Which contributions contain foreign contributions in MEA
An EU regulation on foreign direct investment
On April 10, 2019, a new EU regulation came into force that Regulation (EU) 2019/452. For the first time, it creates a comprehensive framework at EU level for screening foreign direct investments that can pose a threat to security and public order. The ordinance is fully applicable from October 11, 2020. The effects of M&A transactions should not be underestimated.
What is the new EU regulation about?
The regulation does not aim to create an EU-wide screening mechanism for foreign direct investments. Nor does it contain any obligation for the Member States to introduce investment control. Rather, it lays down the legal framework for investment control to be completed by the Member States.
It is also about improving communication and cooperation between the Member States and increasing transparency between the Member States and the European Commission.
What are foreign direct investments actually?
According to the legal definition in Article 2 No. 1 of the regulation, foreign direct investments are all investments that establish permanent and direct relationships with a company. Above all, this includes investments that enable effective participation in the management or control of a company. There is no participation threshold, as provided for in Section 56 of the Foreign Trade and Payments Ordinance (AWV), in the ordinance.
If foreign direct investments are concerned, which are likely to affect projects or programs of Union interest for reasons of security or public order, the European Commission has the right to comment within the meaning of Article 288 of the Treaty on the Functioning of the European Union (TFEU).
Contribution to economic growth, employment and competitiveness
This gives the Commission an instrument that protects projects and programs that make an important contribution to economic growth, employment and competitiveness.
These are projects and programs for which Union funds are made available in considerable amounts or which are governed by Union law in connection with critical infrastructures or critical technologies have been set up and are therefore of particular Union interest.
Such projects and programs include, for example, the Galileo and EGNOS satellite systems, the Copernicus earth observation program and the Trans-European Transport Network.
According to Article 4 of the EU Regulation, there may be a threat to public safety or order in the case of:
- critical infrastructures, such as energy and water supply, transport infrastructure and financial structure, space, sensitive facilities;
- critical dual-use technologies, including artificial intelligence (AI), robotics, semiconductors, cybersecurity, nuclear technology;
- Energy or raw material supply;
- Access to sensitive information or the ability to control such information; or
- Freedom and plurality of the media.
These are just some of the factors that Member States or the European Commission can take into account in the review process. The list essentially corresponds to that of Section 55 (1) sentence 2 AWV.
The terms “semiconductor” or “sensitive information” are very broad. This can impair legal security for affected investors and companies. However, these terms leave room for interpretation so that they can be applied to different situations and adapted to the individual case.
Cooperation between the EU Commission and Member States
The core of the EU regulation is the cooperation between the European Commission and the member states. Article 6 regulates the cooperation mechanism in connection with foreign direct investment that is being screened. Article 7, however, refers to the cooperation mechanism in connection with foreign direct investment that is not audited.
In both cases, the Member States and the Commission have 35 calendar days to submit comments and opinions if they see their public safety or order being affected. The Member State examining FDI must give due consideration to these opinions.
According to Article 6, Paragraph 1, the reviewing Member State is obliged to inform the Commission and the other Member States. Article 6 also provides for a period of 15 days. Within this period, the Member States and the Commission must inform the Member State examining FDI of their intention to comment.
How does the regulation affect?
It is already becoming apparent that more member states will reform their instruments for reviewing foreign direct investments or introduce new ones on the basis of the new legal framework.
The member states are still self responsible, when it comes to, to introduce and implement investment control. However, you must take into account the opinions of other Member States and the Commission.
Ensure know-how protection
The comprehensive information obligation of the reviewing Member State to the Commission and the other Member States is likely to cause displeasure among companies and investors. It must be ensured that the protection of confidential know-how and confidential business information is not jeopardized by such a notification obligation.
The additional period of 35 calendar days for Member States to comment on the investment review is expected great vista delay national procedures. However, the preceding period of 15 days can counteract this. Within this period, the Commission or the Member States must indicate whether they are making comments or opinions, as a kind of "early warning".
Effects on M&A transactions
The impact on M&A transactions should not be underestimated. Cross-border security issues should therefore be clarified earlier in order to avoid delays - as far as the parties can influence them.
In future, the parties to M&A transactions will no longer only have to deal with the Member State in which the investment is planned. You will probably also be in contact with the European Commission. Because with the new regulation, the latter plays an active role in the review process of foreign direct investments.
Author: Anahita Thoms and Madeleine Martinek
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