By Thomas Verellen
Covid-19 represents a shock to global capital flows. As companies see the value of their assets tumble, they may become attractive targets to foreign investors – in particular, state-backed foreign investors less exposed to the economic fallout of the pandemic. To address what has been described as ‘opportunistic investment behaviour’ and – less euphemistically – ‘predatory buying’ practices, jurisdictions with well-established foreign investment screening mechanisms such as Australia and Canada have tightened scrutiny: the Australian government has reduced the value threshold for screening of all foreign investments to zero dollars, and the government of Canada has announced it will subject public health related investments and all investments by state-owned investors, regardless of their sector of activity, to enhanced scrutiny.
For the European Union, Covid-19 came at an interesting time. The EU recently introduced its own FDI screening framework – a mechanism which leaves the ultimate decision-making power over individual investments with Member State screening authorities, but which sets up a framework for cooperation between EU and Member State authorities. The framework will go live on 11 October 2020 and thus was not operational when the pandemic hit in the spring of 2020. Against this backdrop, this blog post explores how the EU has responded to the Covid-19 crisis and in particular to the aforementioned risk of predatory buying that flows from the pandemic’s impact on asset prices. Given the multi-level set up of the EU’s approach to FDI screening, an analysis of the EU response to this risk needs to take into account developments at both the EU and Member State levels. This blog post focusses on the EU side of the equation.
The EU response
The European Commission was quick to come forward with a position on the implications of Covid-19 for FDI screening in the EU. On 13 March 2020, i.e. at around the same time as several Member States entered into lockdown, the Commission published a communication. In it, the Commission set out a broad set of measures it intended to undertake to cope with the economic fallout of the Covid-19 crisis. On the specific issue of FDI screening, the Commission urged Member States ‘to be vigilant and use all tools available at Union and national level to avoid that the current crisis leads to a loss of critical assets and technology’, whereby it identified ‘national security screening and other security related instruments’ as an example of such tools. It also announced that it would ‘guide Member States ahead of the application of the Foreign Direct Investment Screening Regulation.’
Two weeks later, on 25 March 2020, the Commission followed through by means of a second communication on the topic of FDI screening. The communication was addressed to Member State authorities. The communication highlights the aforementioned risk of predatory buying in the healthcare sector by drawing Member States’ attention to ‘an increased risk of attempts to acquire healthcare capacities (for example for the productions of medical or protective equipment) or related industries such as research establishments (for instance developing vaccines) via foreign direct investment.’
In terms of actions to be undertaken to tackle the crisis, the Commission is constrained by the fact that the EU mechanism has not yet gone live (it will do so on 11 October 2020), as well as by the fact that under the cooperation mechanism the EU institutions will be endowed with comparatively soft powers (the EU will not be in a position to block proposed investments, nor will it be able to compel Member States to put in place their own national screening mechanism). Unsurprisingly, therefore, the communication is short on concrete measures and remains, to a large extent, in the realm of nudging.
The following points are worth mentioning:
First, the Commission calls on Member States that already have in place a screening mechanism to make full use of it, whereas those Member States that do not (yet) have a mechanism in place are encouraged to do so as soon as possible. Echoing former CJEU Advocate General Poiares Maduro’s conception of legal pluralism in the EU as a form of ‘contrapunctual law’ whereby Member State courts ought to take into account the potential impact of their rulings on their neighbours and the Union as a whole, the Commission asks national screening authorities to take into account ‘the impact on the European Union as a whole, in particular with a view to ensuring the continued critical capacity of EU industry, going well beyond the healthcare sector.’ Interestingly, a few weeks ago the German government announced its intention to expressly provide for this possibility in an upcoming amendment to the German FDI screening regime.
Second, and closely connected to the first point, the Commission reminds Member States of the possibility provided for in Article 7(8) of the Regulation to make comments on proposed or completed investments in other Member States. Member States can do so up until 15 months after completion of the investment, the Commission mentions – a long period indeed, and one which ensures that investments completed during the present Covid-19 crisis may very well still be commented upon once the cooperation mechanism goes live on 11 October 2020. If (or rather: when) this happens, the Member State concerned – regardless of whether it has a national screening mechanism in place – will have to give ‘due consideration’ to the comments. If the investment affects projects or programmes of Union interest, it will have to take ‘utmost account’ of the opinion issued by the Commission. In its communication, the Commission indicates that ‘particular attention will be paid to all Horizon 2020 projects related to the health sector, including future projects in response to COVID 19 outbreak.’
Third, the Commission highlights how under the EU FDI Screening Regulation a public health emergency may very well affect public security or public order. Article 4(1) of the FDI Screening Regulation provides for a series of factors national screening authorities may look at when making this assessment. The list includes
critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure (emphasis added).
While Member States are not obliged to make use of these criteria, the list is nonetheless likely to influence Member States who may become more inclined to regard public health emergencies through a security lens after having received the Commission’s blessing to do so. Zooming out, this type of nudging may lead to the development of a form of national security ius commune within the Union, whereby a common conception of ‘public security’ may emerge from national screening decision-making practices read in conjunction with Commission guidelines and other forms of soft law, as well as the Court’s free movement case law.
Fourth, and finally, the Commission draws Member States’ attention to other instruments, beyond the FDI Screening Regulation. These include the possibility for Member States to buy ‘golden shares’ (i.e. a minority stake in a company, which grants Member State authorities special voting rights) and to consider imposing restrictions on portfolio investments (i.e. investments that do not lead to control over the targeted company). While such restrictions would constitute a restriction on the free movement of capital, the Commission appears to signal to Member States that it will be lenient in its assessment of the justifications to be brought forward by the Member States. It does so by reminding Member States that public health considerations may justify restrictions, for example if an investment would lead to over-reliance on foreign suppliers of essential supplies or essential services. The Commission here points to the Test Claimants case (para. 171), in which the CJEU hinted at the possibility that Member States enjoy more leeway in restricting extra-EU investments compared to intra-EU investments.
When reading the Commission’s guidelines on FDI screening in times of Covid-19, one cannot help but remain intrigued by the volte-face the Commission – and the EU more broadly – has undertaken in recent years from a staunch defender of investment liberalisation to an advocate of ‘economic sovereignty’ and ‘resilience’ of EU economies. If anything, the Covid-19 crisis is likely to further accelerate the development towards, in the words of French President Macron, a ‘Europe that protects’, i.e. a Union in which the border between the spheres of market and sovereignty is to be significantly redrawn. The FDI screening regulation is a first, arguably timid step in the direction of greater EU involvement in foreign investment screening within the Union. When reading the Commission’s Covid-19 guidelines, one can be quite confident it will not be the last.