Tightening the Screws: the Commission’s Foreign Investment Screening Proposal
In late January 2024, the Commission launched several initiatives to strengthen the economic security of the EU. Among these initiatives was a proposal to reform the Foreign Direct Investment (FDI) Screening Regulation, which was adopted in 2019 and began to apply in 2020. In this post, I examine some aspects of the Commission’s proposal. My initial impression is that the Commission aims to guide Member States toward more uniformity in which investments to screen and how to do so, albeit ever so gently.
The original 2019 regulation piqued my interest because of its unconventional governance structure. Although the regulation was enacted based on the EU’s exclusive competence over FDI, it did not establish an EU-level screening mechanism akin to the American Committee on Foreign Investment in the United States (CFIUS). Instead, the regulation encouraged Member States to adopt their screening mechanisms without mandating it; it provided suggestions on the types of factors Member States might consider when screening investments for security and public order reasons; and it introduced a cooperation mechanism allowing Member States to comment on proposed investments in each other’s territories and the Commission to issue opinions where it deemed a proposed investment likely to affect security and public order in more than one Member State or projects or programs co-funded by the EU or related to critical infrastructures or technologies.
This regulation was notably hands-off, allowing Member States to retain—or reacquire, given the nature of the competence involved—the sole authority to approve or reject investments within their territories. Not without reason, Advocate-General Ćapeta referred to the FDI Screening Regulation as a platypus in her opinion in the Xella case—a mammal that baffled naturalists upon its discovery due to its unique features. Given the power delegations that placed Member States in the lead role in FDI screening, shouldn't this regulation have been a directive instead?
FDI Screening Regulation 2.0
The Commission now proposes to replace the existing regulation with a new one. If the Commission’s proposal is adopted, there will be slightly more uniformity in how investments are screened across the EU. Some noteworthy innovations include:
First, under the Commission’s proposal, introducing a screening mechanism will no longer be optional; all Member States will be required to establish a screening mechanism that meets certain procedural minimum standards.
Second, the material scope of the regulation is expanded in response to the Court’s judgment in the abovementioned Xella case. The Commission suggests that the new regulation should cover investments not only by foreign nationals or companies organized under the laws of a third country but also by investors controlled by foreigners. The Court had previously rejected the suggestion that the existing FDI Screening Regulation should cover investments controlled by third-country investors. The Commission’s proposal includes such investments.
This expansion is significant and raises concerns: by including investments by companies within the EU but controlled by third-country owners, the tension between security-based investment screening and the principles of free movement is likely to increase. This broader scope of the FDI Screening Regulation could potentially undermine the integrity of the internal market, as has been suggested elsewhere.
Third, the Commission proposes that Member States must consider a set of screening criteria when determining if an investment could negatively affect security or public order. This shift from "may" to "shall" aims to standardize how Member States screen investments, though they still retain the final decision.
Fourth, the cooperation mechanism is enhanced, offering more detailed requirements on the notification of investments and the steps and deadlines for Member States to comment on investments affecting multiple Member States.
Fifth, Member States will be required to screen projects or programmes of Union interest, which the existing regulation defines as ‘those projects and programmes which involve a substantial amount or a significant share of Union funding, or which are covered by Union law regarding critical infrastructure, critical technologies or critical inputs which are essential for security or public order.’ Under the current rules, only the Commission was given the opportunity to issue an opinion on such investments.
Lastly, under the proposal the Commission would be empowered to adopt a list of technologies, assets, facilities, equipment and so forth that are ‘of particular importance for the security or public order interests of the Union’. Here again, Member States would be under an obligation to screen. The Commission can amend the list by delegated act, which gives it significant leeway to expand the types of investments Member States are obliged to screen.
Tightening the screws, albeit ever so gently
The introduction of the abovementioned list reflects the Commission’s broader aim with the proposed FDI Screening Regulation 2.0: to move towards a more harmonized framework that nudges Member State screening mechanisms towards uniformity and introduces an emerging EU conception of public security and order. While far from a US-style CFIUS system, the Commission's proposals collectively aim for a more integrated approach to investment screening, gradually aligning Member States’ practices with a common EU vision. The Commission seeks to gently tighten the screws, promoting convergence and a shared understanding of security and order concerns.
