EU Issues Guidance on Investment Screening in View of Public Health Emergencies and Market Valuations/Volatility Issues

On March 25, 2020, the European Commission (Commission) issued guidance (Guidance) to the EU’s Member States on protecting critical European assets from opportunistic acquisition by foreign investors in inbound merger and acquisition (M&A) deals. In essence, the nonbinding Guidance tells Member States that they can — and should — consider blocking or conditioning deals in light of public health emergencies such as the COVID-19 pandemic and market volatility stemming from such public health emergencies

The European Framework for Member State Rules on FDI Screening

As reported in our March 2019 Update, the EU’s Investment Screening Regulation (Regulation) will apply from October 11, 2020. The Regulation establishes the most extensive European framework yet for coordinating foreign direct investment (FDI) screening, but it stops short of permitting the Commission to block — or condition approval of — FDI, as that remains a Member State competence.

The Regulation does, however, confirm that Member States may block foreign investors from acquiring or taking control in European assets if that acquisition or control would result in a threat to security or public order. The Regulation also clears the way for a new, EU-wide system of information exchange among the Commission and the Member States.

Precautionary Measure to Guide Member States on Protecting European Assets

As the Regulation does not yet apply, the Commission has issued the Guidance as a “precautionary” measure. While attempting to stress that the EU remains open to FDI, the Guidance

1. Calls on Member States to use their FDI screening tools fully
2. Explains to Member States how to use their screening tools to protect critical European assets and technology in case of a public health emergency; classifies the COVID-19 pandemic as a threat to security or public health that could justify blocking — or conditioning approval of — an M&A deal
3. Invites Member States that do not yet have (full) FDI screening tools to put in place such tools and/or ensure that their FDI screening tools cover all relevant FDI (to date, only 14 of the 27 Member States have screening tools in place)
4. Suggests that Member States exchange information on FDI, in particular in view of interdependencies in the integrated EU single market

While the Guidance singles out FDI in healthcare (e.g., producing medical or protective equipment) and related industries (e.g., researching vaccines), it also refers to FDI in other critical assets. In particular, the Guidance refers to FDI in any asset that may be underpriced because of what the Commission describes as stock market “undervaluation” and volatility. It also points out that Member States may wish to screen M&A deals involving small to midsize enterprises.

Implications for Inbound European M&A: Closed Deals Can Face Mitigating Measures

Even though the Regulation does not yet apply, the Guidance confirms that the Regulation may affect current inbound European M&A.

Under the Regulation, if a Member State does not screen an investment, the Commission and other Member States may provide comments and opinions on the deal within 15 months of deal completion. These comments and opinions can lead the Member State in which the investment took place to adopt mitigating measures after deal completion, even if the deal was completed before the Regulation started applying.

For example, for M&A deals completed in March 2020, this means that comments and opinions can be provided from October 11, 2020 (when the Regulation starts applying), until June 2021 (15 months after deal completion). Thus, closed deals could face ex post mitigating measures.

Restrictions on Portfolio (i.e., Noncontrolling) Investments Under General Rules on Free Movement of Capital

Finally, the Guidance explains to Member States that portfolio investments (which are not FDI, as they do not confer effective influence over management and control of the asset) can be restricted under the general EU rules on the free movement of capital. Under these rules, Member States can restrict capital movements to protect fundamental societal interests, such as ensuring that essential public services are provided or fending off threats to financial stability. Such restrictions must be aimed at addressing a genuine and sufficiently serious threat to the objective of protecting fundamental societal interests and must be proportionate.

Close Monitoring and Possibility of a More Permissive Approach to Intra-EU Deals?

The Commission has indicated that it will closely monitor the situation concerning FDI and that it stands ready to help coordinate FDI screening efforts among Member States. If the net result of the Guidance and the Regulation (when it starts applying) is to discourage foreign investment in critical EU assets, some Member States (including Germany and France) may look to renew their recent, much-publicized attempts to cause the Commission’s Directorate General for Competition to be more lenient in its antitrust reviews of intra-EU M&A deals, including those that aim at creating “European Champions.”