Plans to strengthen EU foreign direct investment screening outlined

The European Commission has published plans to replace the existing EU regulation on the screening of foreign investments, which was introduced in 2019 and took effect in 2020. The updated framework proposed aims to ensure that all EU countries have mechanisms in place to control foreign direct investment (FDI) and that these screening regimes meet minimum requirements on matters such as review procedures, judicial oversight, and the types of transactions subject to screening.

The national regimes would also have to be applied to a minimum number of sectors, meaning relevant transactions impacting EU entities that sell dual-use goods, military technology and equipment, critical medicines, critical technologies, or operate financial infrastructure would be among those subject to authorisation.

However, among the biggest changes proposed is to the scope of the EU’s screening rules. According to the Commission, the proposals would provide for the monitoring of “risks to security and public order flowing from investments that ultimately lead to control and decision-making power by a third-country investor, whether they are carried out either directly from outside the EU or indirectly through an entity established in the EU but controlled by a foreign investor”.

Frankfurt-based Arkadius M. Strohoff of Pinsent Masons, who specialises in matters of merger control, said: “The reform responds to a ruling by the Court of Justice of the EU in the Xella case, where Hungary's rejection of a transaction breached the EU principle of freedom of establishment.”

“The proposed reforms aim to eliminate the need to prove an EU company with non-EU control is an ‘artificial arrangement’, expanding the regulation to all foreign investments made through EU subsidiaries owned by non-EU investors. This vague expansion may lead to more filings by EU entities with foreign ownership, diverging from the European Commission’s goal of filtering non-critical cases,” he said.

The Commission’s proposals include measures intended to tackle the challenges encountered by businesses completing transactions that trigger notification requirements in multiple jurisdictions within the EU. However, Strohoff said a degree of unpredictability could still persist.

Strohoff said: “While the reforms introduce requirements for simultaneous filing and impose deadlines for key steps, uniformity in decision timelines remains absent, potentially leading to unpredictability. Additionally, mandatory cooperation measures for multi-country deals aim to improve coordination and information sharing but may impact transaction timelines. Increased disclosure requirements for investors seek to address information asymmetry but may still pose challenges in maintaining synchronised decision-making across member states.”

As well as providing for the notification of relevant transactions to national screening authorities under the proposed new framework, the Commission has proposed that it and the national authorities be given powers to scrutinise foreign investment affecting security or public order in cases where the transactions have not been notified, under an ‘own initiative’ procedure.

Strohoff said: “This addresses concerns regarding delayed notifications and aims to enhance collective security. Member states and the Commission would have at least 15 months after the completion of the investment to initiate such a procedure.”

The EU’s 2019 screening regulation promotes more cooperation, information sharing, and a minimum level of transparency regarding the screening of transactions in each EU member state, but while it did outline factors that member states may consider if establishing mechanisms to screen foreign direct investments in their territory on the grounds of security or public order, it did not mandate the introduction of FDI screening in every member state. The result is that there is a patchwork of often very different national FDI screening regimes in place across the EU – some EU countries do not operate any form of FDI screening at all.

The Commission has now said that further EU-level action is needed to strengthen protections against risks to security or public order that can arise from foreign investment.

“The screening of foreign investments in the EU is a transnational issue with cross-border implications that need to be addressed at Union level,” the Commission said. “A foreign investment in one member state can have an impact beyond that member state’s borders, in another member state or at the EU level. The absence of EU-level action may result in member states being less able to protect their security or public order interests related to foreign investments, in particular for cases where the foreign investment likely to negatively affect their security or public order is carried out in the territory of another member state.”

“Experience gained with the implementation of the [2019] regulation shows that it is unlikely that member states would converge on aligned standards and procedures on how to screen foreign investments on grounds of security and public order or reinforce the systematic Union-wide cooperation mechanism to exchange information with each other and the Commission,” it said.

Under its latest proposals, all EU member states would be required to establish FDI screening mechanisms within 15 months of the new law coming into force.

Strohoff said: “This change reflects the evolving investment landscape, driven by security threats, geopolitical shifts, and a focus on domestic resilience. Currently, 22 out of 27 member states have implemented screening mechanisms, with others in progress.”

Alongside the proposed new regulation, the Commission set out other plans to analyse and assess risks associated with outbound foreign investment from the EU. The report produced is expected to inform future policy decisions in respect of the management of outbound investment risk. Other plans to strengthen existing controls on dual-use items were also set out by the Commission.