On 13 September 2017 the European Commission issued a proposed regulation to create a new framework for screening foreign direct investment into the European Union (EU) on the grounds of security or public order.
1. Proposed Regulation
Pursuant to the article 3 (1) (e) and article 207 (1) of the Treaty on the Functioning of the European Union (TFEU), foreign direct investment (FDI) has become part of the common commercial policy (CPP) and falls within the EU’s exclusive competence. Once the proposed regulation (Regulation) is enacted, it could be regarded as part of the EU’s CCP.
The Regulation aims to harmonise existing or proposed national screening mechanisms of Member States by providing common criteria and standards (or a set of minimum requirements), and to create a new oversight role for the European Commission (EC) itself to review FDI. The proposal is not to replace national mechanisms by creating an EU-level review system equivalent to the CFIUS mechanism in US, and it does not require all Member States to establish or maintain an FDI review mechanism, but it allows Member States to operate a screening system with the necessary flexibility i.e. taking account of national circumstances and individual legitimate interests.
2. Key features
(1) Screening power and monitoring role of the EC
The Regulation allows the EC to screen transactions that are likely to affect projects or programmes related to Union interests. In order to ensure the necessary transparency, an Annex to the Regulation provides an illustrative list of projects. In these cases, the EC can issue an opinion to the Member States where the transaction is planned or has been completed, and the Member States concerned are to take utmost account of this opinion and provide an explanation to the EC in the case this opinion is not followed.
The Regulation provides a cooperation mechanism between the Member State screening an FDI and the other Member States affected by this FDI (that can provide comments to the screening Member States). Where the EC considers that a particular FDI is likely to affect security or public order in one or more Member States, it can issue an opinion (non-binding) to the Member State in which such an FDI is planned or has been completed. The Member State should give due consideration to the comments and the opinion, but it takes the final-decision rather than the EC.
(2) The requirements for Member States
The Regulation provides common criteria and standards for a national screening mechanism. The screening mechanism of Member States shall be transparent, shall not discriminate, shall set out the grounds and specific circumstances for screening, and certain procedures shall be in place concerning timeframes and judicial redress. It also requires that Member States have anti-circumvention measures in place.
The Regulation requires Member States to notify the EC with details of existing screening mechanisms, any amendments or any newly-adopted ones, and provide the EC with an annual report on its application with particular information on screened FDI or that which is undergoing screening, prohibition decisions or decisions imposing mitigating measures, and sectors, origin and value of screened and screening FDI and that which is undergoing screened. Those Member States that do not maintain any such kind of mechanisms shall also provide an annual report with information on existing FDI in their territory.
(3) Key screening factors
The list of screening factors is non-exhaustive, while the proposed regulation suggests that Member States may consider the potential effects on the following factors when screening FDI on the grounds of security or public order: a) Critical infrastructure; b) Critical technologies; c) Security of supply and critical inputs; d) Access to or possible control over sensitive information; e) Whether the foreign investor is controlled by the government of a third country, including through significant funding.
In addition to the draft regulation, two concrete measures have been scheduled. Firstly, the EC is establishing a coordination group, which will be chaired by the EC and consist of representatives of the Member States, and which will focus on identifying the sectors and assets that have strategic implications at national or EU-wide level, exchange information on FDI, discuss issues of common concerns, share best practices, and discuss opportunities for cooperation with third countries with shared interests and challenges etc.
Moreover, by the end of 2018, a further in-depth analysis of FDI within the EU will be conducted, particularly in strategic sectors or assets that may raise concerns in the areas of security, public order and/or the control of critical assets. It will particularly consider and analyse whether the investor is owned or controlled by a third country, or benefits from significant state subsidies.
3. Potential Implications
From the perspective of international investment law, theoretical or practical, it is still hard to formulate and standardise one approach for identifying an “investment” or an “investor”. Although the Regulation (Article 2) provides definitions of “FDI” and “foreign investor”, various definitions have existed in both intra-EU Bilateral Investment Treaties (BITs) or international investment agreements (IIAs) between EU Member States and third countries. This Regulation, however, will not replace existing BITs and consequently, how to harmonise various definitions in existing BITs and this Regulation could give rise to questions. Apart from the definition, a majority of IIAs provide investment treatment clauses, e.g. most-favoured-nation treatment, national treatment, it is therefore a concern that whether requirements in the Regulation will conflict with other IIAs. This Regulation indirectly adds extra obligations to both Member States and foreign investors. Even though the Regulation emphasises the substantial benefits of FDI to the EU economy and society and does not create mandatory obligations on Member State, there are still significant uncertainties ahead.
On an EU level, although the EC is proposing a framework for Member States to enable them to screen FDI using minimum and common standards rather than establishing an EU-level review mechanism, the proposal has received criticism, concerns and even opposition. The Regulation has entered into a legislative procedure in EU, which will need to be adopted by the European Parliament and need backing from a weighted majority of Member States. Whereas France, Germany and Italy are highly supportive of an EU-level review mechanism, other Member States including the Netherlands, Nordic countries and Greece have raised concerns. The draft regulation could be attributed to the EU’s concern that the EU’s open commitment to FDI is not reciprocated by key trading partners, particularly China. The EC therefore intends to pressure other partners into providing reciprocal market access. However, many Member States are concerned that this regulation would create problems for free trade, the open market, and the free movement of capital.
It should be acknowledged that protecting national interests or security is the legitimate sovereignty of states, while it is necessary to consider the balance between attracting foreign investment for the domestic economy and protecting the security of public welfare. Creating additional and burdensome rules on foreign investment would increase compliance costs and add uncertainty to political decisions thus driving away FDI.
In addition, although the proposed regulation covers all third countries, it is widely regarded as a response to the concerns over the increasing number of Chinese acquisitions in sensitive industries, including infrastructure, energy, and technology, and especially those made by Chinese State Owned Entities (SOEs) and also Sovereign Wealth Funds (SWFs). Chinese businesses and scholars are worried that this Regulation indicates a signal that Chinese investments made by SOEs would be more likely to receive discriminatory treatment and tightened scrutiny, and that the investment environment in the EU is becoming conservative and uncertain with complicated rules and even an unstable society (due to the issues of nationalism and terrorism). But, it would also be a chance for Chinese companies to adjust and diversify their investment strategies, and for the Chinese government to consider how to protect its investors overseas.
Photo Copy: EPIN