Prelude: An FDI-Friendly Europe
In the perspective of the European Union, a Foreign Direct Investment (“FDI”) is an international investment made by an investor from a third country to establish or maintain a lasting and direct interest in an enterprise resident in a Member State of the European Union. This type of investment usually entails a long-term relationship between the investor and the invested enterprise, with a gain of significant influence by the foreign investor over the latter. According to the OECD foreign direct investments’ restrictiveness index, with its 27 Member States the European Union represents one of the most open investment regimes worldwide. No wonder the EU has been targeted by many foreign investors as a favoured harbour for their FDI throughout the years. Until now, some would say.
COVID-19 Crisis: Stand by Me (and My Business)
We all know COVID-19 has hit Europe harshly; some countries have been affected more than others but, all in all, the whole continent, if not the globe itself, has fell hostage of an invisible kidnapper. While the virus is wreaking havoc throughout the old continent, impacting its citizens and health care systems, the global economic implications of this pandemic are shaping up by the day. It would not come as a shock then if the investment sector would end up being severely affected worldwide and, more specifically, in the EU. In this scenario, one could attempt at gathering some general reflections on how the EU investment regime is coping with such crisis. To this aim, let’s start from one recent piece of news.
Recently, a well renowned German newspaper reported that United States President Donald Trump allegedly offered a substantial amount of money to “CureVac”, a German company active in the “run” for searching a COVID-19 vaccine, to move its research branch to the United States and to use the vaccine for US only. Whether or not in response to this, Peter Altmaier, Germany’s economy Minister, stated that “[…] all those people in hedge funds and elsewhere who are looking forward to acquiring one or the other [German firms] on the cheap — make no mistake, we are determined to stand by our companies.” What does “stand by our companies” means? Minister Altmaier surely implied a screening activity of transactions directed at acquiring German crucial assets (such as CureVac) will be in order. But he also might have hinted at a more pervasive State intervention going well beyond a mere FDI screening mechanism such as, for instance, the 500 billion bailout fund set up by Germany to acquire shares in German distressed companies, to save them from bankruptcy and to ensure them protection.
The EU Protection of Critical Assets
And here it comes the “P” word, “protection”. This term while conveying a powerful significant may potentially serve several purposes. In the context of the COVID-19 emergency and crisis management, protection stands for safeguarding the civil societies from the virus spreading and the collapse of the healthcare systems. It also means shielding businesses from the lurking economic and financial crisis to the maximum extent possible. In this last regard, some businesses operating in critical sectors might need “protection” from the homo homini lupus approach of the many who, by seeing potential in the current crisis, would be ready to acquire essential assets at a lower price. Indeed, the risk of acquisition of European healthcare capacities (e.g. for the medical and protective equipment’s productions) or research establishments (e.g. researching on a COVID-19 vaccine, see for instance the Curevac “affaire” above) is dramatically increased. These are only some of the discussions in the frame of which the “P” word has been brought up.
In this vein, nine EU leaders (of Belgium, France, Greece, Italy, Ireland, Luxembourg, Spain and Portugal) recently signed a joint letter addressing the President of the European Council Charles Michel and calling for the issuance of a common debt instrument by a European institution, namely the famous (or infamous) “Coronabonds”. The letter, however, also touches upon other conjunct reflections as the one contained in the following passage:
“As we implement unprecedented socio-economic measures, with an unparalleled slowdown in economic activity, we still need to guarantee the production and delivery of essential goods and services and the free movement of vital supplies within the EU. Preserving the functioning of the Single market is essential to give all European citizens the best possible care and the strongest guarantee that there will be no shortage of any kind.
[…] We also need to make sure that essential value chains can fully function within the EU borders and that no strategic assets fall prey of hostile takeovers during this phase of economic difficulties. First and foremost, we will put all our efforts to guarantee the production and distribution of key medical equipment and protections, to deliver them in an affordable and timely manner where they are most needed.”
Here, the nine EU leaders stress how, under the current circumstances, supply chains and strategic assets, in primis the ones related to the medical industry, might risk becoming vulnerable targets of “far-sighted” investors. In turn, if this were to happen, the very production and delivery of essential goods within the EU Member States and within the EU borders could be put at risk. This point has already been raised by the Commission in its Communication dated 13 March 2020, whereby it alerted the Member States to be aware the current crisis could lead “to a loss of critical assets and technology”. Then, after encouraging the Member States to use all tools available at the EU and domestic level to avoid the aforementioned scenario from unfolding, the Commission recalled the Member States could make use of an already existing tool: the Regulation (EU) 2019/452 (the “FDI Screening Regulation” or the “Regulation”).
The FDI Screening Regulation
Implemented in March 2019, the FDI Screening Regulation embodies the first EU common framework for screening FDI into Member States’ territories and within the EU zone. Indeed, within the scope of such Regulation, Member States may run reviews on FDI and eventually take appropriate measures on the grounds of security or public order.
Historically, investment screening mechanisms have been set up by many EU trade partners such as, to name one, the US whose FDI screening is carried out by an interagency governmental body, the Committee on Foreign Investment in the United States (“CFIUS”). This mechanism has recently been reformed by the FIRRMA Act which tightened up controls on foreign takeovers of US companies – especially if the foreign investor is a sovereign or sovereign directed entity. Differently from the abovementioned CFIUS, the FDI Screening Regulation is primarily aimed at creating a system of cooperation and exchange of information between Member States and between Member States and the Commission vis-à-vis FDI made in specific sectors crucial to Member States’ (and the EU’s) security interests and public policy.
More specifically, the Regulation prescribes that the Commission may issue opinions in case an investment threats the security or public order of more than one Member State, or in case an investment may undermine a project or programme of interest to the whole EU (see, for instance, Horizon 2020). The Commission may also encourage cooperation on investment screening, including sharing experience, best practices and information on issues of common concerns. It can set certain requirements for Member States wishing to maintain or adopt a screening mechanism at national level.
In determining whether a foreign direct investment may affect security or public order, the Regulation envisages that the Member States and the Commission may consider “all relevant factors, including the effects on critical infrastructure, technologies (including key enabling technologies) and inputs which are essential for security or the maintenance of public order, the disruption, failure, loss or destruction of which would have a significant impact in a Member State or in the Union. In that regard, it should also be possible for Member States and the Commission to take into account the context and circumstances of the foreign direct investment.”
The Regulation leaves intact the exclusive responsibility and sphere of competence of Member States with regard to their national security (Article 4(2) TEU), and their right to protect their essential security interests (Article 346 TFEU). Also, the Regulation provides for a voluntary based framework screening and Member States retain the power to decide whether a specific investment operation should be screened and or allowed in their territories. So far, Member States have been only requested to notify the Commission their national investment screening mechanisms. This regulation will fully apply as from 11 October 2020 and, at the time of writing, 14 Member States have enacted national screening mechanisms among which, inter alia, France, Germany, Italy and Spain.
The EU Guidelines for FDI Screening
Almost in conjunction with the letter by the nine EU leaders and in reply to the CureVac attempted acquisition, on March 25 the Commission issued the “Guidelines for screening FDI in companies and critical assets located in the EU, including those operating in the fields of health, medical research, biotechnology and infrastructures deemed essential for security and public order” (the “Guidelines”). In practice, specifically aimed at protecting Europe’s strategic assets, the Guidelines offer assistance to Member States with regard to FDI screening and free movement of capital from and to third countries within the context of the FDI Screening Regulation.
After recalling the typical openness of the EU investment framework, the Guidelines move on with stating that “today more than ever, the EU’s openness to foreign investment needs to be balanced by appropriate screening tools”. The Commission emphasizes that the COVID-19 emergency has made clear the pivotal importance of preserving and sharing healthcare and research capacities between EU Members – as well as with those in need outside the EU single market. The Commission stresses that, at this moment in time, acquisitions of Member States’ healthcare-related assets have an impact which may go beyond their national borders. Therefore, in carrying out FDI screenings Member States should “take into account the impact on the European Union as a whole, in particular with a view to ensuring the continued critical capacity of EU industry, going well beyond the healthcare sector. […] Strategic assets are crucial to Europe’s security, and are part of the backbone of its economy and, as a result, of its capability for a fast recovery.” In order to do so, the Commission urges the Member States to make full use of their FDI screening mechanisms already in place and to set up one in case they are lacking of it. Also, the Guidelines recall that, in case a foreign investment does not go through a national screening process, the Regulation provides that Member States and the Commission may comment and provide opinions within 15 months after the foreign investment has been completed. Practically, this entails that a foreign investment completed in March 2020 could be subject to ex post comments by Member States or opinions by the Commission as from 11 October 2020 (date of application of the Regulation) and until 15 months after completion of the investment (June 2021).
The Guidelines then analyse the possible grounds for imposing restrictions on free movements of capitals (Artt 63 and 65 TFEU) within the EU and between the EU and third countries. Indeed, constraints to free movement of capitals are allowed when suitable, necessary and proportionate to attain legitimate public policy objectives, such as public security and public health. These objectives have been also recognised by the Court of Justice of the EU – and by the EU Treaties – as overriding reasons of general interest. In this regard, the Guidelines expressly state that “in case of ‘predatory buying’ of strategic assets by foreign investors (e.g. with a view to limit supply to the EU market of a certain good/service), the most relevant exception is “public policy or public security” set out in Article 65 TFEU. This could justify, for instance, restrictive measures necessary to ensure security of supply (for instance in the energy field) or the provision of essential public services if less restrictive measures (e.g. regulatory measures imposing public service obligations on all companies operating in certain sectors) are insufficient to address a genuine and sufficiently serious threat to a fundamental interest of society. Restrictive measures may also be taken to address threats to financial stability.”
One European Protection or many National Protectionisms?
The aforementioned letter by the EU leaders and the Commission’s Regulation and Guidelines underlie the risks EU critical assets may incur by becoming preys of hostile takeovers and predatorial sell-outs in these times of crisis. Therefore, they need protection. On the one hand, fingers have been pointed at foreign investors as being the (only) potential scavengers of EU critical assets and, consequently, a more stringent FDI control amongst Member States has been called for. The Commission especially stresses on the need to ensure a unite and harmonized action vis-à-vis FDI screening, as every each Member State should bear in mind the broader consequences that a foreign acquisition of a domestic critical asset would ensue also at the level of the EU and, I would add, on its unity. Indeed, exactly as the spread of the virus, risks created by an investment do not necessarily stop at the borders of the Member State where the investment has been made. That is why the FDI Screening Regulation does not only provide for the possibility for the Commission to issue opinions with respect to specific investment, but also Member States, other than the one where the investment took place, may request information and comment on the investment operation.
On the other hand, however, if it still holds true that in times like these critical assets and infrastructures may require a higher level of protection in terms of scrutiny of potential predatorial takeovers and vulture-like investors, the foreign extra-European nationality of such investors is not an automatic red flag or a pre-requisite. Undeniably, the COVID-19 emergency has put a severe strain on citizens, health care systems and economies of EU Members States’, perhaps to the point of potentially impacting their cohesion and solidarity between one another. Almost in anticipation to an insidious observation of the sort, the Commission carefully chooses the Guidelines’ concluding remarks by stating “[f]inally, it needs to be noted that in the analysis of justification and proportionality, restrictions on the movement of capital to and from third countries take place in a different legal context compared to restrictions to intra-EU capital movements”.
Why this specification by the Commission? While one could agree on the fact that in “peace times” an investor’s nationality makes a great deal of difference in terms of applicable legal regimes for FDI screening, one could challenge that the same degree of difference should be maintained in times of a global pandemic and financial disruption. Can I really trust my neighbor Country? Can I trust its investors not to feast on my weakened market and acquire my critical assets? Or should I also check on their intentions when addressing (my) national enterprises? These sort of questions, while legitimated by the COVID-19 emergency, the lurking economic depression and unparalleled political drift amongst Member States, they may yet undermine the very foundation of the European project. If remained unanswered, or worst unheard, they may lead to the resurgence of nationalisms and to the (re)creation of a plurality of national protectionisms throughout the old continent. Perhaps, if we still want to uphold the European project, a one single European Protection, one of the kind the Commission is maybe suggesting, would be a better middle ground. In other terms, the choice is between, on one hand, the protection of the EU through real cooperation and solidarity amongst Member States and EU institutions and, on the other, a plurality of European protectionisms based on isolation. As it has been elegantly put by Professor Yuval Noah Harari “[w]hen choosing between alternatives, we should ask ourselves not only how to overcome the immediate threat, but also what kind of world we will inhabit once the storm passes”.
Bianca Nalbandian is a Research Fellow at the Max Planck Institute Luxembourg for International, European and Regulatory Procedural Law. She graduated in European Union Law at the Sapienza University of Rome and holds an LL.M. in International Trade and International Investment Law from the University of Amsterdam (UvA). Before joining the Max Planck Institute in March 2019, she worked for an Italian law firm in Rome where she mostly dealt with domestic civil litigation and international arbitration. Currently, she is a PhD candidate at the University of Luxembourg working in the framework of the DTU REMS II project. Her research focuses on Sovereign Wealth Funds role and interactions with regard to international investment law.