In recent months a number of EU countries have adopted FDI screening laws. Many invoked the coronavirus pandemic and the increased risk of acquisitions of health care capacities (for example for the productions of medical or protective equipment) and related industries such as research establishments (for instance developing vaccines) via FDI as the reason for their adoption.

However, the decision to introduce FDI screening laws in the EU predates Covid-19. Following a study conducted for the European Commission by E&A Law and Millieu from 2016 to June 2018[2], the EU adopted Regulation 2019/452 establishing a framework for the screening of FDI (“Regulation") on 19 March 2019.  This Regulation will enter into force on 11 October this year. 

In anticipation of the Regulation, albeit the Regulation does not oblige EU Member States to adopt foreign screening laws, a number of states have already adopted such laws. The first to do so was Germany, which introduced screening laws in December 2018, even before the Regulation was adopted. On 17 March 2020 Spain followed suit, followed by Hungary on 25 March and Slovenia on 1 June. Poland and France are expected to follow suit shortly.

Although there are differences between the screening laws adopted by the above-mentioned countries they share the following elements:

• They provide for the screening of foreign investments on the grounds of security and public order. Some countries have provided for screening also on public health grounds.

   

• In determining whether a foreign investment is likely to affect security or public order its potential effects on:

will in particular be assessed.

Some countries have also provided that foreign investments will be screened if they affect projects or programmes of Union interest as defined in the Annex to the Regulation which include programmes concerning satellite navigation, space programme, trans-European transport energy infrastructure and telecommunication networks. 

In all countries that have adopted screening laws, the term “foreign investor" is defined as natural or legal persons who is resident/ has its seat in a country (“third country") which is outside of the European Union (“EU"), the European Economic Area (“EEA") or Switzerland. Some countries, such as Slovenia, have adopted an even broader definition of foreign investor which includes all non-Slovenian natural and legal persons. In other countries like Hungary, EU, EEA and Swiss companies which are majority owned by third countries are also regarded as foreign investors. In Spain, EU, EEA and Swiss companies where investors from third countries own 25% of the company are also regarded as foreign investors.

The trigger for screening in most countries is low so that an acquisition of 10% or more of the voting rights in a company will trigger notification obligations. Additional triggers for screening are imposed including in Slovenia in case of the establishment of a new branch, the production of new products and the establishment of a new company in which foreign investor will have more than 10% voting rights. and in Hungary in case of the transfer of use or operational rights in infrastructure or assets that are indispensable for the operation of strategic companies.

The above-mentioned investments have to be notified to the relevant screening body (in some cases the Ministry in others the Competition Authority).  A failure to notify in most countries can result in a fine for the company up to 1% of its annual turnover and imprisonment from 6 months to 5 years for persons responsible.

Depending on the country a standstill period of between 45 and 120 days is required to enable the relevant bodies to undertake the screening. Most countries provide for a certification of non-objection to be deemed to have been given upon the expiry of this time period. However, the Slovenian and Hungarian law do not contain such a provision. In fact, Slovenia reserve itself the right to review all foreign investments for 5 years after they were made even the ones which it had previously reviewed and not objected to.

The potential implications on investors, investments and transactions are significant.

• Introduction of new condition precedents to completion.

   

• Need to prepare more complex documentation and increased transactional costs.

   

• Simultaneous signing and completion of transactions is no longer possible.

   

• Already progressing or signed deals need to be reviewed and completion is likely to be delayed.

   

• Lack of deemed approval and reservation of right to review foreign investment for 5 years after completion generates significant uncertainty.

   

• Uncertainty damages deal environment and may impact deal pricing.

   

• Creating and enforcing security may be not work (e.g. share pledge).

   

• Potential events of default may be triggered.

   

• Typical shareholders’ agreements provisions may be impacted (e.g. provisions covering control rights, call options, anti-dilution etc.)