17 December 2020
On March 25, 2020, the European Commission adopted a Communication providing guidance to Member States on foreign direct investments and the free movement of capital from third countries. The Communication has been issued in the framework of the initiatives identified by the Commission in the Coordinated economic response to the Covid-19 Outbreak of March 13, 2020.
More specifically, the need for guidance has been driven by the increased vulnerability of European companies and assets operating in key sectors (including, but not limited to, the healthcare and related sectors) and their possible exposure to “predatory buying” by foreign investors in the current Covid-19 crisis. It is the European Commission’s concern that the risk of foreign takeovers could be further exacerbated by the volatility or the undervaluation of European stock markets.
Thus, the adoption of this Communication seeks to ensure that these companies are properly protected, so calling upon Member States to be particularly vigilant and use all instruments available at EU and national level to prevent the loss of strategic assets and technologies.
The Communication anticipates and accelerates the application of the so-called FDI Regulation (Regulation (EU) No. 2019/452). The FDI Regulation applies to all sectors, regardless of the economic value of the transaction, and covers the screening of all foreign direct investments in strategic EU infrastructures (namely, energy, transport, defence, electoral, financial and others). Although the FDI Regulation is due to apply only as from October 11, 2020, the Communication states that the regime provided by the FDI Regulation could also apply to foreign investments taking place before such date.
The European Commission encourages Member States that have already adopted screening regimes (to this date, only 14) to make use of these instruments, in accordance with the FDI Regulation, in order to take fully into account the risks to critical health infrastructures, supply of critical inputs and other critical sectors. Member States that do not have such regimes in place (or that adopted regimes not covering all relevant transactions) are invited to set up a fully-fledged screening mechanism. In the meantime, they are asked to consider the application of other measures, in compliance with EU and International law, in order to address cases where the acquisition or control of a particular strategic business could entail a risk to security or public order in the EU.
With respect to investments that do not constitute FDI, such as portfolio investments, the Commission observes that they are considered less likely to raise issues in terms of security and public order, unless representing an acquisition of at least a qualified shareholding (e.g. above 5%) conferring certain rights on their holders. In this case, even portfolio investments could be of some relevance and be addressed by Member States.
Finally, as explained in the Communication, Member States are also allowed to tackle FDI by adopting measures restricting free movement of capital, otherwise prohibited under Article 63 of the Treaty on the Functioning of the European Union, provided that such measures are justified, necessary and proportionate. Reference is made inter alia to “golden shares” that may enable Member States to block or set limits on certain types of foreign investments in companies. The European Commission underlines that restrictions on “predatory buying” of strategic assets by foreign investors may rely on public health, public policy, public security and overriding reasons (such as the need to ensure the security of supply or the provision of essential public services and to address possible threats to financial stability, as well as the objective to protect consumers or to preserve the equilibrium of social security systems).
The European Commission is also open to consider as justified national restrictive measures with regard to companies whose current valuation on capital markets is below their true or intrinsic value, in particular in situations where the foreign investor becomes the main provider of essential supplies or services.
For further information, please get in touch with the following or your usual Chiomenti, Cuatrecasas, Gide or Gleiss Lutz contact.
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