The European Commission has proposed a new regulation to identify risks to, and better protect EU critical assets from, Foreign Direct Investments (FDIs) due to growing geopolitical tensions. The proposed regulation builds on the already adopted regulation (EU) 2019/452, which advises Member States to establish a framework for the screening of certain foreign direct investments into the EU. Although investment from countries outside Europe is a major source of growth and jobs, it can also pose significant risks to security and public order, particularly when involving critical technologies, infrastructure, or sensitive information. Therefore, according to the European Commission, a new legislative instrument is needed to strengthen the efficiency and effectiveness of Regulation (EU) 2019/452 and ensure a higher degree of harmonisation across the European Union.

This article is written by Sefa Gecikli ([email protected]) and Tim Verspeek ([email protected]). Tim and Sefa are both part of RSM Netherlands Business Consulting Services with a specific focus on International Trade and Strategy.

Current regulations

Regulation (EU) 2019/452, which entered into application in October 2020, was adopted by the European Commission in 2019 to help Member States review FDIs in their territory to mitigate the potential risks to security or public order. Albeit voluntary, the regulation allows Member States to take measures to address specific risks by prohibiting or requiring divestment of investments, and to exchange information with the European Commission and other Member States. In determining whether a foreign direct investment is likely to affect security or public order, Member States and the European Commission may consider its potential effects on:

  • Critical Infrastructure: This encompasses physical and virtual assets like energy, transport, water, health, communications, media, data processing, aerospace, defense, electoral, and financial infrastructure, as well as sensitive facilities and crucial real estate.
  • Critical Technologies and Dual-Use Items: Such as artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies, nanotechnologies, and biotechnologies.
  • Supply of Critical Inputs: Including energy, raw materials, and food security.
  • Access to Sensitive Information: Including personal data or the ability to control such information.
  • Media Freedom and Pluralism: Ensuring that media independence is preserved.

Additionally, Member States and the European Commission consider whether the foreign investor is controlled by a third country's government, has been involved in activities affecting security or public order, or poses a serious risk of illegal activities. If a Member State decides to review an investment, it must notify other Member States and the European Commission, providing details such as:

  • Ownership structure of the foreign investor and the target undertaking.
  • Approximate value of the investment.
  • Products, services, and business operations of the investor and target.
  • Relevant business operations in other Member States.
  • Funding and its source.
  • Date of completion or planned completion of the investment.

Other Member States and the European Commission can provide comments or opinions, suggesting whether the investment may pose risks. After a review period of 35 days, taking into account the comments and opinions received, the Member State where the investment takes place can either authorise or prohibit the investment. 

The Dutch VIFO Act

Since 2023, The Netherlands have adopted the Act on Security Screening of Investments, Mergers and Acquisitions (wet Veiligheidstoets investeringen, fusies en overnames or the “Vifo act”). This act requires foreign investors to notify certain transactions related to mergers and acquisitions and complements the already adopted Regulation (EU) 2019/452. 

The Vifo Act applies to acquisition activities involving target companies that are either vital service providers, managers of business campuses, or companies engaged in sensitive technologies. It generally covers acquisitions of control over such undertakings, including through mergers, joint ventures, asset or stock acquisitions, and demergers. However, for activities in highly sensitive technology (e.g., dual-use goods, quantum technology, semiconductor technology, etc.) , a notification is required if the acquirer obtains “significant influence”. Significant influence is defined where the acquirer (i) has at least 10% of voting rights at the target’s general meeting, or (ii) can appoint or dismiss one or more of the target’s board members. 

In contrast to Regulation (EU) 2019/452, which merely targeted investments from outside the EU, the VIFO Act applies to investments from both EU (including Dutch) and non-EU investors. 

If the investment meets the conditions, both the acquirer and target have a duty to notify the Investment Screening Office (Bureau Toetsing Investering or “BTI”), which handles the screening, and the Minister of Economic Affairs and Climate Policy. Following this notification, the Minister and the BTI will review the investment and decide to either prohibit or approve it. Until the BTI and the Minister grant approval, the transaction cannot be closed or finalized. However, whenever the acquirer and target fail to notify a transaction, this may result in (i) a fine of up to € 900,000 or 10% of the target or acquirer’s worldwide turnover, or (ii) the Minster may also coerce companies to take certain measures if they do not comply with the imposed requirements. This can, for example, mean that a transaction must be undone.

Proposed regulation 

The framework established under Regulation (EU) 2019/452 has successfully created a formal mechanism for Member States and the European Commission to exchange information on foreign direct investments and raise awareness of cross-border risks to security and public order. However, a new legislative measure is required to enhance the efficiency and effectiveness of this regulation and to promote greater harmonisation across the EU. 

Some investments not currently covered by Regulation (EU) 2019/452 may still pose risks to the EU’s security and public order. This particularly applies to investments in Member States without a screening mechanism, those where the screening scope does not include certain sensitive investments, and investments made by foreign investors through EU-based subsidiaries that may present the same risks as direct investments from third countries. Therefore, the European Commission has proposed a new regulation that seeks to ensure that all Member States have a screening framework in place. 

Complementing to Regulation (EU) 2019/452, the proposed framework includes the screening of transactions within the EU that involve direct investors based in the EU but controlled by entities outside the EU. In addition, greenfield foreign investments, where a foreign investor or its EU subsidiary establishes new facilities or businesses in the European Union, should be included in the scope of this regulation if deemed relevant by a Member State. These investments can affect security and public order, particularly in critical sectors or when involving significant or essential facilities. Member States are encouraged to cover such investments in their screening mechanisms. 
This complements the Dutch VIFO Act, which primarily focuses on acquisition activities. By including greenfield investments, the proposed regulation addresses a broader range of foreign direct investments and provides a more comprehensive approach to screening, ensuring that all significant foreign investments, whether through acquisitions or new establishments, are considered for their potential impact on security and public order.

Forward-thinking

In the face of rising geopolitical tensions, the EU's push for a more rigorous FDI screening regulation reflects a growing need to safeguard national security and public order. This new framework aims to provide a unified approach to scrutinizing foreign investments, addressing the complexities and risks arising from an increasingly turbulent global landscape. 

For businesses and investors, adapting to these evolving regulations will be crucial. Aligning with the new standards not only ensures regulatory compliance but also helps mitigate investment risks. Companies that effectively integrate these requirements will enhance their strategic positioning, boost investor confidence, and thrive in a more secure and harmonised EU investment environment. Embracing the regulation will be key to navigating the challenges of today’s geopolitical climate and seizing new opportunities in a changing market. For businesses and investors, proactively assessing the applicability of the proposed regulation can be essential. Before moving forward with any investment, entities should determine whether these rules apply to their transactions and, if so, carefully consider the timing. Some may aim to complete their investment processes before the new regulation takes effect, avoiding potential delays or compliance hurdles. Additionally, if the regulations do apply, ensuring all necessary documentation is ready for submission to the relevant state bodies will be critical. Proper planning and early preparation will not only streamline the approval process but also help businesses mitigate risks and maintain their strategic momentum.

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