Towards a centralisation of FDI screening in the EU? On the functioning and effects of the cooperation mechanism in the Commission’s proposal for a revised screening regulation
By Steffen Hindelang and Jan Philipp Huth[i]
A. Introduction
To those arguing, before the backdrop of increasing geopolitical tension, in favour of a security-oriented European industrial policy, it may seem like a relic of bygone times. However, Art. 63 para. 1 TFEU – still – provides for free movement of capital between the EU and third countries. As a result, the EU Single Market remains one of the most open to foreign direct investment.
While the importance of foreign direct investment as a “key source of capital and technology transfer”[ii] is undisputed as such, the potential security risks associated with key technologies[iii] and possible distortions of competition through State aid[iv] have increasingly come to the forefront of public debate in recent years. The fact that the EU Single Market was an important target for foreign direct investment, particularly from China, prior to the adoption of the Screening Regulation in 2019[v] was perceived as (too) high an exposure to the potentially associated risks.
In view of mounting geopolitical tensions which increasingly affect global trade and investment, the Commission, which has described itself as a “geopolitical”[vi] one, presented a proposal to significantly revise the existing Screening Regulation (Proposed Regulation), following an intensive evaluation process of the existing regulatory framework[vii]. Not only will the Member States be obliged to introduce FDI screening mechanisms at national level, but the administrative cooperation between Member State authorities and between the Member States and the Commission would be considerably expanded as well.
Focusing on the cooperation mechanism, this blog post asks whether the Proposed Regulation marks a shift of power in favour of the Commission and thus towards an increasing centralisation of decision-making at the EU level, quietly heralding the end of the Member States’ authority in the field of FDI screening?
The question will be approached in three steps. To begin with, the cooperation mechanism under the current Screening Regulation will be outlined. It then sets out the main reasons for the revision of the current legal framework and the main changes that the Proposed Regulation will bring. Finally, building on this, the main question of this blog post – the potential of the revised (administrative) cooperation mechanism to centralise FDI screening on the Union level – will be examined.
B. The cooperation mechanism under the current Screening Regulation
The cooperation mechanism – regulated in its Art. 6 to 9[viii] – is at the heart of the current Screening Regulation. The Screening Regulation does not oblige the Member States to introduce an FDI screening mechanism. However, all Member States – regardless of whether or not they are screening FDI – are included in the cooperation mechanism of the Screening Regulation. As a result (and also due to political peer pressure), the number of Member States with a screening mechanism has increased significantly in recent years. At the time the Screening Regulation was adopted, only about half of the Member States were screening FDI by default. In the meantime, almost all Member States have either introduced a mechanism, or have at least taken substantive legislative steps in this direction. In addition, the cooperation mechanism has led to a greater formalisation of the informal, bilateral exchange of information between the EU Member States that was already taking place before the adoption of the Screening Regulation (and does still exist)[ix]
I. Formal cooperation between the Commission and Member State authorities under the Screening Regulation
The cooperation mechanism enshrined in the Screening Regulation distinguishes between two scenarios: on the one hand, cooperation in the case of a foreign investment that is screened by a Member State and, on the other, those cases in which an investment is not examined. These basic scenarios are adapted in the case of projects or programmes of Union interest being affected by a foreign investment.
1. Cooperation mechanism for screened direct investments
If a Member State has introduced an FDI screening mechanism, Art. 6 para. 1 of the Screening Regulation requires the Member State to “notify the Commission and the other Member States of all foreign direct investments in its territory that are subject to screening” and to provide information in this regard. This includes, for example, the ownership structure of the investor (Art. 9 para. 2 lit. a) as well as the approximate value (lit. b) and the funding (lit. e) of the investment. If other Member States or the Commission provide comments in this context, these must be given due consideration by the notifying Member State in accordance with Art. 6 para. 9 of the Screening Regulation.
2. Cooperation mechanism for direct investments not undergoing screening
If a Member State does not screen a direct investment which another Member State considers to possibly affect its own security or public order, the latter may provide comments to the respective Member State which does not subject the investment to screening (Art. 7 para. 1 of the Screening Regulation). If security or public order is likely to be affected in more than one Member State, the Commission may issue an opinion (Art. 7 para. 2 of the Screening Regulation). According to Art. 7 para. 7 of the Screening Regulation, both comments and opinions must be given due consideration by the addressee. However, this does not seem to be really feasible but if the Member State addressed has already a screening mechanism in place, which is (as has already been mentioned above) not mandatory under the current Screening Regulation.
Art. 7 para. 5 of the Screening Regulation also provides for the possibility of merely requesting information in the first place, and to submit corresponding comments and opinions subsequently in case that a foreign direct investment is not subject to screening.
3. Projects or programmes of Union interest
If a foreign direct investment is likely to affect projects or programmes of Union interest, the Commission is also entitled to issue an opinion. According to Art. 8 para. 3 Screening Regulation, this includes, for example, projects with a significant share of Union funding as well as certain critical infrastructure and technologies. Art. 8 Screening Regulation attaches stricter obligations to Commission opinions if projects of programmes of Union interest are affected. According to Art. 8 para. 2 lit. c) Screening Regulation, the target State of the investment is obliged to take utmost account of the opinion and to provide an explanation in case of non-compliance with the opinion. Art. 8 Screening Regulation is sometimes held to be the most powerful provision of the Screening Regulation[x].
II. Weaknesses of the existing regulation
The Screening Regulation itself provides for its evaluation by the Commission regarding the framework’s functioning and effectiveness[xi]. An external evaluation carried out by the OECD identified several areas for optimization. Its findings were of particular significance in the process of drafting the Proposed Regulation[xii]. Specifically, the absence of an obligation for Member States to introduce screening mechanisms[xiii] as well as the cooperation mechanism[xiv], showing phenomena of both over- and undersharing, were criticized in the report.
Art. 6 para. 1 of the Screening Regulation currently requires Member States to “notify the Commission and the other Member States of any foreign direct investment in their territory that is undergoing screening”[xv]. This can lead to an oversharing of information, as some Member States have established very comprehensive notification and screening frameworks and thus also feed transactions into the cooperation mechanism that are less relevant in terms of public order and security. However, at the same time, there are still Member States which do not screen any foreign direct investment, and the mechanisms in place are diverging significantly in their respective scope of application. Even the Member States’ interpretations of what falls into the ambit of “screening” according to Art. 6 para. 1 of the Screening Regulation are diverging, with Germany, for example, only notifying cases of in-depth examination. This can lead to undersharing, i.e. information relevant to other Member States or the Union not being fed into the cooperation mechanism.
At the throughput level, the core problem is that information about a direct investment that is being examined in several Member States at the same time is fed asynchronously into the mechanism. In addition, different deadlines within the national procedures sometimes lead to situations where it is impossible to take the Commission’s opinion or the comments of the other Member States into consideration in the context of the domestic decision-making process.
The reform process is likely to have also been spurred by the widely debated Xella ruling[xvi] of the Court of Justice of the European Union (CJEU). The inapplicability of the Screening Regulation to EU companies controlled from third countries was perceived as a significant regulatory loophole by the Commission and certain Member States. The decision has repercussions on the cooperation mechanism since investments in EU companies controlled from outside the EU are not to be channelled into this cooperation mechanism. Furthermore, the judgment laid bare that the Member States’ respective interpretations of the vague concept of security and public order are diverging considerably.
In order to mitigate some of the weaknesses of the Screening Regulation, the Commission carries out on an informal level what is sometimes called horizon scanning[xvii]. In case the Commission becomes aware of non-notified transactions that could potentially fall within the scope of the screening mechanism of one or more Member States, the latter are informed by the Commission. According to the findings of the OECD Report, informal cooperation by carrying out horizon scanning is, however, not considered to be of greater significance, albeit the explanatory value of the survey suffers from the Member States’ reluctance to provide relevant information[xviii].
C. The cooperation mechanism in the Commission’s proposal for a revised screening regulation
The modified cooperation mechanism of the Proposed Regulation distinguishes between two ways in which the exchange of information on FDI-related transactions is initiated: On the one hand following notification by the target State of the investment, and, on the other, via the newly introduced own initiative procedure, which can be triggered by the Commission or any Member State.
I. Notification by the Member State targeted by the FDI
The right of the Member State targeted by a FDI, under specific circumstances amounting to an obligation, to notify an investment follows from Art. 5 of the Proposed Regulation.
An obligation to notify an investment may arise in the following three constellations: First, pursuant to Art. 5 para. 1 lit. a), read together with Art. 4 para. 4 lit. a) of the Proposed Regulation, an obligation exists if the target of the foreign investment established in the territory of the EU is related to projects or programmes of Union interest listed in Annex I of the Proposed Regulation. Second, according to Art. 5 para. 1 lit. b) read together with Art. 4 para. 4 lit. b) of the Proposed Regulation, the target Member State is obliged to notify if the target investment is economically active in an area listed in Annex II of the Proposed Regulation and the foreign investor is, in addition, either under (direct or indirect) control by foreign State, or subject to restrictive measures by the EU, or previously involved in an investment that was not authorised or only authorised with conditions. Finally, third, according to Art. 5 para. 2 of the Proposed Regulation, an obligation to notify always exists if the Member State carries out an in-depth investigation outside the ambit of the aforementioned scenarios, or intends to impose a mitigating measure or prohibition without an in-depth investigation. Therefore, under this variety, only preliminary reviews without any negative repercussions on the investment remain free of an obligation to notify.
Beyond that, the Member States are authorised to notify any investment they assume to be of particular interest to other Member States or the Commission with respect to security or public order according to Art. 5 para. 3 of the Proposed Regulation.
Following notification, any Member States or the Commission may submit comments or an opinion respectively with regard to the investment. While Member States are allowed to submit comments if the foreign investment could affect their security or public order, an opinion by the Commission requires the security or public order of at least two Member States or the Union to be affected. Moreover, both the Member States and the Commission may submit comments or an opinion if they have information, they believe is relevant to the examination of the notified foreign investment.
II. Review via the own initiative procedure
In addition, the Proposed Regulation enables an activation of the cooperation mechanism via the so-called own initiative procedure. This procedure can be activated by either the Commission or any Member State other than the target State of the investment. According to Art. 9 para. 1 of the Proposed Regulation, a Member State can activate the procedure if it concludes that a non-notified foreign investment is likely to negatively affect its security or public order. For the activation of the own initiative procedure by the Commission, Art. 9 para. 3 of the Proposed Regulation refers back to Art. 7 para. 2. The latter provision requires a certain probability of adverse effects on the security or public policy of more than one Member State or on projects or programmes of Union interest. The own initiative procedure thus, to some degree, institutionalises the pre-existing pathways of informal cooperation, such as the abovementioned “horizon scanning”.
The Member State in which the foreign investment is planned or finalised must provide the information requested by the other Member State(s) or the Commission, on the basis of which the latter can then submit comments or an opinion respectively. Again, the question arises as to how exactly the Member State receiving such comments and opinion should take them into account. Under certain circumstances, this may be achieved by initiating of an ex officio screening of the investment in its target Member State, if domestic law provides for such. Otherwise, consideration would only be possible by a future statutory amendment of a Member State’s screening mechanism including the concerns raised by the other Member States and the Commission.
III. The power of “soft law” – On the factual impact of non-binding opinions
As with the current Screening Regulation, the Commission’s Proposal continues to leave the final decision in the field of investment screening to the Member States. It is rather unlikely that this will change in the legislative process. The Commission has already failed once with a proposal for (partly) monopolising this competence in the run-up to the current Screening Regulation[xix]. Under the Proposed Regulation, the Commission will not have any other tool than issuing non-binding opinions (cf., Art. 288 para. 5 TFEU). According to Art. 7 para. 5 of the Proposed Regulation, a Member State, as the addressee of the opinion, must give it utmost consideration.
However, a closer look reveals a more nuanced picture. According to the prevailing view in the settled case law of the CJEU[xx] and the literature[xxi], the non-binding nature of opinions does in no way mean that it lacks any legal effect. On the contrary, opinions should not be underestimated in terms of their effect towards an increasing centralisation of decision-making at European level and a potential increase in the Commission’s power.
Starting with its Grimaldi judgment, the CJEU has consistently held that national authorities have an obligation to take non-binding act such as recommendations and opinions into consideration[xxii], albeit without making any general statements on the exact scope of this obligation[xxiii]. The Proposed Regulation fills this gap by further specifying a procedure for dealing with Commission opinions (as well as comments from other Member States) and the legal consequences of disregarding them.
If a Member State receives an opinion (or a comment), it must first convene a meeting to discuss how to best address the identified risks (Art. 7 para. 6 of the Proposed Regulation). If the Member State does not agree with the risk analysis or intends to deviate from the measure proposed by the Commission, it must contribute to identifying alternative solutions (together with the other Member States, if relevant).
Following the aforementioned meeting, the Member State in question must communicate the result of its investment screening and explain the extent to which the Commission’s opinion has been taken into account or the reasons why it has not been taken into account. If the Commission holds that the Member State has not given utmost consideration to the opinion, a further meeting must be scheduled at which the Member State must explain the reasons for deviating from the opinion. The Member State must also propose solutions to adequately address the risk scenario set out in the opinion in the future, i.e., in line with the solution proposed by the Commission. By proposing appropriate solutions, a certain political commitment is created for future similar decisions if the Member State does not want to lose credibility. The same procedure applies to the comments submitted by the Member States, which can strengthen the actual effect of the Commission’s opinion, but can also weaken it in the event of conflicting objectives in the opinion and comments, for example.
Leaving aside a possible cacophony of opinions and comments, a Member State that does not want to follow the Commission’s opinion is forced twice to propose and discuss solutions that come closest to the Commission’s opinion: once before the investment screening decision and again after having made the decision. Deviating from the opinion therefore comes with higher political costs than compliance. A third level of such a nudging into compliance is the establishment of a decision database with information on the FDI screening procedures falling within the co-operation mechanism, including the results reached under a Member State’s screening mechanism. By creating an institutional memory, FDI screening decisions will become more comparable in the long term. Any inconsistent implementation of the Commission’s opinions by the Member States will be easier for the Commission and the other Member States to understand.
In addition, it is difficult for a Member State to legally defend itself against unfavourable opinions of the Commission. Their contestability by way of an action for annulment is excluded under Art. 263 para. 1 TFEU – precisely because they are not binding. According to CJEU case law, an obligation to give utmost consideration – as in the Proposed Regulation – does not call into question the non-binding nature of the Commission’s opinion, but on the contrary, such wordings emphasise the non-binding character of such acts[xxiv]. However, the boundaries to binding legal acts are becoming increasingly blurred. It is not only assumed by voices in the literature that duties of consideration (particularly those reinforced by secondary law) can constitute a means of political pressure[xxv]. A statement by the General Court (GC) itself[xxvi] that the function of the opinion is “to exhort and to persuade” also points in this direction. According to the CJEU’ case law, non-binding opinions can only be challenged indirectly via the preliminary ruling procedure[xxvii]; however, proceedings against investment screening decisions of Member State authorities are rare.
D. Conclusions
The Proposed Regulation provides for a wide range of possibilities for the Commission to issue opinions, i.e. where it has relevant information on a transaction, or where the public policy and security of more than one Member State or of the Union are likely to be affected. According to the Proposed Regulation, it also participates in coordination meetings of the Member States in multi-jurisdictional screenings at the invitation of a Member State. The obligation of Member States to engage thoroughly with the content of the Commission’s opinions and to provide repeated justifications for non-compliance will undoubtedly have a significant “psychological-political” effect. The ongoing dispute over legal protection against European “soft law” highlights the considerable potential to steer the behaviour of Member States. For example, Advocate General Bobek suggested to the CJEU in Belgium v Commission (albeit unsuccessfully in the end) that it should abandon its distinction between binding and non-binding acts in the context of the annulment action. This suggestion was made to address the reality that legally non-binding acts of the EU can have considerable real-world effects on Member States’ behaviour.[xxviii]
If the Proposed Regulation were to be adopted in its present form, the dialogue it facilitates between the Commission and Member States, as well as the weight of the Commission’s opinions, could increasingly lead to the emergence of a rough consensus on the concept of security and public order at the European level. However, much depends on the dynamics of the cooperation mechanism. While the Commission may lack its own intelligence capacities in individual cases, this can be partly compensated for by open-source research and information provided by private actors. Additionally, Member States and third countries may be interested in supplying the Commission with relevant intelligence information. It should be further noted that such information is only one aspect to be considered in the context of investment screening. The key contribution of the Commission’s opinions could be to leverage its economic expertise, its role as guardian of the EU Treaties, and its comprehensive market overview. This would enable the Commission to systematize, coordinate, and limit (protectionist) unilateral efforts by Member States regarding public policy and security, thereby incrementally fostering a common understanding of these concepts in the context of market access for foreign investment.
Returning to the initial question of this blog post: The cooperation mechanism contained in the Proposed Regulation indicates a (necessary) shift of power in favour of the Commission, although it does not eliminate the Member States’ final decision-making authority in the context of FDI screening. The Commission will, and must, in the interest of maintaining the EU Single Market and a coherent common foreign trade policy, increasingly pre-determinate domestic FDI screening decisions for the sake of the European common good.
[i] This blog post is based on a presentation given by Prof Dr Steffen Hindelang at the University of Vienna in June 2024.
[ii] European Commission, Reflection paper on harnessing globalisation (10 May 2017), COM(2017) 240, p. 8.
[iii] European Commission, Communication, Welcoming Foreign Direct Investment while Protecting Essential Interests (13 September 2017), COM(2017) 494 final, p. 1.
[iv] European Commission, Reflection paper on harnessing globalisation (10 May 2017), COM(2017) 240, p. 9.
[v] European Commission, Communication, Welcoming Foreign Direct Investment while Protecting Essential Interests (13 September 2017), COM(2017) 494 final, p. 2.
[vi] Swedish Institute for European Policy Studies, Von der Leyen's Geopolitical Commission: Vindicated by Events?, available at https://www.sieps.se/globalassets/publikationer/2024/2024_7epa.pdf (last accessed on 22 June 2024, 13:45).
[vii] European Commission, Proposal for a Regulation of the European Parliament and of the Council on the screening of foreign investments in the Union and repealing Regulation (EU) 2019/452 of the European Parliament and of the Council (24 January 2024), COM(2024) 23 final (hereafter “proposed regulation”).
[viii] Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, OJ L 79 I/1 of 21 March 2019 (hereafter “Screening Regulation”).
[ix] Bungenberg, Marc/Reinhold, Philipp, Investitionskontrollrecht (C. H. Beck, 1st ed. 2023), para. 197.
[x] Voland, Thomas/Slobodenjuk, Dimitri in Krenzler, et al. (eds.), EU-Außenwirtschafts- und Zollrecht (C. H. Beck, 22nd update December 2023), EU_VO_2019_452 Art. 8, para. 6.
[xi] Art. 15 para. 1 of the Screening Regulation.
[xii] European Commission, Communication, Advancing European economic security: an introduction to five new initiatives, COM(2024) 22 final, p. 2.
[xiii] OECD, Framework for Screening Foreign Direct Investment into the EU: Assessing effectiveness and efficiency, available at https://www.oecd-ilibrary.org/finance-and-investment/framework-for-screening-foreign-direct-investment-into-the-eu_f75ec890-en (last accessed on 4 July 2024, 7.04 p.m.), p. 65 (hereafter OECD Report).
[xiv] OECD Report, pp. 79.
[xv] Emphasis added.
[xvi] CJEU, Case C-106/22, ECLI:EU:C:2023:568 - Xella Magyarország (“Xella”). For a link between the Xella decision and the initiative to revise the Screening Regulation, see, e.g., https://www.aoshearman.com/en/insights/draft-eu-foreign-investment-screening-regulation-sets-out-more-comprehensive-screening-regime (last accessed on 16 June 2024, 5.20 p.m.).
[xvii] Bungenberg, Marc/Reinhold, Philipp, Investitionskontrollrecht (C. H. Beck, 1st ed. 2023), para. 193.
[xviii] OECD Report, p. 45.
[xix] Marc Bungenberg/Fabian Blandfort in: Terhechte (ed.), Verwaltungsrecht der Europäischen Union (Nomos, 2nd edition 2022), § 30 para. 24.
[xx] Starting with CJEU, Case C-322/88, ECLI:EU:C:1989:646 - Grimaldi v. Fonds des maladies professionnelles ("Grimaldi").
[xxi] Ruffert, Matthias in: Calliess/Ruffert (eds.), EUV/AEUV (C. H. Beck, 6th ed. 2022), Art. 288 TFEU, para. 97 with further references; Nettesheim, Martin in: Grabitz/Hilf/Nettesheim (eds.), Das Recht der Europäischen Union (C. H. Beck, 81st ed. January 2024), Art. 288 TFEU, para. 206.
[xxii] CJEU, Grimaldi, para. 18.
[xxiii] This has recurrently been subject to criticism in the literature, see e.g. Gundel EuR 2018, 597. The CJEU has consistently held that the distinction between non-binding opinions that must be taken into account and binding legal acts is not based on the formal designation of the legal act, but rather on its nature, effect and context (see, for example, CJEU, Case C-16/16, ECLI:EU:C:2018:79 para. 32 - Belgium v Commission). In the AETR judgment, the CJEU already stated that voidability applies to "all measures adopted by the institutions, whatever their nature of form, which are intended to have legal effects" (CJEU, Case 22/70, ECLI:EU:C:1971:32 para. 42, Commission of the European Communities v Council of the European Communities).
[xxiv] CJEU, Case T-660/18, ECLI:EU:T:2019:546 para. 44 - VodafoneZiggo Group v Commission ("VodafoneZiggo"). The CJEU endorsed this reasoning in Case. C-689/19 P ECLI:EU:C:2021:142, para. 53 - VodafoneZiggo Group v Commission.
[xxv] Ruffert, for example, speaks of the “psychological-political effects of opinions” (Ruffert, Matthias in: Calliess/Ruffert (eds.), EUV/AEUV (C. H. Beck, 6th ed. 2022), Art. 288 TFEU, para. 98, our translation), and Nettesheim even ascribes "considerable steering power" to the instrument of the opinion (Nettesheim, Martin in: Grabitz/Hilf/Nettesheim (eds.), Das Recht der Europäischen Union (C. H. Beck, edition 81st ed. January 2024), Art. 288 TFEU, para. 208, our translation).
[xxvi] GC, VodafoneZiggo, para. 43.
[xxvii] CJEU, Case C-911/19, ECLI:EU:C:2021:599 para. 54 - Fédération bancaire française (FBF) v Autorité de contrôle prudentiel et de résolution (ACPR) (”FBF”).
[xxviii] Advocate General Bobek, Opinion of 12 December 2017, Case C-16/16 P, ECLI:EU:C:2017:959 para. 5 - Belgium v Commission.
