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Freshfields Transactions

| 5 minutes read

COVID-19: shut down also for foreign direct investments into Europe? Commission issues guidance to member states on how to protect strategic assets


On 25 March 2020, the EU Commission (the Commission) issued a guidance paper (PDF) in relation to foreign direct investment (FDI) during the current health and economic crisis. 

The paper outlines the application of FDI screening mechanisms at a time where the EU FDI screening regulation is not yet fully applied and where only 14 out of 27 member states have FDI screening mechanisms in place.

The Commission’s message is clear: member states should use all tools available to them to avoid a loss of critical assets and technology to foreign ownership, in particular in (but not limited to), the health sector. 

The guidance focuses on the following issues.

As regards the health crisis:

  • Public health (including healthcare capacities, biotech companies and related industries such as research establishments) is of great importance to the general interest of the EU.
  • Member states should ensure that any FDI will not harm the EU’s capacity to cover the health needs of its citizens.
  • FDI in this sector can result in a threat to public security or public order (and therefore be subject to mitigation measures or prohibition decisions).

As regards the economic crisis:

  • Member states should aim to prevent the current situation resulting in a sell-off of Europe’s business and industrial actors, including infrastructure and other critical assets, but also SMEs.
  • Member states may consider restrictions on FDI in companies with capital markets valuations below their intrinsic value, where such FDI would impact overriding reasons of general interest.

Buyers beware! The guidance paper does not contain any new powers for the Commission or the member states. Rather, it is a call to arms by the Commission to member states to protect against unwanted foreign ownership. 

As a result, we expect foreign investment screening activities and new FDI legislation throughout the EU to pick up considerably. It is likely to lead in practice to an immediate implementation of the EU screening regulation (which will only enter into force on 11 October 2020).

In more detail

The outset

There is currently no FDI screening mechanism at the EU level. This will not change in the foreseeable future. 

Only about half of the EU’s member states have national FDI screening mechanisms in place. While the EU FDI screening regulation entered into force in May 2019, it does not fully apply until November 2020 (see our related briefing here) and it does not, in any event, provide the Commission with review powers of its own. 

Consequently, both the EU and many of the member states currently have only limited tools to fend off undesired FDI.

Under EU law, member states may restrict FDI, where such FDI would create a risk to security or public order in that member state or the EU more generally. 

Some member states have become quite active in the screening of FDI. France, Germany and Italy have reviewed a high number of transactions over the last few years and have imposed remedies where they saw public order or security at risk. There have also been outright prohibitions of FDI, but these have remained the exception so far.

The guidance paper

The guidance paper does not provide either the EU or the member states with new powers in relation to FDI. 

It sets out the existing framework, explains the circumstances under which member states can restrict FDI and puts this general framework into context with the current situation. It also urges those member states who do not yet have a screening mechanism to set up such a mechanism and to use all available options to address cases where FDI may be harmful. 

In addition, the paper reminds member states of the interdependencies of an integrated market and calls on them to seek advice and co-ordination in cases where FDI could have an effect in the single market, even though not necessarily in the member state where the FDI occurs.

The guidance essentially seeks to apply the coordination mechanism of the FDI screening regulation today. In practice, a member states with an FDI screening mechanism could restrict or prohibit FDI in its territory on the basis of an impact to the EU as a whole. 

In this context, it is important to remember that any transaction that has closed since 10 April 2019 can be (retroactively) reviewed under the FDI screening regulation once it fully applies on 11 October 2020.

The guidance paper’s primary focus is the health sector. Specific examples relate to the production of medical or protective equipment and research establishments. Biotech companies are also mentioned by the Commission. 

Clearly, the EU is committed to protect companies active in this sector as they may be required to overcome the current COVID-19 pandemic. From a legal point of view, public health is one of the key general interests in relation to which the member states can review and restrict FDI.

But neither the FDI screening regulation nor the guidance paper are limited to healthcare-related industries. In fact, they apply to all economic sectors, although the Commission’s justification for interventions under this more general notion is more complex. 

The Commission mentions other reasons of general interest like the protection of consumers, preserving the financial equilibrium of the social security system, and achieving social policy objectives. 

But it also refers to the more exceptional safeguards in case of threats to the operation of the economic and monetary union and the balance of payments for member states outside the euro area.

A shift in policy?

The EU is, and continues to be, open to foreign investment and considers FDI essential for the economic growth, competitiveness, employment and innovation within the EU.

But the guidance paper recommends balancing these important factors against the EU’s capacity to respond to the needs of its citizens in times of crisis. 

This is mirrored by recent developments at member state level. 

Both Spain and Italy have already introduced changes to their national FDI screening mechanisms to better deal with the possible economic impact of the COVID-19 pandemic. 

Germany may also tighten its existing FDI screening mechanisms very soon to better protect certain critical sectors or companies. In addition, several members of the German government have made unambiguous statements that Germany would be ready to also use the €500bn COVID-19 bailout fund set-up by the German government this week. 

While the purpose of the bailout fund is to rescue German companies in financial difficulties, the public statements have made it clear that the fund may also be used to protect undervalued companies against hostile takeovers from abroad. 

The latter aspect is also explicitly referred to in the Spanish FDI decree-law. The guidance paper of the Commission confirms that this should generally be permissible under EU law, where such FDI would impact overriding reasons of general interest.

While the practical consequences of this guidance paper in the near future remain to be seen, EU member states are likely to increase enforcement when assessing FDI into their economies. 

The economic crisis may also lead to a shift in their assessment, where public interest concerns are now more likely to outweigh potential restrictions of the free movement of capital from third countries.

Regardless of the above, the Commission underlines that FDI may only be restricted within the limits of the law. 

The screening of a transaction should not necessarily result in a prohibition, where negative consequences can be mitigated, e.g. by supply commitments, compulsory licenses etc. 

But the potentially adverse effect of FDI on companies and the economy at large should be considered when assessing the appropriateness of a specific measure.

The new EU Guidance Paper is likely to increase foreign investment screening activities at Member State level in the coming months and will also accelerate the introduction of new national legislation throughout the European Union


covid-19, europe, mergers and acquisitions, foreign investment