 Canada Square, Canary Wharf, London, E14 5AQ, in The Company Lawyer, Issue 4, 2025 and is reproduced by agreement with the publishers. For further details, please see the publishers’ website.***