Clifford Chance

In its report published two years after the EU FDI screening mechanism came into force, the OECD identifies benefits of the mechanism but also lists 12 issues that any reform could addresses as a priority.

The EU Regulation establishing a framework for the screening of foreign direct investments ("FDI") into the Union ("Regulation") became fully applicable on 11 October 2020 and is subject to an evaluation by the European Commission ("EC") by October 2023. In the context of such evaluation, the OECD had been entrusted with the task of analysing the efficiency of the EU FDI screening mechanism.

Despite a positive overall assessment, the OECD identified 12 issues that diminish effectiveness or efficiency of the EU FDI screening mechanism and suggested the following reforms:

1. Generalise screening

The report points out the absence of screening in some Member States. It is thus suggested that a revision of the Regulation could require all Member States to establish such a mechanism.

2. Harmonise scope of control

Despite having a mechanism in place, certain Member States have limited coverage of the investments governed by such mechanism. The Regulation could require that the national FDI regimes cover at least some core areas or alternatively impose standards going beyond the suggestions currently contained in the text.

3. Political priority

It is pointed out that the priority that political leadership attaches to investment screening in many Member States has declined. Consequently, to address this decline in interest, which also leads to a decline in resources granted for control, the report suggests that a revision of the Regulation could be a catalyst for renewed attention and a provision could be included to require cyclical conversation on investment screening.

4. Information gathering

The utility of the EU FDI screening mechanism is based, in part, on the exchange of information between Member States on transactions. Yet it is observed that many Member States are unable to produce information upon request from other Member States or the EC, especially in cases where the transaction is not undergoing screening. To address this issue, it is suggested that the Regulation could impose an obligation on Member States to introduce domestic powers to be able to gather information on whether or not there is ongoing screening.

5. Detection of non-notified transactions

Another potential enforcement gap lies in the fact that reviewable transactions that are not notified are unlikely to be detected due to the limited detection capacities of the Member States and the EC. If the allocation of resources is autonomously decided by Member States, it is suggested that the EC could play a greater role in investigating transactions, thus reducing the burden on Member States.

6. Taking comments into account

Not all Member States have explicit competencies to act on comments from other Member States. Instead, they are required only to take "due consideration" to comments from Member States or opinion of the Commission. To address this shortcoming, OECD makes a two-fold recommendation. First, to amend national rules to allow them to take into account not only the domestic interests but also common security and public order interests of the Union. Second, an amendment of the Regulation to suggest or require Member States to establish competencies to intervene in transactions, or to require Member States to give an explanation of their course of action when they have received comments or opinions.

7. Accountability regarding comments and opinions

The report notes that accountability in the context of comments and opinions received from Member States and the EC is low, with little feedback from the Member State. To change this, an amended Regulation could explicitly allow or oblige Member States that have received comments or opinions to share feedback on their use.

8. Screening timeline

Legal timelines for screening in some Member States may be too short to allow for the effective incorporation of input from the cooperation mechanism. To reconcile both processes, it is the Member States' responsibility to set a timeline that makes it possible to meet the requirement of the Regulation under all circumstances, e.g. by way of suspensions.

9. Opening channels information sharing

The Regulation requires or permits the flow of transaction-specific information among Member States in limited circumstances. The OECD suggests changing the Regulation to lift conditions on available information channels or provide for voluntary sharing of information, even in the case of transactions not undergoing screening.

10. Improved targeting

In many cases, the information that is irrelevant for the security and public order interests of other Member States or the EU is fed into the information exchange mechanism, while some relevant information is not required to be shared. The proposed amendment to resolve this issue would be to exempt notification where a transaction has no implications beyond a Member State’s borders, and to require notification where a transaction potentially affects the security or public interests of other Member States.

11. Flawed definition of a foreign investor

The definition of a "foreign investor" in the Regulation limits the availability of the cooperation mechanism for investments by third country investors when they invest through a company established in the EU. An amendment to the Regulation could extend the scope of application of the Regulation to cover investors established in the EU but ultimately controlled by third country persons or even to cover all types of asset acquisitions by foreign investor in the EU.

12. Improving the efficiency of multi-jurisdictional FDI screening

Multi-jurisdictional FDI screening sometimes results in repeated, asynchronous, and uncoordinated triggering of the information exchange mechanism, even if the investor submits complete information simultaneously to all Member States involved. To remedy this, it is suggested that a specific procedure be set up only for multi-jurisdictional FDI transactions.

While the OECD report is certainly going to prompt in-depth thinking from the EC ahead of October 2023, it remains to be seen how those 12 issues will, in turn, be addressed effectively and efficiently.