Under the EU Foreign Direct Investment (FDI) screening rules, EU Member States must notify the European Commission (EC) and other EU governments of any FDI undergoing national screening.  Reflecting on this process, the EC published its 2nd Annual Report on EU FDI screening yesterday, which covers the calendar year 2021.  Here are our key takeaways:

25 out of the EU’s 27 Member States now either have formal FDI regimes in place or are taking active steps to implement them.  In 2021, Czechia, Denmark, Slovakia adopted a new screening mechanism, joining the existing regimes in Austria, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, Malta, Poland, Portugal, Slovenia, and Spain.  Romania’s brand new FDI regime entered into force in April 2022, and The Netherlands is in the process of updating its existing FDI mechanism.   Belgium, Croatia, Estonia, Greece, Ireland, Luxembourg and Sweden have also taken steps to introduce regimes, with Bulgaria and Cyprus only watching.

The number of formally screened FDI is increasing, but there are still a large number of “fail-safe” filings being made.  In 2021, the number of applications accepted for formal review by EU national authorities increased by 9% compared to 2020.  However, of the 1,563 authorisation requests and ex-officio cases in 2021, only 29% were formally screened, while the remaining 71% were deemed ineligible or did not require formal screening because of an evident lack of impact on security and public order.  This suggests that dealmakers are often taking a conservative view, and filing applications on a cautionary basis.  We expect the number of ineligible applications to reduce as EU legislators offer additional guidance to stakeholders on “critical sectors” under their FDI rules.   

86% of cases closed in Phase I.  Only 11% of cases proceeded to Phase II, requiring the parties to submit further data on the target’s products and/or services, possible dual-use classifications, customers, competitors and market shares, its control structure, IP portfolio and R&D activities to the EC to assess the criticality of the target’s activities.  3% of transactions are still awaiting a decision.

Phase II timelines can be unpredictable.  Phase I cases are normally resolved swiftly within the prescribed 15 calendar days, while the duration of cases entering Phase II shows significant variation given the time needed by Member States to provide answers to the EC.  In 2021, the average response time in Phase II has been 22 calendar days (a marginal improvement over the 31 calendar days in the EC’s previous Report), but the full range goes from 3 to 101 calendar days. 

The main sectors at issue in Phase II cases were manufacturing, information and communications technology, and the financial sector.  Within manufacturing, defence and aerospace accounted for almost half of the notifications in that sector, followed by energy, semiconductors and pharmaceuticals.  A significant number of notified cases involved critical infrastructure, technology and dual use items, and access to sensitive information, as well as possible government ownership or control of, or influence over, the foreign investor.

23% of transactions required commitments or remedies which represents a significant increase compared to 12% in the EC’s previous Report.  While EU FDI rules allow for structural remedies, national agencies have shown a preference for behavioural remedies that: guarantee continued supply and/or access, control the flow of sensitive information, include obligations to inform agencies of change of control, maintain strategic capabilities, regulate staff and ensure key activities remain under the control of national entities.  Only 1% of transactions were blocked, and the remaining 3% were abandoned by the parties.