The U.S. Prohibition of the MineOne-Acquisition: What would be the treatment under EU and German Foreign Direct Investment Legislation?
By Benedikt Sichla, Research assistant at Clifford Chance
1. Introduction
On May 13, 2024, President Biden issued an order prohibiting for national security reasons the acquisition of real estate and the operation of a cryptocurrency mining facility in close proximity to a U.S. Air Force base. The foreign ownership of the acquirer by nationals of the People’s Republic of China (“PRC”) was a particularly important factor for justifying the president’s order.
The president’s order offers an interesting comparison between U.S., European and German Foreign Direct Investment (“FDI”) regulations. This blog post summarizes the president’s order, and then considers how the acquirer’s property acquisition and business operation would be treated under the applicable European Union (“EU”) and German FDI legislation. Finally, this blog post will discuss anticipated reforms to both EU and German law.
2. MineOne Investment
MineOne Cloud Computing Investment I L.P., together with certain of its affiliates (collectively referred to as “MineOne”), acquired a property located within one mile of the Francis E. Warren Air Force Base (“AFB”) in Cheyenne, Wyoming. AFB is a strategic U.S. missile base and key element of America’s nuclear triad. After the property acquisition, MineOne then made real estate improvements to use the property for specialized cryptocurrency mining operations.
Upon receiving a public tip, the non-notified team of the Committee on Foreign Investment in the United States (“CFIUS”) investigated this real estate transaction which MineOne had not previously filed with CFIUS.
CFIUS has authority to review certain transactions involving foreign investment to ensure that it does not undermine U.S. national security interests. In 2018, the Foreign Investment Risk Review Modernization Act extended CFIUS’s jurisdiction to cover real estate transactions near certain sensitive US military facilities.[i] It is authorized to negotiate, enter agreements, or take other actions to mitigate national security risks arising from applicable real estate transactions. When CFIUS concludes that the transaction poses a national security risk and risk mitigation is not adequate or appropriate, CFIUS may recommend that the president suspends or prohibits the transaction.[ii]
Due to its proximity to AFB, which is of significant strategic military importance, CFIUS identified a national security risk arising from MineOne’s real estate transaction. In particular, CFIUS determined that the presence on the property of specialized equipment used to conduct cryptocurrency mining operations, including some equipment that was foreign-sourced, could facilitate surveillance and espionage. CFIUS referred the matter to the president with a recommendation to block the transaction. On May 13, 2024, President Biden acted upon CFIUS’s recommendation and issued an order prohibiting the transaction and requiring the divestment of the cryptocurrency mining facility as well as requiring the removal of certain real estate improvements and equipment from the property.[iii]
3. FDI Regulatory Framework in the EU and Germany
3.1 EU FDI Framework
In 2019, the EU adopted the Regulation (EU) establishing a framework for the screening of foreign direct investments into the Union(“FDI Screening Regulation”). The FDI Screening Regulation represents a new approach as it was the first EU legislative act dealing with the screening of foreign direct investment (“FDI”) since FDI became part of the Common Commercial Policy (“CCP”), an exclusive competence of the EU (Article 3(1)(e), 207(1) TFEU). In fact, FDI was not part of the CCP prior to the Treaty of Lisbon (cf. Article 133 TEC) but fell within the area of shared competence.
The FDI Screening Regulation establishes framework rules for national screening mechanisms and aims at improving the cooperation between Member States and the European Commission (“Commission”). “Screening” within the meaning of the FDI Screening Regulation means a procedure allowing to assess, investigate, authorize, condition, prohibit or unwind FDI on grounds of security or public order (Article 2(3), (4) FDI Screening Regulation).
The FDI Screening Regulation, in Article 2(1), defines FDI as:
“an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in a Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity”.
Legal commentators disagree as to the exact scope of the FDI Screening Regulation due to the “unusual” definition with regard to the prepositional phrase beginning with the word “including.”[iv] Most commentators as well as the Commission agree however that FDI can occur through either (i) a greenfield investment, or (ii) through mergers and acquisitions (“M&A”).[v] A greenfield investment typically consists of the creation of a new company or the establishment of facilities abroad, an M&A transaction involves the transfer of shares in an existing company or a company’s assets.[vi]
In this context, U.S. and European FDI rules differ in the scope of their application. In the U.S., FDI rules cover certain real estate transactions, but CFIUS is not authorized to investigate greenfield investments.[vii] The FDI Screening Regulation however requires that an investment’s purpose is to establish a direct link between the foreign investor and the company. The establishment of this direct link can be achieved by the foreign investor’s creation of a new entity or acquisition of a company’s existing assets.
Having established what constitutes an FDI within the meaning of the FDI Screening Regulation, we can now look at the factors that Member States may take into account while screening an FDI. The FDI Screening Regulation provides a non-exhaustive list of criteria the Member States may consider while determining whether an FDI is likely to affect security or public order. According to Article 4(1)(a), Member States may consider the potential effects on “critical infrastructure […] as well as land and real estate crucial for the use of such infrastructure” which includes among other things the defense sector.
Thus, a real estate transaction as such would not constitute an FDI under Article 2(1). However, once the investor’s activity constitutes an FDI and falls within the scope of the FDI Screening Regulation, the Member State in whose territory the FDI takes place may assess the investment’s potential effects as they relate to the defense sector’s need for certain land or real estate. As stated above, the establishment of facilities may constitute an FDI in the eyes of the Commission and could therefore be put under scrutiny by a Member State. The Member State could, under its national screening mechanism, assess the investment’s potential effects on the defense sector and consider among other things the proximity of the facility to a military installation (Article 4(1)(a) FDI Screening Regulation).
In the Albore judgment, the ECJ considered a foreign acquirer’s obligation to apply for administrative authorization to purchase real estate in an area of the Italian territory designated as being of military importance. Such a statutory obligation may be compatible with EU law if the Member State – Italy in this case – could demonstrate that its military interests would otherwise be exposed to real, specific, and serious risks that less restrictive procedures could not counter.[viii]
3.2 German FDI Legislation
In Germany, the Foreign Trade and Payments Act (Außenwirtschaftsgesetz – “AWG”) and the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – “AWV”) provide the legal basis for the country’s national FDI screening mechanism. The German Federal Ministry for Economic Affairs and Climate Action (Bundesministerium für Wirtschaft und Klimaschutz – “BMWK”) may review certain transactions made by foreign investors on a case-by-case basis (“German FDI Scheme”).
De lege lata, the German FDI Scheme only applies to the acquisition of an already established German company (cf. section 2(15)(2) AWG, section 55(1), 60(1) AWV), and the BMWK has no explicit jurisdiction to review greenfield investments. However, foreign investor’s acquisition of an existing facility may constitute a so-called asset deal covered by the German FDI Scheme (section 55(1a), 60(1a) AWV).
The German FDI Scheme does not provide for a provision comparable to Article 4(1)(a) FDI Screening Regulation, i.e. regarding the consideration of land and real estate crucial for the use of critical infrastructure. However, for the sake of completeness, it should be mentioned that in a very specific application, the use of real estate can have legal consequences: The German FDI Scheme classifies companies as critical if they directly or indirectly cultivate an agricultural area of more than 10,000 hectares (section 55a(1)(27) AWV). As a result of this classification as critical, the BMWK has the power to screen the investment in such a company at a lower acquisition threshold (20% instead of 25%), and the acquisition may be subject to a mandatory filing requirement (section 55a(4), 56(1)(2) AWV).
4. Outlook
4.1 Proposal for the Revision of the EU FDI Framework
On January 24, 2024, the Commission published a proposal for a revised FDI Screening Regulation (“Proposal”). The Proposal would revise some fundamental aspects of the FDI Screening Regulation, including the Member States’ obligation to establish or maintain a FDI screening mechanism. The Proposal also would modify the definition of FDI as follows:
“‘[Foreign] direct investment’ means an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and an existing or to be established [EU] target, and to which target the foreign investor makes capital available in order to carry out an economic activity in a Member State”.
The inclusion of the language “to be established [EU] target” clarifies that the FDI Screening Regulations includes within its scope greenfield investments. The Proposal also removes the current “unusual” language related to the prepositional phrase “including”. However, in view of the Member States’ obligation to establish a screening mechanism (Article 3(1)), the question arises as to whether the national mechanisms must cover greenfield investments or whether they could only do so. The provisions of the Proposal are not clear in this regard. The language of Recital 17 might suggest that the Member States are not required to include greenfield investments in their screening mechanisms, but are encouraged to do so.[ix]
The Proposal however omits any reference to land or real estate, and reduces the list of criteria which the Member States may consider. Article 13(3)(a) provides that Member States shall consider whether the investment concerned is likely to negatively affect the security, integrity, and functioning of critical infrastructure. Also, the Proposal does not list any examples of critical infrastructure, such as infrastructure required for national defense.
The Commission did not likely intend for the Proposal to reduce the criteria that Member States would consider when screening FDI. Rather, it seems that it was the Commission’s intent to maintain the same scope of criteria as in the current legislation. This results from the different approach of the Proposal compared to the FDI Screening Regulation: The Proposal sets out minimum requirements regarding the scope of application of the national screening mechanisms. The Member States must impose an authorization requirement for EU companies economically active in certain areas listed in an annex to the Proposal (Article 4(4)(b)). The FDI Screening Regulation did not impose when an FDI should be covered by a screening mechanism but only listed sample criteria which Member States could consider while screening an FDI. However, this catalog of criteria in the FDI Screening Regulation could have been understood by Member States as indicative for the scope of application of national screening mechanism. In fact, that seems to be the reasoning behind the extension of the scope of application of the German FDI Scheme in 2020.[x] In addition, the umbrella term of critical infrastructures which also includes the defense sector also remains the same.
4.2 [Reform of] German FDI Law
The FDI Screening Regulation, at least according to the Commission, and the Proposal allow Member States to review greenfield investments encompassing a foreign investor’s establishment of a facility near a critical infrastructure including infrastructure used by the defense sector. Currently, the German FDI Scheme does not apply to such greenfield investments. The BMWK has recently identified greenfield investments as critical investments that are not yet covered by the German FDI Scheme,[xi] which could result in the adaption of new legislation.
Lawmakers considering whether to adopt a reform should carefully consider whether legislation, which could encompass greenfield investments within national FDI screening mechanisms, are necessary. Alternatively, lawmakers may be able to avert national security risks associated with FDI through other means such as the implementation of general rules for the protection of critical infrastructures.
A foreign investor’s greenfield investment is associated with fewer risks than a foreign investor’s acquisition of a company. For example, existing expertise cannot be tapped so easily. Investments from third countries are generally viewed favorably as the establishment of a new company is usually associated with the creation of new jobs and the promotion of innovation.[xii] The Proposal itself underlines the importance of the EU maintaining an open and welcoming foreign investment environment.[xiii]
[i] 50 U.S.C. 4565(a)(4)(B)(ii)(II)(bb)(AA).
[ii] 50 U.S.C. 4565(d)(1).
[iii] The White House, Order Regarding the Acquisition of Certain Real Property of Cheyenne Leads by MineOne Cloud Computing Investment I L.P., May 13, 2024.
[iv] Cf. Günther, Beiträge zum transnationalen Wirtschaftsrecht Nr. 157, August 2018, p. 33 et seq; Brauneck, EuZW 2018, 188 (192).
[v] Günther, Beiträge zum transnationalen Wirtschaftsrecht Nr. 157, August 2018, section 8; Schipke, Die Europäisierung der Investitionskontrolle, 2024, p. 37 et seq.; Schülken, Drittstaatliche Direktinvestitionen in Energieinfrastrukturen, 2021, p. 171; Günther, Beiträge zum transnationalen Wirtschaftsrecht Nr. 157, August 2018, p. 33 et seq.; differing opinion, Ludwig, Die Kontrolle ausländischer Direktinvestitionen, 2023, p. 217.
[vi] European Commission, Frequently asked questions on the EU framework for FDI screening, July 4, 2022, section 8.
[vii] 31 C.F.R. § 800.301(e)(7).
[viii] Cf. ECJ, Judgment of 13 July 2000, Albore, C-423/98, EU:C:2000:401, paragraph 24.
[ix] Cf. von Rummel/Beischau, EuZW 2024, 499 (500).
[x] Gesetzentwurf der Regierungsfraktionen v. 21.4.2020, BT-Drs. 19/18700, p. 17; cf. Schuelken/Sichla, Auswirkungen der EU-Screening-VO auf das deutsche Außenwirtschaftsrecht, DöV 2020, 961 (964).
[xi] BMWK, Evaluierung des Ersten Gesetzes zur Änderung des Außenwirtschaftsgesetzes und der 15.–17. Verordnung zur Änderung der Außenwirtschaftsverordnung, September 2023, p. 22.
[xii] Cf. von Rummel/Beischau, EuZW 2024, 499 (500).
