The International Trade Council acknowledges the recent decision by the Court of Justice of the European Union (CJEU) dated 13 July 2023 on the European Union Foreign Direct Investment Screening Regulation, in place since October 2020.
In the landmark case, Xella Magyarország, the CJEU has clarified that EU-based acquisitions, irrespective of the eventual ownership of non-EU stakeholders, fall under the EU’s laws of freedom of establishment. The court underscored that while EU nations have autonomy in delineating public policy and security objectives, their measures must not infringe upon core EU freedoms unless there’s a tangible threat to society’s fundamental interest.
This judgment has profound implications not only for corporations but also for EU Member States, EU Institutions, and in particular, the European Commission (EC).
The current state of investment screening in the EU is multifaceted, emphasizing the need for an integrated approach. As of today, 25 out of 27 EU Member States either have or are in the process of developing systems for evaluating and authorizing inbound investments.
Such an expansive network of screening processes influences numerous transactions annually. The EC’s latest report reveals that Member States evaluated 1,563 cases in 2021, with 414 cases proposed for mutual collaboration under the FDI Screening Regulation.
This case, Xella Magyarország, particularly highlights the acquisition of a Hungarian firm by another company from the same nation. The restriction by the Hungarian government, rooted in national security concerns, was contested and brought before the CJEU.
The court established that the legislation, in this instance, imposed a severe limitation, particularly because it was not safeguarding a “fundamental interest of society.”
For corporations, this signifies that unless there’s direct non-EU involvement, they shouldn’t anticipate investment screenings to be held up under the FDI Screening Regulation. The verdict has established that EU-based firms can assertively rely on EU law to confront any unjustified screening.
EU Member States are thus prompted to reassess their investment screening methodologies, ensuring they align with EU’s fundamental principles. This necessitates a holistic evaluation of both system design and its application to individual cases.
The European Commission remains at the forefront of this initiative. Their evaluation of the FDI Screening Regulation, due in October 2023, is an opportune moment to bolster efficiency, effectiveness, and ensure compliance with the established EU laws. This could be achieved by refining the scope of the FDI Screening Regulation and fostering convergence amongst the Member States’ diverse screening mechanisms.
In conclusion, while a unified system might be idealistic, a synchronized and harmonized approach to screening investments in the EU can be a tangible reality in the near future.