European Funds Comment: Controlling Investments into the EU

13 October 2017
Issue 11

Many countries have mechanisms in place that enable governments to review – and, in appropriate cases, block – foreign investments, particularly where their national interest is at stake.  Indeed, 12 of the EU’s 28 Member States have such approval procedures, and the German government recently bolstered its own regime to broaden the sectors that come within its purview, following concerns that some key technologies were falling into foreign (often Chinese) hands.  Now, driven by German, French and Italian lobbying, the European Commission is also getting involved.

The Commission’s proposal (more details of which can be found here) is not particularly radical, but it is likely to spark some debate among Member States.  Striking the right balance between protection of national interests and openness to outside investors is notoriously tricky, and the Commission may encounter some resistance to a proposal that would increase its power to make final determinations.

There are those who will push for greater harmonisation and a more central role for the European institutions.  EU competition law is already highly centralised, so there is a clear model for any broader control of outside investment to follow.  Many will endorse that model on the basis that the cross-border freedoms enjoyed by all European companies imply that no Member State can be allowed to give uncontrolled access to the single market by an undesirable outsider.  Investors controlled by foreign governments are clearly driving much of the concern.

On the other hand, some national governments will guard their sovereignty over such decisions more fiercely.  They may wish to encourage foreign investment, especially to support key infrastructure projects, and will argue that national interests should be determined nationally, not by a supra-national regulator.

The Commission’s current proposal tries to strike a balance between these competing viewpoints, and it is hard to argue with its logic.  It does not oblige Member States to put screening mechanisms in place, but would require those without them to make an annual report of foreign investments.  It provides for Member States to raise concerns with each other about investments, and for the Commission to issue non-binding opinions in case of disputes.  And in some areas – identified as those with pan-EU interests, such as projects receiving EU funding – there would be a right for the Commission to intervene directly.

Whatever the outcome of this debate, private equity funds that have a majority of non-EU investors already have to navigate a patchwork of national rules if they want to acquire a sensitive European business.  For them, a one-stop-shop may be helpful.  However, an overly protectionist approach to foreign investment, especially for technology businesses or infrastructure projects, would not be so welcome, and could give EU-based acquirers a competitive advantage.