YSEC Yearbook of Socio-Economic Constitutions 2020: A Common European Law on Investment Screening (CELIS) 3030437566, 9783030437565

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Steffen Hindelang Andreas Moberg Editors

YSEC Yearbook of Socio-Economic Constitutions 2020 A Common European Law on Investment Screening (CELIS)

YSEC Yearbook of Socio-Economic Constitutions Volume 2020

Series Editors Steffen Hindelang, Uppsala University, Sweden, and University of Southern Denmark, Odense, Denmark Andreas Moberg, University of Gothenburg, Gothenburg, Sweden Advisory Editors Johanna Engström, Sävedalen, Sweden Szilard Gaspar-Szilagyi, Wilmslow, UK Eduardo Gill-Pedro, Lund, Sweden Teoman M. Hagemeyer-Witzleb, Berlin, Germany Jens Hillebrand Pohl, Trier, Germany Martin Johansson, Brussels, Belgium Stefan Korte, Chemnitz, Germany Gunnar Þór Pétursson, Reykjavik, Iceland David Schneiderman, Toronto, Canada Eva Storskrubb, Stockholm, Sweden Suzana Tavares da Silva, Coimbra, Portugal Georges Vallindas, Luxembourg, Luxembourg Paolo Vargiu, Leicester, UK

The broad theme of the series revolves around the constitutional frameworks for economic activities and their interaction with the social sphere. It is this very interaction this Yearbook strives to focus on. At the same time, it is this focus which distinguishes it from other formats in the field. The reference to “constitutions” mirrors the Yearbook’s ambition to contribute to a better understating of those legal rules which provide the very foundations for our economic and social wellbeing within a community governed by a constitution, irrespective of whether on the local, national, regional, or global level. The Yearbook aims to, first and foremost, provide a forum for doctrinal legal treatment of the questions that various socioeconomic constitutions are faced with in today’s globalized context, while at the same time remain open to neighbouring disciplines to the extent that they inform the doctrinal treatment. More information about this series at http://www.springer.com/series/16495 and https://www.ysec-yearbook.eu/.

Steffen Hindelang • Andreas Moberg Editors

YSEC Yearbook of SocioEconomic Constitutions 2020 A Common European Law on Investment Screening (CELIS)

Editors Steffen Hindelang Faculty of Law Uppsala University Uppsala, Sweden

Andreas Moberg Department of Law University of Gothenburg Gothenburg, Sweden

Department of Law University of Southern Denmark Odense, Denmark

ISSN 2662-7124 ISSN 2662-7132 (electronic) YSEC Yearbook of Socio-Economic Constitutions ISBN 978-3-030-43756-5 ISBN 978-3-030-43757-2 (eBook) https://doi.org/10.1007/978-3-030-43757-2 © Springer Nature Switzerland AG 2021, corrected publication 2021 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Foreword: A Common European Law on Investment Screening

When the European commission president Jean Claude Juncker had his State of the Union address in the European Parliament plenary in Strasbourg in March 2017, he dedicated considerable time to the very much debated issue of investment screening. “We are not naïve free traders. Europe must always defend its strategic interests. That is why today we are proposing a new EU framework for investment screening. If a foreign, state-owned, company wants to purchase a European harbour, part of our energy infrastructure or a defence technology firm, this should only happen in transparency, with scrutiny and debate. It is a political responsibility to know what is going on in our backyard so that we can protect our collective security if needed.”

The statement was result of a rather intense debate in the EU and an increasing concern that political and strategic considerations, rather than economic, were guiding some foreign direct investment from some authoritarian regimes, notably, but not only, China. In February the same year, Berlin, Paris and Rome had written to the Commission to express their concern about several aggressive investments in strategic sectors, asking it to look into the issue. Also, the European Parliament had adopted an own-initiative report on the matter. Quite a few recent investments by Chinese state-owned companies had created headlines and concern in member states. Foreign investment with strong state backing clearly had advantages with which the member states could not compete. The debate led the Commission to publish a proposal to set up a joint European framework to screen foreign direct investment into the EU. This was a topic that was also discussed in several other countries where existing legislation was being sharpened (USA, Japan, Canada, Australia, etc.). When the regulation was sent to the member states and the European Parliament, it was subject to tough discussions and initial resistance, especially in the Council. The support was broad in the Parliament, but member states were initially divided Dr. Cecilia Malmström is a former EU Trade Commissioner (2014-2019) and presently Assar Gabrielsson Visiting Professor at the Gothenburg School of Business, Economics and Law

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between the traditional free traders and the others, with Germany this time on the side of France. I remember quite aggressive statements from ministers when we first discussed it at the Trade Council. Some countries considered this a clear protectionist tool, accusing the Commission for wanting to decide whether a country should accept an investment or not. Others were afraid of Chinese reactions. Others yet, thought that Europe was being exactly as president Juncker alluded to—naïve—and that it was now time to be tough. At the time of the proposal, twelve member states already had national legislation on investment screening and along the discussion it became clear that there was indeed a need for a European joint approach. Due to the high level of integration within the internal market, a foreign direct investment in one country could pose a risk to security or public order within another member state or indeed in the whole union. The framework, as eventually adopted, therefore created a cooperation mechanism to exchange information between member states and the Commission on foreign investment. Furthermore, it would allow the Commission to publish an opinion on a specific investment that could be considered as a threat. The regulation outlines certain requirements for member states wanting to create or adopt their own national screening mechanism and encourages joint cooperation, for instance, within the OECD. During the process, close contacts and advice were taken from Japan and the USA, although their mechanisms are different and more comprehensive. Legally, the Commission has no competence to decide on investments, the Member States always keep the last word on whether to allow an investment or not. The regulation proposal passed very quickly for an EU law (less than 18 months!) and in March 2019 a final trilogue between MS, EP and the Commission was able to agree on a compromise and adopt the regulation. The UK and Italy abstained. The regulation entered into force in April the same year and member states had until October 2020 to fully comply with the requirements. Even before the entry into force, a coordination group was set up in order to start sharing experiences and best practices. It consists of representatives of all member states. The EU is a very open market and it is also the top destination of global foreign direct investment. There is a strong consensus that the internal market should remain open and in a non-discriminatory way welcome foreign direct investments, but there has also been a growing concern over some quite aggressive investment from China (and to a lesser extent some other countries such as Russia). Representatives of China’s different missions in Brussels and in the capitals lobbied extensively against the proposal. The Chinese official policy as stated in the party’s official document “China 2025” does not hide the country’s ambition to become world leading in some key areas such as AI, aeronautics and bio. The country has also shown in big parts of the world that critical infrastructure is part of this strategy and that investments sometimes have a political price. Investments in critical infrastructure and advanced technology that could threaten public order is a legitimate goal to motivate EU intervention and is accepted WTO language. The final say will always lay in the capitals if the investment concerned is not an EU funded investment such as the space project Galileo.

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The investment screening is a rather modest but important step in the EU’s struggle to protect its workers, companies and citizens while preserving an open investment climate. It has led to several member states initialling their own legislation. The balance between openness and protection could be difficult to uphold and therefore it is of key importance that academia and others follow the development and application of the regulation attentively. It is now crucial that the Commission sets up the necessary implementation tools and expertise for investigating financial networks. It has to show that regulation works and has added value. The new Commission president, Mrs. Ursula van der Leyen, has hinted that there might be a need for strengthening the mechanism in due course. That makes the regulation even more important to scrutinize closely, also in comparison with other existing laws in other countries. I welcome very much the contributions made by the participants in this volume and hope they will be followed by others. Gothenburg, Sweden

Cecilia Malmström

Contents

Towards a “Common European Law on Investment Screening (CELIS)” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Steffen Hindelang and Andreas Moberg Part I

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Economic and Political Context

The Political Economy of Capital Controls and Liberalization in the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Age Bakker

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Investment Screening: The Return of Protectionism? A Business Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stephan F. Wernicke

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Investment Screening: The Return of Protectionism? A Political Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sven Simon

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The Birth of the EU Screening Regulation . . . . . . . . . . . . . . . . . . . . . . . Joanna Warchol Part II

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The European Origins – the EU Member States’ Rules on Screening Foreign Investment

Foreign Investment Screening in Germany and France . . . . . . . . . . . . . Philipp Stompfe

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Foreign Investment Screening in Italy, Spain, Portugal and Greece . . . . 117 Paolo Vargiu Foreign Investment Screening in Poland, Lithuania and Latvia . . . . . . . 139 Marek Jaśkowski and Szymon Pawłowski

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Foreign Investment Screening in Hungary and Romania . . . . . . . . . . . . 187 Szilárd Gáspár-Szilágyi Foreign Investment Screening in Finland, Norway, Sweden and Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 Jonas Hallberg Part III

Existing EU Secondary Legislation on (Discriminatory) Treatment of Third Country Investments – A Plurality of Regulatory Approaches

The Banking and Insurance Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 Henning Berger The Defence, Military and Dual-Use Sector . . . . . . . . . . . . . . . . . . . . . . 265 Dominik Eisenhut The Transport Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 Henning Jessen The Energy Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 Bent Ole Gram Mortensen The Telecommunications and IT Infrastructure Sector . . . . . . . . . . . . . . 317 Michael Fehling Part IV

Beyond Europe – The Screening Schemes of Major EU Trade Partners

Foreign Investment Screening in Russia . . . . . . . . . . . . . . . . . . . . . . . . . 331 Vladimir V. Talanov Foreign Investment Screening in the USA . . . . . . . . . . . . . . . . . . . . . . . . 363 Greta Lichtenbaum and David J. Ribner Foreign Investment Screening in Japan . . . . . . . . . . . . . . . . . . . . . . . . . 379 Kojiro Fujii, Noriko Yodogawa, and Marie Wako Foreign Investment Screening in China . . . . . . . . . . . . . . . . . . . . . . . . . 403 Qingjiang Kong and Cherry Kaiyuan Chen Part V

EU Constitutional Preconditions and Limits

Exploring the Possibilities and Limits of the EU and Member States to Set Up an Investment Screening Mechanism in the Light of Union Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 435 Stefan Korte

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Comment on “Exploring the Possibilities and Limits of the EU and Member States to Set Up an Investment Screening Mechanism in the Light of Union Law” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467 Bugge Thorbjørn Daniel Part VI

Possible Functions of a Common European Law on Investment Screening

Screening for What Threat: Preserving “Public Order and Security”, Securing Reciprocity in International Trade, or Supporting Certain Social, Environmental, or Industrial Policies? . . . . . . . . . . . . . . . . . . . . . 481 Martin Nettesheim Part VII

The EU Screening Regulation in Perspective

What Is a Foreign Direct Investment? . . . . . . . . . . . . . . . . . . . . . . . . . . 507 Lars S. Otto Building Pipelines: Experiences with Formal and Informal Screening Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 589 Barbara Kaech and Moritz Wüstenberg Navigating Between Openness and Protectionism: EU Investment Screening in 25 Years’ Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605 Carolina Dackö The One Belt and One Road (OBOR) Initiative: Reconceptualisation of State Capitalism Vis-à-Vis Remapping of Global Governance? . . . . . . 637 Qingxiu Bu Screening of Foreign Direct Investments Through European Company Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 677 Thomas Papadopoulos The Impact of Investment Treaty Commitments on the Design and Operation of EU Investment Screening Mechanisms . . . . . . . . . . . . 725 Jens Hillebrand Pohl State Aid and Investment Screening: A Multifaceted Relationship . . . . . 769 Grith Skovgaard Ølykke and Louise Tandrup Christensen Access to Legal Redress in an EU Investment Screening Mechanism . . . 795 Teoman M. Hagemeyer Part VIII

Conclusions and Perspectives

A Complex Setting of Cooperation and (Potential) Conflict: Regulation (EU) 2019/452 in a Doctrinal Perspective . . . . . . . . . . . . . . . . . . . . . . . . 837 Steffen Hindelang and Andreas Moberg

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Correction to: YSEC Yearbook of Socio-Economic Constitutions 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Steffen Hindelang and Andreas Moberg

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Towards a “Common European Law on Investment Screening (CELIS)” Steffen Hindelang and Andreas Moberg

Abstract This chapter provides an introduction to the following 30 contributions written by leading Asian, European and North American experts on foreign direct investment on the recently adopted Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investment into the Union (hereinafter the EU Screening Regulation). It is the result of a conference organized at the University of Gothenburg in March 2019, just 2 weeks before the EU Screening Regulation was adopted. The volume takes stock of the historic move towards a Common European Law on Investment Screening (CELIS).

This book contains 30 chapters written by leading Asian, European and North American experts on foreign direct investment on the recently adopted Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investment into the Union (hereinafter the EU Screening Regulation). It is the result of a conference organized at the University of Gothenburg in March 2019, just 2 weeks before the EU Screening Regulation was adopted. The aim of the conference was to gather experts on foreign investment from all over the world in order to take stock of the historic move towards a Common European Law on Investment Screening (CELIS). Our ambition, both as conference organizers and as editors of this volume,

The editors would like to take this opportunity to thank stud. jur. Oliver Frederiksen Johansen of the University of Southern Denmark for his very much appreciated support in style editing the various contributions to this volume. The editors would like to acknowledge the generous financial support of the conference by the Riksbankens Jubileumsfond and the University of Gothenburg. S. Hindelang (*) University of Southern Denmark, Department of Law, Odense, Denmark Humboldt University, Faculty of Law, Berlin, Germany e-mail: [email protected] A. Moberg University of Gothenburg, Department of Law, Gothenburg, Sweden e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 1–8, https://doi.org/10.1007/16495_2020_26, Published online: 9 August 2020

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has been to facilitate the growth of a research community interested in investment screening in particular. This comprehensive edited volume is modelled on the conference programme, which conceptualized the budding field of EU foreign direct investment (FDI) screening as a move towards a harmonized approach. But in order to capture this move, and to analyze the various stages, there is a need to cover several different perspectives on screening. We have identified six different perspectives, and in the book these make up seven parts (parts VI and VII in the book belong to the same perspective on FDI screening). Before we introduce the different parts of the book in more detail, it is important to present a holistic view on how the different perspectives complement each other. First, the economic and political context of foreign investment and FDI screening in particular is introduced for the benefit of a contextual understanding of the rules on investment screening. The insights derived from this perspective are necessary in order to tackle, e.g., the question of whether or not investment screening should be considered a protectionist measure. Second, it is vital to know how those EU Member States that already had screening mechanisms in place have dealt with screening prior to the EU Screening Regulation. It is reasonable to assume that any forward-looking project must be well acquainted to its roots. Through country reports on the situation in a large number of EU Member States, spread out as regards both size and geography, this perspective on investment screening sheds light on possible ways to handle the complex legislative challenge of balancing economic interests with interests of security and public policy. Equally relevant is existing legislation, which may serve the same, or at least a similar, function as investment screening. Tentatively referred to as “the hidden screening mechanism already in place”, which of course is an exaggeration, this third perspective complements the previous perspective in its ambition to map a legal framework in which a growing common European approach to investment screening needs to fit. Following the regulatory situation prior to the EU Screening Regulation within the EU, it is necessary to also give a perspective on the matter from outside the EU. The fourth perspective chosen consists of country reports of some of the EU’s trading partners. For the purposes of this volume, we have chosen to focus on partners that are also highly interesting for geopolitical purposes. We find reports here on Russia, the USA, Japan and China. Having worked through these four perspectives, anyone interested in investment screening should be well equipped to focus on the actual EU Screening Regulation. The fifth perspective is the perspective of EU constitutional law, and it includes thorough analysis of questions regarding legal basis and the scope of FDI screening in relation to other EU tasks and commitments. Finally, the sixth perspective is actually more of an inside-out perspective on the EU Screening Regulation as it includes an eclectic collection of reflections on the effects of the EU Screening Regulation entering into force. This perspective, which corresponds to two parts of the edited volume, covers several different themes, such

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as the nature of what to screen for, the impact of the screening regime on various other legal fields and policy areas and a look into the future 25 years down the road. Now, turning to the more detailed introduction of each part of the book, after a foreword by Anna Cecilia Malmström, part I of the book, as mentioned above, presents the economic and political context of investment screening, with a special focus on the challenge of balancing the interest of a free and open economy with the interest of ensuring national security. Age Bakker describes how the logic of limiting capital movement has changed over the past decades. Originally, capital should only be liberalized to the extent necessary to ensure the proper functioning of the common market. Following the introduction of the euro, capital controls where no longer wanted for economic reasons. However, as the economic concerns have faded, they have been replaced by national security concerns. Having depicted this turn, Bakker draws on history as he looks for viable approaches that strike a balance between economic openness and security interests. Stephan Wernicke and Sven Simon then offer perspectives from business and politics, respectively. Wernicke points out that from a business perspective, there are indeed fears of loopholes in the investment screening system, and of delays of important business decisions, but the biggest worry is that the screening system will turn out too protectionist in nature. Simon points out that the framework for screening is a tentative first step and emphasizes that it does not signal the return of protectionism. Part I also addresses how the EU Screening Regulation came into existence. The chapter written by Joanna Warchol starts with a description of the political debate that sparked the idea to “harmonize” the screening of FDIs in the EU before presenting a detailed account of the legislative process, predominantly from the perspective of the European Parliament. Part II of the book traces the origins of common European rules on investment screening. In an exposé covering national legislation in Denmark, Finland, France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Norway, Poland, Portugal, Romania, Spain and Sweden, the book explains what the current situation was as regards investment screening, prior to the adoption of the regulation. Philipp Stompfe maps recent changes in the French and German systems. Both states demonstrate a move towards a stricter approach regarding the screening of foreign investments. Stompfe shows that foreign investment screening in Germany and France has become a serious public policy instrument to safeguard national economic interests. Paolo Vargiu argues that Spain, Portugal, Italy and Greece have, in contrast to France and Germany, taken a more liberal approach to foreign investments, which pervades their domestic laws on the matter. He concludes that such an approach appears capable of ensuring full cooperation between these southern European countries and the EU Commission towards a common European framework for the screening of foreign direct investments. The screening regimes of Poland, Lithuania and Latvia are described in detail and analyzed by Szymon Pawłowski and Marek Jaśkowski. The authors conduct a systematic review of the three screening regimes respectively, covering, inter alia, investors subject to screening, transactions subject to screening, screening criteria and consequences of unlawful transactions. They also evaluate to what extent the three states need to adapt their current systems and find that while Poland and Lithuania may need to modify their

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systems, the relatively recent Latvian regime lives up to the requirements in the EU Screening Regulation. In his country report on Romania and Hungary, Szilárd Gáspár-Szilágyi highlights that Romania does not yet have a separate law regulating the screening of foreign investments. However, the summary procedures described in the country’s Competition Law, which is the closest example of a screening mechanism at hand, fall short of the requirements of the EU Screening Regulation. In contrast to Romania, Hungary has very recently adopted legislation setting up a detailed investment screening mechanism for national security reasons, in sensitive economic sectors. He concludes that the Hungarian mechanism is mostly in line with the minimum requirements set up by the regulation. In the final chapter in part II, Jonas Hallberg analyzes the Nordic countries. This chapter shows that Sweden, Norway, Denmark and Finland have quite different systems. Out of the four countries, Finland has the only investment screening mechanism, but it needs to be somewhat updated in light of the EU Screening Regulation. Whereas the Norwegian Security Act includes a limited form of a screening mechanism, Sweden does not, currently, have anything even resembling a screening mechanism, but this situation may soon change in light of ongoing governmental inquiries which may lead up to new legislation in the near future. Denmark, like Sweden, also lacks a screening mechanism, but the government has initiated the legislative process aiming to establish a screening mechanism. Hallberg concludes that the three EU Member States will most likely further converge in the future, and the EU Screening Regulation will serve as a guarantee for the convergence. In part III, focus is shifted towards legal mechanisms that share similar functions as investment screening, namely sectoral rules and regulations that limit and constrain the free movement of capital. EU secondary law in these fields is described and analyzed as a complement to the analysis conducted in part II. Henning Berger’s chapter covers the banking and insurance sector. The chapter explains and analyzes the relationship between the prudential ownership control procedures under EU supervisory law and the proposed FDI screening mechanisms under Regulation 2019/452. He concludes that the prudential ownership control procedures may be described as a hidden investment screening mechanism already in place and that the EU Member States thus would not need necessarily to adopt an screening mechanism for foreign investments into financial institutions, although there is no corresponding concept under supervisory law for the cooperation mechanisms between EU Member States and the Commission with regard to foreign direct investments required by the EU Screening Regulation. Dominik Eisenhut covers the defence, military and dual-use sectors. His chapter provides an overview of existing secondary law, mainly merger control law, public procurement law and R&D funding instruments, that can be perceived as hidden control mechanisms and barriers to foreign investment into defence and security companies. Henning Jessen’s contribution to this volume focusses on the transport sector, which distinguishes itself by the fact that it is highly reliant on long-term investments in very expensive physical infrastructure. Such investments are predominantly still carried out by the states through public resources. Jessen concludes that it is difficult to imagine scenarios where private investments cannot be brought in line. As regards the energy sector, Bent Ole Gram

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Mortensen’s chapter presents existing EU legislation amounting in fact to a system that is performing the same function as a screening mechanism. As the energy sector to a large extent consists of what can be termed critical infrastructure, this is not surprising, and it is thus concluded that the present EU energy legislation already contains tools regarding investment control. In the final chapter of part III, Michael Fehling analyzes whether European IT and telecommunication law provides any possibilities to block direct investments and network supply by third-country companies. His analysis shows that preventive investment control in general is neither intended nor justified by the relevant EU directives. Part IV of this edited volume addresses the argument that a lack of reciprocity has been a significant part of the motivation for an EU screening mechanism. If outward EU investment is screened in the markets of the EU’s trading partners, why should the EU not screen inward investment? In this section, the screening regimes of some of the most important EU trading partners are described and analyzed. Vladimir Talanov’s chapter provides an overview and analysis of the Russian screening regime with a specific focus on the laws on foreign investment. The chapter also provides an overview of other rules restricting FDIs. In a separate section of the chapter, Talanov analyzes the procedures for obtaining clearances and the consequences of non-compliance. Greta Lichtenbaum and David J. Ribner provide an overview of the US foreign investment review processes. Their chapter traces the US screening regime’s origins all the way to the most recent statutory changes. It also provides an analysis of the contrasts and similarities of EU and US foreign investment review processes. Kojiro Fujii, Noriko Yodogawa and Marie Wako focus their country report on Japan, on the most recent changes to the country’s foreign investment regulation system. The most recent amendment to the Japanese regulation, which lowers the share or voting right acquisition threshold for prior notification to 1% of the total number of shares or voting rights, is drawing attention from both domestic entities and foreign investors. The fourth and final contribution to this part of the book covers China. Qingjiang Kong and Kaiyuan Chen provide a description of how the Chinese system has undergone sweeping reforms since China began to institutionalize the control of foreign investments in the 1980s. The chapter depicts the move from investment screening based on a case-by-case approval of the “pre-establishment national treatment plus negative list” approach in the new Foreign Investment Law of the People’s Republic of China. In part V, the EU Screening Regulation is analyzed from the perspective of EU constitutional law. The contribution by Stefan Korte contains an in-depth analysis of the legal basis of the EU Screening Regulation, and it is complemented by a comment written by Bugge Thorbjørn Daniel. Korte’s chapter analyzes firstly the terminology and the concepts necessary to regulate FDI screening. With the help of this analysis, the chapter turns to examining the EU treaties in order to determine the scope of the powers conferred on the EU in the relevant policy field before finally concluding that the EU Screening Regulation may well be “built on uncertain ground”. Daniel selects a number of issues from Korte’s chapter and elaborates on these. In particular, Daniel’s intervention discusses the EU Screening Regulation in

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light of the distinction between the common commercial policy and the free movement of capital. Part VI of the conference programme, and consequently of this volume, deals with the fact that a screening mechanism can serve various different functions. Martin Nettesheim highlights that the terms “security” and “public order” used in the regulation as legitimate grounds on which to base a negative screening decision may be both used and abused in what he refers to as today’s political and economic competition in pursuit of strategic economic policy goals. Arguing that the current context of investment screening fails to acknowledge all of its true motivating factors, Nettesheim concludes that the regulation is not entirely “fit for purpose”. The book’s final part, part VII, is a collection of contributions focussing on various aspects of the potential effects of the EU Screening Regulation in various legal fields. Lars S. Otto delves into the question of how to understand a “third country direct investment”, focussing both on principles and on specific facets of transactions that EU Member States may qualify as “third country direct investments”. Barbara Kaech and Moritz Wüstenberg employ the Nord Stream 2 pipeline project as a case study to illustrate how a number of measures may constitute an informal, or non-formalized, screening process during different phases of a largescale project. In their chapter, they discuss whether a more formalized procedure, such as the one in the EU Screening Regulation, is necessary from a business perspective. Carolina Dackö takes a newly adopted EU framework for the screening of foreign direct investments into the Union as a starting point of her forwardlooking analysis, where she draws on the history of export controls to conclude that we are only seeing the very beginning of a transfer of powers from the EU Member States to the EU in the field of investment screening. Qingxiu Bu presents the Chinese One Belt, One Road (OBOR) initiative, as a backdrop do the discussion on investment screening, in a chapter that gives further context to the geopolitical realities that have influenced the EU legislator. Following these chapters, there are three contributions looking into the relation between the EU Screening Regulation and other legal fields of EU law. Thomas Papadopoulos frames his chapter around the rhetorical question “What role for EU company law in screening foreign investment?” as he analyzes the extent to which the ongoing harmonization of EU company law resonates with the screening of foreign investments. Papadopoulos concludes by emphasizing that the effectiveness of European company law is a vital condition for an effective investment screening. Jens Hillebrand Pohl analyzes the influx of investment treaty obligations, both the EU’s and the Member States’, on the design and operation of investment screening conducted both on the EU and Member State levels, with a specific focus on identifying potential norm conflicts. The chapter also contains a discussion on how to deal with such conflicts and what their effects are on the functioning of investment screening mechanisms. Then our focus turns to state aid rules as Grith Skovgaard Ølykke and Louise Tandrup Christensen explore the interface of state aid and investment screening. As the EU Screening Regulation grants EU Member States the right to intervene in markets in order to protect security and public order, the authors of this chapter demonstrate how such intervention may lead to the granting of state aid, e.g. through the

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disqualification of the best bidder or through a state-financed FDI. In the final chapter of part VII, Teomann Hagemeyer discusses access to legal redress for third-country investors against decisions of investment screening mechanisms. The chapter discusses questions regarding legal bases and for legal redress, before turning to an analysis and a discussion of the material criteria of review. He concludes that access to judicial review is scarce and that litigation seeking to annul screening decisions faces sombre prospects. The book’s 30th, and final, contribution is written by the editors of the volume, who also hosted the conference that brought most of the authors together with the aim of initiating research on a Common European Law on Investment Screening. Not in an effort to conclude the findings of the previous chapters but endeavouring to add to the perspectives presented, Steffen Hindelang and Andreas Moberg put forward a doctrinal analysis of the EU Screening Regulation. The chapter seeks to present, clarify and assess the very rules contained in the EU Screening Regulation which ultimately emerged from a complex mix of interests at play when this piece of legislation was drafted.

Steffen Hindelang is a professor (wsr) at the Department of Law of the University of Southern Denmark in Odense. He teaches and researches in the areas of international economic law, esp. international investment law, EU law and German public law. Previously he was a professor at Freie Universität Berlin (2011–2017), senior research associate and senior lecturer at HumboldtUniversität zu Berlin (2010–2011) and research associate and lecturer at the University of Tübingen (2004–2009). He is also a senior fellow at the Walter Hallstein Institute of European Constitutional Law at Humboldt-Universität zu Berlin and an academic advisor to the International Investment Law Centre Cologne (IILCC). He was a guest professor, among others, at the Faculty of Law of the University of Uppsala as a Riksbankens Jubileumsfond – Alexander von Humboldt Stiftung Swedish Prize Laureate, at Nagoya University, Bocconi University Milan, the University of Lausanne, the Charles University Prague, the International Law School of the Moscow State Institute of International Relations (MGIMO) and the Turkish-German University Istanbul. Andreas Moberg is a senior lecturer and an associate professor at the Department of Law of the University of Gothenburg. He is also the assistant director of CERGU (Center for European Research at the University of Gothenburg). He teaches and researches both EU law and public international law but specializes in EU constitutional law. He has lectured in EU law as a visiting professor at Bond University (Australia), San Pablo CEU Madrid and Háskóla Islands Reykjavík.

Part I

Economic and Political Context

The Political Economy of Capital Controls and Liberalization in the European Union Age Bakker

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 A Brief Historical Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Economic Motives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Political Motives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Erga Omnes Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 History Revisited: The Case of Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 The European Investment Screening Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12 13 16 17 19 21 23 25 27

Abstract Over time there has been a major shift in the assessment of the pros and cons of free capital flows. In the Treaty of Rome, a safeguard clause confined the obligation to liberalize capital movements “to the extent necessary to ensure the proper functioning of the Common Market.” Up till the early 1980s, the stabilizing role attributed to capital controls outweighed the textbook economic costs of controls. The establishment of the European Monetary System marked a new beginning as freedom of capital movements was seen as forcing economic discipline and promoting economic reforms and the convergence of policies. Most motives for controlling capital movements no longer apply as the incompatible trinity of having free capital flows, stable exchange rates and autonomous monetary policy at the same time is resolved by the transition to the euro. At the same time, national security and critical infrastructure concerns have gained prominence. The EU framework for investment screening that was agreed to address these concerns should not infringe upon the acquis of free capital flows. Economic interests should not be mixed with national security concerns, and investment screening should not become an extension of industrial policy. Alternative approaches are proposed that would address concerns of intellectual property and reciprocity. Lessons are drawn from an earlier episode when similar concerns were raised with respect to Japan. The

A. Bakker (*) Vrije University Amsterdam, Amsterdam, The Netherlands © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 11–28, https://doi.org/10.1007/16495_2020_14, Published online: 24 May 2020

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negotiation of a bilateral investment treaty between the EU and China, including mutual access rules, would further the view that Europe profits from remaining open to the outside world while European corporations operate on a level playing field.

1 Introduction In the face of rising global trade tensions, the free flow of direct investment capital across borders is in dispute. As trade policy is prominently on the international agenda, it is inevitable that policies vis-à-vis the cross-border movement of capital are looked upon as well. The self-evidence of free capital movements, which has been prevalent since the birth of the euro, no longer can be taken for granted. Concerns have emerged about the intentions of foreign investors acquiring domestic key industries. There have been suspicions of intellectual theft and improper state involvement that may raise security issues. Supervisors in the financial sector are asking probing questions about the provenance of money flows. Know-your-customer requirements have been strengthened in order to cope with money laundering and illegal money flows. There are also the more general questions about reciprocity, where markets are closed for European investments, and about a level playing field, where state aid gives an unfair competitive advantage to competitors. As these issues are being discussed, one should not lose sight of the strictly regulated world where governments come from and the tremendous efforts it took to liberalize. Many have forgotten the post-World War II world in which borders were tightly controlled and largely closed for international capital movements. Many countries applied negative exchange control systems where all cross-border capital transactions were prohibited unless explicitly permitted.1 As recently as 1983, France imposed limits on tourist travel allowances.2 Until the late 1980s, strict limits applied for foreign investments by pension funds. Nowadays, citizens, corporations, and institutional investors are free to move capital in and out of the country. This is a great achievement. This chapter will focus on the philosophy behind the liberalization of capital movements that took effect over the past decades in the European Union and the issues that have remained. First, in a brief historical oversight, the process is sketched that led from the strictly regulated post-world war to the liberalized 1 France switched to a positive system in 1966 under which all cross-border transactions are allowed unless explicitly prohibited. However, the positive system decree was suspended after the political unrest in May 1968, only to be reintroduced in 1985. The Netherlands switched to a positive system in 1977 and Italy in 1988. 2 The carnet de change, introduced in 1983 after three consecutive devaluations of the French franc in 18 months, restricted foreign expenditure to 2.000 francs (approximately 300 euro) for the whole year and resulted in a decrease in tourist expenditures abroad by 13%, see Bakker (1996), p. 170.

The Political Economy of Capital Controls and Liberalization in the European. . .

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financial environment of today. Over time there has been a changed appreciation of the economic and political motives for capital controls, which led to their eventual abolition. In Europe, the drive toward economic and monetary union was decisive for liberalization. The chapter will then address the reasons why the erga omnes principle was embraced by the European Union while liberating capital movements, implying that freedom of capital movements would apply to all countries, inside and outside the European Union, in a nondiscriminatory way. Nowadays, this principle is under pressure as it is felt that reciprocity may be at stake, in particular with respect to flows in and out of China. The openness to China is seen as asymmetric. These present-day concerns vis-à-vis China are reminiscent of similar fears vis-à-vis Japan in the 1980s. Also then there were issues concerning intellectual property, reciprocity, and state support. A comparison is made which shows that there are striking economic similarities while acknowledging the different political settings between now and then. It is instructive to see whether some of the lessons learned can still apply today. The chapter will then assess the implications of the investment screening proposals of the European Union for the freedom of cross-border capital flows and draw some tentative conclusions.

2 A Brief Historical Overview Over time there has been a major shift in the assessment of the pros and cons of free capital flows. In the period following World War II, trade liberalization took precedence over capital account liberalization. Free trade was seen as having a more direct positive impact on economic growth than free capital movements. In order to support trade, current account convertibility was achieved within a relatively short period, implying that residents could freely purchase foreign exchange for buying foreign goods and services. Full current account convertibility was achieved in most European countries by 1958. The Treaty of Rome, which was signed in the same year, provided for the eventual freedom of capital movements in Europe. However, it was felt that one needed to tread carefully, and a safeguard clause was inserted, which clarified that this obligation was limited “to the extent necessary to ensure the proper functioning of the Common Market.” Of the “four freedoms” of the Common Market— guaranteeing the free movement of goods, capital, services, and labor—the free movement of capital was subordinated to the wish to preserve exchange rate stability in the face of speculative capital movements as well as the wish to retain sovereignty over monetary policy. Improved economic conditions made it possible to adopt two capital liberalization directives in the early 1960s allowing free movement of long-term capital flows,

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including direct investment.3 This helped alleviate the shortage of capital to finance much-needed direct investment in European countries at the time because of its positive effects on economic growth, innovation, and employment. At the same time, there was considerable hesitance to liberalize short-term capital movements as persisting international exchange problems continued to undermine the political willingness to move any further. Soon the momentum was lost altogether when France had to evoke the safeguard clause in 1968 in the face of serious domestic disturbances.4 Also problems emerged in the international exchange rate system. In the face of hot money flows, as they were called, the freeing of short-term capital flows was considered to be too risky. Most countries postponed adopting full capital account convertibility for fear that their economies would be destabilized by speculative capital flows. When soon thereafter the Bretton Woods system of fixed exchange rates collapsed, it was widely believed that capital controls were needed to maintain a measure of exchange rate stability among countries with diverging economic performance. In 1972, a directive was adopted that, in a complete reverse of the earlier drive for liberalization, required member states to have instruments at their disposal to ward off unwanted capital flows.5 After the oil crisis of 1973, capital controls were strengthened, implying a major step back. Different policy responses of European countries to the economic shock resulted in large differences in macroeconomic performance. This marked the beginning of years of euro sclerosis—the absence of political willingness to work toward European integration—in which capital liberalization in the EU was deadlocked for a prolonged period of time. At the national level though there were exceptions. All along Germany took a special position within the European Community, as it soon had liberalized most capital transactions, allowing the deutsche mark to play a more prominent international role. Also the United States, Canada, and Switzerland generally adhered to liberal policies. The establishment of the European Monetary System in 1979, where European currencies were linked to one another, marked a new beginning, as did the switch to liberal policies in the Anglo-Saxon world under the Reagan and Thatcher administrations. The United Kingdom in the postwar period operated one of the most extensive systems of capital controls alongside tight domestic financial regulation.6

3 EEC Council 11 May 1960: First Directive for the implementation of Article 67 of the Treaty, OJ 43, 12.7.1960, p. 921. A second much less substantive directive was adopted on 18 December 1962 (Directive 63/21/EEC). 4 France which had only in January 1967 substantially relaxed exchange controls and introduced a positive system of exchange regulation reintroduced a negative exchange control system. Again all cross-border capital transactions were prohibited unless explicitly permitted. 5 Council Directive 72/156/EEC of 21 March 1972 on regulating international capital flows and neutralizing their undesirable effects on domestic liquidity, OJ L 91, 18.4.1972, pp. 13–14. 6 For direct investment abroad, British industry needed to seek foreign financing or acquire foreign currency at a premium through the so-called investment currency market, which had been in operation since 1947.

The Political Economy of Capital Controls and Liberalization in the European. . .

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Despite these controls, the United Kingdom suffered severe exchange rate crises and poor economic performance. In October 1979, in a major upheaval of economic policies, all capital controls were abolished in one stroke and the United Kingdom embarked on a major reorientation of economic policies. This was also inspired by the wish to maintain the position of London as a major financial center. The recent discovery of North Sea oil reserves provided a favorable backdrop. The abrupt abolition of exchange control in the United Kingdom in 1979 and the rapid integration of world financial markets contributed to a different appreciation of the pros and cons of controls in other European countries. Official thinking evolved, and from 1983 liberalization of capital movements was again on the European agenda after an absence of more than a decade. Annual examinations of member states, which silently were stopped in the early 1970s, were resumed.7 These examinations sought to determine whether member states could repeal derogations under the EC safeguard clauses. Member states developed strategies to dismantle their capital control systems. However, unlike the United Kingdom, most member states followed a gradual approach, mindful of the potential disruptive effects of speculative capital flows. The process was called active gradualism, ensuring that member states that were liberalizing capital movements had supporting policies aimed at achieving convergence in place. Gradual liberalization was linked to reform in other policy areas. The liberalization process gathered momentum in the second half of the 1980s, enhanced by a general adherence to stability-oriented budgetary and monetary policies. This resulted in sharply reduced inflation differentials. It also marked the increased policy attention to economic fundamentals, recognizing that controls were unable to deter destabilizing capital flows in the wake of increased capital mobility. The lifting of capital controls was seen by financial markets as a sign of strength. The pace accelerated when political discussions toward monetary unification in Europe gained strength. In 1988, a directive was agreed in which the full liberalization of capital movements was agreed upon within a given time schedule.8 This signaled that governments had become confident that they could manage the macrofinancial challenges of an open capital account. When on 1 July 1990 the first stage of the Economic and Monetary Union (EMU) started, eight member states had abolished capital restrictions. Eventually, when Greece abolished controls in 1994, the liberalization of capital movements in Europe was completed. Europe now has 25 years of complete freedom of capital movements.

7

The First Capital Directive of 1960 had prescribed annual examinations of the use of capital restrictions by member states. Against the rules the practice had developed that derogations from the liberalization obligations had been granted for an unlimited duration. See Bakker (1996), pp. 150–151. 8 The Fourth Directive on capital movements (Directive 888/361/EEC) was adopted by the Council on 24 June 1988.

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Economic Motives

The free movement of capital improves the allocation of scarce resources to their most productive use as capital seeks the most profitable investment opportunities. Free movement of capital facilitates trade and investment across borders. And free movement of capital makes it easier for businesses to raise money. These are the textbook arguments in favor of the freedom of capital movements. However, capital flows can also be a source of vulnerability in crisis times if these flows transmit shocks across borders and disrupt local financial systems. In reality, a range of motives played a role for imposing capital controls on capital outflows or inflows and sometimes on both. These included economic motives, most importantly macroeconomic considerations and industrial policy considerations, as well as political motives. Most common were controls on capital outflows. These helped countries in a weak economic position to avoid downward pressure on the exchange rate, preserve a degree of national monetary policy autonomy, and reduce the need to raise interest rates in case of a speculative attack on the currency. Controls were also seen as keeping domestic savings at home and avoiding tax evasion. They were supplemented by regulations for institutional investors, like pension funds, requiring them to invest a large share of their assets domestically. Controls on inflows were only sparingly used, chiefly by countries in a strong economic position, to help avoid too strong upward pressure on the exchange rate and consequently a decline in competitiveness. Some countries though explicitly controlled inflows for industrial policy reasons, thus shielding their domestic capital markets, favoring domestic industrial sectors or restricting the participation of foreign capital in sensitive sectors. These controls were supplemented by domestic regulations that de facto protected the domestic capital market by discriminating against nonresidents. Europe thus had a very diverse landscape concerning capital movements in the wake of the discussions on EMU. Different traditions and country-specific institutional arrangements resulted in a wide range of controls, often camouflaged by complex administrative rules. For a long time, the stabilizing role attributed to capital controls outweighed the textbook costs of controls. Capital controls restricted cross-border financial transactions, and therefore limited portfolio decisions of households and institutional investors such as pension funds, and hindered the internationalization of companies. They also negatively affected citizens’ freedom to travel abroad by limiting the amount of foreign currency they could obtain. However, their effectiveness was questioned as they were easily circumvented by increasingly sophisticated financial markets. The emergence of derivative financial products blurred the traditional distinctions between long-term and short-term market segments. The capital controls therefore resembled more and more playing cat and mouse; it was just not possible to put a cat for every hole. This explains why countries, once they embarked on a process of capital liberalization, ultimately

The Political Economy of Capital Controls and Liberalization in the European. . .

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pushed for full liberalization. Also judicial enforcement was lacking. Only very rarely were violators prosecuted. Nevertheless, the controls deterred investors. Controls were seen as having the undesired side effect of postponing necessary adjustments of domestic policies. It was realized that controls did not address the fundamental causes of speculative capital flows and thus did not influence exchange rate expectations in a significant and lasting way. They also negatively impacted the investment climate as countries with an open exchange system were favored by international corporations. Political economy considerations played a role as well. In general, it was felt that the imposition of capital controls entailed fewer political costs than a devaluation of the currency. The general public normally did not feel the impact of exchange controls, whereas political resistance against exchange rate devaluations was strong. An exchange rate devaluation shattered national pride and was often seen as a political humiliation. Controls on outflows created “mousetrap” currencies: investors could bring in money, but it was difficult to legally withdraw. Investors were trapped. International investors preferred to bring their money into countries where cross-border transactions were freely allowed and shied away from countries that had a history of imposing controls on outflows. The general better economic performance of European countries in the 1980s created the right climate for dismantling capital controls in a gradual way. In particular, the reorientation of French policies in the mid-1980s, including a modernization of the financial system, was important for swaying the balance within the European Union toward abolishing exchange control.

2.2

Political Motives

In the face of the “incompatible trinity” of having at the same time autonomous monetary policy, free capital movements, and a stable exchange rate, capital controls for a long time had been seen as the lesser evil.9 Capital controls bore fewer political costs than devaluing the national currency or raising interest rates. France held the balance for a common European stance toward capital liberalization. For France there always had been the ideological protectionist argument for capital controls. This fitted well in the postwar dirigistic approach to economic development, channeling domestic savings toward priority industrial sectors. Exchange controls were supplemented by regulations that aimed to further domestic economic priorities and avoid the taking over of French companies by foreign, in particular US, interests. Although their limited effectiveness was recognized, they were kept in place as a complement to the centralized approach to economic

9 The impossible trinity concept, also in macroeconomic theory referred to as the trilemma, was developed by economists John M. Fleming and Robert A. Mundell in the 1960s.

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development, characterized by macroeconomic planning, industrial policy, and sectoral differentiation. Such environment called for protective shields at the border. Germany, on the other hand, supported by the Netherlands, was the driving force toward capital liberalization. This fitted well in the social market economy ideology in which free market forces were left unguided. Free capital flows improved the efficient allocation of scarce financial resources. However, this attitude was not only inspired by free market ideology but also influenced by the practical experience of large trade surpluses on the balance of payments. This threatened to put upward pressure on the exchange rate, thus undermining the competitive position of German industry. In the absence of capital controls, the trade surplus could be offset by capital exports by the private sector. Politically, Germany had been put on the defensive by repeated initiatives by France and other countries to strengthen monetary arrangements in Europe. Germany feared that this in practice would only lead to more financing requests from economically weaker countries. Therefore, Germany declared that it would only be willing to discuss further proposals for European monetary cooperation if crossborder capital controls were dismantled.10 In the German view, free capital movements were a sine qua non for European monetary integration. Capital freedom was seen as forcing economic discipline in neighboring countries: they could no longer follow expansionary policies behind the protective shield of capital controls as this would be punished by financial markets. Better economic performance in the 1980s and a generally stable political environment created the right climate for gradually dismantling capital controls. In particular, the major reorientation of French policies in the mid-1980s swayed the balance within the European Union toward abolishing exchange control altogether. One of the major architects was the then Economics and Finance Minister Jacques Delors, who later was to become President of the European Union.11 France moved toward market-oriented policies and aligned itself closer to other economically more successful European countries, in particular Germany. The reformulated industrial strategy included the opening up of markets and the gradual privatization of nationalized companies and banks. The aim was to encourage the rationalization of French industry through increased foreign competition. The position of Paris as an international financial center was at stake as well, since this would only flourish in a liberal environment. A large part of the success of the French reorientation of economic policies was due to a well-thought-out sequencing of measures in which domestic deregulation and macroeconomic stabilization complemented each other. Deregulation of the financial sector and more market-oriented monetary instruments were first implemented. When the French macroeconomic situation strengthened and the financial sector was considered able to withstand foreign competition, capital

10

Bakker (1996), pp. 171–173; Deutsche Bundesbank (1987), Annual Report 1986, pp. 75–76. Jacques Delors was Minister in the Mitterrand administration from 1981 to 1984 and President of the European Commission from January 1985 to January 1995. 11

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controls were gradually withdrawn. A basic reform of industrial policy was carried through, and subsidies to inefficient firms were discontinued. Progressively, French authorities liberalized policies in France’s own interest and in doing so attuned their policies to those of the vast majority of industrial countries. Influenced by the growing alignment of French and German policies, other countries, like Italy and Spain, eventually had to follow suit. The European Commission, under the inspired leadership of Jacques Delors, played a decisive role by seizing the moment and persisting on full and unconditional capital liberalization. Freedom of cross-border capital flows thus became a sine qua non for European monetary integration. The Commission expected that this would compel the member states to take the necessary adjustment measures in other areas and follow disciplined economic policies, which would create the right setting for monetary unification. Countries had to show that their policies generated sufficient confidence in financial markets without the protection of capital controls. Capital liberalization would prove to be the much-needed dynamic element, which earlier had been lacking. It created the internal momentum for European monetary integration by introducing elements of external discipline. The 1988 Directive, effectively freeing all capital movements, was a landmark in the process of European integration.12 Fundamental factors had been at work: the effectiveness of capital controls was in doubt, their administrative and operational costs were high, and they led to suboptimal allocation of resources. The favorable economic climate in the second half of the 1980s and the relative stability in the European Monetary System (EMS) provided a window of opportunity. The political willingness to create the EMU—in an overall relatively stable political climate in Europe—gave the political push for the lifting of all capital controls, as it was clear that freedom of capital movements was a precondition for monetary unification. The eventual abolition of controls thus must be understood in the political context of European monetary unification. Monetary union implied that the incompatible trinity was resolved by transferring the sovereignty of monetary policy to the European Central Bank (ECB).

3 The Erga Omnes Principle An important aspect in the discussions on capital liberalization was whether this would apply to all countries or whether it would only concern intra-EU capital flows. In setting the first steps in European legislation to free capital movements, domestic administrative rules, which in practice may hinder foreign direct investment flows, were deliberately ignored. Some member countries applied formal approval regimes for investments in key industries and in sectors that were considered crucial for public order and security reasons. These regimes differed among countries, and it

12

Fourth Directive on capital movements (Directive 888/361/EEC).

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was considered politically too difficult to agree on common investment screening rules. While pushing for liberalization of capital movements, Germany all along insisted that liberalization measures should be applied erga omnes, i.e. in a nondiscriminatory fashion. It felt that a discriminatory exchange regime would impair the pull of the Common Market in attracting foreign capital. Another important reason was that the deutsche mark had developed into an international reserve currency and such status was not compatible with common EU restrictions vis-à-vis third countries. Likewise, the euro should be a freely tradeable currency with no strings attached. France, on the other hand, was of the opinion that the erga omnes principle should be a political declaration of intent rather than a legally binding obligation. It was not disinclined to allowing a certain favoritism toward member states. France also felt that Europe should be capable of taking steps vis-à-vis third countries if their policies were a hindrance for the good functioning of the European monetary arrangements. These diverging positions betrayed the more outward-looking attitude of Germany, which favored a Europe open to the outside world, versus the more Eurocentric attitude of France, which, at least initially, upheld the concept of a shielded European capital market.13 The French preferences interestingly already had transpired in the Werner report of 1970, which had provided the first blueprint for economic and monetary union.14 The Werner report took issue with the erga omnes principle and advocated a regime that discriminated between intra-European capital movements and those with third countries.15 But most members states opposed this, also because it was technically difficult to make such distinction. If at all possible, discriminatory rules could be easily circumvented by financial market participants. When capital liberalization again came on the agenda in the late 1980s, the compromise was that while capital movements would be freed erga omnes, countries would preserve a certain measure of leeway in the grey zone of domestic administrative regulations.16 To that effect, some countries maintained screening mechanisms that in practice could provide an obstacle for foreign investors. In order that this grey zone, which explicitly is confined to the protection of national security or public order, was not abused, the Commission and the Court of Justice have given

13 The German position was supported by a number of other countries which are highly dependent on external trade, including the Netherlands. The French position, on the other hand, was strongly supported by Italy which favored the development of a common European capital market. 14 Report to the Council and the Commission on the realization of economic and monetary union in the Community (1970). 15 The Commission likewise favored that Europe manifested itself as a bloc. When tensions emerged in the Bretton Woods system in the early 1970s the Commission proposed that the Community harmonized their capital controls vis-à-vis third countries, while simultaneously liberalizing intraEEC flows, see Bakker (1996), pp. 116–118. 16 In the 1988 Directive the erga omnes principle was accepted, but Germany stood alone in wishing to have this included as a binding obligation in the Directive.

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strict interpretations in subsequent jurisdiction to uphold the notion of free capital flows.17 Looking back at the discussions about the erga omnes principle, it is interesting to note that the prevalent concern at the time was the threat of increased foreign influence in the financial services sector, unlike today where concerns focus on foreign influence in technology companies and critical public infrastructure. France in particular wished to shield its own financial sector, and the United Kingdom felt that reciprocity should be maintained as a negotiating tool, in particular vis-à-vis Japan, which at the time when these discussions took place was seen as a threat for a level playing field.

4 History Revisited: The Case of Japan Japanese financial institutions in the 1980s were aggressively entering European markets. Member states felt that this could only be allowed if the Japanese domestic financial market would be opened up to foreign banks as well. There was a lack of reciprocity as controls on inward direct investment restricted the share of foreign ownership in various Japanese industries, including in the financial sector. These controls were relatively effective as the heavily regulated financial system allowed the authorities to exercise moral suasion. Domestic industrial policy was aimed at preventing the takeover of innovative Japanese companies by foreign competitors. A prior-approval system was in place, and the approval process was used to discourage investment as a decisive answer on a request for a permission was given only after a significant and uncertain waiting period. There was also no shortage of available finance because of the high domestic saving rate in Japan of over 30% of gross domestic product (GDP). This reduced the need for foreign capital, in contrast to the situation in many other industrial countries. Faced with a rapidly deteriorating current account of the balance of payments, the US took issue with the huge bilateral trade deficit with Japan. Japan was accused of manipulating the currency in order to gain a competitive advantage. Controls on capital inflows into Japan, which would have caused more demand for the yen, contributed to the weakness of the currency. There were also accusations of copying intellectual property and infringement of patents. In US Congress, the question was asked “are the Japanese picking our brains?”18 International pressure to end these unfair trading practices intensified. Key changes first resulted from the yen-dollar agreement, which was signed between the US and Japanese governments in 1984. The agreement aimed at internationalizing the yen and opening Japanese capital markets to foreign investors. Subsequently, this bilateral agreement was taken up to the multilateral level, which

17 18

See Hindelang (2009). Dreyfuss (21 December 1987).

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eventually resulted in the Plaza Accord.19 This agreement, signed in 1985 by the Group of Five major industrial countries, the predecessor of the G7, built upon the earlier bilateral agreement reached between the US and Japan. Japan was forced to play according to the rules of the game and deregulate domestic financial markets and liberalize capital movements. Administrative procedures for inward direct investment were eased, and from 1992 prior approval was required only for investment in a few sectors.20 These agreements proved to be a success as the Japanese yen appreciated by more than 50% in two years, making Japanese exports less competitive.21 Outward direct investment from Japan increased dramatically in the late 1980s as the strong yen encouraged Japanese manufacturers to open manufacturing plants in third countries. Inward direct investment eventually picked up following Japanese financial market reform in later years. What is striking about this period is that the final outcome of external bilateral pressure on Japan and multilateral negotiations has been the full incorporation of Japan at an equal footing in the international system. The Plaza Accord was based on an inclusive strategy where Japan was made part of a rule-based system by taking responsibility for international monetary order. Eventually, all parties gained as mutual obligations were recognized. There are striking parallels to the situation vis-à-vis China nowadays. China’s accession to the World Trade Organization (WTO) in 2001 gave many Chinese companies the opportunity to operate internationally. This has given a huge boost to the world economy, and China maintained world growth in the financial crisis in 2008. China similarly has a very high domestic saving rate and is not dependent on foreign capital for its domestic and foreign direct investment drive.22 China manipulates its currency in order to stay competitive. The large current account deficit vis-à-vis the US is a bone of content as well. Again there are fears of others picking Western brains. Of course there are differences between Japan then and China nowadays, including the different economic model as far as the role of the state is concerned, including a much larger role for state-owned companies, and the much larger geopolitical role of China as it implements its Belt and Road infrastructure initiative.23 Nevertheless, there are important lessons to be learned from the standoff of industrial countries with Japan in the 1980s.

19 The Plaza Accord, named after the Plaza Hotel in New York in which it was signed on 22 October 1985, aims at a controlled appreciation of the Japanese yen vis-á-vis the US dollar by interventions in the foreign exchange markets by the central banks. 20 Agriculture, forestry and fishing, mining and petroleum, and leather industries. 21 Between September 1985 and December 1987, the exchange rate of the Japanese yen vis-á-vis the US dollar appreciated from 240 to 130. 22 According to World Bank data China’s gross domestic savings rate amounted to 46% of GDP in 2017. 23 Whereas Japanese private companies made inroads in foreign industrial markets, the Chinese Silk Road is a government-led initiative to build ports, railroads and other trade-enhancing infrastructure in foreign countries. Concerns have arisen that in economically weaker countries infrastructure investments have led to a problematic increase in debt.

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5 The European Investment Screening Proposals Most economic motives for controlling capital movements for Europe no longer apply as the incompatible trinity is resolved by the introduction of the euro. Capital controls would undermine the premises on which the single currency is built and would hinder the unity of monetary policy of the ECB. Of course, capital movements within the euro area can cause trouble, as became clear in the financial crisis when flight capital out of Greece, Spain, Portugal, and Ireland moved to safe havens. More recently, the dispute between Italy and the Commission on the 2019 budget caused large capital flows out of Italy, raising domestic interest rates. However, capital controls to stop outflows are no longer in the toolbox of the eurozone authorities. The political agreement reached on an EU framework for screening foreign direct investment reflects a changed international climate. The fact that the commitment to adopt a new investment screening regulation was taken within one-and-a-half years is almost unprecedented. Only as recently as 2013, a similar initiative for an EU investment protection mechanism was blocked.24 The changed international climate is characterized by a nationalist revival where the political appreciation of liberal policies and open borders has changed as it is increasingly realized that the benefits of globalization are not evenly spread. The political appreciation of what constitutes key industries is changing as well. In particular, there are concerns about foreign investments that are not driven by market considerations and pose risks for strategic technologies and public infrastructure. With rapid technological advances, national security and public order considerations have become more forceful. This provides the context for the proposed European screening framework, which in the words of Commissioner Cecilia Malmström aims to ensure “to protect our collective security while keeping Europe open for business.”25 The Commission proposal is based on three components. The most radical element is the framework for a national screening mechanism with basic requirements regarding deadlines, transparency, confidentiality, and legal protection. Next, a cooperation mechanism between the member states and the Commission will be established. Lastly, the framework creates a cooperation mechanism and allows the Commission to issue opinions in cases that concern several member states or have an impact on European projects. The framework does not intend to infringe on the national responsibility of member states for national security. Member states can maintain their existing review mechanisms.26 A coordination working group has

24 European Commission (15 April 2013), On the free movement of capital in the EU, Brussels, Commission Staff Working Document SWD (2013) 146 final, pp. 14–15. 25 European Commission Press Release (20 November 2018). 26 Currently 14 member states have investment screening mechanisms in place. Some countries perform generic screening for all incoming investments, other countries confine themselves to strategic sectors.

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been set up with member states to identify joint strategic concerns and solutions in the area of foreign direct investment.27 Strengthened screening is taking place at a time when international tensions are already running high because of the trade conflict between the US and China. The unilateral tariff increases imposed by the US and the retaliatory measures taken by China have hurt international trade. Both countries suffer from the protracted trade war, and bilateral foreign direct investment flows have decreased. In the US, the Foreign Investment Risk Review Modernization Act (2018) has empowered the government to block even small minority foreign investments into sensitive technologies. Meanwhile, China has imposed very stringent capital controls on outbound investment.28 Foreign direct investment flows into the US and Europe combined amounted to only $30 billion in 2018, that is 73% lower than in 2017. The number of canceled Chinese investment deals increased significantly. There is thus already a visible effect of tighter investment screening policies, with possible negative effects on the global economy. Global foreign direct investment showed a sharp downturn by 27% in 2019, and global trade has come to a standstill.29 Industries are moving supply chains back home. Strengthened investment screening is creating uncertainty to the Asian region that has been the main driver of the global economy for the past decade. International institutions, such as the International Monetary Fund, see this as a major risk for the global economy. Therefore, in elaborating the present European investment screening framework, it is imperative that the concept of national security is not stretched or mixed with other motives. It is clear that member states have the right to take measures for the protection of national security or public order. But the framework should ensure that screening is based only on grounds of national security and not on other industrial policy objectives. There is a vulnerable line here. Why, for instance, has Europe accepted the hegemony in strategic IT sectors by US companies, such as the “big five,”30 while being concerned about Chinese investments in similar sectors? This not to say that there are not genuine issues that need fixing. Current trade negotiations between the US and China may ideally end up with reforms to end unfair trading practices and proper treatment and protection of intellectual property. This already would constitute a major improvement. A reform of China’s system of state-owned enterprises, allowing more market-led principles, would be welcome as well, as would be a deal on the yuan renminbi. But all this will take time. Regardless of strengthening investment screening procedures, one could envisage alternative approaches that would more effectively address these genuine concerns. China has not yet reciprocated for the openness of the EU, but recently some

27

Regulation (EU) 2019/452 of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, OJ L 79I, 21.3.2019, pp. 1–14, which entered into force on 10 April 2019. 28 Reuters (11 October 2018), China constricts capital outflows with eye on yuan stability. 29 OECD Foreign Direct Investment Statistics (2019), CPB World Trade Monitor (25 April 2019). 30 Alphabet (Google), Amazon, Apple, Facebook, and Microsoft.

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important moves were made under international pressure, including better market access for foreign banks and securities firms in the Chinese financial service sector.31 A more effective way of dealing with concerns of both security and reciprocity would be the negotiation of a bilateral investment treaty between the EU and China where mutual access rules can be agreed, opening up more economic sectors in China to European firms.32 The political basis could be laid in a future EU-China Summit in which state aid rules would also be on the agenda.33 Three are important lessons to be learned from the experience in the 1980s, when the open global system was challenged by severe trade and investment tensions with Japan. The trade system came out of that dispute in a much stronger fashion once a deal was reached. Also here, the US first took the lead negotiating bilateral agreements, which, at a later stage, were turned into in multilateral agreements. The multilateral negotiating table is a better place to address the issues we are facing today than taking bilateral actions that risk countermeasures being taken. What we really need is a reformed trade system in which trade in services is liberalized within an agreed set of measures limiting state aid and protecting intellectual property. Europe traditionally has felt more comfortable in a multilateral, rule-based system, which protects against the exercise of power. Such a system might include a reformed WTO with agreements limiting government subsidies and better crossborder regulatory coordination.34

6 Conclusion International mobility of capital was in most countries strictly limited until the mid-1980s. The application of capital controls under the Bretton Woods system reflected a preference for isolating domestic financial markets from international developments. However, their effectiveness varied and tended to erode over time due to the increasing size of financial markets and the growing sophistication of financial products. Eventually, countries came to the conclusion that controls involved more costs than benefits, and they embarked on a policy of gradually

In November 2018, UBS became the first foreign bank to gain control in a joint Chinese securities firm. ING is set to become the first foreign bank to acquire a majority holding in Chinese joint venture with Bank of Beijing setting up a fully digitalized bank. Other banks are still awaiting approval to take a majority interest in a Chinese partnership. 32 A bilateral international investment agreement between the EU and China could replace the different bilateral investment treaties that individual EU member states have negotiated with China. 33 At the 21st EU-China summit in April 2019 further joint work on improved market access, industrial subsidies, technology transfers and intellectual property protection was scheduled. 34 The WTO published its first ruling on national security in April 2019 in a dispute between Russia and Ukraine. In the ruling the right of countries to impose trade restrictions on national-security grounds is affirmed as is the WTO’s authority to determine whether a security threat warrants such restrictive measures. 31

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lifting them. Controls were thus removed as part of wide-ranging reforms aimed at increasing economic efficiency and growth. By establishing common budgetary targets and setting up the independent ECB, an important element of divergence among European countries was removed. This eventually made monetary unification possible, which by definition is characterized by the free flow of cross-border capital. Liberalization of capital movements overall has been a success, and it has proven a catalyst for further economic reform. In the EU, the political dimension was evident since capital account liberalization was part of the process of achieving economic and monetary integration. Nevertheless, liberalization has not been without its difficulties and costs. Insufficient time has been paid to the need to strengthen the supervision of the financial sector. In the euro area, finishing the banking union and creating a truly European capital market are still needed to make the euro area less prone to financial crises. It is important that the European investment screening proposals on the table do not infringe upon the acquis of free capital flows and adhere to the erga omnes principle. Presently, EU member states have very open investment regimes. This has served European economies well as most are relatively small and open economies, which are dependent on trade. The European economic model is based on fair competition and open markets that make European companies more efficient, innovative, and better able to compete globally. This is all the more necessary as American and Chinese corporations have the advantage of a very large home market. In particular, economic interests should not be mixed with national security concerns. Investment screening should not become an extension of industrial policy. Therefore, the screening should be limited in time and transparent, with clearly defined criteria leaving as little room for interpretation as possible. The framework should not become too generic and focus only on those sectors that are needed for public order or where national security is at stake. Political influencing can be avoided by having the screening carried out by fully independent committees. The duration of the screening procedure should remain as limited as possible, and the procedure should be set up in such a way that it provides the greatest degree of certainty to all parties involved. One should keep in mind that investment screening cannot focus on the full life cycle of the investment, as it, as a rule, takes place before the investment is made. The Dutch perspective coincides with the European perspective. The Netherlands is a very open economy, which is largely dependent on free trade and whose welfare therefore depends on open borders and an attractive investment climate. The Netherlands consistently is in the top five of global foreign direct investors. Investments in and out of the country are regarded as an inseparable part and parcel of the Dutch successful business model. At the same time, Dutch companies, like those in other member states, face barriers outside the EU. There is a need for a better balance in reciprocity and for a level playing field vis-à-vis foreign companies that receive government subsidies. Europe should not be on the wrong side of history. History shows that a collapse of international trade is a possibility. Globalization is not a new phenomenon, nor is it irreversible. More than a century ago, between 1870 and 1913, open borders

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allowed the rapid international distribution of modern technology. That period was one of unprecedented global integration, where goods, money, and people could move across borders with minimal impediments. There were large gains in exports and foreign direct investment as a share of GDP in many economies—a sign of increasing openness. It was also an era of rising inequality. As now, globalization had strong distributional effects, which led to large electoral shifts, which negatively impacted on trade policies. The Great Depression of the 1930s was the ultimate example of deglobalization. The message of history is clear. We need a new impulse to multilateralism and try to rediscover the previous spirit of international cooperation in which the broader spectrum of challenges can be tackled, including the genuine concerns in an era of rapid technological advances and globalization. Europe needs to rebalance its approach to China while aiming for more symmetric openness. The international agenda should aim at not building walls but keeping borders open while addressing national security issues as part of mutual understandings, which would bind countries closer together instead of setting them apart. In a world dominated by large economic powers like China and the United States, Europe’s voice will be heard if its member states stand united. Europe can play a more proactive and constructive role in this.

References Bakker A (1996) The liberalization of capital movements in Europe. Kluwer, Dordrecht CPB World Trade Monitor (25 April 2019) The Hague Delegation of the European Union to China (2019) Joint statement of the 21st EU-China summit, Brussels Dreyfuss R (21 December 1987) How Japan picks America’s brains. Fortune Magazine EEC Council, First Directive for the implementation of Article 67 of the Treaty of 11 May 1960, OJ 43, 12.7.1960, pp 921–932 EEC Council, Second Council 63/21/EEC Directive of 18 December 1962 adding to and amending the First Directive for the implementation of Article 67 of the Treaty of 18 December 1962, OJ 9, 22.1.1963, pp 62–74 EEC Council, Council Directive 72/156/EEC on regulating international capital flows and neutralizing their undesirable effects on domestic liquidity of 21 March 1972, OJ L 91, 18.4.1972, pp 13–14 EEC Council, Fourth Council Directive 88/361/EEC for the implementation of Article 67 of the Treaty of 24 June 1988, OJ L 178, 8.7.1988, pp 5–18 European Commission (15 April 2013) On the free movement of capital in the EU, Brussels, Commission Staff Working Document, SWD (2013) 146 final, pp 14–15 European Commission (20 November 2018) European Commission Press Release: Commission welcomes agreement on foreign investment screening framework Hindelang S (2009) The free movement of capital and foreign investment. Oxford University Press, Oxford 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 79I, 21.3.2019, pp 1–14

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Report to the Council and the Commission on the realization of economic and monetary union in the Community (Werner Report) (1970). Luxembourg

Age Bakker (1950) is Extraordinary Councilor at the Council of State of the Netherlands and Emeritus Professor of Financial Markets and Institutions at VU University Amsterdam. After graduating in economics from VU University Amsterdam in 1976, he joined the Nederlandsche Bank, the Dutch central bank, where he was closely involved with the negotiations leading up to the establishment of the European Central Bank. From 1998 to 2006, he was a member of the ECB’s Monetary Policy Committee and Market Operations Committee. In 2004, he became director of the central bank’s Financial Markets Department. In 2007, he was elected as executive director for the Netherlands constituency at the International Monetary Fund in Washington, a position he relinquished in October 2011. He chaired the Committee for Financial Supervision of the Caribbean countries in the Kingdom of the Netherlands from 2011 until 2017. Currently, he is chairman of the Supervisory Board of NWB Bank and occupies board positions at three Dutch pension funds. Age Bakker obtained his PhD degree from the University of Amsterdam on a dissertation on The liberalization of capital movements in Europe (1995). He has written extensively on international financial issues.

Investment Screening: The Return of Protectionism? A Business Perspective Stephan F. Wernicke

Contents 1 The Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The EU Reaction and Its Legal Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Evaluation from a Business Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Investment Screening Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 EU Investment Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract China is the panda in the room: its extensive foreign investment policy in recent years, whilst only incrementally opening its own internal market, serves as justification and yardstick for investment screening worldwide. But asymmetrical investment policies and the One Belt One Road initiative only provided the trigger for political action in Europe. The EU investment screening mechanism is justified by concerns that are mainly related to public security. This was overdue. However, the procedure set up does not provide sufficient legal certainty, given the various undefined and vague terms, including public order. The cooperation mechanism might therefore, contrary to its laudable intentions, become another element in the ongoing efforts by the EU Commission to politicize investment law, allowing for political horse-trading. It is further argued that economic statecraft demands a clear commitment to the rule of law and to the positive economic aspects of FDI. Investment screening should not become part of the overall negative stance that the EU took relating to investment protection as such. This approach has already undermined the trust of many investors in the integrity of the EU legal system.

All views expressed are personal. The text is the adapted version of the keynote held at the Gothenburg CELIS conference in March 2019. S. F. Wernicke (*) Humboldt-University Berlin, Faculty of Law, Berlin, Germany German Association of Chambers of Commerce and Industry, Berlin, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 29–42, https://doi.org/10.1007/16495_2020_11, Published online: 2 June 2020

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Attaching new regulatory hurdles to the free flow of capital should serve the purposes of the EU, which include free and fair trade, the integration of legal and economic systems, and a global level playing field.

1 The Issue In 1920, over 1000 companies produced pianos and grand pianos in Germany alone. A century later, in 2018, we count less than 12, mostly owned by Chinese companies—amongst which Pearl River China is one of the biggest. It builds more than 125,000 pianos and grand pianos a year—a number dwarfing the 1250 pianos and grand pianos still built today, e.g., by the company Steinway & Sons per year. The world market has become 75% Chinese, with much lower prices. So maybe China is not yet calling the tune, but at least it is producing many instruments. Admittedly, talking about the broad picture of investment screening relates to different scenarios than pianos. But the example is telling anecdotal evidence for a development we should be aware of: in some economic areas, though not necessarily crucial for overall growth but which most would consider essentially Western, China took over global production—without Europe even noticing. Mention could be made of other well-documented cases, e.g. Kuka, the German robotics company taken over by China in 2017 for over 4 bn USD, or the chip equipment producer Aixtron, a deal abandoned following US intervention.1 China is always the panda in the room. The rather innocent example of pianos appears paradigmatic for questioning the EU’s general approach to investment screening: How do we differentiate between presumably innocent investments in a globalized economy—if there are any—and investments in important sectors that merit scrutiny, such as defence, railways, mobile phones and telecommunication networks? China serves as justification and yardstick for any investment screening measure. China’s outbound foreign direct investment (FDI) increased dramatically over the last decade in Europe and worldwide. As recently as 2014, economists regretted the vast untapped potential of the EU-China relationship in investment flows: at the time, China accounted for just 2–3% of overall European investments abroad, whereas Chinese investments in Europe rose but started from an even lower base.2 From 2000 to 2014, Chinese FDI in Germany was in total below 7 bn EUR; even in 2010 it attained just 2.1 bn EUR—but it quickly rose to 10.9 bn in 2016.3 Overall,

1 For key acquisitions of Chinese companies in Europe between 2016 and 2018 cf. Joshi (22 May 2019), China and Europe: Trade, Technology and Competition, ORF Occasional Paper No. 194, Observer Research Foundation, Table 1. 2 O’Sullivan (2016), p. 5; indeed, many sources claim the necessity of unfettered access, cf. Clegg and Voss (2016), pp. 79–100. 3 China Briefing (8 May 2019), Chinese FDI in the EU’s Top 4 Economies.

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Chinese investment in the EU increased 17 times from 2010 to 2016—triggering suspicions that the rise was, inter alia, due to the “Made in China 2025”4 programme focussing on investment in key economic sectors. Seventy per cent of all Chinese FDI in Europe was received in the UK, France, Germany and Italy.5 Remarkably, considering the different economic sectors involved, from 2015 to 2017, 40% of Chinese FDI in Germany concerned machinery and equipment, and 30% went into utilities and automotive, whilst Chinese investment in France was mainly in the energy sector (30%). Despite the fall of Chinese investment in Europe 2018 down to 17.3 bn EUR6 and thus to pre-2015 levels and even if large investments were undertaken by private companies, not by state-owned enterprises (SOE) or state banks, data confirm the importance China attributed to its investment policy. Outbound direct investment clearly has become a tool of economic statecraft7—which in turn led to suspicions. Transfer of technology was not only achieved by purchasing technology, by obtaining licences to its use or through the acquisition of a foreign company. China has simultaneously forced foreign partners in various instances to transfer technology and, according to the US, might have used cyber theft to gain technology.8 Moreover, China itself is far from opening its economy. Whilst it took China’s National People’s Congress until March 2019 to adopt major changes to its Foreign Investment Law (FIL),9 it allows for equity joint ventures, cooperative joint venture and wholly foreign-owned enterprises. A regulatory approval requirement still remained applicable to various projects stipulated in the so-called negative list, which despite incremental openings in the automotive and financial sectors is far-reaching, excluding market access, e.g. in telecommunications and healthcare,

4 The Made in China 2025 plan was published in May 2015, industrial policy strategy calling for China to cultivate indigenous innovation: multinational corporations should be supported in view of raising China’s core competitiveness in advanced manufacturing—by means of inter alia global sourcing, business process reengineering, supply chain consolidation and capital market operations. 5 China Briefing (8 May 2019), Chinese FDI in the EUs top 4 economies. 6 Hanemann et al. (6 March 2019), Chinese FDI in Europe: 2018 trends and impact of new screening policies, Mercartor Institute for China Studies & Rhodium Group (last accessed 6 January 2020); Statista (2019), American Enterprise Institute, The Heritage Foundation; Iin H1 2019 another large decline of 86.6% YOY was reported, see EY (2 August 2019), Overview of China outbound investment in H1 2019, available at: https://www.ey.com/cn/en/newsroom/news-releases/news2019-ey-overview-of-china-outbound-investment-in-h1 (last accessed 6 January 2020). 7 Hanemann et al. and Rhodium Group (6 March 2019), update 2 Q 2019: html/ 158306.htm (last accessed 6 January 2020). 8 United States Trade Representative (USTR) (22 March 2018), Findings of the Investigation of China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation under Section 301 of the Trade Act of 1974; Görg (2019), p. 28 et seq.; relating to loss of technology: Dullien (2019), p. 45. 9 Foreign Investment Law of March 15 2019, in effect as of 1.1.2020, cf. Economist Intelligence Unit (21 March 2019), See also in this volume, Qingjiang Kong and Kaiyuan Chen, Country Report on China.

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until today.10 Implementation details on the enforcement mechanism are lacking, and interventions in cases of “national security interests” (Art. 35 FIL) remains possible with no appeal for foreign companies. Hence, even if the law marks an important step toward the equal treatment of foreign investors,11 China continues to strategically limit access for foreign companies in many sectors. Especially for small and medium-sized enterprises, many obstacles remain when entering the Chinese markets.12 Without a sustainable commitment amongst policymakers in China, its impact is uncertain. In contrast, Chinese investors enjoy one of the most open investment regimes, with almost unfettered access to all sectors and industries. Having all this in mind, the most important challenge yet has just started: the “One Belt One Road” initiative, the most comprehensive investment plan ever— which, however is a topic of its own.13

2 The EU Reaction and Its Legal Implications If China was the trigger, it is in light of the general questions linked to foreign direct investment (FDI) that some countries expressed the salient concern that certain countries or SOEs14 enter their market with specific national, public interests. Conversely, outbound investor countries became concerned at what they perceive as discriminatory investment policies.15 So how should the EU deal with FDI? One solution was to push for the conclusion of free trade agreements (FTAs) with strong investment chapters or, at least, bilateral investment treaties to create a solid framework. EU agreements like CETA included market access rights. The EU-China investment agreement shall improve market access opportunities for investors by establishing a genuine right to invest and prohibit discrimination. The EU and China appear determined to address the key challenges of the regulatory environment, including a high and balanced level of protection for investors and their investments. However, it is still under

10

For an overview of the legal landscape cf. Trakman in: Chaisse et al. (2017), p. 67; Anwar (2012), p. 213; Li (2007). 11 IR Magazine (18 March 2019), Chinese Investment in Europe continues to decline. 12 For a remarkable case study cf. Vesström and Syed (2019) The Challenges of a Swedish SME in Entering the Chinese market—A case study on the market entry process of Cibes Lift Group AB to the Chinese market. 13 Holslag (2019), Foreign Policy (2 February 2018), Why is China buying up Europe’s ports, https://foreignpolicy.com/2018/02/02/why-is-china-buying-up-europes-ports/. See in this volume, Qingxiu Bu, The One Belt and One Road (OBOR) Initiative: Reconceptualisation of State Capitalism vis-à-vis Remapping of Global Governance? 14 A comprehensive study on investment by state-owned enterprises was published by the EU Commission: European Commission Press Release (13 March 2019), Foreign direct investment report: continuous rise of foreign ownership of European companies in key sectors, IP/19/1668. 15 Hooijmaaijers (2019) pp. 451–470.

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negotiation, which began in 2013 and, according to both sides, should be concluded in 2020. Another solution was setting up and harmonizing investment screening. But academic research into the subject had only just begun.16 Comprehensive research until 2015 rather dealt with fundamental disparities due to different state aid regimes, especially in research, development, and innovation (RDI) and state intervention in China, Asia, Russia and South America, calling for an overhaul of the EU state aid regime with a view to staying competitive17—but there were no European templates for investment screening. Given that the legal details will be dealt with in other chapters of this book, this presentation is confined to core tenets of the new EU Screening Regulation.18 The legislative procedure was quick19: only in September 2017 the proposal was published; negotiations between the EU Commission, the European Parliament and the Council of the EU were concluded in November 2018; and the EU Screening Regulation entered into force on 10 April 2019 and will apply as from 11 October 2020.20 Some Member States21 have already created or adapted national legislation

16 Cf. Hindelang and Hagemeyer (2017), pp. 882–890; Hanemann and Huotari (17 April 2018), EU-China FDI: Working towards reciprocity in investment relations, Mercis and Rhodium; Grieger (2017) (last accessed 6 January 2020); Baroncelli and Landoni in: Vecchi (2019), p. 17; Wenniges and Lohman (2019); Schuelken (2018), pp. 577–592; Gerhard (2018), p. 814; Görg (2019); Pandey et al. (2019), pp. 56–65. 17 European Commission, (30 November 2015), ENIRI-study: State aid support schemes for RDI in the EU’s international competitors in the fields of Science, Research and Innovation, is the most comprehensive study undertaken by the Commission in recent years. https://ec.europa.eu/ programmes/horizon2020/sites/.../full_einri_final_study_report.pdf (last accessed 6 January 2020). 18 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 79I, 21.3.2019, pp. 1–14. See also in this volume, Joanna Warchol, The Birth of the EU Screening Regulation; Stefan Korte, In search for an EU Competence to Establish an Investment Screening Mechanism and Restricting Effects Flowing from Fundamental Freedoms, Fundamental Rights, and other EU Primary Law; Martin Nettesheim, Screening for What Threat—Preserving “Public Order and Security”, Securing Reciprocity in International Trade, Supporting Certain Social, Environmental, or Industrial Policies?; and Teoman Hagemeyer, Access to Legal Redress in an EU Investment Screening Mechanism. 19 For documentation cf. European Commission (13 March 2019), Commission staff working document on Foreign Direct Investment in the EU, following up on the Commission Communication “Welcoming Foreign Direct Investment while Protecting Essential Interests” of 13 September 2017, COM SWD(2019) 108 final. 20 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, p. 1, 21.3.2019. 21 For a complete list of recent national legal changes cf. Hanemann et al. (2019), table 2.

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to better cope with investments situations, e.g. Germany.22 Half of the Member States have meanwhile notified the Commission of their national mechanisms.23 The main EU novelty is the creation of a “cooperation mechanism” between the Commission and the Member States, allowing the Commission and other Member States to raise concerns related to specific investments. According to recital 7, the EU Screening Regulation should “provide legal certainty” for Member States’ screening mechanisms on the grounds of security and public order and ensure Union-wide coordination and cooperation on the screening of foreign direct investments “likely to affect security or public order” (Art. 4) or when an investment could undermine a project or programme of interest to the whole EU, such as Horizon 2020 or Galileo. There is no definition provided for “security and public order” in Art. 2 of the Regulation on definitions. One possible reason is the belief that the CJEU has already defined these terms under EU law. Indeed, the notion of “public order” and “security” appears at various places in the Treaty on the Functioning of the European Union (TFEU); most importantly, they provide justifications for Members States having restricted fundamental freedoms. But it is entirely unclear if this jurisprudence applies to cases that are characterized by the fact that “a foreign investor”, meaning a natural person of a third country or an undertaking of a third country, intends to make an investment. Rules and definitions adapted to the common market—and especially the very restrictive interpretation and narrow construction of exceptions in cases of restrictions on fundamental freedoms—do not necessarily apply in situations covering third-country nationals.24 In determining whether FDI is likely to affect security or public order, the Commission may take into account its potential effects on, inter alia, critical infrastructure, including energy, water, transport and health; on critical technologies, including so-called artificial intelligence and robotics; on food security; on access to sensitive information, including personal data; and on the freedom and pluralism of the media. All of these criteria, an indicative and not an exhaustive list, relate to economic areas fundamental to the development of both societies and economies. The methods applied in setting up the cooperation mechanism do not appear unproportional or overly cumbersome: notification, opinions issued by the Commission, sharing experiences and best practices. All of these approaches are less intrusive than what could have been expected when legislative work on the new

22 Germany recently adapted its cross-sector investment review procedure (Section 4, subsection 1, number 4, Section 5 Subsection 2 of the Foreign Trade and Payments Act, Sections 55–59 of the Foreign Trade and Payments Ordinance), a procedure which applies in principle to all sectors regardless of the size of the companies involved in the acquisition; special rules apply to the acquisitions of certain defence and IT security companies, see German Federal Ministry for Economic Affairs and Energy, Investment Reviews. On these changes Hindelang and Hagemeyer (2017), pp. 882–890 and Annweiler (2019), p. 528. 23 List of screening mechanisms notified by Member States, https://trade.ec.europa.eu/doclib/docs/ 2019/june/tradoc_157946.pdf (last accessed 6 January 2020). 24 Cf. Hindelang (2009).

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“screening process” started. Nor does the duty to give “due consideration”— according to the principle of sincere cooperation—to the Commission’s or other Member States’ comments raise serious doubts, even if this principle entails various legal obligations for Member States.25 One lacuna should nevertheless be mentioned: various procedural standards—e.g. on deadlines, rules on confidentiality and disclosure26—are completely missing or far too basic for any modern legal environment requesting predictability (and, by the way, speed: if closing of transactions becomes too onerous, market chances might be lost27). Some national procedures reinforce these problems, e.g. the German system, which stipulates that deadlines will only start once information is “complete”, a criterion to be decided by the government. Companies remain the sole object of the procedure and have to comply, e.g., with information requests (Art. 9 para 4) but do not become parties to the procedure; their legal standing will be difficult to construe.28

3 Evaluation from a Business Perspective Overall, the business community has shown itself remarkably open to the new procedure. The important political and economic developments highlighted above with regard to China made it abundantly clear that some kind of legal/political framework might become necessary.29 It is still too early, especially in times of looming trade wars, to evaluate the political risks, e.g. if the overall investment climate might degrade or if some countries might resort to countermeasures. But legally, even if open markets remain a legal and economic priority, significant restrictions on FDI are not to be expected when compared to the status quo. Hence, in assessing the new framework, the business community developed two lines of thought: first, investment screening was evaluated as a system to monitor and

25 Kahl/Puttler in Callies and Ruffert (2016), Art. 4 EUV, Rn. 42 et seq. with further references; conversely, individual rights, e.g. rights for companies being the object of the procedure and not parties to it will be difficult to establish. 26 E.g., the Commission argues that only member states can request information from companies concerned—but the member state itself seems bound by the request of the Commission. 27 Annweiler (2019), p. 528 (531), focussing on red tape and legal insecurity, see also Dammann de Chapto and Brüggemann (2018), p. 412, criticizing that deadlines will only start once information is “complete”. 28 See in this volume, Teoman Hagemeyer, Access to Legal Redress in an EU Investment Screening Mechanism. 29 German Federation of Industry BDI, China—Partner and Systemic competitor, https://english. bdi.eu/media/publications/#/publication/news/china-partner-and-systemic-competitor; German Chamber of Commerce and Industry (last accessed 6 January 2020), DIHK-Aktionsplan China 2019+, Chinas neue Rolle in der Welt – die Chancen nutzen, https://www.dihk.de/ressourcen/ downloads/aktionsplan-china.pdf/at_download/file?mdate¼1543836319966 (last accessed 6 January 2020).

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by necessity politicize FDI, and secondly, it was judged as part of the broader EU approach to investment protection policies.

3.1

Investment Screening Mechanism

Companies consider open borders and the free movement of capital as the basis of the EU’s market economy and its prosperity. FDI secures jobs and innovation. Excessive regulation could eventually lead to lower FDI inflows and reduced access to capital for domestic companies or even to countermeasures for EU investments abroad. Nevertheless, certain kinds of FDI, particularly in key technologies and infrastructure, have to be monitored. Hence, the creation of a new system as such did not create much resistance in the business community. Furthermore, a common EU approach was timely as 15 Member States already had a national screening mechanism in place, with widely diverging rules. Also, the fact that final decisions remained on the Member State level was perceived as adequate, given the close link to the national public order. Companies as well agreed mainly with the choice of areas covered. The screening procedure as of itself is not protectionist. However, given their vagueness, the core criteria applicable were perceived as improper. We might all think that we know what we talk about when we mention security or public order: defence, the public interest, illegal activities etc. But there simply is no consented concept of public interest under EU law, let alone the catch-all “public order”. Reverting to the CJEU jurisprudence will not solve the issue because the normative definitions established for the internal market do not necessarily apply vis-à-vis third states. Legal insecurity will inevitably result. The procedure is thus prone to produce its own fallacy, whilst from the business perspective transparency, predictability and legal certainty are of utmost importance. And the answer to the opening question on how to differentiate between “dangerous” FDI and regular market mechanism is simple: we cannot. We can only set up a procedure to discuss benefits and drawbacks. Furthermore, it appears that investments as well as mergers and acquisitions undertaken by investment funds under the full control of third countries but with a legal seat within the EU are not covered by the EU Screening Regulation—therefore, a broad spectrum of investments might not be controlled or even observed by the new procedure, which nevertheless could pose similar security problems. Such situations can only be tested against the freedom of capital movement under Arts. 63 and 65 TFEU, allowing for restrictions that are necessary to achieve legitimate public objectives for reasons of public policy or security as an alternative to the

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screening process30: as these restrictions are constructed narrowly under EU law, this might become a loophole that does merit close attention in the near future. Another problem is the danger of serious delays of important business decisions, so various companies questioned the danger of abuse of the cooperation procedure. Experience in the United States (US) revealed that the review process of the Committee on Foreign Investment in the US (CFIUS) is cumbersome and opaque in nature. So clarifications were expected—to no avail: the mechanisms under Art. 6 of the Regulation on how the Commission will reach a “duly justified” opinion, which information (“information necessary to provide comments”) has to be revealed when and by whom, are perfunctory. They do not offer sufficient due process or rights of defence. In the end, the investment screening procedure requires trust between all players. But business associations know from experience that every additional procedure enabling the EU Commission to intervene in the markets, even if presumably for information only, allows for the setting up of new hurdles. It opens the doors for political horse-trading. Over the last years, the Commission has unfortunately shown a continuous string of examples in which allegedly neutral procedures resulted in claims for administrative EU power in the name of an alleged European general interest, be it in tax matters, energy policy or competition law. When planting the dangerous seed of unclear categories, like public order, future development has to be watched carefully, so as not to allow administrations to intervene in the market to an extent that is not merited.

3.2

EU Investment Policy

The second argument is more far-reaching—and tragic. FDI screening must be seen as the counterpart to the decay of the EU’s wider, global policy relating to investments and their protection. Sadly, even though the EU Commission advocated strongly and achieved EU competence for FDI in the Lisbon Treaty, it did not live up to expectations. Furthermore, the European Union has completely reversed the position it took before and after the first enlargement in 2004, when Brussels strongly encouraged bilateral investment treaties (BITs). Indeed, since the overall critical public discourse on the Transatlantic Trade and Investment Partnership (TTIP) and the Comprehensive Economic and Trade Agreement (CETA), investment protection and arbitration have been actively denigrated by the EU: The EU Commission strives at times to present FDI and investor-state dispute settlement (ISDS) almost as tokens of corrupt practices, insinuating that defending ISDS was nothing but business efforts to create a “parallel law” for investors etc. Even the CJEU supports this policy, considering it to be heretic, in 2018, to allow private

30 See Written Answer by the Commission to the European Parliament (16 April 2019), E000679/ 2019.

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dispute settlement in investment cases.31 In the infamous Achmea judgment,32 the Court disallowed the application of EU law in investment arbitration proceedings because this might violate the autonomy of the EU legal order, though a simple reference mechanism to the CFEU would have sufficed to retain whatever integrity of the judicial system the Court presupposed. It accepted that companies should remain without effective protection, requesting them to simply “trust” all national courts in the EU—and possibly globally.33 Despite populists corrupting courts in various countries within the Union, despite the proper EU Justice Scoreboard’s outlining deficiencies in various EU justice systems34 and despite the failure to address these deficiencies timely and effectively,35 the CJEU ruled by fiat and pronounced EU Member States to be judicially perfect. This approach is only understandable in an inherently weak system because only then would doubting the integrity of the legal system in Europa put the Union itself at risk and allow for a strong stance by the CJEU36—apparently a catch-22 situation. Questioning intra-EU investment protection as not necessary or even illegal, the EU Commission weakens its own position towards third countries, and even its advocacy in favour of a Multilateral Investment Court (MIC) within UNCITRAL,37 which has been approved even by the CFEU in the CETA opinion. But as an approach to the current EU, the judgment was self-defeating. In the wake of this jurisprudence, intra-EU BITs cannot be invoked. The Court of Justice thus effectively destroyed simultaneously the intra-EU investment protection system and the trust of investors, as expressed plainly by The Economist: “The desire to resolve disputes at home rather than in an obscure court across the Atlantic would be understandable if courts across the EU could be trusted. But they can’t. (. . .) In light of the politicisation of the judiciary in much of central Europe, the thought of BITs being dismantled at the end of the year fills many investors with dread.”38

31

For a comprehensive discussion cf. Wernicke (2018), p. 1644 with further references. Judgment of the Court (Grand Chamber) of 6 March 2018 Slowakische Republik v Achmea BV, C-284/16, ECLI:EU:C:2018:158. 33 However, the CJEU stepped back from a too restrictive position in Opinion 1/17 (Full Court) of 30 April 2019 - CETA, ECLI:EU:C:2019:341. 34 European Commission (2019), 2019 EU Justice Scoreboard with factsheets, https://ec.europa.eu/ info/publications/2019-eu-justice-scoreboard-factsheets_en (last accessed 6 January 2020). 35 Judgment of the Court (Grand Chamber) of 24 June 2019 Commission v Poland, C-619/18, ECLI: EU:C:2019:531, on the independence of judges at the Polish Supreme Court is an important step but does not suffice to address the structural problems encountered by investors; for a proposal of a new, revised system cf. Stöbener de Mora (2019). 36 Cruz (2018), pp. 178, 195, defends this “orthodoxy” arguing on the basis of C-619/18, Achmea that the integrity of the law of the union is absolute—to allow an escape from the union system is an Illusion. 37 de Mora (2019), p. 140; the EU multinational investment court project, though it contains important objectives, will not be realized any time soon, cf. European Commission http://trade. ec.europa.eu/doclib/press/index.cfm?id¼1608 (last accessed 6 January 2020). 38 The Economist (8 June 2019) Treaty or rough treatment. 32

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It is in this context that the business reaction with regard to the investment screening process has to be evaluated. Whilst the legal differences between both topics are obvious, the link between them is “trust”: the trust that the EU is in dire need of but has lost due to its rigid investment protection rhetoric, sidestepping the debate on the reform of investment law39 and even endangering future FTAs. This trust in the Commission in investment matters will be hard to re-establish in future debates on the investment screening of specific cases—despite the fact that companies might even fully share the objectives of the procedure as such.

4 Conclusion In conclusion, the business community considers the overall intention of the new investment screening process as laudable but remains critical of the procedure that has yet to be installed and tested. Its wish is that the EU will reconsider the screening process as part of a wider approach to investment policy. Investment decisions by private companies need legal security and should be facilitated and only in rare circumstances judged against transient and flexible state interests. Public order is all but a precise criterion. Only hard cases of security concerns shall be selected and tested, whilst investment and free flow of capital as such are and remain the European general interest according to the TFEU. FDI should not be politically framed as dangerous, potentially undermining security interests or violating the rule of law. We must be careful—not only with regard to China—that we always differentiate between rule of law and rule by law. China’s concept of economic relations is certainly not always focussing on the selfregulating force of free markets but rather emphasizing on “the ability of government to build competitive firms”.40 So it is free markets as a tool to protect the economy and the society against the possible abuses of public and private power that we should preserve or else the political panda might wake up and tell us that, possibly, democracy and liberalism, as we understand it, are no longer a condition of development and economic statecraft.41

References Annweiler MJ (2019) Die Auswirkungen der AWV-Novelle auf Unternehmenstransaktionen – Verschärfung ohne den gewünschten Effekt? Neue Zeitschrift für Gesellschaftsrecht 22 (14):528–531

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Hindelang and Wernicke (2015), Kessedjian in: Bungenberg et al. (2015), p. 1879 et seq. Holslag (2019), p. 67. 41 Žižek (2009) p. 132; cf. Financial Times (28 June 2019), Putin says liberalism has ‘become obsolete’, p. 1, 7. 40

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Anwar S (2012) FDI regimes, investment screening process, and institutional frameworks: China versus others in global business. J World Trade 46(2):213–248 Baroncelli A, Landoni M (2019) Chinese state-owned enterprises in the market for corporate control. Evidences and rationalities of acquisition in Western countries: operational challenges and opportunities. In: Vecchi A (ed) Chinese acquisitions in developed countries. Measuring operations performance. Springer, p 17 China Briefing (8 May 2019) Chinese FDI in the EU’s Top 4 Economies Clegg J, Voss H (2016) The new two-way street of Chinese direct investment in the European Union. China-EU Law J 5(1–2):79–100 Cruz JB (2018) What’s left of the law of integration – decay and resistance in European Union law. Oxford University Press de Chapto J, Brüggemann N (2018) Aktuelle Entwicklungen im Investitionskontrollrecht – Der Fall Leifeld und die öffentliche Sicherheit. Neue Zeitschrift für Kartellrecht 6(9):412–415 de Mora SS (2019) Investitionsschutz: Vereinbarung der EU-Mitgliedstaaten zur Beendigung der Intra-EU-BITs. Europäische Zeitschrift für Wirstschaftsrecht 30(4):140 Dullien S (2019) Kontrolle bei Übernahmen durch Nicht-EU-Ausländer auch zur Verteidigung von Technologieführerschaft sinnvoll. Zeitschrift für Wirtschaftspolitik 68(1):45–52 Financial Times (28 June 2019) Putin says liberalism has ‘become obsolete’, p 1, 7 Foreign Policy (2 February 2018) Why is China buying up Europe’s ports. https://foreignpolicy. com/2018/02/02/why-is-china-buying-up-europes-ports/ Gerhard M (2018) Mehr Schutz vor ausländischen Direktinvestitionen? Wirtschaftsdienst 98 (11):814–820 Görg H (2019) Ausländische Direktinvestitionen in Deutschland – die große Angst vor China. Zeitschrift für Wirtschaftspolitik 68(1):28–35 Grieger G (2017) Foreign Direct Investment Screening, EP Research Service, PE 603.941 Hanemann T, Huotari M (2018) EU-China FDI: Working towards reciprocity in investment relations. Mercis/Rhodium Papers on China. https://www.merics.org/en/papers-on-china/ reciprocity Hanemann T, Huotari M, Kratz A (6 March 2019) Chinese FDI in Europe: 2018 trends and impact of new screening policies. Mercartor Institute for China Studies & Rhodium Group. https:// www.merics.org/en/papers-on-china/chinese-fdi-in-europe-2018 Hindelang S (2009) The free movement of capital and foreign direct investment: the scope of protection in EU Law. Oxford University Press Hindelang S, Hagemeyer T (2017) Enemy at the Gates? - Die aktuellen Änderungen der Investitionsprüfvorschriften in der Außenwirtschaftsverordnung im Lichte des Unionsrechts. Europäische Zeitschrift für Wirtschaftsrecht 28(22):882–890 Hindelang S, Wernicke S (2015) Essentials of a modern investment protection regime – objectives and recommendations for action. Free University Berlin and the Association of German Chambers of Commerce and Industry. https://www.dihk.de/ressourcen/downloads/harnackhaus-reflections-engl Holslag J (2019) The Silk Road Trap – how China’s Trade Ambitions challenge Europe. Polity Hooijmaaijers B (2019) Blackening Skies for Chinese investment in the EU? J Chinese Polit Sci 24 (1):451–470 IR Magazine (18 March 2019) Chinese Investment in Europe continues to decline Joshi M (2019) China and Europe: Trade, Technology and Competition. ORF Occasional Paper 194. Observer Research Foundation Kahl W, Putler A (2016) Commentary on the EUV, Art. 4. In: Calliess C, Ruffert M (eds) EU-Vertrag. C.H. Beck, München Katainen J (2019) Chinese investments in the EU. In: Wenniges T, Lohman W (eds) Chinese FDI in the EU and the US. Palgrave Macmillan, p 15 Kessedjian C (2015) Where Public meets private. A few thoughts on investment law and arbitration. In: Bungenberg et al (eds) International investment law. C.H. Beck, pp 1879–1883 Li S (2007) The legal environment and risks for foreign investment in China. Springer

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O’Sullivan D (2016) The EU-China investment treaty: challenges, themes, competence. China-EU Law J 5(1-2):5–10 Pandey G, Rovetta D, Smiatacz A (2019) How many barriers should a steeple chase have? Global Trade Customs J 14(2):56–65 Schuelken T (2018) Der Schutz kritischer Infrastrukturen vor ausländischen Direktinvestitionen in der Europäischen Union. Zeitschrift für Europarecht 53(5):577–592 Stöbener de Mora P (2019) Ideen für einen Mechanismus zum Schutz von Investitionen im Binnenmarkt nach dem Ende der Intra-Eu-BITs. EuZW 217 The Economist (8 June 2019) Treaty or rough treatment Trakman L (2017) China’s Regulation of Foreign Direct Investment. In: Chaisse J, Ishikawa T, S Jusoh (eds) Asia’s changing international investment regime. Springer, p 67 United States Trade Representative (USTR) (22 March 2018) Findings of the Investigation of China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation under Section 301 of the Trade Act of 1974 Vesström M, Syed NR (2019) The challenges of a Swedish SME in entering the Chinese market - a case study on the market entry process of Cibes Lift Group AB to the Chinese market. University of Gothenburg Wernicke S (2018) Autonomie und Häresie – Investitionsschiedsgerichte in der Rechtsunion. Neue Juristische Wochenschrift 71:1644–1647 Žižek S (2009) First as tragedy, then as farce. Verso Books Stephan F. Wernicke is chief legal officer of the Association of German Chambers of Industry and Commerce (DIHK e.V., representing 3.6 million German companies and coordinating the network of 142 bilateral chambers abroad) and a professor of European Law and European Economic and Competition Law at Humboldt-University Berlin. Law studies in Berlin, London, Geneva. He holds a PhD in Law from Humboldt-University and lectures on European Law at both the Free University Berlin and Humboldt-University Berlin. Prior assignments include Member of Cabinet of the Vice President of the European Commission; DG Competition of the European Commission; Head of Cabinet, Chambers of the German Judge at the European Court of Justice, Luxemburg. He advises and is a renowned speaker on German and European legal policy. His work as counsel and arbitrator is focussed on competition law and alternative dispute resolution, including investment protection. Email: [email protected].

Investment Screening: The Return of Protectionism? A Political Account Sven Simon

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Calls for a More Restrictive Approach to FDI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Calls for a Liberal Approach to FDIs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Contextualisation of the EU Screening Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44 45 47 48 50 51

Abstract The new EU regulation raises the question whether we are witnessing a fundamental shift in the approach to foreign direct investment on the EU level. For several years, public and political debate has pushed toward a stronger protection of European economies against foreign direct investment. At the same time, many Member States and interest groups from the economic sector are defending the existing liberal framework, stressing the macro-economic importance of foreign investment. A closer look at the design of the new regulation offers insight into the underlying political developments.

S. Simon (*) Phillipps University, Marburg, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 43–52, https://doi.org/10.1007/16495_2020_29, Published online: 29 August 2020

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1 Introduction The adoption of an EU regulation1 concerning the screening of foreign direct investments (FDIs) did not come as a surprise. For several years, the increased inflow of FDIs has sparked public and academic debate about measures to strengthen control over foreign direct investments.2 Acquisitions, such as the one of Kuka in 2016—a leading robotics manufacturer in Germany—by the Chinese company Midea, have generated political calls for a regulatory response to prevent acquisitions from transferring cutting-edge technological know-how out of Europe.3 During the COVID-19 pandemic, these calls have been further emphasized when the Commission issued a guidance urging Member States to make “full use already now of its FDI screening mechanisms to take fully into account the risks to critical health infrastructures”.4 Such technology transfers are possible since FDIs aim at obtaining a lasting interest by an investor in one economy in an enterprise resident in another economy. It implies that the investor has a significant influence on the way the enterprise is managed. Once an investment is made, it is often protected by a bilateral investment treaty (BIT) between the home country of the investor and the host country. However, the question whether a foreign investor has access to another market is usually not a subject of an international treaty but remains a national decision. Amongst the EU Member States, there are 15 countries that require a foreign investor to get prior admission; in other Member States, investments are not subjected to ex ante screening.5 Recently, the trend has been for existing FDI screening mechanisms to be expanded, resulting in a more thorough and stricter screening of foreign investments. In the EU, this has been the case in Germany, Austria, France and the UK. At the same time, new FDI regimes are being added or considered in countries that have not screened FDIs previously (such as in the Netherlands). Given this diverse regulatory framework, it was to be expected that political calls prior to the EU Screening Regulation vary greatly—from cautious embraces or indifference by some Member States to outright rejection by others. The following chapter aims at creating an overview of the different political positions before the adoption of the EU Screening Regulation in order to subsequently see how the Regulation fits into this picture. The first part of the chapter presents the voices that have been advocating for a more restrictive or even protectionist design of the Regulation (2). The second part looks at the supporters of a

1

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 79I, 21.3.2019, pp. 1–14, (hereinafter the EU Screening Regulation). 2 Hindelang and Hagemeyer (2017), p. 882; Jones and Davies (2014), p. 10; Koenig (2018), p. 221; Pandey et al. (2019), p. 56; Schuelken (2018), p. 577. 3 Moran (27 March 2017). 4 Communication from the Commission, 25.3.2020, C(2020) 1981 final. 5 European Commission (Last update: 22 July 2019), List of screening mechanisms notified by Member States. Available at https://trade.ec.europa.eu/ (last accessed 6 January 2020).

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rather liberal approach to FDIs (3), while the third part seeks to examine how the Screening Regulation fits into the paradigm (4). The final part gives an outlook on how the application of the new mechanism might impact cross-border investments in the future (5).

2 Calls for a More Restrictive Approach to FDI At the heart of the argument for a more restrictive approach towards the admission of FDIs lie two different concerns. The first one is the already mentioned fear of a technology drain on other countries and the loss of market leadership in high-tech industries. The second concern revolves around the principle of reciprocity. Many political actors have complained about the lack of a level playing field when it comes to market access in Europe and other parts of the world. For example, in 2016, Chinese investments in the EU increased by 77%, while in the same period, EU investments in China declined by a quarter.6 The European Chamber of Commerce in this light warned about a persistent lack in reciprocity, noting that many of China’s investments, such as Midea’s takeover of Kuka, would be unimaginable for European companies in China due to the restrictive Chinese regulatory framework.7 During the consultation process prior to the Regulation, these voices were raised. This is, for example, clearly reflected in the position of the Austrian Federal Economic Chamber, which took the view that the principle of reciprocity should be the guiding principle in cross-border investments and that any future regulation should be built on this principle.8 More prominently, this was also emphasised in a common paper sent by the economic ministers of France, Germany and Italy to EU Trade Commissioner Cecilia Malmström in 2017. They urged the Commission to rethink the treatment of FDIs coming from third countries because they were “worried about the lack of reciprocity and about a possible sell-out of European expertise”,9 which Member States “are currently unable to combat with effective instruments”.10 Moreover, according to the three ministers, “additional protection based on economic criteria”11 is needed to protect EU industrial policy, especially

6

Le Corre (2018), p. 162. Financial Times (31 August 2016), Europe lobby warns on China market barriers, available at https://www.ft.com/content/757f5246-6fde-11e6-a0c9-1365ce54b926 (last accessed 6 January 2020). 8 Austrian Federal Economic Chamber (12 December 2017), Position of the Austrian Federal Economic Chamber, available at https://ec.europa.eu/info/law/better-regulation/initiatives/com2017-487/feedback/F8154_en?p_id¼111803 (last accessed 6 January 2020). 9 Common Paper by the Economy Ministers of France, Germany and Italy, available at https://www. bmwi.de/Redaktion/DE/Downloads/S-T/schreiben-de-fr-it-an-malmstroem.pdf?__ blob¼publicationFile&v¼5 (last accessed 14 December 2019). 10 Ibid. 11 Ibid. 7

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when FDIs come from a third country that “does not comply with market rules”12 and where the government has a strong control over the economy. In the same year, this position was also taken up by the European People’s Party, which presented a proposal for a Union act on the screening of foreign investment in strategic sectors arguing that “national instruments already existing in some Member States cannot guarantee reciprocity and fair competitiveness; whereas it is therefore necessary and important to adopt a common European approach on this matter”.13 Connected to the reciprocity concern is the increased activity of state-owned companies which are often seen as detrimental to an economic level playing field.14 State influence may lead the company to acquire an asset for strategic rather than purely commercial reasons, while state support may also result in their ability to pay more than other potential domestic or third-country acquirers might.15 While stateowned companies still represent only a small proportion of foreign acquisitions, their share in the number of acquisitions and their assets have grown rapidly over the latest years.16 Russia, China and the United Arab Emirates stand out in this respect with a total of 18 acquisitions in 2017, three times more than in 2007. The concern can be seen in the European Parliament’s resolution of 5 July 2017, in which it called “on the Commission to pay more attention to the role of foreign-based state-owned enterprises that are supported and subsidised by their governments in ways that EU single market rules prohibit for EU entities”.17 Demands for a stricter regulation of state-owned companies also came from the business sector. The federation of European trade unions, IndustriALL Europe, emphasised that “the fact that state aid and dominant positions are prohibited inside the EU but allowed in other parts of the global economy creates an unequal playing field as foreign companies can use monopoly profits or state aid to acquire industrial assets in the EU”.18 The federation thus urged the Commission “to grant decision powers at European level in case of state-led takeovers”.19 With a view to the design of the Screening Regulation, the strict adoption of a reciprocity principle would mean that foreign investors need to be treated differently—each according to the market access possibilities that European investors

12

Ibid. European Parliament (26 April 2017), Proposal for a Union act submitted under Rule 46(2) of the Rules of Procedure on the Screening of Foreign Investment in Strategic Sectors, B8-0302/2017, recital F. 14 Kowalski and Perepechay (29 September 2015). 15 Moran (27 March 2017). 16 European Commission (13 March 2019), Commission Staff Working Document on Foreign Direct Investment in the EU, SWD (2019) 108 final, p. 56. 17 European Parliament, Resolution on building an ambitious EU industrial strategy as a strategic priority for growth, employment and innovation in Europe (2017/2732(RSP), Nr. 19. 18 IndustriAll (2018), Policy Brief 2018-1, p. 5, available at https://news.industriall-europe.eu/ content/documents/upload/2018/2/636552427060145606_PB2018-01-ScreeningFDIs-EN.pdf. Accessed 07/08/20. 19 Ibid. 13

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have in the third country. One might wonder whether the calls for more reciprocity have already had a significant impact—not on the EU legal framework but on the Chinese one. On 15 March 2019, the new Chinese Foreign Investment Law was passed, turning a new chapter of regulatory and legal regime for foreign direct investments in the second-largest economy in the world. The Foreign Investment Law came into force on 1 January 2020 to replace the existing three laws and their implementing rules governing FDIs.20 The new law is widely seen as a response to the concerns over market entry barriers raised by states and international investors.21 The new Foreign Investment Law expressly provides that China will adopt a pre-entry national treatment regime with a negative list. This means that foreign investments will be regulated in the same way as investments made by Chinese domestic investors, and for industries that do not fall within the scope of the negative list, international investors will thus not be subject to project-by-project prior approval from Chinese authorities.

3 Calls for a Liberal Approach to FDIs In opposition to a restrictive approach to FDIs, calls for a much more liberal FDI framework were also raised. This is reflected in some of the responses to the Commission’s proposal in September 2017. The Netherlands, Malta, Luxembourg, Finland and Sweden were fearful of alienating foreign investments with an all-toostrict screening mechanism. Equally, Portugal’s prime minister, António Costa, warned European partners against misusing new security procedures for screening Chinese investments.22 Portugal is one of Europe’s biggest recipients per capita of Chinese investments. Greece also opposed EU-wide investment screening on economic grounds as the country has benefited immensely from Chinese investments.23 Hungary also dismissed any political threat and welcomed unvetted FDIs from China as a substitute for EU funds. In fact, in 2010, Fidesz launched its “Eastern Opening Strategy” designed specifically to reduce Hungary’s economic dependency on the EU and to reorient its economy towards China.24 In October 2017, the UK

20

See in this volume Kong & Chang, Country Report for China. Norton Rose Fulbright (March 2019), China overhauls its Foreign Investment Regulatory Regime, available at: https://www.nortonrosefulbright.com/en/knowledge/publications/a885f4c3/ china-overhauls-its-foreign-investment-regulatory-regime. (last accessed 6 January 2020); Reuters (27 December 2018), China’s draft foreign investment law bans forced tech transfer, emphasizes reciprocity, available at https://www.reuters.com/article/us-china-economy-foreign-investment/ chinas-draft-foreign-investment-law-bans-forced-tech-transfer-emphasizes-reciprocityidUSKCN1OQ07T (last accessed 6 January 2020). 22 Financial Times (3 March 2019), Portugal PM warns on EU protectionism over China investment screening, https://www.ft.com/content/8bb21cf6-3ab6-11e9-b72b-2c7f526ca5d0 (last accessed 6 January 2020). 23 Meunier and Vachudova (2018), p. 1. 24 Ibid. 21

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government voiced concern about the Commission proposal, arguing that it could lengthen the UK’s screening procedure and “place additional burden and uncertainty on prospective investors, which is at odds with the UK’s stance as an open and liberal investment destination”.25 The Federation of German Industries (Bundesverband der Deutschen Industrie) also advocated for a more liberal approach.26 It argued, on the one hand, that the “final decision on whether an investment is prohibited, should remain in the hands of Member States”. On the other hand—and with a view to the reciprocity argument— it took the position that a level playing field should not be achieved through a restrictive framework but rather through a more active political policy of the EU Commission to increase market access abroad. The federation thus urged the Commission to “work towards more market access in countries in which protectionism prevails”.27

4 Contextualisation of the EU Screening Regulation Against this backdrop, the core provisions of the EU Screening Regulation have to be contextualised. It raises the questions which political calls have found access to the new Regulation and what that means for the future FDI policy of the EU. In a nutshell, the new Regulation creates a cooperation mechanism between the Commission and the Member States to coordinate screening decisions while leaving the question of granting market access with the individual Member State. The first part of the framework lays down a notification requirement of screened investments (Art. 6). In cases in which a Member State decides to review an FDI on the basis of security or public policy concerns, it has to notify both the Commission and the other Member States. It shall in particular provide information regarding the investor’s ownership structure, the target entity and its relevant activities. Based on this notification requirement, Member States have the opportunity to provide comments to the reviewing Member State if they consider that the FDI will affect their security or public order. The reviewing Member State in turn must give “due consideration” to such comments. Member States may also provide comments where the Member State in which the FDI takes place is not conducting a screening. They may do so based on information contained in public sources or provided to them by interested parties. 25 UK Department for International Trade (5 October 2017) Explanatory Memorandum for European Union Legislation and Documents, available at https://www.parliament.uk/documents/ lords-committees/eu-external-affairs-subcommittee/foreign-direct-investment/EM-foreign-directinvestment.pdf. Accessed 25 August 2019. 26 BDI (12 December 2017), Screening Foreign Direct Investment?, available at https://english.bdi. eu/media/publications/-?publicationtype¼Positions#/publication/news/screening-foreign-directinvestment/ (last accessed 6 January 2020). 27 Ibid.

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Importantly, the Commission, upon a review of the information provided, may also issue an opinion if (a) it considers that the FDI is likely to affect security or public order in one or more Member States or (b) the FDI is likely to affect projects or programmes of Union interest on grounds of security or public order—these will be set out in an Annex to the Regulation. Where at least one third of all Member States consider that the FDI will affect their security or public order, the Commission is required to issue an opinion. With regard to the topic of the chapter, the question has to be addressed how the terms “security and public order” should be interpreted. A very broad understanding can open the way for far-reaching protective measures, whereas a narrow interpretation of the term will limit restrictive measures to exceptional circumstances. To date, the criteria and factors applied in the substantive assessment have varied from Member State to Member State. While there has been a general shift over the last few years away from concerns limited to strictly military technologies to an everwidening list of sectors such as infrastructure and emerging technologies, each Member State has focused on different aspects.28 In this context, the Regulation sets out a non-exhaustive list of factors that Member States may take into account in their assessment. The Regulation groups areas for concern into five categories: (i) critical infrastructure (physical or virtual, including utilities, health, transport, finance, communications, data, defence and aerospace, electoral and financial infrastructure, and real estate crucial to sensitive facilities), (ii) critical and strategic technologies (wide-ranging technologies, including artificial intelligence, nano/bio/ quantum technologies, robotics, semiconductors, cybersecurity, energy storage, defence and dual-use items), (iii) critical inputs (commodities, raw materials, agriculture etc.), (iv) access to or ability to control sensitive information (including personal health or large-scale sensitive data) and (v) media freedom and pluralism. Thus, the regulation prescribes a rather broad understanding of security and public order covering different aspects of economic life. Interestingly, the regulation seems to go even further when it explicitly connects the involvement of a foreign government in the investment with the term security and public order. Article 4 (2) (a) lays down the policy that in determining whether a foreign direct investment is likely to affect security or public order, Member States and the Commission may also take into account in particular whether the foreign investor is directly or indirectly controlled by the government of a third country, including through ownership structure or significant funding. If this is to be seen as a stand-alone criterion—which the language of Article 4 indicates—then the involvement of a foreign government automatically becomes a security or public order issue irrespective of the question in which economic sector the investment is going to be made. This way, one could argue, the question of an economic level playing field becomes a security and public policy concern. However, looking at the Regulation as a whole, it is of importance to point out the non-binding character of the opinions and comments issued by other Member States

28

Nicolas (2014), p. 103 (116f.).

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or the Commission. Recitals 17 and 19 of the Regulation explicitly state: “The final decision in relation to any foreign direct investment undergoing screening or any measure taken in relation to a foreign direct investment not undergoing screening remains the sole responsibility of the Member State where the foreign direct investment is planned or completed.” So even if the Regulation offers a broad understanding of security and public order, the final decision of admitting or prohibiting a foreign direct investment remains with the Member States. Yet, a first move in the direction of harmonising screening mechanisms can be seen in the new transparency and information requirements contained in the Regulation. They should be seen as a welcomed move for both foreign investors and the public since FDI screening mechanisms often lack transparency, with limited information made public. The framework lays down the rule that Member States that already have such mechanisms must notify the Commission of their existing mechanisms within 30 days of the Regulation entering into force, and again if any amendments are made. Furthermore, all Member States are required to submit annual reports on FDIs into their territory, with those maintaining screening mechanisms required to provide information on their application. The Commission will then produce a public report on FDIs across the Union, as well as maintain a record of all national mechanisms. When information is requested by the Commission or other Member States, investors are expected to provide national regulators with details such as ownership structures and controlling shareholders, value of the FDI, products, services and business operations involved, the Member States involved, completion date and funding sources. Any failure to provide information must be justified by the Member State.

5 Conclusion The EU has historically been very open to FDIs and has opposed moves aimed at introducing EU-wide FDI screening mechanisms. In the discussions prior to the Regulation, strong voices have been raised to establish a screening mechanism that comprehensively addresses a lack of reciprocity with third countries and cases where state-owned or state-controlled companies undermine rules of fair competitiveness. The current framework should only be seen as a first, tentative step towards investment screening on the EU level.29 This is mainly due to the fact that the final decision in relation to investment screening, or any measure taken in relation to a foreign direct investment not undergoing screening, remains in the hand of the Member State where the foreign direct investment is planned or completed. Taking a closer look at the Regulation, one could, however, see signals that the EU might implement its own screening mechanism in the future. One argument for it is the legal basis on which the EU based the Regulation. Article 207 (2) Treaty on the

29

Bismuth (2018), p. 45.

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Functioning of the European Union (TFEU) falls into the exclusive competence of the EU and would enable the EU to require Member States to screen investments or even create its own mechanism carried out by the Commission. Furthermore, the now implemented reporting system could lay down the empirical basis for such a future, more comprehensive screening mechanism on the EU level. For now, however, the voices calling for a more restrictive and protective screening mechanism have only found little impact on the design of the Regulation. Protectionism has not (yet) returned to the EU.

References Austrian Federal Economic Chamber (12 December 2017) Position of the Austrian Federal Economic Chamber. Available at https://ec.europa.eu/info/law/better-regulation/initiatives/ com-2017-487/feedback/F8154_en?p_id¼111803 BDI (12 December 2017) Screening Foreign Direct Investment? Available at https://english.bdi.eu/ media/publications/-?publicationtype¼Positions#/publication/news/screening-foreign-directinvestment/ Bismuth R (1 January 2018) Screening the Commission’s regulation proposal establishing a framework for screening FDI into the EU. Eur Invest Law Arbitr Rev 3(1):45–60. https://doi. org/10.1163/24689017_00301004 Common Paper by the Economy Ministers of France, Germany and Italy. Available at https://www. bmwi.de/Redaktion/DE/Downloads/S-T/schreiben-de-fr-it-anmalmstroem.pdf?__ blob¼publication-File&v¼5 European Commission List of screening mechanisms notified by Member States. https://trade.ec. europa.eu/doclib/docs/2019/june/tradoc_157946.pdf Financial Times (31 August 2016) Europe lobby warns on China market barriers, available at https://www.ft.com/content/757f5246-6fde-11e6-a0c9-1365ce54b926 Financial Times (3 March 2019) Portugal PM warns on EU protectionism over China investment screening. https://www.ft.com/content/8bb21cf6-3ab6-11e9-b72b-2c7f526ca5d0 Hindelang S, Hagemeyer T (2017) Enemy at the Gates?: Die aktuellen Änderungen der Investitionsprüfvorschriften in der Außenwirtschaftsverordnung im Lichte des Unionsrechts. Europäische Zeitschrift für Wirtschaftsrecht 28(22):882–890 IndustriAll (2018) Policy Brief 2018-1, p. 5. Available at https://news.industriall-europe.eu/content/ documents/upload/2018/2/636552427060145606_PB2018-01-ScreeningFDIs-EN.pdf Jones A, Davies J (2014) Merger control and the public interest: balancing EU and national law in the protectionist debate. Eur Compet J 10(3):453–497. https://doi.org/10.5235/17441056.10.3. 453 Koenig C (2018) Current developments in foreign direct investment control. Eur Compet Regulat Law Rev 2(3):221–225 Kowalski P, Perepechay K (29 September 2015) International Trade and Investment by State Enterprises, OECD Trade Policy Papers No. 184, doi:https://doi.org/10.1787/18166873 Le Corre P (2018) Chinese investments in European countries: experiences and lessons for the “belt and road” initiative. In: Mayer M (ed) Rethinking the Silk Road. Palgrave Macmillan, pp 161–175. https://doi.org/10.1007/978-981-10-5915-5_10 Meunier S, Vachudova MA (19 September 2018) Liberal intergovernmentalism, illiberalism and the potential superpower of the European Union. J Common Mark Stud 56(7):1631-1647. Moran TH (2017) Can Europe “be open but not stupid” on foreign acquisitions by China? Trade and Policy Watch, Peterson Institute for International Economics. Available at https://www.piie. com/blogs/trade-investment-policy-watch/can-europe-be-open-not-stupid-foreign-acquisitionschina

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Nicolas F (2014) China’s direct investment in the European Union: challenges and policy responses. China Econ J 7(1):103–125. https://doi.org/10.1080/17538963.2013.874070 Norton Rose Fulbright (March 2019) China overhauls its Foreign Investment Regulatory Regime. Available at: https://www.nortonrosefulbright.com/en/knowledge/publications/a885f4c3/chinaoverhauls-its-foreign-investment-regulatory-regime Pandey G, Rovetta D, Smiatacz A (2019) How many barriers should a steeple chase have? Will the EU’s proposed regulation on screening of foreign direct investments add yet more delaying barriers when getting a merger deal through the clearance gate, and other considerations. Glob Trade Cust J 14(2):56–65 Reuters (27 December 2018) China’s draft foreign investment law bans forced tech transfer, emphasises reciprocity. Available at https://www.reuters.com/article/us-china-economy-for eign-investment/chinas-draft-foreign-investment-law-bans-forced-tech-transfer-emphasises-rec iprocity-idUSKCN1OQ07T Schuelken T (2018) Der Schutz kritischer Infrastrukturen vor ausländischen Direktinvestitionen in der Europäischen Union. Zum Vorschlag der EU-Kommission für eine Verordnung zur Schaffung eines Rahmens für die Überprüfung ausländischer Direktinvestitionen – KOM (2017) 487 endg. EuR Europarecht 53(5):577–592. https://doi.org/10.5771/0531-2485-20185-577 UK Department for International Trade (5 October 2017) Explanatory Memorandum for European Union Legislation and Documents. Available at https://www.parliament.uk/documents/lordscommittees/eu-external-affairs-subcommittee/foreign-direct-investment/EM-foreign-directinvestment.pdf

The Birth of the EU Screening Regulation Joanna Warchol

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The EU Needs to Ensure a Level Playing Field for Foreign Direct Investments . . . . . . . . . . . 3 How Does the Screening of FDI Fit in the Framework of EU Law? . . . . . . . . . . . . . . . . . . . . . . . 3.1 Free Movement of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Definition of Foreign Direct Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Security Reviews . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 From Idea to Regulation: The Evolution of the EU Screening Regulation . . . . . . . . . . . . . . . . . 4.1 EPP Group Proposal for a Union Act on the Screening of Foreign Investment in Strategic Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Light Bulb Moment: State of Union in September 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 The EC Proposal from September 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Position of the European Parliament as Adopted in May 2018 . . . . . . . . . . . . . . . . . . . . . . . 4.5 The Provisional First Reading Agreement (Trilogue) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 The Achievement of the First Reading Agreement: A Win-Win Situation . . . . . . . . . . . 5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

54 56 57 59 62 63 66 66 67 68 70 71 72 74 75

Abstract This chapter deals with the process that led to the adoption of the EU Screening Regulation. The chapter starts with a description of the political debate that sparked the idea to harmonise the screening of FDI in the EU. Having laid down the political and economic context, the author describes the legal context where the EU Screening Regulation was to fit in before presenting a detailed account of the legislative process, predominantly from the perspective of the European Parliament.

J. Warchol (*) European Parliament, International Trade Committee (INTA), Brussels, Belgium e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 53–76, https://doi.org/10.1007/16495_2020_1, Published online: 28 August 2020

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1 Introduction Foreign direct investment is an important source of economic growth in the EU while sometimes it can be a valid concern for our citizens. This can be the case if the investor is a state-owned enterprise from a third country, which is lacking a market economy status or if the investment is in strategic infrastructure projects, communications or key future technologies. There is a need for the EU to safeguard a level playing field when trading with state-owned enterprises of third countries with planned (controlled) economy status. In case of countries lacking market economy status, political interlocutors such as governments of one-party states or the military are controlling major aspects of the economy. Moreover, administrative acts can determine economic decisions as well as prices, and the state can provide generous subsidies to its industries in order to boost its global competitiveness. The year 2016 has been marked by the press1 as the year in which Chinese foreign direct investment (hereafter FDI) into the EU hit all-time high records, jumping to almost $200 billion US dollars within a year, nearly 50% more than over the last ten years combined. On the other hand, the EU FDI flow to China continued to decline drastically to $8 billion US dollars from 11.8 billion in 2014, proving the growing imbalances,2 while simultaneously slow growth and persisting hurdles to market access in China were an issue. The record high Chinese FDI flow to the EU was a result of different circumstances. First of all, the launch of China’s new Going Global Strategy3 around the year 1999, which focused on investment capitalisation abroad and not on the domestic labour market or the removal of trade barriers. The impetus for the

1

L. Cerulus, J. Hanke, J. Posaner, G. Paravici, Enter the dragon, Chinese investment in crisis-hit countries gives Beijing influence at the European Union’s top table, Politico, 10/4/2017; G. Grieger, Foreign direct investment screening. A debate in light of China - EU FDI flows, EPRS, PE 603.941, May 2017, pp. 1–12; The text of the Article refers to the EU Regulation 2019/452 of the EP and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, OJ L 791, 21 March 2019, pp. 1–14; quoted hereafter: EU Screening Regulation. 2 T. Hanemann, M. Huotari, Chinese investment in Europe. Record flows and growing imbalances, Merics No. 3 2017, pp. 1–44; See under: https://www.merics.org/en/papers-on-china/chineseinvestment-europe-record-flows-and-growing-imbalances; G. Grieger, FDI screening, ibidem, p. 3 et seq. 3 Going Global Strategy (also referred to as the Go Out policy) was a strategy initiated in 1999 by the Chinese government to promote Chinese investments abroad. China Council for the Promotion of International Trade (CCPIT) has lunched several programs to assist domestic companies in order to expand to international market such as among others increase Chinese FDI or expand financial channels for Chinese companies operating in the EU and USA. L. Yushan, China’s go out policy - A review on China’s promotion policy for outward foreign direct investment from a historical perspective, Working paper 244, 26 September 2018, Centre for Economic and Regional Studies HAS, of the Hungarian Academy of Science, See under: http://www.vki.hu/news/news_1267.html.

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‘invasion’ of foreign capital markets in Europe then followed with the arrival of President Xi Jinping4 and the start of the One Belt One Road (OBOR) strategy.5 This has led to new additional funding tools for ‘Chinese investors’, such as the Silk Road Fund (SRF) and the Asian Infrastructure Investment Bank (AIIB), to facilitate the acquisition of companies. Moreover, two blueprints served to accomplish the above strategy: China’s 13th five-year plan (2016–2020) for innovationdriven growth and the Made in China 2025 strategy, which aims to create ‘national champions’ in ten high-tech manufacturing sectors.6 Largely overlooked by the Europeans, China went through significant structural changes over the last decades and developed from being predominantly an exporter of textiles to an exporter of high-tech products. According to an OECD Report,7 the structural changes in nearly all sectors were accompanied by a significant increase in the export of the domestic value-added content. This reflected the Chinese ability to upgrade within the production value chain, either through increased specialisation in higher value-added activities or increased participation (spillovers) by upstream intermediate suppliers. For Chinese investors, the EU continued to be a favourite destination. Chinese FDI in the EU totalled more than 35 billion EUR in 2016, an increase of 77% from 2015. The ‘Big Three’ European economies, namely Germany, the UK and France, together accounted for nearly 60% of the total Chinese investment value in Europe.8

4 Decision taken at the Third Plenary Session of the 18th Central Committee of the Communist Party of China, held in Beijing from 9 to 12/11/2013. The plenum pointed out: The basic economic system with public ownership playing a dominant role and different economic sectors developing side by side is an important pillar of the socialist system with Chinese characteristics and is the foundation of the socialist market economy. Both the public and non-public sectors are key components of the socialist market economy, and are important bases for the economic and social development of China. We must unswervingly consolidate and develop the public economy, persist in the dominant position of public ownership, give full play to the leading role of the state-owned sector, and continuously increase its vitality, controlling force and influence. See under: http://www.china.org. cn/china/third_plenary_session/2014-01/15/content_31203056.htm. 5 The One Belt One Road (OBOR), the brainchild of Chinese President Xi Jinping, is an ambitious project that focuses on improving connectivity and cooperation among multiple countries spread across the continents of Asia, Africa, and Europe. Dubbed as the ‘Project of the Century’ by the Chinese authorities, OBOR spans about 78 countries. The project involves building a big network of roadways, railways, maritime ports, power grids, oil and gas pipelines, and associated infrastructure projects. See more under: www.investopedia.com and the chapter by Bu in this Volume, The One Belt and One Road (OBOR) Initiative: Reconceptualisation of State Capitalism vis-à-vis Remapping of Global Governance?. 6 G. Grieger, FDI screening, ibidem, p. 4 et seq. 7 OECD-WTO, Trade in Value Added: China, October 2015, p. 2 et seq. See under: https://www. oecd.org/sti/ind/tiva/CN_2015_China.pdf; Ch. Criscuolo, J. Timmus, N. Johnstone, The relation between GVCS and productivity, OECD, 6/9/2016, p. 2 et seq. See under link: https://www.oecd. org/global-forum-productivity/events/Relashionship_btween_GVCs_and_productivity_6_09_ 2016.pdf. 8 T. Hanemann, M. Huotari, Chinese investment, ibidem p. 2 et seq.; Scissors (2017), pp. 2–10; S. Adams, T. Gratowski: Global Counsel, The meaning of screening: Germany, the EU and

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With more than 11 billion EUR of completed deals, Germany was by far the largest recipient, accounting for more than 31% of the total European investment from China.9 According to the Merics’ report, China’s biggest investments into European technology and advanced manufacturing companies in 2016 were Tencent’s 6.7 billion EUR acquisition of Finish gaming firm Supercell and Midea’s 4.4 billion EUR acquisition of German robotics company Kuka.10 In the case of the Aixtron deal with China’s Fujian Grand Chip Investment Fund (a US$723-million takeover offer), the deal was cancelled after the Obama administration blocked the sale of the USA’s part of the company’s assets.11

2 The EU Needs to Ensure a Level Playing Field for Foreign Direct Investments These economic developments fuelled a hostile political debate about foreign state involvement in takeovers and mergers in the EU single market. The debate raises concerns about the risk of a loss of core high-industrial technology assets as strategic sectors transfer to countries lacking market economy status, such as China, Russia and Saudi Arabia. As an example, investment to the EU from Brazil grew tenfold, and investment from Russia more than doubled. The EU Member States hence came to the conclusion that foreign direct investment might not be only about ‘stealing’ key technologies but also about gaining political control under the motto ‘divide and conquer’12 the EU. The EU Member States have realised that none of them, even the big ones, can face global challenges alone. The EU of the twenty-first century requires common EU solutions for investment relations with third countries lacking openness and reciprocity. Legal instruments already existing in some Member States were not

Chinese technology transfer, 26/7/2017, p. 1 et seq. See under: https://www.global-counsel.co.uk/ analysis/insight/meaning-screening-germany-eu-and-chinese-technology-transfer. 9 MERICS, Core European Economic Are in the Focus of Chinese Investors, Chinese FDI in the EU-28 by country group 2008–2016, See under link: https://www.merics.org/sites/default/files/ 2017-08/MPOC_03_Update_COFDI_Figure_4.jpg. 10 T. Hanemann, M. Huotari, Chinese investment, ibidem p. 2 et seq. Others example were such as follows: HNA’s for 2.3 billion EUR acquisition of Irish aircraft leasing firm Avolon, Beijing Enterprises’ 4 billion EUR purchase of Germany’s EEW Energy, Ctrip’s 1.6 billion EUR acquisition of British travel platform Skyscanner, Shandong Ruyi Technology’s 1.3 billion EUR investment in French fashion company SMCP Group and Wanda AMC’s 1.1 billion EUR acquisition of U.K Odeon & UCI cinema group. 11 China’s Fujian Grand Chip Investment Fund has dropped its takeover bid for chip equipment maker Aixtron after the United States blocked the deal on security grounds, throwing the German company’s future into doubt. M. Sheahn, China’s Fujian drops Aixtron bid after Obama blocks deal, Reuters Business news 8/12/2016; See under: https://www.reuters.com/Article/us-aixtron-ma-fujian/chinas-fujian-drops-aixtron-bid-after-obama-blocks-deal-idUSKBN13X16H. 12 Meunier (2014), pp. 996–10160.

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granting reciprocity and fair competition competitiveness at the EU level. This is why it was necessary to establish a level playing field by adopting a common European approach. The first impulse for restrictions on Chinese investment came in a letter sent by France, Italy and Germany in February 2017 asking the European Commission (EC) to work on legal measures for a screening that would grant additional protection based on economic criteria taking into account, and with reference to, the Commission’s expertise.13 Member States pointed out their concerns about the lack of reciprocity and a possible sell-out of European expertise, which we are currently unable to effectively combat with existing instruments.14 As a model for the EU, they indicated the US Committee on Foreign Investment (CFIUS), which reviews financial transactions in cases in which a foreign entity might be able to control an American business and/or the investment might have implications for national security. The EC reflection paper of 10 May 2017 on Harnessing Globalisation15 recognised increasing concerns about foreign investors’ strategic acquisitions of European companies with key technologies. The conclusions called into question the capacity of the current regulatory measures of the Member States and therefore recommended addressing them within a new framework at the EU level.

3 How Does the Screening of FDI Fit in the Framework of EU Law? The EU single market is one of the world’s most open environments for the free flow of international capital, while Member States have the fewest restrictions for FDI in the world.16 Moreover, EU investors are protected by the general principles of non-discrimination, proportionality and legal certainty. The Lisbon Treaty has fundamentally modified the scope of the EU’s exclusive competences and the decision-making procedures in the area of the Common Commercial Policy (CCP).17 A major modification is the inclusion of FDI into the EU’s exclusive

13 Letter to DG TRADE Commissioner C. Malmström, from the French, German and Italian governments submitted to the EC, February 2017; Seen under: https://www.bmwi.de/Redaktion/ DE/Downloads/S-T/schreiben-de-fr-it-an-malmstroem.pdf?__blob¼publicationFile&v¼5; L. Cerulus, J. Hanke, J. Posaner, G. Paravici, Enter the dragon, ibidem, pp. 1 et seq. 14 G. Grieger, EU framework for FDI screening, EPRS, PE 614.667, February 2019, p. 6. 15 EC reflection paper on Harnessing Globalisation, 10/5/2017; J. Schuster, EP report on harnessing globalisation: trade aspects, final (2018/2005(INI), PE A8 0319/2018. 16 The OECD expressly acknowledged it in its FDI Regulatory Restrictiveness Index, which measures statutory barriers against foreign investment in over 60 countries. EC working document, SWD (2017) 297 final, Brussels, 13/9/2017. 17 Hindelang and Maydell (2011), pp. 1–29. The inclusion of FDI in the CCP has attracted great interest and discussion among international scholars, mostly because there was neither any

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competence for the CCP.18 The structure of Article 207 Treaty on the Functioning of the European Union (TFEU) is more specific and straightforward than the structure of ex-Article 133 TEC, which contained complicated inter-paragraph references and derogations. In addition to the areas already included in ex-Article 133(1) TEC, Article 207 (1) TFEU second sentence now comprises competences for trade in services, the commercial aspects of intellectual property and FDI. While some aspects of FDI already fell under the EU’s exclusive competence under ex-Article 133 (1) TEC, the competence for other aspects were shared as part of the rules of the internal market. Under ex-Article 133 TEC, some aspects remained within the Member States’ competences, in particular those related to postestablishment treatment of FDI, such as specific provisions on the rules and conditions for expropriation of foreign-controlled undertakings. The EU’s competence and decision-making rules, as provided in Articles 207 and 218 (6) TFEU, have increased significantly the role of the European Parliament in shaping trade policy. In cases of expanded EU exclusive competence (‘EU only’), the powers of the European Parliament have been considerably increased. The EU internal legislative trade measures in the field of CCP can now be adopted in a co-decision by the EP and the Council (ordinary legislative procedure), while unanimous decision-making applies in the case of conclusion of international agreements (consent procedure). Awareness of these developments led the EU legislator to choose Article 207 TFEU over Article 114 TFEU as the legal basis for the EU Screening Regulation. In view of economic developments related to FDI in the EU in 2016, it was obvious that the EU needed to introduce a legally binding mechanism applying across the entire EU in order to tackle cross-border unfair trade practices, especially bearing in mind that EU decisions or actions should not be challenged by Member States. When looking for common ground (guiding principles) for legislation on FDI, it turned out that the applicability of Article 114 TFEU for this purpose was not unchallenged, especially in the context of the EU’s new exclusive trade competences. Article 114 TFEU confers upon the EU the competence to enact ‘measures for the approximation’ (also known as ‘harmonisation’) of national rules regarding the establishment and functioning of the single market. Currently, Article 114 TFEU is the most important legal basis for the harmonisation of substantive rules of private law. Article 114 TFEU allows the EU to regulate those elements of private law (companies), which create obstacles to trade in the internal market. However, it does not specify the types of legal acts that may be adopted on its basis as it speaks only

definition of the term FDI in the Treaties, nor any clarification of the exact scope of the FDI under the CCP. See more under: Shan and Zhang (2010), pp. 1049–1050 et seq.; Lentner and Fina (2016), pp. 419–440. 18 The CCP is one of five scopes of exclusive competence in the TFEU, together with the customs union, the establishment of competition rules necessary for the functioning of the internal market, monetary policy for the Member States whose currency is the Euro, and the conservation of marine biological resources under the common fisheries policy.

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about ‘measures’. The most frequently used legal form is directive. Though harmonisation can take the form of full harmonisation (maximum) or partial or minimum harmonisation, all have advantages and disadvantages. It is also worth mentioning that Article 115 TFEU—in view of the requirement of unanimity in the Council—has lost much of its practical significance in the field of private law. Furthermore, reaching a political compromise on the exact level of harmonisation between Member States is very difficult in terms of defining the scope of directives, as EU experience over the last years has shown. Take as an example the improvement of supply security in the field of energy or the shrinking scope of the Directive on consumer rights.19 To reach a political compromise on the exact level of harmonisation in a maximum harmonisation directive is very difficult: although the EC, for example, was to replace eight of the existing consumer directives initially, it ended up replacing only two of them. The EC made an effort to adopt various legislative acts in order to improve the security of supply in the field of energy of the EU, in cases where the gas or electricity system of a Member State, controlled by a thirdcountry operator,20 was not bringing the expected results. In the end, the EU institutions learned a lesson from the final EU impact assessments of the security of internal market supply in the field of gas and energy where the investor is ultimately owned or controlled directly or indirectly by an undertaking of a third country. This opened a way for the Members of the International Trade Committee in the EP to present a draft proposal for a regulation on FDI based on Article 207 TFEU.

3.1

Free Movement of Capital

Among the four fundamental freedoms that underpin the EU single market (free movement of people, goods, services and capital), the free movement of capital21 is the newest and the most comprehensive in scope22 because it includes third-country dimensions. For companies, it means being able to invest in and to own other European companies across borders.

19 Commission Communication on European Contract Law and the revision of the acquis: the way forward, 11.10.2004, COM(2004) 651 final, p. 3. 20 The Electricity and Gas Directives of the so-called Third Energy Package namely: Directive 2009/ 72/EC concerning common rules for the internal market in electricity; Directive 2009/73/EC concerning common rules for the internal market in natural gas, NIS Directive 2016/1148 on network infrastructure security and Critical Infrastructure Directive 2008/114/EC. More about Directives in context of security reviews under Sect. 3.3. 21 Since the introduction of the Maastricht Treaty in 1992, the legal framework for the free movement of capital includes: treaty provisions, protocols and declarations and transitional measures granted by the acts of accession to new Member States. 22 Hindelang and Maydell (2011), p. 5.

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In the absence of a definition of ‘movements of capital’ in the TFEU, the CJEU has ruled that the definitions in the nomenclature annexed to Directive 88/361/EEC23 can be used. According to these definitions, cross-border capital movements include foreign direct investments, real estate investments or purchases, securities investments (e.g. in shares, bonds, bills, unit trusts), granting of loans and credit, and other operations with financial institutions, including personal capital operations such as dowries, legacies, endowments etc. Article 63 of the TFEU prohibits all restrictions on capital movements not only within the EU but also between Member States and countries outside the EU in such cases where a free trade agreement (FTA) exists between them. However, further provisions in the Treaty stipulate a number of exceptions to the principle of free movement of capital, in particular to prevent problems related to taxation, prudential supervision of financial institutions, public policy, public order and security. Exceptions from its broad scope have been interpreted tightly by the CJEU in its settled case law, notably in the case law regarding some Member States’ ‘golden share’ arrangements with privatised, formerly state-owned enterprises.24 Golden shares (GS) remain in the property of the State, granting it special powers and allowing it to exercise control over the company’s management, which could otherwise only be exercised by a majority shareholder. The EC as a guardian of the treaties enforces the free movement of capital by monitoring capital flows and ensuring that the Member States properly apply the rules of the treaties.25 From an international trade perspective, the free movement of 23 Council Directive 88/361/EEC of 24/6/1988 for the implementation of Article 67 of the Treaty. The CJEU has the final say in interpreting treaty provisions, and there is extensive case law in this area. See under link: https://eur-lex.europa.eu/legal-content/EN/ALL/?uri¼CELEX% 3A31988L0361. 24 Under the then EU law GS had to be justified on the grounds of exceptions laid down in the Treaty. They had to meet legal certainty and proportionality requirement as an imperative that could not be easily satisfied. The CJEU has evaluated the legality of GS in fifteen cases and only in one instance their application has been considered as justified. These condemning judgments are of declamatory character and it is up to the national government to choose how to comply. It was the case with the CJEU’s landmark ruling on C-112/05 EC v Germany which is one of the most famous and longest-running cases in Community history the so called WV case. Other cases: EC v. Italy, C-58/99, CJEU of 23/5/2000; EC v. France, C-483/99, 4/6/2002; EC v. Belgium, C-503/99, 4/6/ 2002 (justified); EC v. Portugal, C-367/98, 4/6/2002; EC v. United Kingdom, C-98/01, 13/5/2003; EC v. Spain, C-463/00, 13/5/2003; EC v. Italy C-174/04, 02/6/2005; Joined cases C-282/04 and C-283/04, EC v. Netherlands, 28/9/2006; Federconsumatori v. Commune di Milano, C-463/04 and C-464/04, referred to the Court for preliminary ruling, 6/12/2007; EC v. Germany, C-112/05, 23/10/ 2007; EC v. Spain, C-274/06, 14/2/2008; EC v. Spain, C-207/07, 17/7/2008; EC v. Italy, C-326/07, 26/3/2009; EC v. Portugal , C-171/06, 8/7/2010; EC v. Portugal, C-543/08, 11/11/2010; J. Ganza, Free movement of capital and Golden Shares in Volkswagen: unexpected twist or foreseeable outcome?, London EU Law Blog KSLR, 7/4/2014. 25 EC Capital Markets Union, EC provides guidance on protection of cross-border EU investments, Brussels, 19/7/2018. Annual working documents on free movement of capital in the EU. See under: https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/ 2019-capital-market-monitoring-analysis_en.pdf. Every year, the EC publishes working documents that describe the developments on capital movements and investment flows across the EU. The EC

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capital has the broadest scope of all treaty freedoms.26 It is the only freedom that goes beyond the boundaries of the EU internal market based on Articles 26 and 114 TFEU and includes capital flows between the EU and third countries, as usually stipulated in FTAs and investment protection agreements (IPA). Nevertheless, this freedom cannot exist without sensible safeguards and protections. EU countries are legally allowed to take precautions to ensure that foreign investment does not expose them to public security threats, and the EU itself can act in cases of emergencies as well as in normal economic circumstances to restrict this freedom. The matter of ‘investment movement’ is principally a single market subject linked to the freedom of establishment and the free movement of capital. Scrutiny in the internal market in the context of FDI was usually carried out in order to verify that mergers and acquisitions comply with EU law. It should be noted that before the Lisbon Treaty, the EC also dealt with investment in the form of the pre-establishment perspective, namely market access. In order to make it more efficient, the essential rules governing the EU CCP and its scope have been enlarged to place foreign direct investment as the exclusive competence of the EU through the introduction of Article 207 in the TFEU by the Lisbon Treaty. The EU carries out activities on FDI based on its exclusive competence, as defined by Article 3(1) (e) TFEU, and it is not subject to a subsidiarity surveillance by national parliaments. However, according to well-established best practices, proposals based on an exclusive EU competence are nevertheless transmitted to national parliaments as part of the formal political dialogue within the Conference of Parliamentary Committees for Unions Affairs (COSAC),27 which

first works with the country concerned to address the issue through dialogue with the EU. If this is unsuccessful, it may start formal infringement proceedings against the country. 26 Hindelang and Maydell (2011), pp. 1–29; Lentner and Fina (2016), pp. 419–440. 27 Conference of Parliamentary Committees for Unions Affairs (COSAC) brings together the EU affairs committees if national Parliaments, as well as Members of the EP. Webpage IPEX is a platform for electronic exchange of EU-related information between national Parliaments in the EU. Accessible under: https://secure.ipex.eu/IPEXL-WEB/home/home.do, E.g.: the position transmitted by the French Senate stressed the need for an evolving definition of the EU’s strategic interests and that the list of factors, which may be considered in the screening process, should be non-exhaustive. Furthermore, the final foreign investor should be identified for the sake of transparency, the coordination group should be permanent and tasked with working towards the convergence of national FDI screening mechanisms. See under: https://www.senat.fr/ue/pac/ EUR000003525.html; The Italian Senate called for an enhanced EC competence and for its advisory opinions to have more strength and validity. It advocated that an EC opinion may be requested by an EU Member State. In case the notion of control is deemed too vague, the measures taken should be scaled according to different forms of control. See under: http://documenti.camera. it/apps/nuovosito/Documenti/DocumentiParlamentari/parser.asp?idLegislatura¼17& categoria¼018&tipologiaDoc¼documento&numero¼100&doc¼intero; The German Bundesrat voiced concern about the scope of the EC’s right to screen FDI that may have an impact on projects or programmes of Union interest. As these are broadly defined and the list provided is non-exhaustive, this would allow several forms of FDI to fall under the procedure where the EC has stronger rights. It argues that the notions of security or public order are vague and do not provide legal certainty as regards the EC’s power to intervene. It stresses that the requirements of the

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allows for an exchange of views to find common positions between national parliaments, the EP and the EC. According to Article 10 of Protocol (No. 1) on the inter-parliamentary cooperation and role of national parliaments in the EU of the Treaty of Lisbon, COSAC may submit any contribution it deems appropriate to the attention of the EP, the Council and the EC. According to Article 12 TEU, national parliaments ‘contribute actively to the good functioning of the Union [. . .] by taking part in the inter-parliamentary cooperation between national Parliaments and with the European Parliament’.

3.2

Definition of Foreign Direct Investment

It is difficult to combine the formulation of FDI with the scope of control.28 Moreover, recent formulations in the EU FTAs and IPAs, besides offering a list of industry sectors or a list of sensitive products/technologies, are very limited with simplified wording on investment, such as ‘a certain duration and other characteristics such as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk’.29 Basically, the CJEU opinion on the FTA with Singapore30 has reconfirmed the EU’s exclusive competence on FDI, except for the parts on arbitration and investment protection, as well as portfolio investments.31 The CJEU opinion on the FTA with Singapore partially confirmed the expectations of the European Commission and the European Parliament with tangible formulations, such as ‘it is settled case-law that direct investment consists in

proposal for a regulation on FDI must not create a culture of control and a bureaucratic burden undermining the EU's competitiveness. See under: https://www.umwelt-online.de/PDFBR/2017/ 0655_2D1_2D17.pdf. 28 EC Interpretative guidelines on Regulation (EC)1008/2008 - Rules on Ownership and Control of EU air carriers C(2017) 3711 final, Brussels, 8/6/2017; See under link: https://ec.europa.eu/trans port/sites/transport/files/c20173711-guidelines-ownership-control-carriers.pdf. More about: At a glance, CJEU opinion on the EU-Singapore Agreement, EPRS May 2017; CJEU opinion on FTA Singapore 2/15 on 16/5/2017; See inter alia: Judgments of 12 December 2006, Test Claimants in the FII Group Litigation, C-446/04, EU:C:2006:774, paragraphs 181 and 182; of 26/3/2009, Commission v Italy, C-326/07, EU:C:2009:193, paragraph 35; and of 24/11/ 2016, SECIL, C-464/14, EU:C:2016:896, paragraphs 75 and 76; OECD guidelines best practices definition of ‘control’ and ‘effective’ and substantial influence. 29 The provisions of CETA from 2017; EU-Vietnam FTA provisions from 2016, EU-Singapore FTA provisions from 2015, TTIP Commission draft text in 2017. 30 CJEU opinion on FTA Singapore 2/15 on 16/5/2017; Full text of the CJEU Ruling under the link: http://curia.europa.eu/juris/document/document.jsf; jsessionid¼D0D3C0681A9EDCEC997018C27CEF7FC5?text¼&docid¼193964& pageIndex¼0&doclang¼en&mode¼req&dir¼&occ¼first&part¼1&cid¼3948262. 31 Some experts consider that competences in terms of free movement of capital remain shared in view of the Article 4 (2) TFE, even if Article 65 TFEU limits this competence. Dimopoulos (2012).

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investments of any kind made by natural or legal persons which serve to establish or maintain lasting and direct links between the persons providing the capital and the undertakings to which that capital is made available in order to carry out an economic activity. Acquisition of a holding in an undertaking constituted as a company limited by shares is a direct investment where the shares held by the shareholder enable him to participate effectively in the management of that company or in its control.’32 In the absence of a common definition of control at the EU level, there was too much room for interpretation and discretionary appreciation. Therefore, the EP proposal for an EU Screening Regulation set up the ambitious goal to introduce a precise definition of FDI in order to tackle the deficits of the treaty provisions as well as the CJEU ruling on Singapore.33 The following definition of FDI was introduced in Article 2 of the EU Screening Regulation: ‘Foreign direct investment’ means an investments of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in a Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity.

3.3

Security Reviews

Though the OECD acknowledged Europe as an open investment regime for the FDI,34 the EU has still no single foreign direct investment screening mechanism comparable to well-established schemes such as in Australia, Canada, Japan, the USA etc. Currently, only 14 out of the 28 Member States have an operational screening mechanism on grounds of security or public order review.35 The systems vary widely, and countries do not coordinate their approaches even when foreign direct investment might affect multiple Member States in the EU. Until 2010, no formal coordination among Member States or between Member States and the EC existed, except for national rules for the protection of

32 CJEU opinion on FTA Singapore 2/15 on 16/5/2017; paragraph 80. See inter alia judgments of 12/12/2006 Test Claimants in the FII Group Litigation, C-446/04 EU:C:2006:774 (paragraphs 181 and 182); 26/3/2009 Commission v Italy, C-326/07, EU:C:2009:193 (paragraph 35); and of 24/11/2016, SECIL, C-464/14, EU:C:2016:896, (paragraphs 75 and 76). 33 CJEU opinion on Singapore 2/15, ibidem. 34 OECD report quoted in EC working document, SWD (2017) 297 final, Brussels, 13/9/2017. 35 In 2018, the following Member States had security review mechanisms in place: Austria, Denmark, Germany, Finland, France, Latvia, Lithuania, Italy, Poland, Portugal, Spain, Hungary, the Netherlands, and the United Kingdom.

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infrastructure relevant for security of supply in the energy sector commissioned by the EC.36 When speaking about secure gas deliveries from third countries to the EU, the only legal basis for the Internal Market Regulation on the security of gas supply or the energy sector in Europe was Articles 194 and 222 TFEU and the guiding principle of solidarity,37 as expressed in the Treaties. Over the last ten years, the EU has adopted numerous legislation, namely directives for the energy sector.38 The aim was to grant security review to safeguard the Union’s energy security and to obtain continuity of energy supply to Europe from third countries, as well as improving the integrity of critical infrastructure or MS solidarity in the field of energy and gas, while respecting MS competences in this sensitive sector. Based on experiences made with the energy sector, the EU Screening Regulation does not envisage integrating the already existing national screening mechanisms. Therefore, security screening is conducted independently from merger control reviews. The cross-border effects of acquisitions by non-EU investors in certain sectors pose difficult challenges on the effectiveness of the EU’s fragmented system of monitoring of FDI inflows when it comes to responding adequately to new global challenges. As stated in the explanatory memorandum and in recital 23 of the regulation, foreign direct investment may take the form of mergers, acquisitions, or joint ventures that constitute concentrations falling within the scope of the EU Merger Regulation.39 As mentioned above, Article 63 of the TFEU prohibits all restrictions of the free movement of capital, but Member States still retain some possibilities to restrict it: by invoking grounds of either public policy or public security, as explicitly

36 EC, Review of national rules for the protection of infrastructure relevant for security of supply, final report, February 2018; The regulatory base which has triggered that kind of masseurs for energy sector was the EU Regulation on security of Gas Supply (EU) No. 994/2010. It has introduced the EC coordination mechanism among Member States, with information exchange among them for purpose of energy/gas solidarity, while preserving the Member States exclusive rights on security. A table overview can be seen under G. Grieger, EU framework for FDI, ibidem, p. 3. 37 New Regulation on security on gas supply has been introduced: EU Regulation 1938/2017. Fleming (2019), pp. 102–110. 38 The Electricity and Gas Directives of the so-called Third Energy Package (Directive 2009/72/EC concerning common rules for the internal market in electricity; Directive 2009/73/EC concerning common rules for the internal market in natural gas) contain provisions requiring the assessment of security of supply implications for the MS concerned but also the EU as a whole where the gas or the electricity transmission system of a MS is controlled by a 3th country operator. The Regulation on Security of Gas Supply focuses specifically on security of supply concerns and requires MS to carry out Risk Assessments, at national and regional level, assessing all possible risks for the gas system, including the risks associated to the control of infrastructure relevant for security of supply by third country entities, and to prepare comprehensive Preventive Action Plans and Emergency Plans with measures to mitigate those risks. To mention are the NIS Directive (Directive 2016/1148 on network infrastructure security) as well as the Critical Infrastructure Directive (Council Directive 2008/114/EC). 39 Council Regulation (EC) No. 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation), OJ L 24, 29/1/2004, pp. 1–22.

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mentioned in Article 65(1)(b) TFEU, which may not constitute protectionist measures. Any national measures imposed must be shown to be both necessary and proportional. Such prohibitions or restrictions must not constitute a means according to Article XX GATT, namely a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade,40 or invoke overriding reasons relating to the general interest, e.g. general exception such as environmental protection, town and country planning, and consumer protection or EU overriding interest.41 Screening of foreign direct investment is the sole responsibility of EU Member States under EU law, and national security exceptions are formulated only in Article 4 (2) of the Treaty on the European Union (TEU) and in Article 346 (1) b) TFEU. Article 346 TFEU foresees a possibility for Member States to derogate from the single market principle for the protection of the essential interests of its security. Consequently, as this provision derogates from the basic principle, measures taken by Member States under these provisions are subject to a proportionality test (discrimination/restrictions) and must be reported to the EC. The protection of essential security interests is also known in international law.42 Therefore, the EU Member States’ national security reviews are based on one or both of the following legal bases. First of all, Article 346(1)(b) TFEU excludes the national defence sector and, hence, measures that the Member States consider necessary for the protection of essential interests relating to their security. Secondly, Article 65(1)(b) TFEU is a derogation from the fundamental principle of free movement of capital and payments, as enshrined in Articles 63–66 TFEU. The achievement of the EU Screening Regulation is an establishment of the cooperation mechanism between Member States with the EC taking a lead role, simultaneously combining the exclusive competences of the EU and the ‘shared involvement’ of Member States, with respect to the competences reserved only for Member States. Its final shape is similar to the EC’s assistance in the case of Member States’ national rules for the protection of infrastructure relevant for security in the energy sector.

40 Article XX General Agreements on Tariffs and Trade (GATT) allows WTO Members to introduce general exception such as stipulated under point a) until j). 41 G. Grieger, FDI screening, ibidem, p. 5 et seq. 42 Article XXI General Agreements on Tariffs and Trade (GATT) allows a WTO Member to introduce security exception and take ‘any action which it considers necessary for the protection of its essential interests’.

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4 From Idea to Regulation: The Evolution of the EU Screening Regulation 4.1

EPP Group Proposal for a Union Act on the Screening of Foreign Investment in Strategic Sectors

The existence of a national review mechanism in some Member States in energy sectors triggered vital political discussion with MEPs of the European People's Party Group about adjusting the imbalances related to FDI in sensitive sectors, especially in relation to third countries lacking fair and equitable treatment standards. In order to tackle the problem head-on, EPP Group Chairman Manfred Weber and International Trade Committee (INTA) Coordinator Daniel Caspary, together with eight other MEPs from the EPP Group, submitted an EP proposal for a Union Act on the Screening of Foreign Investment in Strategic Sectors.43 Furthermore, the EPP Group called on the EC to come up with a legislative proposal to ensure equal access to third countries for EU investors. It was suggested to put forward a proposal for a European Committee on Foreign Investment to monitor, investigate and control foreign investment in European enterprises. The proposal for a Union Act on the Screening of foreign investment in strategic sectors (EP B8-0302/2017)44 was tabled by ten INTA members at the European Parliament (EP) in accordance with rule 46 (2) Rules of the Procedure of the EP. According to the right of initiative granted to the EP under Article 225 TFEU, any member of the European Parliament may table a proposal requesting the Commission to propose a Union Act, which can be a new act or an amendment to an existing legislative act. The deliberation on the possible solution was put forward during an exchange of views on 19 June 2017 during an INTA meeting. During another INTA meeting, the EP’s coordinators of INTA decided to produce a report in the form of a legislative initiative (INL) with Member of the EP Frank Proust as the EP leading rapporteur. On 5 July 2017, the EP in its motion for a resolution on building an ambitious EU industrial strategy as a strategic priority for growth, employment and innovation in Europe called on the EC and Member States, firstly, to pay more attention to the role of foreign-based state-owned enterprises that are supported and subsidised by their governments, which is contradictory to the EU fair competition and state aid rules of the single market; secondly, to screen third-country FDI in the EU in strategic

43

The eight remaining MEPs of the EPP Group were: S. Cicu, F. Proust, G. Quisthoudt-Rowohl, V. Reding, T. Saifi, A. Schwab, A. Szejnfeld and I. Winkler. The original Proposal for the Union act on the Screening of Foreign Investment in Strategic Sector as it was tabled on 20 March 2017 can be found under No B [8-0000/2017]. See under following link: http://g8fip1kplyr33r3krz5b97d1. wpengine.netdna-cdn.com/wp-content/uploads/2017/03/2017-03-20-Draft-Union-Act-on-ForeignInvestment.pdf. 44 See under link: http://www.europarl.europa.eu/doceo/document/PV-8-2017-04-26-ITM-008_ EN.html?redirect.

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industries, infrastructure and key future technologies; and, thirdly, to screen other assets that are relevant for security while bearing in mind that Europe depends to a large extent on FDI. In conclusion of the joint motion for resolution, the EP asked the Commission to present a proposal on this matter in accordance only with Article 207 of the TFEU and without prejudice to existing bilateral and multilateral agreements.45

4.2

Light Bulb Moment: State of Union in September 2017

At that point, the debate was vigorous between Member States and the European Parliament with the simple assumption that from the international trade perspective, the most suitable solution would be comprehensive agreements with third countries on investment protection (e.g. EU–China Investment Agreement). The Member States were divided into blocks:46 Portugal, Greece, Spain and Hungary, which needed foreign investment to boost their economies for recovery versus Italy, Germany and France, which wanted a coordinated retaliation mechanism at EU level in order to better tackle global challenges. The Nordic and Anglo-Saxon countries, traditionally being liberal countries, and Poland feared that this kind of measures could be interpreted as a sign of protectionism at a time when Europe wants to reinforce its trade policy. In the end, the European Council in June 2017 diluted the proposal for an EU-level screening mechanism arguing that the EC should ‘tackle unfair and discriminatory trade practices and market distortions (. . .) ensuring swift and effective application through non-legislative implementing measures to make the EU trade practices and defence instruments more reactive and efficient and to propose, if necessary, complementary measures’.47

45

The text of the joint motion for a resolution can be found under the following link: EP resolution of 5/7/2017 on building an ambitious EU industrial strategy as a strategic priority for growth, employment and innovation in Europe. See under link: http://www.europarl.europa.eu/oeil/popups/ ficheprocedure.do?lang¼en&reference¼2017/2732(RSP); See under: http://www.europarl.europa. eu/doceo/document/TA-8-2017-0305_EN.html?redirect. 46 This geographical division was as well among the Eastern European Member States. E. Zalan, Macrons investment screening idea watered down by leaders, 23/6/2017, See under link: https:// euobserver.com/economic/138341. 47 The debate in the European Council on 22/23 June 2017 was vigorous, with Finland’s Trade Minister warning that introducing protectionist measures could spark a trade war—this led to the following formulation of the Council Conclusions. (European Council Conclusions, EUCO 8/17 (CO EUR 8 CONCL 3) point 17) ‘The European Council is convinced that trade and investment can only be free if it is also fair and mutually beneficial. The European Council therefore calls on the co-legislators to swiftly agree on modern, WTO-compatible trade defence instruments, which will reinforce the ability of the EU to effectively tackle unfair and discriminatory trade practices and market distortions. (. . .) It also calls on the EC and the Council to deepen and take forward the debate on how to enhance reciprocity in the fields of public procurement and investment. In this

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The Conclusion of the European Council was not satisfactory for a big block of the Member States, which sent an additional complementary letter to the EC in July 2017.48 This time, the letter included a legislative proposal with concrete rules, which Member States wished to see developed by the EC. As a follow-up, the EC came out with an initiative to analyse investments from third parties in strategic sectors, while fully respecting Member States competences and essential interests.49 Regrettably, this approach overlooked the problem that there was no level playing field, which caused perturbation in the free flow of capital in the FTAs in the first place since EU companies have to compete with foreign undertakings that are subsidised by state bodies. This disappointment triggered vital political discussions between Members of the European Parliament and resulted in various calls by Member States to the Commission to take a follow-up action. In the end, the EC prepared a legislative proposal on an investment screening regulation and announced it as part of a trade and investment package for Europe. When addressing the annual State of the Union in September 2017 in Strasbourg, President of the EC J. C. Juncker stated: Let me say once and for all: we are not naive free traders. Europe must always defend its strategic interests. This is why today we are proposing a new EU framework for investment screening. If a foreign, state-owned, company wants to purchase a European harbour, part of our energy infrastructure or a defence technology firm, this should only happen in transparency, with scrutiny and debate. It is a political responsibility to know what is going on in our own backyard so that we can protect our collective security if needed.50

4.3

The EC Proposal from September 2017

On 13 September 2017, the EC unveiled proposals for a regulation establishing a legal framework for the screening of foreign direct investment into the EU.51 In context, it welcomes the EC’s initiative to harness globalisation and, inter alia, to analyse investments from third countries in strategic sectors, while fully respecting Members States’ competences. The European Council will revert to this issue at one of its future meetings.’ 48 F. Bouyala Imbert, An EU FDI screening mechanism. Now the debate can really start, DG EXPO, note 2017_240, September 2017, p. 8 et seq. 49 Communication from the EC to the EP and European Council, the Council, from the European Economic and Social Committee of the Regions, Welcoming Foreign Direct Investment while Protecting Essential Interests, Brussels, 13/9/2017 COM(2017) 494 final. See under link: https://ec. europa.eu/transparency/regdoc/rep/1/2017/EN/COM-2017-494-F1-EN-MAIN-PART-1.PDF. 50 EC President, J. C. Juncker annual speech on State of the Union 2017, Strasbourg, 13/9/2017; See under link: http://europa.eu/rapid/press-release_SPEECH-17-3165_en.htm. 51 Procedure 2017/0224/COD, COM (2017) 487: Proposal for a regulation of the EP and of the Council establishing a framework for screening of foreign direct investments into the EU. See under link: https://eur-lex.europa.eu/procedure/EN/2017_224; Accessible under: https://ec.europa.eu/ transparency/regdoc/rep/1/2017/EN/COM-2017-487-F1-EN-MAIN-PART-1.PDF.

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parallel, the EC was about to start a detailed analysis of the FDI flows into the EU and set up a coordination group with Member States to help identify joint strategic concerns and solutions in the area of foreign direct investment. With this proposal, the EC came a bit closer to politicians’ legitimate fears while balancing them with Member States’ competences (as stated in the treaties). We have to keep in mind that the proposal of the EC on the legal framework at the EU level builds on the national review mechanisms, which were already in place within 13 Member States.52 This was highlighted by the EC following the European Council’s request that the regulation should not affect EU countries’ abilities to adopt any new review mechanisms or to remain without such national mechanisms, so that when it comes to decisions on FDI, the European framework will maintain the necessary national flexibility of the Member States regarding any investment screening. The new legal framework aimed at enabling Europe to preserve it’s, at least, essential interests and should embrace the diversity of Member States’ approaches to FDI screening and their exclusive responsibility for national security measures. In addition, the proposal should endorse adequate redress possibilities with regard to decisions adopted under these review mechanisms as well as a timeline for Member States’ introduction of FDI screening procedures. At the same time, projected was a non-exhaustive list of factors that may be taken into consideration in the screening process. The EC proposal for the EU Screening Regulation maintained the status quo regarding Member States’ prerogatives and therefore reaffirmed that Member States may maintain, amend or adopt FDI screening mechanisms on the grounds of security or public order, under the conditions proposed in the Regulation. Consequently, Member States would not be obliged to create an FDI screening mechanism and could retain their final decision-making power on FDI. The Regulation proposed to achieve a cooperation mechanism between Member States and the EC aimed at enhancing the coordination of screening decisions taken by the Member States concerned and to increase the awareness of Member States and the EC. To achieve the envisaged cooperation among Member States and the EC, the proposed EU Screening Regulation equipped the Commission with a new competence to screen FDI and to issue a non-binding opinion in cases when (a) an FDI in a Member State may affect the security or public order of projects or programmes ‘of Union interest’ and (b) an FDI in a Member State may affect the security or public order of another Member State. Finally, it proposed to introduce transparency and information requirements for screening and non-screening Member States linked to this new cooperation mechanism. In September 2017, the European Parliament welcomed the Commission’s initiative to open a legislative analysis on investment from third countries in strategic sectors, while fully respecting Member States’ competences.

52 EC, State of the Union 2017, Trade Package: EC proposes framework for screening of foreign direct investments, Brussels, 14/9/2017, IP/17/3183.

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Position of the European Parliament as Adopted in May 2018

A first exchange of views took place on the proposal with EP Standing Rapporteur Franck Proust (Member of the EP, France) during the INTA meeting of 22 November 2017. Then it was followed by a number of technical briefings organised to provide information, including a public hearing during the INTA meeting of 23 January 2018. In the meeting of 22 March 2018, INTA discussed the rapporteur’s working document and draft report.53 Three EP committees had given opinions on the INTA report.54 Amendments to the Proust report were considered in the INTA meeting of 24 April 2018. After preparatory meetings, INTA adopted its recommendation to the report on 28 May 2018 by 30 votes in favour to 7 votes against, with no abstentions. INTA simultaneously adopted the decision to enter into interinstitutional (trilogue)55 negotiations by 30 votes in favour to 6 against with 1 abstention. Pursuant to Article 69c of the EP’s Rules of Procedure, INTA was authorised by the Parliaments’ plenary on 5 June 201856 to start negotiations with the Council immediately. The provisional text as adopted in INTA incorporated the EP recommendations and added a new definition of ‘foreign government-controlled direct investment’ and complemented the non-exhaustive list of Union projects or programmes in the Annex of the planned Regulation. Moreover, the EPs recommended further items to the proposed factors, which have to be taken into account in the screening process, such as media and election infrastructure, as well as introduced new factors, which may be considered, such as (a) the degree of reciprocity of market access and (b) a level playing field for EU companies in the foreign investor’s market. Likewise, the EP intended to broaden the information exchange and dialogue among Member States in order to facilitate the Commission’s opinion and Member States’ comments on an FDI that could affect the security or public order of one or more Member States. The EPs’ goal was to increase peer pressure on Member States in which an FDI is planned, still without affecting its sovereign right to take the final decision on that FDI. Recommendation for the introduction of an Investment Screening Coordination Group as a second institutional coordination body (next to the envisaged 53 Procedure 2017/00224 (COD); See under link: https://oeil.secure.europarl.europa.eu/oeil/popups/ ficheprocedure.do?reference¼2017/0224(COD)&l¼en. 54 EP AFET Committee opinion PE 616.888 voted on 22/3/2018 (rapporteur G. Van Orden), EP ECON Committee opinion PE 615.441 voted on 5/4/2018 (rapporteur R. Zile), EP ITRE Committee opinion PE 615.451 voted on 25/4/2018 (rapporteur R. Buetikofer). 55 Council of the EU: Proposal for a Regulation of the EP and of the Council establishing a framework for screening of foreign direct investments into the EU. First reading: Confirmation of the final compromise text with a view to approve provisional agreement on 20 November 2018. 56 INTA Committee report tabled for plenary to start 1st reading inter-institutional negotiations; EP A8-0198/2018. See under link: http://www.europarl.europa.eu/doceo/document/A-8-2018-0198_ EN.html?redirect.

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FDI screening contact points) was supported by the majority of political groups in the EP. The proposal of the Socialist Group in the EP that stakeholders such as trade unions should be allowed to request Member States’ authorities to consider activating their FDI screening mechanism has found unexpected support among Members of the EP. After raising the level of internal information exchange, the EP recommended to introduce reporting obligation and required all Member States to submit an annual FDI report to the Commission and those Member States with FDI screening mechanisms to provide additional information on their application, based on which the Commission is to draw up and publish an annual report.

4.5

The Provisional First Reading Agreement (Trilogue)

The legislative process was addressed simultaneously in the Council as a second co-legislator, where the EU Member States united on a position that preserved their competences while limiting the role of the EC. On 13 June 2018, the EU Member States’ Permanent Representatives (COREPER) agreed on the Council’s position for the proposed regulation on the screening of FDI and asked the Presidency to start negotiations with the European Parliament as soon as possible. The inter-institutional confrontation between the EP and the Council and the EC (so-called trilogue phase) started on 10 July 2018. On 20 November 2018, after months of inter-institutional negotiations and legislative deliberation, the trade negotiators of the EU Ministers in the Council, led under the Austrian Presidency of the EU, agreed with the EP on a cooperation mechanism to screen foreign direct investment in a transparent and non-discriminatory manner and to enhance cooperation between Member States and the EC.57 The hard-achieved compromise agreement of the first reading was finally endorsed by the Committee of Permanent Representatives (COREPER) and approved in the EP’s INTA Committee, with 30 votes in favour to 4 votes against with 5 abstentions, on 10 December 2018. After a long debate on keeping a balance between openness and protectionism, EC exclusive and Member States’ shared competences, the outcome of the first reading agreement negotiation was satisfactory for the inter-institutional participants. As a result, the outcome of compromises stresses that the proposed regulation’s scope is strictly limited to FDI screening only on grounds of security or public order. It leaves the broadened list of factors non-exhaustive, adding among others directly or indirectly government-controlled investors and notably the media and electoral infrastructure. As a compromise between EU institutions, the final text of

57

Final Regulation (EU) 2019/452 of the EP and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, OJ L 791, 21 March 2019, pp. 1–14.

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the EU Screening Regulation splits the cooperation mechanism into two procedures: one, for FDI undergoing screening and, two, for FDI not undergoing screening. Summarising all institutional requests, the final text introduced the drafting of a nonbinding Commission opinion, which Member States are obliged to ‘give due consideration’ mandatory, if an FDI undergoes no screening and if one third of Member States consider that their security or public order may be affected. Additionally, the procedure allows Member States to make comments and the EC to issue a non-binding opinion up to 15 months after the completion of an FDI if the FDI has undergone no screening. It likewise allows Member States, which consider that an FDI in their territory may not undergo screening and is likely to affect their security or public order, to request the Commission to issue an opinion. Especially in a case where an FDI is likely to affect projects or programmes of Union interest, the respective Member States must ‘take utmost account’ of the Commission’s opinion and provide an explanation if this opinion is not followed. Finally, it enables EC screening on grounds of security or public order in cases in which the FDI in Member States may affect projects or programmes of Union interest. This includes projects and programmes in the areas of research (Horizon 2020), space (Galileo), transport (Trans-European Networks for Transport, TEN-T), energy (TEN-E) and telecommunications.

4.6

The Achievement of the First Reading Agreement: A Win-Win Situation

Despite the sensitivities of the topic, the new provisions on how to screen were voted on by the full House of the European Parliament on 14 February 2019, with 500 votes for, 49 against and 56 abstentions closing the legislative procedure. With these votes, the first-ever EU legal framework was established to screen FDI on grounds of security and public order. The EP persuaded the Member States to compromise on key elements. The EU Screening Regulation grants each Member State the sole responsibility for its national security and the right to protect its essential security interests, as stipulated in the Treaty. Nothing in the R regulation shall limit the right of each Member States to decide whether or not to screen a particular FDI within the framework of this Regulation. This concession paved the way for the Council to formally endorse the agreement in March 2019, closing the legislative procedure. The European Parliament’s negotiators were particularly happy that the definition of a foreign investor had been included (Article 2 point (1) EU Screening Regulation) in order to make clear that the ultimate investor is still included (Article 9. 2 (a)). Article 4 of the EU Screening Regulation clarifies that the list of factors that may be taken into consideration by Member States or the Commission in order to evaluate the impact of foreign investment in the EU, has been extended. The structure of the legislation is divided between a first scenario, that is a cooperation

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mechanism in relation to foreign direct investment undergoing screening, as stipulated in Article 6, and a second scenario, namely a cooperation mechanism in relation to foreign direct investment not undergoing screening, expressed in Article 7 of the EU Screening Regulation. In both cases, the system foresees the exchange of information between Member States and the possibility for the EC to issue a non-binding opinion. The Member State where the foreign investment is planned or has been completed shall give due consideration to the comments of the other Member States and the opinion of the Commission (Article 6 paragraph 7 and Article 7 paragraph 7 EU Screening Regulation). The decision to refuse a foreign investment remains entirely in the hands of a Member State. Nevertheless, the exchange of information requirements among the different actors, Member States and the Commission is substantially increased (Article 9 of the EU Screening Regulation). When the Commission issues an ‘opinion’ on foreign investment, it will simultaneously inform all the Member States. Member States can provide comments to the Member State where the foreign direct investment is planned. Member States that consider that an FDI in their territory that does not undergo screening is likely to affect their security or public order might request the EC for a follow-up action. The handling of all the information shall be done with the utmost attention paid to its potential sensitivity, and the highest levels and standards of protection have to be guaranteed. In case of foreign direct investments likely to affect projects or programmes of Union interest, the same procedure applies, but in the end the Member States where the investment is planned or completed must take account of the comments and the opinion. A so-called third scenario has been introduced, namely where one-third of the MSs have presented comments on a foreign direct investment, the EC shall issue an opinion when justified (Article 6 paragraph 3 and Article 7 paragraph 2 of the EU Screening Regulation). Moreover, a specific article on international cooperation has been included permitting Member States and the EC to cooperate with the authorities of third countries. The list of factors that may be taken into consideration in determining whether a foreign direct investment is likely to affect security or public order has been extended—under pressure from the EP—to include energy storages, water, health, media electoral infrastructure etc. A specific article on international cooperation has been included permitting Member States and the Commission to cooperate with the authorities of third countries. The group on inward foreign direct investment will exchange information, best practices and analysis on foreign direct investments, and it will discuss issues of common concern, such as subsidies and other practices by third countries facilitating strategic acquisitions (Article 13 on International Cooperation). The group will be chaired by the Commission and composed of representatives of all Member States. In parallel, the Commission should start a detailed analysis of foreign direct investment flows into the EU and set up a coordination group with Member States to help identify joint strategic concerns and solutions in the area of foreign direct investment, in particular if the investor is owned or controlled by a third government or benefits from significant state subsidies. Moreover, both Member States and the

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Commission cannot make comments or issue an opinion respectively later than 15 months after the foreign direct investment has been completed.

5 Conclusions The new screening mechanism at EU level is based on the primary economic findings that the geopolitical activities of some countries, in particular in trade relations or capital movements with non-market-economies, demand special legal treatment. Article 207 TFEU has been triggered for the third time as a legal base, which confers exclusive competence on the EU in the field of FDI, as it was in the case of the so-called Grandfathering regulation on termination of Bilateral Investments Agreements58 and Investor-to-State Dispute Settlement—financial responsibility regulation.59 As stated in the preamble of the EU Screening Regulation, the Regulation aims to ensure legal certainty while preserving existing flexibility and diversity of approach to screening mechanisms between the EU Member States. The interdependence of foreign direct investment with until now well-established jurisprudence on free movement of capital has to be carefully observed. There is a lot of legal incentives that may lead to the unbinding of foreign direct investment from the freedom of capital movements in the bright future, firstly, because the interpretation of FDI has to be performed in light of Articles 216 TFEU and 3 (5) TEU, in view of the exclusive power in the area of CCP and not primarily with the objective of deepening the harmonisation of the single market. Secondly, rules on capital movement can be affected by international agreements relating to foreign investment, with the conclusion of new IPAs within the EU’s shared competence with Member States. Thirdly, the EC has to ensure the coherence and consistency of the external action of the representation of the Union when shaping an external policy, whereas Article 4 (3) TEU and Article 13 (1) TEU) will determine the uniform interpretation of FTAs’ and IPAs’ enforcement. The cross-fertilisation between the EU institutions during inter-institutional negotiations on the regulation on the FDI was welcomed by some of the Member States, while other Member States are still reflecting about the fast developments. Last but not least, despite the sensitivity of the subject, with the coming into force of the EU Screening Regulation, Europe is taking control of its destiny. It can bring Europe closer to becoming a superpower in order to face other economic world powers, like a Goliath against a Goliath. 58 ‘Grandfathering Regulation’, Regulation (EU) No. 1219/2012 of the EP and of the Council of 12/12/2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries, OJ L 351, 20.12.2012, pp. 40–46. 59 Regulation (EU) No. 912/2014 of the EP and of the Council of 23/7/2014 establishing a framework for managing financial responsibility linked to investor-to-state dispute settlement tribunals established by international agreements to which the EU is party, OJ L 257, 28.8.2014, pp. 121–134.

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References Dimopoulos A (2012) EU foreign investment law, Oxford Fleming R (2019) A legal perspective on gas solidarity. Energy Policy 124:102–110 Hindelang S, Maydell N (2011) The EUs common investment policy – connecting the dots. In: Hindelang S, Bungenberg M, Griebel J (eds) International investment law and EU law. European Yearbook of International Economic Law, Berlin, Heidelberg, pp 1–29 Lentner G, Fina S (2016) The scope of the EU’s investment competence after Lisbon. Santa Clara J Int 14:419–440 Meunier S (2014) Divide and conquer? China and the cacophony of foreign investment rules un the EU. J Eur Public Policy 21:996–10160 Scissors D (2017) Record Chinese outward investment in 2016: don’t overreact. American Enterprise Institute, January, pp 2–10 Shan W, Zhang S (2010) The Treaty of Lisbon: half way toward a common investment policy. Eur J Int 21:1049–1050 et seq

Dr. iur. Joanna Warchol is legal and political adviser at the Committee on International Trade (INTA) at the European Parliament. She has been responsible for legislative acts on investment protections, the EU–WTO relations, better law making as well as proceedings on the conclusion of international free trade agreements aligning to the post-Lisbon decision-making procedures such as the DCFTA Ukraine Georgia, Moldova, and on Economic Partnership Agreement between EU and Japan as well as FTA and IPA with Singapore and FTA with Vietnam. In 2018–2019, as a member of EPP team of the EP Rapporteur, Franc Proust contributed in Inter-Institutional trialogue negotiations on the Proposal for a regulation establishing a framework for screening of foreign direct investment into the EU (Screening of the FDI into the EU). Prior to working in INTA, she was working as a coordinating adviser between the German and Polish Delegation within the EPP Group starting from the German Presidency of the EU in 2007 with Prof. H-G. Poettering until the Polish Presidency working together with Prof. Jerzy Buzek, the first Polish President of the EP. Before joining the Parliament, she has obtained a PhD in European Commercial Law at the University of Heidelberg in Germany. She was a guest speaker on various European universities e. g. at the German University of Heidelberg, Hamburg and Bonn, in Italy at the Bocconi University in Milan, in Ferrara and in Bologna, in Austria at Vienna University of Economics and Business, as well as at University Louvain-la-Neuve in Belgium, University of Luxembourg and in Poland at Jagiellonian University in Krakow. During her academic experience, she was as well senior fellow in frame of the DFG, Deutsche Forschungsgemeinschaft at the Ruperto Carola Heidelberg University and in Max Planck Institute for Comparative Public Law and International Law in Heidelberg.

Part II

The European Origins – the EU Member States’ Rules on Screening Foreign Investment

Foreign Investment Screening in Germany and France Philipp Stompfe

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Cross-Sectoral Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Sector-Specific Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Comparative Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Investment Control Regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Scrutiny Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 National Interest Clearance/Ministry’s Power to Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Legal Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 Legal Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Implications of the EU Screening Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract At the end of 2018, the German and French governments substantially tightened the applicable regulatory framework for the review of foreign investment by significantly extending the investment sectors subject to review and by lowering the relevant thresholds triggering the screening mechanism. For this reason, this chapter demonstrates and analyzes the current foreign investment control regimes in Germany and France. In particular, the strong tendency by both governments towards a stricter approach regarding the screening of foreign investment and the legal implications thereof will be outlined. It will be shown that foreign investment screening in Germany and France has become a serious public policy instrument to safeguard national economic interests.

P. Stompfe (*) Alexander and Partner, Berlin, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 79–116, https://doi.org/10.1007/16495_2020_15, Published online: 30 May 2020

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1 Introduction Mechanisms on the screening of foreign direct investment differ from country to country, both in substance and procedure. Traditionally, countries of the European Union, in particular Germany and France, provide relatively open investment regimes to foreign investors. However, in the aftermath of controversially discussed company takeovers and acquisitions of major European enterprises, in particular by Chinese state-owned enterprises, a growing concern in Germany and France regarding foreign investment by non-EU investors is indisputable. Therefore, the mechanisms on foreign investment screening have become an increasingly relevant issue in cross-border transactions that require an in-depth legal risk assessment and management prior to concluding the transaction. This is particularly underscored by the latest amendments of the applicable laws in Germany and France resulting in much stricter and more comprehensive foreign investment control regimes, substantially expending the right of the competent authorities to monitor and restrict foreign investments. These national developments must, additionally, be seen in the context of the adoption of the regulation on establishing a framework for the screening of foreign direct investment into the European Union (the EU Screening Regulation) in March 2019 by the European Council and the European Parliament setting out imperative minimum requirements that must be common to member states’ screening mechanisms. The main purpose of this chapter is to analyze the substantive structure and procedural rules of regulations on foreign direct investment in Germany and France, which will be done for each country separately. To this purpose, this chapter first introduces the relevant legal basis and general government policies and practice with regard to the screening of foreign investment. It then focuses on analyzing the scope of application, the types of investments caught by the respective foreign investment control regimes, the jurisdictional thresholds triggering the review, the substantive test for clearance, the concrete scrutiny procedure and the right of recourse against decisions of the competent authorities. The final part of this chapter illustrates the key features of the EU Screening Regulation and discusses potential implications on the national investment screening regimes.

2 Germany In general, Germany is seeking to provide an open and positive investment climate to foreign investors. According to the UNCTAD World Investment Prospects Survey, Germany is the most attractive business location in continental Europe.1 1

Cf. UNCTAD (2018), p. 20.

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German legal, regulatory and accounting systems are transparent and consistent with the international standard; foreign and domestic investors are treated equally when it comes to investment incentives and the establishment and protection of property, both real and intellectual. Foreign investors can fully rely on the legal system, which is efficient and sophisticated.2 Furthermore, Germany maintains the largest and one of the most efficient networks of bilateral investment treaties in the world.3 However, in the light of acquisitions of German enterprises by Chinese stateowned companies, the German government has adopted a stricter approach towards its foreign investment control regime.4 The legal basis for the review of foreign direct investments in Germany is provided within the German Foreign Trade and Payments Act (Außenwirtschaftsgesetz, AWG) and the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, AWV). Furthermore, the procedure regarding foreign investment review and control is regulated in the Administrative Procedure Act (Verwaltungsverfahrensgesetz, VwVfG). The permissible remedies against impairing investment control measures and decisions are regulated in the Code of Administrative Court Procedure (Verwaltungsgerichtsordnung, VwGO). The structure and scope of investment review provided for under the AWG in conjunction with the AWV is that the Federal Ministry of Economics and Energy (the Ministry), being the competent German authority, possesses an extensive ex post examination competence regarding the acquisition of shares (share deal) of German companies as well as with regard to the acquisition of an enterprise in terms of an asset deal by third-country nationals. Of particular importance for foreign direct investments is the screening of cross-sectoral investments pursuant to Sec. 55 et seq. AWV and sector-specific investments pursuant to Sec. 60 et seq. AWV.5 On 19 December 2018, the German government has passed significant amendments to the AWV, inter alia lowering the threshold for the screening of foreign direct investments (FDIs) to the acquisition of 10% of the voting rights of a German company being active in the military and encryption sector and of German 2

U.S. Department of State (2018). Cf. Stompfe (2017), p. 228. 4 Cf. Reinhardt and Pelster (2009), p. 444; Hasselbach and Peters (2017), pp. 1348 et seq.; Flaßhoff and Glasmacher (2017), p. 489; Seibt and Kulenkamp (2017), p. 1355; BDI (2019), Investitionskontrollen in Deutschland und Europa; Handelsblatt (2018), Kuka wird zum Testfall für chinesische Investoren in Deutschland. 5 From the standpoint of legal doctrine, it must be considered that the provisions on sector-specific review pursuant to Sec. 60 et seq. AWV take precedence over Sec. 55 et seq. AWV. This is of particular importance with regards to the reporting obligations, the civil law effects of the investment review and the procedural deadlines. In addition, the legislative intention of a possible prohibition of the relevant investment differs. While the sector-specific investment review serves to protect essential security interests and the foreign relations of the Federal Republic of Germany as well as to protect the peaceful coexistence of nations (Sec. 4(1) no. 1-3 AWG), the cross-sectoral investment review is intended to guarantee the protection of public order or security (Sec. 4(1) no. 4 AWG); cf. Müller and Hempel (2009), p. 1638. 3

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companies that are operating in the field of critical infrastructure.6 For the definition of the term “critical infrastructure”, Sec. 55(1) AWV explicitly refers to the Act on the Federal Office for Information Security (Gesetz über das Bundesamt für Sicherheit in der Informationstechnik). Critical infrastructure is defined in the EU Screening Regulation on the Definition of Critical Infrastructure.

2.1

Cross-Sectoral Review

The review of cross-sectoral investments pursuant to Sec. 55 et seq. AWV (sectorindependent investment control) grants the Ministry the authority to prohibit the acquisition of domestic companies or shares/participations in such companies by non-EU nationals in certain cases or to flank such acquisitions with specific orders. The constitutive feature in this regard is that such measures must be indispensable in order to guarantee public order or security in the Federal Republic of Germany.

2.1.1

Scope of Application

The prerequisites for the Ministry’s competence to review foreign investments are stipulated in Sec. 55(1) AWV. The Ministry’s right to review and the Ministry’s right to prohibit or restrict foreign investments require that a domestic target company (inländisches Zielunternehmen)7 is acquired directly or indirectly by a foreign investor in whole or in part based on a certain legal transaction8 (Rechtsgeschäft). It should be noted that the acquisition of a domestic company by an EU resident (European investor), meaning, inter alia, natural persons resident or habitually resident in the EU and legal persons or partnerships based or headquartered in the EU,9 in which a foreigner holds at least 10% or 25% of the direct or indirect share of voting rights can also be subject to the Ministry’s review procedure if the company is deemed to be particularly relevant under public order or security aspects.10 A restriction of the acquisition additionally requires a genuine and sufficiently serious threat to public order and security resulting directly out of the acquisition transaction.11

6

These changes may be regarded as incompatible with EU law, cf. Stompfe (2019). Hereinafter referred to as “target company” or “domestic company”. 8 Legal transaction within the meaning of an acquisition transaction (“Erwerbsgeschäft”) in the sense of an acquisition of a company or an acquisition of stock. 9 Cf. Sec. 2(18) AWG. 10 Cf. BT-Drs. 16/10730, p. 14; Krolop (2008), p. 41; Seibt and Wollenschläger (2009), p. 839. 11 BT-Drs. 16/10730, p. 15. 7

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Object of Acquisition: “Domestic Company”

Investment screening pursuant to Sec. 55 et seq. AWV is only permissible if a domestic company is the objective of the transaction. Definition of “Domestic” The term “domestic” is legally defined in Sec. 2(15) AWG. In this regard, domestic shall mean (i) natural persons resident or habitually resident in Germany, (ii) legal persons and partnerships based or headquartered in Germany, (iii) branches of foreign legal persons or partnerships if the headquarters of the branch are in Germany and separate accounts are kept for them and (iv) permanent establishments of foreign legal persons or partnerships in Germany if the permanent establishments are administered in Germany. Whereas the seat of a legal person or partnership is governed by commercial law,12 the “place of management” is determined by the place where the management actually takes the relevant decisions.13 Therefore, foreign companies with registered offices in other countries and administrative headquarters in Germany are also covered by the definition of domestic.14, 15 Definition of “Company” There is no legal definition of the term “company”. It includes all legal entities (stock companies, limited liability companies and associations) and partnerships as well as natural persons, provided that they are sole traders and can be identified on the market as an organized entity.16 It has to be considered that the legal form and the capital market capability of the target company are irrelevant factors for the Ministry’s right to review under German public law.17 In order to avoid corporate loopholes, the takeover of parts of a company within the scope of a spin-off in accordance with the German Transformation Act (Umwandlungsgesetz, UmwG) or through the takeover of associated operating resources (dazugehörige Betriebsmittel) are also to be qualified as the “acquisition of a domestic company” within the meaning of Sec. 55(1) AWV.18 Mausch-Liotta (2017), § 55, para. 13. Mausch-Liotta (2017), § 55, para. 13. 14 Seibt and Wollenschläger (2009), p. 835. 15 For a German limited liability company (GmbH) this means that a GmbH which relocates its administrative headquarters abroad, but still maintains its registered office within Germany also qualifies as domestic, see Sec. 4a of the German Limited Liability Companies Act (“Gesetz betreffend die Gesellschaften mit beschränkter Haftung”, GmbHG). 16 Pottmeyer (2018), §§ 55–59, para. 12. See with regards to the GmbH Hasselbrink (2010), p. 513. 17 Seibt and Wollenschläger (2009), p. 835. 18 Söhner (2011), pp. 461 et seq.; Seibt and Wollenschläger (2009), p. 836; Mausch-Liotta (2017), § 55, para. 14. 12 13

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Furthermore, it must be considered that the Ministry’s right to review and restrict does not require the target company to belong to a certain economic sector.19 Therefore, the Ministry’s right to review and restrict a priori encompasses all economic sectors.

2.1.1.2

Foreign Investor

The scope of cross-sectoral investment review, in principle, includes any investor that is not residing in either the European Union or any member state of the European Free Trade Association20 (EFTA).21 In the case of natural persons, the domicile or usual place of residence is decisive for the determination of “residency” (Ansässigkeit); in the case of legal entities or partnerships, the statutory seat or place of management is decisive. It is particularly important for private equity investors that investors residing on the Channel Islands (Jersey, Sark, Guernsey, Alderney, Herm) and the Isle of Man are exempted from investment control under foreign trade law as the Channel Islands are part of the customs territory under EU law and are therefore part of the community territory as defined in the AWG.22, 23 Parallel Application on State and Private Investors It must be emphasized that the Ministry’s right to review applies to both state and private investors. This is remarkable, especially since the political argumentation and justification in the public discussion regarding the numerous changes to the AWG and AWV and the associated stricter investment control regulations have always been driven by the concern of uncontrolled takeovers of German companies by foreign state companies, in particular by Chinese state and hedge funds. In this regard, it must be highlighted that the personnel scope of the cross-sectoral investment control is by no means limited to foreign state and hedge funds but also affects private and institutional investors. The legal status of the foreign investor is also irrelevant.

Mausch-Liotta (2017), § 55, para. 15. The EFTA member states are Iceland, Norway, Liechtenstein and Switzerland. 21 The legal definition of a non-member of the EU in Sec. 2(19) AWG is a negative definition: all natural persons, legal entities and partnerships that are not residents of the EU in accordance with § 2 para. 18 AWG are to be qualified as a non-member of the EU. 22 Sec. 2(8) AWG; cf. Voland (2009), p. 520; Seibt and Wollenschläger (2009), p. 835; Pottmeyer (2018), §§ 55–59, para. 19. 23 To the contrary, the Cayman Islands, British Virgin Islands and Bermuda and the other overseas countries and territories listed in Annex II to the Treaty of Lisbon are outside the customs territory of the Community and are therefore not counted as Community territory within the meaning of the AWG, Seibt and Wollenschläger (2009), p. 835; Pottmeyer (2018), §§ 55–59, para. 19. 19 20

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Therefore, the final legal codification of the definition and scope of the “foreign investor” goes far beyond the original political intention. Prevention of Misuse and Circumvention Pursuant to Sec. 55(2) AWV The German legislator is strict on the legal capturing of abuse and circumvention constellations.24, 25 Pursuant to Sec. 55(2)(1) AWV, acquisitions of domestic companies by residents of the European Union are also subject to investment control pursuant to Sec. 55 (1) AWV if there are indications that an abusive approach or a circumvention transaction has been undertaken in order to avoid or undermine an examination pursuant to Sec. 55(1) AWV. It should be emphasized that this provision does not limit the power of review to constellations in which a foreign investor holds at least 10% or 25% of the direct or indirect share of voting rights (Stimmrechte) of the enterprise directly acquiring the domestic company. Thus, the right to review also exists if the direct acquirer (unmittelbarer Erwerber) could only be indirectly influenced by foreign investors, e.g. through the interposition of another company.26 Indications of an abusive approach within the meaning of Sec. 55(2)(1) AWV shall in particular include cases where the direct acquirer does not maintain any business operations of its own other than the acquisition pursuant to Sec. 55 (1) AWV or does not have any permanent establishment of its own, including offices, staff and equipment within the European Union.27 Unlike the determination of the residency of the target company, branches and permanent establishments of the non-EU acquirer are not considered to be EU residents (unionsansässig).28 The overriding goal of this limitation of the definition of the term “community residence” according to Sec. 2(18) AWG and Sec. 2 (19) AWG is to constitute a comprehensive right for the Ministry to examine and restrict investments conducted by these corporate forms. In this constellation, only the parent company is relevant for the determination of nationality.29 The parent

24

Cf. BT-Drs. 16/11898, p. 12; Thoms (2018), p. 107; Hindelang and Hagemeyer (2017), p. 884; Walter (2017), p. 653. 25 In this context, difficulties arise in particular where, for example, a Dutch subsidiary of a non-EU company is acting as an intermediary. It should be noted, however, that a prohibition power only exists to the extent that an abusive structure can be identified. In particular, the involvement or participation of Special Purpose Vehicles can constitute a violation. It is characteristic that these SPVs have no corporate assets other than their share capital and therefore have no commercial justification, Hasselbrink (2010), pp. 513–514; Rosenberg et al. (2009), p. 832. 26 Mausch-Liotta (2017), § 55, para. 33. 27 Sec. 55(2)(2) AWV. 28 Sec. 55(2)(3) AWV. 29 Mausch-Liotta (2017), § 55, para. 35.

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company is only to be considered as residing within the EU if its registered office and head office are located in the European Union.30 Furthermore, the anti-circumvention provision of Sec. 55(2) AWV also applies to purchasers from EFTA states. In this constellation, it must be examined if the direct acquirer from the EFTA states will arrange for a foreign acquirer from outside the EFTA states to acquire a shareholding that is relevant within the meaning of Sec. 56 AWV.

2.1.1.3

Acquisition Transaction (Erwerbsgeschäft)

First, it shall be highlighted that the target company must be “acquired”. With regard to the relevant acquisition transaction, the AWV distinguishes between the acquisition of a company (Unternehmenserwerb) and the acquisition of shareholdings (Beteiligungserwerb). Company Acquisition The acquisition of a domestic company only covers the acquisition of an entire enterprise, meaning not less than 100% of the shares of that particular enterprise.31 It is legally irrelevant if the acquisition is a public takeover according to Securities Acquisition and Takeover Act (Wertpapier- und Übernahmegesetz, WpÜG) or any other company acquisition.32 Furthermore, the applicable provisions on investment screening apply to share deals and asset deals alike.33 Additionally, the acquisition of a company after a spinoff (Abspaltung) within the meaning of the UmwG or the operating material (Betriebsmittel) of a separable business unit also falls under the term “company acquisition” within the meaning of Sec. 55(1) AWV.34 Acquisition of Shareholding In addition, the acquisition of direct and indirect shareholding in a domestic company by a foreign investor is covered by the Ministry’s authority to review foreign investments. The direct shareholding comprises the direct acquisition of shares by the foreign investor in a domestic company. The acquisition of an indirect shareholding comprises, on the one hand, the constellation in which the foreign investor acquires a

30

Sec. 2(18) No. 2 AWV. Pottmeyer (2018), §§ 55–59, para. 13. 32 Seibt and Wollenschläger (2009), p. 836; Rosenberg et al. (2009), p. 832. 33 Hasselbrink (2010), p. 514; Söhner (2011), p. 460. 34 Mausch-Liotta (2017), § 55, para. 22; Pottmeyer (2018), §§ 55–59, para. 13; Hasselbrink (2010), p. 514. 31

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direct stake in a foreign company residing in the EU that already has a shareholding in a domestic company.35 On the other hand, the acquisition of an indirect shareholding covers the constellation in which a company based in the EU or EFTA acquires a domestic company or shareholdings in this company and has itself a foreign majority shareholder.36 In the later constellation, the acquisition conducted by the foreign majority shareholder only takes place indirectly. Acquisition Threshold In principle, all acquisitions of direct and indirect shareholding by which investors domiciled outside of the EU or the EFTA region acquire at least 25% of the voting rights in a domestic company can be subject to examination. However, as a result of the AWV amendment in December 2018, examination of foreign investments is already possible with an acquisition of at least 10% of the voting rights, if the domestic company is operating in the field of critical infrastructure or provides other particularly security-related services as defined in Sec. 55(1) (2) nos. 1–6 AWV. Critical infrastructure includes, inter alia, the following sectors: – – – – – – – –

Telecommunications Energy Information technology Transport and traffic Health Water Nutrition Finance and insurance In addition, particularly security-relevant services can, inter alia, be the following:

– Cloud computing services – Media services (broadcasting, tele media, print products) – Development and modification of software for the industry-specific operation of critical infrastructures within the meaning of the Act on the Federal Office for Information Security – Measures pursuant to Sec. 110 of the Telecommunications Act (Telekommunikationsgesetz) – Telematic infrastructure pursuant to Sec. 291b (1a) and (1e) of the German Social Code V (Sozialgesetzbuch V).

35 36

BT-Drs. 16/10730, p. 13; Mausch-Liotta (2017), § 55, paras 18 et seq. Mausch-Liotta (2017), § 55, para. 20.

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It shall be emphasized that the thresholds of 25% and 10%, respectively, must be reached or exceeded as a direct result of the acquisition.37 If the foreign investor already holds 25%, 10% respectively, or more of the voting rights and subsequently acquires further voting rights, the later acquisition does not trigger the examination procedure (again). If, however, the acquirer initially holds less than 25%, 10% respectively, of the voting rights and subsequently acquires further voting rights, whereby the relevant acquisition threshold is reached or exceeded, the Ministry’s right to review inevitably exists.38 The threshold of 25% finds its legal basis in corporate law. For the German legislator, the blocking minority (Sperrminorität), which is reached by acquiring 25% of the voting rights, of a foreign investor is decisive in order to assume a controlling influence.39, 40 However, the German legislator does not provide any concrete or comprehensible justification for establishing the 10% threshold for the critical infrastructure sector. In this context, it shall be emphasized that the compatibility of the 10% threshold with EU law is highly questionable.41 Attribution of Voting Rights The AWV does not only cover the direct acquisition of shareholding but also includes other forms of attribution facts. If the foreign investor acquires less than 25%, 10% respectively, of the domestic company in a specific case, it is further to be examined if the voting rights held by other companies or persons in the same domestic company must be attributed to the foreign investor. Pursuant to Sec. 56(2) AWV, voting rights of companies in which the foreign investor holds at least 25%, 10% respectively, of the voting rights or with which it

37

Pursuant to Sec. 12(1)(1) of the German Stock Corporation Act (“Aktiengesetz”, AktG), every share of a stock corporation equals one voting right. The corresponding shareholders are entitled to vote in the GmbH. Pursuant to Sec. 47(2) GmbHG each euro of a share grants one vote. It should be emphasised that preferred shares (“Vorzugsaktien”) pursuant to Sec. 139(1) AktG, for which voting rights were excluded, are not to be taken into account when determining the relevant proportion of voting rights. Additionally, profit participation rights (“Genussrechte”) pursuant to Sec. 221(3) AktG and silent partnerships pursuant to Sec. 230 et seq. of the German Commercial Code (“Handelsgesetzbuch”) have to be disregarded when determining the relevant proportion of voting rights. The same applies to other legal positions such as call options, cash equity/total return swaps as well as pre-emption and pre-acquisition rights (“Vorkaufs- und Vorerwerbsrechte”), Seibt and Wollenschläger (2009), p. 837; Voland (2009), p. 520. 38 Traugott and Strümpell (2009), p. 188; Mausch-Liotta (2017), § 55, para. 19. 39 BT-Drs. 16/10730, p. 13. 40 By acquiring a blocking minority, the foreign investor, inter alia, obtains the right to block transactions of the management board requiring approval, as well as to block amendments to the Articles of Association and the liquidation of the company, Reinhardt and Pelster (2009), p. 441. 41 Cf. Stompfe (2019).

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has concluded an agreement on the joint exercise of voting rights are attributable to the foreign investor.

2.1.1.4

Acquisition of Further Shareholdings

By determining the relevant voting stake within the framework of Sec. 56(1) no. 1 AWV, those voting rights of third companies in which the foreign investor holds at least 25% or, in the field of critical infrastructure at least 10% of the voting rights, are initially to be attributed. If the foreign investor holds at least 25%, 10% respectively, of the voting rights in a third company, the German legislator assumes that this percentage (influence) is sufficient to persuade this company to exercise its voting rights in the interest of the foreign investor in the target company.42

2.1.1.5

Iterative Acquisition of Additional Voting Rights

Furthermore, Sec. 56(2) no. 1 AWV encompasses the constellation in which the acquisition of voting rights and the exceeding of the relevant threshold occur by means of several purchases of voting rights. In this regard, it has to be taken into account that it is not the upstream acquisition transaction that finally triggers the Ministry’s right to review but only the acquisition through which the relevant threshold is actually exceeded.43 A differentiated system of reporting thresholds does not exist within the scope of application of the AWV. The only decisive factor is the crossing of the 25% or 10% threshold.

2.1.1.6

Agreements on Exercising Voting Rights

Furthermore, pursuant to Sec. 56(2)(2) AWV, voting rights of third parties with whom the foreign investor has concluded an agreement on the joint exercise of voting rights (Stimmrechtsausübungsvereinbarungen) are attributed to the foreign investor. Agreements on exercising voting rights include all agreements between shareholders to vote or elect in a certain manner at the shareholders’ meeting.44 The essential prerequisite for this form of attribution is that the agreement of exercising voting rights already exists at the time when the contract pertaining to the acquisition of the domestic company by the foreign investor has already been concluded or that the agreement of exercising voting rights is concluded within the

Mausch-Liotta (2017), § 56, paras 5–8. Cf. Söhner (2011), p. 459; Hasselbrink (2010), p. 515; Seibt and Wollenschläger (2009), p. 839; Traugott and Strümpell (2009), p. 191. 44 Cf. von Bülow and Stephanblome (2008), p. 1797; Seibt and Wollenschläger (2009), p. 837. 42 43

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3-month period for the commencement of the examination procedure pursuant to Sec. 55(3) AWV.45 Furthermore, agreements of exercising voting rights must be of a long-term nature. Consequently, agreements of exercising voting rights for the individual case are excluded from the scope of application of Sec. 56(2)(2) AWV since these agreements lack the required long-term and sustainable possibility of influencing the target company.46

2.1.1.7

Indirect Acquisitions

Pursuant to Sec. 55(3) AWV, a relevant attribution is further possible in cases in which the foreign investor only indirectly holds a shareholding in the domestic company (mittelbarer Erwerb), but the voting rights in the respective subsidiary companies are attributable to the foreign investor by application of the principles pursuant to Sec. 56(2) AWV. The prerequisite for attribution is that the foreign investor holds at least 25%, 10% respectively, of the intermediate company.47 In the case of multi-level corporate structures, it has to be considered, however, that the allocation chain is already interrupted if only one shareholding in an intermediate company does not reach the required threshold. Nevertheless, the attributable direct participation of the intermediate company in the target company itself may be below the 25% or 10% threshold.48 For example, A-GmbH has its registered office in the Federal Republic of Germany. B-GmbH, which also has its registered office in Germany, has a six per cent share in this company. The non-EU C Inc. would like to acquire a share of 20% in A-GmbH. In turn, C Inc. has a share of 25% in B-GmbH. In this constellation, Sec. 56(2) no. 2 AWV applies. The shares held by B-GmbH in A-GmbH shall be attributed to C Inc. As a result, C Inc. reaches a share participation of 26% in A-GmbH and, therefore, exceeds the relevant threshold pursuant to Sec. 56(1) AWV.49

2.1.2

Threat to Public Order or Security

The Ministry’s examination right is explicitly linked to a threat to public order or security (öffentliche Sicherheit oder Ordnung) in Germany.

Pottmeyer (2018), §§ 55–59, para. 25. Seibt and Wollenschläger (2009), p. 838. 47 Cf. BT-Drs. 16/10730, p. 23; Reinhardt and Pelster (2009), p. 443. 48 Seibt and Wollenschläger (2009), p. 838. 49 Pottmeyer (2018), §§ 55–59, paras. 23 et seq. (with further examples). 45 46

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The indefinite legal concept of public order or security within the context of German foreign trade and payment regulations is not to be understood as the corresponding concept contained in German police and public order law, which in terms of content is considerably broader, but is rather to be determined according to EU law.50 Invoking the legal concept of public order or security is only permissible if there is a genuine and sufficiently serious threat affecting a fundamental interest of society in a particular case.51 Therefore, public security or order concerns the core area of statehood and thus the safeguarding of Germany both internally and externally.52 A threat to public order or security may exist if the target company is the operator of a critical infrastructure within the meaning of the Act on the Federal Office for Information Security or if it provides other particularly security-relevant services within the meaning of Sec. 55(1)(2) AWV. In contrast, general economic, labour market or financial interests of the state do not fall under the concept of public order or security.53 Therefore, the Ministry’s right to screen foreign investment is, in principle, not suitable to protect against the relocation of manufacturing facilities overseas and for safeguarding jobs in Germany.54 It should be noted that the term public order and security, in particular with reference to the free movement of capital, as one of the four fundamental freedoms of the EU single market, according to Article 63 TFEU, which also applies to thirdcountry nationals, and the legal principle of proportionality, which is decisive for restrictions, gives rise to considerable reservations under EU law. Despite the lack of existing case law, it must, however, be concluded that irrespective of a possible violation of EU law, a restrictive interpretation and application of the Ministry’s authorization to intervene is in any event imperative.55

2.1.3

Scrutiny Procedure

Acquisitions by which the foreign investor acquires at least 10% of the voting rights in a company that operates within the critical infrastructure or provides certain particularly security-relevant services must be reported to the Ministry by the foreign investor.56

50 See Sec. 4(1) no. 4 and Sec. 5(2) AWG; Hindelang and Hagemeyer (2017), p. 883; BT-Drs. 16/10730, p. 10 et seq.; Reinhardt and Pelster (2009), p. 443. 51 BT-Drs. 16/10730, p. 15. 52 BT-Drs. 16/10730, p. 15. 53 CJEU, Judgment of the Court of 4 June 2002 – Case C-367/98, para. 52. 54 Cf. Seibt and Wollenschläger (2009), p. 839; Hasselbrink (2010), p. 516. 55 Cf. Stompfe (2019). 56 Cf. Walter (2017), pp. 650 et seq.

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Section 55(4) AWV explicitly states that information about the conclusion of a contract governed by the law of obligations regarding the acquisition of a domestic company within the meaning of Sec. 55(1)(2) AWV or a direct or indirect acquisition of a stake within the meaning of Sec. 56 AWV of a domestic company by a non-EU resident shall be provided to the Ministry in writing. Apart from this, foreign investors are not subject to any further notification requirements. However, the Ministry may initiate an ex officio examination within 3 months from the date of obtaining knowledge that the acquisition agreement has been concluded.57 In this case, the Ministry is required to officially inform the direct acquirer and the target company about initiating the examination proceedings prior to the expiry of the 3-month period.58 When deciding whether to examine a specific acquisition transaction, the Ministry is subject to the common restrictions on exercising discretion. In this context, a wide margin of discretion is generally to be assumed. Two conditions must be met in order to conduct the examination procedure: (i) indications of a threat to public order or public security in Germany must exist, and (ii) it must be an acquisition transaction within the meaning of Sec. 55(1) in conjunction with Sec. 56 AWV. In the event of initiating an examination procedure, the foreign investor is obliged to submit all documents and information relevant for an in-depth examination to the Ministry.59 The required documents and information, inter alia, include the following:60 – Name and registered office of the direct acquirer and the domestic company. – Shareholding: the amount of the direct and indirect voting rights held by the direct acquirer (i) before the acquisition and (ii) after the acquisition must be declared. – Business operation: the nature of the business operation (i) of the direct acquirer (ii) of the domestic company must be declared. – It must be declared if the domestic company is required to protect classified government information. – State and local authorities are to be named with whom the domestic company has had business contacts in the last 5 years. – All direct and indirect shareholders holding a stake (i) of the direct acquirer (ii) of the domestic company must be disclosed. – All direct and indirect shareholdings in third companies (i) of the direct acquirer (ii) of the domestic company must be declared. – Acquisition agreement: a copy of the acquisition agreement under the law of obligations must be submitted; in the case of an offer within the meaning of the WpÜG, a copy of the offer document must be submitted.

57

Sec. 55(3) AWV. Cf. Voland (2009), p. 521; Pottmeyer (2018), §§ 55–59, para. 35. 59 Sec. 57 AWV. 60 General Ruling of the German Federal Ministry of Economic Affairs and Energy with regards to Sec. 57 AWV dated 2 September 2013. 58

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– Syndicate agreement: it has to be disclosed whether a syndicate agreement should exist for the post-acquisition period in respect of the target company. If so, a copy of the syndicate agreement must be provided. – Business strategy: the short, medium and long-term business strategy of the target company for the post-acquisition period must be provided. Aspects relevant to the public order or security of the Federal Republic of Germany must specifically be disclosed. – Trade register excerpt. – Annual financial statements and management reports. – Consolidated financial statements and group management reports. – Power of representation: the authorization of the person submitting the documents to represent the direct acquirer must be provided. In cases of a foreign investor, a person authorized to receive service in Germany must be named. In addition, the Ministry is permitted to request further documents for examination. Once complete documentation has been submitted, the acquisition can only be restricted or prohibited within 4 months.61 During the application process, it is up to the discretion of the foreign investor to be assisted by or to rely on public affairs or lobbying specialists or sector experts. In this regard, there is no statutory prohibition. The deadlines in Sec. 55(3) AWV constitute statutory deadlines, which are not subject to any extension. If the Ministry has not notified the direct acquirer about initiating the examination procedure within the 3-month period, the Ministry is precluded from conducting any further examination.62 The investment review proceedings do not trigger any fees or expenses, but the foreign investor must bear its own costs and expenses. In Germany, foreign investment decisions of an acquisition under the scope of the AWV are not published and the Ministry is bound by a strict confidentiality obligation.63

2.1.4

The Ministry’s Powers to Act

The Ministry is responsible for carrying out the examination procedure. It is legally obliged to involve the other ministries concerned in the concrete case within the framework of their responsibilities.64 Pursuant to Sec. 59(1) AWV, the Ministry may prohibit both the acquisition of an enterprise and the acquisition of a participation as defined in Sec. 56 AWV within

61

Sec. 59(1) AWV. Cf. Mausch-Liotta (2017), § 55, para. 43. 63 Cf. Sec. 3(1)(f) German Freedom of Information Act (“Informationsfreiheitsgesetz”). 64 BT-Drs. 16/10730, p. 24. 62

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4 months after receipt of the complete documents pursuant to Sec. 57 AWV in order to guarantee public order or security. Furthermore, the Ministry is entitled to enact orders it considers appropriate to guarantee public order or security. For example, the foreign investor may be required to maintain certain supply-relevant branches of production permanently or for a certain period of time or to provide location guarantees.65 Furthermore, orders may be issued to exclude certain business areas of the target company from the acquisition.66 Only the direct acquirer may be the addressee of administrative measures pursuant to Sec. 59 AWV. In the event of an indirect acquisition, it is the acquirer who acquires shares in a company which, in turn, directly or indirectly (as part of an acquisition chain) holds an interest in the target company.67 If the preconditions for a prohibition or an order are fulfilled, the Ministry’s further action lies in its dutiful measurement of resolutions and selections. The actual exercise of discretion can only be subject to limited judicial review. An essential aspect of judicial review is the question of whether the fundamental freedoms of the EU, the constitutional principle of equal treatment, fundamental rights and the principle of proportionality have been observed. Complete prohibitions or administrative orders are mandatorily subject to the consent of the entire federal government pursuant to Sec. 59(1)(2) AWV. Prior to the issuance of a prohibition order or any other administrative order, the potential direct acquirer must be given the right to be heard in accordance with Sec. 28(1) VwVfG. Therefore, the potential direct acquirer must be informed of the Ministry's intention before issuing any adverse order. The intentional or negligent infringement of an enforceable prohibition order or of any other permissible order pursuant to Sec. 59(1) AWV constitutes an administrative offence pursuant to Sec. 81(1) no. 6 AWV and may be subject to prosecution pursuant to Sec. 19(6) AWG in conjunction with Sec. 19(3) AWG with a fine in the total amount of up to EUR 500,000. However, if the economic advantage of the perpetrator exceeds this amount, the fine may also be set higher.68

2.1.5

Certificate of Non-objection Pursuant to Sec. 58 AWV

In order to obtain legal certainty at an early stage, the foreign investor is entitled to apply for a legally binding clearance certificate69 from the Ministry prior to the acquisition in accordance with Sec. 58(1) AWV. The overriding statutory objective

Pottmeyer (2018), §§ 55–59, para. 48. Mausch-Liotta (2017), § 59, para. 20. 67 Mausch-Liotta (2017), § 59, para. 4. 68 Cf. BT-Drs. 16/10730, p. 26; Mausch-Liotta (2017), § 59, para. 28. 69 The terms “certificate of non-objection” and “clearance certificate” are used interchangeably in this contribution. 65 66

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of a clearance certificate is to confirm that no objections with regard to public order or security exists. The application regarding the issuance of a clearance certificate can already be submitted to the Ministry before the execution of the contract of acquisition under the law of obligations.70 In this regard, the written application must outline the main features of the planned acquisition, the acquirer, the domestic company to be acquired and the respective areas of business. It shall be emphasized that the right to submit an application for the issuance of a clearance certificate is not limited to the direct acquirer but is expanded to any acquirer.71 However, it should be reiterated that neither the seller nor the target company is entitled to file an application unless they have explicitly been authorized by the acquirer.72 If the Ministry does not initiate a formal review within 2 months from the receipt of the written application of the acquirer for the issuance of a clearance certificate, the clearance certificate is deemed to have been issued.73

2.1.6

Legal Consequences

During the review period, the legal transaction underlying the foreign investment remains valid. Thus, despite the fact that a formal review has been initiated by the Ministry, no enforcement ban exists until the official prohibition order has been issued.74 However, the Ministry’s right to review is flanked under civil law to the effect that the occurrence of the legal effects of the transaction under the law of obligations is subject to the resolutory condition (auflösende Bedingung) pursuant to Sec. 15 (4) AWG in conjunction with Sec. 158(2) of the German Civil Code (Bürgerliches Gesetzbuch, BGB) that the Ministry prohibits the acquisition.75 Hence, pursuant to Sec. 15(2) AWG, the prohibition ultimately leads to the entry of the resolutory condition for the acquisition transaction under the law of obligations, which in turn renders the acquisition transaction null and void. As a direct consequence, the acquisition transaction is to be completely rescinded in accordance with Sec. 812 (1)(2)(1st alt.) BGB (conditio ob causam finitam).76 In order to enforce a prohibition, the Ministry can in particular prohibit or restrict the exercise of voting rights in the acquired company that belong to a non-EU

70

BT-Drs. 16/10730, p. 25. Cf. Sec. 58(1) AWV. 72 Pottmeyer (2018), §§ 55–59, para. 51. 73 Sec. 58(2) AWV. 74 Traugott and Strümpell (2009), p. 188. 75 Cf. Weller (2008), p. 861; Seibt and Wollenschläger (2009), p. 840; Hasselbrink (2010), p. 516; Krause (2009), p. 1085. 76 Cf. Seibt and Wollenschläger (2009), p. 841. 71

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acquirer or are attributed to him or to appoint a trustee to bring about the unwinding of a completed acquisition at the expense of the acquirer.77

2.1.7

Legal Protection

The foreign investor is, in principle, entitled to legal protection under German administrative law against impaired measures of the Ministry in form of an action for annulment (Anfechtungsklage) pursuant to Sec. 42(1)(1st alt.) VwGO. It is undisputed that the direct acquirer as the direct addressee of the incriminating order is entitled to bring an action. His power to bring an action derives from the general freedom of contract, which is constitutionally guaranteed pursuant to Article 2(1) of the German Constitution (Grundgesetz, GG) as well as from the free movement of capital pursuant to Article 63 TFEU.78 In addition, the right to bring an action of the seller results from its fundamental right under Article 14(1) GG to sell its shares. However, the target company and other shareholders do not have the right to bring an action.79 The legal action against the prohibition order or against any other order must be filed within 1 month after the official notification of the impairing order and must be directed against the Federal Republic of Germany as the legal entity of the Ministry.

2.2

Sector-Specific Review

2.2.1 2.2.1.1

General Scope of Application

Rules on the screening of sector-specific foreign investments apply to the acquisition of companies operating in particularly security-sensitive sectors. Pursuant to Sec. 60(1) AWV, the Ministry can examine whether essential security interests of Germany are endangered if a foreigner acquires a domestic company or a direct or indirect participation80 in a domestic company. This includes manufacturers and developers of war weapons and other key military technologies, especially designed engines and gearboxes for military tracked armoured vehicles, and products with IT security features that are used for processing classified government information. 77

Sec. 59(3) AWV. Müller and Hempel (2009), p. 1641; Seibt and Wollenschläger (2009), p. 844; Mausch-Liotta (2017), § 59, para. 23. 79 Müller and Hempel (2009), p. 1641; Seibt and Wollenschläger (2009), p. 844; Mausch-Liotta (2017), § 59, para. 23. 80 Within the meaning of Sec. 60a AWV. 78

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Any acquisition of a company by foreign investors whereby these acquire ownership of at least 10% of the voting rights of a company resident in Germany can be subjected to such review. The acquirer must be a foreigner within the meaning of Sec. 2(5) AWG. Therefore, in contrast to the cross-sectoral review procedure, Secs. 60–62 AWV also apply to EU investors. Moreover, it is legally insignificant if the foreign investor is a natural person or a legal entity. Hence, the subjects of investment review are not only actual acquisition transactions but also pure foreign financial investments.81 Acquisitions by German residents shall also be subjected to an examination if there are indications that an abusive approach or a transaction circumventing the law has been undertaken, not least partly in order to avoid an investment review pursuant to Sec. 60(1) AWV. Indications of an abusive approach within the meaning of Sec. 60 et seq. AWV in particular include cases where the direct acquirer does not maintain any business operations of its own other than the relevant acquisition or does not have any permanent establishment of its own, including offices, staff and equipment within Germany. In summary, sector-specific investment control concerns each foreign acquisition, without limitation to non-EU/EFTA foreigners, in areas that are particularly sensitive in terms of security, inter alia military weapons and equipment, as well as crypto technology.

2.2.1.2

Threat to “Essential Security Interests”

In particular, the sector-specific investment review aims at ensuring that the German government maintains direct legal access to the German defence industry and access to companies that produce crypto technology for encoding sensitive government information.82 The defence and crypto technology industry are considered as a security policy instrument and further as an essential requirement for an independent political and military capability for action.83 In this regard, the screening considers whether the respective acquisition poses a threat to essential security interests of Germany. The term “essential security interests” derives from EU law and constitutes an indeterminate legal concept. Pursuant to Article 346(2) TFEU, “any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material; such measures shall not adversely affect the conditions of competition in the internal market regarding products which are not intended for specifically military purposes”.

Mausch-Liotta (2017), § 60, para. 11. BR-Drs. 5/04, p. 5. 83 BR-Drs. 5/04, p. 6. 81 82

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According to the government reasoning, “essential security interests” are jeopardized in cases where security interests or military security precautions are impaired.84 Therefore, the relevant acquisition transaction shall not negatively affect the government right of disposition of core abilities of the German defence industry.85 The explanations in terms of legal protection for cross-sectoral investments apply mutatis mutandis to sector-specific investments.

2.2.2

Scrutiny Procedure

Acquisitions subject to sector-specific investment review must be reported by the foreign investor in writing to the Ministry.86 The report shall cite the acquisition, the acquirer and the domestic company to be acquired and outline the fields of business in which the acquirer and the domestic company to be acquired are active.87 The Ministry shall issue a clearance in writing to the foreign investor if there are no objections to the acquisition in terms of essential security interests of the Federal Republic of Germany. The clearance shall be deemed to have been issued if the Ministry does not launch an examination procedure within 3 months of receipt of the complete documentation.88 If an examination procedure is officially initiated by the Ministry, the foreign investor is obliged to submit further documents. In addition, the Ministry may request further documentation for examination. Upon submission of complete documents, the acquisition can only be restricted or prohibited within 3 months.89 The Ministry is responsible for carrying out the examination procedure. It involves the other ministries concerned in the specific individual case within the framework of their responsibilities. Orders or prohibitions are issued in agreement with the Federal Foreign Office, the Federal Ministry of Defence and—on IT matters—with the Federal Ministry of the Interior, for Construction and Home Affairs.90 The legal transaction on which the acquisition is based shall remain pending and ineffective (subject the resolutory condition) pursuant to Sec. 15(3) AWG until the Ministry expressly or tacitly grants the release within the above-mentioned periods.91

84

BR-Drs. 5/04, p. 7. BR-Drs. 5/04, p. 5. 86 Sec. 60(3)(1) AWV in conjunction with Sec. 58(1)(2) AWV. 87 Cf. Sec. 60(3)(2) AWV. 88 Sec. 61 AWV. 89 Sec. 62(1) AWV. 90 BMWi (2019). 91 Cf. Pottmeyer (2018), §§ 60–62, para. 41. 85

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99

Comparative Description

The main procedural differences between sector-specific and cross-sectoral investment review shall be demonstrated by the following Fig. 1.92

3 France French law, as a general rule according to Article L 151-1 of the French Monetary and Financial Code (code monétaire et financier, MFC), states that “financial relations between France and abroad are free”. This statutory principle is consistent with the constant increase of foreign direct investment flows into France; between 2016 and 2017, France has recorded an increase by 42% (from US$ 35 billion in 2016 to US$ 50 billion) of inbound foreign direct investment.93 However, the “freedom of investment” as stipulated in Article L 151-1 MFC is subject to certain exceptions in order to secure national interests, meaning in particular public policy, public security and national defence.94 The competent authority for the review of foreign direct investment in France is the Ministry of Economy (French Ministry). The MFC provides the main legal basis for the review of foreign investments in France. In particular, the screening of foreign investments is regulated by Articles L 151-1 to L 151-4 and Articles R 151-1 to R 153-12 MFC. The central legal norm for the screening of foreign investments is Article L 151-3 MFC. In this regard, French law distinguishes between the requirement of declaration and the requirement of obtaining prior approval depending on the respective sector of the investment. Foreign investments conducted in so-called non-sensitive sectors95 are only subject to a simple declaration of whether they are administrative or statistic. In contrast, foreign investments conducted in sectors that are considered to be of “sensitive” or “extra-sensitive” nature according to the MFC imperatively require the prior approval of the Ministry.96 At first, the French foreign investment review regime was limited to a small number of business activities, in particular to gambling, private security services, 92

https://www.bmwi.de/Redaktion/EN/Artikel/Foreign-Trade/investment-screening.html (last accessed 6 January 2020). 93 UNCTAD (2018), p. 20. 94 Cf. Article L 151-3-1a MFC. 95 Non-sensitive sectors pursuant to Art. R 152-4 MFC, inter alia, include: “(i) creation or extension of activity of a French company held directly or indirectly by foreign companies or nonresident individuals when they amount to at least 1.5 million Euros; (ii) real estate property acquisitions in France by foreign investors when they amount to at least 1.5 million Euros; (iii) acquisitions of agricultural lands giving rise to wine exploitation; (iv) liquidation of direct foreign investments in France; and (v) realization of operations submitted to prior authorization by the French Ministry”. 96 Cf. Charrière-Bournazel (2014), p. 72.

Prohibition/Orders BMWi by agreement with the Fed. Foreign Office + Fed. Min. of Defence (+Fed. Min. of the Interior)

Buyer applies for certificate of non-objection

Certificate of non-objection by BMWi

Prohibition/Orders by BMWi with the consent of the Federal Government

Within 4 months after receipt of the full set of documents

Review procedure; if necessary, BMWi requests additional documents

BMWi initiates review procedure within 3 months after obtaining knowledge of the acquisition

Notification obligation only, if the target company operates a critical infrastructure

Fig. 1 Review of company acquisitions (© Federal Ministry for Economic Affairs and Energy (BMWi))

BMWi decides whether to grant its approval by agreement with the Fed. For. Office + Fed. Min. of Defence (+Fed. Min. of the Interior)

Within 3 months after receipt of the full set of documents

BMWi opens review procedure by agreement with the Federal Foreign Office + Federal Ministry of Defence (+Federal Ministry of the Interior) If necessary, BMWi requests additional documents

Buyer is subject to a notification obligation

Express or implied approval

Only concerns acquisitions by non-EU/EFTA foreigners

Express or implied approval

Concerns each foreign acquisition in areas which are particularly sensitive in terms of security (military weapons & equipment/ crypto technology)

after 3 months

General (Sections 55-59 of the Foreign Trade and Payments Ordinance)

after 2 months

Sector-specific (Sections 60-62 of the Foreign Trade and Payments Ordinance)

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weapons, warfare equipment and cryptology. However, due to the MFC amendment by Decree No. 2014-479 dated 14 May 2014, Decree No. 2018-1057 dated 29 November 2018 and Decree No. 2019-486 dated May 2019, the right of the French Ministry to review and restrict foreign investment has substantially been increased. Historically, the relevant French regulations on the review of foreign direct investment (Articles L 151-1 to L 151-4 and Articles R 151-1 to R 153-12 MFC) must be read in the light of the judgement of the Court of Justice of the European Union (CJEU) Église de Scientology.97 In this judgement, the CJEU condemned the former French investment screening/ authorization regime98 on the ground that it was incompatible with EU treaty rules on the free movement of capital due to the fact that the definition of a material investment was too broad and vague. According to the CJEU, the former French investment screening regime violated the principle of legal certainty.99 In this regard, it shall be emphasized that any requirement of declaration or prior authorization by the Ministry for foreign direct investment in non-reserved areas of the French economy according to the MFC has been abandoned. This division of investment sectors does not, however, reduce the control of foreign investment in France but expresses the desire to concentrate control on strategic areas of activity. As a direct consequence of the above-mentioned CJEU judgement, the French legislator has introduced a clear and precise definition of a “foreign investor” and has stipulated a clear concept of investment sectors being subject to review by the French Ministry, which will be shown below in detail.

3.1

Investment Control Regime

According to the French Central Bank, a foreign direct investment “is a category of cross-border investment made by a resident in one economy (the direct investor) with the objective of establishing a lasting interest in an enterprise (the direct investment enterprise) that is resident in an economy other than that of the direct investor”.100 This is a rather broad and non-legally binding definition, which largely reflects the OECD benchmark definition. In terms of investment screening, the French investment control regime applies to material investments made by a foreign investor in a French enterprise operating in a so-called sensitive/extra-sensitive economic sector. In general, the screening of foreign investment is governed by Articles L 151-1 to 151-4 and Articles R 151-1 to R 153-12 MFC.

CJEU, Judgment of the Court of 14 March 2000 – Case C-54/99. In particular, Article 3(c) and Article 5 of Law 1966-1008 as well as Article 12 of Decree No. 89-938 of 29 December 1989. 99 CJEU, Judgment of the Court of 14 March 2000 – Case C-54/99, para. 22. 100 Banque de France (2019). 97 98

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Regulated Economic Sectors

With regard to economic sectors relevant for scrutiny by the Ministry, French law imperatively distinguishes between so-called sensitive sectors and extra-sensitive sectors. Sensitive sectors101 include the following:102 – Businesses involving gambling industry (except casinos) – Regulated businesses providing private security services – Businesses involved in the research and development or manufacture of means of fighting the illegal use of pathogens or toxic substances by terrorists and preventing the adverse health-related consequences of such case – Businesses dealing with wiretapping and mail interception equipment – Businesses licensed to audit and certify services relating to the security of information technology systems and products. – Businesses providing goods or services relating to the security of the information systems of public or private-sector companies managing critical infrastructures and – Businesses relating to dual civil and military technology goods and services “Extra-sensitive” sectors include the following:103 – Businesses involved in providing cryptology goods and services – Businesses possessing defence secret information – Businesses involved in the research, development and sale of weapons, munitions, powder or explosive substances to be used for military ends or war and other restricted materials – Businesses involving companies that have entered into a design or equipment supply contract with the French Defence Ministry, whether directly or through a subcontractor concerning dual-use items and technology or the items listed above – Businesses related to equipment, products or services, including those relating to the safety and proper functioning of facilities and equipment, essential to guarantee French national interests in terms of public policy, public security or national defence, as listed below: • Integrity, safety and supply of water in accordance with public health standards • Integrity, safety and supply of energy resources (including electricity, gas, hydrocarbons) • Integrity, safety and exploitation of transport networks and services

101

It shall be emphasized, that the interpretation and application of these sectors in concrete individual cases depends on the actual qualification of the investor. In consequence, the definition of “sensitive” sectors is broader for non-EU investors than for EU-investors. 102 Cf. Article R 153-2 nos. 1-7. 103 Cf. Article R 153-2 nos. 8-14.

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• Integrity, safety and exploitation of electronic communication networks and services • Integrity, safety and exploitation of an installation, facility or structure of critical importance within the meaning of Articles L 1333-1 and L 1332-2 of the French Defence Code and • Public health protection – Businesses involved in research and development relating to the fields of cybersecurity, artificial intelligence, robotics, additive manufacturing, semiconductors and dual-use items and technologies listed in Annex I to Council Regulation (EC) of 5 May 2009 – Businesses related to data hosting.

3.1.2

Definition of “Foreign Investor”

The applicability and scope of the relevant investment review provisions largely depend on the respective category of “foreign investor” in each individual case. In this regard, French law distinguishes between three types of “foreign investor”. It shall be emphasized that the investment review procedure applies to private investors and state-owned enterprises as well as sovereign wealth funds alike. (1) The EU investor: pursuant to Article R 153-4 MFC, an investor that is either a national of an EU member state or an EFTA state or a legal entity that has its registered office in an EU member state or a French national residing in another EU member state qualifies as an “EU-Investor”. (2) The non-EU investor: there is no legal definition of a “Non-EU investor” in French law. Hence, in reverse to Article R 153-4 MFC, a non-EU investor is either a natural person being a non-EU national or a legal entity not having its registered office within the EU or an EFEA state or a French national residing outside the EU. (3) The foreign-controlled French investor (FCFI): Administrative Decree No. 2012-691 legally introduced a new qualification of a foreign investor relevant within the meaning of investment screening. FCFIs are entities that have their registered office in France but are controlled104 by a citizen of a

Article L 233-3 of the Commercial Code defines “control” as “holding, directly or indirectly, a percentage of the stock conferring the majority of the voting rights in the general meetings of the company; holding the majority of the voting rights in a company pursuant to an agreement concluded with other shareholders, and which is not contrary to the interests of the company; and the power to make decisions at shareholders’ meetings because of the held voting rights. A company is presumed to control another when it holds, directly or indirectly, a percentage of the voting rights above 40 per cent and when no other shareholder holds, directly or indirectly, a percentage higher than its own” [Emphasis added].

104

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country other than France, companies whose registered offices are located outside France and French citizens residing outside France.105 3.1.3

Authorization Requirement

In principle, prior to conducting an investment in any of the sensitive or extrasensitive sectors, as described above, the investor106 is obliged to inform the French Ministry of the planned investment and must obtain authorization. It shall be emphasized that the Ministry’s approval constitutes a condition precedent to the relevant transaction. Whether an investment requires authorization depends on multiple factors. In this regard, French law adopts a two-step approach. First, it has to be examined if the relevant investment constitutes an operation (corporate form of investment) within the meaning of the MFC. Second, the relevant sector in which the investment is made has to be determined. Ultimately, the final interpretation and application of this approach depends on the applicable type of investor in each individual case. Therefore, the following explanations are subdivided by the possible categories of the “foreign investor”.

3.1.3.1

EU Investor

Regarding an EU investor, at first, it needs to be examined if the investment constitutes an operation within the meaning of Article R 153-3 MFC. Pursuant to this article, there are two possible investment operations, which may require an authorization by the French Ministry: (1) Either the direct or indirect acquisition of the control107 of a company whose registered office is located in France108 (2) Or the acquisition of all or part of a branch of activity (a business) of a company whose registered office is located in France109 If the investment does not constitute one of these operations, it needs no authorization and the general principle of free admission applies. However, if the investment concerns one of the operations mentioned in Article R 153-3 MFC, subsequently it needs to be determined if the investment may be regarded as falling

105

Article R 153-5-2 MFC. In practice, the French seller of an enterprise actively assists the investor by notifying the French Ministry, in particular with regards to providing necessary information of the enterprise and its business activities. 107 Within the meaning of Article L 233-3 of the French Commercial Code. 108 Article R 153-3-1 MFC. 109 Article R 153-3-2 MFC. 106

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within one of the sectors (sensitive or extra-sensitive sector) covered by Article R 153-4 MFC or R 153-5 MFC. Regarding the identification of the relevant sector, it has to be distinguished between the acquisition of control pursuant to Article R 153-3 1 MFC and the acquisition of a business or part of a business pursuant to Article R 153-3 2 MFC. In cases of direct or indirect acquisition of the control, pursuant to Article R 153-4 MFC, prior authorization of the French Ministry is only required if the investment relates to an “extra-sensitive” sector. In cases of acquisition of all or part of a branch of activity, pursuant to Articles R 153-4 MFC and R 153-5 MFC, prior authorization of the French Ministry is required if the investment relates to a “sensitive” or “extra-sensitive” sector. However, for EU investors, the category of “businesses involving gambling industry” does not apply. If the investment within the meaning of Article R 153-3 MFC does not pertain to one of the relevant sectors, the investment can be made freely. In turn, if the investment concerns one of these sectors, it is subject to authorization by the French Ministry.

3.1.3.2

Non-EU Investor

Regarding a non-EU Investor, at first, it needs to be examined if the investment constitutes an operation within the meaning of Article R 153-1 MFC. In contrast to the requirements applicable to EU investors, one additional investment operation exists, which may require authorization by the French Ministry, summing it up to the following three possible operations: (1) Either the direct or indirect acquisition of the control110 of a company whose registered office is located in France111 (2) Or the acquisition of all or part of a branch of activity (a business) of a company whose registered office is located in France112 (3) Or the acquisition of more than 25% of equity or voting rights of a company whose registered office is located in France.113 If the investment does not constitute one of these operations, it needs no authorization and the general principle of free admission applies. However, if the investment concerns one of the operations stipulated in Article R 153-1 MFC, it has to be determined in a second step whether the relevant investment sector is one of those covered by Article R 153-2 MFC. With regard to investments made by non EU investors, in contrast to EU investors, no differentiation between the divergent investment operations needs to

“Control” according to Article L.233-3 of the Commercial Code. Article R 153-1-1 MFC. 112 Article R 153-1-2 MFC. 113 Article R 153-1-3 MFC. 110 111

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be drawn. The only decisive factor regarding the question on whether the investor requires an authorization from the French Ministry or not is whether the investment falls within the scope of any “sensitive” or “extra-sensitive” sector. Therefore, it can be concluded that if the investment within the meaning of Article R 153-1 MFC does not pertain to one of these sectors, the investment does not need any authorization. However, if the investment concerns one of the sectors, it is imperatively subject to authorization from the French Ministry.

3.1.3.3

French-Controlled Foreign Investor

FCFIs are also subject to the two-step approach contained in the MFC, which applies to the EU investor and the non-EU investor. However, the FCFI is much less constrained and therefore enjoys much more freedom with regard to its investment operations. Pursuant to Article R 153-5 1 MFC, investments made by an FCFI are only subject to authorization when they relate to the acquisition of all or part of a branch of activity of a company whose registered office is located in France and fall within the scope of any “extrasensitive” sectors.

3.1.4

Exemptions

According to Article R 153-6 MFC, certain types of transactions are exempted from the requirement of authorization. In particular, the authorization shall be deemed granted when the investment is made between companies all belonging to the same group (intra group investments), i.e. companies in which the same shareholder holds more than 50% of the capital or voting rights, directly or indirectly,114 except if the purpose of the investment is to transfer all or part of a branch of a “sensitive” activity.115 Furthermore, investors that have been previously authorized to acquire a controlling stake in a strategic sector company are also exempted from the authorization requirement in cases where they increase their ownership interest, directly or indirectly, beyond 33.3% of the stock and voting rights of the said company.116

114

Article R 153-6-1 MFC. This concerns activities listed in Articles R 153-2 and R 153-4 MFC. 116 Article R 153-6-II MFC. 115

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Scrutiny Procedure

The French investment screening regime does not stipulate a fixed mandatory deadline for submitting an authorization request to the French Ministry. However, the foreign investor is obliged to submit the authorization request to the treasury department of the French Ministry at the latest prior to the conclusion of the relevant transaction, i.e. “formalization of the parties’ agreement such as the signature of a contract, publication of a public bid or acquisition of an asset constituting a direct investment in France”.117 Primarily, the Ministry is answerable to the request for authorization within 30 days of the receipt of the same on specifically three counts: 1. issue declaration that authorization for the requested investment in unnecessary; 2. grant authorization to the requested investment without conditions; 3. issue declaration stating that additional review is warranted to determine whether conditional authorization is sufficient to protect French national interests. Secondly, in the event that an additional review is deemed necessary by the Ministry, shall an excess 45 days to authorize or prohibit the request concerned. Failure to respond by the Ministry within these timeframes as described above results in the request being deemed rejected. It shall be highlighted that the French screening system provides an informal “fast-track” option. Pursuant to Article R 153-7 MFC, the foreign investor is permitted to submit a request to the French Ministry to ascertain whether or not the planned investment will require prior government approval. Furthermore, it shall explicitly be emphasized that according to Decree No. 2018-1057, this “fast-track” option additionally applies now to the target company as well. The French Ministry is given a period of 2 months to respond to such request. However, failure by the French Ministry to respond does not mean that the authorization will be deemed granted. The authorization request must contain the following information about the investor, the target company and the actual investment itself: (1) If the investor is a legal entity, the names, addresses and information about the individuals and public legal entities with ultimate control are required. If the investor is a listed company, it will need to report the identity of the shareholders known to have more than 5% of the stock or voting rights and the names and addresses of the board members. In the case of a fund, the identity of a fund manager will be required. (2) The target company’s corporate name, legal address, Kbis extract (certificate of registration) or registry number (SIREN number), details of the business activity, and the most recent fiscal year turnover and results are required.

117

Charrière-Bournazel (2014), p. 73.

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(3) Regarding the investment, the details required are the shareholding structure before and after the contemplated operation; the purchase option on the remaining capital, if any; and the total amount of the operation, with the financial terms and conditions.118 There is no filling fee. The request for authorization must be filled with three copies. During the authorization process, confidential information is protected by the laws applicable to each regulated sector. In addition, undisclosed business information and trade secrets enjoy a special protection against unlawful use and disclosure in accordance with Law No. 2018-670. The MFC alone regulates the foreign investment review procedure in France. However, foreign investors are free to be assisted and to rely on the assistance of public relations and political advisors or lobbying groups throughout the review procedure.

3.3

National Interest Clearance/Ministry’s Power to Act

As already outlined above, the legal principle of “freedom of investment” contained in French law is subject to certain exceptions in order to secure national interests, meaning in particular public policy, public security and national defence. In this regard, the French Ministry is obliged to ensure that foreign investment will not contravene with national interests. It has to be highlighted that the concept of national interest is not legally defined in French law. Hence, the French Ministry has a high degree of discretion with regard to approving or rejecting foreign investment. Moreover, the French Ministry’s discretion is further enhanced due to the fact that the relevant regulated sectors are intentionally very broadly defined and therefore providing the foreign investor with little or no predictable guidance. However, the French Ministry’s decisional power is not limited to approving or rejecting a request for authorization. The French Ministry is also legally entitled to grant the authorization subject to certain conditions. In any event, the conditions imposed must comply with the principle of proportionality, primarily with regard to the protection of the national interest being safeguarded.119 If the French Ministry considers it necessary, it may impose conditions on the investment relating, in particular, to (i) the continuity of the business; (ii) its industrial, research and development capacities or related know-how; (iii) the safety of its supply chain; and (iv) the performance of procurement contracts or contracts concerning public safety, national defence or research, or the production or trading

118 119

Théophile and Chriqui-Guiot (2018), p. 77. Cf. Article R 153-9 MFC.

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of weapons, ammunition or explosive powders or substances, by companies that have their registered office in France.120 In cases in which the French Ministry comes to the conclusion that imposing additional conditions may not suffice to exclude existing concerns, the French Ministry must deny authorization of an investment.121 In this event, the French Ministry is under a statutory obligation to provide the foreign investor with reasons explaining such denial.122 Moreover, the French Ministry is obliged to examine whether there is a serious presumption or sustainable risk that the foreign investor is likely to commit certain criminal offences punishable under French criminal law, such as the following: – – – – – – –

Drug trafficking Criminal exploitation of a person’s weakness or ignorance Procurement and related crimes Money laundering Acts of terrorism or financing of terrorism Corruption and influence peddling and Acting in a conspiracy123

If such presumption is established, the French Ministry must deny the authorization of the planned investment.124 Again, the French Ministry is obliged to state reasons for its denial, unless the reasons for the decision shall not be disclosed for national security reasons.125 In the course of assessing the relevant facts and prior to making its final decision, the French Ministry may consult with other French governmental bodies or administrative authorities and is further entitled to seek the assistance of foreign authorities, in particular pertaining the verification of information submitted by the foreign investor in the course of the application process.126

120

Article R 153-9 MFC; Théophile and Chriqui-Guiot (2018), p. 78. Article R 153-10 MFC. 122 Article R 153-10 MFC. 123 Théophile and Chriqui-Guiot (2018), p. 78. 124 Article R 153-10 MFC. 125 Article R 153-10 MFC. 126 Cf. Article R 153-12 MFC. 121

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Legal Consequences

Any foreign investment subject to prior approval that does not comply with the mandatory authorization requirements will be null and void.127 In this regard, if the French Ministry finds that a foreign investment is being, or has been, made in violation of the authorization requirements according to the MFC, it may order the investor to desist from proceeding with the transaction, to alter the nature thereof or to restore the status quo ante at his own expense.128 Therefore, the French Ministry is entitled to order the foreign investor to unwind the relevant transaction at its own costs. However, such an order cannot be given until formal notice has been served to the foreign investor in order to make his observations known within 15 days. If ordered, the investor is required to accomplish the rescission within 12 months after having been served with the official notification.129 Moreover, Decree No. 2018-1057, which applies to requests for prior approval submitted after 1 January 2019, now grants the French Ministry the additional statutory power to order the investor to: – Suspend the voting rights of the investor and appoint a temporary manager entrusted with the management, the operation and the representation of the legal entity at stake – Suspend, restrict or prohibit temporarily the free disposal of all or part of the assets related to the sensitive activities at stake – Prohibit or limit the distribution of dividends to shareholders

3.5

Sanctions

Should the foreign investor fail to comply with the order requested by the French Ministry, it may, having given the investor an opportunity to present his observations on the allegations against him within a time limit of at least 15 days and without prejudice to the restoration of the status quo ante, impose a financial penalty on the foreign investor, which cannot exceed the highest of the following amounts:130 – Twice the amount of the non-complying investment – 10% of the annual turnover earned by the target company – EUR 1 million for natural persons Article L 151-4 MFC: “Any undertaking, agreement or contractual clause which directly or indirectly gives rise to a foreign investment in an activity referred to in I of Article L 151-3 when that investment has not received the prior authorization required under law is null and void”. 128 Article L 151-3 III MFC. 129 Article R 153-11 MFC. 130 Article L151-3 III MFC in conjunction with Decree No. 2018-1057. 127

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– EUR 5 million for legal entities Moreover, in the event of non-compliance with an injunction, the French Ministry may revoke the previously granted authorization and request the foreign investor to either divest all or part of the sensitive activities at stake or to implement the initial clearance conditions or implement measures to restore the initial situation prior to the transaction.

3.6

Legal Protection

A negative decision in terms of refusing to grant authorization issued by the French Ministry can be challenged in front of the French administrative courts. Pursuant to Article L 151-3-III MFC, the decisions of the French Ministry on authorizations of foreign investment are subject to the full judicial review (recours de plein contentieux) by the administrative judge.131 The judge may annul or validate an administrative act. Furthermore, the judge is entitled to modify the decision of the French Ministry or even replace it with a new one. Moreover, the judge may order the French government to pay compensation for damages to the foreign investor resulting out of a negative decision.

4 Implications of the EU Screening Regulation Restrictive investment screening procedures are also being adopted on the EU level. In March 2019, following an initiative of Germany, France and Italy, the Council of the EU approved a Regulation on establishing a framework for screening of foreign direct investments into the European Union (EU Screening Regulation).132 The EU Screening Regulation creates an enabling framework for member states to screen foreign direct investments on grounds of security and public order. The regulation does not require member states to adopt a screening mechanism for foreign direct investment, nor does it exhaustively mandate the substantive or procedural features for screening mechanisms. It only sets out basic requirements that should be common to member states’ screening mechanisms.133 Those minimum requirements in particular include the establishment of appropriate time frames for the screening procedure,134 the obligation that screening This applies to both, foreign investment in “sensitive” and “extra-sensitive” sectors. 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 (2019). 133 European Commission (2017), p. 8. 134 Article 3(3) EU Screening Regulation. 131 132

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decisions and mechanisms are transparent and do not discriminate between third countries.135 Moreover, the member states must provide the possibility to foreign investors to seek recourse against screening decisions of the competent national authorities.136 Furthermore, member states may maintain, amend or adopt measures necessary to prevent a circumvention of the screening mechanisms and screening decisions.137 In addition, the EU Screening Regulation establishes a cooperation mechanism between member states to share information about foreign direct investments planned or completed on the territory of one or several member states.138 In this context, Article 5(4) in conjunction with Article 10 of the regulation ensures that information acquired in the application of the regulation is used only for the purpose for which it was requested and that any confidential information, including commercially sensitive information, is protected. It also provides the possibility for other member states and the Commission to comment on such investment but leaves the final decision on the appropriate response to the member states in which the investment is planned or completed. In this regard, it shall be highlighted that Article 3(1) of the regulation confirms that member states may continue maintaining and amending existing or adopting new measures to screen investments on grounds of security or public order, taking into account their national circumstances. Taken into consideration the comprehensive regulations pertaining to the screening of foreign investments in Germany, already in place, in particular with reference to the minimum requirements pursuant to Article 3 of the regulation, the German legislator is not obliged to conduct any mandatory amendments or changes. In principle, the same conclusion applies to the current investment screening regime in France. However, two amendments might still become necessary: (i) the establishment of legislative measures necessary to prevent a circumvention of the screening mechanisms and (ii) extension of the 2-month scrutiny period in order to meet the substantive and temporal requirements regarding the exchange of information and the right of other member states and the Commission to issue opinions. In summary, at least according to official EU announcements, the new EU Screening Regulation does not attempt to harmonize the existing investment screening mechanisms of the member states or to introduce an EU-wide screening mechanism. However, there is no doubt that the EU investment screening regulations will have a very practical impact on foreign direct investments into the EU, both in substance and procedure. In particular, the new regulation will lead to the following:

135

Article 3(2) EU Screening Regulation. Article 3(5) EU Screening Regulation. 137 Article 3(6) of the EU Screening Regulation. See in this regard Sec. 55(2) AWV. 138 Cf. Articles 6 and 9 of the EU Screening Regulation. 136

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(1) The regulation in conjunction with the current amendments of relevant national laws in major European economies further enlarges protectionism towards FDI. (2) The regulation establishes a dual system of review and control of FDIs on the EU level. In addition to screening acquisition transactions under a merger control perspective pursuant to the EC Merger Regulation,139 the EC now has the competence to review transactions and issue opinions from a “public order and security” perspective. (3) With the exception of Germany, the EU Screening Regulation will have a serious impact on the timing of FDI screening. Due to the right of other affected member states to provide comments and the right of the EC to issue an opinion, flanked by the obligation of the host state (the state where the investment is made) to properly consider those comments and opinions, national scrutiny procedures are likely to be delayed. (4) The EU Screening Regulation, inevitably, will rise further awareness of the sensitivities originating from FDIs, which in turn may lead to an alignment of the substantial and procedural rules of member states that, until now, are having a less comprehensive investment review regime. (5) This is not the end—it is just the beginning: until today, the EU Screening Regulation only grants the EC a “coordinating role”. However, the EC, on a regular basis, in its own publications emphasizes that other elements will be further assessed accompanying the regulation.140 Therefore, considering the unstoppable regulatory craze in Brussels, it is to be expected that the competences of the EC, regarding the review and control of FDI, will be substantially enlarged in the near future.

References Banque de France (2019) Foreign Direct Investment. https://www.banque-france.fr/en/statistics/ balance-payments/foreign-direct-investment BDI (2019) Investitionskontrollen in Deutschland und Europa of 19 February 2019. https://bdi.eu/ artikel/news/investitionskontrollen-in-deutschland-und-europa/ BMWi (2019) Investment Reviews. https://www.bmwi.de/Redaktion/EN/Artikel/Foreign-Trade/ investment-reviews.html BR-Drs. (2004) 5/04. https://www.bundesrat.de/SharedDocs/drucksachen/2004/0001-0100/5-04. pdf?__blob¼publicationFile&v¼1 BT-Drs. (2008) 16/10730. http://dip21.bundestag.de/dip21/btd/16/107/1610730.pdf BT-Drs. (2009) 16/11898. http://dip21.bundestag.de/dip21/btd/16/118/1611898.pdf Charrière-Bournazel B (2014) Pitfalls in private M&A in France. ILP:71–80 European Commission (2017) Final Proposal for a Regulation of the European Parliament and of the Council establishing a framework for the screening of foreign direct investments into the

139

Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (2004). 140 Cf. European Commission (2017), p. 10.

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Union. https://eur-lex.europa.eu/resource.html?uri¼cellar:cf655d2a-9858-11e7-b92d01aa75ed71a1.0001.02/DOC_1&format¼PDF. Accessed 30 May 2019 Flaßhoff C, Glasmacher S (2017) Wankende Verwaltungsakte im Außenwirtschaftsrecht bei Unternehmenskäufen. Neue Zeitschrift für Gesellschaftsrecht:489–495 Handelsblatt (2018) Kuka wird zum Testfall für chinesische Investoren in Deutschland of 26 November 2018. https://www.handelsblatt.com/meinung/kommentare/kommentar-kukawird-zum-testfall-fuer-chinesische-investoren-in-deutschland/23679014.html?ticket¼ST4351-LHrSrad7LuvFVOC42zvU-ap5. Accessed 1 June 2019 Hasselbach K, Peters K (2017) Entwicklung des Übernahmerechts 2016/2017. Betriebsberater:1347–1354 Hasselbrink H (2010) Beteiligungserwerbe an GmbH durch ausländische Investoren. GmbHRundschau:505–512 Hindelang S, Hagemeyer T (2017) Enemy at the Gates? Die aktuellen Änderungen der Investitionsprüfvorschriften in der Außenwirtschaftsverordnung im Lichte des Unionsrechts. Europäische Zeitschrift für Wirtschaftsrecht:882–890 Krause H (2009) Die Novellierung des Außenwirtschaftsgesetzes und ihre Auswirkungen auf M&A-Transaktionen mit ausländischen Investoren. Betriebsberater:1082–1087 Krolop K (2008) Schutz vor Staatsfonds und anderen ausländischen Kapitalmarktakteuren unter Ausblendung des Kapitalmarktrechts?. Zeitschrift für Rechtspolitik:40–44 Mausch-Liotta M (2017) In: Hocke E, Sachs B, Pelz C (eds) Außenwirtschaftsrecht. C.F. Müller, Heidelberg Müller H, Hempel R (2009) Änderungen des Außenwirtschaftsrechts zur Kontrolle ausländischer Investoren. Neue Juristische Wochenschrift:1638–1642 Pottmeyer K (2018) In: Wolffgang HM, Simonsen O, Rogmann A (eds) AWR-Kommentar Kommentar für das gesamte Außenwirtschaftsrecht. Bundesanzeiger, Köln Reinhardt W, Pelster A (2009) Stärkere Kontrolle von ausländischen Investitionen - Zu den Änderungen von AWG und AWV. Neue Zeitschrift für Gesellschaftsrecht:441–445 Rosenberg O, Hilf J, Kleppe M (2009) Protektion statt offener Märkte?. Der Betrieb:831–836 Seibt C, Kulenkamp S (2017) CFIUS-Verfahren und Folgen für M&A-Transaktionen mit Beteiligung deutscher Unternehmen – und als Modell für die Weiterentwicklung des deutschen Außenwirtschaftsrechts?. Zeitschrift für Wirtschaftsrecht:1345–1357 Seibt C, Wollenschläger B (2009) Unternehmenstransaktionen mit Auslandsbezug nach der Reform des Außenwirtschaftsrechts. Zeitschrift für Wirtschaftsrecht:833–845 Söhner M (2011) Sicherheitenstellungen und Außenwirtschaftsrecht. Recht der Internationalen Wirtschaft:454–462 Stompfe P (2017) Die Gestaltung und Sicherung internationaler Investor-Staat-Verträge in der arabischen Welt am Beispiel Libyens und Katars. Nomos, Baden-Baden Stompfe P (2019) Rebuilding the Berlin Wall?. https://verfassungsblog.de/rebuilding-the-berlinwall. Accessed 1 June 2019 Théophile D, Chriqui-Guiot O (2018) In: Goldman C (ed) The foreign investment regulation review, 6th edn. Law Business Research Ltd, London, p 72 Thoms A (2018) Verschärfte Kontrolle internationaler Unternehmenstransaktionen. Außenwirtschaftliche Praxis:102–107 Traugott R, Strümpell P (2009) Die Novelle des Außenwirtschaftsgesetzes: Neue Regeln für den Erwerb deutscher Unternehmen durch ausländische Investoren. Die Aktiengesellschaft:186–192 U.S. Department of State (2018) Investment Climate Statements, Report on Germany. https://www. state.gov/e/eb/rls/othr/ics/2018/eur/281587.htm. Accessed 1 June 2019 UNCTAD (2018) World Investment Report 2018. United Nations, Geneva Voland T (2009) Freitag, der Dreizehnte - Die Neuregelungen des Außenwirtschaftsrechts zur verschärften Kontrolle ausländischer Investitionen. Europäische Zeitschrift für Wirtschaftsrecht:519–523

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von Bülow C, Stephanblome M (2008) Acting in Concert und neue Offenlegungspflichten nach dem Risikobegrenzungsgesetz. Zeitschrift für Wirtschaftsrecht:1797–1806 Walter K (2017) Die neuen Regelungen zu Unternehmenserwerben. Recht der Internationalen Wirtschaft:650–655 Weller MP (2008) Ausländische Staatsfonds zwischen Fusionskontrolle, Außenwirtschafts-recht und Grundfreiheiten. Zeitschrift für Wirtschaftsrecht:857–864

Philipp Stompfe LL.M. (London) is attorney at law at Alexander & Partner (Berlin/Stuttgart/ Paris/Vienna/Doha/Riyadh/Ras Al Khaimah/Cairo/Muscat). Within the team of Alexander & Partner, Dr. Philipp Stompfe is primarily involved in international litigation and arbitration. He is constantly acting as counsel in commercial and investment arbitrations before all of the major arbitral institutions mainly related to construction, energy, distribution, real estate and M&A disputes. He is specialized in international investment law and further advises on international contract and corporate law and on the structuring and implementation of cross-border investment projects, in particular in the Near and Middle East.

Foreign Investment Screening in Italy, Spain, Portugal and Greece Paolo Vargiu

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Investment Screening in Greece and the Lack of a Formal Screening Mechanism . . . . . . . 2.1 Private Investment Aid Schemes: Law 4399 of 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 The Promotion of Strategic Investment: Laws 4146/2013 and 3908/2011 . . . . . . . . . . 2.3 The EU Screening Regulation and the Absence of a Screening Mechanism . . . . . . . . 3 A Liberal Approach to Foreign Investment: Spain’s Screening Mechanism . . . . . . . . . . . . . . 3.1 The Scope of Application of the Spanish Screening Mechanism . . . . . . . . . . . . . . . . . . . . 3.2 The Screening Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Considerations on the Implementation of the EU Screening Regulation in Spain . . 4 Discretion and Foreign Investment Screening: The Case of Portugal . . . . . . . . . . . . . . . . . . . . . 4.1 The “Opposition Procedure” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 The “Opposition Procedure” and the EU Screening Regulation . . . . . . . . . . . . . . . . . . . . . 5 Mitigation over Objection: The Screening of Foreign Investment in Italy . . . . . . . . . . . . . . . . 5.1 The Screening Procedure and Its Scope of Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 The Screening of Investments in Investments in Energy, Transport and Telecommunication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 The Italian Screening Mechanism and the EU Screening Regulation . . . . . . . . . . . . . . . 6 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

118 119 119 120 122 123 123 124 126 128 129 130 132 132 134 136 136 137

Abstract This chapter addresses the investment screening mechanisms of Spain, Portugal and Italy and the choice by Greece not to implement a formal screening mechanism, testing them against the aims and requirements of Regulation (EU) 2019/452. It is argued that the four countries analysed in this chapter share a common liberal approach to foreign investment, which pervades their domestic laws on the matter, and that such approach appears capable of ensuring full cooperation between southern European countries and the EU Commission towards a common European framework for the screening of foreign investment.

P. Vargiu (*) University of Leicester, Leicester Law School, Leicester, UK e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 117–138, https://doi.org/10.1007/16495_2020_16, Published online: 24 May 2020

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1 Introduction In the eyes of the uninformed stranger, southern Europe could be seen as one large, sunny country. The resemblance among their famously beautiful landscapes goes alongside the common roots, appearances and sounds of the Portuguese, Italian and Spanish idioms, and the influence of Magna Graecia is still prominent over the various cultures of the countries overlooking the Mediterranean Sea. Centuries after the dissolution of the Roman Empire, however, “southern Europe” is a term that probably makes sense only in the brochures of holiday agents, as the social, economic and political situations of Portugal, Italy, Greece and Spain have, in fact, rather few things in common. What the four countries often derogatorily referred to as “PIGS” do have in common, however, is a very liberal approach to entry requirements for foreign investment. The domestic markets of Portugal, Italy, Greece and Spain are indeed quite open to foreign investors. Foreign companies can access such markets subject to very few hurdles and demands from host states, and said hurdles are mostly limited to situations in which the planned investment may raise risks to sectors considered crucial for national interests. In this chapter, this approach to foreign investment shall be called favor collocationi, partially borrowing the expression from the international commercial law principle of favor contractus,1 to underscore the will of the states hereby analysed to limit the entry of foreign investment as little as possible and solely when the investment in question affects certain crucial industry sectors. Indeed, the screening mechanisms implemented by Spain, Portugal and Italy, as well as the various schemes introduced in Greece to aid the establishment of foreign investors, seem to be all inspired by this welcoming and investorfriendly approach. As it will be argued in this chapter, it is an approach that appears promising in ensuring that the aims of the EU Screening Regulation2 will not be frustrated by the presence, in three southern European countries, of custom investment screening mechanisms. Moreover, it is possible that the very presence of such mechanisms may in fact aid the achievement of the aims stated in the preamble to the Regulation. Indeed, the EU Screening Regulation establishing a framework for the screening of foreign direct investments into the European Union is not only the result of years of work towards the definition of such framework, but also the product of concerted efforts of the EU member states that have provided major input based on their experiences at the domestic level.3 Therefore, as it will be seen in this chapter, it is unlikely that the implementation of the Regulation will make significant amendments to national legislation necessary in the countries under investigation here. Nevertheless, a few tweaks to existing national frameworks 1

See generally Keller (2008), pp. 247–266; Baron (1999), p. 125. 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 79I, 21.3.2019, pp. 1–14 (“EU Screening Regulation”). 3 As evidenced in the preamble to the EU Screening Regulation. 2

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may be needed in order to reach, if not full uniformity, at least a significant degree of harmonisation in how foreign investments are screened when entering one of the EU member states’ markets. This chapter is structured as follows. Section 2 shall address the investment legal scenario in Greece, the one country in southern Europe that elected not to implement an investment screening mechanism. Section 3 shall turn to Spain and its very liberal approach to investment screening. Portugal and its peculiar system, based on the government’s discretion, will be analysed in Sect. 4, while Sect. 5 will cover the Italian law on investment screening. Each section shall assess the relevant national mechanism against the newly entered into force EU Screening Regulation. Finally, Sect. 6 will provide some brief concluding remarks.

2 Investment Screening in Greece and the Lack of a Formal Screening Mechanism Greece is one of the few EU member states that have not established a domestic mechanism for the screening of foreign investment. Nonetheless, it can be affirmed that the Greek government has adequate tools to effectively monitor the investments that enter its territory. Indeed, a significant number of legal provisions, equally applicable to both national and foreign companies, allow the government to constantly have a clear picture of the investment activities taking place in the territory of Greece. A comprehensive enquiry on the various mechanisms that allow the Greek government to keep track of all the investment in Greece would require much longer than a book chapter, and the reader must therefore be necessarily referred to the specialist literature in the field.4 However, it is possible to provide a few exemplary cases that help draw a more general picture of Greece’s monitoring of investment in its territory.

2.1

Private Investment Aid Schemes: Law 4399 of 2016

The first example is Law 4399 of 2016, entitled “Institutional framework for establishing Private Investment Aid schemes for the country’s regional and economic development – Establishing the Development Council and other provisions”.5 According to its preamble, the aim of Law 4399 is “to promote the balanced development with respect to the environmental resources and support the country’s less favoured areas, increase employment, improve cooperation and increase the average size of undertakings, achieve technological upgrading, form a new extrovert 4 5

See a.o. Dryllerakis and Giannikas (2019). Published in the Government Gazette of the Hellenic Republic, 22 June 2016, no. 117.

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national identity (branding), improve competitiveness in high value-added and knowledge-intensive sectors, shift the value in the production chain for the production of more complex products, save natural resources in the perspective of a circular economy, offer better services, attract direct foreign investments”. The law represents the main framework establishing incentives for economic activities in Greece and provides a number of favourable conditions, such as exemptions from payment of income tax, state subsidies towards part of the costing of investment plans, leasing subsidies for the purchase of equipment and the creation of jobs associated with investment, fixed corporate income tax rates and fast track licensing procedures.6 The scope of application of Law 4399 is quite broad, as it lists as possible beneficiaries of the incentives any company that is established or maintains a branch in Greece at the commencement date of the investment plan and is a personal, commercial or social cooperative7 company, an agricultural cooperative, a producer group or agricultural corporate partnership,8 companies undergoing establishment or merger procedures (as long as the publicity requirements have been met before the commencement date of the investment plan), joint ventures registered in the General Electronic Commercial Registry (GEMI), public and municipal companies, and their subsidiaries. Each project is evaluated by the agency competent for the relevant industry sector within 30 days;9 if such evaluation is successful, and the project therefore benefits from the aid scheme, the investment “shall be checked during their implementation, upon completion and commissioning of the investment”.10 Therefore, the government’s monitoring of foreign investment—at least those that benefit from the aid introduced by Law 4399—continues throughout the whole duration of the investment activity.

2.2

The Promotion of Strategic Investment: Laws 4146/2013 and 3908/2011

A similarly noteworthy example is provided by Law No. 4146 of 2013, entitled “Creation of a Friendly Development Environment for Strategic and Private

6

Ibid., Article 10. Social Cooperative Enterprises of Law 4019/2011 (Gov. Gaz. 216, Vol. A). 8 As defined by the Law 4384/2016 (Gov. Gaz. 78, Vol. A). 9 Ibid., Article 14(B)(6). 10 Ibid, Article 16(1): ‘Τα επενδυτικά σχε
δια πoυ υπάγoνται στα καθεστω
τα ενισχύσεων ελε
γχoνται κατά τη διάρκεια υλoπoίησής τoυς, κατά την oλoκλήρωση και
εναρξη της παραγωγικής λειτoυργίας της επε
νδυσης και για την τήρηση των μα- κρoχρóνιων υπoχρεω
σεω
ν τoυς. Ο
ελεγχoς μπoρεί να εί- ναι
ελεγχoς επί των εγγράφων τoυ φακε
λoυ («διoικητικóς
ελεγχoς») ή/και επιτóπιoς
ελεγχoς. Ο διoικητικóς
ελεγχoς διενεργείται είτε απó την Υπηρεσία είτε απó εντεταλμε
νo óργανo ελε
γχoυ, κατά τα oριζóμενα στην παράγραφo 8. Ο επιτóπιoς
ελεγχoς διενεργείται απoκλειστικά απó τo ως άνω εντεταλμε
νo óργανo ελε
γχoυ.’ 7

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Investments and Other Provisions”.11 The law was issued in the aftermath of the 2011 crisis and was aimed at creating a friendly environment for “strategic investments”, defined as “the productive investments [. . .] which generate quantitative and qualitative results of major significance for the overall national economy [. . .] and [. . .] facilitate the country’s exit from the economic crisis”.12 Such strategic investments could originate from “either the Government or individuals or through publicprivate partnerships”.13 Article 14 sets out the requirements for the inclusion of investment proposals from private subjects in the procedures provided for by Law 4146 for the purpose of the acceleration of the strategic investments (called “Strategic Investments Procedures”). Investors must file a detailed application to the Interministerial Committee for Strategic Investments, which is expected to reach a decision on the application within 45 days from the application. Investors admitted to the Strategic Investment Procedure assume disclosure obligations and a set of other obligations to carry out their project.14 Also interesting is Law 3908 of 2011, entitled “Aid for Private Investment to Promote Economic Growth, Entrepreneurship and Regional Cohesion”.15 The aim of such law is “to promote economic growth in Greece by introducing investment aid schemes to improve entrepreneurship, technological development, the competitiveness of enterprises and regional cohesion and promote green economy, the efficient function of existing infrastructures and the deployment of the country’s human resources”.16 A piece of legislation with a very broad scope of application,17 Law 3908/2011 provides investors with measures such as tax relief, financial subsidies and leases to up to 7 years.18 Investors aiming at entering the scheme must file an application as detailed in Article 8 of the law, which shall be assessed by the Minister for the Economy, Competitiveness and Shipping under the criteria listed in Article 10, which addresses the composition of the company, the viability and performance of the investment plan and the company, questions of technological development, innovation and new products and services, and the contribution of the investment to the economy and to regional development. Investments admitted to the scheme are subject to disclosure obligations and constant monitoring by the Minister for the Economy, Competitiveness and Shipping.19

11

Published in the Government Gazette of the Hellenic Republic, Issue A, 18 April 2013, no. 90. Ibid., Article 1. 13 Ibid. 14 Ibid., Article 15. 15 Published in the Government Gazette of the Hellenic Republic, Issue A, 1 February 2011, no. 8. 16 Ibid., Article 1. 17 Ibid., Article 2. 18 Ibid., Article 4. 19 Ibid., Article 11. 12

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The EU Screening Regulation and the Absence of a Screening Mechanism

The lack of a screening mechanism in Greece, paired with the schemes in place to aid investors in specific sectors, is indicative of the state’s approach to foreign investment, seen as a crucial tool for development (especially in the wake of the economic crisis and the bailout procedures).20 Foreign investment is carefully monitored in those sectors in which state aid is seen as necessary or where the law requires the state’s participation (such as, among others, manufacturing, energy, tourism, transport and communications, health services or waste management). It is arguable, in light of the legislation currently in force, that Greece is less interested in screening (and perhaps mitigating the possible adverse effect on the market for domestic companies) of foreign investment in particular sectors and rather concerned with creating the conditions for a de facto screening based on setting up conditions to access aid schemes for foreign and national investors alike. While not constituting a formal screening mechanism, the conditions to access the aid schemes create a field where certain players, by virtue of such access, are granted better odds than others— making it thus inefficient, from a business perspective, to enter the market without benefitting from said schemes. It is arguable, therefore, that Greece would face no relevant obstacles in implementing the provision under Article 7(3) of the EU Screening Regulation, which requires each member states to “duly consider” whether foreign direct investment in its territory “is likely to affect its security or public order” and gives them the option to request an opinion from the Commission or comments from other Member States. Another issue that may be raised with regard to Greece is whether it will be the Commission’s task, lacking a formal domestic screening procedure, to ensure the respect of Article 3(2) of the EU Screening Regulation, under which “[r]ules and procedures related to screening mechanisms, including relevant timeframes, shall be transparent and not discriminate between third countries”. Even in absence of a formal screening mechanism, it is arguable that questions of transparency and non-discrimination will nonetheless apply to the treatment of foreign investors—especially in regulated sectors such as those listed in laws like 4399/2016, 4146/2013 or 3908/2011. However, this may not even be a problem in practice: access to the aid schemes and mechanisms that allow Greece to monitor foreign investment inflows in its territory is not limited to companies incorporated in Greece, nor does said legislation include potentially discriminatory provisions. As long as the application of the principles and rules listed in those laws complies with requirements of transparency and non-discrimination, the implementation of the EU Screening Regulation shall not affect Greece’s approach to foreign investment.

20

Atik (2016), p. 1215.

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3 A Liberal Approach to Foreign Investment: Spain’s Screening Mechanism Spain has long introduced a formal screening mechanism for foreign investment. Such mechanism is embedded in the legislation applicable to foreign investment in Spain, contained in Real Decreto 664 of 23 April 1999,21 which established the legal regime for foreign investments in Spain and Spanish investments abroad.22 The Real Decreto in question replaced the regime established by Real Decreto 671 of 2 July 1992 (on foreign investment in Spain) and Real Decreto 672 of 2 July 1992 (on Spanish investments abroad). The previous legislation established an “administrative exchange control regime”23 and were not consistent with the aims of liberalisation of foreign investment introduced by the Treaty on the European Union. Real Decreto 664 of 23 April 1999 (hereinafter referred to simply as “Decreto”), replacing the previous investment regulation, introduced a liberalised regime for foreign investment—a regime in which the screening mechanism serves the purpose of allowing the Spanish government to constantly monitor the foreign investment inflow.

3.1

The Scope of Application of the Spanish Screening Mechanism

A wide range of activities are subject to the requirements and the screening procedure laid down in the aforementioned Real Decreto—namely, participation in Spanish companies, the constitution of a company in Spain and operations to increase in the number of branches, the subscription and acquisition of negotiable securities representative of loans issued by residents, participation in investment funds registered in the Registries of the National Securities Market Commission, the acquisition of real estate located in Spain with funds coming from tax havens and the “constitution, formalization or participation in contracts of participation accounts,

21 Real Decreto 664/1999, de 23 de abril, sobre inversiones exteriores, Ministerio de Economía y Hacienda, published in “BOE” n. 106 of 4 May 1999. 22 Real Decreto 664/1999, Art. 1(1): ‘En el presente Real Decreto se establece el régimen jurídico de las inversiones extranjeras en España y de las españolas en el exterior, quedando liberalizadas las citadas inversiones, así como su liquidación, independientemente del acto de disposición por el que se realicen, siempre que se ajusten a lo dispuesto en el presente Real Decreto y sus normas de desarrollo.’ 23 Ibid., Preamble.

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foundations, economic interest groupings, cooperatives and communities of goods”.24 The screening procedures laid down in the Decreto also apply to investments in specific sectors that, under Spanish law, are already subject to special regimes, such as air transport, radio, minerals and mineral raw materials of strategic interest and mining rights, television, gambling, telecommunications, private security, manufacture, trade or distribution of weapons and explosives for civil use and activities related to national defence.25 All activities related to foreign investment activities are monitored by the Board of Foreign Investment (Junta de Inversiones Exteriores), which is a collegiate, interministerial body that reports to the General Directorate for Trade Policy and Foreign Investments.26

3.2

The Screening Procedure

The screening procedure begins with a mandatory declaration of any investment falling within the definitions in the aforementioned Article 3. The declaration is to be 24 Ibid., Article 3: ‘Las inversiones extranjeras en España, a los efectos establecidos en el artículo siguiente, podrán llevarse a efecto a través de cualquiera de las siguientes operaciones: a) Participación en sociedades españolas. [. . .] b) La constitución y ampliación de la dotación de sucursales. c) La suscripción y adquisición de valores negociables representativos de empréstitos emitidos por residentes. d) La participación en fondos de inversión, inscritos en los Registros de la Comisión Nacional del Mercado de Valores. e) La adquisición de bienes inmuebles sitos en España, cuyo importe total supere los 500.000.000 de pesetas, o su contravalor en euros o cuando, con independencia de su importe, proceda de paraísos fiscales, entendiéndose por tales, los países y territorios relacionados en el artículo único del Real Decreto 1080/1991, de 5 de julio. f) La constitución, formalización o participación en contratos de cuentas en participación, fundaciones, agrupaciones de interés económico, cooperativas y comunidades de bienes, cuando el valor total correspondiente a la participación de los inversores extranjeros sea superior a 500.000.000 de pesetas, o su contravalor en euros o cuando, con independencia de su importe, proceda de paraísos fiscales, entendiéndose por tales los países y territorios relacionados en el artículo único del Real Decreto 1080/1991, de 5 de julio.’ 25 Ibid., Article 1(2): ‘Las disposiciones contenidas en el presente Real Decreto se entenderán sin perjuicio de los regímenes especiales que afecten a las inversiones extranjeras en España establecidos en legislaciones sectoriales específicas, y, en particular, en materia de transporte aéreo, radio, minerales y materias primas minerales de interés estratégico y derechos mineros, televisión, juego, telecomunicaciones, seguridad privada, fabricación, comercio o distribución de armas y explosivos de uso civil y actividades relacionadas con la Defensa Nacional. En los supuestos anteriores, las inversiones se ajustarán a los requisitos exigidos por los órganos administrativos competentes fijados en dichas normas. Una vez cumplidos los requisitos dispuestos en la mencionada legislación sectorial, deberá estarse a lo previsto en el presente Real Decreto.’ 26 Ibid., Article 9: ‘1. La Junta de Inversiones Exteriores es el órgano colegiado interministerial, adscrito a la Dirección General de Política Comercial e Inversiones Exteriores, con funciones de informe en materia de inversiones exteriores. 2. Compete a la Junta de Inversiones: a) Informar de aquellos asuntos, que, sobre inversiones exteriores, le sean sometidos por el órgano que resulte competente en la materia. b) Informar los expedientes a que se refiere el artículo 10 del presente Real Decreto. c) Cualesquiera otras atribuciones que le sean encomendadas por la legislación vigente.’

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rendered “for administrative, statistical or economic purposes” to the Investment Registry of the Ministry of Economy and Finance. Under Article 4 of the Decreto, such declaration is to be made ex post by investors that do not hold residency in Spain.27 The exception to the rule is represented by those instances in which the investment comes from a tax haven, in which case the declaration must be made prior to the commencement of the investment as well as immediately after the investment is established.28 Article 8 of the Decreto provides for the possibility that a number of subjects (investment holders, Spanish companies in which foreign individuals or entities hold participations, public notaries, investment services companies, credit institutions and other financial entities that have acted in investment operations) be required to provide further information as needed by the General Directorate of Commercial Policy and Foreign Investments. The screening mechanism established by Spain, besides fulfilling the purpose of monitoring the inflow of foreign investment, has also the function of addressing questions of influence of foreign investment on public order, public health and safety. Indeed, should the nature, form or conditions of performance of foreign investment affect (or could they possibly affect) activities related to public powers, public order, public health and safety, Article 10(2) gives the Council of Ministers the power to decide on the suspension of the regime accorded to foreign investments by Real Decreto 664/1999;29 should the regime be suspended, every further operation related to the investment by the investor affected by the Council’s decision shall not be carried out without obtaining prior authorisation.30 If such authorisation is

27

Ibid., Article 4(2.2.b). More in detail, Article 4(2.a) of the Real Decreto 664/1999 states that ‘[l]a obligación de declaración a que se refiere el apartado anterior se ajustará a las siguientes reglas: a) Si la declaración tiene por objeto una inversión que proceda de paraísos fiscales, entendiéndose por tales los territorios o países previstos en el Real Decreto 1080/1991, de 5 de julio, el titular de la misma deberá efectuarla con carácter previo a la realización de la inversión. Esta declaración se entenderá sin perjuicio de la que hay que efectuar con posterioridad a la realización de la inversión, conforme a la letra siguiente. No obstante, se exceptuará de la declaración previa los casos siguientes: 1. Las inversiones en valores negociables ya sean emitidos u ofertados públicamente ya sean negociados en un mercado secundario oficial o no, así como las participaciones en fondos de inversión inscritos en los Registros de la Comisión Nacional del Mercado de Valores. 2. Cuando la participación extranjera no supere el 50 por 100 del capital de la sociedad española destinataria de la inversión.’ 29 Ibid., Article 10(1): ‘El Consejo de Ministros, a propuesta del Ministro de Economía y Hacienda y, en su caso, del titular del Departamento competente por razón de la materia, y previo informe de la Junta de Inversiones Exteriores, podrá acordar, de forma motivada, con carácter general o particular, la suspensión del régimen de liberalización establecido en el presente Real Decreto y siempre que las inversiones por su naturaleza, forma o condiciones de realización, afecten o puedan afectar a actividades relacionadas, aunque sólo sea de modo ocasional, con el ejercicio de poder público, o a actividades que afecten o puedan afectar al orden público, seguridad y salud públicas.’ 30 Ibid., Article 10(2): ‘Una vez suspendido el régimen de liberalización, el inversor afectado deberá solicitar autorización administrativa previa respecto de las operaciones de inversión que, a partir del momento de la notificación de la suspensión, se propusiera realizar. La solicitud de autorización se dirigirá al Director general de Política Comercial e Inversiones Exteriores, correspondiendo su 28

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granted, the activities concerned must be carried out within the period specified by the authorisation; should the authorisation not set up a deadline for the activities in question, the law sets up an automatic six-month term. If the investment is not completed before the term has elapsed, the authorisation will be deemed expired, unless an extension is obtained.31 The Council of Ministers, however, can only take this decision upon the proposal of the Minister of Economy and Finance and, where appropriate, the head of the department responsible for the matter and after a report from the Board of Foreign Investments. Such decision shall be formal and expressly motivated.32 Investments in sectors relevant to national defence, such as the production or trade of weapons, ammunition, explosives and war materials, always require authorisation by the Council of Ministers, at the proposal of the Minister of Defence and following a report from the Board of Foreign Investments.33

3.3

Considerations on the Implementation of the EU Screening Regulation in Spain

It is arguable that the screening mechanism established by Real Decreto 664 of 23 April 1999 reflects the liberal approach to foreign investment proper of a country that, in Europe, finds itself in a peculiar situation of being at the same time a favourite destination of foreign investment as well as a strong capital-exporting country.34 The preamble to the Decreto is quite explicit in stating that the “ex post” general declaration system, on the one hand, replaced the previous system based on verification and authorisation procedures and, on the other hand, has the sole purpose of

resolución al Consejo de Ministros a propuesta del Ministro de Economía y Hacienda y, en su caso, del titular del Departamento competente por razón de la materia y previo informe de la Junta de Inversiones Exteriores. Transcurridos seis meses desde el día de la fecha en que la solicitud haya tenido entrada en cualquiera de los registros del órgano administrativo competente para resolver, sin que haya recaído resolución expresa se producirán los efectos previstos en el artículo 43.2 de la Ley 30/1992, de 26 de noviembre, de Régimen Jurídico de las Administraciones Públicas y del Procedimiento Administrativo Común.’ 31 Ibid., Article 10(3): ‘Las inversiones autorizadas de acuerdo con el apartado anterior deberán realizarse dentro del plazo que específicamente hubiere señalado la autorización o, en su defecto, en el de seis meses; transcurrido el plazo sin haberse realizado la inversión, se entenderá caducada la autorización, salvo que se obtenga prórroga.’ 32 Ibid. 33 Ibid., Article 11(1): ‘El régimen de liberalización establecido en el presente Real Decreto queda suspendido respecto de las inversiones extranjeras en España en actividades directamente relacionadas con la Defensa Nacional, tales como las que se destinen a la producción o comercio de armas, municiones, explosivos y material de guerra.’ 34 See for recent statistics on investment inflow into Spain the official website of the Spanish Ministry of Finance at http://www.hacienda.gob.es/es-ES/Areas%20Tematicas/ParqueMovil/ Paginas/Estad%C3%ADsticas.aspx (last visited 12 June 2019).

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the analysis and evaluation of information “for administrative, statistical or economic purposes and for the promotion of foreign investments”. Moreover, and most notably, the Decreto abolishes the categorisation of investments that characterised the system of verification and authorisations of the previous regime and simply states that certain operations as described in Article 3 “are considered foreign investments for the purpose of their declaration to the Investment Registry”; any other operation is simply not subject to the declaration and, therefore, to the screening procedure. The exception to this general rule, as stated beforehand, is that investments coming from tax havens are subject to prior declaration, underscoring the attention posed by the Spanish government to the origin of the capitals entering their territory. Even in such cases, however, the liberalisation regime does apply without significant differences, with the sole exception of the necessary further declaration by the investors aimed at keeping a somehow more attentive overlook on said investment. Furthermore, the nature of the deadline set in the Real Decreto—namely the automatic six-month term should the Council of Ministers’ decision not set a shorter one—shows the favor collocationi that permeates the law and, in general, the Spanish approach to foreign investment. Article 3 of the EU Screening Regulation may also raise minor questions with regard to the Decreto. First, it is doubtful, however, whether the automatic six-month term for the completion of the investment subject to governmental authorisation under Article 10(2) of the Decreto—in the absence of stricter deadlines set by the Council of Ministers—is consistent with the objectives of the EU Screening Regulation. One problematic aspect is constituted by Article 3(5) of the EU Screening Regulation, according to which “[f]oreign investors and the undertakings concerned shall have the possibility to seek recourse against screening decisions of the national authorities”. Should an investor wish to exercise the right set out in Article 3(5) of the EU Screening Regulation, it is unclear whether such recourse would be compatible with the requirement, under the Decreto, that the planned investment are carried out within the six-month (or shorter) deadline. The other problematic issue is raised by the cooperation mechanism in relation to foreign direct investments undergoing screening established by Article 6 of the EU Screening Regulation. The fact that the Decreto only requires declarations from foreign investors to be rendered ex post (with the only exception to this rule being investment by entities from tax haven) raises the question on how such cooperation can be effectively achieved. The objectives of the EU Screening Regulation in terms of cooperation—and especially questions of likelihood that investments in Spain may affect other member states—can be successfully accomplished only if the screening mechanism is in fact activated. The Decreto, however, merely provides for a declaration to be rendered when the investor is already active in the territory of Spain (and therefore the European Union) or the activation of a more robust procedure solely in the aforementioned cases under Article 10(2)—that is, when the investment may affect matters relative to the exercise of public power or public order, public safety and health, and, even in these cases, the mechanism is only concerned with activities that affect Spanish powers, public order, safety and health.

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4 Discretion and Foreign Investment Screening: The Case of Portugal The framework of reference for the screening of foreign investment in Portugal is Decreto-Lei 138/2014.35 This piece of legislation is aimed at safeguarding strategic assets essential to guaranteeing national defence and security, as well as the security of Portugal’s supply of services essential to national interests in the sectors of energy, transport and communication.36 The rationale behind the screening mechanism is explained in Article 3 of the Decreto-Lei. The Council of Ministers, on the proposal of the member of the government responsible for the area in which the strategic asset in question is integrated, may object to operations that directly or indirectly result in direct or indirect control, by a person or persons from third countries to the EU and the European Economic Area, of strategic assets in cases where there is a real and sufficiently serious threat to the defence and national security or security of supply of the country in services fundamental to national interest.37 Such a threat is assessed against the criteria laid down in the same provision: the procedure is aimed at preserving the physical security, integrity and permanent availability and effectiveness of strategic assets; the continuity, regularity and quality of services of general interest; the preservation of the confidentiality, imposed by law or public contract, of the data and information obtained in the exercise of their activity by the entities that control, directly or indirectly, the strategic assets and of the technological assets necessary for the management of the strategic assets.38

35

Published in the Diário da República n. 177/2014, Série I of 15 September 2014, pp. 4937–4940. Decreto-Lei n. 138/2014, Article 1: ‘O presente decreto-lei estabelece o regime de salvaguarda de ativos estratégicos essenciais para garantir a defesa e segurança nacional e a segurança do aprovisionamento do País em serviços fundamentais para o interesse nacional, nas áreas da energia, dos transportes e comunicações, enquanto interesses fundamentais de segurança pública.’ 37 Ibid., Article 3(1): ‘O Conselho de Ministros, sob proposta do membro do Governo responsável pela área em que o ativo estratégico em causa esteja integrado, pode opor-se, nos termos do artigo seguinte, à realização de operações das quais resulte, direta ou indiretamente, a aquisição de controlo, direto ou indireto, por uma pessoa ou pessoas de países terceiros à União Europeia e ao Espaço Económico Europeu, sobre ativos estratégicos, independentemente da respetiva forma jurídica, nos casos em que se determine que estes possam pôr em causa, de forma real e suficientemente grave, a defesa e segurança nacional ou a segurança do aprovisionamento do País em serviços fundamentais para o interesse nacional, nos termos do presente decreto-lei.’ 38 Ibid., Article 3(2). 36

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The “Opposition Procedure”

The procedure is dictated by Article 4 of the Decreto-Lei, and it is eloquently named “Opposition Procedure”.39 The whole process must begin within 30 days from the date of the conclusion of the legal transactions relating to a relevant operation or, if the business becomes known after the conclusion of the relevant transaction, from a later date when the government acquires knowledge of the transaction. The evaluation procedure may be initiated by the member of the government responsible for the area in which the strategic asset in question is affected, threatened or interested.40 The procedure must end within 60 days from its commencement, and its output must be either a reasoned decision assessing the risk of such an operation for the defence and national security or for the security of Portugal’s supply of services essential to the national interest or no formal decision, which constitutes a decision of non-opposition.41 If the outcome of the procedure is the opposition to the transactions, all acts and agreements relating to the transaction in question are null and void.42 The decision is open to challenge, pursuant to the Code of Procedure, in the Administrative Courts.43 Much like the one introduced in Spain by Real Decreto 664 of 23 April 1999,44 the screening mechanism established by Portugal with Decreto-Lei 138/2014 clearly shows the favor collocationi that pervades the Portuguese legislation on foreign investment. However, while the Spanish procedure requires the Minister of Economy and Finance to actually intervene every time an investment can potentially 39

Procedimento de oposição, Article 4. Ibid., Article 4(1): ‘No prazo de 30 dias, a contar da celebração dos negócios jurídicos relativos a uma operação da qual resulte, direta ou indiretamente, a aquisição de controlo, direto ou indireto, por uma pessoa ou pessoas de países terceiros à União Europeia e ao Espaço Económico Europeu, sobre ativos estratégicos, independentemente da respetiva forma jurídica, ou a contar da data em que tais negócios passem a ser do conhecimento geral, caso esta seja posterior, o membro do Governo responsável pela área em que o ativo estratégico em causa se integre pode dar início a um procedimento de avaliação, mediante decisão fundamentada, a fim de avaliar o risco de tal operação para a defesa e segurança nacional ou para a segurança do aprovisionamento do País em serviços fundamentais para o interesse nacional.’ 41 Ibid., Article 4(5) and (6): ‘5. Até ao fim do prazo de 60 dias contados da entrega completa das informações e documentos a que se refere o n. 2, o Conselho de Ministros, sob proposta do membro do Governo responsável pela área em que o ativo estratégico em causa se integre, pode decidir opor-se à operação, através de decisão fundamentada, nos termos do n. 1 do artigo anterior, de acordo com os critérios enunciados no n. 2 do referido artigo, e no respeito pelas regras e princípios legais aplicáveis, em particular o princípio da proporcionalidade. 6. A ausência de decisão no prazo a que se refere o número anterior vale como decisão de não oposição.’ 42 Ibid., Article 4(7): ‘Sendo adotada uma decisão de oposição nos termos do n. 5, todos os atos e negócios jurídicos relativos à operação em causa são nulos e ineficazes, incluindo os respeitantes à exploração económica ou ao exercício de direitos sobre os ativos ou sobre as entidades que os controlam.’ 43 Article 4(8): ‘A decisão do Conselho de Ministros a que se refere o n. 5 é impugnável, nos termos do Código de Processo nos Tribunais Administrativos.’ 44 See above, Sect. 3. 40

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affect the exercise of public powers or activities related to public order, safety or health, it is arguable that the Portuguese mechanism is even less strict. The key is in the word pode (may) in Article 3(1) of the Decreto-Lei, which describes the powers of the Council of Ministers to object to operations that directly or indirectly result in direct or indirect control of strategic assets in cases where there is a real and sufficiently serious threat to the defence and national security or security of supply of the country in services fundamental to the national interest. The Portuguese screening mechanism is aimed at monitoring and assessing foreign investment against the same criteria, mutatis mutandis, listed in other southern European screening procedures. Unlike the Spanish and, as it will be seen in the remainder of this chapter, the Italian ones, however, the Portuguese screening mechanism does not automatically operate when foreign investors enter the national market, nor does it set routine requirements, in terms of declarations or documents, for investors wishing to enter such market. Instead, the Decreto-Lei introduces a discretional power in the hands of the Council of Ministers to decide whether to activate the screening mechanism and a procedure of opposition should the Council find that a prospective investment could possibly affect national security or defence. Regardless of official statistics or anecdotal knowledge suggesting that the screening procedure under Article 4 of the Decreto-Lei has rarely been activated, it is worth underscoring that the discretional powers given to the Council of Ministers show a very positive aspect of the Portuguese law on foreign investment, as well as a somehow worrisome one. The former is, as mentioned beforehand, the fact that the Decreto-Lei introduces an investor-friendly legislative scenario, opening as a matter of fact the Portuguese market to an exceptionally wide array of prospective investors. The latter is represented by the fact that such discretional powers in the hands of the Council of Ministers also allow for the possibility of less than transparent or discriminatory decisions. Gross abuses of such powers would likely be challenged pursuant to the aforementioned Article 5 of the Decreto-Lei; nevertheless, the compatibility of these powers with the EU Screening Regulation is somewhat questionable.45

4.2

The “Opposition Procedure” and the EU Screening Regulation

As stated beforehand, Portugal’s discretional mechanism can be activated at will by the government. There are no circumstances in which such activation is mandatory. Moreover, the mechanism defined in Articles 3 and 4 of Decreto-Lei 138/2014 only confers discretional powers to the government to object to an investment or a particular activity linked to it, rather than authorising its establishment in the territory of the state. It is therefore uncertain whether the cooperation objectives set out in 45

See below, Sect. 6.

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Articles 6 (related to foreign investments undergoing screening) and 7 (not undergoing screening) of the EU Screening Regulation can be achieved. On the one hand, it is conceivable that Portugal maintains a clear picture of which foreign investors are entering its market in order to be able to activate the opposition procedure should it be needed to preserve national security or defence; therefore, should an investment be subject to screening, the issue of the necessary notifications to the Commission under Article 6 of the EU Screening Regulation would not be particularly complicated. On the other hand, the fact that the government enjoys broad discretion on whether to activate the screening procedure makes it difficult to predict how the cooperation objectives laid down in the EU Screening Regulation will be effectively achieved. The objective of Article 7 of the EU Screening Regulation is the sharing of information on whether “foreign direct investment planned or completed in another Member State which is not undergoing screening in that Member State is likely to affect its security or public order”. It is questionable how Portugal would comply with the requirements of Article 7 of the EU Screening Regulation, which—in this case—call to action a state that is not very keen on foreign investment screening in the first place. Moreover, it remains to be verified whether the screening mechanism established by Portugal, with the discretional powers of the government in terms of which investments to object to, is in fact consistent with the requirement, under Article 3 (2) of the EU Screening Regulation, that “[r]ules and procedures related to screening mechanisms, including relevant timeframes, shall be transparent and not discriminate between third countries’” The rules in the Decreto-Lei, while not discriminatory per se, are not very transparent and could be abused to discriminate foreign investors, since the government can decide whether to activate the opposition procedure at will and is not obliged to activate it unless they so desire. However, unless the Commission raises this issue itself and forces Portugal to change its screening mechanism towards greater consistency with the objectives of Article 3(2) of the EU Screening Regulation, it is very likely that the significance of this problem will be relatively low: should the Commission not act, any objection to the effect of the discretion conferred to the Portuguese government by the Decreto-Lei would have to be raised by foreign investors on the basis of bilateral investment treaties, and questions of transparency and non-discrimination would be basically left to the appreciation of investment arbitrators, who are under no obligation to apply EU law uniformly.

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5 Mitigation over Objection: The Screening of Foreign Investment in Italy The foreign investment screening mechanism in Italy has been introduced by Decreto Legge 21/2012.46 Similarly to the Portuguese screening mechanism, the Decreto Legge introduced rules on special powers on corporate structures in the defence and national security sectors, as well as for activities of strategic importance in the energy, transport and communications sectors. It is worthwhile underscoring that the Decreto Legge recognises explicitly the role of member states as gateways for non-European investors to enter EU territory by providing that, when assessing national interest, the Ministry of Economic Development must consider EU interests alongside the national one.47 It is by decree of the same Ministry that, every three years, the activities to be considered strategic to national security and defence are identified.48

5.1

The Screening Procedure and Its Scope of Application

Article 1(1) of the Decreto Legge gives the government special powers that may be exercised on foreign investors in case of threat of serious injury to essential defence interests and national security, such as the imposition of specific safety conditions, veto powers on the adoption of certain board decisions and outright opposition to acquisition of companies or participation by any private (Italian or otherwise) subject.49

46

Decreto Legge 15 marzo 2012, n. 21, published in the Gazzetta Ufficiale - Serie generale - n. 63 of 15 March 2012, converted into law by Legge 11 maggio 2012, n. 56 (published in the Gazzetta Ufficiale - Serie generale - n. 111 of 14 May 2012 at p. 1), recante: “Norme in materia di poteri speciali sugli assetti societari nei settori della difesa e della sicurezza nazionale, nonche’ per le attivita’ di rilevanza strategica nei settori dell’energia, dei trasporti e delle comunicazioni.”. (12A05505) (GU Serie Generale n.111 del 14-05-2012). 47 Ibid., Article 1(3)(b) specifies that the interest of the EU is to be desumed from its official positions and assessed alongside—thus without giving either prominence—the Italian interest: ‘l’esistenza, tenuto conto anche delle posizioni ufficiali dell’Unione Europea’ (emphasis added). 48 Ibid., Article 1(7). By way of example, see the Decreto Legge 16 Ottobre 2017, n. 148, named ‘Disposizioni urgenti in materia finanziaria e per esigenze indifferibili’ (Urgent Provisions on financial matters and for urgent requirements), published in the Gazzetta Ufficiale - Serie Generale n. 242 of 16 October 2017, that lists high-technology sectors (e.g. storage and treatment of data, artificial intelligence, and aerospace technology) among those essential to national interests or presenting risks to public order and national security. 49 The salient elements of the long provision included in Article 1(1) of the Decreto Legge 21/2012 state that ‘[c]on uno o più decreti del Presidente del Consiglio dei Ministri [. . .] sono individuate le attività di rilevanza strategica per il sistema di difesa e sicurezza nazionale, ivi incluse le attività strategiche chiave, in relazione alle quali [. . .] possono essere esercitati i seguenti poteri speciali in caso di minaccia di grave pregiudizio per gli interessi essenziali della difesa e della sicurezza

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Article 1(3) provides the criteria for the assessment of the threat to national interest. The Ministry of Economic Development evaluates the economic, financial, technical and organisational capacity of the purchaser as well as of the industrial project, considering the potential for the regular continuation of activities, the maintenance of technological assets, the activities’ key strategies, the security and continuity of supply, as well as the correct and timely execution of contractual obligations assumed vis-à-vis public administrations, directly or indirectly, by the company whose investments are subject to acquisition. Moreover, and most notably, the Ministry shall investigate on the personal and political links of the investor with states that raise concerns with regard to democracy, rule of law, and criminal or terrorist influences.50 Acts and decisions that may be relevant for the Ministry’s assessment must be promptly notified by the investor, to allow for the exercise of the power of veto. The decision on the veto must be reached within 15 days from the notification, which can be extended for another 10 days should further information be needed and

nazionale: a) imposizione di specifiche condizioni relative alla sicurezza degli approvvigionamenti, alla sicurezza delle informazioni, ai trasferimenti tecnologici, al controllo delle esportazioni nel caso di acquisto, a qualsiasi titolo, di partecipazioni in imprese che svolgono attività di rilevanza strategica per il sistema di difesa e sicurezza nazionale; b) veto all’adozione di delibere dell’assemblea o degli organi di amministrazione di un’impresa di cui alla lettera a), aventi ad oggetto la fusione o la scissione della società, il trasferimento dell’azienda o di rami di essa o di società controllate, il trasferimento all’estero della sede sociale, il mutamento dell’oggetto sociale, lo scioglimento della società, [. . .] le cessioni di diritti reali o di utilizzo relative a beni materiali o immateriali o l’assunzione di vincoli che ne condizionino l’impiego; c) opposizione all’acquisto, a qualsiasi titolo, di partecipazioni in un’impresa di cui alla lettera a) da parte di un soggetto diverso dallo Stato italiano, enti pubblici italiani o soggetti da questi controllati, qualora l’acquirente venga a detenere, direttamente o indirettamente, anche attraverso acquisizioni successive, per interposta persona o tramite soggetti altrimenti collegati, un livello della partecipazione al capitale con diritto di voto in grado di compromettere nel caso specifico gli interessi della difesa e della sicurezza nazionale. [. . .] 50 Ibid., Article 1(3): ‘Al fine di valutare la minaccia di grave pregiudizio per gli interessi essenziali della difesa e della sicurezza nazionale [. . .] il Governo, nel rispetto dei principi di proporzionalità e ragionevolezza, considera [. . .] a) l’adeguatezza, tenuto conto anche delle modalità di finanziamento dell’acquisizione, della capacità economica, finanziaria, tecnica e organizzativa dell’acquirente nonché del progetto industriale, rispetto alla regolare prosecuzione delle attività, al mantenimento del patrimonio tecnologico, anche con riferimento alle attività strategiche chiave, alla sicurezza e alla continuità degli approvvigionamenti, oltre che alla corretta e puntuale esecuzione degli obblighi contrattuali assunti nei confronti di pubbliche amministrazioni, direttamente o indirettamente, dalla società le cui partecipazioni sono oggetto di acquisizione, con specifico riguardo ai rapporti relativi alla difesa nazionale, all’ordine pubblico e alla sicurezza nazionale; b) l’esistenza, tenuto conto anche delle posizioni ufficiali dell’Unione europea, di motivi oggettivi che facciano ritenere possibile la sussistenza di legami fra l’acquirente e paesi terzi che non riconoscono i principi di democrazia o dello Stato di diritto, che non rispettano le norme del diritto internazionale o che hanno assunto comportamenti a rischio nei confronti della comunità internazionale, desunti dalla natura delle loro alleanze, o hanno rapporti con organizzazioni criminali o terroristiche o con soggetti ad esse comunque collegati.’

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requested by the Ministry.51 Similarly, Article 1(5) provides that any investor that acquires participation in companies that operate in sectors strategic to national interest and defence must notify the Ministry of Economic Development within 10 days from the acquisition, to allow for the exercise of the same powers listed in the aforementioned Article 1(4). It is worth underscoring that, besides exercising the power of veto, the Decreto Legge provides the Ministry with ample powers to impose specific prescriptions or conditions for the protection of strategic national interest and defence.52

5.2

The Screening of Investments in Investments in Energy, Transport and Telecommunication

Article 2 of the Decreto Legge provides for provisions similar to the general ones in Article 1 to be applied to investments in the energy, transport and telecommunication sectors. Every decision, act or operation of a company active in such sector resulting in changes in ownership, control, availability, mission, mergers, acquisitions or transfers must be notified within 10 days to the Presidency of the Council of Ministers,53 which can extend the deadline for 10 more days should further information be needed. The decision on whether to exercise veto on the company’s action is rendered within 15 days from the notification.54 Furthermore, Article 2(5) of the

51 Ibid., Article 1(4): ‘Ai fini dell’esercizio del potere di veto [. . .], l’impresa notifica alla Presidenza del Consiglio dei Ministri una informativa completa sulla delibera o sull’atto da adottare in modo da consentire il tempestivo esercizio del potere di veto.[. . .] Entro quindici giorni dalla notifica il Presidente del Consiglio dei Ministri comunica l’eventuale veto. Qualora si renda necessario richiedere informazioni all’impresa, tale termine è sospeso, per una sola volta, fino al ricevimento delle informazioni richieste, che sono rese entro il termine di dieci giorni. Le richieste di informazioni successive alla prima non sospendono i termini. Decorsi i predetti termini l’operazione può essere effettuata. Il potere di cui al presente comma è esercitato nella forma di imposizione di specifiche prescrizioni o condizioni ogniqualvolta ciò sia sufficiente ad assicurare la tutela degli interessi essenziali della difesa e della sicurezza nazionale. Le delibere o gli atti adottati in violazione del presente comma sono nulli. Il Governo può altresì ingiungere alla società e all’eventuale controparte di ripristinare a proprie spese la situazione anteriore. [. . .]’ 52 Ibid. 53 Ibid., Article 2(2): ‘Qualsiasi delibera, atto o operazione [. . .] che abbia per effetto modifiche della titolarità, del controllo o della disponibilità degli attivi medesimi o il cambiamento della loro destinazione, comprese le delibere dell’assemblea o degli organi di amministrazione aventi ad oggetto la fusione o la scissione della società, il trasferimento all’estero della sede sociale, il mutamento dell’oggetto sociale, lo scioglimento della società, la modifica di clausole statutarie [. . .] il trasferimento dell’azienda o di rami di essa in cui siano compresi detti attivi o l’assegnazione degli stessi a titolo di garanzia, è notificato, entro dieci giorni e comunque prima che vi sia data attuazione, alla Presidenza del Consiglio dei Ministri dalla società stessa.[. . .]’ 54 Article 2(4): ‘[. . .] Entro quindici giorni dalla notifica, il Presidente del Consiglio dei Ministri comunica l’eventuale veto. Qualora si renda necessario richiedere informazioni alla società, tale termine è sospeso, per una sola volta, fino al ricevimento delle informazioni richieste, che sono rese

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Decreto Legge states that investors from outside the EU must notify the Presidency of the Council of Ministers within 10 days of the operation that brings them into the Italian market. Should the investment be considered as threatening essential public interests in the sectors of energy, transport and telecommunication, Article 2(6) provides the Council of Ministers with the power to subject the investment to express guarantees to protect such interests; the government, however, can object to the investment as a whole should the public interest not be sufficiently protected by means of said express guarantees. Such threat is assessed according to the same criteria listed in Article 1(3) for threats of serious injury to the essential defence interests and national security of Italy—that is, “on the basis of objective criteria”; however, Article 2 (7) also requires the state to comply with the principle of non-discrimination.55 This is a rather unique feature among the screening mechanisms of southern European countries, and, at first glance, it may be also considered a redundant one: as this provision is aimed at foreign investors only, Article 2(7) of the Decreto Legge provides an extra safeguard, for foreign investors in relevant sectors, against discriminatory decisions by the Italian government, in addition to those—in particular the most favoured nation (MFN) treatment and national treatment standards— already included in the 178 bilateral investment treaties and free trade agreements to which Italy is a signatory state, which bind Italy to treat investors not less favourably than investors from third countries and national companies. MFN provisions in bilateral investment treaties rarely provide for exceptions in cases of measures adopted by a state to protect crucial public interests. Article 2(7), however, allows Italy to apply measures to individual investors should the activities of the investors in question be capable of affecting essential national interests or present a risk to public order and national security. It is likely, however, that such investors may frustrate the application of Article 2(7) by filing for investment arbitration against Italy on the basis of the violation of the MFN clause in a bilateral investment treaty.

entro il termine di dieci giorni. Le richieste di informazioni successive alla prima non sospendono i termini. Fino alla notifica e comunque fino al decorso dei termini previsti dal presente comma è sospesa l’efficacia della delibera, dell’atto o dell’operazione rilevante. Decorsi i termini previsti dal presente comma l’operazione può essere effettuata. Il potere di veto [. . .] è espresso nella forma di imposizione di specifiche prescrizioni o condizioni ogniqualvolta ciò sia sufficiente ad assicurare la tutela degli interessi pubblici [. . .]. Le delibere o gli atti o le operazioni adottati o attuati in violazione del presente comma sono nulli. Il Governo può altresì ingiungere alla società e all’eventuale controparte di ripristinare a proprie spese la situazione anteriore.[. . .]’ 55 Ibid., Article 2(7): ‘I poteri speciali di cui ai commi 3 e 6 sono esercitati esclusivamente sulla base di criteri oggettivi e non discriminatori.[. . .]’

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The Italian Screening Mechanism and the EU Screening Regulation

At first glance, it may be observed that the broad powers granted to the Italian government by Decreto Legge 21/2012 create a significantly supervised investment environment in Italy. A more thorough reading of the provisions briefly analysed above, however, paints a rather different picture. The rules in Articles 1(4), 2(3) and 2(6) of the Decreto Legge are in fact aimed at mitigating the possible risks and threats to the matters protected by the law in question, rather than allowing the government to outright object to the establishment of foreign investors or the implementation of their investment activities. Articles 1(4), 2(3) and 2(6) rather represent another example, in fact, of the favor collocationi proper of southern European countries and already observed in the legislation on foreign investment of Spain and Portugal (and, to a lesser degree, Greece). The possibility for the Italian government to exercise its veto powers to the extent of blocking foreign investment is indeed limited to those instances in which the public interest may not be sufficiently protected by means of binding investors to the respect of express guarantees. Furthermore, the attention of the Italian law to the positions of the European Union can be seen as a testament to the Italian legislator’s will to open the market to foreign investors as much as possible without prejudicing essential Italian interest as well as those of the European Union as a whole. It is thus arguable that the Italian mechanism for the screening of foreign investment, also in light of its attention to the interests of the European Union, will not raise particular issues in interacting with the EU Screening Regulation. It is, however, possible that a revision of Articles 1 and 2 of Decreto Legge 21/2012 would be needed to ensure consistency of the Italian law with the cooperation mechanism under Article 6 of the EU Screening Regulation. Currently, the Italian law provides for 15- and 10-day deadlines for the notification of information between investors and the government and the decision on whether to exercise the veto powers granted by the Decreto Legge. Such strict deadlines, while favourable to foreign investors as ensuring a quick and effective settlement of any issue raised by the screening mechanism, properly allow for neither the notification requirements under Article 6(1) nor the exchange of information between the host state and other member states, as well as between the host state and the Commission. It is likely, however, that any decision in this regard will be reactive rather than proactive and that the Italian law will be amended if and when issues of communication and exchange of information will be raised by the Commission or any other EU member state.

6 Concluding Remarks As shown by this report, southern European countries appear to share a common approach towards opening their domestic markets to foreign investor—an approach here labelled favor collocationi and characterised by the will to limit the entry of

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foreign investment as little as possible and only if the investment affects certain crucial sectors. Such approach pervades the screening mechanisms implemented by Spain, Portugal and Italy, as well as the various schemes introduced in Greece to aid the establishment of foreign investors. Notwithstanding the differences among these mechanisms and schemes, it is possible to easily observe that not only are they consistent with the EU’s approach on free movement of goods and services and the interest in the growth of the common market, but they are also, generally speaking, consistent with the aims stated in the preamble of the EU Screening Regulation. It has been pointed out that a few tweaks and amendments may be needed in order to ensure the full compatibility of the existing mechanisms with the EU Screening Regulation and that the Commission may have to require Greece’s collaboration to implement certain measures included in the EU Screening Regulation (with particular reference to the cooperation mechanism in ex Article 7). Nevertheless, the outlook seems that of a smooth and unproblematic interaction between southern member states’ mechanisms and the common European framework for the screening of foreign investment. It remains to be seen, in practice, whether the few added requirements shall serve the further purpose of increasing foreign investment flows intra-EU and from third countries besides the commendable objective of the intensification of cooperation among member states with regard to investment screening.

References Atik J (2016) From “no bailout” to the European Stability Mechanism. Fordham Int Law J 39 (5):1201–1224 Baron G (1999) Do the UNIDROIT principles of international commercial contracts form a New Lex Mercatoria? Arbitr Int 15(2):115–130 Dryllerakis E, Giannikas C (2019) Ο Νεoσ Kωδικασ Ανωνυμων Εταιρειων. Nomiki Bibliothiki Keller B (2008) Reading the CISG in favor of the contract: “Favor Contractus”. In: Andersen CB, Schroeter UG (eds) Sharing international commercial law across national boundaries: Festschrift for Albert H. Kritzer on the occasion of his eightieth birthday. Wildy, Simmonds & Hill, pp 247–266

Paolo Vargiu is a lecturer in law at the University of Leicester, UK, where he teaches public international law, investment law and jurisprudence. He obtained a JD from the University of Cagliari and an LLM and a PhD from the University of Nottingham and gained his Fellowship at the Higher Education Academy during his time at the University of Leicester. He has authored numerous publications in the fields of international investment law and arbitration, public international law and human rights. Dr Vargiu is a member of the Italian Bar and regularly advises clients on matters falling within his areas of expertise.

Foreign Investment Screening in Poland, Lithuania and Latvia Marek Jaśkowski and Szymon Pawłowski

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Poland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Principal Laws Governing Investment Screening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Screening Mechanism According to the Law on Control of Certain Investments . . 2.3 The Polish Law on Control of Certain Investments in the Light of the EU Screening Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Lithuania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Principal Laws Concerning Investment Screening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Screening Mechanism According to the Law on the Protection of Objects of Importance to Ensuring National Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Law on the Protection of Objects of Importance to Ensuring National Security in the Light of the EU Screening Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Latvia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Principal Laws Concerning Investment Screening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Screening Mechanism According to the National Security Law . . . . . . . . . . . . . . . . . . . . 4.3 National Security Law in the Light of the Screening Regulation . . . . . . . . . . . . . . . . . . . . 4.4 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

140 140 140 142 151 159 160 160 161 166 167 168 168 171 182 184 185

Abstract In this chapter, the authors present the current state of national legislation in Poland, Lithuania and Latvia enacted to protect national and public security in the context of foreign direct investment (FDI). The authors discuss the following aspects related to FDI screening: investors subject to screening, protected objects,

M. Jaśkowski Cardinal Stefan Wyszyński University, Department of International and European Law, Warsaw, Poland e-mail: [email protected] S. Pawłowski (*) Cardinal Stefan Wyszyński University, Department of International Diplomatic Law and Public Diplomacy, Warsaw, Poland e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 139–186, https://doi.org/10.1007/16495_2020_13, Published online: 10 June 2020

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transactions subject to screening, screening criteria, competent authorities, procedures, administrative/judicial review and consequences of unlawful transactions. Thereafter, an analysis of the different national legal regimes is made in the light of the EU Screening Regulation.

1 Introduction This chapter is divided into three sections, dedicated to Poland, Lithuania and Latvia, respectively. Each section outlines principal national laws that are of relevance to the foreign direct investment (FDI) in each country. It then proceeds to present the screening mechanisms as provided for by, respectively, the Polish Law of 24 July 2015 on Control of Certain Investments, Lithuanian Law of 10 October 2002 on the Protection of Objects of Importance to Ensuring National Security and Latvian Law of 14 December 2000 – National Security Law. The following aspects are discussed: investors subject to screening, protected objects, transactions subject to screening, screening criteria, competent authorities, procedures, administrative/judicial review and consequences of unlawful transactions. Finally, the relevance of EU Regulation 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 (hereinafter the ‘EU Screening Regulation’) for Polish, Lithuanian and Latvian screening mechanisms is evaluated, including the analysis with regard to the need for modification of national laws.

2 Poland 2.1

Principal Laws Governing Investment Screening

The principal act on investment screening is the Law of 24 July 2015 on Control of Certain Investments1 (hereinafter also referred to as LCCI), discussed in more detail in Sect. 2.2. In accordance with its title, it regulates the principles and procedures of acquisition of shares, of shareholders’ rights or of parts of establishments leading to acquiring important participation or domination in any of the protected companies. The declared objective of the LCCI is the protection of public order and public security according to Treaty on the Functioning of the European Union (TFEU) and in the light of Article 4 paragraph 2 of the Treaty on the European Union (TEU).

1 Ustawa z dnia 24 lipca 2015 r. o kontroli niektórych inwestycji, Polish OJ 2017, item 1857, as amended.

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Besides, one should mention three other laws of relevance for the subject matter. The mechanisms of control provided for in these laws are of a different character, and therefore they will only be summarised below, without detailed presentation in the present contribution. Firstly, the Law of 16 December 2016 on Principles of Management of State Property2 (hereinafter ‘Management Law’ or ML). This act has the nature of lex generalis as it is applicable in the absence of particular provisions (Article 1). It regulates, inter alia, such problems as exercising the shareholders’ rights, principles of acquisition and disposal of shares by the Treasury, principles of exercising shareholders’ rights in companies defined as important for the national economy and the functioning of State Fund for Capital Investments. According to Article 11 ML, the disposal of shares belonging to the Treasury is subject to the approval by the Polish Council of Ministers (numerous exceptions to this rule are provided in paragraph 3 of that article). This rule is also applicable to the disposal of shares belonging to state legal persons3 (Article 15 ML). Transactions concluded in violation of the above rules are void (Article 16 ML). Notably, Article 13(1) ML contains an express prohibition for the Treasury to dispose of shares of 29 companies enumerated therein (and equally of any companies created due to transformations of the enumerated companies). The prohibition is not, however, absolute. Article 13 (2) and (3) provides for certain exceptions thereto. First, it is permitted to sell the shares to another company entirely owned by the Treasury or another state legal person or to any of the companies listed in Article 13(1) (subject to approval by the Polish Council of Ministers). Second, in the case of listed companies, the disposal is authorised in the case of obligatory disposal triggered by exceeding certain limits, as stipulated in Article 73(2)(2) of the Law on Public Offer and Conditions for Introducing Financial Instruments to Organised Trading System and on Listed Companies. Third, shares can be sold to workers of the company concerned, in accordance with the Law of 30 August 1996 on commercialisation4 and certain rights of the employees. Transactions concluded in violation of the above rules are void (Article 16 ML). The second law is the Law of 18 March 2010 on Special Powers of the Minister Competent in the Field of State Assets and Their Execution in Certain Companies or Groups Active in Sectors of Electricity, Crude Oil and Gas Fuels.5 The law empowers the competent minister to issue an opposition to decisions of companies

2

Ustawa z dnia 16 grudnia 2016 r. o zasadach zarządzania mieniem państwowym, Polish OJ of 2016, item 2259. 3 ‘State legal persons’ (‘państwowe osoby prawne’) are special public law persons, categories of which are listed in Article 3(1) ML. 4 For the purposes of this law, the term ‘commercialisation’ is understood as a transformation of a state enterprise into a commercial company. 5 Ustawa z dnia 18 marca 2010 r. o szczególnych uprawnieniach ministra właściwego do spraw aktywów państwowych oraz ich wykonywaniu w niektórych spółkach kapitałowych lub grupach kapitałowych prowadzących działalność w sektorach energii elektrycznej, ropy naftowej oraz paliw gazowych, Polish OJ 2016, item 2012.

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to dispose of certain types of infrastructure (exploited for purposes of production, processing, storing etc. of electricity, crude oil and gas fuel). Additionally, fundamental decisions with regard to the further operation of a company can be opposed if it constitutes a genuine threat to the functioning of critical infrastructure. The third act is the Law of 6 March 2018 on Rules Concerning the Conducting of Economic Activity in Poland by Foreign Undertakings and Other Foreign Persons.6 According to Article 20(1) of this law, the minister competent in the field of economy issues a prohibition to conduct economic activity in Poland via a branch if, among others, the activity of a given foreign (non-EEA) undertaking constitutes a threat to the security or defence of the state, to the security of classified information or to other overriding public interest. The latter notion is defined in Article 3 of this law in rather broad terms as ‘a protected value, in particular public order, public security, security of the state, public health, preserving the financial balance of social security system, protection of consumers, recipients of services and workers, fairness in commercial transactions, combating of fraud, protection of natural and urban environment, animal health, intellectual property, aims of social and cultural policy and protection of national and artistic heritage’.

2.2

Screening Mechanism According to the Law on Control of Certain Investments

This section explains in more detail the extent and mechanism of investment control, as provided for in the Law on Control of Certain Investments. It discusses the ratione personae application of the law (investors subject to screening, protected enterprises, competent authorities), the types of transactions subject to screening and screening criteria, the procedure (including available means of administrative and judicial review) and consequences of unlawful transactions. Finally, the (rather modest) practice of application of the Law on Control of Certain Investments is discussed.

2.2.1

Investors Subject to Screening

The LCCI does not target specifically investments by foreign persons. It englobes investments by any investor, home or foreign, EU or non-EU. Furthermore, it does not differentiate between privately or publicly owned investors.

6

Ustawa z dnia 6 marca 2018 r. o zasadach uczestnictwa przedsiębiorców zagranicznych i innych osób zagranicznych w obrocie gospodarczym na terytorium Rzeczypospolitej Polskiej, Polish OJ 2019, item 1079, as amended.

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Protected Enterprises

The LCCI does not specify individual companies to which the control procedure would be applicable (‘protected companies’ according to the LCCI), leaving it to the executive (Polish Council of Ministers). The law does, however, enumerate the sectors, companies active in which can be declared ‘protected’ (Article 4(1) LCCI): • • • • • • • • • • • • • • •

Generation of electricity Production of motor gasoline or diesel oil Pipeline transport of crude oil, motor gasoline or diesel oil Storage of motor gasoline, diesel oil, natural gas Underground storage of crude oil or natural gas Production of chemicals, fertilisers and chemical products Manufacture and trading of explosives, weapons and ammunition, as well as products and technology for military or police purposes Regasification or liquefaction of natural gas Transhipment of crude oil and its products in seaports Distribution of natural gas or electricity Transhipment in ports of fundamental importance to the national economy Telecommunications activity Transmission of gaseous fuels Production of rhenium, or Mining and processing of metal ores used for the production of explosives, weapons and ammunition, as well as of products and technologies for military or police purposes

The Council of Ministers, when deciding on classifying an enterprise as protected, shall take into account the following elements: (1) its market share, (2) scale of its activity, (3) probability and seriousness of risk for fundamental interests of society and (4) necessity of application of the control procedure in the case of a given company for the protection of public order or public security, as understood in Articles 52(1) and 65(1) TFEU (Article 4(2) LCCI). For the purpose of qualifying a company as protected, it is irrelevant whether it is a state- or a privately owned enterprise. The current list of protected companies is fixed in the Regulation of the Council of Ministers of 23 December 2019 Concerning the List of Entities Subject to Protection and Competent Control Authorities.7 The regulation is binding starting from 1 January 2020 and remains in force until the end of 2020. Similarly, the previous two regulations had a 1-year lifespan. It was only the first regulation ever that encompassed a shorter period, from 6 July 2016 till the end of 2016.8 Apparently, this is how the Council of Ministers decided to fulfil a condition specified in

7 8

Polish OJ of 2019, item 2501. Polish OJ of 2016, item 977.

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Article 4(2) LCCI, according to which it should take into account the necessary time span of the protection. The Regulation cannot be appealed against to the administrative court by the company subject to protection. It is, however, possible to challenge the legality of the inclusion on the list in an indirect way, by instituting proceedings against a decision founded on the regulation and addressed to the company. In the proceedings, the administrative court may verify the legality of the inclusion as it is bound by laws but not by regulations.9 Such an action may only, however, result in an annulment of the contested decision (Article 145 of the Law on the Proceedings Before the Administrative Courts10), leaving the Regulation intact (even though such a ruling might constitute an indication for future judgments). Apart from that, the Regulation itself may be reviewed by the Constitutional Court, but only on grounds of incompatibility with the Constitution. The constitutional complaint may be initiated by any person whose constitutionally guaranteed freedoms or rights have been violated against a law or a normative act on the basis of which a court or an administrative authority issued a decision concerning the rights or obligations of that person (Article 79 of Polish Constitution). The complaint may be submitted only after the exhaustion of available legal means within 3 months after notification of the final judgment or decision (Article 77(1) of the Law of 30 November 2016 on the Organisation and Procedure Before the Constitutional Court11). Judgments of the Constitutional Court have the effect of erga omnes (Article 190 of the Polish Constitution). The list in force includes nine entities: • EmiTel S.A. (privately owned company, principal sector of activity: telecom infrastructure) • Grupa Azoty S.A. (Treasury share: 33%, principal sectors of activity: diverse (fertilisers, chemicals, sulphur extraction)) • innogy Stoen Operator sp. z o.o. (RWE-owned, principal sector of activity: energy distribution infrastructure) • KGHM Polska Miedź S.A. (Treasury share: 31%, principal sectors of activity: mining, extraction of metals) • Polski Koncern Naftowy ORLEN S.A. (Treasury share: 28%, principal sectors of activity: petroleum refining, fuel retailer) • PKP Energetyka S.A. (privatised,12 principal sector of activity: energy distribution) • Tauron Polska Energia S.A. (Treasury 30%, KGHM 10%, principal sectors of activity: coal mining, energy production and distribution)

9

SAC judgment in case I OPS 4/05. Prawo o postępowaniu przed sądami administracyjnymi, Polish OJ 2018, item 1302, as amended. 11 Ustawa z dnia 30 listopada 2016 r. o organizacji i trybie postępowania przed Trybunałem Konstytucyjnym (Polish OJ 2016, item 2072). 12 Owned by Caryville Investments Sp. z o.o., property of CVC Capital Partners which is an investment fund managing the resources of, inter alia, US and Canadian pension programs. 10

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• TK Telekom sp. z o.o. (privately owned, principal sector of activity: telecommunications) • HAWE Telekom sp. z o.o. (principal sector of activity: telecommunications)

2.2.3

Transactions Subject to Screening

The control procedure is initiated in the case of transactions leading, in any of the protected companies, to domination (50% of votes/capital or more) or important participation (understood as (1) achieving relevant thresholds, 20%, 25%, 33% of votes/capital; (2) achieving a weighted average of 20% of votes during the last 2 years; or (3) acquisition of an establishment13 from a protected company). These thresholds can be reached as a result of a direct or indirect acquisition. The term ‘indirect acquisition’ is understood in the LCCI (Article 3(5) and (6)) in a rather wide sense, encompassing not only (1) acquisition by a subsidiary but also acquisition (2) by an entity the statute of which provides for particular dispositions concerning its property after its dissolution, (3) acquisition in one’s own name but on behalf of other persons, (4) acquisition by an entity that concluded a contract to transfer to another person the rights stemming from the shares in the protected company and (5) acquisition in concert with other persons. Additionally, according to Article 3(6) LCCI, a situation in which an entity becomes dominant in a society holding at least 20% of votes/capital in a protected company or having important participation therein or having a title to an establishment of a protected company shall be qualified as an indirect acquisition. If the acquisition defined in Article 3 (6) LCCI took place on the basis of an act accomplished according to the laws of a legal order other than Polish, the LCCI provisions apply to the results specified in Article 3(6) LCCI. Finally, Article 3(7) LCCI defines a ‘consequential acquisition’ consisting of reaching the specified thresholds as a consequence of an amortisation or buyback of own shares of a protected company, a split or a merger of a protected company, a modification of status of preferred shares in the protected company or an annulment of shares of the protected company.

2.2.4

Screening Criteria

Article 11 LCCI lists formal and substantive grounds for issuing an opposition to the transaction by a competent authority. First, an opposition is delivered if the applicant did not supplement, within the period specified by the competent authority, the application, information or documents. Apart from the formal reasons, the LCCI

Establishment (Polish: przedsiębiorstwo) is defined by Polish Civil code as ‘an organized set of tangible and intangible elements intended for conducting business activity’.

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(Article 11(1)(2)) enumerates the following bases for opposing the transaction: (1) protection of independence and territorial integrity, human and citizen rights, the security of citizens and the environment; (2) prevention of events that would render more difficult or impossible the fulfilling of obligations stemming from the NATO Treaty; (3) preventing events or activities that can damage the international relations of Poland; or (4) ensuring public order or the security of the state, as well as the essential needs of the population in the area of protection of health and life. The reasons for opposition are therefore not limited to security interests but also include grounds of a different nature (human rights, the environment), as well as a possibly wide notion of ‘public order’. On the other hand, according to the same provision, any decision has to take into account Articles 52(1) and 65(1) TFEU. It has been indicated that, as a consequence, the authorities applying the LCCI are bound to take into consideration the interpretation and application of these provisions in the case law of the CJEU, and what is more, certain terms employed among the grounds for refusal should be given the meaning adopted in the EU acquis (in conformity with the principle of autonomous interpretation of EU law).14 The economic interest of the state is explicitly excluded as a reason for opposition (Article 11(4) LCCI).

2.2.5

Competent Authorities

Although the LCCI is a relatively recent law, the list of authorities competent to review the transactions has already been modified several times. Currently, the competent authority is one of the following ministers: for State Assets, for National Defence or for Maritime Management, depending on the field of activity of the protected company. Additionally, an important role in the control procedure is exercised by the Consultative Committee (hereinafter CC). It is an advisory body composed of representatives of 22 authorities (most of them are the ministers but also services competent in the field of national security, (counter)intelligence, electronic communications and energy). Members of the CC are appointed by the Prime Minister.

2.2.6

Procedure

As a preliminary remark, it must be indicated that in the case of the absence of a specific regulation in the LCCI, the general rules of administrative procedure (which

14

Kochowska and Mataczyński (2016), para. 25.

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is the Polish Code of the Administrative Procedure15 (hereinafter CAP)) apply to the procedure before the competent authority. What is important, in 2017, the CAP was revised to include a specific regulation concerning the tacit mode of resolving an administrative case (Chapter 8A CAP). A case is deemed to be resolved tacitly if, within a prescribed period, the administrative authority does not issue a decision or a ruling (a tacit conclusion of the proceedings) or does not issue an opposition in the form of a decision (a tacit acceptance). As a result, the case will be dealt with tacitly, with the consequence of wholly accepting the applicant’s demands. However, according to Article 122a(1) CAP, a case can be resolved in a tacit procedure only if a particular legal provision authorises the resort to this procedure. It has been a subject of controversy whether this authorisation should be express (with a clear reference to the tacit resolution procedure as regulated in Chapter 8A CAP) or whether it suffices that a particular law provides for a mechanism that is equivalent to one of those provided for in Chapter 8A CAP, without, however, any reference to this chapter. The former position would lead to a situation in which Chapter 8A would not be applicable at all until particular pre-existing (pre-2017) laws are modified to take into account the 2017 revision of the CAP. This question is relevant for the present paper because, it will be recalled, the LCCI was adopted in 2015, and therefore it was not possible to include any reference to the Chapter 8A procedure, created 2 years later, there. The debate in Polish legal literature seems to be far from conclusion, and case law is scarce, which is not surprising, taking into account the short period following the entry into force of the 2017 CAP revision. Also, this problem, relevant as it is for the subject of the present contribution, shall not be discussed here at length for it would exceed the level of detail intended for this paper.16 Rather, this introductory paragraph serves as an explanation for why in some instances below consideration of alternative scenarios will be necessary. According to the LCCI, the procedure is initiated on notification or – in enumerated cases – ex officio.17 The duty of notification rests, in principle, on the person exceeding specified thresholds of votes/capital. However, in situations indicated in Article 5 LCCI, other persons may be bound to notify the authorities (a company dominant with regard to the investor, its subsidiary, a protected company itself). Typically, the notification should take place before concluding any contract creating a duty of the transfer of property or any other legal deed(s) leading to such a transfer or before publishing a tender offer. Article 5(6) to (9) LCCI contains specific regulations concerning deadlines in more complex hypotheses (including notification ex post), as described in Transactions Subject to Control, above. Article 6 LCCI contains a detailed list of information to be submitted with the notification. In a nutshell, it is required to produce data on the capital and factual links of the investor, his previous activity, experience, criminal record or pending

15

Code of administrative procedure of 14.6.1960 (Kodeks postępowania administracyjnego, Polish OJ 2018, item 2096, amended). 16 For a recent discussion, see, for example: Knysiak-Sudyka (2019) and Lewicki (2019). 17 To our knowledge, so far there have been no instances of initiating the procedure ex officio.

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procedures, supervisory interventions, financial standing, planned manner of completing the intended acquisition and plans with regard to the protected acquired enterprise (development plans, organisational modifications).18 If the procedure is initiated ex officio, the information and documents shall be submitted on demand of the competent authority. Before delivering the decision, the competent authority has to seek a recommendation of the CC. According to Article 11 ILC, the competent authority ‘issues’ (and not ‘may issue’) an opposition if any of the concerns mentioned above exists. This led M. Mataczyński and E. Kochowska to conclude that issuing the opposition is mandatory for the competent authority once the Consultative Committee found that there are reasons to do so. According to these authors, there is no discretion on the part of the competent authority.19 This reasoning was reproduced by the regional administrative court in Warsaw, but the judgment was appealed against, and the case is still pending.20 The regional administrative court added that the opposition is simply a consequence of findings with regard to factual circumstances. To our knowledge, except for this example, there are no instances of interpretation of this provision by Polish courts. An interpretation according to which the competent authority is deprived of any discretion seems, however, to ignore those provisions of LCCI that explicitly state that the CC is a body of an advisory character that presents to the competent authority no more than recommendations (Article 13(1) and (2) LCCI). Mataczyński and Kochowska rightly emphasise that Article 11 LCCI uses the seemingly imperative form ‘issues’ and not ‘may issue’, but it cannot be overlooked that according to this provision the competent authority ‘issues opposition . . . if this is justified by’ reasons listed there. This provision is therefore conditional on finding that the opposition would be justified by given reasons. There is no reason (especially in the light of Article 13 LCCI) why the competent authority should be deprived, for the ‘benefit’ of the CC, of the margin of discretion inherent to such determination. Moreover, according to Article 11(4) LCCI, when issuing an opposition, the competent authority has to take into account the principles of the policy of the Polish state in the field of social or economic life. Should we accept the view that the authority does not enjoy any margin of discretion in such a situation, this provision would become useless, for the authority would not be in a position to modify the stance of the CC in any way. The competent authority refuses to initiate the procedure if the notified transaction falls outside the scope of the LCCI (Article 9(4) LCCI). However, the LCCI 18 List of documents certifying the above information can be found in the Regulation of the Council of Ministers of 25 February 2016 on Documents Attached to Notifications of the Intention to Acquire or to Achieve Significant Participation or Acquisition of Domination in an Entity Subject to Protection, Polish OJ 2016, item 324. 19 Kochowska and Mataczyński (2016), para. 10. A contrary view (without, however, detailed analysis) has been expressed by Rogucki (2018). 20 Judgments of Regional Administrative Court in Warsaw of 17 October 2017 in cases VI SA/Wa 727/17, 728/17 and 776/17.

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does not provide the authority with the competence to issue a decision confirming that there are no grounds for opposing the transaction or a decision imposing conditions under which the transaction would be accepted. This fact leads P. Wiórek to conclude that potential applicants would not be interested in trying to sound the attitude of the competent authority towards the planned transaction.21 Indeed, the LCCI does not provide any basis for negotiating individual conditions or issuing guidance for a potential applicant. On the other hand, the competent authority may seek additional information from the applicant in the course of the proceedings (Article 10(1)(2) LCCI). It should, however, be noted that according to M. Mataczyński and E. Kochowska, the absence of an explicit legal basis for issuing a decision stating that there are no reasons to oppose the transaction is not decisive. The competence to deliver such a decision (particularly before the expiry of the deadline for issuing the opposition) is, for these authors, a logical consequence of the structure of the verification procedure.22 This question has now – after the 2017 revision of the CAP – to be examined from yet another dimension. Should the view that Chapter 8A CAP is applicable to LCCI procedure prevail, it ought to be considered that according to Article 122c(1), second sentence, the competent authority may notify the party, before the expiry of the deadline, that it shall not oppose the transaction. In such a case, the tacit resolution takes effect on the day following the notification. The opposition decision should be issued within 90 days from the date of commencement of the procedure. In the case of an annulment of the decision by the court, the 90-day period runs anew from the date of notification of the judgment. The deadline is postponed by the period during which the authority was awaiting the information and documents from the party. The applicant has to refrain from completing the transaction until the lapse of the deadline prescribed by LCCI. After this period, it can be completed unless a negative decision has been issued.

2.2.7

Administrative and Judicial Review

With regard to the opposition decision, according to Article 127(3) CAP, there is no appeal to the second (administrative) instance against a decision issued by a minister. Instead, the dissatisfied party may demand a re-examination of the original decision by the same minister. A final decision may be appealed against to an administrative court by persons having legal interest23 (two judicial instances).

21

Wiórek (2017). Kochowska and Mataczyński (2016), para. 5. 23 Law on the Proceedings before the Administrative Courts (Prawo o postępowaniu przed sądami administracyjnymi), Polish OJ 2018, item 1302, as amended, Article 50. 22

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Also, in the case of refusal to initiate the control procedure, the decision can be appealed against to the administrative court. The protected enterprise concerned shall be notified about the refusal, and it shall have the standing to appeal against it. With regard to the tacit acceptance of the transaction, the legal situation is, to some extent, ambiguous. Even in the scenario in which one assumes that Chapter 8A CAP is applicable to the LCCI procedure, the possibility of appealing against a tacit acceptance remains excluded or – at best – questionable, for there is no decision to be challenged.24 An alternative point of view has been submitted by M. Jaśkowska, according to whom since (1) the tacit resolution of the case is an equivalent of a decision (an implied administrative act) and (2) the general principle of two-tier administrative procedure (Article 15 CAP) cannot be excluded without an express provision to this effect, and there is no such provision, and (3) Article 78 of the Polish Constitution provides for the right to appeal against first-instance decisions, the relevant CAP provisions (Articles 127(1) and 122g) should be interpreted so as to allow the administrative appeal.25

2.2.8

Consequences of Unlawful Transactions

Any transaction concluded without a previous application or despite an opposition is, in principle, void. In some instances (certain cases of indirect acquisition), the transaction would not be void, but the possibility of exercising the shareholders’ rights would be limited. In such situations, however, the authority may issue a decision ordering the disposal of shares in a determined period. Failure to fulfil such an obligation may lead to an appointment of a person managing these shares to perform the sale. Resolutions of a shareholder’s assembly of a protected enterprise adopted in violation of the above restrictions are susceptible to be invalidated unless the conditions for their adoption are fulfilled even without taking into account the invalid votes. Additionally, the LCCI provides for penal sanctions for violating some of its provisions. In the case of an acquisition of important participation or of a domination without previous notification, the person who acquired such a status or a person acting in the name or in the interest of a legal person that acquired such a status would be punished by a fine of up to 100,000,000 PLN (~23,000,000 EUR), imprisonment of up to 5 years or both (Article 15 LCCI). Besides, a penalty of up to 10,000,000 PLN (~2,300,000 EUR), imprisonment of up to 5 years, or both may be imposed for exercising shareholders’ rights despite lack of notification, as well as for failure to notify an acquisition concerning a subsidiary (Article 16 LCCI).

24 25

Gurba (2017), pp. 96–97; Kamiński (2019). Jaśkowska (2019); Similarly Romańska (2019).

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LCCI in Action

To our knowledge, so far, the Minister for Energy has been the only competent authority to deal with cases based on the LCCI. A total of six cases have been decided; in four of them, the Minister for Energy has voiced oppositions. In the reasons presented by the Minister, it was indicated that all the oppositions were dictated by the need to ensure public order or the security of the state, as well as the essential needs of the population in the area of protection of health and life. In all four instances, the applicants demanded a re-examination of the decision, but all decisions were upheld. Three of them were later appealed against to the administrative court and rejected on merits in the first instance (appeal pending). Interestingly, all the three cases concerned the same situation: transmission of elements of the property of a protected company to a separate company. The Minister for Energy decided (and the administrative court shared this view) that a protected company has to be seen (protected) as a whole, and its partition could in principle have a negative influence on an effective fulfilment of goals of importance for the state. Therefore, in the opinion of the Minister, as well as that of the court, the proposed transaction would constitute an act of circumvention of the LCCI.26

2.3

The Polish Law on Control of Certain Investments in the Light of the EU Screening Regulation

As a preliminary remark, the EU Screening Regulation27 concerns the screening of only foreign direct investment, and therefore it targets only investments by a natural person of a non-EU country or an undertaking of a non-EU country. At the same time, Polish LCCI does not distinguish between EU and non-EU transactions. Therefore, the EU Screening Regulation applies to the LCCI only insofar as it is relevant for FDI screening. Accordingly, it is theoretically conceivable (even if not feasible) to modify the LCCI only to the extent to which it applies to FDI in the sense adopted by the EU Screening Regulation. The following analysis should be read with this reservation in mind. According to the EU Screening Regulation, Member States may maintain, amend or adopt mechanisms to screen foreign direct investments in their territory on the ground of security or public order. This chapter is, however, not intended to analyse whether substantive reasons for opposing the transaction remain within the limits of ‘security or public order’, for a potential incompatibility of the LCCI with EU

26 Judgments of Regional Administrative Court in Warsaw of 17.10.2017 in cases VI SA/Wa 727/17, 728/17 and 776/17. 27 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, 21.3.2019, pp. 1–14.

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(treaty) law in this regard would not result from the adoption of the EU Screening Regulation; it would persist despite its adoption. Moreover, the list of factors that may be taken into consideration by Member States (Article 4 of the EU Screening Regulation) is only of indicative value. This aspect will, therefore, remain outside the scope of the present analysis. As presented above, the procedures regulated by the LCCI include relevant time frames and do not discriminate between third countries. Moreover, they set out the circumstances triggering the screening, the grounds for screening and the applicable detailed procedural rules. To this extent, no modifications seem necessary. Additionally, it should be considered whether the time frames set in the LCCI are sufficient to take into account the comments of the Member States and of the Commission, as required by Article 3(3) of the EU Screening Regulation. Articles 6, 7 and 8 of this Regulation do not determine any specific deadlines for the Member State proceeding with the screening procedure. Nevertheless, effective application of those articles demands that – when determining national time frames – Member States take into consideration the sequence of actions prescribed by the EU Screening Regulation: (1) notification of the screening procedure to the Commission and Member States; (2) notification within 15 days by the other Member States and the Commission of the intention to provide comments or opinion, simultaneously with (3) a possible request from the part of other Member States or the Commission for additional information; (4) and actual submissions by the other Member States or the Commission within 35 days counting from the receipt of the initial information about the procedure or 20 days from the receipt of additional information (if requested) or – in the case of an opinion of the Commission – no later than 5 days after the expiration of these deadlines. In the light of Article 6(8) and (9), as well as Article 8(2)(c), it is in principle expected that the Member State undertaking the screening procedure shall not adopt final decisions before the deadlines indicated above have expired. Deviation from this rule is authorised only exceptionally where the Member State undertaking the screening considers that its security or public order requires immediate action. Taking into account the fact that according to the LCCI opposition to the transaction has to be issued within 90 days from the start of the control procedure, it appears prima facie that this period should be sufficient to enable Polish authorities to take into account comments/opinions submitted by the MSs/Commission. Concerning the protection of commercially sensitive information, as required by Article 3(4) of the EU Screening Regulation, to start with, it has to be indicated that the Polish Code of Administrative Procedure provides a general principle of transparency of the procedure for its parties (internal transparency). This principle finds expression in, inter alia, Article 73 CAP, according to which parties (as well as participants enjoying equivalent rights) have the right to consult the files of the case,

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to make notes and copies. This right also persists after the closing of the procedure. In consequence, this might lead to the disclosure of business secrets. In general, two approaches can be observed in Polish law with regard to this problem. First, particular acts regulating certain procedures provide for confidentiality guarantees in these procedures or concerning certain authorities.28 The LCCI does not, however, contain such specific provisions. Second, then, in the case of absence of such a particular regulation, general rules are applicable, i.e. the CAP, and therein lies the rub – that seemingly the Code is not sufficiently equipped to protect business secrets. There are nonetheless some divergent views on this matter. The legal basis that has been suggested for this purpose was Article 74(1) CAP, which provides that Article 73 CAP does not apply to files containing classified information (secret/top secret) or to other files excluded by a public authority for important interests of the state. It has been argued that, although Article 74(1) CAP mentions only information classified as secret/top secret, ‘there is no doubt’ that ex lege a public authority is prevented from disclosing any other legally protected secret, even to other parties to the proceedings.29 Somewhat different is the conclusion of B. Adamiak and J. Borkowski according to whom other secrets (which may include business secrets) may be protected if the authority decides so, and it should do so if it is confronted with a legally protected secret. These authors seem to base their view on the assumption that protection of other secrets is in the interest of a state ruled by law (a synonym of the principle of the rule of law), though this is not univocally expressed. On the other hand, they indicate that exception to the principle of transparency should not be interpreted extensively.30 Contrary to the above opinions, basing the protection of business secrets on the clause of ‘important interests of the state’ seems to be a misinterpretation. This clause should rather be understood as covering the protection of fundamental state interests, including internal and external security, protection of economic interests, public order etc. Therefore, we subscribe to the view that Article 74(1) CAP does not constitute a sufficient legal basis for the protection of business secrets by refusing to parties access to files31 (even more so if we apply the somewhat overused principle of legal interpretation exceptiones non sunt extendendae).32 Also, certain judgments of the SAC concerning the protection of business secrets in proceedings before the Bureau of Railway Transport confirm rather than deny the need for legislative intervention in this area, for though SAC recognises the

28 See, for example, Law on Protection of the Competition and of Consumers (Polish OJ 2019, item 369), in particular Article 69. 29 Taradejna and Taradejna (2003), p. 114; in similar vein Malanowski (2018). 30 Adamiak and Borkowski (2019). 31 Zimna (2013). 32 The principle of strict interpretation of exceptions is a widely accepted directive of interpretation of legal texts, also in Polish law (Morawski 2002, pp. 253–256; Tanajewska and MalarewiczJakubów 2012, p. 19; Szczygielski 2017, p. 217).

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protection of those secrets even in the absence of specific rules to this aim, the pains to which it apparently goes to find a proper legal basis thereto are meaningful.33 One should, indeed, agree with the view that Article 74(1) CAP cannot be interpreted as excluding, in the administrative proceedings, application of specific provisions protecting secrets in different fields (including business secrets).34 However, in the analysed case, neither the LCCI nor any other law imposes on the competent authority the duty to refuse access to files to persons entitled on the basis of Article 73 CAP. Notably (and contrary to the findings of the Polish Supreme Administrative Court (hereinafter SAC) in II GSK 842/16), it is doubtful whether an administrative authority can be found to commit an act of unfair competition by granting access to files containing one’s business secrets. It has been indicated (and rightly so) that only another undertaking can commit an act of unfair competition.35 Does this lead to an inevitable conclusion that the LCCI should be revised to include protection of business secrets as a basis for refusal for case-file access? Not necessarily. If we agree that, as indicated above, Article 74(1) CAP does not exclude the application of specific provisions protecting secrets in different fields, then Article 3 (4) of the EU Screening Regulation itself might be a sufficient basis for the administrative authority to protect business secrets. This provision is not, contrary to some of the other paragraphs in this article,36 worded in a directive-like manner. Nor does it leave the margin of discretion to the national legislator or require the adoption of additional national provisions to make it applicable. It is also unconditional and sufficiently precise to determine what rights are to be protected. Additionally, according to the Polish Law of 6 September 2001 on the Access to Public Information37 (hereinafter API), every person (and therefore not just the parties to proceedings) enjoys the right of access to public information (understood as ‘every information concerning public affairs’, Articles 1(1) and 2(1) API). To what extent the information contained in the case files constitutes ‘public information’ remains a subject of controversy.38 It does not, however, seem necessary to analyse this question in detail because, anyway, according to Article 5(2) API, the 33

See, for instance, case II GSK 842/16 where the SAC found it necessary to include 4 legal bases, including Polish Constitution. Interestingly, the SAC quoted a view from the legal literature that the important interest of the state is interpreted as the need to protect fundamental interests of the state related to internal and external security, protection of economic interests and protection of public order, only to conclude that ‘the duty to protect commercial secrets is included in the notion of important interest of the state, even though – obviously – it requires concretisation in each specific administrative case’. The SAC explained that the access to business secrets would be contrary to principles of fair competition. Fair competition is, in turn, in the interest of the state. The same position was taken by SAC in case II GSK 967/16. 34 Taradejna (2011), p. 148. 35 Szydło (2016). 36 For example, ‘Member States [. . .] shall maintain, amend or adopt measures necessary to identify and prevent circumvention of the screening mechanisms and screening decisions’. 37 Polish OJ 2018, items 1330 and 1669. 38 See, for example, commentary to Article 1 in Kamińska and Rozbicka-Ostrowska (2016) and Wróbel (2019a).

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right of access to public information is restricted to protect business secrets, as defined by the Law of 16 April 1993 on Combating Unfair Competition.39 According to Article 3(5) of the EU Screening Regulation, foreign investors and the undertakings concerned should have the possibility to seek recourse against screening decisions of the national authorities. The regulation does not specify whether the measure of legal protection should be of administrative or judicial nature. It has been indicated above that an opposition to a transaction issued by a competent authority can be the subject of a request for a re-examination by the same authority. Additionally, an action against the decision can be filed with an administrative court. According to Article 50 of the Law on the Proceeding Before the Administrative Courts,40 an action against an administrative court can be filed by any person having a legal interest. ‘Legal interest’ is understood as the own interest of an individual, which is based on legal provisions.41 It is a subjective right of a public nature, understood as according to an individual by a legal provision of an actual advantage, which can be enforced in an administrative proceeding. The basis for a ‘legal interest’ is usually found in substantive administrative law.42 It has been, however, indicated also that the legal interest may be as well derived from provisions belonging to other branches of law, like private law.43 Moreover, it may result not only from substantive norms but also from procedural ones.44 It has been observed that it is only exceptionally that the ‘legal interest’ is expressed directly by a statutory provision. To the contrary, it usually requires elaborate interpretational operations, not restricted to a single provision but encompassing the entirety of a given law and also rules of other laws, not to forget the constitutional principles.45 The notion is, therefore, of a vague nature.46 Consequently, even though the foreign investor (who is the addressee of the opposition decision) will be entitled to introduce the action, the case may be less clear with regard to the ‘undertaking concerned’ (which term is not defined by the EU Screening Regulation and is probably meant to refer to the undertaking being the object of the intended transaction, but it might prima facie mean other undertakings, a previous owner from whom the shares are to be acquired, for example). Determining

Polish OJ 2019, item 1010 (also translated as ‘Fair Trading Act), Article 11(2): technical, technological, organisational information of the enterprise or other information of economic value which, as a whole or in a particular composition or set of their elements, is not widely known to persons commonly dealing with this sort of information or which is not easily accessible for them, if the entitled to exploit or control the information undertook, with due diligence, actions to keep the information confidential. 40 Law on the Proceedings before the Administrative Courts (Prawo o postępowaniu przed sądami administracyjnymi), Polish OJ 2018, item 1302, as amended. 41 SAC resolution (I OPS 5/06). 42 SAC resolution (II OPS 1/11). 43 Wróbel (2019b). 44 Kabat (2018). 45 SAC resolution (II OPS 1/11). 46 Wróbel (2019b). 39

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its legal interest on the basis of national law is not excluded, but it may be problematic if it was not a party to the administrative proceedings.47 Nevertheless, prima facie there is no reason why Article 3(5) of the EU Screening Regulation could not be the basis for recognising the existence of the legal interest of the undertakings concerned, for this is a provision that grants them a legally protected interest. Its procedural nature does constitute an obstacle thereto, as indicated above. Moreover, it hardly needs to be mentioned that regulations of the EU are directly applicable in the Member States of the EU. Alternatively, to fulfil the obligation expressed in Article 3(5) of the EU Screening Regulation, one might consider the option to confer the standing on the concerned undertakings expressis verbis. On the other hand, Article 3(5) of the EU Screening Regulation cannot be regarded as a specific basis for bringing an action to the administrative court, as provided for in Article 50(2) LPAC, for – contrary to the original proposal of the Commission – it does not give standing in judicial proceedings. It only provides that the persons concerned shall have the possibility to seek recourse against screening decisions of the national authorities. It does not specify what kind of legal measures should be available, leaving it to the discretion of the Member States. With regard to the acceptance of the transaction, the meaning of Article 3(5) of the EU Screening Regulation becomes unclear. Literally, it requires the Member States to offer legal protection to (1) foreign investors and (2) the undertakings concerned. In the case of authorisation of the transaction, the investor has no reasons to appeal. The same is true with regard to the undertaking concerned – the seller, and therefore the other party to the transaction. The situation might be different with the undertaking concerned – the object of the transaction (the ‘protected undertaking’ according to the LCCI). It seems to us, however, contrary to the objective both of the EU Screening Regulation and the LCCI to give standing to the protected undertaking in such a situation. Both acts are intended to protect the public interest, but entitling the protected undertaking to contest the (tacit) position of the competent authority that the transaction poses no substantial risk to public interest would serve rather the private interest of the undertaking protected (giving it an opportunity to try to resist a hostile takeover, for example). The same is true in the case of other undertakings potentially concerned in one way or another (competitors, creditors, contractors etc. of the protected undertaking). Be that as it may, in the light of Polish CAP, the standing to bring an appeal against a tacit acceptance is not well founded, to say the least (see Administrative and Judicial Review, above), even if we assume that Chapter 8A CAP is applicable

47 Taking into account a variety of situations in which different persons have the duty to notify the competent authority, the situation of the ‘undertaking concerned’ may vary. The only dispute resolved so far by a court concerned a transmission of elements of property of a protected company to separate companies and therefore the protected company was a party to the administrative proceedings from the beginning as an entity initiating the transaction (judgments of Regional Administrative Court in Warsaw of 17.10.2017 in cases VI SA/Wa 727/17, 728/17 and 776/17).

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to the LCCI proceedings (see Procedure, above). It has been indicated that in the case of implicit (tacit) administrative decisions, the law should provide for specific instruments for the legal protection of interests of third parties. In such a situation, there is no administrative act that could be challenged. It has therefore been suggested to create in Polish law a new form of an administrative decision of declaratory nature, issued on demand, which would confirm the implicit resolution of the case and which could be appealed against by persons having legal interest.48 According to Article 3(6) of the EU Screening Regulation, the Member States that have a screening mechanism in place shall maintain, amend or adopt measures necessary to identify and prevent the circumvention of the screening mechanisms and screening decisions. As explained in recital 10 of the EU Screening Regulation, ‘this should cover investments from within the Union by means of artificial arrangements that do not reflect economic reality and circumvent the screening mechanisms and screening decisions, where the investor is ultimately owned or controlled by a natural person or an undertaking of a third country’. Taking into account the fact that Polish LCCI does not distinguish investors based on their origin, it is not necessary to modify it to accommodate the requirements stemming from Article 3(6) of the EU Screening Regulation. According to Article 6(9) of the EU Screening Regulation, the Member State undertaking the screening shall give due consideration to the comments of the other Member States and to the opinion of the Commission. Similarly, according to Article 8(2)(c) of the EU Screening Regulation, the Member State where the foreign direct investment is planned or has been completed shall take utmost account of the Commission’s opinion and explain to the Commission if its opinion is not followed. The LCCI does not mention those circumstances among those to be considered by the competent authority in the process of examining the admissibility of the notified transaction. Therefore, should the LCCI be supplemented to both enable and oblige the competent authority to take into account submissions of the Member States and those of the Commission? According to Article 288 TFEU, regulations have general application; they are binding in their entirety and are directly applicable in all Member States. Therefore, provisions of the EU Screening Regulation as such can and should be applied by the competent authority. It should, however, be indicated that to be applied, the provisions should be unconditional and sufficiently precise. Can it be concluded that the discussed provisions of the EU Screening Regulation fulfil these conditions? It might be argued that the duty to ‘give due consideration to’ and even to ‘take utmost account of’ leaves all too much discretion to the Member State to be regarded as unconditional and sufficiently precise.49 Yet such a conclusion should be rejected. In fact, both Articles 6(9) and 8(2)(c) of the EU Screening Regulation satisfy the conditions for their application, for they contain a clear duty to

48

W. Gurba, Bezczynność i przewlekłość postępowania. Milczące załatwianie spraw, pp. 96–97. For application of this condition see Judgment of the Court (Sixth Chamber) of 11 January 2001, Azienda Agricola Monte Arcosu Srl v Regione Autonoma della Sardegna, C-403/98, ECLI:EU: C:2001:6, paras. 26–28. 49

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take certain positions into consideration. They do not leave the national legislator any discretion in this regard (the discretion is on the part of the competent authority, and anyway it is not about taking the submissions into regard or not as this is mandatory). Even if we assumed that this obligation should be transposed to the national legal order, the national law would do no more than impose on the competent authority the duty to take into account the above opinions as one of a whole set of factors to consider. In our opinion, in consequence, these provisions of the EU Screening Regulation can and should be applied directly by the competent national authorities, and therefore there is no need to transpose these duties to national legislation. Modification of national administrative arrangements may be necessary to enable the cooperation mechanism, though. Article 7 of the EU Screening Regulation, regulating the cooperation mechanism in relation to foreign direct investments not undergoing screening, provides for a duty for the Member State where a foreign direct investment is planned or has been completed to give due consideration to the comments of the other Member States and to the opinion of the Commission, submitted in accordance with this article (paragraph 7). In the case of FDIs likely to affect projects or programmes of Union interest, this Member State should take utmost account of the Commission’s opinion and explain to the Commission if its opinion is not followed (Article 8(2)(c) of the EU Screening Regulation). As explained in recital 17, the Member State concerned should give such comments or opinion due consideration through, where appropriate, measures available under its national law or in its broader policymaking. Therefore, in the case of Poland, one should consider the possibility of extending the list of bases for initiating the control procedure ex officio by empowering the competent authority to start the control proceedings as a result of analysing the comments or opinion submitted on the basis of the EU Screening Regulation. Such a solution might enable Poland to fulfil the duties resulting from the provisions indicated above (even though, in the light of Article 1(3) of the EU Screening Regulation, the Regulation cannot be interpreted as imposing on a Member State a duty to screen certain investment). With regard to ensuring the protection of confidential information and ensuring that classified information is not downgraded or declassified without the prior written consent of the originator, one should take into account the Polish Law of 5 August 2010 on the Protection of Classified Information50 (hereinafter PCI). According to Article 5 PCI, information can be classified into the following categories: ‘top secret’, ‘secret’, confidential’ or ‘restricted’. Information transmitted by international organisations or by other states based on international agreements is classified into one of the categories indicated above. Classified information is protected until the classification attribute is removed by the competent national authority. Nevertheless, classified information obtained from authorities of other states or from international organisations is protected indefinitely, if this was the condition for their transmission (Article 7(1)(3) PCI). In the light of the foregoing,

50

Ustawa z dnia 5 sierpnia 2010 r. o ochronie informacji niejawnych, Polish OJ 2019, item 742.

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one could conclude that classified information provided or exchanged under the EU Screening Regulation is sufficiently protected in Polish law, even though the necessity to include the said condition by the party transmitting the document can cast doubt on the firmness of this conclusion.

2.4

Conclusion

The principal Polish act on investment screening is the Law of 24 July 2015 on Control of Certain Investments (LCCI). It regulates the principles and procedures of acquisition of shares, of shareholders’ rights or of parts of establishments leading to acquiring important participation or domination in any of the protected companies. The declared objective of the LCCI is the protection of public order and public security according to Treaty on the Functioning of the European Union and, in the light of Article 4 paragraph 2 of the Treaty on the European Union, does not target specifically investments by foreign persons. It englobes investments by any investor, home or foreign, EU or non-EU. Furthermore, it does not differentiate between privately or publicly owned investors. A list of ‘protected companies’ (i.e. companies’ investment in which is subject to control) is fixed in the Regulation of the Polish Council of Ministers. The control procedure is initiated (on notification or – in enumerated cases – ex officio) in the case of transactions leading, in any of the protected companies, to domination or important participation. LCCI lists formal and substantive grounds for issuing an opposition to the transaction by the competent authority. LCCI does not provide the basis for issuing a decision confirming that there are no grounds for opposing the transaction or for a decision imposing conditions under which the transaction would be accepted. In case of an opposition as well as a refusal to initiate the control procedure, the decision may be appealed against to the administrative court. Any transaction concluded without a previous application or despite an opposition is, in principle, void. In some instances (certain cases of indirect acquisition), the transaction would not be void, but the possibility of exercising the shareholders’ rights would be limited. Additionally, LCCI provides penal sanctions for violating some of its provisions. The entry into force of the EU Screening Regulation entails the necessity of modification of the LCCI to fulfil the obligations resulting from Articles 7(7) and 8 (2)(c) of the Regulation (the duty of the Member State where a foreign direct investment is planned or has been completed to give due consideration to the comments of the other Member States and to the opinion of the Commission, as well as – in the case of FDIs likely to affect projects or programmes of Union interest – to take utmost account of the Commission’s opinion). Also, to fulfil the obligation expressed in Article 3(5) of the EU Screening Regulation, one might consider conferring explicitly the standing on the undertakings concerned.

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3 Lithuania 3.1

Principal Laws Concerning Investment Screening

The general terms and conditions of investment, as well as the rights of the investors and investment protection measures, are regulated in the Law of 7 July 1999 on Investments51 (hereinafter IL). Its application is subsidiary with regard to international agreements ratified by the Lithuanian parliament, which take precedence in case of a collision with the IL (Article 15(2) IL). The IL defines the notion of ‘direct investment’ in a rather lengthy formula as follows: the investments aimed at establishing an economic entity and acquiring the capital of a registered economic entity or a share therein, also reinvestments, loans to economic entities the capital whereof is owned by the investor or in which the investor has a share in the capital, the subordinated loans where the objective of investment is to establish or to maintain long-term direct links between the investor and the economic entity into which investment is made, and the share in the capital acquired through investment grants the investor the right to either control the economic entity or to exert a considerable influence over it.

Moreover, the IL distinguishes domestic and foreign investments, as well as state investments, private investments and the investments made by foreign states and international organisations, as a separate category. In principle, both domestic and foreign investors shall enjoy a level playing field for operation (Article 5(1) IL). Investments are permitted in all lawful commercial and economic activities. Nevertheless, legislation may provide for exceptions from this principle. Indeed, according to Article 8(2) IL, foreign investments shall be prohibited in activities guaranteeing state security and defence (except for investments by the economic entities meeting the criteria of European and trans-Atlantic integration, which Lithuania has opted for, provided that this is approved by the State Defence Council). Investment in objects related to exploitation of natural resources belonging to the state by right of exclusive ownership is regulated by particular legal acts. The principal statutory act that regulates the screening of acquisitions and investments based on national interest in Lithuania is the Law of 10 October 2002 on the Protection of Objects of Importance to Ensuring National Security52 (hereinafter referred to as the ‘Protection Law’ or PL53). The objective of the Protection Law is to ensure that the objects important for national security of the State (enterprises, facilities, property and economic sectors) and the property and territory within the protection zones of the enterprises, facilities and property of importance to ensuring

Investicijų įstatymas, No. VIII-1312, as amended. Nacionaliniam saugumui užtikrinti svarbių objektų apsaugos įstatymas, No. IX-1132, recently amended on 20.12.2018, No. XIII-1859. 53 For the purposes of this paper we had recourse to the translation of this law notified by Lithuania to the OECD on 2 October 2018 (DAF/INV/RD(2018)6) with later amendments. 51 52

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national security are protected against all risk factors that may pose a threat to national security interests. National security interests are defined by the Protection Law as ‘vital and primary interests of national security within the meaning of the National Security Strategy, the development of the trans-European infrastructure and the essential public interests enshrined in the laws of the Republic of Lithuania, including the provision of the most important services of common interest, etc.’ (Article 2(7) PL). Moreover, the Protection Law is intended to eliminate the causes of and conditions for the emergence of such risk factors. The Protection Law also regulates other areas, besides verification of acquisition transactions: transactions by enterprises, their reorganisation/restructuration, management, dissolution, managing staff. These subjects remain, however, outside the scope of this chapter.

3.2

3.2.1

Screening Mechanism According to the Law on the Protection of Objects of Importance to Ensuring National Security Investors Subject to Screening

An ‘investor’, as defined in Article 2(2) PL, shall mean an investor from the Republic of Lithuania, a foreign investor or a third-country investor that intends to carry out transactions specified by the Protection Law. A ‘foreign investor’ is understood as a citizen of a Member State of the EU or of a member of NATO, EFTA and/or OECD or a legal person or organisation established in these states, except for cases where 1/4 or more of the voting rights at the meeting of participants of such a legal person or another organisation are held by a third country, legal persons controlled by it or its citizens (Article 2(3) PL). A ‘third country‘ means a state other than any EU Member State or a member of NATO, the EFTA and/or the OECD, while a ‘third country investor’ is defined as a third-country national or a legal person or another organisation established in a third country, as well as a legal person or another organisation established in any EU Member State or in a member of NATO, the EFTA and/or the OECD in which 1/4 or more of the voting rights at the meeting of its participants are held by the third country, legal persons controlled by it or its citizens (Article 2(3), (9) and (11) PL). Importantly, certain categories of investors are a priori deemed as not posing a threat, and as such, they are exempt from the verification procedure (Article 10(4), (5) and (6) PL). This applies to (1) enterprises of importance to ensuring national security, state enterprises, municipal enterprises as well as state-owned companies54; (2) legal persons of limited liability as well as those comparable in legal form to public limited liability

54

A state-owned company is defined as a public limited liability company or a private limited liability company in which shares carrying over 1/2 of votes at the general meeting of shareholders

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companies or private limited liability companies from any EU Member State or a member of NATO, the OECD or the EFTA in which the central, regional and/or local authorities of these states hold the securities or shares, representing the capital, carrying over 1/2 of votes in these legal persons, international financial organisations of which the Republic of Lithuania is a member as well as other international financial institutions or organisations whose objectives, investment policies and activities do not pose a threat to national security; (3) investors from the Republic of Lithuania or foreign investors carrying out long-term activities in any EU Member State or a member of NATO, the OECD or the EFTA and having experience in a relevant area and real possibilities to implement the actions provided for in points 1–5 of Article 12(1) of this law, except for cases where an investor from the Republic of Lithuania, a foreign investor or a state in which it is established or by which it is controlled, or a third country with which such an investor is associated operates in such a way that it poses risk factors, dangers or threats to national security interests.

3.2.2

Protected Objects

As indicated above, the objective of the Protection Law is to ensure that objects important for the national security of the State (enterprises, facilities, property and economic sectors) are protected. Economic sectors of strategic importance to ensuring national security are listed in Article 6 PL: (1) energy; (2) transport; (3) information technologies, telecommunications and other high technologies; (4) finance and credit; and (5) military equipment. According to Article 6(2) PL, it is for the government to determine specific areas of economic activity that are to be considered a part of the economic sectors of strategic importance to ensuring national security. Currently, those activities are listed in the Resolution of 6 June 2018 concerning the establishment of a list of economic activities regarded as part of economic sectors of strategic importance to ensuring national security.55 The Protection Law differentiates between three categories of enterprises of importance to ensuring national security. Enterprises belonging to these categories are enumerated in annexes to the law.

3.2.3

Transactions Subject to Screening

According to Article 12(1), verification of an investor’s conformity to national security interests must be carried out in the following cases: (1) transfer, pledge or mortgage by the investor of facilities or property of importance to ensuring national security; (2) acquisition of shares or conclusion of agreements on the transfer of the

are held by the State (apparently meaning ‘the Lithuanian State’, as opposed to ‘foreign states’ and ‘third countries’). 55 No. 556, as amended by the resolution of 5.6.2019, No. 552.

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voting right and the right to exercise non-property rights attached to the shares (1/4 of shares/votes threshold for Category I or II enterprises, 1/3 for Category III enterprises); (3) acquisition of convertible bonds in enterprises of importance to ensuring national security (the same thresholds). Additionally, the verification shall be carried out in a situation in which the change of a controlling person of a shareholder holding more than 1/3 of votes in the enterprise of importance to ensuring national security is planned.

3.2.4

Screening Criteria

According to Article 10(1) PL, any natural person, private and public legal person and other organisations may be an investor provided that it does not pose a threat to national security interests. Verification of the existence of the threat shall be performed according to the procedure regulated in Article 12 PL (see ‘Procedure’, below). The Commission shall assess the existence of the threat in the light of criteria set forth in Article 11 PL. Article 11 PL enumerates nine circumstances in which an investor shall not be deemed to conform to national security interests: • it is a dominant importer of fossil energy resources of any kind into the Republic of Lithuania or a related person, • it maintains or, in the past, maintained relations with institutions of foreign states or natural or legal persons from those states which increase the risk or pose a threat to national security, • it maintains or, in the past, maintained links with organised groups, special services or groupings of foreign states related to international terrorist organisations or maintaining relations with persons suspected of membership thereof which increase the risk or pose a threat to national security, • it has been found guilty of a grave, serious or less serious crime under the Criminal Code of the Republic of Lithuania or of a crime under the criminal laws of foreign states which corresponds to the elements of a grave, serious or less serious crime specified in the Special Part of the Criminal Code of the Republic of Lithuania or the person is subject to criminal prosecution for commission of such a crime and the investor’s conviction for the committed crime has not expired or has not been expunged, • it has been found guilty of a crime against the independence, territorial integrity and constitutional order of the State of Lithuania or has, over the last 24 months, violated the provisions of the Protection Law and other legal acts regulating the activities of objects of importance to ensuring national security, • it fails to provide proof of real possibilities to implement the planned transactions, • a decision that the investor conforms to national security interests is not adopted due to the investor’s failure to produce documents specified in the Rules of Procedure of the Commission,

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• an investor from a specific third country may not be an investor on the basis of other laws. This is a reference to Article 10(3) of the Protection Law, under which ‘other laws may provide for cases when, for safeguarding public security and public order or by applying counter-measures in respect of third countries, an investor from a specific third country may not be an investor’. • there are other justified data concerning the investor’s non-conformity to national security interests.

3.2.5

Competent Authorities

Fundamental roles within the procedure are exercised by the government and by the Commission for Coordination of Protection of Objects of Importance to Ensuring National Security (hereinafter the ‘Commission’). According to Article 19 PL, the Commission shall be formed by the government, which would also approve its Rules of Procedure. The Commission consists of the representatives of eight ministries and representatives of the Prosecutor General’s Office, the Special Investigation Service, and the State Security Department.56

3.2.6

Procedure

Before transferring the facilities or property of importance to ensuring national security or the relevant amount of shares or convertibles, investors or owners of the securities should file a verification request with the Commission (Article 12 (1) PL). In the case where the investor carries out (or intends to carry out) activities or acquires (or intends to acquire) the securities of a legal person operating or being established in the economic sector of strategic importance to ensuring national security or in the territory of the protection zone, the verification may be carried out on the initiative of public entities listed in Article 12(5) if they learn about possible national security interest threats. Therefore, under such circumstances, verification ex post can take place.57 A position with regard to investor’s conformity with national security interests shall be submitted to the Commission, within their remit, by the following authorities: State Security Department of the Republic of Lithuania, the Ministry of Foreign Affairs of the Republic of Lithuania, the Ministry of the Interior of the Republic of Lithuania, the Police Department under the Ministry of the Interior of the Republic of Lithuania, the Prosecutor General’s Office of the Republic of

See Investment policy related to National Security – Notification by Lithuania of 23.10.2018, OECD DAF/INV/RD(2018)6, p. 3. 57 See Investment policy related to National Security – Notification by Lithuania of 23.10.2018, OECD DAF/INV/RD(2018)6, p. 3. 56

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Lithuania. The Commission may also demand that any other institution submit its conclusions in this regard. The competent institutions are required to submit their conclusions to the Commission within 15 days from the date of receiving the request. In case of failure to observe this deadline, the institution would be deemed not to possess any information relevant for the assessment of the investor’s conformity with the national security interests. This time limit can, however, be extended by up to 5 days on the basis of a decision of the chair of the Commission, acting on a request of the institution. The Commission itself is expected to deliver its conclusions within 20 days from the date of launching verification of the investor’s conformity to national security interests (with a possible extension by up to 5 days). Failure to do so will be considered as a decision on investor’s conformity, thus authorising him to carry on with the transaction. Also, positive conclusions by the Commission are to be considered final decisions on conformity. On the other hand, when negative conclusions are adopted by the Commission, they are forwarded, together with accompanying files, to the government that issues the final decision on an investor’s conformity to national security interests and, where necessary, on the full or partial investment ban and compulsory requirements or conditions to be set. The decision should be adopted within 14 days. Failure to observe the deadline is considered a positive decision, thus opening the way to completing the transaction. The final negative decision prevents the investor from completing the transaction, unless the causes posing a threat to national security interests indicated in the refusal are removed and a new decision of the government is adopted, following the Commission’s conclusions. However, causes consisting of maintaining relations with institutions of foreign states or natural or legal persons from those states which increase the risk or pose a threat to national security, as well as with organised groups, special services or groupings of foreign states related to international terrorist organisations, or maintaining relations with persons suspected of membership thereof which increase the risk or pose a threat to national security cannot be remedied. In conformity with Article 12(6) in finem, if the investor, the applicant or the entity specified in paragraph 5 of this article indicates in writing at the time of transmission of information that this information constitutes a commercial/industrial secret or is confidential, the government or the Commission must ensure the confidentiality of such information.

3.2.7

Judicial Review

Decisions adopted pursuant to the Protection Law can be appealed against to the administrative court (two-instance judicial procedure).

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Consequences of Unlawful Transactions

In principle, transactions ‘which are in conflict with national security interests’ shall be deemed unlawful and invalid ex tunc (Article 10(8) PL). An exception to this principle is provided for in Article 14 PL. According to this article, an investor that acquired shares of an enterprise of importance to ensuring national security or has acquired the right to exercise non-property rights attached to the shares contrary to the provisions of the PL or the decision of the government will not be entitled to exercise voting rights or other non-property rights attached to these shares. The same consequence would stem from an illicit change of a controlling person of a shareholder holding more than 1/3 of votes in the enterprise of importance to ensuring national security.

3.3

Law on the Protection of Objects of Importance to Ensuring National Security in the Light of the EU Screening Regulation

According to Article 3(2) of the EU Screening Regulation, national rules and procedures related to screening mechanisms should be transparent and should not discriminate between third countries. In this regard, it should be observed that the Lithuanian PL provides for differential treatment of investments originating from various groups of non-EU states. This results, firstly, from definitions of a ‘foreign investor’, ‘third country’ (‘a state other than any EU Member State or a member of NATO, the EFTA and/or the OECD’) and ‘third country investor’ (Article 2(3), (9) and (11) PL), and, secondly, from different screening standards applied to ‘foreign’ and ‘third country’ investors (see, in particular, Article 10(6) excluding ‘foreign’ (but not ‘third country’) investors from verification procedure (under conditions)). Similarly, Article 10(5) PL exempts from the verification procedure publicly owned investors not only from any EU Member State but also from a member of NATO, the OECD or the EFTA. In light of the foregoing, the screening conditions set forth in PL are not in conformity with Article 3(2) of the EU Screening Regulation. According to Article 3(3) of the EU Screening Regulation, Member States shall apply time frames under their screening mechanisms. The screening mechanisms shall allow the Member States to take into account the comments of other Member States referred to in Articles 6 and 7 and the opinions of the European Commission referred to in Articles 6, 7 and 8. As indicated in the section concerning Poland, in principle, the other Member States and the European Commission have up to 35/40 days to present their comments/opinion (more, if they request additional information from the Member State initiating the screening procedure). In this context, the short deadlines provided for in the PL would in principle be impossible to reconcile with

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the obligation to take into account the comments/opinion and should be extended (without prejudice to Article 6(8) of the EU Screening Regulation). With regard to the obligation to protect confidential information, including commercially sensitive information, made available to a Member State (Article 3 (4) of the EU Screening Regulation), it suffices to indicate that according to Article 10(6) PL, when submitting the information, the investor, the applicant or the entity may indicate in writing that this information constitutes a commercial/industrial secret or is confidential. In such a case, the government or the Commission must ensure the confidentiality of such information. With regard to the possibility to seek recourse against screening decisions of the national authorities, Article 20 PL provides for such a right (in accordance with the procedure laid down in the Law of the Republic of Lithuania on Administrative Proceedings). Article 3(6) of the EU Screening Regulation imposes – on those Member States that have a screening mechanism – a duty to maintain, amend or adopt measures necessary to identify and prevent a circumvention of the screening mechanisms and screening decisions. Protection Law addresses this problem by defining the notions of ‘investor from the Republic of Lithuania’ and ‘foreign investor’, as described in the section Investors Subject to Screening, above. Additionally, Article 10(6) PL, exempting investors from Lithuania and ‘foreign investors’ from the screening procedure, excludes from this exemption cases where an investor from the Republic of Lithuania, a foreign investor or a state in which it is established or by which it is controlled or a third country with which such an investor is associated operates in such a way that it poses risk factors, dangers or threats to national security interests. According to Article 6(9) of the EU Screening Regulation, the Member State undertaking the screening shall give due consideration to the comments of the other Member States and to the opinion of the Commission. Similarly, under Article 8(2) (c) of the EU Screening Regulation, the Member State where the foreign direct investment is planned or has been completed shall take utmost account of the Commission’s opinion and provide an explanation to the Commission if its opinion is not followed. Taking into account the direct applicability of EU regulations, there is no need to transpose these duties to national legislation.58 On the other hand, modification of national administrative arrangements may be necessary to enable the cooperation mechanism.

3.4

Conclusions

The general Lithuanian legislation on foreign and domestic investments is the Law of 7 July 1999 on Investments. In principle, both domestic and foreign investors shall enjoy a level playing field for operation. However, foreign investors (with 58

For a more detailed explanation see the section concerning Poland.

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exceptions) are precluded from investing in activities guaranteeing state security and defence. The principal statutory act that regulates screening, based on national interest, of acquisitions and investments in Lithuania is the Law of 10 October 2002 on the Protection of Objects of Importance to Ensuring National Security (Protection Law). The law introduces a distinction between different categories of investors and provides rules for the screening of their investments accordingly. Within boundaries of the law, it is for the government to determine specific areas of economic activity that are to be considered a part of the economic sectors of strategic importance to ensuring national security. Circumstances in which an investor shall not be deemed to conform to national security interests are enumerated in the law. A final negative decision prevents the investor from completing the transaction unless the causes posing a threat to national security interests indicated in the refusal are removed and a new decision of the government is adopted. Decisions issued pursuant to the Protection Law can also be appealed against to the administrative court (two-instance judicial procedure). In principle, transactions ‘which are in conflict with national security interests’ shall be deemed unlawful and invalid ex tunc. The entry into force of the EU Screening Regulation entails the necessity of modification of the Protection Law to make it compatible with Article 3(2) of the Regulation (prohibition of discrimination between third countries). Moreover, the time frames provided for by the law need to be adapted to make it possible for other member States and the European Commission to submit their comments/opinion in accordance with Articles 6, 7 and 8 of the Regulation.

4 Latvia 4.1

Principal Laws Concerning Investment Screening

Before the investment screening mechanism is analysed, the domestic laws that enable such a control over foreign investments need to be specified. For that purpose, the legal framework that impacts the legal position of a foreign investor needs to be determined, with the constitutional standard taken into account as well. The Constitution of Latvia (hereinafter ‘Satversme’)59 does not contain any provisions that would directly regulate the status of foreign investment in Latvia. There is no constitutional regulation that would ensure expressis verbis a right to invest or, broadly speaking, the freedom of economic activity.60 But the Constitution of Latvia provides for two constitutional rights that are important for foreign investors. Firstly, the Satversme guarantees the equality of rights and prohibits

59

The Constitution of Latvia; Publication: Latvijas Vēstnesis, 43, 01.07.1993; https://likumi.lv/ta/ id/57980-latvijas-republikas-satversme. 60 The constitution does not establish expressis verbis the principle of market economy, either.

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certain forms of discrimination. This principle includes also equal treatment of entrepreneurs, which are or are not legal persons.61 Secondly, the Constitution also ensures that everybody, including foreign investors, has the right to own property.62 The Constitutional Court has recognised that a person’s economic interest to engage in business activities falls within the scope of this constitutional right – to own property.63 However, the constitutional regulation allows the Latvian Parliament to restrict the property right with a law enacted in view of the public interest.64 It is also legal to expropriate the owner of their property, but only under the following conditions: expropriation may occur, firstly, for public purposes; secondly, in exceptional cases, on the basis of a specific law; thirdly, with a fair compensation awarded.65 In conclusion, it must be stated that the constitutional standard ensures foreign investors, in general, equal treatment and protection of their property rights,

“All human beings in Latvia shall be equal before the law and the courts. Human rights shall be realised without discrimination of any kind” – Art. 91; the principle of equality enshrined in Article 91 of the Satversme prohibits state institutions from issuing legislative norms that allow, without reasonable grounds, differential treatment of persons, who are in similar and in accordance with certain criteria comparable circumstances. The principle of equality allows and even requires differential treatment of persons, who are in different circumstances, as well as allows differential treatment of persons who are in similar circumstances, if there are objective and reasonable grounds for it; see, for example, Judgement of 29 December 2008 by the Constitutional Court in Case No. 2008-37-03, Para 7, Judgement of 21 June 2012 in Case No. 2011-20-01, Para 15, Judgement of 2 March 2016 by the Constitutional Court in Case No. 2015-11-03; In the case-law of the Constitutional Court it has been established that certain fundamental rights (for instance, the right of property, the right to a fair trial) are also enjoyed by legal persons. 62 According to Art. 105 s. 1-3, the right of property is, however, subject to restrictions: property shall not be used contrary to the interests of the public and the ownership could be otherwise limited, but only in accordance with the law. This article of the Constitution provides a comprehensive guarantee for rights of material nature, understanding by “property rights” all rights of material nature that a person may use for his own benefit and that he can handle according to his own will, including the rights that follow from shares (and securities); see, for example, Judgement of 27 October 2010 by the Constitutional Court in Case No. 2010-12-03, Para 7, and Judgement of 3 November 2011 in Case No. 2011-05-01, Para 15.2. 63 See Judgement of 12 December 2014 by the Constitutional Court in Case No. 2013-21-03, Para 10.1, Judgment of 15 November 2016 by the Constitutional Court in Case No. 2015-25-01, Para 10, for example, Judgement of 8 June 2007 by the Constitutional Court in Case No. 2007-01-01, Para 22. 64 See, for example, Judgement of 26 April 2007 by the Constitutional Court in Case No. 2006-3803, Para 12, and Judgement of 10 October 2014 in Case No. 2014-04-03, Para 7.2. 65 Art. 105 s. 3-4 of Latvia Constitution; The enforcement of a coercive measure established by the State, like taxation, cannot be classified as a form of expropriation; see Judgement of 8 April 2015 by the Constitutional Court in Case No. 2014-34-01, Para 12.3; it has to be stressed that Article 105 of the Satversme shall be interpreted in conjunction with Article 1 of the Protocol No. 1 of the Convention (see, e.g.: Judgment of 20 May 2002 of the Constitutional Court in the case No. 200201-03, Concluding Part, Judgment of 26 April 2007 in the case No. 2006-38-03, Para 10, and Judgment of 28 May 2009 in the case No. 2008-47-01, Par. 7.1; The Constitutional Court has stressed, as part of considerations on constitutional property law, that merchants and credit institutions should show higher level of diligence; “The legislator does not have the obligation to adopt legal regulation that would envisage compensating from the state budget for any risk that a 61

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but also the Latvian Constitution allows restrictions of the foreign investors’ rights to conduct business activities. Every statutory investment screening mechanism must fall within the constitutional framework described above. This is because the Latvian Constitution permits limiting the freedom of business activities with a law, which means that it establishes frames for the legislator’s freedom to regulate within that scope. After Latvia regained its independence, the legal framework for foreign investment was set by a legislative act – ‘Law on Foreign Investment in the Republic of Latvia’.66 On 13 April 2000, the Commercial Law – a new regulatory framework for business activities, including undertakings by foreign investors – was adopted67 and came into force on 1 January 2002.68 Consequently, the Law on Foreign Investment69 was repealed.70 Since the derogation of the Law on Foreign Investment, Latvia has not had any specific legal framework that would regulate the status of foreign investments, including direct ones, and foreign investors. As a rule, foreign investors can therefore participate in economic life on a general basis. If a foreign investor operates as a natural person – as an individual merchant – or using a commercial company, they must act in accordance with the legal regime of the Commercial Law.71 In the Latvian law regulating business activities, there are no provisions that would establish restrictions or registration measures affecting only foreign investments. The

person assumes by becoming involved in private law relations”, see, Judgement of 7 July 2014 by the Constitutional Court in Case No. 2013-17-01, Para 28. 66 Par ārvalstu ieguldījumiem Latvijas Republikā; Latvijas Republikas Augstākās Padomes un Valdības Ziņotājs, 46, 21.11.1991.; Diena, 223, 15.11.1991. Foreign undertakings (companies) had to be registered with the Enterprise Register of the Republic of Latvia, which was established on the basis of the Law on the Enterprise Register of the Republic of Latvia from 1990; Par Latvijas Republikas Uzņēmumu registru; Latvijas Republikas Augstākās Padomes un Valdības Ziņotājs, 49, 06.12.1990.; Diena, 3, 01.12.1990. 67 For more information about the constitutive doubts related to the entry of the Commercial Law into force, see the Judgment of the Constitutional Court of Latvia, 6.10.2010, case no. 2009-1130106. 68 See the Law on Procedures for Coming of the Commercial Law into Force, 20 December 2001, Komerclikuma spēkā stāšanās kārtības likums 20.12.2001. likums/LV, 188 (2575), 28.12.2001.; Ziņotājs, 24.01.2002. 69 Also the Law On Business Partnerships (Latvijas Republikas Augstākās Padomes un Valdības Ziņotājs, 1991, No. 11/12), the Law On Limited Liability Companies (Latvijas Republikas Augstākās Padomes un Valdības Ziņotājs, 1991, No. 9/10), the Law On Stock Companies (Latvijas Republikas Augstākās Padomes un Valdības Ziņotājs, 1993, No. 24/25) and The Law on Entrepreneurial Activity (Latvijas Republikas Augstākās Padomes un Valdības Ziņotājs, 1990, No. 42) were derogated. 70 On 1 January 2005 by a Law on Procedures for the Coming into Force of the Commercial Law (Section 28). 71 Komerclikums, Latvijas Vēstnesis, 158/160 (2069/2071), 04.05.2000.; Latvijas Republikas Saeimas un Ministru Kabineta Ziņotājs, 11, 01.06.2000; see also Law on the Enterprise Register of the Republic of Latvia.

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Commercial Law provides for the licensing (subject to authorisation) of several types of business activities.72 Such licences are issued for enterprises registered in Latvia on a non-discriminatory basis, irrespective of nationality, to any applicant that meets specific requirements. Restrictions on commercial activities may only be imposed by law or on the basis of law. The Latvian law contains no restrictions on foreign investment in any sector of the national economy, but as regards commercial companies that are significant for national security, the provisions of Commercial Law shall be applied to the extent not regulated by the National Security Law (hereinafter NSL).73 The National Security Law74 came into force on 12 January 2001, and according to section 2 of the NSL, its purpose is to provide for and govern the national security system and its tasks, the competences of the persons or institutions responsible for the national security system and the principles of and procedures for coordination, implementation and control of their activities. The NSL sets out rules regarding critical infrastructure (section 222), introduced into the NSL on 29 April 2010,75 amended by the Law of 23 March 2017,76 and restrictions on commercial companies of significance to national security (sections 37–46), introduced into the NSL on 23 March 2017.77 It shall be stressed that the National Security Law is the basic legal act enabling the screening of investments in the territory of Latvia.78

4.2

Screening Mechanism According to the National Security Law

This section provides clarifications for the scope and mechanism of investment screening, in accordance with the NSL. Issues related to the classification (according to the type of investment) of investors subject to screening, protected enterprises, types of transactions subject to screening and screening criteria are discussed. The national authorities responsible for screening are identified, and the procedures are discussed, including the available administrative and judicial control measures and the consequences of illegal transactions.

72

See Section 4 of the Commercial Law. Section 5 of the Commercial Law. 74 Latvijas Vēstnesis, 473/476, 29.12.2000.; Latvijas Republikas Saeimas un Ministru Kabineta Ziņotājs, 3, 08.02.2001. 75 Grozījumi Nacionālās drošības likumā Latvijas Vēstnesis, 76, 14.05.2010. 76 Grozījumi Nacionālās drošības likumā Latvijas Vēstnesis, 64 (5891), 28.03.2017. 77 Ibidem. 78 The regulations contained in the NSL are supplemented with regulations pertaining to particular sectors, see for example the Law on the Security of Information Technologies; Latvijas Vestnesis, 178, 10.11.2010. 73

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Investors Subject to Screening

Latvian law has not defined the term ‘a foreign investor’ since the Law on Foreign Investment in the Republic of Latvia was repealed. Commercial Law and the NSL do not use this concept. The only exception to this rule can be found in bilateral investment treaties concluded by Latvia.79 As mentioned above, a foreign investor may exercise their business activities after registration in Latvia, unless any EU law provides otherwise, on a non-discriminatory basis, irrespective of their nationality. So there is no need and no space to set up a screening regulation only for specific EU or non-EU investors. It has to be mentioned that the restriction referring to critical infrastructure is addressed to the owner or legal possessor of the critical infrastructure, without any distinction between foreign and domestic investors. The same non-discriminatory principle applies to commercial companies of significance to national security and to their shareholders.

4.2.2

Protected Objects

The NSL provides for two mechanisms for protection of interests that are of significance for the national security. The first of them consists in separating the subjective range of infrastructure critical for the performance of state functions. Transfers of the ownership or possession of critical infrastructure components are supervised by the state. The other mechanism, which is both subjective and objective, consists in establishing a category of commercial companies of significance to the national security. Gaining decisive influence on such companies is controlled by the state. Section 222 of the NSL defines critical infrastructure as objects, systems or parts thereof located in the Republic of Latvia that are of significance for ensuring the implementation of important public functions, as well as human health protection, security, economic or social welfare and the destruction of or interferences in the operation of which would significantly affect the implementation of Latvia’s functions. Critical infrastructure shall be classified as follows: 1. Especially important critical infrastructure of state level (Category A critical infrastructure), destruction of or reduction of operational capabilities of which significantly endangers Latvian administration and national security

79 Those binding international agreements state that the term “investor” means any natural or legal person who invests in the territory of the other Contracting Party. The term “investment” means every kind of asset invested by investors of one Contracting Party in accordance with the laws and regulations of the other Contracting Party in the territory of the latter; see for example Agreement between the Government of the Republic of Latvia and the Government of the Republic of Armenia for the promotion and reciprocal protection of investments, “"Latvijas Vēstnesis”, 44, 20.03.2002.

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2. Important critical infrastructure of state level (Category B critical infrastructure), destruction of or reduction of operational capabilities of which hinders Latvian administration and endangers public and national security 3. Critical infrastructure of local governments and sectors (Category C critical infrastructure), destruction of or reduction of operational capabilities of which hinders administration of local government activities or sectors, as well as endangers public security A separate critical infrastructure the destruction of which or the reduction of operational capabilities of which would significantly affect at least two European Union Member States, and which is covered by an agreement reached with the relevant Member States of the European Union, may be determined as a European critical infrastructure. The significance of such effects shall be evaluated in terms of cross-cutting criteria, including the consequences resulting from the dependence of several sectors on other types of critical infrastructure. The cross-cutting criteria are (a) casualties criterion (assessed in terms of the potential number of fatalities or injuries), (b) economic effects criterion (assessed in terms of the significance of economic loss or degradation of products or services, including the loss of essential services, alternatives for the provision of services, and disruption of services and length of restoration thereof) and (c) public effects criterion (assessed in terms of the impact on public confidence, physical suffering and disruption of daily life, including the loss of essential services, alternatives for the provision of services, and disruption of services and length of restoration thereof). Pursuant to Section 222 (6) NSL, the Cabinet, which is composed of the Prime Minister and the ministers chosen by the Prime Minister (Article 55 of the Constitution of Latvia), shall determine the procedures for surveying critical infrastructure, including European critical infrastructure, and for planning and implementing security measures. Using this competence, the Cabinet established a procedure for the identification of critical infrastructure, including European critical infrastructure, and the planning and implementation of security measures (Cabinet Regulation No. 496 adopted on 1 June 2010).80 According to the procedure, the responsible sectoral ministries, the Security Police, the Constitution Protection Bureau and the Defence Intelligence and Security Service should identify the possible critical infrastructure or European critical infrastructure and submit proposals to the Commission of Intermediary Institutions for State Security (hereinafter the ‘Commission for State Security’)81 regarding the determination thereof as a critical infrastructure 80

Ministru kabineta noteikumi Nr.496 Kritiskās infrastruktūras, tajā skaitā Eiropas kritiskās infrastruktūras, apzināšanas un drošības pasākumu plānošanas un īstenošanas kārtība; Latvijas Vēstnesis, 97 (4289), 18.06.2010. 81 The composition of the Commission for State Security shall include authorised officials from the following institutions: the Ministry of Defence; the Ministry of Foreign Affairs; the Ministry of Economics; the Ministry of Finance; the Ministry of the Interior; the Ministry of Transport; the Ministry of Justice; the Ministry of Health; the Ministry of Environmental Protection and Regional Development; the Security Police; the Bank of Latvia; Defence Intelligence and Security Service; the National Armed Forces; the Constitution Protection Bureau; the State Fire-fighting and Rescue

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or European critical infrastructure. The Commission for State Security should evaluate such proposals, and after the evaluation it should draft legislative proposals for submission to the Cabinet regarding the aggregate of critical infrastructure, including European critical infrastructure. As regards European critical infrastructure, the Ministry of the Interior, on the basis of the proposals from the Commission, informs the European Commission and the European Union Member States, which may be significantly affected by the potential European critical infrastructure, about such European critical infrastructure and the reasons why it was determined as potential European critical infrastructure and coordinates bilateral or multilateral negotiations with other European Union Member States, which may be significantly affected by the potential European critical infrastructure. The Cabinet approves the aggregate of critical infrastructure (Section 10 (1.3.) NSL). The approval does not have the form of an administrative decision. Obtaining the status of critical infrastructure by specific enterprises (or parts thereof) brings about certain limitations on the rights of their owners and holders. The owner or legal possessor of critical infrastructure, including European critical infrastructure, shall ensure the planning and implementation of security measures and shall determine the status of restricted access information for documents governing internal security measures. Regardless of the restrictions associated with critical infrastructure, the NSL introduces restrictions on commercial companies registered in the Republic of Latvia that have been recognised by the legislator as essential for national security. A commercial company is a company entered into the Commercial Register in the Republic of Latvia. There are two types of commercial companies: a (general and limited) partnership and a capital company. A general partnership (pilnsabiedrība) is a partnership the purpose of which is the performance of commercial activities through the use of a joint firm name and in which two or more persons (members) have united, on the basis of a partnership agreement, without limiting their liability against creditors of the general partnership (Section 77 of the Commercial Law). A limited partnership (komandītsabiedrība) is a partnership the purpose of which is the performance of commercial activities through the use of a joint firm name and in which two or more persons (members) have agreed, on the basis of a partnership agreement, if the liability of at least one of the members of the partnership (limited partner) in relation to the creditors of the partnership is limited to the amount of their contribution, but the personal liability of the other members of the partnership (general partners) is not limited (Section 118 of the Commercial Law). A capital company is a commercial company the equity capital of which consists of the total sum of the nominal value of equity capital shares or stock (the shares). A capital company is a limited liability company or a stock company. The company is a legal person. The company is founded and acquires the status of a legal person from the date when it is entered in the Commercial Register. A shareholder of the commercial

Service; the State Police; the Information Technologies Security Incidents Response Institution. The composition of the Commission shall be approved by the Minister for the Interior.

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company is a person who has been entered in the register of shareholders (stockholders). Founders shall acquire the status of a shareholder from the date when the company is entered in the Commercial Register (Sections 134–136 of the Commercial Law). According to Section 37 of the NSL, a commercial company of significance to the national security is a company that satisfies at least one of the following conditions: (1) is an electronic communications merchant with significant market power which has been imposed liabilities for tariff regulation and cost accounting in accordance with the procedures provided for in the Electronic Communications Law82; (2) is an audible electronic mass medium the coverage zone of the programme of which, using technical means for terrestrial broadcasting, according to the broadcasting permit issued by the National Electronic Mass Media Council is Latvia or at least 60% of its territory, or is an audio-visual electronic mass medium the coverage zone of the programme of which, using technical means for terrestrial broadcasting, according to the broadcasting permit issued by the National Electronic Mass Media Council, is Latvia or at least 95% of its territory; (3) has received a licence in the Republic of Latvia for transmission, distribution, storage of natural gas or has, in its ownership, a liquefied natural gas facility connected to a transmission system; (4) is an electricity or thermal energy producer the installed actual capacity of which exceeds 50 mw; (5) is a thermal energy transmission and distribution operator which has heat supply networks in its ownership in length of at least 100 km; (6) has received a licence for electricity transmission in the Republic of Latvia. A commercial company shall, within 5 working days from the day when it conforms to any of the conditions referred to in Section 37 of NSL: 1. Submit a notification to the Commercial Register Office regarding its conformity with the conditions for a commercial company of significance to national security 2. Make an entry in the register of stockholders or shareholders regarding the status of the capital company 3. Inform the shareholders or stockholders of the relevant capital company and persons who exercise indirect holding (right to vote) or members of the partnership regarding its conformity with the conditions for a commercial company of significance to national security 4. Inform the institution stipulated by the Cabinet regarding its shareholders, stockholders and persons who exercise indirect holding (right to vote) or regarding members, as well as beneficial owners – natural persons who directly or indirectly have qualifying holding in this commercial company The Commercial Register Office shall publish the information regarding the conformity of the commercial company with the conditions for a commercial company of significance to national security on the website of the Commercial Register Office. If beneficial owners are:

82

Elektronisko sakaru likums; Latvijas Vēstnesis, 183 (3131), 17.11.2004.; Latvijas Republikas Saeimas un Ministru Kabineta Ziņotājs, 23, 09.12.2004.

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1. A financial institution supervised by the competent financial and capital market supervisory institution of the relevant state, an alternative investment fund and investors in foundations equivalent thereto – information regarding beneficial owners may contain only information regarding the relevant financial institution and its operational policy 2. An association or foundation – information regarding the beneficial owner shall contain information regarding the relevant association or foundation and its purpose of operation 3. Stockholders of such joint stock company the stocks of which are included in a regulated market – information shall be provided only regarding such stockholders that exceed 10% of the total number of voting stocks of the relevant joint stock company The Cabinet shall determine the institution to which the information specified in paragraph 1, clause 4 of Section 39 of the NSL shall be submitted, the amount of the information to be submitted and the procedures for submitting it.

4.2.3

Transactions Subject to Screening

A permission from the Cabinet is required for the transfer of the critical infrastructure, including European critical infrastructure, into the possession or ownership of another person. Thus, the transfer of ownership from a foreign investor is possible only with the permission of the Cabinet. So each transaction that transfers ownership or possession of critical infrastructure, or parts thereof, is covered by the screening mechanism. In order to preclude an influence endangering or potentially endangering national security in a commercial company of significance to national security, the Cabinet decides on the permission for the following activities: 1. In relation to capital companies: (a) (b) (c) (d)

Obtaining of qualifying holding Obtaining of decisive influence Transition of an undertaking Preservation of the status of a stockholder or shareholder or preservation of the right to exercise indirect holding (right to vote) if the beneficial owner changes

2. In relation to partnerships: (a) Joining of a new member (b) Preservation of the status of a member if the beneficial owner changes

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The term ‘qualifying holding’ used in the NSL conforms to the concept of qualifying holding within the meaning of the Financial Instrument Market Law83 if a smaller proportion of holding or other additional conditions have not been specified in another law; the concept of ‘decisive influence’ conforms to the concept of decisive influence within the meaning of the Group of Companies Law; the concept of ‘beneficial owner’ conforms to the concept of the beneficial owner within the meaning of the Law on the Prevention of Money Laundering and Terrorism Financing.84

4.2.4

Screening Criteria

As it has been stated above, the consent of the Cabinet is required for (a) the transfer of ownership or possession of especially important and important critical infrastructure (categories A and B, Section 222 paragraph 7 of the NSL); (b) obtaining qualifying holding or decisive influence in a commercial company of significance to national security (Section 40 paragraph 1 of the NSL); (c) each transaction of an undertaking as a result of which a person obtains such undertaking in its ownership from a capital company of significance to national security which has assets that are used for carrying out the activity referred to in Section 37 of the NSL, as mentioned above (Section 42 of the NSL); and (d) retaining holding of a shareholder or stockholder in a commercial company of significance to national security or a person who exercises indirect holding (right to vote) or remaining a member in the commercial company if its beneficial owner changes (Section 41 of the NSL; a beneficial owner means a natural person who is the owner of a legal person or who controls the legal person or on whose behalf, for whose benefit or in whose interests business relationship is being established or an individual transaction is being executed). Therefore, the first investment screening criterion is establishing whether it concerns a facility or a system deemed to constitute critical infrastructure. Critical infrastructure ensures the performance of important public functions, as well as human health protection, security, and economic or social welfare. Its destruction or interference with its operation would significantly affect the performance of state functions. The second screening criterion is the answer to the question whether the investment concerns a commercial company of significance to national security (for information on the activity that a company must carry out in order to be recognised as a commercial company of significance to national security, see above – Section 37 of the NSL).

83

Finanšu instrumentu tirgus likums; Latvijas Vēstnesis, 175 (2940), 11.12.2003.; Latvijas Republikas Saeimas un Ministru Kabineta Ziņotājs, 2, 29.01.2004. 84 Noziedzīgi iegūtu līdzekļu legalizācijas un terorisma un proliferācijas finansēšanas novēršanas likums; Latvijas Vēstnesis, 116 (3900), 30.07.2008.; Latvijas Republikas Saeimas un Ministru Kabineta Ziņotājs, 16, 28.08.2008.

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After it has been established that an investment concerns critical infrastructure or a commercial company of significance to national security, the Cabinet must decide whether consent for the investment may be given. According to Section 44 paragraph 2 of the NSL, upon taking a decision in the cases referred to above, the Cabinet shall evaluate the restriction on the rights of the person, its commensurability with the national security interests and the opinion of a state security institution, as well as conformity with the principle of legitimate expectations. The Cabinet shall take a decision to refuse to issue the permit if (a) the issuing of the permit threatens interests of the national security, (b) the person who has submitted the application has failed to submit additional information or documents necessary for the preparation of opinion of state security institutions within the period of time set by the Ministry of Economics and the state security institutions (for information on state security institutions, see Section 15 NSL) and (c) the Ministry of Economics or the state security institutions establish that they have been provided with false information (paragraph 11 of Cabinet Regulation no. 606 adopted on 3 October 2017 – Regulations Regarding the Institution Determined in the National Security Law, the Scope of Information to Be Submitted, the Procedures for Submission Thereof, and the Evaluation of the Submitted Information, and also the Taking and Notification of the Decision Determined in the National Security Law85). A shareholder or stockholder of a commercial company of significance to national security, a person who exercises indirect holding (right to vote) or a member thereof must receive a permit to retain holding or to remain a member in the commercial company if its beneficial owner changes. A permit of the Cabinet shall not be required if: 1. The same capital company obtains shares or stocks of the share capital in the cases specified in the law. 2. The shares or stocks of a state capital company and state capital are managed in accordance with the Law on Governance of Capital Shares of a Public Person and Capital Companies.86 3. An undertaking, shares or stocks of the share capital are transferred into the ownership of a public person, capital company of a public person or a public private capital company. 4. In accordance with the procedures laid down in the Criminal Procedure Law, the person directing the proceedings decides on returning the shares or stocks of the share capital to the lawful owner. 5. In accordance with the procedures laid down in the Criminal Procedure Law, the court decides on confiscating the shares or stocks of the share capital.

85

Noteikumi par Nacionālās drošības likumā noteikto institūciju, institūcijā iesniedzamās informācijas apjomu, iesniegšanas kārtību un iesniegtās informācijas izvērtēšanu, kā arī Nacionālās drošības likumā noteiktā lēmuma pieņemšanu un paziņošanuLatvijas Vēstnesis, 203 (6030), 12.10.2017. 86 Publiskas personas kapitāla daļu un kapitālsabiedrību pārvaldības likums; Latvijas Vēstnesis, 216 (5276), 31.10.2014.

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Competent Authorities

The Cabinet shall approve the aggregate of critical infrastructure, take a decision on retaining the influence of a person or a permission to obtain influence in commercial companies of significance to national security, as well as on a permission to transfer the critical infrastructure into possession or ownership of another person. Also, the Cabinet shall determine the obligations for commercial companies of significance to national security and decide on the permission for taking control over this company. A commercial company significant for the national security shall submit the information to the Ministry of Economics in accordance with the National Security Law.

4.2.6

Procedure

The procedure for issuing an administrative decision concerning consent to the taking up of critical infrastructure or of a commercial company significant for national security has been regulated through NSL (Section 44) and through an act of secondary legislation.87 To matters not regulated by the procedure for issuing such decisions, the Administrative Procedure Law88 should be applied. A permit of the Cabinet shall be necessary before a person or several persons who act in a coordinated manner obtain qualifying holding or decisive influence in a commercial company of significance to national security or become a member of such a commercial company or also obtain influence in a capital company registered in the Republic of Latvia, which is a member of a commercial company of significance to national security. An application for the receipt of a permit shall be submitted by a person who wishes to obtain qualifying holding or decisive influence in a commercial company of significance to national security. An application for the receipt of a permit shall be submitted by the relevant shareholder or stockholder in a commercial company of significance to national security, person who exercises indirect holding (right to vote) or member within 5 working days from the day when change of the beneficial owner occurred. The Cabinet is entitled to take a decision by which an obligation is imposed on the person to alienate shares or stocks of the share capital accordingly within a specific period of time or to terminate indirect holding (right to vote) or to leave the commercial company. If the person has not carried out the activities that are specified in the decision (permission), it is not entitled to exercise the right to vote in the relevant capital

87

Regulations Regarding the Institution Determined in the National Security Law, the Scope of Information to be Submitted, the Procedures for Submission Thereof, and the Evaluation of the Submitted Information, and also the Taking and Notification of the Decision Determined in the National Security Law. 88 Latvijas Vēstnesis, 164, 14.11.2001.; Latvijas Republikas Saeimas un Ministru Kabineta Ziņotājs, 23, 13.12.2001.

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company or is not entitled to represent the partnership and to manage record-keeping on the following day after the specified period of time. A permit of the Cabinet shall be required for each transition of an undertaking as a result of which a person obtains such undertaking in its ownership from a capital company of significance to national security which has assets that are used for carrying out the activity referred to in Section 37 of the NSL. A commercial company of significance to national security shall submit an application for the receipt of a permit in accordance with the procedures stipulated by the Cabinet. A decision of the Cabinet (permission for changing the ownership of critical infrastructure, obtaining qualifying holding or decisive influence, change of a beneficial owner, transition of an undertaking) is taken within 1 month from the day of receiving an application. This time period may be extended up to 4 months. By taking the above-mentioned decision, the Cabinet shall evaluate the restriction on the rights of the person, its commensurability with the national security interests and the opinion of a state security institution, as well as conformity with the principle of legitimate expectations. The decision referred to in Section 222 paragraph 7, Section 40 paragraph 1, Section 41, paragraph 3 and Section 42 paragraph one of the NSL shall be notified to the addressee, and a notification on the decision taken shall be sent to the relevant commercial company of significance to national security if it is not the addressee of the decision. If the Cabinet has not taken a decision within the time period of 4 months, it shall be deemed that a permit has been granted after the expiry of the time period.

4.2.7

Administrative and Judicial Review

In accordance with the general principles stipulated in the Administrative Procedure Law, an administrative act may be disputed by a submitter, an addressee, a third party, a legal entity, as well as a legal person whose rights or legal interests are restricted by the administrative act and who has not been invited to participate in the administrative proceeding as a third party (Section 76(1) of APL). An administrative act may be disputed before a higher authority in accordance with procedures regarding subordination. If the administrative decision is, however, taken by the Cabinet, the administrative act may by immediately appealed to a court (Section 76 (1) of APL). The decision of the Cabinet may be appealed to the Administrative District Court. The appeal of the decision shall not suspend the operation thereof. The court shall examine the case as the court of first instance. The case is examined in the composition of three judges. A judgement of the Administrative District Court may be appealed by submitting a cassation complaint. If for objective clarification of the circumstances of the case the court needs to examine information containing an official secret, then only the court shall be become acquainted with such information and evaluate it. The court shall indicate in the ruling that such information has been evaluated (Section 44 points 4–6 NSL).

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Within the scope not regulated with the NSL, court proceedings pertaining to administrative decisions are regulated under Part C, ‘Administrative Procedure in Court’, of the Administrative Procedure Law (Sections 102–357).

4.2.8

Consequences of Unlawful Transactions

If a person or several persons, who act in a coordinated manner, obtain qualifying holding or decisive influence in a commercial company of significance to national security or become a member of such commercial company without receiving the permit referred to in Section 40 of the NSL, then a transaction concluded or an action carried out in Latvia that was a ground for obtaining the above-mentioned rights is not valid from the moment of concluding or carrying out. Regardless of the place of concluding the transaction or the action, the commercial company of significance to national security is not entitled to make changes in the register of stockholders or shareholders if the permit specified in Section 40 of the NSL has not been received. If as a result of the transition of an undertaking another person obtains such undertaking into its ownership from a capital company of significance to national security which holds assets that are used for carrying out the activity referred to in Section 37 of the NSL, without receiving the permit referred to in Section 42 of the NSL, the transition is not valid. Decisions of a meeting of shareholders or stockholders of a commercial company of significance to national security voted by shareholders and stockholders for holding or a change of the beneficial owner of which the Cabinet has not given a permission or decisions taken in violation of the prohibition of the right to vote specified in this Chapter shall not be valid. Also, any action of a member that has been carried out thereby on behalf of the commercial company of significance to national security, thus violating the restrictions on representation and record-keeping specified in the NSL, shall not be valid. In the cases specified in paragraph 1 of Section 45 of the NSL, the Cabinet shall take a decision by which the following obligation is imposed: 1. on shareholders or stockholders of capital companies to alienate shares or stocks of the share capital or to terminate indirect holding (right to vote), and prohibits to exercise the right to vote in the relevant capital company until fulfilment of the abovementioned obligation; 2. on members of partnerships to leave the company, and prohibits to represent the company and to manage its record-keeping until fulfilment of the abovementioned obligation.

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National Security Law in the Light of the Screening Regulation

The EU Screening Regulation provides for a possibility to maintain in Member States mechanisms to screen foreign direct investments in their territory on the ground of security or public order (Article 3(1)). Such a mechanism is established in Latvia. According to the National Security Law, it consists in evaluation on whether investments in critical infrastructure are admissible or whether gaining control over or a dominant position in commercial companies of significance to national security is admissible. The domestic screening mechanism, as referred to in Article 3(1) of the EU Screening Regulation, may be used where security or public order is to be protected. It has been specified more precisely in Article 4(1). As has been said above, upon taking a decision to express consent to an investment in critical infrastructure or in commercial companies significant for the national security, the Cabinet should evaluate the restriction of the rights of a person, its commensurability with the national security interests and the opinion of a state security institution, as well as conformity with the principle of the legitimate expectations. The Cabinet should refuse to issue a permit if its issuance would threaten the interests of national security. It has been specified in Section 1 of the Latvian National Security Law that national security means guaranteeing independence of the State, its constitutional structure and territorial integrity, the prospect of free development of society, welfare and stability. This means that more general concepts have been used in the NSL than in Article 4(1) of the EU Screening Regulation. The first three values, independence, constitutional structure and territorial integrity, should be perceived as concepts falling within the scope of public security, as referred to in Article 3 of the EU Screening Regulation. The guarantees of free development of society, including economic development, and of stability are contained in the concept of public order. The specified in the NSL functions fulfilled by critical infrastructure, namely important public functions, as well as human health protection, security, economic or social welfare, and areas of activity of commercial companies of significance to national security, that is electronic communications, electronic mass media, transmission, distribution, storage of natural gas or liquefied natural gas, producing electricity or thermal energy, thermal energy transmission and distribution, electricity transmission, coincide in terms of meaning with the functions specified in Article 4(1) of the EU Screening Regulation. A threat to national security is the only material premise for refusal to give consent to an investment in critical infrastructure or in a commercial company of significance to national security. The Latvian law does not provide for a list of features of an ‘undesirable’ foreign investor that would be similar to the one contained in Article 4(2) of the EU Screening Regulation. National rules and procedures related to screening mechanisms should be transparent and should not discriminate between third countries (Article 3(2) of the EU Screening Regulation). The Latvian screening mechanism has been specified in

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statutory regulations. Although the basic concept of national security is very general and wide, the legislator made an attempt to define it more specifically in the NSL. In addition, it established a procedure for determining what critical infrastructure is and specified conditions for obtaining the status of a commercial company of significance to national security. Therefore, it can be assumed that the Latvian screening mechanism meets the condition of transparency required under the EU law. It must be stressed, however, that due to the specific character of regulations pertaining to national security, they need to use general concepts that enable the protection of that value of greatest importance for the state. Giving up the notion of a ‘foreign investor’ enabled Latvia to establish a totally non-discriminatory screening mechanism. Establishing for both domestic and foreign entities the same procedure for obtaining consent to become the owner or possessor of components of critical infrastructure or to take control of commercial companies of significance to national security makes it possible to deem NSL to be in conformity with Article 3(2) of the EU Screening Regulation. Member States shall apply time frames under their screening mechanisms. The screening mechanisms should allow the Member States to take into account the comments of other Member States referred to in Articles 6 and 7 and the opinions of the European Commission referred to in Articles 6, 7 and 8 (Article 3(3) of the EU Screening Regulation). Pursuant to Section 44(1) of the NSL a decision to grant (or refuse) consent to an investment in critical infrastructure or in a commercial company of significance to national security needs to be taken within 1 month from the day of receiving an application. This period may be extended to 4 months as maximum. If the consent is not refused within the specified time limit, after its lapse, the applicant obtains consent for the investment by virtue of the law. It must be noted that the period of 1 month may be too short for the Member States and the European Commission to use their competences guaranteed under the EU Screening Regulation. The period of 4 months meets the EU requirements. As regards the obligation to protect the confidential information, including commercially sensitive information, that are made available to the Member State undertaking the screening (Article 3(4) of the EU Screening Regulation), a reference must be made to the general rules of the Latvian administrative procedure. Section 54 (Provision of Information to Private Persons’ of the Administrative Procedure Law prohibits an administrative institution to place the relevant information at the disposal of a private person if such information is to be considered restricted access information in accordance with the law. Also, court proceedings may be conducted in camera if they involve a secret protected by law. Pursuant to a reasoned court decision, an administrative matter may be adjudicated in a closed court sitting to protect state, professional and commercial secrets (Section 108 (2) of the Administrative Procedure Law). Commercial secrets are a type of information that must not be made available. Information that is created by a merchant or belongs to a merchant and the disclosing of which may have a significant adverse impact on the competitiveness of the

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merchant shall be regarded to be a commercial secret. A merchant, when providing information to an institution, shall indicate whether the information is a commercial secret and what is the legal basis for such a status. If an institution has received a request for the provision of such information, which is a commercial secret, it shall, prior to providing such information or refusing to provide it, ascertain the viewpoint of the merchant regarding compliance with the provisions of the Administrative Procedure Law. Information regarding commercial secret shall be considered restricted access information until the merchant has notified an institution regarding the termination of commercial secret (Section 7 of the Freedom of Information Law89). In the light of the above, it needs to be said that the conditions stipulated in Article 3(4) of the EU Screening Regulation have been met. According to Article 3(5) of the EU Screening Regulation, foreign investors and the undertakings concerned shall have the possibility to seek recourse against screening decisions of the national authorities. This right is guaranteed under the Latvian law. Administrative decisions to refuse consent to an investment in critical infrastructure or in a commercial company of significance to national security are subject to judicial review. Article 3(6) of the EU Screening Regulation imposes on Latvia a duty to maintain, amend or adopt measures necessary to identify and prevent the circumvention of the screening mechanisms and screening decisions. Also here, the Latvian law meets the EU conditions. Pursuant to Section 45 of the NSL, investments made in critical infrastructure or in commercial companies of significance to national security without the required consent are invalid from the moment of transaction. European Union law norms that guarantee the right of another Member State or the Commission to express their opinions (see Article 6(9), Article 8(2)(c) of the EU Screening Regulation) are directly applicable in the Latvia domestic law system, and there is no need to transpose these duties to the national legislation.90

4.4

Conclusions

The Latvian constitutional system, which is based on the principles of equal treatment and protection of property, establishes a framework for the legislator’s freedom to regulate. Within such a framework, the Parliament was able to set a mechanism restricting the entrepreneurs’ right to make investments in the name of a fundamental value, which is national security. It did so by means of establishing two institutions: critical infrastructure and commercial companies of significance to national security, investments in which can be made only under control exercised by the state. The relatively young Latvian mechanism, which was established in 2017, meets the EU

89 Latvijas Vēstnesis, 334/335, 06.11.1998.; Latvijas Republikas Saeimas un Ministru Kabineta Ziņotājs, 24, 24.12.1998. 90 For a more detailed explanation see the section concerning Poland.

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requirements. It is based on the principle of non-discrimination and guarantees protection of company secrets and the right to be heard in court if a consent to an investment is refused.

References Adamiak B, Borkowski J (2019) Kodeks postępowania administracyjnego. Komentarz. Legalis, Warszawa Gurba W (2017) Bezczynność i przewlekłość postępowania. Milczące załatwianie spraw (art. 14 § 3, art. 36–38, art. 104a–104c). In: Kmieciak Z (ed) Raport Zespołu Eksperckiego z prac w latach 2012-2016. Reforma prawa o postępowaniu administracyjnym. Naczelny Sąd Administracyjny, Warszawa Jaśkowska M (2019) Środki zaskarżenia milczącego załatwienia sprawy. In: Gajda-Durlik M, Kmieciak Z (eds) Milczące załatwienie sprawy przez organ administracji publicznej. Wolters Kluwer Polska, Warszawa Kabat A (2018) Article 50. In: Dauter B, Kabat A, Niezgódka-Medek M (eds) Prawo o postępowaniu przed sądami administracyjnymi. Komentarz. Wolters Kluwer Polska, Warszawa Kamińska I, Rozbicka-Ostrowska M (2016) Ustawa o dostępie do informacji publicznej. Komentarz. Wolters Kluwer Polska, Warszawa Kamiński M (2019) Milczenie administracyjne a milczące załatwienie sprawy i jego weryfikacja. rozwiązania normatywne w prawie polskim na tle prawnoporównawczym. In: Gajda-Durlik M, Kmieciak Z (eds) Milczące załatwienie sprawy przez organ administracji publicznej. Wolters Kluwer Polska, Warszawa Knysiak-Sudyka H (2019) Zakres stosowania przepisów kodeksu postępowania administracyjnego o milczącym załatwieniu sprawy – problemy interpretacyjne. In: Gajda-Durlik M, Kmieciak Z (eds) Milczące załatwienie sprawy przez organ administracji publicznej. Wolters Kluwer Polska, Warszawa Kochowska E, Mataczyński M (2016) Artykuł 11. In: Mataczyński M (ed) Ustawa o kontroli niektórych inwestycji. Komentarz. Wolters Kluwer Polska, Warszawa Lewicki M (2019) Zakres stosowania przepisów o milczącym załatwieniu sprawy. In: GajdaDurlik M, Kmieciak Z (eds) Milczące załatwienie sprawy przez organ administracji publicznej. Wolters Kluwer Polska, Warszawa Malanowski J (2018) Artykuł 74. In: Hauser R, Wierzbowski M (eds) Kodeks postępowania administracyjnego. Komentarz. Wolters Kluwer Polska, Warszawa Morawski L (2002) Wykładnia w orzecznictwie sądów. Komentarz. TNOiK, Toruń Rogucki T (2018) Mechanizmy zwiększające kontrolę (control enhancing mechanisms) w polskich spółkach akcyjnych. C.H. Beck, Warszawa Romańska M (2019) Środki prawne w postępowaniu administracyjnym kończącym się milczącym załatwieniem sprawy – problemy konstrukcyjne. In: Gajda-Durlik M, Kmieciak Z (eds) Milczące załatwienie sprawy przez organ administracji publicznej. Wolters Kluwer Polska, Warszawa Szczygielski K (2017) Latin legal maxims in the judgments of the Constitutional Tribunal in Poland. Stud Logic Gramm Rhetor 49:213–223. https://doi.org/10.1515/slgr-2017-0013 Szydło M (2016) Artykuł 2. In: Sieradzka M, Zdyb M (eds) Ustawa o zwalczaniu nieuczciwej konkurencji. Komentarz. Wolters Kluwer Polska, Warszawa Tanajewska R, Malarewicz-Jakubów A (2012) The ambiguity of law interpretation. Stud Logic Gramm Rhetor 31:11–26 Taradejna R (2011) Kodeks postępowania administracyjnego. Tekst ujednolicony z komentarzem i wybranym orzecznictwem. Wydawnictwo Adam Marszałek, Toruń

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Taradejna M, Taradejna R (2003) Dostep do informacji publicznej, a prawna ochrona informacji dotyczących działalności gospodarczej, społecznej i zawodowej oraz życia prywatnego. Wydawnictwo Adam Marszałek, Toruń Wiórek P (2017) No title. In: Kidyba A, Michalski M (eds) Spółki Skarbu Państwa na rynku kapitałowym. Wolters Kluwer Polska, Warszawa Wróbel A (2019a) Artykuł 73. In: Jaśkowska M, Wilbrandt-Gotowicz M, Wróbel A (eds) Komentarz aktualizowany do Kodeksu postępowania administracyjnego. Wolters Kluwer Polska, Warszawa Wróbel A (2019b) Artykuł 28. In: Jaśkowska M, Wilbrandt-Gotowicz M, Wróbel A (eds) Komentarz aktualizowany do Kodeksu postępowania administracyjnego. Wolters Kluwer Polska, Warszawa Zimna T (2013) Dostęp do oferty konkurencyjnej w postępowaniu odwoławczym przed NFZ. Glosa do wyroku NSA z dnia 16 marca 2011 r., II GSK 264/10. Gdańskie Stud Prawnicze – Przegląd Orzecznictwa

Marek Jaśkowski (ORCiD 0000-0001-6598-810X) is an assistant professor at the Cardinal Stefan Wyszyński University in Warsaw (Faculty of Law and Administration) and a legislation specialist in the Bureau of Research of the Chancellery of the Sejm (Lower House of Polish parliament). His current research interests focus on EU internal market law, public security, stateowned enterprises and foreign investment. He holds the degrees of PhD in EU Law (UKSW, Warsaw) and Master Droit français et européen des affaires (Université de Poitiers). Szymon Pawłowski (ORCiD: 0000-0003-4670-4321) is an assistant professor at the Cardinal Stefan Wyszynski University in Warsaw (Faculty of Law and Administration), legal counsel, and a legal expert in polish Financial Supervision Authority. His current research interest focuses on EU public security, financial market supervision, Central Banks and their policies, and constitutional identity. He holds the degrees of PhD in constitutional law (Gdansk University) and Master of Law LL.M (Cologne).

Foreign Investment Screening in Hungary and Romania Szilárd Gáspár-Szilágyi

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Romanian Competition Law No 21/1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Scope of Application of Hungarian Law LVII of 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 The ‘Foreign’ Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 ‘Operating’ in Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 In a ‘Sensitive’ Economic Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Ratione Temporis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Procedural Framework Set Out by Hungarian Law LVII of 2018 . . . . . . . . . . . . . . . . . . . . 4.1 The Obligations of the Foreign Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 The Procedure and Judicial Redress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 The Effects of the Minister’s Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 What if Investors Do Not Comply with the Obligation to Declare Their Activities? 5 The Interplay with the EU Screening Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 The Subject Matter and Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 The Procedural Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Factors to Be Taken into Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

188 189 193 194 195 197 198 198 198 199 201 202 203 203 205 206 206 207

Abstract Romania does not yet have a separate law regulating the screening of foreign investments. Therefore, it is difficult to argue that the 2011 amendment to

The original version of this chapter was revised for an incorrect chapter 25, title as ‘Country Report on Hungary and Romania’ whereas it should be ‘Foreign Investment Screening in Hungary and Romania’. The correction to this chapter can be found at https://doi.org/10.1007/978-3-030-43757-2_32 This work was partly supported by the Research Council of Norway through its Centres of Excellence funding scheme, project number 223274. S. Gáspár-Szilágyi (*) Keele University, Newcastle, UK PluriCourts, University of Oslo, Oslo, Norway e-mail: [email protected] © Springer Nature Switzerland AG 2020, corrected publication 2021 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 187–208, https://doi.org/10.1007/16495_2020_25, Published online: 30 July 2020

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Romania’s Competition Law, which allows the blocking of a takeover for national security reasons, can be considered a comprehensive investment screening mechanism under EU Regulation 2019/452. If it can be considered as such, then the summary procedures described in the Competition Law fall short of the requirements of the EU Regulation. Compared to Romania, Hungary has very recently adopted Law LVII of 2018 and Government Decree 246/2018, which set up a detailed investment screening mechanism for national security reasons, in sensitive economic sectors. The Hungarian mechanism is mostly in line with the Regulation’s mandatory minimum requirements. It only falls short when it comes to better detailing some of the grounds based on which non-EU, non-EEA, or non-Swiss foreign investors can have their investments blocked, and it does not include provisions on the protection of sensitive information. It is to be seen how effective the Hungarian mechanism becomes as a number of foreign investors will be affected by it.

1 Introduction Hungary and Romania joined the European Union (EU) in 2004 and 2007, respectively. According to the World Bank, in 2017 Hungary had a population of 9.8 million and a nominal gross domestic product (GDP) of 139.7 billion USD, while for the same year, Romania’s population stood at 19.6 million with a nominal GDP of 211.9 billion USD.1 In both countries, the period following the collapse of communism saw a rise in foreign direct investments (FDIs). In 2017, the net FDI flow into Hungary2 stood at 2.492 billion USD and 5.160 billion USD for Romania.3 In the case of Romania, the net FDI flow has been positive since 2000 and reached its highest peak in 2008, with a net flow of 13.492 billion USD. Hungary paints a more varied picture. The highest net flow was in 2012, when it reached 14.409 billion USD, while 2015 and 2016 saw a negative net flow of FDIs.4 For both countries, foreign capital and EU funds represent a significant part of investments. Therefore, one would expect that neither country would enact laws regulating the inflow of foreign capital. However, in October 2018 the Hungarian

1

World Bank (2019). For the country specific populations see https://data.worldbank.org/indicator/ sp.pop.totl; for the county specific real GDP see https://data.worldbank.org/indicator/ny.gdp. mktp.cd. 2 The Hungarian Central Statistical Office (Központi Statisztikai Hivatal) (2019) includes in the annual net FDI flows the following: the annual net investment of non-resident investors, either in the form of money or in kind, including loans given by non-resident companies to their local subsidiaries. https://www.ksh.hu/docs/hun/modsz/modsz70.html, point 7.3.22. 3 The Hungarian Central Statistical Office (2019). Közvetlen külföldi működőtőke-befektetések (2000–). 4 Ibid.

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Parliament passed Law LVII concerning the screening of foreign investments affecting Hungary’s security interests (‘Law LVII’, ‘the Law’), after having postponed the initial vote in July 2018.5 Law LVII is complemented by Government Decree 246 of 2018 concerning the implementation of the Law (‘Decree 246/2018’, ‘the Government Decree’).6 At the time of writing, Romania does not have a selfstanding piece of legislation that provides for the screening of foreign investments for national security purposes. Instead, the 2011 amendment of the Romanian Competition Law No 21/19967 includes some provisions on blocking takeovers that could affect national security. Given the summary character of the Romanian legal provisions, Sect. 2 of the Report starts by describing the Romanian legal framework. This is then followed by a detailed description of the Hungarian legal framework in Sects. 3 and 4, focusing on its scope of application, and the procedures and obligations described in it. Section 5 looks at the interplay between the national provisions and EU Regulation 2019/452 on the screening of foreign direct investments (EU Screening Regulation). Section 6 is reserved for concluding observations.

2 Romanian Competition Law No 21/1996 According to Horobeț and Popovici, Romania has a number of features that make it attractive for FDI: a strategically important geographical position, a relatively large market and low labour costs.8 Nevertheless, Romania is not an FDI hub in the region for several reasons. Firstly, Romania lacks a clear strategy that identifies the key sectors that require investments. Secondly, there is a lack of economic incentives specifically tailored for FDI. Thirdly, no government agencies exist that are specialized on attracting FDI, such as in the Czech Republic or Hungary.9 Therefore, it is not that surprising that Romania does not yet have a self-standing law governing the screening of foreign investments. However, the country’s Competition Law does include several provisions on takeovers that can potentially affect national security. Law 21/1996 (‘the Competition Law’) came into force on 1 February 1997 and was subsequently amended several times. Following the 2011 amendment, Article 47(9)–(10) of the Competition Law provides that if the takeover of an undertaking or of certain assets poses a risk to national security, the government – pursuant to the 5

2018. évi LVII. törvény, A Magyarország biztonsági érdekét sértő külföldi befektetések ellenőrzéséről. Magyar Közlöny, 157. szám, 2018. október 11. 6 246/2018. (XII.17.) Kormány rendelet, A Magyarország biztonsági érdekét sértő külföldi befektetések ellenőrzéséről szóló 2018. évi LVII. Törvény végrehajtásáról. Magyar Közlöny, 201. szám, 2018. december 11. 7 Legea 21/1995, Legea Concurenței, Republicare. Publicat în Monitorul Oficial cu numărul 153 din data de 29 februarie 2016. 8 Horobeț and Popovici (2017), pp. 16–18. 9 Ibid.

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proposal of the Supreme Defence Council of the Country (CSAT, Consiliul Suprem de Apărare a Țării) – shall issue a decision to forbid the takeover. During the procedure, the European Commission’s competences in this field shall be respected. The Competition Council (Consiliul Concurenței) – during a takeover investigation – shall inform the CSAT of those operations concerning the concentration of undertakings that could be susceptible to analysis from the perspective of national security. If the CSAT then informs the Competition Council that such a process might pose a risk to national security, the deadlines prescribed by the Law for the Competition Council to assess a concentration of undertakings are suspended until the CSAT delivers its decision to allow or block the takeover. The state authorities and bodies that are competent over national security issues can ask the Competition Council to provide them with the necessary documents and information so that the CSAT can make its assessment. Finally, if the CSAT decides to block a takeover, the investigations before the Competition Council are terminated, and within 15 days from receiving the CSAT’s decision, the Competition Council shall inform the undertaking concerned. It must also be added that the CSAT is an autonomous administrative body vested with the power to organize and coordinate the country’s defence and national security.10 The CSAT is presided over by the President of Romania, while the Prime Minister is the Vice President. Its members include the Minister of National Defence, the Minister for Internal Affairs, the Minister for External Affairs, the Minister for Industry and Natural Resources, the Minister for Public Finances, the Director of the Romanian Information Services, the Director of the External Information Services, the General Chief of Staff, and the Presidential Counsellor for National Security.11 The Romanian provisions raise more questions than they answer. Firstly, since the provisions are not included in a self-standing piece of legislation on the screening of foreign investments, the above-described procedure is applicable only within the confines of the Competition Law and more specifically in the case of a takeover of undertakings or other assets. Since the provisions are embedded in Article 47 of the Competition Law, which deals with the concentration of undertakings and does not differentiate between the nationalities of the undertakings, it would follow that the CSAT could block a takeover for national security reasons, regardless of the nationality of the company initiating the takeover. Thus, it should not matter whether the company taking over is registered in Romania, another EU or EEA country or a third country. In 2017, a local news agency reported that the CSAT was notified by the Competition Council when a UK-based company was planning to take over a local company offering online payments.12

Legea Nr. 415 din 27 iunie 2002 privind organizarea și funcționarea Consiliului Suprem de Apărare a Țării. Forma consolidată, Article 1. 11 Ibid, Article 5. 12 Florian (2017). In this case, a locally incorporated company owned by the UK based online payment operator, PayPoint, wanted to take over the local subsidiary of Payzone. 10

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Secondly, Article 47(9)–(10) of the Competition Law does not include a list of activities that might be deemed sensitive from the perspective of national security. Thus, it seems that as long as it is a takeover that could potentially have national security implications, all economic activities are covered. One could think of a variety of fields with national security implications, such as the energy sector, online payment systems, security systems, data collection systems, the production of weapons, etc. Thirdly, several local bodies and authorities are involved in the process, without clearly defined procedures and timelines. The Competition Council, the CSAT, and the government all have a role to play. Pursuant to paras. 9 and 10 of Article 47 of the Competition Law, the procedure seems to be the following (see Fig. 1). The Competition Council informs the CSAT of any operations concerning the

Competition Council (C.C.) Is the takeover susceptible to be analyzed from a national security perspective?

YES

NO

Takeover investigation continues

C.C. Informs CSAT

CSAT initial assessment Susceptible to cause risks for national security?

NO

YES

Takeover investigation suspended

Takeover investigation continues

CSAT final decision Does it affect national security? YES

CSAT Informs C.C. Takeover investigation at C.C. is terminated

Government forbids takeover

Fig. 1 The Romanian procedure

NO

CSAT Informs C.C. Takeover investigation at C.C. resumes

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concentration of undertakings that could be susceptible to an analysis of their national security implications. This means that the Competition Council has some level of discretion to perform a prima facie check of the takeover’s national security implications. Following this, the CSAT looks at whether the takeover has implications for national security and informs the Competition Council. The procedures (takeover investigations) before the Competition Council are then suspended. This initial assessment of the CSAT is followed by a final decision of the CSAT, based on which the government issues a decision forbidding the takeover. However, para. 12 of Article 47 then mentions how the procedure before the Competition Council ends following the CSAT’s decision to block the takeover. This seems to be at odds with the para. 9 requirements that the government issues the blocking decision, based on the CSAT’s proposal. Involving the government in the process also seems excessive as the CSAT already includes the Prime Minister (the head of the government) and several ministers. The procedure also does not include any timelines. For example, we do not know how much time should the CSAT’s decision take. Fourthly, the Competition Law provides no special remedies against the CSAT’s or the government’s decision to block the takeover. In case the CSAT decides to block the takeover for national security issues, what can the investor do? Furthermore, since it looks like the government issues the final decision, should the company bring a case against the CSAT, the government or both? If so, should this be an administrative procedure? One could argue that the general remedy against the decisions of administrative authorities would also apply to the decision of the CSAT or the government. As mentioned, pursuant to Article 1 of the Law concerning the establishment of the CSAT (Law 415/2002),13 the CSAT is an ‘autonomous administrative authority’. Law 554/2004 concerning administrative remedies14 allows any individual whose rights or legitimate interests have been breached by a public authority, pursuant to an administrative act, to challenge such acts before the competent administrative courts (Article 1(1)). A ‘public authority’ includes any state body (including the government) or territorial unit that exercises public authority in order to satisfy a legitimate public interest (Article 2(b) Law 554/2004), while an ‘administrative act’ includes all acts of public authorities, enacted pursuant to public powers and which produce legal effects (Article 2(c) Law 554/2004). Thus, even if the Competition Law does not include a specific remedy against the CSAT’s or the government’s decision to block a takeover for national security purposes, the investor could resort to the general administrative remedies mentioned in Law 554/2004. Nonetheless, the extent to which the investor would be successful is a matter of debate. The ‘School of Bucharest’ argues that the administrative courts can only review the legality (legalitatea) of the act, while the ‘School of Cluj’ argues that the

13

See fn 9. Legea Nr. 554 din 2 decembrie 2004 a contenciosului administrativ, forma consolidată si actualizată (2019). 14

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courts can also review the appropriateness (oportunitatea) of the administrative act. If a court follows the legality test, then the investor would only be successful if it can prove that the CSAT’s decision was not adopted according to the correct procedure or is contrary to a higher legal act or the Constitution. On the other hand, the appropriateness test gives a larger margin of discretion to the reviewing court to also take into consideration whether the measure was the appropriate one out of several equally possible solutions (one could argue that this is somewhat similar to a proportionality test).15 Romania’s very recent Memorandum with the USA concerning 5G technology and Huawei’s involvement in its development might result in the CSAT blocking Huawei’s investment in this technology.16 This will be a good test to see whether the general administrative remedies will or can be successfully used by Huawei.

3 The Scope of Application of Hungarian Law LVII of 2018 Unlike Romania, Hungary has a more streamlined strategy and a specialized agency to attract FDI. The Hungarian Investment Promotion Agency (HIPA) is governed by the Ministry of Foreign Affairs and Trade and acts as a one-stop-shop office to help foreign investors before and after they invest in Hungary.17 Their services cover eight key sectors: the automotive industry, business services centres, the electronics industry, information and communications technology, the food industry, life sciences, logistics and transportation, renewable energy, and medical technology.18 Furthermore, Hungary has very recently adopted a self-standing law on the screening of foreign investments. Hungarian Law LVII of 2018 provides that foreign investors operating in Hungary in certain sensitive sectors have an obligation to declare their activities to the competent Hungarian Minister, based on which the latter will check whether the investment affects Hungary’s security interests. Law LVII is complemented by Government Decree 246/2018 concerning the implementation of the Law. The following sections look at the application of Law LVII, focusing on its application ratione personae, materiae, and temporis.

15

See Podaru (2009). See Olaru (2019). 17 Hungarian Investment Promotion Agency (2019a, b). 18 Hungarian Investment Promotion Agency (2019a, b). 16

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Foreign Investor

Natural/Legal Person NOT registered in

EU

OR

EEA

OR

Legal Person registered in

CH

EU

OR

>50% of voting rights held by non-EU, non-EEA, non-CH

EEA

OR

CH

Dominant Influence OR by non-EU, non-EEA, non-CH

Fig. 2 ‘Foreign investors’ under Hungarian Law LVII of 2018

3.1

The ‘Foreign’ Investor

Article 1 of Law LVII defines foreign investors in two ways (see Fig. 2). The main criterion in the first definition is territorial. Thus, a foreign investor is the citizen of or a legal person registered in a country that is not a member of the EU, the European Economic Area (EEA), or the Swiss Confederation. In this way, the Hungarian legislation treats investors from Hungary, other EU Member States, Switzerland, Norway, Iceland, and Liechtenstein as belonging to the same market. Furthermore, Law LVII ensures that it does not infringe the freedom of establishment, the free movement of capital, and the free movement of services under the TFEU and the equivalent provisions in the EEA Agreement and the Swiss bilateral agreements. The main criterion of the second definition is that of control. Since the first definition also covers legal persons, which could easily circumvent the aforementioned territorial limitations, the second definition includes an anti-circumvention clause. Thus, legal entities registered in Hungary, in another EU or EEA Member State, or in Switzerland – which operate in the manner described in Sect. 3.2 – may also qualify as a foreign investor if a non-EU, non-EEA, or non-Swiss legal or natural person has a majority control in the said legal entities, pursuant to the Hungarian Civil Code (Polgári Törvénykönyv). Section 8:2 of the Hungarian Civil Code19 defines majority control as a relationship ‘where a natural or legal person (holder of a participating interest) controls over fifty per cent of the voting rights in a legal person, or in which it has a dominant influence’. In turn, the holder of a participating interest is deemed to have a ‘dominant influence’ when it has the right to appoint and recall the majority of the executive officers or supervisory board members or when:

19

2013. évi V. törvény a Polgári Törvénykönyvről (The Hungarian Civil Code).

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other members of or shareholders in that legal person are committed under agreement with the holder of a participating interest to vote in concert with the holder of a participating interest, or they exercise their voting rights through the holder of a participating interest, provided that together they control more than half of the votes.

According to Section 8:3(3)–(4) of the Civil Code, a dominant influence can also be exercised via indirect control, through an intermediary legal person. Several observations follow. Firstly, in the case of foreign investors who are natural persons, the first definition, based on the territorial criterion, suffices. Since Law LVII does not mention double nationals, as long as the foreign, natural person investors are from the EU, EEA, or Switzerland, they do not have the obligation to declare their activities, regardless of their second nationality. One of course wonders whether this provision provides adequate anti-circumvention guarantees in the case of naturalized EU, EEA, or Swiss citizens who retain their original, third-country nationality as well. Secondly, in the case of foreign investors that are legal persons, the control criterion of the second definition is the decisive factor when qualifying them as foreign investors. This means that in practice, it is important to check the control or dominant influence over all companies that operate in the ways and in the sectors described in Sect. 3.2, regardless of whether they are registered in the EU, Norway, Iceland, Liechtenstein, or Switzerland.

3.2

‘Operating’ in Hungary

Law LVII conditions the foreign investors’ obligation to declare their activities to the competent Minister in two ways. The first set of conditions concerns the way in which the foreign investors operate in Hungary, and the second condition enumerates a set of ‘sensitive’ economic sectors and activities in which the foreign investors operate. Both conditions must be cumulatively met. This section details the first set of conditions, while the next section discusses the sensitive economic sectors. Under Law LVII, not all foreign investors have the obligation to declare their activities to the competent Minister, only those that operate in Hungary in one of the situations prescribed by the Law. The first situation concerns the setting up of a local company or the acquisition of shares in an existing local company. Thus, under Article 2 of Law LVII, the obligation to declare their activities applies to foreign investors that acquire in a direct or indirect manner: • More than 25% – in the case of a publicly listed joint stock company 10% – of the shares of a company with its seat in Hungary or • Exercise a dominant influence as defined by the Hungarian Civil Code (supra) Article 2(2) of Law LVII provides that the obligation to declare the activities is also applicable when no foreign investor owns more than 25% of the shares but cumulatively they own more than 25% (except for public joint stock companies).

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Besides acquisition, the second situation covers the setting up of a local branch by the foreign investor. Thus, foreign investors – as defined by Law LVIII – that set up a branch in Hungary also have the obligation to declare their activities (provided they operate in one of the economic sectors detailed in Sect. 3.3). Pursuant to Article 3, the Law also applies to foreign investors that intend to obtain the right to operate or use the indispensable infrastructure, machinery, and facilities that are essential to carry out the activities that are listed (see Sect. 3.3) as sensitive economic sectors (‘right to operate’ scenario). Several observations are warranted. Firstly, as mentioned, not all foreign investors have the obligation to declare their activities, but only the ones that operate in the ways described by the Law. The first situation covers several scenarios and covers not only majority shareholding but minority shareholding as well. Thus, those minority shareholders are also covered that own more than 25% or 10% of the shares, depending on whether it is a publicly listed company or not. For example, a foreign investor that acquired 30% of the shares of a non-publicly listed Hungarian company would need to declare its activities to the competent Minister, even if a Hungarian investor owns the remaining 70% of shares. These percentages can be lower still in two scenarios. In the first scenario, a foreign shareholding of less than 25% would be covered in case the foreign investor has a dominant influence over the Hungarian company. For example, it might happen that the company does not follow the one-share-one-vote rule; therefore, the less than 25% of shares give the foreign investor over half of the voting rights. The second scenario covers the situation when no individual foreign investor owns more than 25% of the shares but cumulatively they do. This is meant to prevent a situation in which the same foreign investor acquires the shares via different intermediary companies or when different foreign investors have an agreement to act in a concerted manner. Secondly, while Law LVII foresees several ways in which foreign investors can operate in Hungary, Article 2 of the Law does not cover entirely all the different modalities through which foreign direct investments can be made. According to the OECD’s benchmark definition of FDI, four types of operations can qualify as FDI: • • • •

Purchase/sale of existing equity in the form of mergers and acquisitions (M&A) Greenfield investments Extension of capital (additional new investments) and Financial restructuring20

Article 2 of Law LVII covers the setting up of a local company, the acquisition of shares (above a certain percentage), and the setting up of a local branch. In the Organisation for Economic Co-operation and Development (OECD) definition, these scenarios are covered by M&A, by greenfield investments (new investments), and to some extent by the extension of capital (‘additional new investments as an

20

OECD (2008), p. 87.

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expansion of an established business’,21 for example in the case of opening a branch). However, FDI can also happen via financial restructuring, which covers debt repayment or loss reduction. The question thus arises whether a minority foreign shareholder not covered by Article 2 of Law LVIII, which pays a substantial portion of a Hungarian company’s debts, should also have the obligation to declare its activities. While a strict interpretation of the Law would result in such an investor not being obliged to declare its activities, it should prompt the local authorities to check whether such a potential debt repayment does not evidence some ‘unseen’ influence of the foreign shareholder over the local company. Furthermore, Law LVII also covers a way of operating in the host country that is not covered by the OECD’s definition of FDI, the ‘right to operate’ critical infrastructures. Thirdly, the ‘right to operate’ scenario is not explicit as to whether it covers only the situation when the foreign investors directly operate the infrastructure essential to Hungary’s national security interests or also indirectly. In case the foreign investor sets up a local branch through which it seeks to obtain the ‘right to operate’, then this scenario is no different from the second scenario (the setting up of a branch). However, if it seeks to obtain the ‘right to operate’ via a local company, then under Article 3 there is no minimum shareholding requirement, as in the first scenario (acquisition). In other words, as long as the foreign investors seek to use or operate infrastructure or facilities essential to the sensitive economic sectors via a local company, they have the obligation to declare their activities to the Minister, regardless of how many shares they own in the local company. This requirement seems a bit excessive in case of local companies that have a couple of percentages of foreign shareholding.

3.3

In a ‘Sensitive’ Economic Sector

Not only do the foreign investors need to operate in the manner described in the previous section, but they must also operate in one of the economic sectors or pursue one of the activities enumerated in Article 2(4) of Law LVII. This exhaustive list includes: • The production of weapons, munitions, and military equipment that needs prior approval • The production of dual-use goods • The production of secret service tools as prescribed by the relevant legislation • The operation of financial service systems as provided in the relevant legislation • Services falling under the relevant legislation on the provision of electricity, natural gas, public water services, and electronic communication

21

Ibid.

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• The creation, development, and operation of electronic information systems that fall under the law concerning the information security of public authorities According to Article 2(5) of the Law, it applies to services covering the provision of electricity, natural gas, public water services, and electronic communication if – under the Law concerning the identification and protection of essential systems and facilities – they directly touch upon essential systems of national or European importance. The Article 2(4) list must be read together with Annex 1 to Decree 246/2018. Annex 1 lists all the specific national and European legislation that applies in the sensitive sectors. For example, according to Article 1 of Annex 1, the manufacture of weapons does not cover museum artefacts pursuant to the Hungarian legislation in the field. Under Article 2 of Annex 1, dual-use goods are the ones defined in Council Regulation 428/2009 on dual-use goods. Furthermore, the Article 2(4) list is exhaustive. Thus, if a foreign investor – as defined by the Law – operates in a manner described in Sect. 3.2 but not in one of the sectors enumerated in Article 2(4) of Law LVII, then they do not have to declare their activities.

3.4

Ratione Temporis

Both Law LVII and the Government Decree entered into force on 1 January 2019. Article 13 of the Law provides that it has a prospective effect. Thus, it applies to acquisitions, the setting up of companies, the setting up of branches, and the obtaining of the right to operate that occurred or were made following the entry into force of the Law. Furthermore, it also applies to existing companies that decided to take up new activities in the fields provided by the Law, following its entry into force, as well as to pending investigations by the state authorities.

4 The Procedural Framework Set Out by Hungarian Law LVII of 2018 4.1

The Obligations of the Foreign Investor

Foreign investors have the obligation to declare their activities to the competent Minister if they operate in the ways and the sectors described in Sect. 3. Under Article 5 of the Law, the foreign investors need to include in their declaration all relevant documents that describe their economic activities, ownership structure, as well as the true owner, in accordance with the Law concerning money laundering and the financing of terrorism. Pursuant to Article 3 of Law LVII, the foreign investor can only obtain the ‘right to operate’ essential infrastructure after its declaration to the Minister and after the

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Minister confirms receipt of the declaration. Similarly, under Article 4 of the Law, the setting up of a local branch/or a new company, the acquisition of shares, or the continuation of a company’s current activities – in which a foreign investor operates in the manner and in the sectors previously described – can only continue or occur following the declaration to the Minister and after the Minister confirms receipt of the declaration. It follows that without the Minister’s confirmation of the receipt of the declaration, the legal transactions – through which the foreign investors want to operate in Hungary – cannot take effect. However, once the confirmation is made, the transactions can have their required effects. Even so, this confirmation does not yet guarantee that the transaction is set in stone as the Minister then has to decide whether the investment affects Hungary’s national security interests. As we shall see in Sect. 4.3, a negative decision has very important consequences for the transaction.

4.2

The Procedure and Judicial Redress

In order to properly understand the procedure (see Fig. 3), Law LVII must be read together with the Government Decree. Article 1 of Decree 246/2018 specifies that the competent Minister is the one responsible for the coordination of civil national security services, which is currently the Minister of Interior. It is to be noted that unlike in Romania – where the government and the CSAT were involved in the procedure – in Hungary it is only the Minister of Interior who is involved. The procedure is then detailed in Articles 3–11 of the Government Decree and Article 6 of Law LVII. I shall address some of its key points. Firstly, the foreign investors have the obligation to declare their activities to the competent Minister in the Hungarian language, within 10 days after the legal transaction for obtaining the right to operate or the shares of a company or within 10 days after the registration of the new activity in the trade registry. Article 4 of the Government Decree then details all the information the declaration must contain and the documents that need to be attached to it. It is to be noted that the period of 10 days seems short, especially when the translation into Hungarian of complex contracts is involved, in sensitive economic sectors governed by further national and EU legislation. Furthermore, as mentioned in the previous section, the transactions will not take effect until the investors receive the Minister’s confirmation of the receipt of the declaration. In other words, even if a foreign investor has concluded a share purchasing agreement with a local company, the actual transfer of ownership over the shares will not take place until the Minister’s confirmation is received. Secondly, after the investors declared their activities, the competent Minister is also under a strict deadline. Under Article 6(2) of Law LVII, the Minister has to inform the foreign investors of the receipt of the declaration within 8 days. Based on the declaration, the Minister shall assess whether the activities of the investor affect Hungary’s national security interests, within 60 days following the receipt of the

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Foreign Investor OR

Acquisition

Subsidiary

OR

Right to operate

Sensitive Sector

The Office oversees

Declare activity 10 days

IF NOT

Minister 60 days Threat to national security?

Minister Penalty

YES

Investment forbidden

NO

Investment continues

Metropolitan Court can review Fig. 3 The Hungarian procedure

declaration. If the activities affect the country’s national security interests, the Minister forbids the acquisition of the shares, the right to operate, or the start of new activities. In exceptional circumstances, the Minister can extend its assessment by another 60-day period. Thirdly, pursuant to Article 6(6) of Law LVII, a foreign investor that is registered in the EU, EEA, or Switzerland but over which a non-EU, non-EEA, or non-Swiss legal person exercises control and that operates in the manner described by the Law shall be deemed to be a threat to the country’s national security interests if the acquisition of shares, the setting up of a branch, or obtaining the right to operate is meant to: • Conceal threats to national security or • Make the Minister’s assessment more difficult or • Circumvent the procedure described in Law LVII This is especially the case if the legal person does not pursue any actual economic activities in the country in which it is registered and there are no signs of continuous

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economic activities in that country. The Minister’s decision has to contain all the information specified in Article 13 of the Government Decree. It is to be noted that Article 6(6) of the Law in essence differentiates the Minister’s assessment of a threat to national security, depending on whether the foreign investors are registered in or come from a non-EU, non-Swiss, or non-EEA country and whether they come from the EU, the EEA, or Switzerland, but foreign investors not registered in these countries exercise control over them (the situation described by Article 6(6) Law LVII). Thus, in the case of a Chinese company making the investment, the Minister seems to have full discretion when assessing the risk of the investment to national security. However, if the same Chinese company controls a German company making the investment, then the discretion of the Minister is narrower and the Minister has to look at whether the operations of the foreign investor conceal threats to national security or make the Minister’s assessment more difficult or circumvent the procedure described in the Law. Furthermore, Article 11 of the Government Decree mentions that the Minister can ask other state bodies to provide necessary information during the assessment process, and any suggestions made by such bodies do not bind the Minister. Fourthly, the Law also prescribed the legal redress against the Minister’s decision. Under Article 6(8) of Law LVII, the foreign investor has the right to launch an administrative case against the Minister before the Budapest Metropolitan Court (Fővárosi Törvényszék) for the Minister’s failure to follow the prescribed procedure or its assessment of the national security threat. The Metropolitan Court decides following a simplified procedure, and in case if finds a violation of Law LVII, it shall annul the Minister’s decision and oblige it to start a new procedure. Thus, compared to the general administrative remedy against the decision of the CSAT or the government provided by the Romanian legislation, the Hungarian provisions provide for a special, simplified procedure. Furthermore, unlike the uncertainties surrounding the Romanian doctrinal split (legality vs. appropriateness, see Sect. 2) that can affect the extent of the administrative courts’ review, it is clear that the Metropolitan Court’s review does not only extend to procedural matters, but it also extends to the assessment by the Minister of the national security threat.

4.3

The Effects of the Minister’s Decision

The Minister’s decision has several consequences, depending on how the foreign investor intends to operate in Hungary. Firstly, pursuant to Article 8 of Law LVII, the foreign investor acquiring shares in a local company cannot be included in the company’s shares registry: • If the Minister decided to forbid the investment or • If the company did not declare its activities as prescribed by the Law or • If the Minister did not confirm the receipt of the declaration

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Furthermore, if the foreign investor has already been registered in the local company’s registry prior to the aforementioned three situations, the investor will not be able to exercise its rights as shareholder. Secondly, if any of the aforementioned three situations occur, the transaction based on which the foreign investor acquired the right to operate infrastructure essential to one of the sensitive sectors is invalid. Thirdly, any new activities that have been registered in the company’s registry that are forbidden by the Minister’s decision must be erased from the registry. Article 8 of the Law once again illustrates that the investors’ obligation to declare their activities and the Minister’s confirmation of the receipt of the declaration also have serious consequences for the transactions through which the investments are made, not just the Minister’s decision to block the investment.

4.4

What if Investors Do Not Comply with the Obligation to Declare Their Activities?

What if the foreign investors do not declare their activities to the competent Minister? Law LVII answers this question by designating an authority that is tasked to check whether investors made such a declaration and by prescribing certain penalties. Article 9(1) of Law LVII, read together with Article 14 of the Government Decree, provides that the Office for the Protection of the Constitution (the Office, Alkotmányvédelmi Hivatal) shall check whether a company has fulfilled its obligation to declare its activities under the Law. The inspection may also cover data from the trade registry and the company’s shares registry. The Law does not mention whether the Office should commence an investigation proprio motu – on its own initiative – or pursuant to the notification of other parties, economic operators, or state bodies. Given the large number of companies with foreign shareholding, it might happen that in practice the Office will rely heavily on the notification of other parties. If, following the Office’s inspection, it results that the foreign investor breached its obligations under Law LVII, the Minister shall issue a fine. Depending on whether the activities would pose a threat to national security, the Minister will also issue a decision on this matter. In other words, a foreign investor whose activities do not pose a threat to national security can also be fined if it has failed to declare its activities to the Minister. In case the Minister decides that the investment poses a threat to national security, then the foreign investor has up to 3 months to sell its shares, close its subsidiary, or change its activity. In case of the sale of shares, the Hungarian government has a pre-emption right. In case the foreign investor does not comply within 3 months, the Minister shall appoint a state body to finalize those operations in the name of the investor.

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Article 10 of the Law and Article 21 of the Decree describe the penalties. In case foreign investors have not complied with the obligation to declare their activities, the Minister shall impose a fine of 1 million HUF (approx. 3000 euros) on natural persons and 10 million HUF (approx. 30.000 euros) on legal persons. When deciding on the penalty, the Minister shall take into account the ‘material weight’ of the breach and its effects on Hungary’s national security. As mentioned, this penalty is to be paid regardless of whether the foreign investor’s activities are deemed to pose a threat to Hungary’s national security if the foreign investor did not comply with its obligation to declare its activities.

5 The Interplay with the EU Screening Regulation The EU Screening Regulation ‘establishes a framework for the screening by Member States of foreign direct investments into the Union on the grounds of security or public order’,22 as well as a mechanism for cooperation between the Member States and between the Commission and the Member States. The EU Screening Regulation is also without prejudice to and shall not limit the right of each Member State to decide what might affect its national security and whether to screen FDIs for national security reasons. In the following sections, we will only focus on those provisions of the EU Screening Regulation that have some form of counterpart in the national legislation analyzed: the scope of application, the procedure, and the factors to be taken into consideration when screening foreign investments. Conversely, the upcoming sections do not discuss the cooperation mechanism detailed in the EU Screening Regulation or the provisions on the setting up of national contact points as none of the national laws analyzed in this chapter include any provisions on them.

5.1

The Subject Matter and Scope

Both the Romanian Competition Law’s provisions and those of Hungarian Law LVII refer to takeovers (Romania) or foreign investments (Hungary) that can potentially pose threats to national security. Therefore, subject-matter wise, they fall within the scope of the EU Screening Regulation, even if this might be debatable in the case of the Romanian provisions, due to its narrow scope (infra). Furthermore, neither mention the screening of investments on the ground of public order.

22

Article 1.1 of 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 79I, 21.3.2019, p. 1–14. Emphasis added.

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Article 2 of the EU Screening Regulation defines the terms ‘foreign direct investment’, ‘foreign investor’, as well as ‘undertaking of a third country’. Article 2(1) defines foreign investors as ‘a natural person of a third county or an undertaking of a third country, intending to make or having made a foreign direct investment’. Thus, the EU Screening Regulation treats the entirety of the EU as one market, and only investors from non-EU countries are to be considered foreign. FDI in turn requires the establishment and maintenance of ‘lasting and direct links’ between the foreign investor and the local economic entity, while the term ‘third country undertakings’ refers to undertakings ‘constituted or otherwise organised under the law of a third country’. Both the Romanian and the Hungarian provisions differ from the EU Screening Regulation. The Romanian provisions, which were inserted into the Competition Law in 2011, refer to any takeovers that have the potential to affect national security. Thus, takeovers could be made/initiated by companies registered in non-EU and EU states alike. The Hungarian provisions, on the other hand, were adopted when the draft version of the EU Screening Regulation was already known, and they treat the EU, the EEA, and Switzerland as one market. Thus, the Hungarian Law is more in line with the EU Screening Regulation’s scope of creating a framework to screen investments that come ‘into the Union’ and not just one Member State. Nevertheless, the Hungarian legislation differs from the EU Screening Regulation in several ways. Firstly, Law LVII broadens the territorial scope beyond the EU to legal or natural persons from the EEA countries or Switzerland as well. Secondly, the Hungarian Law also contains an anti-circumvention clause in the definition of foreign investors (which is otherwise required by Article 3(6) of the EU Screening Regulation). Thus, EU, EEA, or Swiss investors can also be deemed to be ‘foreign’ under the Hungarian Law if they are controlled by entities that come from outside of the EU, EEA, or Switzerland. Thirdly, while the EU Screening Regulation’s definition of FDI covers a lot of potential ways in which the investments can be made – as long as they have lasting and direct links – and does not restrict the economic sectors in which foreign investors can operate in EU territory, Law LVII has a narrower scope. It only concerns the setting up of local companies, the acquisition of shares above a certain threshold, the setting up of a subsidiary, and the right to operate critical infrastructure. Furthermore, these methods of making the investment are only relevant if they occur in the sensitive economic sectors numerated in the exhaustive list of Article 2(4) of Law LVII. Ratione temporis, the EU Screening Regulation shall apply from 11 October 2020, while the Romanian provisions have been in effect since the 2011 amendments to the Competition Law, and the Hungarian Law and Government Decree have taken effect from 1 January 2019.

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205

The Procedural Mechanisms

The EU Screening Regulation allows Member States to adopt, maintain, or amend mechanisms to screen foreign investors. However, if they choose to have such mechanisms, the EU Screening Regulation provides some basic requirements for their operation, all worded in mandatory language (shall). Thus, Member States shall ensure that: • The rules and procedures are transparent and do not discriminate between third countries. • They set out detailed time frames, procedural rules, the circumstances triggering the screening, and the grounds for screening. • They protect confidential information. • Foreign investors shall have the possibility to seek recourse against the screening decisions of national authorities. • They include anti-circumvention measures. Whether or not the Romanian provisions can be described as setting up domestic investment screening procedures is debatable. As mentioned, the Romanian provisions were included as an amendment to the Competition Law prior to any EU-level discussions on creating a framework for investment screening. Furthermore, they only apply in the narrow situation when the Romanian Competition Council investigates takeovers. If these provisions qualify as an investment screening mechanism, then they do not meet all the requirements of the EU Screening Regulation. The provisions describe in broad terms the procedure, the names, and the duties of the main authorities involved (the Competition Council, the CSAT, and the government), and they do not discriminate between third-country investors. However, they do not provide for detailed time frames, detailed procedural rules, anti-circumvention measures, or provisions on the protection of sensitive information. Neither does the Romanian Competition Law provide any special procedure for the investor to have recourse against the CSAT’s or the government’s decision to block the investment. As discussed, the investor would have to resort to the general administrative remedies provided by Romanian Law 554/2004, the efficacy of which in the case of a political decision of the CSAT is debatable. The very recent and elaborate Hungarian provisions include a detailed procedure, with detailed time frames, anti-circumvention measures, and the right to have judicial recourse against the competent Minister’s decision to forbid the foreign investment. Law LVII also does not discriminate between third-country investors. Nevertheless, neither the Law nor the Government Decree contain provisions on the protection of sensitive information. Furthermore, the grounds for forbidding an investment are only detailed in the case of those foreign investors that come from the EU, the EEA, or Switzerland but are controlled by non-EU, non-EEA, or non-Swiss entities. The grounds for forbidding an investment are not detailed for those investors that directly come from a non-EU, non-EEA country or are not from Switzerland.

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Factors to Be Taken into Consideration

Article 4 of the EU Screening Regulation gives a lot of discretion to the Commission and the Member States to consider various factors during the screening of foreign investors. These include the potential effects on critical infrastructure (energy, transport, media, water, health, data processing, defence, etc.), critical technologies and dual-use goods, the supply of raw materials, access to sensitive information, the freedom and pluralism of the media, etc. Furthermore, they may also take into consideration whether the investor is directly or indirectly controlled by the government of a third country. Due to the summary character of the Romanian provisions, there is nothing in the Competition Law addressing these issues. The Hungarian Law, as we have seen, provides an exhaustive list of sensitive economic sectors, many of which overlap with the ones mentioned in the EU Screening Regulation. Interestingly, Law LVII does not explicitly mention foreign investors controlled by third-country governments. One could argue that the term ‘legal person’ as used in the Hungarian definition of foreign investors is wide enough to include a foreign state or one of its bodies.

6 Conclusion The EU is slowly following the trend in other high-income economies to screen investments that might pose a threat to security or public order. Whether the EU Screening Regulation is the right way to achieve this goal is up to debate. From the text of the EU Screening Regulation, it is evident that Member States want to retain as much control as possible over the screening of foreign investments, and the EU Screening Regulation allows the Commission to give only non-binding opinions. This situation is somewhat understandable since EU Member States are varied in terms of the size and development of their economies, as well as their reliance on foreign investments. Thus, finding a common ground that is acceptable to all EU Member States is easier said than done. Where the EU Screening Regulation has some ‘bite’, are the mandatory minimum requirements that a Member State’s screening mechanism must meet. Romania does not yet have a separate piece of legislation regulating the screening of foreign investments. Therefore, it is difficult to argue that the 2011 amendment to Romania’s Competition Law, which allows the blocking of a takeover for national security reasons, can be considered an investment screening mechanism under the EU Screening Regulation. If it can be considered as such, then the summary procedures described in the Competition Law fall short of the requirements of the EU Screening Regulation. Compared to Romania, Hungary has very recently adopted Law LVII of 2018 and Government Decree 246/2018, which set up a detailed investment screening

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mechanism for national security reasons, in sensitive economic sectors. It is evident that the legislation was passed considering the discussion for the adoption of the EU Screening Regulation. The Hungarian mechanism is mostly in line with the EU Screening Regulation’s mandatory minimum requirements. They fall short, however, when it comes to better detailing some of the grounds based on which non-EU, non-EEA, or non-Swiss foreign investors can have their investments blocked, and they do not include provisions on the protection of sensitive information. It is to be seen how effective the Hungarian mechanism will be as a number of foreign investors are/will be affected by it.

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National and EU Legislation 2013 évi V. törvény a Polgári Törvénykönyvről (The Hungarian Civil Code). For the English translation see http://www.ilo.org/dyn/natlex/docs/ELECTRONIC/96512/114273/ F720272867/Civil_Code.pdf. For the Hungarian version see https://net.jogtar.hu/jogszabaly? docid¼A1300005.TV. Accessed 6 Jan 2020 2018 évi LVII. törvény, A Magyarország biztonsági érdekét sértő külföldi befektetések ellenőrzéséről. Magyar Közlöny, 157. szám, 2018. október 11 246/2018. (XII.17.) Kormány rendelet, A Magyarország biztonsági érdekét sértő külföldi befektetések ellenőrzéséről szóló 2018. évi LVII. Törvény végrehajtásáról. Magyar Közlöny, 201. szám, 2018. december 11 Council of the European Union, Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the Union of 19 March 2019, OJ L 79I, 21.3.2019, p. 1–14. Legea 21/1995, Legea Concurenței, Republicare. Publicat în Monitorul Oficial cu numărul 153 din data de 29 februarie 2016 Legea Nr. 554 din 2 decembrie 2004 a contenciosului administrativ, forma consolidată si actualizată (2019) Legea Nr. 415 din 27 iunie 2002 privind organizarea și funcționarea Consiliului Suprem de Apărare a Țării. Forma consolidată

Foreign Investment Screening in Finland, Norway, Sweden and Denmark Jonas Hallberg

Contents 1 Introduction: Investment Screening in Four Nordic Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Monitoring Acquisitions in Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Which Acquisitions Are Screened? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Which Sectors and Factors Are Considered When Determining to Allow an Investment? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Which Procedure Is Applied When Determining Whether to Allow an Investment? 2.4 Competence and Reasons for Rejection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Legal Consequences and the Possibility to Appeal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Norway’s Security Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 The Former and New Norwegian Security Act on Protective Security Agreements 3.2 Monitoring Acquisitions in Norway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Sweden and the Protective Security Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 A Proposal for a New Protective Security Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Sweden and a Limited Investment Screening Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Sweden and a Comprehensive Investment Screening Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Similarities and Differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

210 212 213 213 214 215 216 217 217 218 220 221 222 223 224 225 225

Abstract This chapter analyses Acts (here, the translation of ‘lag’ and ‘lov’ into English is ‘Act’) on investment screening and protective security agreements in Finland, Norway, Sweden and Denmark. To put the existing Acts into perspective, also potential future Acts are discussed. The following questions are asked: Which acquisitions are screened/monitored or subject to protective security agreements? Which sectors and factors are considered? Which are the reasons for rejection? This chapter shows that Sweden, Norway, Denmark and Finland have quite different systems. Out of the four countries, Finland has the only investment screening mechanism, but to accommodate the new EU Screening Regulation on investment screening, the Act needs to be somewhat updated. J. Hallberg (*) Kommerskollegium/National Board of Trade, Stockholm, Sweden e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 209–226, https://doi.org/10.1007/16495_2020_17, Published online: 29 May 2020

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The Norwegian Security Act contains a limited form of investment screening mechanism. If a foreign actor buys a company of strategic importance in part or in full, the Norwegian Act gives the government the power to approve or reject an acquisition of critical infrastructure when vital national security could be undermined. In addition to security-sensitive information, critical infrastructure is at the core of the Act of Norway and on its way to be in the Act of Sweden. Sweden does not currently have anything resembling an investment screening mechanism. Instead, much like the already mentioned Norwegian Act, the Protective Security Act focuses on situations related to running a business that holds information important for Sweden’s security. However, a governmental report was released in the end of 2018 regarding a potential future Protective Security Act that would cover situations involving the transfer of ownership of private companies holding sensitive security information. The proposal only relates to the security of the nation and not to the strategic security of society or, for that matter, ‘security or public order’. In mid-2019, another report suggested a limited investment screening mechanism covering seaports, airports and strategically important geographical sites. Denmark does not have an investment screening mechanism; instead, Denmark has the Prime Minister’s Security Circular. The Circular is similar to the present Swedish Act in its focus on classified information. There are some area-specific rules concerning the screening of foreign investments in regard to the production of war materials, cyber-security, electricity and gas, and financial operations. However, the Danish Government has created an inter-ministerial working group whose task is to propose legislation on a national screening mechanism. Moreover, critical infrastructure is mentioned in the EU Screening Regulation as an example of what is targeted by the Regulation. In the future, it will be of interest to follow the differences between what is covered by national security (national competence) and what is by the EU Screening Regulation (EU competence) and how these competencies will interact. The three EU countries will most likely further converge in the future, with the EU Screening Regulation serving as a guarantee for the convergence. This likely would have happened anyway but not to the same degree and not as rapidly.

1 Introduction: Investment Screening in Four Nordic Countries In recent years, much attention has been paid to foreign companies acquiring European companies that are of strategic importance. However, there is no effective overarching investment screening mechanism at the EU level. Acquisitions have been identified for which there were no sound economic reasons,1 and suspicions arose that the reasons for these acquisitions were to gain 1

Grieger (2017).

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influence or knowledge about functions vital to state security. There have also been examples of companies that are forbidden to export certain products or services and that have been acquired by companies from the very countries to which it is forbidden to export.2 These problems caught the attention of members of the EU Parliament,3 who called for an EU regulation that would give EU Member States the tools to control these situations and ensure that the same rules would apply across the entire EU. Before the negotiations on such EU Screening Regulation began, the EU Commission examined the investment screening mechanisms of the Member States and found that investment screening mechanisms existed in 13 of them (now 14).4 There were wide variations between these mechanisms, and the argument was made that there should be greater conformity as well as increased information sharing between the Member States and the EU Commission. This was the rationale for having common rules across the EU Member States. The EU Member States have now reached an agreement among themselves and the EU Parliament on a future investment screening framework.5 This chapter aims to give an overview of how Finland, Norway, Sweden and Denmark have (or have not) addressed investment screening until the present. To provide a more nuanced picture, the chapter also covers Acts regarding securityclassified areas that require security protection agreements. The chapter analyses the existing Acts in these four countries, as well as previous Acts and a potential future Act with an emphasis on the following questions: What acquisitions are screened? What sectors and factors are considered? What are the reasons for rejection? The Finnish system will be used as an example of how an investment screening mechanism can be constructed and also to illustrate some of the characteristics of the EU Screening Regulation. The comparison between Sweden, Norway, Denmark and Finland shows that the countries have quite different systems. Out of the four countries, Finland has the only investment screening mechanism, but its Act needs to be updated to accommodate the new EU Screening Regulation. The Norwegian Act includes transfer of critical infrastructure, which is at the focus of this analysis, at the expense of security agreements. Protective security agreements are agreements between on the one side a state entity or someone who acts on behalf of the state and on the other side a private actor. The content of the agreement is that security-classified information in public

2

The companies Imego, Norstel and Silex produces semiconductors and were sold to Chinese companies. 3 Grieger (2017). 4 As described at the EU Commission home page: http://trade.ec.europa.eu/doclib/press/index.cfm? id¼1716. 5 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 79I, 21.3.2019, p. 1–14.

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procurements, outsourcing and, in some cases, acquisitions must be handled with care, and if there is no agreement, there is no contract.

2 Monitoring Acquisitions in Finland In Finland, the Act on the Screening of Foreign Corporate Acquisitions 20126 aims to screen and, if required due to key national interests, restrict foreign influence in Finnish companies.7 The key8 national interests mainly refer to (1) national defence, (2) security of supply and (3) functions fundamental to society.9 The Ministry of Economic Affairs and Employment must approve the corporate acquisition unless it potentially conflicts with such interest. If the corporate acquisition may potentially conflict with a key national interest, then the Ministry must refer the matter for consideration at a governmental plenary session.10 The Finnish screening system targets ‘mergers and acquisitions’, whereas the new EU Screening Regulation concerns ‘foreign direct investment’ (FDI). However, in practice, there seems to be little difference between the two. This is because in the Finnish Act, the term ‘acquisitions’ targets the situation of ‘[w]hen a foreign owner gains control of at least one-tenth, at least one-third, or at least one-half of the aggregate number of votes conferred by all shares in the company, or a holding that otherwise corresponds to a decision-making authority in a limited liability company or other monitored entity’.11 Recalling the difference between an FDI and a portfolio investment,12 we can conclude that in this matter the Finnish Act is in line with the EU Screening Regulation that only covers FDI.13 However, the Act does not cover real estate

Lag om tillsyn över utlänningars företagsköp 13.4.2012/172, here translated as the “Act on the Monitoring of Foreign Corporate Acquisitions” (172/2012). 7 The overview of the Finnish system is based on the author’s reading of the Finnish law and on information published on the home page of the Finnish Government: https://tem.fi/en/acquisitions. 8 ‘Key’ could be replaced here by ‘utmost’ or ‘fundamental’, stressing the severity of the national interest that is at stake. 9 Section 1 of the Act on the Screening of Foreign Corporate Acquisitions (172/2012) and home page of the Government of Finland. 10 The Governmental plenary session is a meeting between the ministers held weakly headed by the Prime minister. 11 Chapter 5 paragraph 2 of The Act on the Screening of Foreign Corporate Acquisitions. 12 FDI requires at least one-tenth of the deciding votes in a company. Less than that is a portfolio investment. 13 Paras. 8 and 9 in the recital of the EU Screening Regulation. Even if the CJEU has clarified what is meant by FDI the Regulation has a definition of its own in Article 2(1): foreign direct investment’ means an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in a Member State, including 6

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investments and green field investments.14 Not long ago, in March 2019, a new legislation concerning the screening of foreign acquisitions of certain land and properties of importance to the total defence was approved in Finland and entered into force in January 2020. The Finnish Ministry of Defence is in practice responsible for these screening processes.

2.1

Which Acquisitions Are Screened?

A state can choose to require that investments be approved either in advance or after an acquisition. Finland provides for both, depending on the sector. All corporate acquisitions in the defence15 and dual-use16 sectors require advance approval by the Ministry of Economic Affairs and Employment. In the defence material industry, screening covers all foreign owners, including EU and EFTA investors. Investors in other sectors covered by the Act can voluntarily notify of the acquisition in advance or even after the acquisition.17 However, an advance notification can only be submitted immediately before the final conclusion of the acquisition. If the acquisition concerns companies outside of the defence sector, the rules on monitoring only applies to foreign owners residing in or domiciled outside the EU or EFTA.18 If a party considers that a company subject to screening could be critical to functions fundamental to society, it is recommended that they file a notification with the Ministry of Economic Affairs and Employment.

2.2

Which Sectors and Factors Are Considered When Determining to Allow an Investment?

The Act does not specify sectors (apart from defence) or operations in the private or public sector where companies would fall within the scope of screening. According

investments which enable effective participation in the management or control of a company carrying out an economic activity. 14 Green field investment is a type of investment where a parent company builds its operations in a foreign country from the start. 15 Chapter 4 of The Act on the Screening of Foreign Corporate Acquisitions. 16 Chapter 4 paragraph 1 of The Act on the Screening of Foreign Corporate Acquisitions. 17 Chapter 5 paragraph 2 of The Act on the Screening of Foreign Corporate Acquisitions. 18 Chapter 5 section 1 of The Act on the Screening of Foreign Corporate Acquisitions and Ministry of Economic Affairs and Employment screens foreign corporate acquisitions, home page of the Government of Finland last visited the 13th of December 2018; https://tem.fi/en/acquisitions.

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to the Government of Finland, this is because it is not possible to determine which sectors or operations will be critical to securing the functions fundamental to society in the long term.19 The needs of national defence, public order and security and other critical functions in society are ultimately decided by the conditions prevailing at that time. Even if ‘security of supply’ is a key national interest, this does not mean that all companies operating in one of these sectors are screened under the Act. For example, a great number of companies operating in the food supply or logistics sectors are not considered as having a key role in the security of supply. Indicative information about the Act’s scope of application is available in the public guidance documents on security of supply and national security.20 In the EU Screening Regulation, the EU has more or less followed that approach, with an amendment that includes a non-exhaustive and indicative list of factors and sectors, such as critical infrastructure.21 As mentioned, new legislation on real estate investment and ownership has entered into force in Finland on 1 January 2020. This new legislation includes three new Acts, which allow the government to screen real estate transactions and ownership in Finland. The purpose of the legislation is to ensure that the ownership and use of real estate property, especially in strategically significant locations, does not pose a threat to Finland’s national security interests. Foreigners outside the EU and EES need to get approval in advance if they want to buy property in certain areas that are of importance for territorial integrity.22

2.3

Which Procedure Is Applied When Determining Whether to Allow an Investment?

Application/notification must contain all information regarding the entity subject to screening, the foreign owner (including the ownership structure that is also mentioned in the EU Screening Regulation in regard to information requirements23) and the corporate acquisition necessary for examining the notified case at hand.24 The Ministry must request information within 3 months after a notification of a corporate acquisition in any sector other than the defence sector.25 The EU Screening

19

Ibid. Government Decision on the Objectives of Security of Supply, official version only in Finnish and Swedish, but unofficial version available also in English. Security Strategy for Society (Government resolution of 2.11.2017). 21 Para 12 in the recital and Article 4 of the EU Screening Regulation. 22 Act on Transfers of Real Estate Requiring Special Permission. See also RP 253/2018 rd. 23 Article 9(2)(a) of the EU Screening Regulation. 24 Chapter 1 section 5 of the Act. 25 Chapter 2 section 5 of the Act. 20

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Regulation is less specific in this regard and only states that EU Member States shall apply time frames.26 The Act does not specify deadlines by which the Ministry can intervene in a defence sector acquisition or request information. To be in line with the EU Screening Regulation, this must be changed.

2.4

Competence and Reasons for Rejection

The Finnish Act refers to Articles 52 and 65 of the Treaty on the Functioning of the European Union (TFEU) and states that ‘a key national interest means securing national defence or safeguarding public order and security in accordance. . .’ with the above-mentioned articles. Both articles contain exceptions, including public policy and public security.27 This is also the basis for denial of confirmation (approval) in the Finnish Act.28 The new EU Screening Regulation is based on the EU’s exclusive competence to monitor foreign direct investments (FDIs) stemming from Article 207(2) TFEU within the Common Commercial Policy. The ground for refusal provided in the Regulation is ‘security or public order’. However, the Regulation reaffirms that this is without prejudice to the sole responsibility of the EU Member States to safeguard their national security, as provided for in Article 4(2) TEU. The recital states that the Regulation is without prejudice to the protection of the EU Member States’ essential security interests, in accordance with Article 346 TFEU,29 and that the Regulation is without prejudice to the rights of Member States to derogate from the free movement of capital, as described in Article 65(1) TFEU. Hence, a state may put in place a screening mechanism based on the EU Screening Regulation, which itself is based on Article 207(2) TFEU. But whether or not a country has implemented the Regulation, the country may refuse an investment using Articles 65(1) and 346 TFEU and Article 4(2) TEU. The author’s interpretation is that if a country puts in place a screening mechanism, thanks to the Regulation, the possibility to refuse an investment is broader than otherwise. This is why the ground for refusal in the Regulation is ‘security or public order’ and not ‘public policy and public security’. If this were not the case, the wording would have been the same. To be clear, Article 3 of the EU Screening Regulation states that EU Member States may maintain, amend or adopt mechanisms to screen foreign direct investments on the ground of ‘security or public order’. This means that it is possible to have an investment screening mechanism that uses Article 65(1) TFEU to deny an

26

Article 3(2) of the EU Screening Regulation. Chapter 2 paragraph 1 of the Act. 28 Chapter 7, the Act on the Monitoring of Foreign Corporate Acquisitions. 29 Recital 7 of the EU Screening Regulation. 27

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investment, but if Finland desires wider possibilities to deny investments it needs to include a reference to the Regulation. Then what is the difference between ‘security or public order’ and ‘public policy and public security’? The latter is defined in several decisions of the Court of Justice of the European Union (CJEU), whereas ‘security or public order’ is a new creature that has been imported from the GATS using a combination of two articles.30 ‘Public order’ comes from Article XIV GATS, and ‘security’ comes from ‘essential security interests’ in Article XIV GATS bis. ‘Security’ and ‘public order’ have been merged into one expression: security or public order.31 The expected difference between ‘public policy and public security’ and ‘security or public order’ is that the latter will give EU Member States a broader possibility to deny entry of FDI compared to Article 65(1) TFEU.32

2.5

Legal Consequences and the Possibility to Appeal

If the Finnish authorities do not approve the acquisition, then the foreign investor must dispose of the shares to a degree that diminishes the number of votes to less than ten percent of the total stock, or voting share, or to a previous allowed level.33 Section 9 in the Finnish Act regulates the right to appeal. In principle, decisions made by the Ministry of Employment and Economy and the Government Plenary Session are open to appeal in the manner prescribed in the Finnish Administrative Judicial Procedure Act. Based on the Finnish Act, the right to appeal applies equally to the defence sector and other corporate acquisitions. Decisions that cannot be appealed are the ones under: – Section 4(3) of the Act—referral from the Ministry to the Government’s Plenary session relating to acquisitions in the defence sector – Section 5(3) of the Act—referral from the Ministry to the Government’s Plenary session relating to other corporate acquisitions – Section 5(4) of the Act—decisions of the Ministry to further look into the application 30

Paragraph 1 in the recital of the EU Screening Regulation. Paragraph 35 in the recital and Article 2 of the EU Screening Regulation. 32 As stated above it is stipulated that the EU Screening Regulation is without prejudice to the right of Member States to derogate from the free movement of capital as provided for in point b of Article 65(1) TFEU. However, it will be interesting to see to what extent case law from the CJEU regarding the Regulation will be influenced by the case law stemming from Article 65(1) TFEU. We know from CJEU case law that EU Member States may limit the free movement of capital on the grounds of a serious threat to fundamental interests of society. The EU Commission, and later the EU Member states, chose not to include this in the Regulation as a ground for refusal. The interpretation made here is that this was deemed unnecessary because it is included in the ‘security or public order’. Time will tell if the CJEU makes the same interpretation. 33 Chapter 8 of the Act. 31

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The EU Screening Regulation states that foreign investors and the undertakings concerned shall have the possibility to seek recourse against screening decisions of the national authorities.34 Seek recourse is a vague description, and the question arises if it is sufficient to provide a possibility to appeal to the government or if it is necessary to provide access to the domestic courts in accordance with Article 19 TEU.

3 Norway’s Security Act Since 2002, Norway has no rules on acquisitions apart from acquisitions of critical infrastructure.35 The first part of the analysis of the Norwegian system covers the former Norwegian Security Act (Sikkerhetsloven)36 and the new Security Act (lov om nasjonal sikkherhet), which entered into force on 1 January 2019,37 leaving the Competition Act38 and the Stock exchange Act39 aside. The purpose of the new Act is to safeguard the Norwegian territory, the democratic system and national security interests.40 In practice, this means that for functions such as production of services, products or other businesses that are of such importance, a partial or complete removal of their production would damage national security. The Act covers security-graded information as well as information, information systems, physical constructions and infrastructure that have significant meaning for fundamental national functions.41

3.1

The Former and New Norwegian Security Act on Protective Security Agreements

A protective security agreement is of relevance when analysing a country’s investment screening mechanism since it is an agreement between the state and a supplier of a service or goods under a public procurement agreement. When using a security agreement, a country may set certain conditions that could make a supplier of service

34

Article 3(5) of the Regulation. Lov 20. Mars 1998 nr. 10 om forebyggende sikkerhetstjeneste. 36 Lov om forebyggende sikkerhetstjeneste, all translations from Norwegian into English were made by the author. 37 Lov 1. juni 2018 nr. 24 om nasjonal sikkherhet (sikkerhetsloven). 38 Lov 5. mars 2012 nr. 12 om konkurranse mellom foretak og kontroll med foretakssammenslutninger (konkurranseloven). 39 Lov 29. juni 2007 nr. 74 om regulerte markeder (börsloven). 40 Chapter 1-1 of the new Act. 41 Chapter 1-3 of the new Act. 35

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or goods hesitant to make an investment that would be necessary to fulfil the conditions set out in the procurement agreement. Hence, a security agreement could indirectly work as a way to deter investments. The aim of chapter 7 of the former Norwegian Security Act was to guarantee security when a supplier of services or goods gained access to an object or information considered worthy of protection. When this was the case, the parties (state and supplier) had to enter into a protective security agreement, and in some cases, the supplier needed to be approved by the responsible Ministry. The new Security Act42 came into force in January 2019, and in addition to physical infrastructure the new Act also includes information infrastructure, such as the Internet and mobile telephones.43 The change of what is considered necessary to protect clearly reflects a world moving away from the production of goods to the production of services. What was needed to protect yesterday is not the same as what is needed today. There is also a chapter in the new Act on ownership control, to which we will return.44

3.2

Monitoring Acquisitions in Norway

Recall that the Finnish Act and the EU Screening Regulation only affect FDI above 10% of the controlling power of a company. In the new Norwegian Act, only those acquisitions above qualified holdings are affected, which, in the Norwegian context, means 1/3 of the stock or the right to vote or any other significant influence over the company.45 Therefore, to be applied, the new Act requires more than three times as much ownership than the Finnish Act or the EU Screening Regulation. To avoid foreign owners circumventing the Act, for example by using a Norwegian mailbox company to acquire a strategically important company, the Act also covers Norwegian owners. This is in contrast to the EU Screening Regulation, which only covers investments into the union.46

3.2.1

Which Sectors and Factors Are Considered?

The scope of the new Act when it comes to acquisitions has been broadened in the sense that in critical infrastructure is now also explicitly included technical infrastructure. Each Governmental Ministry is responsible for identifying, classifying and monitoring objects and infrastructure worthy of protection. An object or infrastructure is worthy of protection if damage to it affects fundamental national functions.

42

Lov om nasjonal sikkerhet. The analysis of the new Act is based on prop. 153 L 2016–2017. 44 Chapter 10 of the new Act. 45 Chapter 10-1 of the new Act. 46 Article 1 of the EU Screening Regulation. 43

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The different classifications of these objects and infrastructure are ‘very critical’, ‘critical’ and ‘important’.47 Hence, only the first two categories are considered ‘critical’. If an investor would like to acquire a qualified majority of anything wherein the Norwegian Ministry has deemed to include one or several of the following: – Security classified information – An information system – Object or infrastructure that is considered to be of significance to basic national functions or – Whether its operations include an activity that is considered to be of significance to basic national functions then the buyer must report this to the responsible Ministry.48 In the new Act, it is specified that the buyer is responsible for contacting a Ministry about the acquisition.49

3.2.2

What Are the Reasons for Rejection?

According to the Act, the Ministry receiving the notification from a potential buyer (of critical infrastructure) may ask relevant agencies for information about the buyer’s ‘risk potential’ and ‘trustworthiness in security matters’. If the government finds that the transaction could bring about a more than insignificant risk, then the government can decide either to forbid the acquisition or to attach conditions. This is possible even if the acquisition has already been made. There is no explicit condition in the Act that a buyer could get a clearance beforehand. Instead, it is stated that a negative decision can be taken even if the parties have already entered into a contract. If the buyer completes the acquisition before receiving an answer from the government, then the buyer risks being forced to sell if the acquisition is not approved.50 Decisions not to approve an acquisition occur only in exceptional circumstances and can only be taken after a proportionality test in each specific case.51 The Act gives the government an insight into the ownership structure of suppliers of goods and services, and the possibility to withdraw clearance to deliver if the owner structure, or a new owner structure, presents an increased security risk. However, the Act is restricted to concrete public procurement and deals less with the general need to control the ownership of strategically important companies. The

47

Chapter 7 of the new Act. Chapter 10-1 of the new Act. 49 Chapter 10-1 of the new Act. 50 Chapter 10-3 of the new Act. 51 Chapter 153 L (2016–2017) Lov om nasjonal sikkerhet (sikkerhetsloven) p. 152. 48

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Act cannot therefore ensure that essential national security functions will not be harmed if a foreign actor buys a strategically important company in part or in full.52

3.2.3

The Possibility to Appeal

Negative decisions on the right to be or to continue to be a supplier can be appealed to the Ministry of Defence.53 In regard to acquisitions, it is the government54 that decides if the acquisition should be approved and if there should be conditions attached.55 The decisions taken by the government cannot be appealed.

4 Sweden and the Protective Security Act On the 1 April 2019, a Protective Security Act replaced the former Protective Security Act.56 The new Act has primarily the same aim as the old one, i.e. to protect security-sensitive information of essential interest to Sweden’s security. In this regard, the Act is quite similar to the Norwegian Act in that it is not an investment screening mechanism; instead, it covers situations such as public procurement and public building contracts. Unlike the Norwegian Act, it does not cover acquisitions of critical infrastructure. That said, the Swedish Act is even less of an investment screening mechanism than the Norwegian Act. The Protective Security Ordinance57 complements the Act and entered into force on the same date as the Act. In the Protective Security Ordinance, it is regulated that the seller of a security-sensitive business must report to the Swedish Security Service or the Swedish Armed Forces before the acquisition is completed.58 According to the Act, an operator59 of a public or private business sensitive for national security is obliged to make a security analysis sharing the information one way or the other. Based on the results of such analysis, the operator must take actions related to what is required considering the specific operation, the existence of

52 Sikkerhetsutvalgets rapport NOU 2016:19 Samhandling for sikkerhet – Beskyttelse av grunnleggende samfunnsfunksjoner i en omskiftelig tid, chapter 12.2. 53 Chapter 9-3 of the new Act. 54 Kongen i statsråd. 55 Chapter 9-4 and 10-3 of the new Act. 56 Protective Security Act (1996:627)—Säkerhetsskyddslagen—replaces Protective Security Act (2018:545). 57 Protective Security Ordinance (2018:658)—Säkerhetsskyddsförordningen—replaces Protective Security Ordinance (1996:633). 58 Chapter 2 paragraph 9 Protective Security Ordinance. 59 “Verksamhetsutövare” in Swedish language.

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classified information and other circumstances.60 If there are security concerns, then the operator and the other party needs to enter into a protective security agreement. The Act therefore places the onus on the business operator—not the acquirer. Furthermore, there are no sanctions connected to the Act. The Act focuses on information and is not an investment screening mechanism. If an acquisition concerns sensitive information, there is a requirement to inform the state, but the acquisition in itself does not need to be approved.61

4.1

A Proposal for a New Protective Security Act

However, the government commissioned an investigator to analyse the need to amend the Act well in advance of the Act being approved by Parliament. The result of the investigator’s work was a report62 that identified situations where sensitive information can be exposed to outsiders and when there is no obligation to enter into protective security agreements. The report suggested that the obligation to enter into such agreements should be extended. The responsible authorities, NGOs and other concerned parties have commented on the report, and the Ministry of Justice has compiled the comments. However, the report proposes an additional 110 persons to conduct the work. For this reason, it is difficult to predict the end result of the report. Even so, since it is quite probable that some version of the proposal will be implemented, we will look into what is suggested below.

4.1.1

Which Acquisitions Are (or Should Be) Monitored?

As indicated above, Sweden does not currently have a general mechanism for screening FDIs or acquisitions. The simple answer to what acquisitions are being monitored today is, therefore, none.63 The report mentioned above proposes that the requirement to enter into a protective security agreement should be extended to procedures other than public procurements and to other acquisitions. For what is relevant here the extended requirement means that in regard to acquisitions there should be an obligation for the current business operator to identify security-classified information and to assess whether or not it is appropriate that the other party gains access to such information

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Chapter 2 paragraph 1 Protective Security Act (2018:545). There are other Acts that impact ownership, such as the Act on war material (1992:1300), the law on acquisition of land (1979:230) and others, but these Acts do not. 62 Betänkande av Utredningen om vissa säkerhetsskyddsfrågor (särtryck), SOU 2018:82. Chapter 4.1 is based on an official summary of SOU 2018:82. 63 There are however regulations regarding export control; lag (1992:1300) om krigsmateriel and förordning (1992:1303) om krigsmateriel. 61

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(a special security assessment). If the business operator finds that there is sensitive information involved, then there should be an obligation to consult with the supervising authority. This should also apply when a company subject to the provisions of the Protective Security Act intends to transfer ownership of (1) all or any part of its security-sensitive activities or (2) any property involved in its security-sensitive activities that is of importance to Sweden’s security or to an international protective security commitment that is binding to Sweden. In the case of a transfer of ownership, consultation may also include an order stipulating that the transfer may only be carried out under certain conditions; therefore, the result of failing to comply is that the transfer will be declared void. In this respect, the proposal is quite equivalent to an investment screening mechanism. The proposal is limited in the sense that only acquisitions in privately owned security-sensitive companies are targeted and not transfer of stocks in public limited companies. Another difference compared to many investment screening mechanisms, such as the Finnish, is that it is the business operator that is targeted by the proposal and not the buyer/investor. Also, the Norwegian Act64 regulates that it is the buyer that is responsible for contacting a Ministry about the acquisition and not the seller as in the Swedish case. Furthermore, the proposal concerns matters related to the essential security of the nation and does not refer to ‘security or public order’.

4.2

Sweden and a Limited Investment Screening Act

A more recent parliamentarian inquiry named Enhanced protection for the total defence (2019:34)65 proposes to put in place a limited investment screening Act.66 A realistic schedule for the Act to take effect is in the end of 2021, if ever.

4.2.1

What Investments Are to Be Screened?

The authors of the inquiry suggest that the limited investment screening Act should be subordinate to the Protective Security Act.67 Hence, if an investment is cleared after being controlled under the Protective Security Act, it needs not to be screened under the investment screening Act as well.

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Section 3.2.1 above. Enhanced protection for the total defence, in Swedish Förbättrat skydd för totalförsvaret, SOU 2019:34. 66 Förslag till lag om överlåtelser och upplåtelser av egendom av väsentligt intresse för totalförsvaret. 67 SOU 2019:34 p. 65

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The proposition is to monitor acquisitions of seaports, airports and real estate in geographic areas of essential importance for military defence. There will also be a requirement that protected sites currently used by the civil defence may be sold or rented only after been given a permission by the state. It is the seller’s responsibility to acquire permission to sell.

4.2.2

Which Factors Are Considered?

It is difficult from the wording of the Act to understand what criteria are to be considered.

4.2.3

What Are the Reasons for Rejection?

It is in chapter 4 paragraph 2 wherein it is stated that a permission to sell may be given if there is no reason to assume that the acquisition will harm essential total defence interests. Hence, an acquisition may be denied if it is assumed that it may harm essential defence interests. How to decide if that is the case is not mentioned other than that the decision must be proportional to what is protected.68 As was the case with the proposition to the Protective Security Act, the limited investment screening Act proposes that a transfer of ownership may be conditioned with an order stipulating that the transfer may only be carried out under certain conditions; the result of failing to comply is that the transfer will be declared void.69

4.2.4

The Possibility to Appeal

The decision whether or not to approve an acquisition is to be taken by a County Administrative Board, and a negative decision may be appealed directly to the government.70 It will also be possible to ask the Administrative Supreme Court to validate that a negative governmental decision is in accordance with Swedish law.

4.3

Sweden and a Comprehensive Investment Screening Act

The government has commissioned retired president to the Supreme Administrative Court Sten Heckscher to conduct an inquiry to adapt Swedish laws to the binding commitments in the EU Screening Regulation. The inquiry reported proposed

68

Chapter 5 paragraph 2. Chapter 4 paragraph 2. 70 Chapter 5 paragraph 6. 69

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changes in April 2020. The same inquiry shall also present a proposition to a comprehensive investment screening Act in November 2021. According to the directives to the inquiry, the purpose of the future Act is to control strategic acquisitions of companies whose business and technology are of importance for Swedish security or public order. Because of the special circumstances due to the Corona virus Covid 19, the Government has stated that it will implement an investment screening Act taking effect much sooner than previously expected. Hence, most likely the Government will not wait for the report in November 2021. Instead, an Act will take effect as soon as possible. The content of that Act is at the moment of writing not public. There are indications that the Inspectorate of Strategic Products will be responsible for the screening mechanism.

5 Denmark In Denmark, security protection is regulated by the Prime Minister’s security Circular71 covering both Danish information worth protecting as well as information from other countries and organisations. The Circular focuses on information security and does not give protection in other regards.72 The Danish Circular is therefore reminiscent of the present Swedish Protection Security Act. Industry security is not regulated by law, but the Circular contains a regulation stating that the National Security Authority can enter into agreements regarding security approval. Another Act73 gives the secret service of the Defence Authority the same rights. These agreements are entered into between the state and a private contractor. The Secret Service of the Defence Authority decides whether or not the treatment of classified information is allowed or not. Hence, Denmark does not have a national system in place for the screening of foreign investments. There are some area-specific rules concerning the screening of foreign investments in regard to the production of war materials, cyber-security, electricity and gas, and financial operations. The Danish Government has convened an inter-ministerial working group tasked with proposing legislation on a national screening mechanism in Denmark. The working group consists of several ministries, including the Ministry of Justice, Ministry of Foreign Affairs, Ministry of Business, Ministry of Defence and Ministry of Finance. The Ministry of Justice heads the working group. The work is still in an early phase, and information from other countries with screenings systems, including

71

Statsministeriets Cirkulære om sikkerhedsbeskyttelse af informationer af fælles interesse for landene i NATO eller EU, andre klassificerede informationer samt informationer af sikkerhedsmæssig beskyttelseinteresse i øvrigt, CIR nr. 10338 af 17/12/2014. 72 Kompletteringar till den nya säkerhetsskyddslagen, SOU 2018:82, p. 115. 73 Lov nr. 602 af 12/06/2013.

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Germany, the United Kingdom and other Nordic countries, is being compiled as inspiration for possible screening models for the Danish system.

6 Similarities and Differences Norway, Sweden and Denmark have systems focusing on protecting sensitive information in the form of protective security agreements. In Norway there also exists, to some extent, protection for acquisitions of critical infrastructure (which also is at the heart of the EU Screening Regulation), and Sweden and Denmark are moving in that direction. Of these three countries, Norway has most recently updated its security Act, moving further in the direction of investment screening of critical infrastructure. Sweden will probably soon have an act that also covers acquisitions of critical infrastructure. However, none of these three countries have presently anything close to a substantial investment screening mechanism, nor will they have such a mechanism in the near future, with the possible exception of Sweden if the screening Act would take effect much earlier than planed due to the Corona-situation. Out of the four countries described above, only Finland has what could be defined as a proper investment screening Act. Finland is also working to modernise this Act. In addition to security-sensitive information, critical infrastructure is at the core of the Acts covering protective security agreements. Moreover, critical infrastructure is mentioned in the EU Screening Regulation as an example of what is targeted by the Regulation. The worldwide transition from production of goods to production of services seems to make protective security agreements a necessary complement to investment screening mechanisms since in reality the protection given by the agreements are of different nature to screening mechanisms even if there are some overlapping. A country with only an investment screening mechanism is well advised to also use protective security agreements. Denmark and Sweden have now learnt that these agreements are not enough. Instead, it is also necessary with a broad investment screening mechanism.

References Betänkande av Utredningen om vissa säkerhetsskyddsfrågor (särtryck), SOU 2018:82 Förbättrat skydd för totalförsvaret, SOU 2019:34, translated into Enhanced protection for the total defence Förordning (1992:1303) om krigsmateriel Goals of Security of Supply (Government Resolution 1048/2018). Unofficial English translation: https://tem.fi/documents/1410877/2095070/Government+Decision+on+the+Objectives+of +Security+of+Supply/cf19f480-dc61-b59c-3926-11857f811bfa/Government+Decision+on +the+Objectives+of+Security+of+Supply.pdf

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Grieger G (2017) Foreign direct investment screening, A debate in light of China-EU FDI flows, European Parliamentary Research Service (EPRS), European Parliament Kompletteringar till den nya säkerhetsskyddslagen, SOU 2018:82 Lag (1979:230) om jordförvärv, translated into the law on acquisition of land (1979:230) Lag (1992:1300) om krigsmateriell, translated into the Act on war material (1992:1300) Lag om tillsyn över utlänningars företagsköp 13.4.2012/172, here translated to the ‘Act on the Monitoring of Foreign Corporate Acquisitions’ (172/2012) Lov 20. Mars 1998 nr. 10 om forebyggende sikkerhetstjeneste Lov 29. juni 2007 nr. 74 om regulerte markeder (börsloven) Lov 5. mars 2012 nr. 12 om konkurranse mellom foretak og kontroll med foretakssammenslutninger (konkurranseloven) Lov nr. 602 af 12/06/2013 om Forsvarets Efterretningstjeneste (FE) Lov 1. juni 2018 nr. 24 om nasjonal sikkherhet (sikkerhetsloven) Ministry of Economic Affairs and Employment monitors foreign corporate acquisitions, home page of the Government of Finland last visited the 13th of December 2018. https://tem.fi/en/ acquisitions Prop. 153 L (2016–2017) Lov om nasjonal sikkerhet (sikkerhetsloven) 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 79I, 21.3.2019, pp 1–14 Säkerhetsskyddsförordningen (1996:633), translated into Protective Security Ordinance (1996:633) Säkerhetsskyddsförordningen (2018:658), translated into Protective Security Ordinance (2018:658) Säkerhetsskyddslagen (1996:627), translated into Protective Security Act (1996:627) Säkerhetsskyddslagen (2018:545), translated into Protective Security Act (2018:545) Security Strategy for Society (Government resolution of 2.11.2017) Sikkerhetsutvalgets rapport NOU 2016:19 Samhandling for sikkerhet – Beskyttelse av grunnleggende samfunnsfunksjoner i en omskiftelig tid, chapter 12.2 Statsministeriets Cirkulære om sikkerhedsbeskyttelse af informationer af fælles interesse for landene i NATO eller EU, andre klassificerede informationer samt informationer af sikkerhedsmæssig beskyttelseinteresse i øvrigt, CIR nr. 10338 af 17/12/2014

Jonas Hallberg is a legal adviser as well as a policy adviser at the National Board of Trade Sweden, where he primarily focuses on international investment law and the intersection between investment law and EU law. He works closely with the Swedish Ministry for Foreign Affairs in all matters concerning international investment treaties. He has also been involved in the negotiations of the European investment screening regulation. He is currently an expert in the ongoing work in Sweden for creating a national investment screening mechanism. On a regular basis, Hallberg represents Sweden at the OECD, UNCTAD, UNCITRAL as well as the council group TPCSI. He has, for example, written papers relating to the CETA between the EU and Canada and the mostfavoured nation clause in the Swedish bilateral investment treaties. During the years 2018 and 2019, he published articles about the effects of the CJEU ruling Achmea and on retroactivity in EU and investment arbitration law. Before working at the board, he worked at the Upper Administrative Court of Appeal, the Ministry of Justice and the Ministry for Foreign Affairs.

Part III

Existing EU Secondary Legislation on (Discriminatory) Treatment of Third Country Investments – A Plurality of Regulatory Approaches

The Banking and Insurance Sector Henning Berger

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Outset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 The EU Screening Regulation and Prudential Ownership Control Procedures . . . . . 1.3 Prudential Ownership Control Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 FDI Screening Mechanisms Under the EU Screening Regulation . . . . . . . . . . . . . . . . . . . 2 Investment Control Under Supervisory Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Supervision in the Single Supervisory Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Supervision of Insurance and Reinsurance Undertakings and Investment Firms . . . 3 Ownership Control Under EU Supervisory Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Harmonized Rules and Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Main Terms and Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Sector-specific Competencies and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Legal Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Relationship Between FDI Screening Mechanisms and Prudential Ownership Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 The Design of Screening Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Screening Mechanisms for Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Cooperation Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

230 230 231 232 234 236 236 239 240 240 241 241 254 255 257 257 258 260 261 262

Abstract This chapter focuses on procedures and mechanisms to control foreign direct investments into the EU banking and insurance sector. It explains and analyzes the relationship between the prudential ownership control procedures under EU supervisory law and the proposed FDI screening mechanisms under Regulation 2019/452. In the outset, an overview on prudential ownership control and the FDI The author thanks research assistant Filiz Wölfle, White & Case LLP, Berlin, for valuable contributions to this chapter. H. Berger (*) LLP White & Case, Berlin, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 229–264, https://doi.org/10.1007/16495_2020_18, Published online: 23 June 2020

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screening mechanisms under Regulation 2019/452 is given. Then the main areas and principles of prudential supervision are described for credit institutions, insurance companies and investment firms, followed by a detailed explanation of prudential ownership control requirements and procedures. On this basis, an analysis of the new framework for the screening of foreign direct investments under Regulation 2019/ 452 is undertaken with regard to the possible design of the screening mechanisms, the application of such mechanisms to financial institutions in addition to the prudential ownership control procedures and the new cooperation mechanisms between Member States and the Commission. The analysis shows that Member States are not obliged to adopt an FDI screening mechanism for foreign direct investments into financial institutions. As prudential ownership control requirements always apply, a Member State may refrain from setting up an additional FDI screening mechanism if security and public order in the sense of Regulation 2019/ 452 are effectively protected by prudential ownership control procedures. This may be the case with regard to the protection of the financial infrastructure of the Member States and the Union against risks posed by certain foreign investments; the same could be held with regard to the protection of sensitive data collected by financial institutions and to the defence against foreign investors involved in criminal activities. So far, the prudential ownership control procedures may be described as a hidden investment screening mechanism already in place. However, as the prudential ownership control is neutral as to the origin of a foreign investor and does not discriminate against certain foreign states, it may be necessary for Member States to set up an FDI screening mechanism at least to screen the proposed acquisition of qualifying holdings in financial institutions by certain foreign states and state funds. Furthermore, Regulation 2019/452 provides for cooperation mechanisms between Member States and the Commission with regard to foreign direct investments, independent of whether such investments are subject to FDI screenings or not, for which there is no corresponding concept under supervisory law.

1 Introduction 1.1

Outset

This chapter analyzes prudential ownership control procedures for the proposed acquisition of qualifying holdings in financial institutions by third country investors in the light of the new Regulation (EU) No. 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 (EU Screening Regulation or Regulation 2019/452). The EU Screening Regulation, which will apply from 11 October 2020, creates a framework for the screening of foreign direct investments (FDI) on the grounds of security and public order, which may also affect acquisitions of qualifying holdings in financial institutions. The EU Screening Regulation will apply to

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investments from all countries, which are not members of the EU, and therefore also apply to investments from the UK, if Brexit takes place.1 As the analysis will show, prudential ownership control procedures may be described as a hidden European investment screening mechanism already in place, as suggested by the title of this chapter, because they cover many—though not all—of the objectives of an FDI screening mechanism under the EU Screening Regulation. Against this backdrop, this chapter will also show that setting up parallel FDI screening mechanisms for financial institutions could mainly be necessary with regard to investments by foreign states or state-controlled or state-funded entities into such institutions, which are deemed part of the financial infrastructure of a Member State and/or the Union.

1.2

The EU Screening Regulation and Prudential Ownership Control Procedures

The EU Screening Regulation does not oblige Member States to establish screening mechanisms and refrains from fully harmonizing existing screening mechanisms. Member States may adapt to changing circumstances while maintaining the necessary flexibility and taking into account individual situations and national specificities. They may also differentiate between the sectors of industry and types of target undertakings protected by an FDI screening mechanism. Within the framework of the EU Screening Regulation, a Member State may establish FDI screening mechanisms for the acquisition of financial institutions. Financial institutions in the sense of this chapter are Capital Requirements Regulation2 (hereinafter CRR) credit institutions, investment firms and insurance and reinsurance undertakings, which are subject to extensive prudential supervision by

1 For a discussion of market access for financial services providers in case of Brexit, see Berger and Badenhoop (2018). 2 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176, 27.6.2013, pp. 1–337.

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national and/or European supervisory authorities under the CRD IV,3 MiFiD II4 and Solvency II directives5 (supervisory law). Supervisory law provides for rules on prudential ownership control procedures with regard to the proposed acquisition of qualifying holdings in financial institutions. These rules remain unaffected by the framework for FDI screening mechanisms according to Recital 13 Regulation 2019/452 as they provide for a distinct procedure with specific objectives. Before setting up an FDI screening mechanism for the acquisition of financial institutions in view of their individual situations and national specificities, Member States should also consider whether such a mechanism is actually necessary to achieve the objectives of the EU Screening Regulation or if the prudential ownership control procedures provide sufficient protection against the risks related to such investments. From a practical standpoint, this consideration should be made in order to avoid unnecessary regulatory burdens, as the two mechanisms partially apply in parallel.

1.3 1.3.1

Prudential Ownership Control Procedures Objectives, Requirements and Responsibilities

The objectives of prudential ownership control procedures are to ensure the effective supervision of financial institutions and to prevent risks stemming from individual shareholders. These procedures protect financial institutions from unfit and unreliable shareholders, which indirectly safeguards the functioning of the financial system, protects customers and combats money laundering and terrorist financing. In order to reach the objectives of prudential ownership control in a clear and common approach in the three sectors of financial services addressed here, the European Supervisory Authorities (ESAs) have specified the requirements for prudential ownership control procedures for qualifying holdings in financial institutions in the Joint Guidelines of 20 December 2016 (JC/GL/2016/01).6 JC/GL/2016/01 3 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, OJ L 176, 27.6.2013, pp. 338–436. 4 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, OJ L 173, 12.6.2014, pp. 349–496. 5 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance, OJ L 335, 17.12.2009, pp. 1–155. 6 European Banking Authority (EBA) et al. (20 December 2016), Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector, JC/GL/2016/ 01.

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are—though legally non-binding—essentially complied with by all competent authorities on the levels of the Member States and the Union. The ownership control procedure is triggered when a person has taken the decision either to acquire or to further increase a qualifying holding to certain levels, not after such an acquisition has taken place. The responsible person is obliged to notify the competent authority upon taking the decision and to provide the authority with all necessary information and documents in order to allow the authority to undertake a complete assessment before the acquisition is completed. If it is to obtain approval, a proposed acquirer must have a good reputation and be reliable, be financially sound, comply with all prudential requirements and not be suspected of money laundering or terrorist financing. The term ‘prudential requirements’ is used in Art. 23 (1) lit. (d) CRD IV. Prudential requirements cover all prudential or synonymously supervisory obligations stipulated in CRD IV, CRR and, where applicable, other Union laws that the credit institution has to comply with. Compliance with prudential requirement is a general term, which is broader in its coverage than the term requirement of prudential ownership control since it is not limited to requirements of a certain prudential procedure only. Responsibility for prudential ownership control procedures related to CRR credit institutions in the eurozone lies with the Single Supervisory Mechanism (SSM), which is led by the European Central Bank (ECB) in close cooperation with the National Competent Authorities (NCAs). Responsibility for prudential ownership control procedures related to non-eurozone CRR credit institutions, investment firms and insurance and reinsurance undertakings lies only with Member State authorities. Coordination between the competent authorities in different Member States as well with the ECB is encouraged in all cases of cross-border transactions, thus triggering multiple notifications of acquisitions of qualifying holdings within the EU. Where there are multiple target supervisors, they should coordinate with each other with the aim of aligning the notification and assessment process.

1.3.2

Third Country Investors

Third country investors into financial institutions are in principle not treated differently than EU investors in prudential ownership control procedures. The third country origin of an investor would not of itself be a reason to refuse the approval of a proposed acquisition, as supervisory law is in general open to third country investments. However, under the principle of proportionality, the third country origin of a proposed acquirer can be a relevant factor in that it is up to the competent authority to determine the type and breadth of information required from an investor. The more complex the structure of a third country acquirer or third country acquisition is, the more intensive the ownership control procedure for a qualifying holding becomes in practice, so as to safeguard the aims of the prudential assessment. Furthermore, a third country origin may require a more thorough review of certain assessment criteria by the competent authorities, e.g. because of the particular

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social, legal or economic situation in the third country. The competent authorities will evaluate whether an effective supervision might be prevented by third country laws, regulations or administrative provisions applying to a natural or legal person with close links to the target undertaking. Investors from countries with strategic deficiencies that pose a risk to the international financial system or with deficiencies in their national anti-money laundering or counterterrorism financing regime will also face intensive scrutiny by the supervisory authorities regarding the criterion of suspicion of money laundering and terrorist financing.

1.4

FDI Screening Mechanisms Under the EU Screening Regulation

The EU Screening Regulation creates a framework for the screening of foreign direct investments, which may also include acquisitions of qualifying holdings in financial institutions. Insofar, it would provide for an additional layer of procedure and cooperation between the Member States and the Commission not already provided for by supervisory law.

1.4.1

Basic Elements of the EU Screening Regulation

The EU Screening Regulation essentially provides for a framework with three main elements: • Screening mechanisms of Member States, i.e. instruments of general application to assess, investigate, authorize, condition, prohibit or unwind foreign direct investments on grounds of security or public order7 • A screening by the European Commission on grounds of security or public order for cases in which foreign direct investment in Member States may affect projects or programmes of Union interest and • A cooperation mechanism between Member States and the Commission8 As Union projects or programmes would not be affected by the acquisition of qualifying holdings in financial institutions, the focus of this analysis will be on screening mechanisms of Member States.

1.4.2

Screening Mechanism for Financial Institutions

According to Art. 3(1) Regulation 2019/452, Member States may maintain, amend or adopt mechanisms to screen foreign direct investments in their territory on 7 8

Art. 2(4), Regulation 2019/452. Copenhagen Economics (2018), Screening of FDI towards the EU, p. 10.

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grounds of security or public order. The risk caused by a foreign direct investment to security or public order must have a certain weight to justify setting up a screening mechanism, as Recital 23 Regulation 2019/452 in conjunction with Art. 4 Regulation 2019/452 shows. Article 4(1) Regulation 2019/452 provides that in determining whether a foreign direct investment is likely to affect security or public order, Member States may consider its potential effects on certain factors related to the target undertaking, which partly include financial institutions. Furthermore, Art. 4(2) Regulation 2019/ 452 provides that Member States may also take into account certain investor-related factors, which also come into play when a financial institution is to be acquired. As further analysis will show, an FDI screening mechanism may be adopted especially with the objective to protect the financial infrastructure of the Member States, to safeguard sensitive information held by financial institutions, to control investments by foreign states and to avoid risks related to criminal activities of investors.9

1.4.3

Flexibility of the Member States

However, while the EU Screening Regulation allows the adoption of screening mechanisms for FDI into financial institutions by the Member States, it does not oblige the states to do so and refrains from fully harmonizing existing screening mechanisms of the Member States.10 The EU Screening Regulation (only) intends to provide Member States with the means to address risks to security or public order in a comprehensive manner and to adapt to changing circumstances while maintaining the necessary flexibility and taking into account their individual situations and national specificities.11 Member States remain free to set up and execute such mechanisms on national level12 and may differentiate individually between sectors of industry and types of target undertakings protected by an FDI screening mechanism. Hence, the EU Screening Regulation creates (not more than) a framework, which safeguards that national screening mechanisms can be reviewed and fulfil certain minimum requirements.13

1.4.4

FDI Screening and Prudential Ownership Control

One particular aspect to be considered by Member States prior to adopting an FDI screening mechanism related to financial institutions is that such a mechanism could not replace the prudential ownership control procedure but would always apply in

9

See Below Sect. 4.2.1. Lippert (2019), p. 1538. 11 Recital 8, Regulation 2019/452. 12 Recital 17, Regulation 2019/452. Currently 15 Member States have established national screening mechanisms, which will in future need to comply with the framework under Regulation 2019/452. 13 Lippert (2019), p. 1540. 10

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parallel. This follows from Recital 37 Regulation 2019/452, according to which ‘this Regulation does not affect Union rules for the prudential assessment of acquisitions of qualifying holding in the financial sector, which is a distinct procedure with a specific objective’. As the adoption of an FDI screening mechanism with regard to financial institutions would mean that a second authorization process would be established besides the prudential ownership control procedure, Member States should consider if the latter is a sufficient protection for security and public order or if an FDI screening mechanism may be necessary to safeguard public interest. Furthermore, insofar as the prudential ownership control procedures effectively function as a hidden investment screening mechanism already in place, it could also be disproportionate to establish an additional FDI screening mechanism, which could be time consuming and unnecessarily burdensome for the seller, the proposed purchaser and the target institution.

2 Investment Control Under Supervisory Law 2.1 2.1.1

Overview Regulated Sectors and Regulations

The European financial sector is heavily regulated by European secondary law14 and non-binding administrative instruments such as guidelines governing three sub-sectors in particular: • CRR credit institutions and investment firms • Insurance and reinsurance undertakings CRR credit institutions take deposits or other repayable funds from the public and grant credits for their own account.15 Such institutions are mainly regulated by the CRD IV Directive16 and transposing national laws,17 the CRR,18 the SSM Regulation19 (SSMR) and other rules contained in the Single Rulebook of the European 14

Directives and regulations in the sense of Art. 288 TFEU. Art. 4 (1) no. 1 CRR. 16 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, OJ L 176, 27.6.2013, pp. 338–436. 17 In Germany, e.g., the CRD IV-requirements are transposed in the Kreditwesengesetz (German Banking Act). 18 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176, 27.6.2013, pp. 1–337. 19 Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, OJ L 287, 29.10.2013, pp. 63–89. 15

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Banking Union.20 Recently, the European legislator passed new rules for CRR credit institutions regulating, inter alia, a leverage ratio requirement for all institutions, a new market risk framework for reporting purposes and a requirement for third country investors with significant activities in the EU to set up an intermediate parent undertaking domiciled in the EU.21 Investment firms are mainly governed by the MiFID II Directive22 respectively by the national laws transposing this directive23 and the MiFIR Regulation,24 while insurance and reinsurance undertakings are subject to the Solvency II Directive25 and the Omnibus Directive26 respectively the national laws transposing these directives.27

2.1.2

Main Supervisory Aims

The main supervisory aims for the named sectors are as follows: • Stability and safety of financial institutions • Stability and functioning of financial markets • Prevention of systemic risks28 and

20 The Single Rulebook contains prudential rules for all banks supervised in the European Union. It consists of all directly applicable European Regulations, national supervisory laws implementing EU Directives, as well as guidelines and recommendations of the European Banking Authority (EBA); Berger (2018), p. 1909. 21 European Commission Fact Sheet (16 April 2019), Adoption of the banking package: revised rules on capital requirements (CRRII/CRD V) and resolution (BRRD/SRM), http://europa.eu/rapid/ press-release_MEMO-19-2129_en.htm. 22 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, OJ L 173, 12.6.2014, pp. 349–496. 23 In Germany, the MIFID II-requirements are transposed in the Kreditwesengesetz (German Banking Act) and the Wertpapierhandelsgesetz (German Securities Trading Act). 24 Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012, OJ L 173, 12.6.2014, pp. 84–148. 25 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), OJ L 335, 17.12.2009, pp. 1–155. 26 Directive No. 2014/51/EU of the European Parliament and of the Council of 16 April 2014 amending Directives 2003/71/EC and 2009/138/EC and Regulations (EC) No 1060/2009, (EU) No 1094/2010 and (EU) No 1095/2010 in respect of the powers of the European Supervisory Authority (European Insurance and Occupational Pensions Authority) and the European Supervisory Authority (European Securities and Markets Authority), OJ L 153, 22.5.2014, pp. 1–61. 27 In Germany, the Solvency II-requirements are transposed in the Versicherungsaufsichtsgesetz (German Insurance Supervision Act). 28 Ohler (2013), p. 647.

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• Customer/consumer protection29 However, the emphasis placed on these aims differs among the respective sectors and regulations. Whereas CRD IV and CRR place strong emphasis on the stability and safety of a credit institution, MiFID II focuses more on investor protection. In the insurance sector, customer and consumer protection have traditionally played a more prominent role than in the banking sector, with particular importance attached to the fulfilment of insurance contracts over the long term.

2.1.3

Supervisory Law and Third Country Investors

Supervisory law partly differentiates between investors from the EU and third countries. Third country investors in this sense are sometimes also referred to as ‘third-country undertakings’,30 ‘undertakings governed by the law of a third country’,31 ‘proposed acquirers being an entity established in a third country or being part of a group established outside the Union’32 or ‘a legal person which has its head office registered in a third country’.33 While the term third country investor in the sense of supervisory law can have a similar meaning to that of the term foreign direct investor as used in the EU Screening Regulation, the term foreign direct investor is not commonly used in supervisory law. In principle, investments into financial institutions by third country investors are subject to the same prudential ownership control procedure as investments made by EU investors,34 although third country investors may be subject to specific requirements.35 Supervisory law does not provide for an investment screening mechanism aimed specifically at foreign direct investments in the sense of the EU Screening Regulation.

29

Berger (2018), p. 1908; Badenhoop (2020). Recital 73 of Solvency II. 31 Art. 176 of Solvency II. 32 Recital 10 of the Commission Delegated Regulation 2017/1946 of 11 July 2017 supplementing Directives 2004/39/EC and 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for an exhaustive list of information to be included by proposed acquirers in the notification of a proposed acquisition of a qualifying holding in an investment firm, OJ L 276, 26.10.2017, pp. 32–43. 33 Art. 5 (2) Commission Delegated Regulation 2017/1946. 34 Berger (2018), p. 684. 35 For details see below Sect. 3. 30

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Supervision in the Single Supervisory Mechanism

The supervision of CRR credit institutions in the participating Member States of the eurozone takes place in the Single Supervisory Mechanism (SSM). The purpose of the SSM is to contribute to the safety and soundness of credit institutions and the stability of the financial system within the Union and each participating Member State.36 It is made up of the European Central Bank (ECB) as the central, leading supervisor and the National Competent Authorities (NCAs) of the participating Member States, which cooperate closely with the ECB. Details of the cooperation between the ECB and the NCAs are regulated by Regulation (EU) No. 468/2014 of the European Central Bank (SSM Framework Regulation (SSMFR)). The structure of the SSM aims at reducing the negative link (home bias) between the CRR credit institutions and their home Member States significantly, which was identified as a major obstacle to an effective banking supervision in the EU following the financial crisis of 2008.37 Individual entities as well as groups are subject to supervision within the SSM. Supervised individual entities include not only CRR credit institutions but also financial holding companies,38 mixed financial holding companies39 and branches established in a participating Member State by a CRR credit institution domiciled in a non-participating Member State.40 Each supervised entity is directly supervised either by the ECB or by an NCA. In principle, the ECB is competent only for the direct supervision of significant supervised entities and groups.41 Five criteria determine whether a supervised entity or supervised group is significant: (i) size, (ii) importance for the economy of the Union or participating Member State, (iii) significance of cross-border activities, (iv) request for or receipt of public financial assistance directly from the ESM and (v) the fact that it is one of the three most significant credit institutions in a participating Member State.42 Furthermore, the ECB also has certain exclusive competencies under the SSMR. This includes the competence for granting authorizations to CRR credit institutions, the withdrawal of authorizations and—most notably in the present context of foreign direct investments—the assessment and decision about the acquisition of a qualifying holding for all supervised entities regardless of their size and significance in the course of an ownership control procedure.43

36

Berger (2016a), p. 2326. Lackhoff (2017), p. 1. 38 Art.4 (1) no. 20 CRR. 39 Art. 4 (1) no. 21 CRR. 40 Lackhoff (2017), p. 138. 41 Art. 6 (4) SSMR, Lackhoff (2017), p. 159. 42 Art. 6 (4) SSMR, Lackhoff (2017), p. 137. 43 Berger (2016a), p. 2326. 37

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Hence, the supervisory control of third country investments into CRR credit institutions within the SSM lies exclusively with the ECB and therefore at the European level.

2.3

Supervision of Insurance and Reinsurance Undertakings and Investment Firms

In contrast to the supervision of CRR credit institutions, the supervision of insurance and reinsurance undertakings and investment firms rests with the NCAs of the Member States only. The European legislator has not created similar supervisory mechanisms for these two financial sectors. However, to address cross-border issues in these sectors, NCAs cooperate with each other. Furthermore, NCAs are coordinated and overseen by the sector-specific ESAs, i.e. the European Insurance and Occupational Pensions Authority (EIOPA) for insurance undertakings and the European Securities and Markets Authority (ESMA) for investment firms.44 Therefore, in the case of third country investments, ownership control procedures are carried out by the home NCA of the respective supervised entity or group, where necessary in cooperation with the NCAs of other Member States.

3 Ownership Control Under EU Supervisory Law Notwithstanding the ongoing supervision of financial institutions, the assessment of (potential) owners of supervised institutions takes place in two distinct types of procedures before the competent authorities: i. Authorization procedures for credit institutions, investment firms, and insurance and reinsurance undertakings ii. Ownership control procedures for the proposed acquisition of qualifying holdings in credit institutions, investment firms, and insurance and reinsurance undertakings Of these two types of procedures, it is the ownership control mechanism for the proposed acquisition of qualifying holdings that addresses foreign direct investments in the sense of Regulation No. 2019/452. Therefore, only the control of ownership requirements and procedures are considered in the following discussion.

44

Moloney (2014), p. 407.

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Harmonized Rules and Objectives

EU supervisory law provides for a harmonized framework for the prudential assessment of qualifying holdings in the financial sector as part of the prudential ownership control procedure, which is—also according to Recital 37 Regulation No. 2019/ 452—‘a distinct procedure with a specific objective’ under the rules of CRD IV, Solvency II and MiFiD II. The objective of the ownership control procedures under the framework is to ensure the effective supervision of the regulated financial institutions and to prevent risks stemming from individual shareholders. The supervised entities are protected from unfit and unreliable shareholders, so that the ownership control procedures also indirectly serve to safeguard the functioning of the financial sector, protect customers and combat money laundering and terrorist financing.45 The ESAs have specified the framework under CRD IV, Solvency II and MiFiD II in JC/GL/2016/01. The aim of JC/GL/2016/01 is to provide for a clear and common approach with regard to central aspects of ownership control proceedings.46 JC/GL/2016/01 greatly influences the supervisory practice of the ECB and the NCAs alike and supports regulatory convergence in all ownership control procedures. Even though JC/GL/2016/01 is not legally binding, the competent authorities must inform the responsible ESA whether they comply or intend not to comply with it (Art. 16 of Regulation No. 1093/201047).48

3.2 3.2.1

Main Terms and Requirements Intended Acquisition of a Qualifying Holding

The intended acquisition of a ‘qualifying holding’ is subject to the ownership control procedures.49 A qualifying holding is a direct or indirect holding of 10% of the capital or of the voting rights of a company or one that makes it possible to exercise a

45

Steck (2018), p. 155. Steck (2018), p. 156. 47 Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC, OJ L 331, 15.12.2010, pp. 12–47. 48 While some Member States may implement JC/GL/2016/01 into national law (for Germany see Herz (2019), p. 64), they are not obliged to do so and may also set deviating national law, as long as they comply with Art. 16 of Regulation No. 1093/2010. As to sector-specific information requirements see below under Sect. 3.2.3.3. 49 Art. 22 (1) CRD IV; Art. 4 (1) no. 36 CRR. 46

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significant influence over the management of the company.50 All the criteria, i.e. capital, voting rights and significant influence, may be fulfilled alternatively, i.e. one is enough to trigger the ownership control requirement. Furthermore, it is key to the procedures that the ownership control procedure is triggered when a person has taken the decision either to acquire or to further increase a qualifying holding to certain levels, not after such acquisition has taken place. The responsible person is obliged to notify the competent authority upon taking the decision and to provide it with all the necessary information and documents in order to allow the authority to undertake a complete assessment before the acquisition is completed.

3.2.2

General Concepts Under JC/GL/2016/01

JC/GL/2016/01 provides certain general concepts or notions on how to apply the aforementioned general requirements, which are of great practical importance since the NCAs and the ECB regularly carry out their supervisory practices on these standards.

3.2.2.1

Acting in Concert

JC/GL/2016/01 specifies the general concept of acting in concert, which applies to any legal or natural persons deciding to acquire or increase a direct or indirect qualifying holding in accordance with an explicit or implicit agreement between them.51 When certain persons act in concert, target supervisors should aggregate their holdings in order to determine whether such persons would be acquiring a qualifying holding or crossing the relevant thresholds contemplated in the sectoral directives and regulations.52 The competent authority will take several factors into account in order to assess whether a natural or legal person is acting in concert. The factors to be considered include, inter alia, shareholder and corporate governance agreements, the existence of family relationships, the relationship between undertakings in the same group, the use of the same source of finance for acquisition by different persons and consistent patterns of voting by the relevant shareholders. In order to establish acting in concert, the competent authority will carry out an analysis on a case-by-case basis. In view of the broad criteria to be applied, it is fair to say that the authorities do in practice have a significant margin of discretion.53

50

Art. 4 (1) no. 36 CRR. JC/GL/2016/01, p. 12. 52 JC/GL/2016/01, p. 12. 53 Steck (2018), p. 160. 51

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In cases where legal or natural persons are acting in concert, the obligation to submit a prior notification to the competent authority is incumbent on each of the entities individually.54 However, in practice, these entities should coordinate their submission as all the information provided during the course of the procedures, apart from that relating to the notifying entities themselves, can be expected to be similar. In the present context, it is also important to note that JC/GL/2016/01 explicitly states that, for the avoidance of doubt, the interpretation of the notion of acting in concert set out in the guidelines should apply exclusively to the prudential assessment of the acquisitions in qualifying holdings in the financial sector and should not affect the interpretation of any similar notion contemplated in other EU legislative acts, such as Directive 2004/25/EU on takeover bids.55

3.2.2.2

Significant Influence

While the acquisition of the relevant capital or voting rights of 10% or more in a target undertaking can be assessed on the basis of the relevant corporate law and documents, assessment proves to be more difficult with regard to the criterion of significant influence. Therefore, JC/GL/2016/01 states that supervisors should take into account several factors in order to assess whether there is any significant influence over the target undertaking, including the ownership structure of the target undertaking and the actual level of involvement of the proposed acquirer in the management of the target undertaking.56 JC/GL/2016/01 further sets out a non-exhaustive list of factors to be taken into account for the purpose of assessing whether a proposed acquisition of a holding would make it possible for the proposed acquirer to exercise significant influence over the management of the target undertaking.

3.2.2.3

Indirect Acquisition

The inclusion of indirect acquisitions of qualifying holdings significantly broadens the scope of natural and legal persons subject to the ownership control procedures. Indirect acquirers have the possibility of exerting influence on the target undertaking through their influence on the direct acquirer. However, indirect acquirers must notify the competent authority about a proposed acquisition, even if they have no actual intention to exert influence over the target company.57

54 Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) (27 November 2015), Merkblatt zur Inhaberkontrolle, II 1). 55 JC/GL/2016/01, p. 14. 56 JC/GL/2016/01, p. 15. 57 BaFin (27 November 2015), Merkblatt zur Inhaberkontrolle, IV.1.

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JC/GL/2016/01 sets out a test for assessing whether a qualifying holding is acquired indirectly and determines which entity is obliged to submit prior notification. According to the Guidelines, an indirect acquisition can occur in cases where: • A natural or legal person acquires or increases a direct or indirect participation in an existing holder of a qualifying holding or • A natural or legal person has a direct or indirect holding in a person that acquires or increases a direct participation in a target undertaking58 In order to assess whether an indirect qualifying holding is acquired, two tests are to be applied by the supervisors. Control Criterion Under the first test, the so-called control criterion is applied. Control in this sense is exercised, inter alia, when a majority of the voting rights in an existing holder of a qualifying holding or the proposed acquirer of a qualifying holding is to be acquired or held by a certain person, when the person concerned has a right to appoint or remove a majority of the members of the administrative or supervisory body of the holder of the qualifying holding or when a control agreement exists with the holder.59 The control criterion always aims at determining the ultimate natural person or persons at the top of the corporate control chain, who gain control over the qualifying holding, and therefore are deemed indirect acquirers. Any person directly or indirectly acquiring control over an existing holder of a qualifying holding is considered an indirect acquirer of a qualifying holding. Where that is the case, the existing holder of a qualifying holding should not be required to submit a prior notification to the competent authority. Only the indirect acquirer is subject to this obligation.60 In cases where a person has a direct or indirect holding, and thereby control, over a person acquiring or increasing a direct participation in a target undertaking, that first person will be deemed to be an indirect acquirer. For this acquisition structure, the notification obligations apply equally to the direct acquirer and the indirect acquirer of the target undertaking. Multiplication Criterion If the application of the control criterion does not determine that a qualifying holding was acquired indirectly by the person to which the control criterion was applied, the multiplication criterion will be applied instead.61 This criterion entails that the percentages of the holdings across the corporate control chain, starting from the participation held directly in the target undertaking,

58

JC/GL/2016/01, p. 16. JC/GL/2016/01, p. 10. 60 JC/GL/2016/01, p. 16. 61 JC/GL/2016/01, p. 17. 59

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have to be multiplied by the participation held at the level immediately above and continuing up the corporate control chain for so long as the result of the multiplication continues to be 10% or more.62

3.2.2.4

Proportionality Principle

General Rules JC/GL/2016/01 correctly points out that the supervisory authorities should carry out the prudential assessment of proposed acquirers in accordance with the principle of proportionality.63 This is envisaged in respect of (i) the intensity of the assessment, which should take into account the likely influence that the potential acquirer may exercise on the target undertaking, and (ii) the composition of the required information, which should be proportionate to the nature of the proposed acquirer and of the proposed acquisition. Besides influencing the material assessment, the proportionality principle can also impact the assessment procedures and lead to certain simplifications of procedure, especially in cases of two or more acquirers acting in concert or of proposed indirect acquisitions.64 The criteria to be considered when applying the principle of proportionality include the nature of the proposed acquirers, the objective of the acquisition and the extent to which the proposed acquirers may exercise influence control over the target undertaking. Third Country Acquirers Under the principle of proportionality, the third country origin of a proposed acquirer can be a relevant factor when calibrating the type and breadth of information required from an acquirer. JC/GL/2016/01 refers to the origin of an acquirer by asking whether or not the person is a financial institution supervised in the EU or a third country considered equivalent.65 The concept of equivalence involves a positive assessment of the third country framework, which enables reliance on third country rules and the work of the third country supervisor.66 Therefore, a financial institution from a third country, which is not supervised in a way considered equivalent to the supervision of an EU

62

JC/GL/2016/01, p. 17. JC/GL/2016/01, p. 18. 64 JC/GL/2016/01, p. 18. 65 JC/GL/2016/01, p. 18; a good overview over equivalence rules in financial services is provided by European Parliament Economic Governance Support Unit from DG Internal Policies, Briefing of 12 July 2017, ’Third-country equivalence in EU banking legislation’, PE 587.369; Berger and Badenhoop (2018), p. 684; Ceyssens and Tarde (2019), p. 805. 66 Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions, 63

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financial institution, can usually not expect a comparable reduction of prudential requirements under the principle of proportionality as a supervised EU financial institution. The same can be observed as to the practice of the supervisory authorities regarding ownership control procedures for non-financial institutions from third countries proposing to acquire a qualifying holding in a financial institution in the EU. Suggestions by such acquirers, e.g. third country state funds or private equity funds, to reduce the standard type and breadth of information to be provided to the authorities under the principle of proportionality are usually unsuccessful. In such cases, authorities tend to require full documentation all the way up the corporate chain of control of the acquirer, which is often multi-layered and can—especially in the case of third country private equity funds—include a multitude of third country entities. Furthermore, it can be said that the more complex the structure of a third country acquirer and acquisition is, the more intensive the ownership control procedure for a qualifying holding becomes in practice, in order to safeguard the aims of the prudential assessment. This may even lead to a request by the supervisory authorities to restructure an acquisition and set up an intermediary holding of the acquirer within the EU in order to safeguard the capacity of the acquirer to provide further capital to the target undertaking in the midterm, if necessary.

3.2.3 3.2.3.1

Notification and Assessment Procedures Notification and Pre-notification

As stated above, a requirement to notify the competent authorities arises when a person has taken the decision either to acquire or to further increase a qualifying holding to certain levels. JC/GL/2016/01 contains a non-exhaustive list of elements indicating such intent.67 Pre-notification contacts between the acquirer and the competent authority are quite normal in practice, though not required by law. In particular, coordination with the competent authority with respect to the question of which legal or natural person is obliged to notify will usually take place.68 Furthermore, pre-notification contacts are encouraged to prepare the competent authority for making the assessment once the formal notification has taken place.69

Brussels, 29.7.2019, COM(2019) 349 final: https://eur-lex.europa.eu/resource.html? uri¼cellar:989ca6f3-b1de-11e9-9d01-01aa75ed71a1.0001.02/DOC_1&format¼PDF. 67 JC/GL/2016/01, p. 17. 68 Steck (2018), p. 157. 69 JC/GL/2016/01, p. 20.

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Coordination in Cross-Border Transactions

Coordination between the competent authorities in different Member States is encouraged in all cases of cross-border transactions, triggering several notifications of acquisitions of qualifying holdings within the EU. Several target supervisors should coordinate with each other with the aim of aligning the notification and assessment process.70 As far as CRR credit institutions in different Member States are concerned, which are under the supervision of the SSM,71 coordination will be undertaken automatically between the ECB and all relevant NCAs participating in the SSM.72 However, insofar as notification requirements also arise for CRR credit institutions outside of the SSM, e.g. in Poland, the responsible non-SSM NCA will need to coordinate its procedures with the ECB and vice versa.

3.2.3.3

Assessment Period

It is key to ownership control procedures for financial institutions that the formal assessment period does not start before all the required information has been provided to the competent authority.73 The assessment period is 60 working days, if not extended.74

3.2.3.4

Information Requirements

Pursuant to the sectoral directives and regulations, the Member States are required to publish a list specifying the information that is necessary to carry out the assessment of acquisitions and increases of qualifying holdings.75 The basis of the information requirements differs depending on the respective financial institution sub-sector. Information requirements for CRR credit institutions as well as insurance and reinsurance undertakings follow Annex I of JC/GL/2016/01, which sets out a recommended list of information required for the assessment of an acquisition of a qualifying holding. Information requirements for investment firms are subject to Commission Delegated Regulation (EU) No. 2017/1946 of 11 July 2017 on information requirements for investment firms and therefore fully harmonized on the European level. Commission Delegated Regulation (EU) No. 2017/1946 provides for an exhaustive list of

70

JC/GL/2016/01, p. 20. See Sect. 2.2. 72 For details of the ownership control procedure within the SSM see below Sect. 3.3.1. 73 JC/GL/2016/01, p. 19. 74 Art. 22 (2) CRD IV. 75 Art. 23 (4) CRD IV. 71

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information to be included by the proposed acquirers in the notification of a proposed acquisition of a qualifying holding. While the requirements under Annex I of JC/GL/2016/01 correspond in main points to the requirements under Commission Delegated Regulation 2017/1946, Member States may set different requirements for CRR credit institutions and insurance and reinsurance undertakings as JC/GL/2016/01 is non-binding.76 For ease of reference, only the requirements under JC/GL/2016/01 are referred to in the following. Essential Information Essential information to be provided in the ownership control procedures for financial institutions includes general data relating to the identity of the proposed acquirer, such as personal details like the person’s name, date and place of birth, address (with regard to natural persons) and contact details or documents certifying the business name and registered address of a legal person’s head office. Moreover, information on criminal records, criminal investigations or proceedings, relevant civil and administrative cases and disciplinary actions also have to be submitted. The shareholding structure of the proposed acquirer is also of key relevance. If the proposed acquirer is part of a group, whether as a subsidiary or as a parent undertaking, a detailed organizational chart of the entire corporate structure is required. Information Regarding Third Country Investors Furthermore, Annex I Section 5 of JC/GL/2016/01 sets out specific requirements applicable to third country investors. If the proposed acquirer is a legal person that has its head office registered in a third country, it must provide, inter alia: • A certificate of good standing, or equivalent where not available, from foreign financial sector authorities in relation to the proposed acquirer • Where available, a declaration by foreign financial sector authorities that there are no obstacles or limitations to the provision of information necessary for the supervision of the target undertaking • General information on the regulatory regime of that third country as applicable to the proposed acquirer77 Moreover, specific information requirements are stipulated for cases where the proposed acquirer is a sovereign wealth fund, which are often domiciled in third countries. Sovereign wealth funds should provide information on:

76 77

See Sect. 3.1. Section 5 (3) of Annex I of the JC/GL/2016/01, p. 38.

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• The name of the ministry or government department in charge of defining the investment policy of the fund • Details of the investment policy and restrictions on investment • The name and position of the individuals responsible for making the investment decisions for the fund and • Details of any influence exerted by the identified ministry or government department on the day-to-day operations of the fund and the target undertaking78

3.2.3.5

Assessment of Proposed Acquirers

General Assessment Criteria The provisions on the assessment of acquisitions of qualifying holdings provide for an exhaustive list of factors for the suitability assessment of a proposed acquirer. To obtain an approval, a proposed acquirer must: • • • • •

Provide all required information to the competent authority Have a good reputation and be reliable Be financially sound Comply with all prudential requirements and Not be suspected of money laundering or terrorist financing79

Although the provisions do not contain an explicit assessment criterion allowing competent authorities to take into account the impact of proposed acquisitions on the stability of the financial system, the financial crisis has demonstrated that mergers and acquisitions in the banking sector can lead to financial stability risks. However, financial stability is implicitly addressed by the assessment criteria of the respective directives, such as the assessment criteria on the financial soundness of the proposed acquirer and on compliance with prudential requirements, since these criteria have a forward-looking element.80 With regard to the assessment criteria, strong emphasis is placed on compliance with prudential requirements and transparency as to governance structures and, additionally, on mitigating the risk of involving the target undertaking in, among others, the funding of activities of affiliated companies.81

78

Section 5 (4) of Annex I of the JC/GL/2016/01, p. 38. Art. 23 CRD IV, Art. 13 MiFID II, Art. 59 Solvency II. 80 European Commission Communication (11 February 2013), Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on the Application of Directive 2007/44/EC amending Council Directive 92/49/EEC and Directives 2002/83/EC, 2004/39/EC and 2006/48/EC as regards procedural rules and evaluation criteria for the prudential assessment of acquisitions and increase of holdings in the financial sector, COM/2013/64/Final, p. 8. 81 Lackhoff (2017), p. 174. 79

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Reputation and Reliability A key criterion for assessing a proposed acquirer is his reputation and reliability. An acquirer is of good repute if his (i) integrity and (ii) professional competence can be ensured.82 The integrity of the acquirer—and in the case of a legal person its legal and beneficial owners83—requires, but is not limited to, the absence of negative records. Such negative records include any criminal or relevant administrative records, whereby any violation of laws governing banks, financial, securities and insurance activity are considered to be of specific relevance.84 Furthermore, the propriety of the proposed acquirer in past business dealings has to be assessed.85 The competent authority should be able to ask the proposed acquirer to supply documents (for instance, recent extracts from the criminal register), evidencing that no adverse events have taken place. Failure by the proposed acquirer to supply these documents will call into question the approval of the acquisition.86 As to the second criterion, professional competence encompasses the ‘management competence’ and the ‘technical competence’ of the proposed acquirer. The term technical competence refers to the proposed acquirer’s ability in the area of financial activities carried out by the target undertaking. This competence may be based on the proposed acquirer’s previous experience in operating and managing financial institutions as a controlling shareholder or as a person who effectively directs the business of the firm. The management competence may be based on the proposed acquirer’s previous experience in acquiring and managing holding companies. It should demonstrate due skill, care, diligence and compliance with relevant standards.87 In the application of the principle of proportionality, the assessment of the professional competence may be reduced for proposed acquirers who are not in a position to exercise any influence over the target undertaking or who intend to acquire holdings purely for passive investment purposes. However, regardless of the influence over the target undertaking, the principle of proportionality does not allow for a reduced assessment of the integrity criterion.88 Financial Soundness The financial soundness of the proposed acquirer should be understood as the capacity of the proposed acquirer to finance the proposed acquisition and to

82

JC/GL/2016/01, p. 21. JC/GL/2016/01, p. 21. 84 Steck (2018), p. 173. 85 JC/GL/2016/01, p. 24. 86 JC/GL/2016/01, p. 24. 87 JC/GL/2016/01, p. 25. 88 JC/GL/2016/01, p. 21. 83

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maintain, for a foreseeable future, a sound financial structure in respect of the proposed acquirer and of the target undertaking.89 Pursuant to JC/GL/2016/01, the depth of the assessment should be linked to the likely influence of the proposed acquirer; the nature of the proposed acquirer; whether the proposed acquirer is a strategic or a financial investor, including whether it is a private equity fund or a hedge fund; and the nature of the acquisition.90 Compliance with Prudential Requirements Compliance with prudential requirements has to be assessed with the help of the proposed acquirer’s declared intention towards the target undertaking expressed in its strategy (including as reflected in the business plan). The prudential assessment of the proposed acquirer should also cover its capacity to support adequate organization of the target undertaking within its new group. Both the target undertaking and the group should have clear and transparent corporate governance arrangements and adequate organization. If the proposed acquisition were to result in a qualifying holding of 50% or more or in the target undertaking, becoming a subsidiary of the proposed acquirer, the fourth criterion should be assessed at the time of acquisition and on a continuous basis for the foreseeable future (usually three years).91 Suspicion of Money Laundering and Terrorist Financing When assessing whether a proposed acquisition gives rise to an increased risk of money laundering or terrorist financing, the competent authority should consider the information about the proposed acquirer gathered during the assessment process, evaluations, assessments or reports drawn up by international organizations and standard setters in the field of money laundering, as well as open media research.92 An acquisition can be opposed even when there are no criminal records or where there are no reasonable grounds to suspect that money laundering is being committed or attempted. This can be the case if reasonable grounds exist to suspect that there will be an increased risk of money laundering or terrorist financing. The acquirer might have close links with a country or territory identified by the Financial Action Task Force as having strategic deficiencies that pose a risk to the international financial system or with a country or territory identified by the European Commission as having deficiencies in its national anti-money laundering or counterterrorism financing regime that pose significant threats to the financial system.93 The competent authorities should also consider the relevant reports by organizations such as

89

JC/GL/2016/01, p. 26. JC/GL/2016/01, p. 27. 91 JC/GL/2016/01, p. 29. 92 JC/GL/2016/01, p. 29. 93 JC/GL/2016/01, p. 30. 90

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Transparency International, the OECD and the World Bank for their assessment. Reasonable grounds for suspicion of money laundering and terrorist financing are deemed sufficient to oppose the acquisition.94 Assessment of Third Country Investors The stated general assessment criteria also apply to third country investors and will be reviewed by the supervisory authorities on a case-by-case basis. The third country origin of an investor would not of itself be a reason to refuse a proposed acquisition as the supervisory law does not discriminate against third country investors. However, a third country origin may require the competent authorities to review certain criteria more thoroughly, e.g. because of the particular social, legal or economic situation in the third country. Moreover, the following general points may be taken into account based on general principles and JC/GL/ 2016/01: • If the proposed acquirer is a financial entity supervised by a competent supervisor in a third country considered equivalent, the assessment of the criterion of financial soundness may be facilitated by cooperation with that competent authority.95 • To safeguard the criterion of financial soundness, the competent authorities sometimes require third country investors to establish an intermediate holding company in the EU, which is sufficiently funded to support the target undertaking in the future. • With regard to the criterion of compliance with prudential requirements the competent authorities will incidentally also evaluate whether an effective supervision might be prevented by the laws, regulations or administrative provisions of a third country governing a natural or legal person with close links to the target undertaking. The target supervisor should never be prevented from fulfilling its monitoring duties by the laws, regulations or administrative provisions of another country governing a natural or legal person with close links to the target undertaking or by difficulties in the enforcement of those laws, regulations or administrative provisions.96 Opaque group structures and complex control structures with several corporate layers located in various countries can also, as Lackhoff points out,97 constitute an impediment to effective supervision and compliance with prudential requirements. • Furthermore, third country investors from countries with strategic deficiencies that pose a risk to the international financial system or with links to a country or territory identified by the European Commission as having deficiencies in its

94

JC/GL/2016/01, pp. 30–31. JC/GL/2016/01, p. 27. 96 JC/GL/2016/01, p. 28. 97 Lackhoff (2017), p. 174. 95

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national anti-money laundering or counterterrorism financing regime will face intensive scrutiny by the supervisory authorities as regards the criterion of suspicion of money laundering and terrorist financing.98 Protection of Confidential Information Confidential information provided in the course of the ownership control procedure is subject to professional secrecy requirements. Professional secrecy requirements are set out in CRD IV, MiFID II and Solvency II.99 They specify that Member States shall provide that all persons working for, or who have worked for, the competent authorities and auditors or experts acting on behalf of the competent authorities shall be bound by the obligation of professional secrecy. Furthermore, information that such persons, auditors or experts receive in the course of their duties may be disclosed only in summary or aggregated form, such that individual credit institutions cannot be identified, without prejudice to cases covered by criminal law. However, the provisions do not prevent competent authorities from exchanging information with each other or transmitting information to the ESRB or the ESAs.100 The professional secrecy requirements for the supervision of banking, investment services and insurance differ slightly from each other, which is reflected in recent CJEU case law.101 Therefore, some argue for the creation of a single professional secrecy standard covering the three sectors altogether and binding also the ECB in its supervisory function.102 For the ECB, professional secrecy requirements are set out in Art. 27 SSMR, which states that members of the Supervisory Board and the staff of the ECB and staff seconded by participating Member States carrying out supervisory duties, even after the duties are ceased, shall be subject to professional secrecy requirements set out in Art. 37 of the Statute of the ECB and the relevant acts of Union law.103 Furthermore, the ECB is bound by national laws transposing the CRD IV professional secrecy obligations when acting within the SSM according to Arts. 4(3) and 27 (1) SSMR.104 Pursuant to Art. 27 (2) SSMR, the ECB is authorized to exchange information with national or Union authorities and bodies in cases where the relevant Union law allows national competent authorities to disclose information to those entities or where Member States may provide for such disclosure under the relevant Union law.

98

JC/GL/2016/01, p. 30. Art. 53 CRD IV, Art. 75 MiFID II, Art. 64 Solvency II. 100 Art. 53 (2) CRD IV. 101 Smits and Badenhoop (2019), pp. 299–313. 102 Smits and Badenhoop (2019), pp. 314–318. 103 Art. 27 (1) SSMR. 104 Smits and Badenhoop (2019), p. 303. 99

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Sector-specific Competencies and Procedures

The general framework for ownership control proceedings for the three sub-sectors is the same, as stated above. However, there are certain differences with regard to the following aspects of competencies and procedure: • CRR credit institutions within the SSM are subject to a specific, two-step ownership control procedure under the leadership of the ECB. • The Solvency II Directive establishes a reporting mechanism between Member States and the European Commission with respect to acquisitions of qualifying holdings of EU insurance or reinsurance companies by third country entities.

3.3.1

CRR Credit Institutions

As mentioned before, the role of the ECB in the context of the assessment of the acquisition of a qualifying holding in a CRR credit institution is set out in Art. 4(1) (c) SSMR and Art. 15 SSMR in conjunction with Art. 85 SSMFR. There are no diverging rules applicable to third country investors. The ownership control procedure is triggered by a notification to the NCA. Pursuant to Art. 85(1), an NCA that receives a notification of an intention to acquire a qualifying holding in a credit institution is required to notify the ECB of such notification no later than five working days following the acknowledgment of receipt in accordance with Art. 22(2) CRD IV. The NCA then assesses whether the potential acquisition complies with all the conditions laid down in the relevant Union and national law. Following this assessment, the NCA prepares a draft decision for the ECB to oppose or not to oppose the acquisition.105 Pursuant to Art. 15 (2) SSMR, the NCA then forwards the draft decision to the ECB at least ten working days before the expiry of the relevant assessment period of, in general, 60 working days. The final decision whether to oppose the acquisition on the basis of the assessment criteria set out in CRD IV and in accordance with the procedure and within the periods set out therein lies with the ECB.106 The final decision whether to oppose the acquisition on the basis of the assessment criteria lies with the ECB.107 Based on this, ownership control for CRR credit institutions within the SSM is organized as a two-step procedure involving the NCA and the ECB in subsequent steps.108 In practice, however, the NCAs and the ECB exchange information and coordinate their activities from the beginning, so that the ECB is involved from an early stage. This enables the ECB to make a sound assessment as the minimum

105

Art. 86 (1) SSMFR. Art. 15 (3) SSMR. 107 Art. 15 (3) SSMR. 108 Berger (2016b), p. 2362. 106

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period of 10 days before the expiry of the overall assessment period would be too short to come to a sound decision in the majority of cases.

3.3.2

Insurance Undertakings

The assessment of the acquisition of qualifying holdings for insurance and reinsurance undertakings is regulated in Arts. 57–63 Solvency II Directive. In contrast to the directives of the other sub-sectors, Solvency II establishes a reporting mechanism between Member States and the European Commission and between Member States themselves, also addressing third country ownership. Pursuant to Art. 176 Solvency II Directive, the supervisory authorities of the Member States are required to inform the Commission and the supervisory authorities of the Member States of any authorization of a direct or indirect subsidiary, whose parent undertakings are governed by the laws of a third country. That information should contain an indication of the structure of the group concerned. Furthermore, the supervisory authorities of the home Member State are required to inform the Commission and the supervisory authorities of other Member States when a third country undertaking acquires a holding in an insurance or reinsurance undertaking authorized in the Community, which would turn that insurance or reinsurance undertaking into a subsidiary of that third country undertaking. Moreover, Solvency II entails a reporting system based on reciprocity. Article 177 (1) and (2) Solvency II require the Member States to inform the Commission of any general difficulties encountered by their insurance or reinsurance undertakings in establishing themselves and operating in a third country or pursuing activities in a third country. In a next step, the Commission periodically submits a report to the Council as to this matter with a specific focus on, inter alia, the acquisition of holdings in third country insurance or reinsurance undertakings.109

3.4

Legal Remedies

If a competent authority opposes the acquisition of a qualifying holding, there is no uniform set of legal remedies available. The appropriate remedy differs with respect to the relevant sub-sector and the competent authority taking the decision and may follow either Member State or EU law. The decision can be challenged by administrative appeal110 and/or court action.111

109

Art. 177 (2) b) Solvency II. Art. 24 SSMR applies within the SSM. Outside of the SSM, national laws determine the available legal remedy pursuant to Art. 19 (1) 2nd sub-paragraph TEU. 111 Art. 263 4th sub-paragraph TFEU or respectively national procedural laws pursuant to Art. 19 (1) 2nd sub-paragraph TEU. 110

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Legal Remedies Against Decisions Within the SSM

If the ECB opposes the acquisition of a CRR credit institution within the SSM, the decision can be challenged under EU law. The SSMR provides for an ‘internal administrative review’ by the Administrative Board of Review (ABoR) pursuant to Art. 24 SSMR. The addressee of a decision can always initiate a review. Pursuant to Art. 24 (6) SSMR, an application for review has to be filed within one month of the notification of the decision to the applicant or, in the absence of such notification, of the day on which it came to the applicant’s knowledge. The yardstick for the internal review by the ABoR is whether the contested decision was in line with substantive law and procedural laws.112 ECB supervisory decisions can also be contested before the Court of Justice of the European Union (CJEU) by bringing an action for annulment pursuant to Art. 256 (1) and Art. 263 (4) of the Treaty on the Functioning of the European Union (TFEU). An ABoR review is not a precondition for bringing an action before the CJEU.113 An action for annulment has merits if the plaintiff can establish circumstances that fulfil the requirements provided for in Art. 263 TFEU. The procedural pleas that may be brought are lack of competence and infringement of essential procedural requirements. The material complaints available are the claim of infringement of the treaties or of any rule of law relating to their application and the misuse of powers.114 If the action for annulment is successful, the CJEU will declare the relevant decision fully or partially void with retroactive effect (ex tunc) and with effect for any person (erga omnes).115

3.4.2

Legal Remedies Against Decisions Outside of the SSM

As far as proposed acquisitions of investment firms, insurance and reinsurance undertakings are concerned, the proposed acquirer may challenge the NCAs’ decision under the respective Member State law. In Germany, for example, the proposed acquirer can lodge an administrative appeal with the NCA (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)). If the appeal is denied by BaFin, the acquirer can file an action for the annulment of BaFin’s decision before an administrative court. The action has merit if the decision is unlawful and hence violates the applicant’s rights. This will be the case, for example, if BaFin did not apply the assessment criteria correctly and the court holds that the proposed acquirer does meet all the criteria. However, insofar as the applicable law provides for discretion of the competent authority, the German

112

Lackhoff (2017), p. 248. See footnote 115. 114 Art. 263 (2), (4) TFEU. 115 Art. 264 TFEU, Lackhoff (2017), p. 253. 113

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administrative courts are limited in their power to review the administrative decisions.

4 Relationship Between FDI Screening Mechanisms and Prudential Ownership Control The purpose of this final chapter is to analyze the possible relationship between the FDI investment screening mechanisms under the EU Screening Regulation and the ownership control procedures in the financial sector as described in the previous chapters. The analysis focuses on the possible design of screening mechanisms, the necessity of screening mechanisms for financial institutions and the cooperation mechanisms between the Member States and the Commission.

4.1

The Design of Screening Mechanisms

FDI screening mechanisms are instruments of general application to assess, investigate, authorize, condition, prohibit or unwind foreign direct investments on grounds of security or public order (Art. 2(4) Regulation 2019/452). The Member States have the freedom to adopt and design the screening mechanisms based on their individual needs and decisions but are obliged to follow the general framework provided by Art. 3 Regulation 2019/452. According to Art. 3(2) Regulation 2019/452, rules and procedures related to screening mechanisms, including time frames, shall be transparent and not discriminate between third countries; furthermore, Member States shall set out the circumstances triggering the screening, the grounds for the screening and the applicable procedural rules. According to Art. 3(5) Regulation 2019/452, foreign investors and the undertakings concerned shall have the possibility to seek recourse against screening decisions of the national authorities (Art. 3(2) and (5) Regulation 2019/ 452). Hence, future FDI screening mechanisms under the EU Screening Regulation concerning financial institutions could at least in their main features resemble the prudential ownership control procedures.

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Screening Mechanisms for Financial Institutions

In view of the flexibility of the Member States to adopt an FDI screening mechanism related to financial institutions116 and the fact that such mechanism could not replace the prudential ownership control procedure,117 Member States must consider if and when an investment into financial institutions could actually pose a threat to security and public order under the EU Screening Regulation. Furthermore, as already stated above,118 as far as the prudential ownership control procedures effectively function as a hidden investment screening mechanism already in place, Member States should also determine if adopting an FDI screening mechanism in addition to the prudential procedure is actually necessary to protect security and public order. Article 4 Regulation 2019/452 provides that in determining whether a foreign direct investment is likely to affect security or public order, Member States may consider its potential effects on eight different factors related to the target undertaking as well as to the investor itself.119 Four of these factors have a relation to financial institutions and could insofar justify the adoption of an FDI screening mechanism if the prudential ownership control procedure should not already safeguard public interests.

4.2.1

Investments in Financial Infrastructure

According to Art. 4(1)(a) Regulation 2019/452, Member States may establish an FDI screening mechanism for critical infrastructure, whether physical or virtual, including financial infrastructure of the Member State and/or the Union. Recital 13 Regulation 2019/452 specifies that the relevant infrastructure must be of importance to the Member State or the Union by stating that their ‘disruption, failure, loss or destruction [. . .] would have a significant impact’ on the security or public order in a Member State or the Union. In view of this, Art. 4(1)(a) Regulation 2019/452 could include financial institutions with specialized functions and nationwide or even Union-wide importance for the financial system and the real economy, such as securities exchanges, derivative clearing houses or providers of payment services. It could also include systemically important financial institutions (SiFis), whose size, market position and/or interconnectedness with other institutions provide them with an important role in the financial system.120

116

See above Sect. 1.4.3. See above Sect. 1.4.4. 118 See Sect. 1.4.4. 119 See above Sect. 1.4.2. 120 This could include major CRR Credit Institutions supervised by the ECB within the SSM as well as major insurance and reinsurance undertakings. 117

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However, as the stability and functioning of financial markets and the prevention of systemic risks for the financial system are central aims of supervisory law121 and prudential ownership control procedures effectively safeguard these aims, it seems that the protection of financial infrastructure does not necessarily require additional FDI screening mechanisms.

4.2.2

Investments in Collectors of Sensitive Information

According to Art. 4(1)(d) Regulation 2019/452, Member States may establish an FDI screening mechanism for investments, which may provide access to sensitive information, including personal data, or the ability to control such information. Therefore, the EU Screening Regulation could also justify the adoption of an FDI Screening Mechanism with regard to investments into financial institutions, which are collectors of sensitive information, especially deposit taking credit institutions, insurance companies or payment institutions with a large consumer customer base. However, similar to investments in financial infrastructure,122 one could take the view that as the prudential ownership control procedures also aim at protecting the interests of customers and consumers, including the protection of personal data, an additional FDI screening mechanism is not necessary in this regard.

4.2.3

Foreign States as Investors

According to Art. 4(2)(a) Regulation 2019/452, Member States may also, when determining whether an FDI may affect security or public order, take into account whether the foreign investor is directly or indirectly controlled by the government, including state bodies, of a third country, including through ownership structure or significant funding. This provision seems rather important regarding investments in financial institutions, not only because foreign sovereign funds show great interest in the acquisition of holdings in European banks and insurance companies but because the prudential ownership control rules are, in principle, neutral as to the nature and origin of a proposed acquirer. Only if a particular foreign state is deemed unreliable by the competent authorities or a threat to the ownership control criteria described above has been ascertained otherwise can a proposed acquisition be stopped under supervisory law.123 Therefore, a Member State setting up an FDI screening mechanism to control the acquisition of a qualifying holding in a financial institution by certain foreign states

121

See above Sect. 2.1.2. See above Sect. 4.2.1. 123 See above Sect. 3.3.5.1. 122

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(or organizations controlled and/or funded by such states) would create a significant requirement unknown to supervisory law. Such an FDI screening requirement would rather have a complementary function to the prudential ownership control requirement and thus be deemed necessary by the Member States.

4.2.4

Investors Involved in Criminal Activities

Finally, pursuant to Art. 4(2)(b) and (c) Regulation 2019/452, Member States may furthermore consider whether the foreign investor has already been involved in activities affecting security or public order in a Member State and/or whether there is a serious risk that the foreign investor engages in illegal or criminal activities. This is of great importance for investments into financial institutions and a key element of the prudential ownership control procedure.124 However, as with investments in financial infrastructure and the collectors of sensitive data,125 it seems doubtful if setting an FDI screening mechanism for financial institutions with regard to these factors was necessary as both factors are fully covered by the prudential assessment criteria.126

4.3

Cooperation Mechanisms

Articles 6 and 7 Regulation 2019/452 provide that Member States and the Commission exchange information and cooperate in relation to both foreign direct investments that undergo screening and those that do not undergo screening. These mechanisms are to enable Member States to cooperate and assist each other where a foreign direct investment in one Member State could affect security or public order in other Member States. It allows Member States to provide comments to a Member State in which such investment is planned or has been completed, irrespective of whether that Member State has a screening mechanism in place (Art. 6 Regulation 2019/452) or whether such an investment is not undergoing screening (Art. 7 Regulation 2019/452). Furthermore, the Commission shall have the possibility to issue an opinion in the sense of Art. 288 TFEU to the Member State where the investment is planned or has been completed.127 This concept differs significantly from the cooperation mechanisms found in the prudential ownership procedures described above.128 Based on its established

124 See above Sect. 3.2.3.5 Reputation and Reliability and 3.2.3.5 Suspicion of Money Laundering and Terrorist Financing. 125 See above Sects. 4.2.1 and 4.2.2. 126 See above Sect. 3.3.5.1. 127 Recital 16 Regulation 2019/452. 128 See Sects. 3.2 and 3.3.

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sectoral approach, supervisory law does not provide for a cross-sectoral collaboration mechanism, which channels information flows with regard to micro-prudential matters regarding the respective sub-sectors to one central institution or contact point as provided for in Regulation No. 2019/452.129 There is also no mechanism providing for interaction between actors other than the proposed acquirer and the competent authority during the assessment of an acquisition of a qualifying holding in a financial institution. Therefore, the Member States can only participate in a cooperation mechanism under the EU Screening Regulation with regard to an investment into a financial institution, not under the prudential ownership procedures. The same applies to the Commission, which used to have a more prevalent role in all three sub-sectors of supervisory law in the past,130 as competent authorities of the Member States were required to inform the Commission on authorizations of subsidiaries governed by third country parent undertakings.131 Furthermore, the Commission was competent to negotiate with third countries that did not grant effective market access to EU companies.132 These cooperation mechanisms between the competent authorities of the Member States and the Commission, as well as the reciprocity aspects, were eliminated for the banking and investment sector with the coming into force of CRD IV and MiFID II while remaining in force for the insurance and reinsurance sector only.133

5 Conclusion The analysis shows that Member States are not obliged to adopt an FDI screening mechanism with regard to foreign direct investments into financial institutions. As prudential ownership control requirements must always apply, a Member State may refrain from setting up an additional FDI screening mechanism if security and public order in the sense of the EU Screening Regulation are effectively protected by the prudential ownership control procedures.

129

With regard to macro-prudential oversight the EU has created the European Systemic Risk Board (ESRB) by Regulation (EU) No. 1092/2010 (OJ L 331/1), which, however, does not participate in individual prudential decisions. 130 Hindelang (2009), pp. 294–297. 131 Art. 8 of Directive 89/646/ECC of 15 December 1989 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions and amending Directive 77/780/EEC, OJ L 386, 30.12.1989, pp. 1–13. 132 Art. (2) of Directive 2004/39/EG of 21 April 2004 on markets and financial instruments amending Council Directive 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, OJ L 145, 30.4.2004, pp. 1–44. 133 See above Sect. 3.3.2.

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This may be the case with regard to the protection of the financial infrastructure of the Member States and the Union against risks posed by certain foreign investments; the same could be held with regard to the protection of sensitive data collected by financial institutions and to the defence against foreign investors involved in criminal activities. Insofar, the prudential ownership control procedures may be described as a hidden investment screening mechanism already in place. However, as the prudential ownership control is neutral as to the origin of a foreign investor and does not discriminate against certain foreign states, it may be necessary for Member States to set up an FDI screening mechanism at least to screen the proposed acquisition of financial institutions by certain foreign states and state funds. Furthermore, the EU Screening Regulation provides for cooperation mechanisms between Member States and the Commission with regard to foreign direct investments, independent of whether such investments are subject to FDI screenings or not, for which there is no corresponding concept under supervisory law. In conclusion, the EU Screening Regulation will probably lead to additional layers of procedures with regard to foreign direct investments into financial institutions in the Member States. These are likely to complement the prudential ownership control procedures as far as these do not effectively protect security and public order in the sense of the EU Screening Regulation and as far as the regulation introduces concepts of cooperation between Member States and the Commission unknown to supervisory law.

References Badenhoop N (2020) Individual protection goals in EU prudential regulation - a process towards private law enforcement. In: Grundmann S, Sirena P (eds) European contract law in the banking and financial union. Intersentia, Cambridge (in press) Berger H (2016a) Rechtsanwendung durch die EZB im Single Supervisory Mechanism (SSM), Teil I. Wertpapiermitteilungen 49:2325–2336 Berger H (2016b) Rechtsanwendung durch die EZB im Single Supervisory Mechanism (SSM), Teil II. Wertpapiermitteilungen 50–52:2362–2369 Berger H (2018) Bankaufsichtsrecht. In: Lieder J, Wilk C, Ghassemi-Tabar N (eds) Münchner Handbuch des Gesellschaftsrechts, Band 8, Umwandlungsrecht, 5th edn. C.H. Beck, München Berger H, Badenhoop N (2018) Financial services and Brexit: navigating towards future market access. Eur Bus Organ Law Rev 19:679–714 Ceyssens H, Tarde A (2019) Äquivalenz im Finanzdienstleistungsrecht der Europäischen Union. Europäische Zeitschrift für Wirtschaftsrecht (EuZW) 30:805–812 Herz B (2019) Die Entwicklung des europäischen Bankaufsichtsrecht in den Jahren 2017/2018. Teil II. Europäische Zeitschrift für Wirtschaftsrecht (EuZW) 30:60–67 Hindelang S (2009) The free movement of capital and foreign direct investment-the scope of protection in EU law. Oxford University Press, New York Lackhoff K (2017) Single supervisory mechanism- European banking supervision by the SSM-A practitioner’s guide. C.H. Beck, München Lippert A (2019) Investitionskontrolle reloaded – Auswirkungen der neuen EU-Verordnung zur Überprüfung ausländischer Direktinvestitionen. Betriebsberater:1538–1543

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Moloney N (2014) EU securities and financial markets regulation, 3rd edn. Oxford University Press, New York Ohler C (2013) Finanzmarktregulierung und –aufsicht. In: Hatje A, Müller-Graff PC, Ruffert M (eds) Enzyklopädie Europarecht, vol. 5, Europäisches Sektorales Wirtschaftsrecht. Nomos, Baden-Baden, pp 611–669 Smits R, Badenhoop N (2019) Towards a single standard of professional secrecy for financial sector supervisory authorities: a reform proposal. Eur Law Rev 44:295–318 Steck A (2018) Beteiligungskontrolle. In: Binder J, Glos A, Riepe J (eds) Handbuch Bankenaufsichtsrecht. RWS Verlag Kommunikationsforum GmbH, Köln Henning Berger is a partner of international law firm White & Case LLP and office executive partner of the Berlin office of the firm. Henning heads the financial advisory practice of White & Case in Germany. A focus of his work is on European and cross-border issues of banking and insurance supervision, including the supervision by the European Central Bank in the Single Supervisory Mechanism (SSM) and ownership control. Henning’s clients include banking and insurance companies, as well as government entities and institutions. Henning represents his clients in leading regulatory cases before the German administrative courts, as well as before the German Constitutional Court and the Court of the European Union. Henning is a certified lawyer for administrative law. He studied law at the Universities of Constance and Berlin and received his PhD in law from the Freie Universität Berlin. Henning regularly publishes on issues of European and German financial supervisory law. Recent articles include ‘Financial Services and Brexit: Navigating Towards Future Market Access’, in: European Business Organization Law Review 2018 (with Badenhoop); ‘Bankenaufsicht’ (Banking Supervision), in: Lieder/Wilk/GhassemiTabar, Münchener Handbuch des Gesellschaftsrechts, Vol. 8, 2018, Chapt. 64.

The Defence, Military and Dual-Use Sector Dominik Eisenhut

Contents 1 Investment Screening in the Defence Industry: Report from the Bermuda Triangle of EU Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Secondary Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Merger Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Public Procurement Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 The New European Defence Fund/EDIDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Primary Law: Free Movement of Capital and Article 346 Para. 1 (b) TFEU . . . . . . . . . . . . . 3.1 Investment Screening as a Restriction of the Free Movement of Capital and the Freedom of Establishment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 The Special Security Exemption Under Article 346 TFEU . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Bermuda Triangle Demystified: The Future Application of Article 346 TFEU . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract The contribution gives an overview of existing secondary law that can be perceived as hidden control mechanisms and barriers to foreign investment into defence and security companies. Such provisions can be found in merger control law, public procurement law, and R&D funding instruments. In addition, the piece examines the role of Article 346 TFEU as a means to enable national investment screening measures in the defence sector, and the correct interpretation of the provision.

D. Eisenhut (*) Airbus Defence and Space, Munich, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 265–282, https://doi.org/10.1007/16495_2020_19, Published online: 31 July 2020

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1 Investment Screening in the Defence Industry: Report from the Bermuda Triangle of EU Law The investment screening mechanisms for the defence and security sector are the Doyen of the existing screening mechanisms in most European legal orders, and they are not so hidden. National legislation of most EU Member States since long has foreseen notification and approval requirements for investments into their domestic defence and security industry. Discrimination of investors on grounds of nationality have some specific bases in EU secondary law but most importantly in the TFEU itself: Article 346 para. 1 (b) of the Treaty on the Functioning of the European Union (TFEU) allows Member States to prevent foreign investments on grounds of national security considerations, and that, interestingly, irrespective of the origin of the investment from a company from inside the European Union or from a third country. The reason for this relic of a purely national regulatory framework for an important industry sector can be found in the object of its activities. Defence and security undertakings are both relevant for a State’s national security and an economic actor within the EU’s Internal Market, like undertakings from any other industry sector. From the perspective of EU law, the defence industry is active in the Internal Market and therefore submitted to the usual rules applicable to it, notably the fundamental freedoms, competition law and state aid law. The Member State’s perspective hitherto used to be quite different: the majority of them still seems to perceive defence companies mainly as part of their national security domain, closely linked to their defence and security policy, and only secondarily as an area of economic policy in a certain industry sector. This becomes also apparent in Recital 7 of the new EU Screening Regulation,1 which emphasized that the new framework for investment screening “is without prejudice to the sole responsibility of Member States for safeguarding their national security”, and in Article 1 para. 2 of the EU Screening Regulation, which states that “[t]his Regulation is without prejudice to each Member State having sole responsibility for its national security, as provided for in Article 4(2) TEU, and to the right of each Member State to protect its essential security interests in accordance with Article 346 TFEU”. It is fair to say that this stance on the nature of the sector varies between Member States, with for example France very strongly considering its defence industry as a component of its national defence strategy and, as an example on the other end of the spectrum, Sweden treating its armament companies more or less like any other industry.2

1 Regulation 2019/452 establishing a framework for screening of foreign direct investments into the European Union, O.J. 2019 L791/1. 2 This is likely to change in the case of Sweden, which is currently debating the introduction of an investment screening mechanism, at least for critical industries. See in this volume Hallberg, Country Report on Finland, Norway, Sweden and Denmark.

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However, even if, like in the case of Sweden, no specific investment screening mechanisms for the defence sector exist, the defence industry is an important component in all Member States’ security and defence strategies as a warrant for armament autonomy, a bargaining chip in foreign relations (notably when it comes to arms exports) and a means to maintain a strategic advantage in deploying cuttingedge technology in their armed forces. Over the last 60 years, Member States have comfortably founded their perception of the industry sector as “something apart” on the specific exception the EU Treaties contain for it, and have used Article 346 para. 1 (b) TFEU systematically to pursue their national defence industrial policies without paying too much attention to EU law constraints. Before taking a closer look at Article 346 TFEU as a “wholly exceptional clause”,3 we will provide an overview of the open or hidden barriers to foreign investment in the defence and security sector under EU secondary law. Even though, on the basis of Article 346 para. 1 (b) TFEU, investment screening in defence is based on national law, some specific rules in EU secondary law do exist that at least indirectly create barriers to foreign investment into local defence undertakings.

2 Secondary Law 2.1

Merger Control

The Merger Regulation4 is certainly the most obvious secondary act to look at when it comes to investment screening, also in the area of defence and security. At the outset, the Merger Regulation is applicable to the defence industries; no general exception for the sector exists, and the examination of mergers in the sector follows the usual Commission practice under Regulation 139/2004.5 However, with Article 21 para. 4, the Regulation contains a broad “security exception”, which allows Member States to take “appropriate measures to protect [their] interests”, inter alia, in the field of “public security”.6 Such appropriate measures include—in line with Member States’ standing practice—the interdiction of mergers in case they are considered to be contradictory to the respective Member State’s security interests. The provision is applicable to intra-EU takeovers as well as takeovers from third

3

Mention of the Court related to the parallel provision of Article 347 TFEU in Judgment of 15 May 1986, Johnston v Chief Constable of the Royal Ulster Constabulary, C-222/84, EU:C:1986:206, para 27. Due to their systematic context and similar wording, the notion can be equally used for Article 346 TFEU. 4 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation), O.J. 2004 L 24/1. 5 Richter (2007), pp. 347 et seq. 6 Körber in Immenga and Mestmäcker (2012) Article 21 paras. 23 et seq., para. 28.

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country bidders;7 in case of “mixed” mergers in which only a part of the undertaking (s) is active in defence or security, Article 21 para. 4 Merger Regulation may only be invoked for the defence- and security-related part of the transaction.8 With the provision, the EU law on merger control contains a norm allowing for investment screening within its field of application. Article 21 para. 4 has been repeatedly used in practice, often in parallel with Article 346 TFEU.9 In an example from 2017, the Italian government vetoed an intra-EU takeover of Italian (defence) engineering services company Next AST by the French Altran Group, showing that investment screening in defence is not limited to non-EU investors.10 An older example would be the German decision to object to the takeover of the defence-electronics company Atlas Elektronik by French Thales Group.11 Article 21 para. 4 Merger Regulation can be used for any interest of public security, also beyond the armament companies covered in parallel by the scope of Article 346 para. 1 (b) TFEU, for example in the area of dual-use goods, cybersecurity or artificial intelligence, which do not fall under Article 346 TFEU. As mentioned above, Article 21 para. 4 Merger Regulation allows the Member States to block a takeover that has been previously cleared by the Commission or to request additional (behavioural) undertakings from the concerned companies.12 It thus addresses the typical investment control scenario in which the takeover would be in line with EU antitrust law but would have negative effects on the security of the Member State in which a domestic defence or security undertaking would come under foreign control. The opposite scenario, in which a merger or takeover is seen as problematic by the Commission under the EU competition law but perceived by the concerned Member States as being in the interest of their national security, is not covered by Article 21 para. 4 Merger Regulation. In practice, this latter scenario is usually more important for two reasons: first, the market situation for defence undertakings is such that a very limited number of EU competitors is active in the same monopsonistic markets; market shares that are problematic under EU merger control law are easily reached. Second, due to the very high research and 7

Interestingly the current German Außenwirtschaftsverordnung as the relevant legal instrument allows for the interdiction of takeovers from both EU and non-EU companies in the area of defence, whereas in all other areas the distinction is between non-EU companies and companies from EU Member States. This distinction is possible under and in line with the security-exception of Article 346 TFEU if the conditions of this provision are fulfilled in the individual merger or takeover case. 8 Körber in Immenga and Mestmäcker (2012) Article 21 paras. 42, 43; also Schild in MüKoEuWettbR (2014), Article 21 para. 36. 9 For example Case IV/M.336, IBM France/CGI (19 May 1993); in the case Royal Ordinance Plc/MBDA the takeover was cleared with undertakings only (see Press Release of the UK Department of Trade and Industry P/2002/754 of 27 November 2002); for a comprehensive overview see Richter (2007) pp. 342 et seq. 10 See Le Figaro (2 November 2017). 11 Even though in the Atlas case neither Article 21 (4) of Regulation 139/2004 nor Article 346 TFEU was formally invoked by the German government, the provisions were cited as the basis of governmental intervention in the event Thales would not withdraw its bid for Atlas. 12 Körber in Immenga/Mestmäcker, Article 21 para. 36.

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development costs for cutting-edge defence and security technology for which the market opportunities are limited by demand and budgets of the EU Member States’ armed forces and fierce competition from the significantly bigger US defence conglomerates in export markets, Member States are inclined to merge their domestic industries into “European Champions” in order to avoid duplications in developments and to remain competitive on the global markets. Such companies are likely to be considered as dominant in their respective fields of activities, or at least raise concerns under Article 102 TFEU. If, in this latter scenario, the concerned Member State wants to enable the takeover or merger despite competition law constraints, Article 21 para. 4 Merger Regulation is not an option. Instead, it will rely on Article 346 para. 1 (b) TFEU. Even though it is used rarely,13 the invocation of this provision seems to work efficiently for the Member States as no merger in which it was evoked was ever blocked by the Commission.14 In extreme cases, like the merger of the helicopter businesses of Aerospatiale and MBB in the late 1990s to create Eurocopter or the merger of the rocket and ordinance businesses of Royal Ordinance (UK), Matra Defence (France) and LFK (Germany) to create MBDA, the market share of these new “European Champions” came close to 100% in certain market segments.15 Procedurally, the reliance on Article 346 para. 1 (b) TFEU comes at an earlier stage of the antitrust clearance process than Article 21 para. 4 of the Merger Regulation.16 While the latter provision can be invoked after the merger or takeover has been cleared by the Commission, the invocation of Article 346 para 1 (b) TFEU is usually accompanied by an instruction of the companies involved in the transaction to abstain from applying for antitrust clearance in the first place. Alternatively, or in addition, the Member State can address its request directly to the Commission, which in consequence might only be informed of the decision not to notify the transaction based on Article 346 TFEU.

13 See for example Decision of the Commission in Case IV/M.528, British Aerospace/VSEL (24 November 1994). In most cases of mergers in the defence industry the Member States do not seem to use Article 346 TFEU and instead the transaction undergoes standard merger clearance (for example in Case IV/M.1258, GEC Marconi and Alenia (28 August 1998); Case IV/M.1413, Thomson-CSF/Racal (15 March 1999); Decision in case IV/M.2079, Raytheon/Thales/JV (30 March 2001); for further references see also Körber in Immenga and Mestmäcker (2012), Article 21 para. 40 Fn. 95). This was the case even in large strategic consolidations like the creation of EADS (now Airbus) in 2000, Case IV/M.1745-3, EADS (11 May 2000). 14 In case of the merger between Saab and Celsius however the Commission challenged the use of Article 346 para. 1 (b) for the military part of a transaction successfully vis-à-vis Sweden. The entire transaction was then merger-cleared under the normal procedure of the Merger Regulation; see Case IV/M.1797, Saab/Celsius (4 February 2000). 15 Lange (1994), pp. 272 et seq. However, it is important to note that these calculated very high market shares are due to the hitherto stance of the Commission to consider the markets in the area of defence and security as remaining confined to the individual Member States, given the applied public procurement rules and the Member State’s tendency to “buy national”. 16 See Körber in Immenga/Mestmäcker, Article 21 paras. 40 et seq.

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Instead of a review by the Commission, the Member State can either instruct the national merger control authority to review the merger application17 or abstain from any review at all.18 If the Commission has doubts about the correct invocation of Article 346 para 1 (b) TFEU, it first has to take legal action against the Member State’s decision to rely on Article 346 para. 1 (b) TFEU itself, under the procedure foreseen in Article 348 TFEU. The respective Member State then has to demonstrate for the individual case that the merger or takeover at stake is necessary to protect its essential security interests.19 If it fails to do so and the Commission successfully defends its review rights under the Merger Regulation (eventually before the Court of Justice of the European Union), the Commission may ultimately review the intended merger in full.

2.2

Public Procurement Law

EU Public Procurement Law, which governs almost all sales transactions in the defence and security market, contains no direct link to investment screening for foreign investors into the defence and security sector. Moreover, public procurement law itself foresees no direct discrimination between EU and non-EU players in its tender procedures. In the dedicated 2009 Directive on Procurement Procedures in the area of defence and security,20 the nationality of the bidder for a defence tender is not mentioned as eligibility or selection criterion, nor is it mentioned as a factor for the rules on mandatory subcontracting. Recital 3 of the Directive even mentions the aim of fair competition worldwide. Contrary to other topical secondary law,21 the Defence Procurement Directive does not differentiate between companies with ultimate owners within the EU and EU subsidiaries of foreign defence companies. By thus not “piercing the corporate veil”, the EU framework for the national procurement regimes of the Member States in principle provides for non-discriminatory treatment of foreign-controlled subsidiaries in public tenders in the European Union. However, the Directive does not forbid Member States to discriminate non-EU bidders. In its Recital 18, it even explicitly states that the Member States remain free to discriminate between EU bidders and bidders from third countries in their national procurement rules, making reference to Article XXIII para. 1 GPA, which provides 17

See for a detailed analysis of this possibility Schild in MüKoEuWettbR, Art. 21 paras. 43 et seq. Schild in MüKoEuWettbR, Art. 21 paras. 33, 34. 19 For a detailed analysis of the conditions of Article 346 TFEU see below under Sect. 3. Specifically, in the context of merges and takeovers see Schild in MüKoEuWettbR, Art. 21 para. 39. 20 Directive 2009/81/EC of the European Parliament and of the Council of 13 July 2009, on the coordination of procedures for the award of certain works contracts, supply contracts and service contracts by contracting authorities or entities in the fields of defence and security, and amending Directives 2004/17/EC and 2004/18/EC, O.J. 2009 L 216/76 et seq. 21 See below Sect. 2.3 regarding EDF and EDIDP. 18

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the legal basis in World Trade Organization (WTO) law for such discrimination. Further, it can be submitted that EU public procurement rules and related secondary law at least indirectly establish de facto preferential conditions for EU bidders to the detriment of non-EU bidders, for example by foreseeing mechanisms for the mutual recognition of security clearances between EU companies, through security of supply commitments between Member States and via the easing of export control procedures between EU Member States.22 In sum, even though European public procurement law does not address the issue of investment screening or the protection of European companies from extra-EU influence, its provisions nevertheless have an influence on such investment. This influence is twofold: on the one hand, Directive 2009/81 on defence procurement is opening the door for discrimination of non-EU bidders on the national level and can therefore indirectly disincentive foreign investments in the EU. On the other hand, public procurement law does not discriminate between foreign-controlled and European-controlled EU-incorporated legal entities in the bidding process for defence tenders. Consequently, if a foreign investor has established a legal entity within the EU, this company, even if it was fully under non-EU foreign control, would be—in theory at least—treated equally under European public procurement law.

2.3

The New European Defence Fund/EDIDP

As part of its initiative in the field of its Common Security and Defence Policy, the EU has recently adopted a “European Defence Industrial Development Programme” (EDIDP) in the form of Regulation 2018/109223 and is currently setting up a “European Defence Fund” (EDF).24 Both instruments are tools to co-invest, together with the Member States, significant sums into security and defence technological research and development. While the EDIDP Regulation covers grants for the years 2019 and 2020, the EDF will cover the years 2021 to 2027. Differently from Article 21 (4) of the Merger Regulation and to the Article 346 TFEU exemption, both the EDIDP and the draft EDF Regulation clearly differentiate between EU companies and companies from outside the EU. Article 7 of the EDIDP Regulation restricts eligibility for funding to “public or private entities established in the Union” that are not “subject to control by third countries or 22 Directive 2009/41/EC of the European Parliament and of the Council of 6 May 2009 on the contained use of genetically modified micro-organisms, O.J. 2009 L 125/75. 23 Regulation (EU) 2018/1092 of the European Parliament and of the Council of 18 July 2018 establishing the European Defence Industrial Development Programme aiming at supporting the competitiveness and innovation capacity of the Union’s defence industry, OJ L 200, 7.8.2018, pp. 30–43. 24 See Commission Communication: Launching the European Defence Fund, 7 June 2017, COM (2017) 295 final.

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by third country entities” and thus clearly discriminates non-EU grant applicants (even though exceptions to the rule are possible under certain conditions). Not only does the Regulation differentiate according to the country of incorporation of an applicant, but it also “pierces the corporate veil” and declares EU-incorporated companies under foreign control as ineligible for EDIDP funding. The same regime will likely apply to the European Defence Fund. Article 9 (3) of the current draft states that “the beneficiaries and their subcontractors involved in the action shall not be subject to control by third countries or by third country entities”.25 In addition, Article 8 of the EU Screening Regulation enables the Commission itself to become active in case it fears that an investment into companies participating in EDIDP initiatives may have negative effects on EU interests. Also, from this angle, the EDIDP and future EDF initiatives are clearly protective of EU interests against foreign investors. Even though the de facto exclusion of foreign-controlled undertakings will comprise a significant part of future defence and security research and development activities in the European Union and is therefore fiercely opposed by the US government,26 it seems that the provision already contained in the EDIDP will also make it into the EDF. EDIDP and EDF will then openly discriminate non-EU companies by excluding them from funding under both mechanisms. The mere fact that the concerned entity is an entity incorporated in the EU is no longer sufficient to obtain equal treatment. This “piercing of the corporate veil” approach to create a certain European preference in order to maintain technological and strategic independence is certainly a new approach in EU legislation, the effects of which are not yet entirely foreseeable.

3 Primary Law: Free Movement of Capital and Article 346 Para. 1 (b) TFEU 3.1

Investment Screening as a Restriction of the Free Movement of Capital and the Freedom of Establishment

As it was mentioned at the beginning, most Member States do systematically monitor and screen investments into their national defence industry; in many, the respective laws and regulations also openly foresee the screening—and the potential interdiction—of investments from other EU Member States. The typical means for such restrictions are—like in other critical industry sectors—restrictions via

25 Commission proposal: Proposal for a Regulation establishing the European Defence Fund, 13 June 2018, COM (2018) 476 final. 26 Deutsche Welle (15 May 2019).

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so-called golden shares, pre-emption rights of the State or outright approval requirements under national investment control laws.27 By applying these tools, Member States restrict the free movement of capital and/or the freedom of establishment under Articles 49 and 63 of the TFEU. With regard to the freedom to move capital between Member States according to Article 63 TFEU, direct investments are covered by its scope by virtue of Annex 1 of Directive 88/361,28 which is commonly used to define the scope of this freedom and which explicitly mentions the takeover of or investment into undertakings as investment cases protected as movement of capital. The scope of the right to free movement of capital against the freedom of establishment depends on the answer to the question of whether the investor aims at obtaining control of the target, i.e. over its business decisions. If this is the case, Article 49 TFEU instead of Article 63 TFEU is the topical fundamental freedom to protect an investment.29 In all other so-called portfolio investment cases, Article 63 TFEU applies. However, because of the virtually identical justification standard for derogations under the two freedoms, the assessment and result as to whether a measure can be justified under EU law is usually identical and the delineation therefore a rather theoretical exercise. The European Court repeatedly had to deal in particular with the legality of “golden shares” that Member States reserved for themselves in undertakings of specific relevance.30 Golden shares as control tools for security-relevant companies usually result(ed) from privatisations of public undertakings, in the course of which the State reserved certain specific rights linked to its remaining shareholding and thus ownership of the company. Although the cases decided by the Court did not concern the field of defence and security, the findings can be applied to this sector as well. Usually, the special shares contain certain special shareholder rights, such as veto rights, to important management decisions, to divestments, mergers or changes to the shareholder structure. As such, these shares and the uncertainties related to the ensuing influence of the Member State over management decisions do make investments into the respective company less attractive. Issued on the basis of specific laws or regulations, they also constitute a measure of the State. Therefore, the Court has repeatedly found such “golden shares” to impede the free movement of capital31 and

27

For example in Germany Art. 7 AWV. Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty, O.J. 1988 L 178/5. 29 Usually the Court does not delineate the two freedoms as it is not necessary for the assessment on the level of justifying the restriction; see for example Judgment of the Court of 4 June 2002, Commission v France, C-483/99, ECLI:EU:C:2002:327. 30 Ibid.; Judgment of the Court of 4 June 2002 Commission v Portugal, C-367/98, ECLI:EU: C:2002:326; Judgment of the Court of 4 June 2002 Commission v Belgium, C-503/99, ECLI: EU:C:2002:328; Judgment of the Court of 13 May 2003 Commission v United Kingdom, C-98/01, ECLI:EU:C:2003:71; Judgment of the Court (First Chamber) of 28 September 2006, Commission v Netherlands, C-282/04, ECLI:EU:C:2006:608. 31 Firstly, in C-483/99, para. 41. 28

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then went on to examine whether the specific restriction is legal under the justifications for deviation from the fundamental freedoms. Beyond the influence exercised via shareholding, many Member States also foresee outright approval requirements under national law.32 These statutory approval requirements for foreign investment were also already brought before the European Court,33 which consistently stated that they constitute a restriction to the fundamental freedoms of EU law and therefore need to be justified in each individual case. For all these different forms of restrictions, the Member States usually rely on Article 346 para 1 (b) TFEU as the required justification—if they provide justification at all or do not recur to the merger-specific provision of Article 21(4) of the Merger Regulation. In parallel or in addition, they may of course rely on the “usual” respective exceptions to the fundamental freedoms, such as Article 65 (1) b TFEU; Recital 4 of the EU Screening Regulation explicitly references this provision.

3.2

The Special Security Exemption Under Article 346 TFEU

Until recently, Article 346 TFEU was fairly unknown and still is a very atypical provision of EU primary law. The provision delineates the boundary between the application of supranational EU law under the TFEU and mainly its fundamental freedoms, and national policy regarding the production of weaponry. Where applicable, it allows the Member States to take respective measures nationally and regardless of contradicting EU (Internal Market) law. According to its wording and positioning in the TFEU, it can justify any deviation from EU law of a Member State if this state considers such deviation necessary for its essential security interests. In the past, due to historical reasons linked to the failure to establish the European Defence Community in the 1950s34 and the ensuing (mis)perception that

32 See in this volume Stompfe, Country Report on Germany and France; Vargiu, Country Report on Italy, Spain, Portugal, and Greece; Pawłowski and Jaśkowski, Country Report on Poland, Lithuania and Latvia; Gáspár-Szilágyi, Country Report on Hungary and Romania; Hallberg, Country Report on Finland, Norway, Sweden and Denmark; Talanov, Country Report on Russia; Lichtenbaum and Ribner, Country Report on Northern America; Fujii, Yodogawa and Wako, Country Report on Japan; Kong and Chen, Country Report on China. 33 Judgment of the Court of 14 March 2000, Église de scientologie de Paris, C-54/99, ECLI:EU: C:2000:124. 34 The level of integration of military policy and the national defence forces themselves that was foreseen in the European Defence Community (EDC) went significantly beyond even the current state of military cooperation in the EU. The idea was to make this policy field—right after the coal and steel sectors—a front runner of European integration. After the last minute-failure of the EDC due to its rejection by the French Parliament, the Treaties of Rome took care to prevent another failure due to this sensitive area and excluded defence cooperation from the founding treaties of the European Communities. With regard to the intersecting area of defence industrial policy, a way out was found by introducing Article 346 TFEU (then: Article 223 ECT). The wording of Article

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the entire sector of defence was categorically excluded from EU law, Member States have treated their industrial policy in defence as domaine réservé, also with regard to restrictions on foreign investments in the defence sector. However, contrary to the practice of most Member States, like any derogations from the Internal Market rules laid down in the TFEU, Article 346 TFEU needs to be construed narrowly.35 The Court of Justice of the European Union has made this very clear in the case Commission v Spain, where it stated that derogations from the EU treaties like Article 346 TFEU “deal with exceptional and clearly defined cases. Because of their limited character, those articles do not lend themselves to a wide interpretation.”36 Member States thus have to demonstrate in each individual use case that a deviation from the applicable EU law is necessary for their essential security interests. The Commission, backed by recent pertinent case law from the European Court,37 has started to scrutinize the use of Article 346 TFEU more closely, and one can see first changes in the Member States’ practice with regard to the provision. A correct application of the exception needs to examine whether the material scope of the provision is fulfilled and whether the measure is necessary to protect essential security interests without having negative effects on the civil market.

3.2.1

Scope

Article 346 TFEU is only applicable to measures related to products that can be qualified as arms, munitions and war material. As per Article 346 para. 2 TFEU, these products are enumerated in a list drawn up by the European Council. The list was never officially published,38 nor has it been updated since it was drawn up in 1958. Due to the time of its compilation, the list contains rather “classical” defence goods, such as guns, tanks, armoured vehicles, military aircraft and defence electronics.39 Therefore, with regard to companies that are active in the field of more advanced and often dual-use defence products (such as cyber technology, artificial intelligence or satellite technology), Article 346 TFEU is not applicable ratione materiae in the first place, be it as a legal basis for investment screening measures

346 TFEU was largely copied from a similar provision of the General Agreement on Tariffs and Trade, Art. XXI GATT. 35 Judgment of the Court of 15 May 1986, Johnston v Chief Constable of the Royal Ulster Constabulary, C-222/84, EU:C:1986:206, para 26. 36 Judgment of the Court (Sixth Chamber) of 16 September 1999, Commission v Spain, C-414/97, ECLI:EU:C:1999:417, para 21. 37 See for example Judgment of the Court (Fifth Chamber) of 4 September 2014, Schiebel Aircraft GmbH v Bundesminister für Wirtschaft, Familie und Jugend, C-474/12, ECLI:EU:C:2014:2139. 38 It is however available on the website of the European Parliament, as part of an answer of the Commission to a question asked by MEP Bert Staes in 2001: Written Question E-1324/01 (4 May 2001), OJ C 364E/85. 39 For a detailed analysis of the list see Eisenhut (2010), pp. 151 et seq.

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towards investors from other Member States or any other measure against Internal Market law. However, outside of the material scope of Article 346 TFEU, the usual justifications of derogations from the fundamental freedoms, such as Article 65 para. 1 TFEU, remain applicable.

3.2.2

Essential Security Interests

It is the core of Article 346 TFEU that it may enable the Member States to protect their national security interests. As the Commission states in its Interpretative Communication on the application of Article (346 TFEU) in the field of defence procurement, “it is the Member States prerogative to define their essential security interests [. . .]. The concept of essential security interests gives them the flexibility in the choice of measures to protect those interests.”40 This statement is fully valid for questions of investment control. However, it does not mean that any invocation of “essential security interests” automatically justifies the taken measures. To the contrary and as was shown above, the notion must be interpreted narrowly.41 The mere context of a measure related to national defence considerations does not change this logic of Article 346 TFEU being the confined exception to the rule.42 The stance of the Court is well summarized in its ruling in a recent case concerning a rule under Austrian corporate law, which required Austrian nationality for managing directors of companies active in the defence sector: [E]ven though Article 346(1)(b) TFEU refers to measures that a Member State may consider necessary for the protection of the essential interests of its security, that provision cannot be construed as conferring on Member States a power to depart from the provisions of the Treaty simply in reliance on those interests [. . .]. The Member State which wishes to avail itself of the derogation allowed under Article 346(1)(b) TFEU must show that such derogation is necessary in order to protect its essential security interests [. . .].43

Furthermore, the fact that Article 346 TFEU speaks of “essential” security interests and thereby uses narrower wording than, for example, Article 36 or 65 TFEU for the “normal” security exemptions to fundamental freedoms demonstrates that the reasons invoked under the provision must be of fundamental nature for the concerned Member State. Based on this wording, and on the telos of the exception itself, which is to allow exceptional measures detrimental to the Internal Market for the sake of specific Interpretative Communication: on the application of Article 296 of the Treaty in the field of defence procurement, 7 December 2006, COM (2006) 779 final, p. 7. 41 Judgment of the Court of 26 October 1999, Angela Maria Sirdar v The Army Board, C-273/97, EU:C: 1999:523, para 16; Judgment of the Court of 11 March 2003, Dory v Germany, C-186/01, EU:C:2003:146, para. 31. 42 See also Judgment of the Court (Grand Chamber) of 8 April 2008, Commission v Italy, C-337/05, ECLI:EU:C:2008:203, para 42. 43 Judgment of the Court (Fifth Chamber) of 4 September 2014, Schiebel Aircraft GmbH v Bundesminister für Wirtschaft, Familie und Jugend, C-474/12, EU:C:2014:2139, para. 34. 40

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security-related concerns, the Court has made it quite clear that a derogation from the TFEU Internal Market provisions cannot be invoked in order to protect economic interests as such, for example the protection of employment.44

3.2.3

Necessity

The measure taken on the basis of Article 346 para. 1 (b) TFEU furthermore needs to be necessary to achieve the intended security aim. In accordance with the general case law of the Court,45 the necessity of the measure in question to achieve the protection of essential security interest requires that the Member State relying on the measure prove that no less restrictive measure is available to achieve this protection. In particular, with regard to Article 346 TFEU, the distinction needs to be made between the security interests themselves, which the Member State invokes and which cannot be “second-guessed” by the Court, and the question whether the means to protect these interests are necessary and therefore justified. Whereas the former question is clearly attributed to the sole discretion of the Member State on the basis of Article 4(2) TEU,46 the latter is subject to full judicial review.47 It needs to be emphasized that it is for the Member State that seeks to rely on Article 346 TFEU to prove “that it is necessary to have recourse to that derogation in order to protect its essential security interests”48 and that the judiciary has to measure this justification against the necessity criteria laid out above. For example, in the Schiebel case, the court consequently ruled that such a strict rule as the interdiction of foreign managing directors in defence companies may not be justified under Article 346 TFEU because the protection of legitimate security interests may be achieved by less restrictive means than the outright interdiction for non-Austrian citizens to serve as managing directors of defence companies.49

44 Judgment of the Court of 9 June 1982, Commission v Italy. C-95/81, EU:C:1982:216, para 27. See also COM (2006) 779 final, p. 7. 45 Judgment of the Court (Fourth Chamber) of 7 June 2012, Insinööritoimisto InsTiimi Oy, C-615/ 10, ECLI:EU:C:2012:324, para 45, where the Court requested a detailed justification why the applicable public procurement regime for a defence procurement was not used. Similarly in the case ECJ C-474/12 Schiebel Aircraft GmbH v Bundesminister für Wirtschaft, Familie und Jugend EU: C:2014:2139, paras. 34–38, the Court examined whether less restrictive measures than the interdiction of foreign nationals to become managing director of defence companies were available. 46 See also the statement of the Commission in its COM (2006) 779 final, p. 3 that the Commission may not give “an interpretation of the Member States’ essential security interests” and on p. 4 (Section 2 first para.) of the same document. 47 Eisenhut (2010) pp. 187 et seq. 48 Judgment of the Court (Grand Chamber) of 15 December 2009, Commission v Finland, Case C-284/05, EU:C:2009:778, para. 49. See also C-414/97, para 22; C-337/05 para. 44. 49 See C-474/12.

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With regard to investment screening, the summary of the Commission in its Guidance Note on Offsets50 can be applied correspondingly: when establishing investment screening laws or applying a screening measure, “[t]he Member State in question must be prepared to specify the essential security interests that makes the specific [measure] necessary, to demonstrate that this [measure] is an appropriate means to protect that interest, and to explain why it is not possible to achieve the same objective by less restrictive means”.

3.2.4

No Negative Impact on the Civil Market

Article 346 para. 1 (b) TFEU finally requires that national measures in the interest of essential security interests “shall not adversely affect the conditions of competition in the internal market regarding products which are not intended for specifically military purposes”. The requirement aims at protecting the Internal Market from negative implications that the measures intended under Article 346 TFEU might have outside the defence industry. This logic is in line with the reasoning of the Court in cases like Cowan v Trésor Public,51 where it ruled that a measure based on national criminal law, which as such cannot be reviewed by the Court as the area of law is purely attributed to the Member States, may, however, be scrutinized as far as its effect has implications on the Internal Market. In the area of investment screening, this requirement has particular importance with regard to investment targets that are active both in the military and in the civil domain. Indeed, most defence industrial players do operate in both the military and civil markets, even more so in high-technology areas of information technology and electronics, where the military markets are today driven by the technological progress in the civil domain. As a consequence of the caveat against negative effects of the use of Article 346 TFEU on civil markets, measures of investment protection may not be used for an entire company when only a part of it is producing military goods; instead, the measure can only be applied to the defence part of the company, a practice that is duly followed at least in the area of merger control.52

3.2.5

Scrutiny and Enforcement

The Commission has for a long time tolerated the excessive use of Article 346 TFEU,53 and the Court of Justice of the European Union ruled on the provision

50

Offset Guidance Note related to Directive 2009/81, para. 21. Judgment of the Court of 2 February 1989, Cowan v Trésor Public, C-186/87, ECLI:EU: C:1989:47. 52 See for example Case IV/M.1797; Case IV/M.1258. 53 See further Eisenhut (2008), p. 578. 51

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in 1999 only.54 Since then, the Commission has launched an initiative for the achievement of a common market for defence goods and has shown more willingness to look into the (ab)use of Article 346 TFEU, also by means of infringement procedures. In the area of investment screening, no cases of an action against the Member State’s national regulations or practices are apparent. In the event that the Commission would want to take action against a Member State relying on Article 346 TFEU to forbid investments in its defence industry, it would have to request a justification of the interdiction under the specific procedural provision of Article 348 TFEU, which foresees a specific infringement procedure for the scrutiny of Articles 346 and 347 TFEU. If it would not be convinced by the justification for the measure given by the Member State, it would have the right to launch the procedure under Article 348 TFEU, which might then lead to an infringement procedure before the Court. Under the EU Screening Regulation, this process will likely not change. The Regulation is not applicable to intra-EU transactions in the first place. For both intraand extra-EU investments, Article 1 para. 2 of the Regulation demonstrates that the willingness of the Member States to rely on Article 346 TFEU where they deem this necessary is likely to prevail.

4 Bermuda Triangle Demystified: The Future Application of Article 346 TFEU Whereas in the past all EU legal requirements have regularly “disappeared” when it came to their application to the defence and security industrial sector, this is very likely to change. Over the last years, the Commission has become much more active in the sector and has taken a much stricter stance on the reliance on Article 346 TFEU by Member States. Awareness of both Member States and industry players for the confines of the provision has increased. For investment screening and intervention in transactions between companies from different Member States, this will certainly have important effects. It will become more difficult for governments to shield their local defence players against “foreign” influence from another Member State. However, the Member States continue to defend their autonomy in security and defence matters even if they affect the Internal Market and will continue to rely on Article 346 TFEU for investment screening and prevention measures. With this aim, they have insisted to include wording into the EU Screening Regulation stating that the new legal framework is “without prejudice [. . .] to the right of each Member State to protect its essential security interests in accordance with Article 346 TFEU”.55

54 55

C-414/97. See Article 1 para. 2 of the Regulation.

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At the same time, and in line with the general trend towards a stricter investment screening with regard to EU external investors, it is unlikely that the sector will open up to foreign direct investment at least from non-North Atlantic Treaty Organization countries outside the European Union. The restrictions in this direction in the EDIDP and European Defence Fund are a recent example to demonstrate this policy trend.

References Literature Eisenhut D (2008) The special security exception of Art. 296 EC. Eur Law Rev 33:578 Eisenhut D (2010) Europäische Rüstungskooperation – Zwischen Binnenmarkt und zwischenstaatlicher Zusammenarbeit. Nomos Deutsche Welle (15 May 2019) US warns EU over €13-billion defense spending. Available at: https://www.dw.com/en/us-warns-eu-over-13-billion-defense-spending/a-48738562 Körber T (2012) In: Immenga U, Mestmäcker E (eds) Wettbewerbsrecht, Commentary, 5th edn, C.H. Beck Lange K (1994) Räumliche Marktabgrenzung in der europäischen Fusionskontrolle. In: Lang P (ed) Europäische Hochschulschriften Recht, vol. 1598, Peter Lang GmbH, Internationaler Verlag der Wissenschaften Le Figaro (2 November 2017) Rome bloque le rachat de Next par le francais Altran. Available at: http://www.lefigaro.fr/flash-eco/2017/11/02/97002-20171102FILWWW00357-rome-bloquele-rachat-de-next-par-le-francais-altran.php Richter T (2007) Die Rüstungsindustrie im Europäischen Gemeinschaftsrecht. Nomos Schild AL (2014) In: Bornkamm J, Montag F, Säcker FJ (eds) Münchner Kommentar zum Wettbewerbsrecht vol. 1, 2nd edn. C.H. Beck UK Department of Trade and Industry (27 November 2002) Press release, P/2002/754

Legal Documents and Case Law Commission Communication: Launching the European Defence Fund, COM 2017/295/final Commission proposal: Proposal for a Regulation establishing the European Defence Fund, COM 2018/476 final Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty, OJ L 178, 8.7.1988, pp 5–18 Council of the European Union, Regulation (EU) 2019/452 establishing a framework for screening of foreign direct investments into the European Union of 19 March 2019, OJ L 79I, 21.3.2019, pp 1–14 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation), OJ L 24, 29.1.2004, p. 1–22. Directive 2009/81/EC of the European Parliament and of the Council of 13 July 2009, on the coordination of procedures for the award of certain works contracts, supply contracts and service contracts by contracting authorities or entities in the fields of defence and security, and amending Directives 2004/17/EC and 2004/18/EC. OJ L 216, 20.8.2009, pp 76–136 Directive 2009/41/EC of the European Parliament and of the Council of 6 May 2009 on the contained use of genetically modified micro-organisms, OJ L 125, 21.5.2009, pp 75–97

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Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung - AWV) (2018) art. 7 Regulation (EU) 2018/1092 of the European Parliament and of the Council of 18 July 2018 establishing the European Defence Industrial Development Programme aiming at supporting the competitiveness and innovation capacity of the Union's defence industry, OJ L 200, 7.8.2018, pp 30–43 Written Question E-1324/01 by Bert Staes to the Council. Article 296(1)(b) of the EC Treaty (4 May 2001) OJ C 364 E/85 Angela Maria Sirdar v The Army Board, Judgment of the Court of 26 October 1999, C-273/97, EU: C: 1999:523 Commission v Belgium, Judgment of the Court of 4 June 2002, C-503/99, ECLI:EU:C:2002:328 Commission v Finland, Judgment of the Court (Grand Chamber) of 15 December 2009, Case C-284/05, EU:C:2009:778 Commission v France, Judgment of the Court of 4 June 2002, C-483/99, ECLI:EU:C:2002:327 Commission v Italy, Judgment of the Court of 9 June 1982 C-95/81, EU:C:1982:216 Commission v Italy, Judgment of the Court (Grand Chamber) of 8 April 2008, C-337/05, ECLI:EU: C:2008:203 Commission v Netherlands, Judgment of the Court (First Chamber) of 28 September 2006, C-282/ 04, ECLI:EU:C:2006:608 Commission v Portugal, Judgment of the Court of 4 June 2002, C-367/98, ECLI:EU:C:2002:326 Commission v Spain, Judgment of the Court (Sixth Chamber) of 16 September 1999, C-414/97, ECLI:EU:C:1999:417 Commission v United Kingdom, Judgment of the Court of 13 May 2003, C-98/01, ECLI:EU: C:2003:71 Cowan v Trésor Public, Judgment of the Court of 2 February 1989, C-186/87, ECLI:EU:C:1989:47 Dory v Germany, Judgment of the Court of 11 March 2003, C-186/01, EU:C:2003:146 Église de scientologie de Paris, Judgment of the Court of 14 March 2000, C-54/99, ECLI:EU: C:2000:124 Insinööritoimisto InsTiimi Oy, Judgment of the Court (Fourth Chamber) of 7 June 2012, Case C-615/10, ECLI:EU:C:2012:324 Johnston v Chief Constable of the Royal Ulster Constabulary, Judgment of 15 May 1986, C-222/84, EU:C:1986:206. Schiebel Aircraft GmbH v Bundesminister für Wirtschaft, Familie und Jugend, Judgment of the Court (Fifth Chamber) of 4 September 2014, C-474/12, EU:C:2014:2139.

Merger Regulation and Related Cases Council Regulation No. 4064/89 on the Control of Concentrations, 1989 O.J. L 395/1, corrected version in 1990 O.J. L 257/13 Case IV/M.336, IBM France/CGI (19 May 1993) Case IV/M.528, British Aerospace/VSEL (24 November 1994) Case IV/M.1258, GEC Marconi/Alenia (28 August 1998) Case IV/M.1413, Thomson-CSF/Racal (15 March 1999) Case IV/M.1745-3, EADS (11 May 2000) Case IV/M.1797, Saab/Celsius (4 February 2000) Case IV/M.2079, Raytheon/Thales/JV (30 March 2001)

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Dominik Eisenhut is senior legal counsel at Airbus Defence and Space’s headquarters in Munich, where he – inter alia – advises on EU law matters, notably regarding public procurement law, offset and European defence funding. Prior to taking up his position at Airbus, he worked as a corporate attorney in Munich and at the Chair of International and European Law at the University of the Bundeswehr. Dominik holds a Ph.D. from Augsburg University on the applicability of EU law in the area of defence and security and an LL.M. from University College London. He studied law in Freiburg, Grenoble, and Munich and was admitted to the Munich bar in 2007. Dominik is a lecturer in European law at the Bundeswehr University. He is a contributor to different TEU/TFEU commentaries and the author of several articles on Article 346 TFEU and on other aspects of EU law in the field of security and defence.

The Transport Sector Henning Jessen

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The Establishment of a Common Transport Policy Aiming to Create a Single EU Transport Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Is There Any Existing EU Legal Basis for Foreign Direct Investment Screening in the Transport Sector? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Legal Basis for the Trans-European Transport Networks (TEN-T) . . . . . . . . . . . . . . . . . . . 5 Long-Term Investment Measures to Implement the TEN-T Objectives . . . . . . . . . . . . . . . . . . . 5.1 First Example: Developing EU Sea Ports and EU Sea Port Facilities . . . . . . . . . . . . . . . 5.2 Second Example: Motorways of the Sea as a Horizontal Priority . . . . . . . . . . . . . . . . . . . 5.3 Relevance to the EU Screening Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract One of the main characteristics of the transport sector is its enormous demand for long-term financial investments in physical infrastructure, which is hardly matched by any other sector. Traditionally, these investments are still undertaken mostly by public bodies, i.e. by the State itself, its organs or private entities under public control and supervision. However, there are continuously shrinking public finance capacities in many areas, and this also includes the transport sector. At the same time, there is an ever-increasing investment demand to replace or at least overhaul ageing infrastructure like roads, railway networks, inland waterways and transport hubs (sea ports and airports). On the one hand, the resulting infrastructure gaps might be partially bridged by private investors—although private investors usually take a rather cautious approach when it comes to financial “adventures” in the area of upgrading any physical transport-related infrastructure. On the other The views expressed in this chapter are exclusively personal and should not be attributed to any institution. H. Jessen (*) World Maritime University (WMU), Malmö, Sweden e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 283–302, https://doi.org/10.1007/16495_2020_20, Published online: 10 June 2020

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hand, the transport sector is part of the legal understanding of “critical infrastructure” where EU-wide investment screening is generally possible in the future. It is submitted, however, that this inclusion will not generate any significant negative effects or political concerns. The general message in the transport sector is that any large-scale private investments are most welcome—although they still might be subject to a screening exercise at the domestic level, less likely by the European Commission. It is difficult to imagine scenarios where private investments cannot be brought in line—at least via negotiations and contractual clarifications—with existing projects or programmes of EU interest or where security or public order would be negatively affected. As a result, Regulation (EU) 2019/452 will neither generate negative effects in the transport sector, nor will it boost any foreign direct investments in an area where it is already most difficult to attract sufficient private capital to address public needs.

1 Introduction Given the enormous dimension of the transport sector, it may seem rather surprising that 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 Union1 only incorporates two direct references to the transport sector: first, Article 4.1(a) includes transport in a non-exhaustive list, which forms part of the legal understanding of critical infrastructure. This broadly phrased term includes “whether physical or virtual, [. . .] energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure”. Second, the transport sector is mentioned in the Annex to the EU Screening Regulation, which lists projects or programmes of Union interest: No. 4 of the Annex refers to the Trans-European Networks for Transport (TEN-T), which shall be briefly discussed further below.2 The reference to No. 4 of the Annex to the EU Screening Regulation must be read in the context of Article 8 of the EU Screening Regulation (“Foreign direct investments likely to affect projects or programmes of Union interest”). The third paragraph of this provision clarifies that projects or programmes of Union interest shall include those projects and programmes which involve a substantial amount or a 1 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 79I of 21 March 2019, 1–14, hereinafter “EU Screening Regulation”. 2 Regulation (EU) No 1315/2013 of the European Parliament and of the Council of 11 December 2013 on Union guidelines for the development of the trans-European transport network and repealing Decision No 661/2010/EU, OJ L 348, 20 December 2013, pp. 1–128; the TEN-T concept is extensively discussed by Johnson and Turner (2007).

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significant share of Union funding, or which are covered by Union law regarding critical infrastructure, critical technologies or critical inputs which are essential for security or public order. Generally, where the European Commission considers that a foreign direct investment is likely to affect projects or programmes of Union interest on grounds of security or public order, the Commission may issue an opinion addressed to the Member State where the foreign direct investment is planned or has been completed (Article 8.1 of the EU Screening Regulation). This short introductory assessment indicates that the transport sector was definitely not at the top of all political objectives of the EU legislator in relation to a coordinated FDI investment screening. Transport-related investments do not seem to be “loaded” as much with political concerns if we compare the transport sector to other critical infrastructure sectors like communication, defence or energy. On the other hand, significant foreign (non-EU) direct investment does actually occur in the EU’s transport sector and can sometimes even make news headlines: one of the most prominent examples is probably the multimillion-dollar investments of COSCO (the China Ocean Shipping (Group) Company) in the Greek port of Piraeus since 2009. Between 2009 and 2019, COSCO has invested about 660 million USD in one of Europe’s most important maritime hubs and now owns a 51% stake in Piraeus Port Authority (PPA).3 In total, COSCO has accepted a contractual commitment to invest hundreds of millions of USD to upgrade the port’s facilities over a 35-year period.4 An even bigger financial deal in the wider transport service sector was the 2017 acquisition of the European warehouse and logistics company Logicor by China Investment Corporation (CIC) for 12.25 billion EUR. It is largely related to those two transactions, which explains why the European transportation service and logistics sector has received a comparatively high share of Chinese FDI until 2018.5 However, and in contrast to the long-term proceedings at the container terminals in Piraeus, the Logicor investment must rather be characterized as a private equity deal, i.e. a mere acquisition and transfer of company shares. Thus, unlike the COSCO investment, the Logicor deal does not involve a comparable direct investment in upgrading existing or building any new physical installations to improve transport operations for the future. Consequently, it does not reflect a private, transport-related infrastructure investment, as discussed in this chapter.

3

See Port Technology (15 November 2019), EIB Joins COSCO in Piraeus Transformation, available at: https://www.porttechnology.org/news/eib-joins-cosco-in-piraeus-transformation/. Piraeus represents the third-busiest container port in the Mediterranean. 4 The installation of a fourth Chinese-operated container terminal at the Port of Piraeus is under discussion since 2019. 5 See European Commission (13 March 2019), Commission Staff Working Document on Foreign Direct Investment in the EU—Following up on the Commission Communication “Welcoming Foreign Direct Investment while Protecting Essential Interests” of 13 September 2017, SWD (2019) 108 final, p. 61.

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Other sub-sectors of the enormously wide transport sector (taking into account, in particular, the railway grid infrastructure6 or the road motorways of EU States) might be both less liberalized and less attractive to FDI as compared to general logistics services, maritime transport or the aviation sector. Generally, it is worthwhile to first shortly delimit the understanding of the transport sector itself and then to highlight some general investment challenges faced by this sector as a whole. This will be concluded by an assessment of whether foreign direct investment in the transport sector will potentially create problematic issues for future screening under the rules of the EU Screening Regulation. Already at this stage, it is submitted that this will not be the case. In an area that is already quite technocratic, the EU Screening Regulation is not designed to create any further regulatory barriers for transport-related infrastructure investments. On the contrary, the transport sector is so enormously capital intensive that—generally speaking—any kind of large-scale investment, whether public or private and whether originating from an intra-EU source or from a foreign (i.e. non-EU) source, will meet favourable investment conditions if it can be established that the relevant investment supports projects or programmes of Union interest.

2 The Establishment of a Common Transport Policy Aiming to Create a Single EU Transport Area The ultimate aim of the EU—officially voiced since 2011—is to create a Single Transport Area by 2050.7 And this is for good reasons: there can be no Single European Market without transport. Efficient transportation of persons and goods is the backbone of any national economy. Closely connected to other aspects of infrastructure policy, the transport sector aims to ensure the provision of economically efficient and sustainable services for the general public and for private businesses—on land, sea and air—via different modes of transport (railways, roads (incl. cycling), maritime, inland waterways and aviation). Most States have thus developed a National Transport Policy, which reflects an essential policy tool to enable economic growth and development and which is usually subject to continuous updates within longer policy cycles.8 A conceptual delimitation of the transport sector is challenging: examples of important stakeholders within the transportation service sector must include 6 The highest share of public transport-related investment within the EU (i.e. 16 billion EUR between 2014 and 2019) relates—by far—to the railroad sector, see European Commission (last updated 16 December 2019), Connecting Europe Facility, available at: https://ec.europa.eu/trans port/themes/infrastructure/cef_en. 7 See European Commission (28 March 2011), White Paper—Roadmap to a Single European Transport Area—Towards a competitive and resource efficient transport system, COM/2011/ 0144 final (hereinafter: Transport White Paper 2011). 8 For an early analysis of that political necessity see Nupp (1970), pp. 143–158.

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infrastructure managers, private operators and contractors, local and regional authorities, logistics service providers, shippers and all users and equipment suppliers in the different modes of transport (and their intermodal intersections). To be comprehensive, one would also have to include all supporting industries for transportrelated equipment. Quite quickly, one has to realize that large parts of the economy are either directly or at least indirectly intertwined with the transport sector. It is thus not surprising at all that both the Treaty on the European Union (TEU)9 and the Treaty on the Functioning of the European Union (TFEU)10 reflect the geographical and economic importance of transport for trade and its role in the process of liberalization and economic and social integration—which has lain at the very heart of European policy integration ever since. To be more precise, over the decades, the EU has developed a Common Transport Policy, which constitutes an essential component in the legal and policy framework for a genuine single market that is based on the four fundamental freedoms within the EU.11 Moreover, this sector can be considered even more essential because transport logistics services represents in itself a very important sector of the economy, accounting for up to 10% of the EU’s gross domestic product—depending on how broadly the sector is defined—while at the same time transportation plays a vital role in the practical realization of the free movement of goods and persons in general. The development of a Common Transport Policy was clearly established as an early objective of the EU since the Treaty of Rome (though initially not named like that). This is also because the transport sector is, broadly speaking, nothing but the provision of a service, frequently crossing national borders, and as such it is covered by the four fundamental freedoms within the EU. The legal predecessor to Article 58 TFEU specified that the freedom to provide services in this field should be governed by the provisions of a specific title on transport. This is now Title VI of the TFEU (Articles 90–100). Under those provisions, the Council of Ministers was initially obliged by Article 91 TFEU and Article 100 TFEU to take legislative measures only in the case of inland transport, that is road, rail and inland waterways. Initially, the Council was also empowered by Article 100 TFEU (but not obliged) to adopt provisions for maritime and air transport as well when it unanimously thought fit. The completion of an internal market in maritime and air transport by 31 December 1992 became an obligation under the Single European Act of 1986. Since 2009, the Lisbon Treaty has made the adoption of provisions for maritime and air transport subject to the ordinary legislative procedure involving co-decision of the Council and European Parliament and a qualified majority voting in the Council. Leaving all historic developments of the EU Common Transport Policy aside, it may suffice to highlight that the TFEU grants significant powers to the European Commission in certain areas such as State aid and anti-competitive behaviour in the

9

Consolidated version of the Treaty on European Union, OJ C 326, 26 October 2012, 13–45. Consolidated version of the Treaty on the Functioning of the European Union, OJ C 115, 09 May 2008, 47–199. 11 See Pallis (2017) and Jessen and Werner (2016). 10

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transport sector (just like in other service sectors). In all transport modes, the Commission has frequently used those powers in the past to drive forward regulations and directives and to adopt decisions and guidelines (for example, on State aid to maritime transport).12

3 Is There Any Existing EU Legal Basis for Foreign Direct Investment Screening in the Transport Sector? The answer to the question posed above is, in short, a simple no. Of course, any national investment screening rules of the EU Member States might potentially apply in the transport sector. There are very few examples where it is actually possible to establish a link to any type of EU-coordinated investment control in the transport sector (not to speak of any type of “screening” at all). One of those limited examples is represented by Regulation (EC) No 1008/2008 on common rules for the operation of air services in the Community:13 Article 4 of that Regulation provides (inter alia) that one of the legal conditions for granting the relevant operating licence for air services to an undertaking by the competent licensing authority of an EU Member State is that Member States and/or nationals of Member States own more than 50% of the undertaking and effectively control it, whether directly or indirectly through one or more intermediate undertakings, except as provided for in an agreement with a third country to which the Community is a party (see sub-paragraph (f) of Article 4). Consequently, this provision is generally designed to restrict the provision of air transport services to EU-controlled undertakings. Potential exemptions must be based on the conclusion of a reciprocal air transport service agreement—which may be negotiated between the EU and third countries.14 Second, after years of highly contentious discussions, the successful adoption of Regulation (EU) 2017/352—better known as the Port Package III, which only entered into force in March 2019—marks another important milestone in the EU’s

12

See Community guidelines on State aid to maritime transport, OJ C 205, 5.7.1997, pp. 5–15) and Commission Communication C(2004) 43—Community guidelines on State aid to maritime transport, OJ C 13/3, 17.1.2004, pp. 3–12. 13 See Regulation (EC) No 1008/2008 of the European Parliament and of the Council of 24 September 2008 on common rules for the operation of air services in the Community, OJ L 293/3, 31.10.2008, pp. 3–20 (as amended in 2018 and 2019). A consolidated version can be found at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri¼CELEX:02008R1008-20190203. 14 The proviso applies in relation to bilateral “Air Transport Agreements”, for example, as concluded between the EU and the United States (“Open Skies Agreement”), Air Transport Agreement—Annexes—Declarations—Protocol, OJ L 134, 25.5.2007, pp. 4–41. The “Open Skies Agreement” was amended by a Protocol of 24 June 2010: Protocol to amend the Air Transport Agreement signed on 25 and 30 April 2007 between the United States of America and the European Community and its Member States, signed on 25 and 30 April 2007, OJ L 223, 25.8.2010, pp. 3–19.

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quest to improve the efficiency and financial transparency of port services through the introduction of more competition as regards pilotage, towing, mooring, passenger reception and cargo handling.15 The Port Package III, however, does not include any type of investment screening. Rather, the Regulation seeks to establish a stable legal framework for port investment and to contribute to a climate favorable to investments to develop ports in line with current and future transport and logistics requirements (see Recital 1). As such, the Port Package III is rather an instrument to liberalize and standardize EU-wide port services, especially in the area of financial transparency, and it also aims to tackle the performance gap in some TEN-T ports.16 Finally, it should be noted that public investments in port infrastructure fall within the scope of Commission Regulation (EU) No 651/2014 (General Block Exemption Regulation)17 and have been covered by a more specific Commission Regulation (which now also includes airports) since 2017.18

4 The Legal Basis for the Trans-European Transport Networks (TEN-T) The ultimate aim to create trans-European networks—a concept that has been developed since the early 1990s—is to interconnect national infrastructure networks and to ensure their interoperability, setting standards for the removal of technical barriers.19 The TEN-T policy is not only about the construction of new physical infrastructure. The policy framework is also designed to support the application of innovation, new technologies and digital solutions to all modes of transport. The objective is improved use of infrastructure, reduced environmental impact of transport, enhanced energy efficiency and increased safety.20 TEN-T comprises two network layers: first, the “Core Network”, which includes the most important connections, linking the most important nodes, and which is to be

15 Regulation (EU) 2017/352 of the European Parliament and of the Council of 15 February 2017 establishing a framework for the provision of port services and common rules on the financial transparency of port, OJ L 57, 3.3.2017, pp. 1–18. 16 See in more detail Claassen in: Ehlers and Paschke (2018), pp. 349–373. 17 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.6.2014, pp. 1–78. 18 Commission Regulation (EU) 2017/1084 of 14 June 2017 amending Regulation (EU) No 651/2014 as regards aid for port and airport infrastructure, notification thresholds for aid for culture and heritage conservation and for aid for sport and multifunctional recreational infrastructures, and regional operating aid schemes for outermost regions and amending Regulation (EU) No 702/2014 as regards the calculation of eligible costs, C/2017/4213, OJ L 156, 20.6.2017, pp. 1–18. 19 See European Commission (last updated 16 December 2019), Trans-European Transport Network (TEN-T) available at: https://ec.europa.eu/transport/themes/infrastructure/ten-t_en. 20 Ibid.

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completed by 2030. Nine Core Network Corridors and two horizontal priorities have been identified under the TEN-T to streamline and facilitate the coordinated development of the “Core Network”.21 Second, there is the “Comprehensive Network”, which covers all European regions and is to be completed by 2050. When it comes to transport in general, infrastructure, system development and integration constitute a vital domain in which the EU seeks to derive full advantage from a modern transportation industry. The objective is to properly integrate these into a multimodal transport system serving the EU as a whole and its external trade capacities. To further this objective, the EU has at its disposal a number of instruments—in addition to legislation in the classical form of regulations and directives. Among these instruments have been research and development projects under the EU’s research framework programmes, including long-term technological development and integration of traffic monitoring and management systems. Thus, the EU disposes not only of the usual suspects of legal instruments but also of a number of “policy tools” for developing further the overarching objective of a common transport policy. It is important to highlight that these “policy tools” include the financing of research and development; the adoption of guidelines for all trans-European networks, including the trans-European transport networks (TEN-T, see further below); and the financing of investments in transport infrastructure and innovative technical systems.22 Treaty provisions having as their objective the coordination or provision of financing for research or infrastructure development, however, have a different character from (e.g.) EU regulations or directives imposing specific obligations on operators. They provide the framework and means for action having certain defined objectives without imposing obligations to realize particular results. More specifically, as regards adoption procedures, while all trans-European network guidelines and projects are decided by co-decision with qualified majority decision-making in the Council (just like regulatory measures under the common transport policy), they also require the approval of the individual Member States to whose territories they relate (Article 172(2) TFEU). Originally, the provisions on trans-European transport networks (TEN-T) were introduced by the Treaty of Maastricht in 1992 as one of the innovations designed to allow the EU to further develop and complement the liberalized internal market achieved through the abolition of regulatory barriers to cross frontier economic activities under the single market programme.23 They would allow the development of positive measures to support the adaptation, extension and modernization of the EU’s transport infrastructure both to meet the needs of operators in the single market and to reduce disparities between the levels of development of the various regions 21

The nine core network corridors are: Atlantic, the Baltic Adriatic, the Mediterranean, the North Sea-Baltic, the North Sea-Mediterranean, the Orient-East Med, Rhine-Alpine, Rhine-Danube and the Scandinavian-Mediterranean. The two horizontal priorities are the “Motorways of the Sea” (discussed in some more detail further below) and the European Rail Traffic Management System (ERTMS). 22 See extensively Johnson and Turner (2007), p. 48 et seq. 23 Article 154 to 156 TFEU.

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and the backwardness of the least favoured regions or islands, including rural areas. Such measures would aim at promoting the interconnection and interoperability of national networks, as well as access to them. They would also take particular account of the need to link islands, landlocked and peripheral regions with the central regions of the EU. The inclusion of such provisions had been supported by many influential economic actors, some of them from within the transport sector itself.24 All trans-European network-related measures are adopted under Title XVI TFEU, and for the transport sector, specifically under Articles 170–172 TFEU. That is precisely where the reference in Article 8 of the EU Screening Regulation—in conjunction with No. 4 of the Annex to the EU Screening Regulation—might potentially unfold some practical relevance for future investment screening in the transport sector. However, two major requirements would have to be met: first, a transport-related private investment in a project would have to fall under the TEN-T framework. Second, as mentioned in both the first and third paragraphs of Article 8 of the EU Screening Regulation, the project or programme would have to be essential for security or public order. This combination could trigger the competence of the European Commission to screen this activity and to issue an opinion to the Member State where the foreign direct investment is planned or has been completed. It is quite difficult to think of a concrete example—restricted to the physical demands of the transport sector—where both requirements would be met. A crude example could be a private investor demanding the creation of restricted (“embassy-like”) areas within a port or terminal where not even the public authorities of the EU Member could exercise sovereign oversight and control. Again, it seems to be easier to raise and exemplify security or public-order-related concerns in other critical infrastructure sectors, like energy, defence or IT. The TEN-T guidelines represent an important further legal source to understand the set-up of the TEN-T framework and its wider policy objectives. The guidelines were first agreed via a decision in 1996,25 revised several times26 and then finally, in 2013, “upgraded” to a complex TEN-T Regulation.27 It is vital to highlight the importance of this Regulation (EU) 1315/2013 in the context of this discussion because, according to Article 1, this legal act:

24 See the reports of the European Round Table of Industrialists (ERT) on Missing Links (1984) and Missing Networks (1991). 25 Decision 1692/96/EC on Community guidelines for the development of the trans-European transport networks, OJ L228/1, 9.9.1996, pp. 1–103; see also Council Regulation 2236/95 laying down general rules for the granting of Community financial aid in the field of trans-European networks, OJ L228/1, 23.9.1995, pp. 1–7. 26 See for example Decision No 884/2004/EC of the European Parliament and of the Council of 29 April 2004 amending Decision No 1692/96/EC on Community guidelines for the development of the trans-European transport network, OJ L 167, 30.4.2004, 1–38; see for a corrected version (“Corrigendum”) of that Decision, OJ L201/1, 7.6.2004, 1–55. 27 Regulation (EU) No 1315/2013 of the European Parliament and of the Council of 11 December 2013 on Union guidelines for the development of the trans-European transport network and repealing Decision No 661/2010/EU, OJ L 348, 20.12.2013, pp. 1–128.

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– Establishes guidelines for the development of the TEN-T comprising a dual-layer structure consisting of the comprehensive network and of the core network, the latter being established on the basis of the comprehensive network – Identifies projects of common interest (now referred to as Union interest in the FDI Screening Regulation) and specifies the requirements to be complied with for the management of the infrastructure of the TEN-T – Sets out the priorities for the development of the TEN-T – Provides for measures for the implementation of the TEN-T As for the last point raised, the implementation of projects of Union interest depends on their degree of maturity, compliance with Union and national legal procedures and the availability of financial resources, without prejudging the financial commitment of a Member State or of the EU. In the past, long-term technological development and integration of traffic monitoring and transport-related management systems have been used in synergy with network development under the guidelines for the development of the TEN-T. They are supported by massive (public) financial investment, including from the cohesion funds in Member States that can benefit from them.

5 Long-Term Investment Measures to Implement the TEN-T Objectives For reasons of its massive regulatory complexity (which extends over more than 100 pages), it is not possible to thoroughly analyze the TEN-T Regulation of 2013 as part of a more investment-related discussion. However, it is possible (and necessary) to discuss two practical examples of ongoing TEN-T implementation within the EU in order to highlight the bureaucratic and financial (i.e. investment) challenges. These compressed examples are taken from the maritime mode of transport—for reasons of the comparatively higher “globalized” nature of that sector—at least if compared to national road, inland waterways and railway transport sectors. Modern maritime transport—be it within or outside the EU—increasingly functions within the context of a very sophisticated infrastructure, which, of course, must include ports and terminals (some of them highly specialized), telecommunications, navigation aids, traffic monitoring and management systems and integrated multimodal transport systems. The EU has taken action concerning all of these aspects in its attempt to integrate maritime transport into an effective, efficient and sustainable multimodal transport system serving its internal market and external trade. The first example shall relate to the development of sea ports and sea port facilities. The second example discusses the creation of so-called Motorways of the Seas, which also includes the political promotion of short sea shipping (SSS). This represents a

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major attempt to relieve European roads from transport-related traffic congestion (which costs Europe about 1% of its gross domestic product per year).28

5.1

First Example: Developing EU Sea Ports and EU Sea Port Facilities

The most obvious type of infrastructure on which maritime transport relies is sea ports, their approaches and hinterlands. The EU has more than a thousand “bigger” sea ports that are commercially relevant, i.e. handling more than one million freight tons per year. Given their long histories, their diverse geographical positions and the major differences in the way they are economically and legally organized, those sea ports have proved difficult for the EU to address in developing policy and regulation.29 Initially, many European sea ports feared that regulatory interventions at the EU level would distort the conditions of competition among ports or would even lead to dirigiste attempts to allocate traffic flows. Thus, European sea ports resisted their inclusion in the network guidelines being developed by the Commission in the 1990s. However, their inclusion was unavoidable, given that the different transport networks would necessarily have some terminals and nodes where ports are located. As a result, when the transport-related network guidelines were first adopted in 1996, seaports were included, but merely in a summary way, with no attempt to identify priority problems or particular development opportunities. For the European Commission, however, this outcome was unsatisfactory. Not only because of the importance of sea ports, as well as inland ports and multimodal terminals and for the development of the transport networks taken as a whole, but also with a view to creating a progressively integrating multimodal network.30 Accordingly, in 1998, the Commission proposed a relatively rapid modification of the network guidelines to identify sea ports according to objective criteria, including size and geographical position, and to specify the conditions to be met by projects for them to qualify as projects of common interest meriting (financial) support. The modification was adopted in 2001, leading to the identification of about 300 sea ports, the largest of which were to be shown on indicative maps like most other

28 See European Commission Memo (28 March 2011), Transport 2050: The major challenges, the key measures, MEMO/11/197. 29 For details see Jessen and Werner (2016), p. 26 et seq. 30 European Commission (10 December 1997), Green Paper on Seaports and Maritime Infrastructure, COM (1997)678 final and European Commission Communication (1 February 2001), on Reinforcing Quality Service in Sea Ports: A Key for European Transport, COM/2001/35 final.

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networks.31 Subsequently, this list increased to include about 400 ports (as a result of the EU’s 2004 enlargement). The treatment of sea ports in the guidelines, in addition to continuing suspicion from the sector itself, led to very little in the way of specific port projects as other more interested actors pushed for priority to be given to projects in their areas. Some of these may well have coincidentally assisted port development, such as certain priority corridor projects serving particular ports like the Betuwe Line connecting the biggest EU sea port (Rotterdam) with its hinterland and inland waterway ports. Financing under the structural and cohesion funds was committed to a number of investments in ports in the period after 2000, but these projects do not appear either to have had strategic effects as regards the interconnection or integration of the EU’s transport infrastructure, and a significant proportion of them in the period 2000 to 2006 encountered significant implementation problems limiting their beneficial impact.32 Thus, in the initial phases of implementing the network guidelines, their sea port provisions did not contribute to significant infrastructure development in ports themselves. In 2009, the European Commission began a consultative process as part of a fundamental review of policy on the transport network.33 It emphasized the potential benefits of moving to a dual-layer structure with both a comprehensive network and a core priority network, the latter to allow more systematic incorporation of nodes, ports and airports as the network’s entry points and the main intermodal connections that underpin strong network integration. This approach received a positive reception from many sources, including the European Parliament34 and the sea ports themselves.35 Accordingly, it was followed in the 2011 Commission proposal to modify the transport network guidelines36 as one component of the Connecting Europe

31 Decision No 1346/2001/EC of the European Parliament and of the Council of 22 May 2001 amending Decision No 1692/96/EC as regards seaports, inland ports and intermodal terminals as well as project No 8 in Annex III, OJ L 185, 6.7.2001, pp. 1–36. The guidelines were subsequently amended again in 2004 by Decision No 884/2004/EC of the European Parliament and of the Council of 29 April 2004 amending Decision No 1692/96/EC on Community guidelines for the development of the trans-European transport network, OJ L167/1, 30.4.2004, pp. 1–38. 32 European Court of Auditors (25 April 2012), Special Report No. 4/2012, Using structural and cohesion funds to co-finance transport infrastructure in seaports: an effective investment? 33 European Commission (4 February 2009), Green Paper on the TEN-T: A policy review (Towards a better integrated Trans-European transport network at the service of the common transport policy), COM(2009)44 final. 34 European Parliament Resolution of 27 April 2009 on the Green Paper on the future TEN-T policy, P6_TA(2009)0258. 35 European Sea Ports Organisation (15 May 2009), European Commission Green Paper “TEN-T: A policy review”—Towards a core and comprehensive network—policy contribution of ESPO. 36 Proposal for a Regulation on Union guidelines for the development of the trans-European transport network, COM/2011/0650/final 2, 19.10.2011.

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package.37 This was finally cast in an EU Regulation in 2013—designed to fund 50 billion EUR of investment in the EU’s transport, energy and telecommunications networks.38 The 2013 Regulation has established the so-called Connecting Europe Facility (CEF), which is a comprehensive EU funding instrument. The CEF is devised to facilitate the realization of European transport infrastructure policy, focused on projects of common (Union) interest—as exemplified by the TEN-T— that aim at removing bottlenecks and bridging missing links in the Core and Comprehensive Networks and Horizontal Priorities.39

5.2

Second Example: Motorways of the Sea as a Horizontal Priority

Another key transport-related project in the TEN-T context is called Motorways of the Sea.40 This project represents a horizontal priority of the EU, i.e. cutting across all core network corridors, and is designed to concentrate freight flows on logistical routes so as to improve existing maritime links or to establish new viable ones. The ultimate aim is to reduce road congestion, to remove traffic bottlenecks and to improve access to peripheral and island regions and States. Fuller use is to be made of complementary rail and inland waterway links as part of integrated multimodal chains. Indeed, certain waterways and canals provide important links for the sea motorways, forming part of the network itself.41 For this purpose, four major maritime corridors have been designated by the TEN-T Regulation.42 Complementing steps to develop infrastructure and a multimodal system have been a broad range of measures to promote short sea shipping (SSS), financially supported by the Marco Polo programmes. These programmes are designed to

37

Proposal for a Regulation establishing the Connecting Europe Facility, COM/2011/0665/final 3, 19.10.2011; see also Commission Communication (19 October 2011) “A growth package for integrated European infrastructure”, COM/2011/0676 final. 38 Regulation (EU) No 1316/2013 of 11 December 2013 establishing the Connecting Europe Facility, amending Regulation (EU) No 913/2010 and repealing Regulations (EC) No 680/2007 and (EC) No 67/2010, OJ L 348, 20.12.2013, pp. 129–171. 39 See European Commission (last updated 16 December 2019), Connecting Europe Facility, available at: https://ec.europa.eu/transport/themes/infrastructure/cef_en. 40 See generally Aperte and Baird (2013), pp. 10–26; Jessen and Werner (2016), p. 28 et seq. 41 In particular, the Saaima Canal in Finland; the Kiel Canal in Germany; and, most importantly, the cross-border Rhine-Meuse-Danube system. 42 The Baltic Sea; Western Europe, along the Atlantic Arc to the North and Irish Seas; South East Europe, connecting the Adriatic to the Ionian Sea and the Eastern Mediterranean; and South West Europe connecting Spain, France and Italy and through Malta joining with the South Eastern corridor and links to the Black Sea.

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encourage through financial assistance new services shifting freight from road to other modes.43 Already in its Transport White Paper of 2001,44 the European Commission had indicated its intention to propose legislation on a new concept to develop intermodal maritime-based transport chains in Europe in particular to reduce road congestion: the 2004 amendment of the TEN-T guidelines included new provisions to implement this concept. The objectives of the motorways of the sea were defined as the concentration of freight flows on sea-based logistical routes in such a way as to improve existing links or to establish new viable, regular and frequent maritime links for the transport of goods between Member States so as to reduce road congestion and/or improve access to peripheral and island regions and States.45 The transport of persons together with goods is not excluded provided freight transport is predominant. The initial objective was to complete relevant projects of “common interest” by 2010. The definition of the motorways, and hence of the projects of common interest to realize them, is complex, embracing the different components needed to realize sea-based multimodal systems. These include: – – – –

Sea port facilities Electronic logistics management systems Safety, security, administrative and customs procedures and Infrastructure for direct land and sea access, including facilities for dredging and ice-breaking

Major inland waterways and canals are to be included where they contribute to the motorways’ effectiveness and efficiency.46 Projects are to be proposed by at least two EU Member States, shall be geared to actual needs and shall generally involve both the private and public sectors. They are to be organized through public calls for tender—either to establish new links originating in particular major ports on the corridor or targeting consortia bringing together at least shipping companies and ports located there. Start-up aid in support of duly justified capital costs can be included for up to 2 years. Regulation (EC) 1692/2006 establishing the second “Marco Polo” programme for the granting of Community financial assistance to improve the environmental performance of the freight transport system (Marco Polo II) and repealing Regulation (EC) 1382/2003, OJ L328/1, 24.11.2006, p. 1; see also Regulation (EC) 1382/2003 of 22 July 2003 on the granting of Community financial assistance to improve the environmental performance of the freight transport system, OJ L196/1, 2.8.2003, pp. 1–6; for more information see: Innovation and Networks Executive Agency (INEA), Marco Polo Programme, https://ec.europa.eu/inea/en/connecting-europe-facility/motorways-sea-one-stophelp-desk/mos-financial-support/marco-polo. 44 European Commission (12 September 2001), White Paper—European transport policy for 2010: Time to Decide, COM(2001)370 final, p. 42. 45 See Article 12a and Annex III of project 21, revised TEN-T guidelines as cited, e.g., by van Hooydonk (2006), p. 73. 46 Particularly relevant are the Saaima Canal in Finland; the Kiel Canal; and the Rhine-MeuseDanube systems. 43

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As already mentioned above, support for motorways of the sea under the network guidelines can be combined with financial support under the Marco Polo programmes to improve the environmental performance of the freight transport system, which focuses on actions to contribute to measurable and sustainable modal shift in favour of short sea shipping, rail or inland waterway transport or a combination of modes of transport in which road journeys are as short as possible. This financial assistance is not limited to preparatory actions or the provision of infrastructure but includes general financial support for the launch of a new service. However, the ambition of the motorways of the sea concept has proved difficult to realize in practice because of the technical and commercial complexities that new sea-based intermodal connections entail. Problems of market analysis and trade distortion in introducing new competitive services to an already flexible and highly competitive shipping market compound the difficulties. After a substantial amount of preparatory work had been undertaken on about 20 different projects, six TEN-T and two Marco Polo projects have commenced or improved commercial regular Ro-Ro services between EU Member States. Lately, more emphasis has been given to developing harmonized approaches to LNG bunkering in the Baltic, the Mediterranean, the Atlantic approaches and the Black Sea. Despite all difficulties, the European Commission remains committed to the concept and considers that it deserves greater attention in the context of the revised the network guidelines.47 The motorways of the sea are being developed within the broader context of programmes to encourage the use of shipping as an alternative to congested road transport, notably the action plan to promote short sea shipping and the establishment of a European maritime transport space without barriers.48 The programmes include the adoption of systems to facilitate the cross-frontier movement of goods and persons while ensuring a high level of security and compliance with relevant Regulations. Since 2002, all reporting formalities and other requirements for ships arriving in and/or departing from ports of EU Members have been continuously standardized.49 It has to be noted that this development is also driven forward by more sophisticated international standardization demands, which are based on the

Green Paper of 2009 (COM(2009)44 final) and Article 25 of the proposal to amend the Regulation on the guidelines. 48 See Koliousis et al. (2013), p. 500; Ng, Sauri and Turro, Short Sea Shipping in Europe: Issues, Policies and Challenges, at 196, in: Finger and Holvad (eds.), Regulating Transport in Europe (2013); Power, The Historical Evolution of European Union Shipping Law, 38 Tulane Maritime Law Journal 2014, at 343. 49 Directive 2002/6/EC of 18 February 2002 on reporting formalities for ships arriving in and/or departing from ports of the Member States of the Community, OJ L67/31 9.3.2002, pp. 31–45. Larger passenger vessels were already covered by more detailed requirements under Directive 98/41/EC. The cargo declaration was excluded because procedures are based on cargo manifests. 47

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implementation of the IMO’s 1965 Convention on Facilitation of International Maritime Travel and Transport as amended (FAL Convention).50

5.3

Relevance to the EU Screening Regulation

One might wonder: Why is this discussion relevant at all for any potential future screening of investments under Regulation (EU) 2019/452? In particular, the funding numbers and financial volumes are important in the context of any transport-related discussion of the EU FDI Screening Regulation. The transport component of funding under the Connecting Europe Facility (CEF) amounts to about EUR 32 billion. EUR 24 billion was made available from the EU’s 2014–2020 budget to co-fund priority transport projects in the EU. A greater emphasis in funding priorities is continuously placed on projects in or closely related to sea ports and relating to inland waterway transport.51 Thus, if it is treated as one sector, transport requires massive, large-scale investment, in particular in relation to upgrading and expanding physical infrastructure. In 2015, the European Commission highlighted that studies had identified TEN-Trelated infrastructure development needs, which would represent approximately 700 billion EUR of financial investment until 2030.52 Another EU publication even names investment needs for transport infrastructure (including all modes) in the range of 1.5 trillion (sic!) EUR by 2030—where TEN-T alone would require financial investments of 550 billion EUR by 2020.53 Consequently—although all the dizzying numbers that are circulating in this context are far from being consistent—it is quite obvious that the public sector cannot provide the required investment volumes alone. The crucial question raised—not only in the EU—is how to bridge infrastructure financing gaps since many governments across the world encounter these gaps due to increasing investment demand for infrastructure with shrinking public finance at the same time.54 The volume of private participation in financing

50 See International Maritime Organization (2019) http://www.imo.org/en/OurWork/Facilitation/ Pages/Home.aspx which provides the starting point for further information in relation to electronic documents and standardized forms and documents. 51 Initially, in 2000, the relevant share was about 1.5% with the EU “aiming at 20%” in the period between 2014 and 2020, see, e.g., the Annual Report 2013 of Inland Navigation Europe (INE), 7. 52 See Commission Press Release (15 January 2015), European Commission identifies the infrastructure priorities and investment needs for the Trans-European Transport Network until 2030. 53 The completion of the TEN-T network requires about € 550 billion until 2020 out of which some € 215 billion can be referred to the removal of the main bottlenecks (Transport White Paper 2011, p. 14). 54 See, in particular, the 2014 report of the European coordinators Bodewig and Secchi (prepared under the auspices of the European Commission), Attracting Investments Towards Transport Infrastructure—Potential Lines for Action, 14, available at: https://ec.europa.eu/transport/sites/ transport/files/themes/infrastructure/ten-t-guidelines/doc/10_09_financingpaper2014.pdf.

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infrastructure projects in the EU, however, remains relatively modest.55 Quite frequently, private investors—no matter whether they are situated within the EU or in a third country—apply a rather cautious approach towards transport-related investments because there are all kinds of potential regulatory drawbacks that hinder private transport investments.56 For example, in 2018, COSCO’s further investment plans in relation to the development of the port of Piraeus clashed with the national Greek rules on protecting and preserving archaeological sites and had to be put on hold for the time being. But generally, there is a strong interest within the EU to attract more transport and infrastructure-related FDI in the future and—balancing all political interests and maybe differing from other sectors of the critical infrastructure—it seems highly unlikely that the EU Screening Regulation will create additional barriers in relation to that difficult challenge.

6 Conclusions In the past, research and development projects under the EU’s research framework programmes have addressed the long-term technological development of the transport system, including its multimodal integration, not least through systems for traffic and cargo information, monitoring and management. Some of these projects have been used in synergy with the large-scale deployment of the new technologies under safety regulations or the guidelines for the development of the trans-European transport networks (TEN-T). These projects and programmes have also been supported by significant financial investment from the EU budget, including from the cohesion funds in Member States that are entitled to benefit from them. However, the demand for attracting and coordinating more financial investments—from both the private and the public sectors—is enormous. There is concern of a growing gap in transport-related infrastructure investment. Private stakeholders of the Connecting Europe Facility (CEF) Transport Campaign have highlighted that if transport investment stops, the economy stops.57 Their 2018 Ljubljana Declaration is probably the best summary document for all long-term transport-related investment needs from the perspective of private European transport associations.58 Thus, it may safely be assumed that investing in environmentally sustainable mobility and infrastructure will be a top European priority in the future. When it comes to the transport sector, this is where—potentially—the new rules of the EU Screening Regulation might come into play at some point. As confirmed by Art. 8 of the EU Screening Regulation, any kind of large-scale private investment must be in

55

Ibid. See generally Panayiotoua and Medda (2014), pp. 424–431. 57 See the related “Ljubljana Declaration” (2018) as moreeubudget4transport.org/. 58 Ibid. 56

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line with the objectives of the TEN-T (under the applicable guidelines), which represents a key tool to ensure a fast and reliable transport of persons and goods both within the Union as well as in all relations with third countries. All other aspects of investment screening will be left to any relevant national screening mechanisms of affected EU Member State(s), an important aspect that should not be overlooked. In any case, the true focus in the transport sector will rather be set on increasing the budget for the CEF under the next EU multi-annual financial framework (2021–2027) to facilitate the completion of the core network, requiring roughly 500 billion EUR between 2021 and 2030. To attract private capital for investing in physical transport infrastructure remains a most difficult challenge in itself. The Chinese investments under the One Belt, One Road Initiative—resulting in almost 200 signed transport-related deals globally until 2019—represent a formidable exception in that regard.59 However, and in stark contrast to other sectors of the critical infrastructure (above all, in contrast to the communication and defence sectors), these investments are generally welcome. In addition, concerns of a complete “sell-out” of ownership assets are simply overstated: despite some significant foreign acquisitions of Chinese port and terminal operators, the global share of such Chinese ownership in foreign transport-related assets remains rather small, representing selective strategic decisions.60 In fact, any private transport-related investment provides a helpful assistance to partially close the widening physical infrastructure gap in that sector. Moreover, this kind of investment contributes to enhancing interoperability and multimodality as well as improving safety and efficiency. If such transport-related investments occur within the EU, ultimately they also benefit Europe’s citizens and the European economies.

References Aperte XG, Baird AJ (2013) Motorways of the sea policy in Europe. Marit Policy Manage 40 (1):10–26. https://doi.org/10.1080/03088839.2012.705028 Bodewig L, Secchi C (2014) Attracting investments towards transport infrastructure – potential lines for action. Report prepared under the auspices of the European Commission, Brussels Claassen KD (2018) The port package III: a European framework for the provision of port services and common rules on the financial transparency of ports. In: Ehlers P, Paschke M (eds) Maritime law – current developments and perspectives. Lit Verlag, Muenster, pp 349–373 Jessen H, Werner MJ (eds) (2016) EU maritime transport law. Beck/Nomos Johnson D, Turner C (2007) Strategy and policy for trans-European networks. Palgrave MacMillan

59

For some details see The Maritime Executive (21 November 2019), China Has Signed 197 Belt and Road Deals with 137 Countries, available at: https://www.maritime-executive.com/article/ china-has-signed-197-belt-and-road-deals-with-137-countries. 60 See Lloyd’s List (3 December 2019), Chinese ownership of foreign ports concerns are ‘overstated’, available at: https://lloydslist.maritimeintelligence.informa.com/LL1130247/Chi nese-ownership-of-foreign-ports-concerns-are-overstated.

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Koliousis I, Koliousis P, Papadimitriou S (2013) Estimating the impact of road transport deregulation in short sea shipping: experience from deregulation in the European Union. Int J Shipp Transp Logist 5(4–5):500–511 Ng AKY, Sauri S, Turro M (2013) Short sea shipping in Europe: issues, policies and challenges. In: Finger M, Holvad T (eds) Regulating transport in Europe. Edward Elgar, pp 196–217 Nupp B (1970) National transportation policy in the United States – an analysis of the concept. Transp Law J 2:143–158 Pallis AA (2017) The common EU maritime transport policy: policy Europeanisation in the 1990s. Routledge Panayiotoua A, Medda FR (2014) Attracting private sector participation in transport investment. Proc Soc Behav Sci 111:424–431. https://doi.org/10.1016/j.sbspro.2014.01.075 Power V (2014) The historical evolution of European Union shipping law. Tulane Marit Law J 38 (2):313–362 van Hooydonk E (2006) The impact of EU environmental law on ports and waterways. Maklu Press, Antwerp

Henning Jessen LL.M. (Tulane) Henning Jessen is a fully qualified lawyer in his German home jurisdiction. He graduated from the University of Kiel in 2002 (First State Exam) and took the Second State Exam in 2006. Supported by a Fulbright Scholarship, he undertook postgraduate studies in Admiralty and Maritime Law in the United States (Tulane Law School, New Orleans) from 2003–2004. From 2006 to 2008, Henning Jessen worked for the German Federal Ministry for Economic Cooperation & Development (focus areas being world trade law and aid for trade). Since 2008, he has been working as a Professor for Maritime Law and the Law of the Sea at two universities in the German maritime hubs of Bremen (2008–2012) and Hamburg (2012–2016). Henning Jessen has co-edited and authored an extensive commentary on the EU’s regulatory activity in the maritime realm (Brussels Commentary on EU Maritime Transport Law). Since 2016, he has been an Associate Professor for Maritime Law & Policy at the World Maritime University (WMU) in Malmö, Sweden. His main areas of teaching and research are legal aspects of IMO conventions and related EU law, as well as the law of the sea, carriage of goods by sea law, international aspects of transport law, trade facilitation and related WTO law.

The Energy Sector Bent Ole Gram Mortensen

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Critical Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The EU Energy Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 The Internal Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 The EU Energy Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 The Need for Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Existing EU Secondary Legislation Relating to FDI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Hydrocarbons Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Risk Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Unbundling Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Energy Charter Treaty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

304 304 304 306 307 307 308 308 309 309 310 311 312 314 315

Abstract To a large extent, the energy sector consists of what can be termed critical infrastructure. It is therefore not surprising that the EU’s new foreign direct investment screening mechanism also includes the energy sector. However, existing EU legislation has provisions that can perform the same function as the more formal screening mechanism. This chapter presents and analyzes this legislation. It is concluded that the present EU energy legislation already contains tools regarding investment control.

B. O. G. Mortensen (*) University of Southern Denmark, Odense, Denmark e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 303–316, https://doi.org/10.1007/16495_2020_21, Published online: 19 June 2020

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1 Introduction With the Critical Infrastructure Directive,1 Member States were required to identify European critical infrastructure and prepare security plans. In Article 4 of the EU Screening Regulation,2 several factors that may be taken into consideration by the Member States or the Commission are defined. Among these is critical infrastructure. And among the listed examples is critical infrastructure within the energy sector.

1.1

Critical Systems

There is no doubt that energy supply systems are critical to any society. In the event of disruption of these supply services, modern societies will find it difficult to operate, and citizens’ health and safety will be threatened. Concerns about the disruption of energy supply are expressed in energy policies regarding the security of supply known from most countries. Security of energy supply can be defined as securing the “flow of energy supply to meet demand in a manner and at a price level that does not disrupt the course of the economy in an environmental[ly] sustainable manner.” The vast concept includes a reliable supply of energy (primary energy sources and suppliers), reliable transportation of supply, reliable distribution, and delivery of supply to the final customer and at reasonable prices.3 Energy supply security is closely connected with investments made in the energy sector. Without timely investments made in different parts of the value chain, the security of supply will be threatened.

1.2

Investments

The need for investment may give rise to lower barrier to these investments. In general, most Member States and the EU as such wish to be an attractive destination for investment, including foreign investments. And energy is an EU policy area. The

1

Council Directive 2008/114/EC of 8 December 2008 on the identification and designation of European critical infrastructures and the assessment of the need to improve their protection, OJ L 345, 23.12.2008, pp. 75–82. 2 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 79I, 21.3.2019, pp. 1–14. 3 This definition comes from Chevalier (2006).

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competence is shared between the Union and the Member States (Article 4(2) (i) TFEU).4 However, the wish to attract also foreign investments must be balanced up against the risk that foreign investments can be used to, for instance, extract know-how, commit espionage, abuse natural monopolies, or establish control5 over critical infrastructure or other facilities, making it possible to close down the supply.6 Part of the risk relates to the danger of becoming intertwined with geopolitics. In some parts of the energy sector, the share of foreign direct investments (FDI) are high. In a report, the Commission mentions: “Although it is widespread across virtually all sectors of the EU economy, foreign ownership is remarkably high in a number of sectors that are at the heart of the economy, such as oil refining (67 percent of total assets of the sector) . . .”.7 The same report shows much lower FDI level in other parts of the energy sector. China is one of the biggest third country investors. Chinese SOEs already control significant stakes in the Italian power grids, British gas network, and Greece’s grid operator.8 China Three Gorges Corp. is holding a 23% stake at the Energias de Portugal SA (EDP) and had in April 2019 proposed a hostile takeover of EDP, which was rejected at the EDF shareholders’ meeting. In July 2018, the German government announced to buy a 20% stake in electricity network company 50Hertz, in effect blocking the State Grid Corporation of China (SGCC) from taking a majority stake in the network company.9

4

See below under Sect. 2 regarding EU competence regarding energy. The capability for hostile reasons to shut down infrastructure or other facilities are among the risk by foreign investments in critical infrastructure. This is often referred to as a kill switch. However, this term is normally used to describe security measures in among others digital devices, which is installed to protect data by erasing the data or disabling the device, for instance in connection with thefts. 6 For other legislation supporting the focus on security, see Directive (EU) 2016/1148 of the European Parliament and of the Council of 6 July 2016 concerning measures for a high common level of security of network and information systems across the Union, OJ L 194, 19.7.2016, pp. 1–30, and Regulation (EU) 2019/881 of the European Parliament and of the Council of 17 April 2019 on ENISA (the European Union Agency for Cybersecurity) and on information and communications technology cybersecurity certification and repealing Regulation (EU) No 526/2013 (Cybersecurity Act), OJ L 151, 7.6.2019, pp. 15–69. Further, in 2019 the Commission adopted a dedicated Guidance on cybersecurity in the energy sector. 7 See European Commission, 13 March 2019, Commission Staff Working Document on Foreign Direct Investment in the EU—Following up on the Commission Communication “Welcoming Foreign Direct Investment while Protecting Essential Interests” of 13 September 2017, SWD(2019) 108 final, p. 2. 8 EURACTIV (16 July 2018), China set to fully control Portugal’s power grid amid Europe’s inertia, available at: https://www.euractiv.com/section/eu-china/news/china-set-to-fully-control-portugalspower-grid-amid-europes-inertia/ (last accessed 6 January 2020). See also Liedtke (2017) and Asensio et al. (2018). 9 The ownership of 50Hertz is now shared between the Belgian system operator Elia and the German state-owned KfW Bank Group. 5

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The EU seems in the resent past to have been more interested in Chinese investment in the EU’s energy sector. In 2016, a cooperation agreement was thus concluded. It also contains investment elements.10 The need to control foreign investments therefore seems obvious. In fact, 14 EU Member States had national investment screening mechanisms in place before the EU Screening Regulation, some on a general legal basis, others regarding certain sectors.11

2 The EU Energy Sector Energy is a main EU policy area. This is nothing new. Energy, together with steel, was among the main drivers for integration in post-World War II. In 1951, the European Coal and Steel Community (ECSC) was formed by the Treaty of Paris.12 And the Treaty establishing the European Atomic Energy Community was formed in 1957. Today, the Treaty on the Functioning of the European Union (TFEU) includes articles relevant for water and energy. Energy is now a special policy area. Article 194 TFEU includes the objectives of the EU energy policy, such as the functioning of the energy market, security of energy supply in the Union, energy efficiency, and the interconnection of energy networks. Further, in TFEU 194(2), a Member State’s right to determine the conditions for exploiting its energy resources, its choice between different energy sources, and the general structure of its energy supply are stated.13 TFEU Article 194 expresses a balance between the competence of the Member States and that of the EU within the energy sector.14 There is a limit to harmonization also regarding investments and ownership.

10 European Commission (2016), EU-China Roadmap on energy cooperation (2016–2020). Available at: https://ec.europa.eu/energy/sites/ener/files/documents/FINAL_EU_CHINA_ENERGY_ ROADMAP_EN.pdf (last accessed 6 January 2020). 11 European Commission Press Release (14 February 2019), Commission welcomes European Parliament’s support for investment screening framework, available at: http://europa.eu/rapid/ press-release_IP-19-1052_en.htm (last accessed 6 January 2020). The national law of the Member States will not be dealt with in this chapter. Nor will treaty provisions regarding the EU internal market freedoms. For a comment to those, please see De Luca (2013). 12 The policy areas covered by the ECSC treaty were integrated into the Treaty of Rome, and the ECSC expired in 2002. 13 For a discussion regarding the balance of competences between the EU and the Member States regarding the EU Screening Regulation with regards to energy, see Reins (2019). 14 Regarding the interpretation of TFEU Article 194(2), see Johnston and van der Marel (2013), p. 181.

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The Internal Market

However, concerning the internal market in particular, there has been harmonization in relation to the supply of electricity and natural gas. These supply sectors are characterized by interconnectors, publicly owned companies, and natural monopolies. It has therefore been difficult de facto to make the internal market work in these areas. These challenges have been shared by the two energy supply sectors with other sectors such as air transport, railways, telecommunications, and postal services.15 Special regulation regarding the nuclear industry is found in the European Atomic Energy Community (Euratom).16 A notification procedure is established by Council Regulation (Euratom) No 2587/1999 of 2 December 1999 defining the investment projects to be communicated to the Commission under Article 41 of the Treaty establishing the European Atomic Energy Community.

2.2

The EU Energy Policy

The energy supply sector is a sector in a transition period. Due to climate considerations, the use of fossil fuels will have to be reduced.17 The increased use of renewable and technical development will call for increased decarbonization, decentralization, and digitalization. Further, these climate considerations bring the political focus on the energy supply sector. Energy policy is a mix of different considerations, including climate, environment, competition, consumer protection, and industrial policy. Within the EU, the focus regarding energy has been on climate issues, the security of supply, and creating an internal market for, especially, electricity and natural gas. The construction of an internal electricity and natural gas market has been going on for several years. The first electricity and natural gas market directives date back to the second half of the 1990s.18 The current market directives are part of the third

15

See about these sectors in Mortensen in: Jessen et al. (2016), pp. 421–555. Based on the Treaty Establishing the European Atomic Energy Community (Consolidated version), OJ C 327, 26.10.2012, pp. 1–107. 17 See the Clean Energy for All Europeans package consisting of eight legislative acts updating the EU Energy Policy. A reference to the updated legislation can be found at https://ec.europa.eu/ energy/en/topics/energy-strategy-and-energy-union/clean-energy-all-europeans (last accessed 6 January 2020). 18 Directive 96/92/EC concerning common rules for the internal market in electricity, OJ L 27, 30.1.1997, pp. 20–29 (hereinafter the first Electricity Directive); and Directive 98/30/EC concerning common rules for the internal market in natural gas, OJ L 204, 21.7.1998, pp. 1–12 (hereinafter the first Gas Directive). 16

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energy package.19 Legal instruments applied in these market directives such as requirements for authorization and unbundling may have effect corresponding to requirements for investment screening. Explicitly, the original EU energy regulation did not relate to the controlling of investments from third countries. It was not one of the objectives of EU energy policy, as stated in the Action Plan “An Energy Policy for Europe”20 adopted at the EU Summit of Heads of State and Government on March 8–9, 2007. However, there have been later initiatives approaching investment screening in EU legislation.

2.3

The Need for Investments

If fossil fuels are to be replaced by other energy sources, this will require huge investments in new production facilities even in the industrialized part of the world. New technical developments, including increased decentralized production from, e. g., solar cells and an increasing number of electric cars, will require future huge investments in the power grid. Quoting the International Energy Agency: “In advanced economies, electricity demand growth is modest, but the investment requirement is still huge as the generation mix changes and infrastructure is upgraded.”21 In a study, EUR 95 to 145 billion is estimated as annual investments needed in the power sector in 2021–2050.22 Regarding the natural gas network, the ENTSOG finds sufficient flexibility for transmitting supplies to the demand areas in most of Europe. However, in some areas, further investment is needed to meet the risk of disruption of imports.23

3 Existing EU Secondary Legislation Relating to FDI In the following, a number of EU legal instruments with similar effects to investment screening will be discussed.

19

Directive 2009/73/EC concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC, OJ L 211, 14.8.2009, pp. 94–136 (hereinafter the gas market directive). Directive 2009/72/EC concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, OJ L 211, 14.8.2009, pp. 55–93 have been replaced by Directive (EU) 2019/944, OJ L 158, 14.6.2019, pp. 125–199 (hereinafter the electricity market directive). 20 European Commission, Communication from the Commission to the European Council and the European Parliament of 10 January 2007, “An energy policy for Europe”, COM(2007) 1 final. 21 International Energy Agency (IEA) (2018). 22 Van Nuffel et al. (2017), p. 16. Available at https://www.europarl.europa.eu/RegData/etudes/ STUD/2017/595356/IPOL_STU(2017)595356_EN.pdf (last accessed 6 January 2020). 23 ENTSOG (2018), p. 32.

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Hydrocarbons Directive

Directive 94/22/EC of the European Parliament and the Council of 30 May 1994 on the conditions for granting and using authorizations for the prospection, exploration, and production of hydrocarbons (the Hydrocarbons Directive)24 contains provisions regarding reciprocity of access to investments between the EU and third countries. The general rule in Article 2(2) is that when an area is made available for the exercise of prospecting, exploring for, and producing hydrocarbons, the Member States shall ensure that there is no discrimination between entities as regards access to, and exercise of, these activities. This is under the general principle of nondiscrimination due to nationality within the EU. However, Article 2(2) also states that the Member States may refuse, on grounds of national security, to allow access to and exercise of these activities to any entity which is effectively controlled by third countries or third country nationals. Although an entity is a resident of a Member State, the actual control by a third country over the undertaking concerned may allow a Member State to refuse to grant a license for prospection, exploration, and production of hydrocarbons. However, this can only be done on grounds of national security. The Directive does not specify what national security consists of. Furthermore, the Hydrocarbon Directive contains a provision on procedures in connection with a lack of reciprocity in relation to access to or exercise of the activities of prospecting, exploration for, and producing hydrocarbons in third countries in Article 8.

3.2

Authorizations

The Member States are required to establish procedures for granting authorizations within certain parts of the energy sector. Authorization is in this context to be understood as a public license to operate a business, to establish new capacity, or to utilize a resource.25 The authorization requirement can be connected to different links in the value chain.

3.2.1

Authorization to Operate

When authorization is required to run an energy business, this is partly because there may be large socioeconomic costs of supply disconnection and partly because 24

Directive 94/22/EC of the European Parliament and of the Council of 30 May 1994 on the conditions for granting and using authorizations for the prospection, exploration and production of hydrocarbons, OJ L 164, 30.6.1994, pp. 3–8. 25 Regarding a license to utilize a resource, see Hydrocarbons Directive Article 3(1).

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special technical insight and financial capacity may be needed. Further, public service obligations may be imposed on the company.26 Especially when it comes to operating natural monopolies such as engaging as a transmission system operator (TSO), the electricity and gas market directives include obligations on the TSO. Some of these demands reflect organizational demands (unbundling); others reflect the qualities of the company. When it comes to certification concerning third countries, a special notification procedure applies.27 Article 11 is also referred to as the “third country clause”28 or the “Gazprom clause.”29 This clause calls for the notification of the Commission and the regulatory authority in Member States when a person or persons from a third country or third countries acquires control of the transmission system or the TSO or a transmission system owner that is controlled by a person or persons from a third country or third countries either requests certification or acquires control over the TSO.

3.2.2

Authorization for New Capacity

The electricity market directive instructs the Member States to lay down criteria for the granting of authorization for the construction of generating capacity in their territory. Public security interests can be protected.

3.3

Risk Assessment

According to the Regulation on Security of Gas Supply,30 Member States are required “to carry out Risk Assessments, at national and regional level, assessing all possible risks for the gas system, including the risks associated with the control of infrastructure relevant for security of supply by third country entities, and to prepare comprehensive Preventive Action Plans and Emergency Plans with measures to

26

See Article 3(2) in the gas market directive and Article 9 in the electricity market directive. Electricity market directive Article 53 (former Article 11) and Gas market directive Article 11. 28 See in this volume, Barbara Kaech & Moritz Wüstenberg, Building Pipelines—Experiences with Formal and Informal Screening Mechanisms. 29 Vranes (2012), p. 642. 30 Regulation (EU) 2017/1938 of the European Parliament and of the Council of 25 October 2017 concerning measures to safeguard the security of gas supply and repealing Regulation (EU) No 994/2010, OJ L 280, 28.10.2017, pp. 1–56. 27

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mitigate those risks.”31 The same requirements to carry out Risk Assessments are found within the electricity sector in the Regulation on risk preparedness.32

3.4

Unbundling Requirements

One of the tools used in competition law to uphold a sufficient level of competition in, e.g., vertical integrated industries is unbundling, which is a form of separation of activities between different links in the value chain (vertical unbundling).33 EU legislation has used unbundling as a legal tool in both the electricity market directive and the gas market directive. Both directives state the reason for using this tool, such as for “avoiding discrimination, cross-subsidization and distortion of competition.”34 Unbundling is normally divided into four different levels: accounting, management, organizational/functional, and ownership.35 The later, ownership unbundling was introduced in Article 9 in the electricity market directive in 2009 on transmission level.36 It means that the same person/company or persons/companies are not entitled to exercise control over a generation or supply undertaking and, at the same time, exercise control or any right over a transmission system operator or a transmission system. In the preambular paras 10 and 11, it is argued that the rules on legal and functional unbundling did not lead to effective unbundling of the transmission system operators, and ownership unbundling was referred to as the most effective tool to promote investments in infrastructure in a nondiscriminatory way, fair access to the network for new entrants, and transparency in the market. The 2009 version of the electricity market directive is described as the “first example of a measure that is clearly meant to protect domestic interests against foreign investments.”37 As these rules apply also to persons/companies from a third

31

European Commission Communication (13 September 2017), Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union, COM(2017) 487 final, p. 6. 32 Regulation (EU) 2019/941 of the European Parliament and of the Council of 5 June 2019 on riskpreparedness in the electricity sector and repealing Directive 2005/89/EC, OJ L 158, 14.6.2019, pp. 1–21. 33 Examples of horizontal separation can be found in the railway sector. See Mortensen (2016), p. 442. 34 Article 31(3) in the gas market directive and Article 56 in the electricity market directive (both regardig unbundling of accounts). 35 Mortensen (2016), p. 442 ff. Regarding the electricity market directive, see p. 482 and regarding the gas market directive pp. 496–497. 36 Ownership unbundling was not a demand in the previous two directives, the first Electricity Directive and Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC— Statements made with regard to decommissioning and waste management activities, OJ L 176, 15.7.2003, pp. 37–56. 37 Vranes (2012) pp. 641–642. The Member States have an alternative to ownership unbundling— independent system operator (ISO) or independent transmission operator (ITO).

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country, it would block investments from at least energy enterprises involved in the generation and/or supply of energy. The gas directive has the same provisions regarding ownership unbundling and the alternative—ISO and ITO. The internal market provisions in Article 43 of the electricity market directive only applies within the internal market. This used to be the case regarding the gas directive. However, in connection with the discussion on the natural gas transit line Nord Stream 2, the European Commission wanted to extend its general energy policy principles to the entire transit line. However, at the end of September 2017, the Commission’s interpretations of the Natural Gas Directive were shot down by the Council's Legal Service.38 Already in early November 2017, the EU Commission was able to present a draft amendment.39 This draft meant that the gas directive should apply to pipelines to and from third countries. The proposal broadened the scope of the Natural Gas Directive to not only apply to land but also cover offshore pipelines landing in the EU, including in the exclusive economic zone, otherwise regulated by the Convention on the Law of the Sea. Thus, EU rules on, among others, ownership unbundling would apply to the entire pipeline, including the part located in international waters. Later, a compromise was reached. The Directive now only covers the part of the gas transmission line that is located on the territorial sea of the Member State where the gas pipeline is landed.

4 The Energy Charter Treaty The Energy Charter Treaty (ECT) protects cross-border investments of all aspects of commercial energy activities. In Title II of the ECT the purpose regarding investments are revealed as to “make every effort to remove all barriers to investment in the energy sector and provide, at national level, for a stable, transparent legal framework for foreign investments, in conformity with the relevant international laws and rules on investment and trade. As such, the ECT is intended to promote cross-border investments. The treaty includes a dispute resolution procedure allowing investor-state arbitration (regarding investment disputes, ECT Article 26).40

38 Opinion of 27 September 2017 of the Legal Service. Available at: http://www.politico.eu/wpcontent/uploads/2017/09/SPOLITICO-17092812480.pdf (last accessed 6 January 2020). The failed attempt by the Commission is described in this volume, (see the chapter by Kaech and Wüstenberg). These authors also refer to Talus (2017), who argues that the gas directive was limited to the EU domestic gas market. 39 European Commission Communication (30 June 2017) Report from the Commission—Annual Report 2016 on Subsidiarity and Proportionality, COM(2017)600 final. See also Talus (2019). 40 The Energy Charter Treaty entered into force on 16 April 1998. A consolidated version can be found on https://energycharter.org/fileadmin/DocumentsMedia/Legal/ECTC-en.pdf (last accessed 6 January 2020).

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Among the contracting parties are the EU and most of its Member States. It is claimed to be “the most frequently invoked International Investment Agreement (IIA) in the world.”41 Many investor-state cases have been issued under the ECT dispute rules. More than a hundred cases are known.42 However, arbitrations can be kept confidential, so the number of disputes might be higher.43 One of the upcoming cases may relate to the establishment of the well-known Nord Stream 2 gas pipeline in the Baltic Sea.44 In a notification from April 12, 2019, the Swiss project company Nord Stream 2 AG informed the European Union about its considerations regarding initiating investment dispute proceedings against the EU under the ECT. Nord Stream 2 AG argues that a recent amendment to the EU Gas Directive45 extending the applicability of the EU gas market rules to pipelines bringing natural gas into the EU is discriminatory as it only applies to the Nord Stream 2.46 The amendment has previously been named Lex Nord Stream as the sole motivation seems to have been a desire to block Nord Stream 2.47 Such a case may demonstrate the use of EU secondary legislation to regulate (block) direct foreign direct investments. Recently, probably sparked by the Nord Stream 2 case, the dependency of imports of natural gas has become a focus area within the EU. The timeliness of this focus is due to an increase in the already large imports of Russian natural gas over the past decades. At the same time, the EU is meeting an increased need for imports as a result of a decrease in the EU's production of gas and the phasing out of coal as fuel in power plants and also the phasing out of nuclear power plants in Germany.

41 International Energy Charter (11 January 2019), The Energy Charter Treaty (ECT) Remains the Most Frequently Invoked IIA. Available at: https://energycharter.org/media/news/article/theenergy-charter-treaty-ect-remains-the-most-frequently-invoked-iia/?tx_news_pi1%5Bcontroller% 5D¼News&tx_news_pi1%5Baction%5D¼detail&cHash¼4b7f59380a66e07d026d71f9d4823302 (last accessed 6 January 2020). 42 A list of cases can be found on https://energycharter.org/what-we-do/dispute-settlement/all-invest ment-dispute-settlement-cases/ (last accessed 6 January 2020). 43 Regarding statistic on the disputes, see https://energycharter.org/what-we-do/dispute-settlement/ cases-up-to-18-may-2018/ (last accessed 6 January 2020). 44 For an analysis of the Nord Stream 2 project, see in this volume Kaech and Wüstenberg, Building Pipelines—Experiences with Formal and Informal Screening Mechanisms. 45 Directive (EU) 2019/692 of the European Parliament and of the Council of 17 April 2019 amending Directive 2009/73/EC concerning common rules for the internal market in natural gas, OJ L 117, 3.5.2019, pp. 1–7. 46 See for a comment on that possible case by EURACTIV (29 May 2019), Exploring the limits of EU’s unbelievable behaviour on Nord Stream 2. Available at https://www.euractiv.com/section/ energy/opinion/exploring-the-limits-of-eus-unbelievable-behaviour-on-nord-stream-2/ (last accessed 6 January 2020). 47 See EnergyPost.eu (10 April 2018), New Gas Market Directive will change balance of power between EU and Member States. Available at https://energypost.eu/new-gas-market-directive-willchange-balance-of-power-between-eu-and-member-states/ (last accessed 6 January 2020).

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One can question whether an investment treaty as the ECT applies between individual EU Member States. The Achmea case,48 in which the Court of Justice of the European Union (CJEU) found that investor-state arbitration clauses contained in bilateral investment treaties (BITs) between the Member States were incompatible with EU law, may be interpreted in this way. It is the Commission's view that the ECT cannot be used as a basis for dispute settlement between EU investors and the EU Member States.49 This was the position of the Commission also before the judgement. But the Achmea case deals only with BITs, not with a more general treaty as the ECT. And the judgement concerns only intra-EU disputes, not those relating to third country investments. In the same direction, the Mox Plant case,50 where the Court found that Ireland, by instituting dispute settlement proceedings within the framework of the United Nations Convention on the Law of the Sea based on provisions of that Convention falling within the competence of the Community, exercised a competence that belongs to the Community. In general, the Commission prefers permanent multilateral bodies to decide investment disputes instead of ad hoc arbitration, which is possible under the ECT. However, according to the ECT, only 10 out of 121 cases known to the ECT were brought before ad hoc arbitration tribunals.51 Attempts to reform the ECT is ongoing. The UN Conference for Trade and Development (UNCTAD) leads international effort to reform IIAs.52

5 Concluding Remarks The energy sector with its natural monopolies and great societal significance is an obvious sector for screening third country investments. Different legal tools for investment control existed in the EU energy legislation before the Critical Infrastructure Directive.

48

Judgement of the Court (Grand Chamber) of 6 March 2018, Slovak Republic v Achmea BV, C-284/16, ECLI:EU:C:2018:158. 49 See European Commission Communication (19 July 2018), Protection of intra-EU investment, COM(2018) 547 final. 50 Judgement of the Court (Grand Chamber) of 30 May 2006, The Commission v Ireland, C-459/03, ECLI:EU:C:2006:345. The case concerned the MOX Plant at Sellafield, UK (recycling of plutonium from spent nuclear fuel). 51 International Energy Charter (11 January 2019), The Energy Charter Treaty (ECT) Remains the Most Frequently Invoked IIA. Available at: https://energycharter.org/media/news/article/theenergy-charter-treaty-ect-remains-the-most-frequently-invoked-iia/?tx_news_pi1%5Bcontroller% 5D¼News&tx_news_pi1%5Baction%5D¼detail&cHash¼4b7f59380a66e07d026d71f9d4823302 (last accessed 6 January 2020). 52 EnergyPost.eu (6 March 2019), “Outdated Energy Charter Treaty leaves new economy investments unprotected”. Available at: https://energypost.eu/outdated-energy-charter-treaty-leaves-neweconomy-investments-unprotected/ (last accessed 6 January 2020).

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Whether formal or informal screening processes are applied, they can be characterized by political interference. It can lead to unpredictability, which hardly attracts investments. However, in different directives, public service obligations may apply. And the Member State may emphasize the security of supply.

References Asencio JM, Fiorini A, Navarro JPJ (2018) Chinese foreign direct investments in the EU energy sector. Econ Policy Energy Environ 2:207–229 Chevalier J-M (2006) Security of energy supply for the European Union. Eur Rev Energy Mark 1 (3). Available at https://www.eeinstitute.org/european-review-of-energy-market/EREM%203% 20article%20Jean-Marie%20Chevalier.pdf De Luca A (2013) The legal framework for foreign investments in the EU: the EU internal market freedoms, the destiny of Member States’ BITs, and future European agreements on protection of foreign investments. In: Trakman L, Ranieri N (eds) Regionalism in international investment law. Oxford University Press EnergyPost.eu (10 April 2018) New Gas Market Directive will change balance of power between EU and Member States. Available at https://energypost.eu/new-gas-market-directive-willchange-balance-of-power-between-eu-and-member-states/ EnergyPost.eu (6 March 2019) Outdated Energy Charter Treaty leaves new economy investments unprotected. Available at: https://energypost.eu/outdated-energy-charter-treaty-leaves-neweconomy-investments-unprotected/ ENTSOG (2018) Ten-year Network Development Plan 2018. Available at https://www.entsog.eu/ sites/default/files/2018-12/ENTSOG_TYNDP_2018_System%20Assessment_web.pdf EURACTIV (16 July 2018) China set to fully control Portugal’s power grid amid Europe’s inertia. Available at: https://www.euractiv.com/section/eu-china/news/china-set-to-fully-controlportugals-power-grid-amid-europes-inertia/ EURACTIV (29 May 2019) Exploring the limits of EU’s unbelievable behaviour on Nord Stream 2. Available at https://www.euractiv.com/section/energy/opinion/exploring-the-limits-of-eusunbelievable-behaviour-on-nord-stream-2/ International Energy Agency, IEA (2018) World Energy Outlook, executive summary Johnston A, van der Marel E (2013) Ad Lucem? Interpreting the new EU energy provision, and in particular the meaning of Article 194(2) TFEU. Eur Energy Environ Law Rev 22(5):181–199 Liedtke S (2017) Chinese energy investments in Europe: an analysis of policy drivers and approaches. Energy Policy 101:659–669 Mortensen BOG (2016) The liberalised sectors. In: Jessen PW, Mortensen BOG, Steinicke M, Sørensen KE (eds) Regulating competition in the EU. Wolters Kluwer, pp 421–555 Reins L (2019) The European Union’s framework for FDI screening: towards an ever more growing competence over energy policy? Energy Policy 128:665–672 Talus K (2017) Application of EU energy and certain national laws of Baltic Sea countries to the Nord Stream 2 pipeline project. J World Energy Law Bus 10:30–42 Talus K (2019) EU gas market amendment - despite of compromise, problems remain. Oil Gas Energy Law Intell (OGEL) 2 Van Nuffel L et al (2017) Study for the ITRE Committee: European Energy Industry Investments. Available at https://www.europarl.europa.eu/RegData/etudes/STUD/2017/595356/IPOL_STU (2017)595356_EN.pdf Vranes E (2012) State measures protecting against “undesirable” foreign investment. Issues in EU and International Law. Zeitschrift für öffentliches Recht (ZöR) 67(4):639–677

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Bent Ole Gram Mortensen is a professor of law at the University of Southern Denmark. Since 2004, he has had a Chair of Public Law and since 2009 a Chair of Commercial Law, including Environmental and Energy Law. He has a background in law firms, the oil industry, the Danish Ministry of Justice, and the university sector. He has since 1995 dealt with legal research in especially environmental and energy regulation in Denmark, the EU, the Arctic, and China. He has published a large number of books, book chapters, and articles in English, German, and Danish. Further, he is a member of the Danish Energy Board of Appeal, chair of the Wind Turbine Valuation Authority, and member of the Council for Protection of Intellectual Property (UBVA).

The Telecommunications and IT Infrastructure Sector Michael Fehling

Contents 1 Introduction: Huawei “Ante Portas” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Initial Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 No Directly Applicable Rules or Judicial Precedents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Reasons: Different Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Utilising General Rules for Hidden Investment Screening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Telecommunication Networks and Services in General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 In Particular: Auction of Frequencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract This chapter analyses whether European IT and telecommunications law provides any possibilities to ban direct investments and network supply by third country-companies. A closer look onto the prohibitions of discrimination and the concept of general authorisation shows that preventive investment control in general is neither intended nor justified by the relevant EU directives. Even when interpreting German eligibility requirements for admission to the frequency auction (5G), the main purposes of European telecommunications law—open competition and technological dynamism—hinder a strict exclusion of suppliers from third countries.

M. Fehling (*) Bucerius Law School, Hamburg, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 317–328, https://doi.org/10.1007/16495_2020_22, Published online: 6 August 2020

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1 Introduction: Huawei “Ante Portas” The telecommunications sector is at the centre of political attention when Germany and the EU are considering restrictions on direct investment from third countries. This is not only due to a concern well known from other economic sectors—that especially Chinese companies will unilaterally extract valuable know-how while simultaneously continuing to close off their domestic market. Rather, the principal fear is that such companies could act as “Trojan horses”, giving their government control over critical telecommunications and IT infrastructure in Europe.1 Currently, such fears are sparked particularly by the case of the Chinese telecommunications technology supplier Huawei.2 Strictly speaking, however, this is not a case of direct investments. Instead, it is the large European telecommunications companies, above all Deutsche Telekom, that want to use Huawei components for their next-generation 5G mobile networks. Yet there are similar possible risks and “horror scenarios”, such as China using “backdoors” in Huawei technology for the purpose of espionage. In the worst case, EU Member States may even be susceptible to blackmailing because China could use Huawei components to shut down telecommunications networks (so-called kill switch).3 These security concerns mix with classic economic policy objectives. If Europe falls behind in 5G technology, this would also increase the risk of investors from third countries abusing their market power for political purposes.4 This is why—following the example set by the USA5—some officials at the EU and national levels are looking for legal means to ban the use of Huawei technology in critical infrastructure.6 In Germany, this affects in particular the forthcoming auction of mobile frequencies. Here, the question is if bidders can be obliged to refrain from using Huawei components when setting up their network.7 This results in calls for changes to EU and national telecommunications law. Conversely, such demands indicate that the given legal possibilities are (too) limited. In the following, I shall review if this is indeed the case. In view of the current

1

See e.g. Die Zeit (6 December 2018), 5G-Netz: Kontrolle ist besser. Süddeutsche Zeitung (4 January 2019), Riskanter Anschluss. 3 tagesschau.de (30 January 2019), Sicherheitsbehörden warnen vor Huawei. 4 Frankfurter Allgemeine (2 February 2019), EU-Kommissar springt denen bei, die Angst vor Huawei haben. 5 In May 2019 President Trump issued the Executive Order on Securing the Information and Communications Technology and Services Supply Chain to ban transactions which pose “an unacceptable risk” to the national security, see e.g. The New York Times (15 May 2019), Huawei Is a Target as Trump Moves to Ban Foreign Telecom Gear; see also Segal (2018), p. 18. 6 Reuters (30 January 2019), Exclusive: EU considers proposals to exclude Chinese firms from 5G network. 7 Currently there are no concerns, see e.g.: Financial Times (14 April 2019), German regulator says Huawei can stay in 5G race; Frankfurter Allgemeine (15 April 2019), Bundesnetzagentur hat keine Bedenken wegen Huawei. 2

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challenges, I will address both direct investments and the mere supply of network components as it is the case with Huawei. Therefore, my question is: Does the current sector-specific IT and telecommunications legislation on the EU level contain rules that—although primarily serving other purposes—may also be used to control direct investments and arrangements with similar effects?

2 Initial Findings 2.1

No Directly Applicable Rules or Judicial Precedents

No judicial precedents can be found concerning the utilisation of IT or telecommunications law for a preventive control of investments from third countries. At first sight, there are also no (sector-specific) regulations for this, neither in the current directives—most importantly the Authorisation Directive8 and the Framework Directive9—nor in the new Directive establishing the European Electronic Communications Code (EECC Directive),10 adopted at the end of 2018.

2.2

Reasons: Different Objectives

This is hardly surprising since telecommunications law is in principle committed to other objectives. It seeks to enable open markets and equal competition, as well as innovation and technological dynamism.11 Ultimately, the hope is to improve telecommunications services for citizens and companies. At least at first glance, these objectives are served best when there is a large number of providers, including such from third countries. Also, the world’s best technology should be used. Although telecommunications law pursues objectives similar to energy law, the focus in telecommunications law is comparatively stronger on liberalisation and market opening, while energy law places greater emphasis on the classification as

8 Directive 2002/20/EC of the European Parliament and of the Council of 7 March 2002 on the authorisation of electronic communications networks and services (Authorisation Directive), OJ L 108/21. 9 Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services (Framework Directive), OJ L 108/33. 10 Directive (EU) 2018/1972 of the European Parliament and of the Council of 11 December 2018 establishing the European Electronic Communications Code (Recast)Text with EEA relevance, OJ L 321/36. 11 See e.g. Article 8(2) and recital 1, 4 Framework Directive; Recital 3 EECC-Directive; for a short overview see Gärditz (2018), marginal numbers 32–34.

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services of general economic interest according to Art. 14 TFEU. Thus, investment screening in the energy sector ultimately remains closely linked to the preservation of national sovereignty in services of general interest. This may explain to a certain extent why only EU energy law, but not IT and telecommunications law, provides connecting points for a sectoral screening mechanism. In the realm of financial services, systemic risks and the vulnerability to money laundering and organised crime have led to the ex ante regulation of shareholdings by a holder control procedure.12 However, such aspects do not exist in the IT and telecommunications sector. Of course, IT and telecommunications law does address security interests. There is even a Directive on Network and Information Security (NIS Directive) to guarantee a “high common level of security of network and information systems across the Union”.13 This Directive, however, follows a completely different approach. It does not lay down or allow any licensing or comparable instruments to control the acquisition of shareholdings. Rather, the Directive in a general way obliges the Member States to develop a national strategy on IT security14 and subsequently to impose organisational obligations on the operators of essential services in order to prevent major disruptions.15 And if “security” is referred to in telecommunications law outside the NIS Directive, this refers to either rights of information and further means of intervention by the police or other agencies16 or the “security of supply” for the public.17 Both aspects have nothing to do with the specific risks of investments from third countries.

3 Utilising General Rules for Hidden Investment Screening One question remains: Can very general rules, which are actually intended for other purposes, be (re)interpreted creatively in such a way that they enable hidden investment screening or even enable the stopping of investment altogether?

12

Concerning the German Banking Act [Kreditwesengesetz] Schäfer (2016), marginal numbers 1–3. 13 Directive (EU) 2016/1148 of the European Parliament and of the Council of 6 July 2016 concerning measures for a high common level of security of network and information systems across the Union (NIS-Directive), OJ L 194/1; see Witt and Freudenberg (2016), p. 657 ff. 14 Article 7 of the NIS-Directive. 15 Cf. Article 14 of the NIS-Directive. 16 See e.g. Article 10(6) and recital 3, 27 Authorisation Directive; Article 8(4), 12(2) and recital 7 Framework Directive; Article 2(21), Article 40 ff. EECC Directive. 17 See e.g. Recital 94 EECC-Directive.

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Telecommunication Networks and Services in General Reinterpreting Prohibitions of Discrimination?

All of the secondary law on telecommunications contains prohibitions of discrimination.18 This also concerns market access. The relevant provisions19 and, above all, the recitals20 make clear time and again that the regulatory objective is to create one single market, open and undistorted. Accordingly, one could consider to teleologically reduce the prohibitions of discrimination to the effect that they only apply to companies from that single market. Conversely, discriminatory restrictions for companies from third countries would be permissible. However, the prohibitions of discrimination in secondary law must again be interpreted in accordance with the EU fundamental freedoms.21 Article 12(1) of the EECC Directive and—mutatis mutandis—Art. 3(1) of the Authorisation Directive even refer expressly to the rules of exception in Art. 52(1) TFEU. As far as the scope of application of the free movement of capital is concerned, the scope of protection also extends to nationals of third countries (Art. 63 TFEU); discrimination and restrictions hence require an explicit legal basis. However, following the widespread (albeit controversial)22 view that direct investments are covered by the freedom of establishment (which would supersede the free movement of capital under established doctrine),23 then primary law would not prohibit discrimination against companies from third countries.24 This is because the freedom of establishment, contrary to the free movement of capital, does not extend to companies from third countries outside of the EU (e.g. China) but only covers companies located already within the Member States. So, by way of an argumentum e contrario, a discriminatory investment screening might remain permissible. Regarding the use of technical components—as is the case with Huawei—the free movement of goods can also be affected.25 However, in the end, such interpretation of the prohibitions of discrimination, which excludes companies from third countries, does not really seem to be convincing. Probably nobody has even raised this issue in legal literature before.26

18

See further Grussmann and Honekamp (2013), marginal numbers 112, 126. E.g. Article 8(2) Framework Directive; Article 3(2) EECC-Directive. 20 E.g. Recital 1 Framework Directive; Recital 23 EECC-Directive. 21 See also Grussmann and Honekamp (2013), marginal numbers 69–79. 22 Hindelang (2009), pp. 88–114. 23 Cf. Müller-Ibold (2010), pp. 115 ff.; Hindelang and Hagemeyer (2017), p. 885. 24 von Wilmowsky (2014), marginal number 44. 25 See for further information on the concept of goods according to Article 28 TFEU Epiney (2014), marginal numbers 8–14. 26 At least, none of the German commentaries on telecommunications law mention this question. 19

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Lack of Specific Authorisation of a Screening Mechanism

Another hurdle is even more significant: with some of the arguments outlined above, the prohibitions of discrimination under telecommunications law could be eliminated as obstacles to investment screening. However, this does not substitute a specific authorisation of a screening mechanism for market access. In this respect, there is usually not even an approval procedure that could serve as a starting point. The directives only allow for a general authorisation combined with a mere notification obligation.27 Only in the case of the allocation of scarce resources, such as mobile frequencies, is it permissible to grant an individual right of use28 with a preliminary competitive selection procedure.29

3.1.3

Possible Conditions Linked to the General Authorisation

If nothing else, the general authorisation may be subject to certain conditions,30 the implementation of which is to be determined by the Member States. However, the number of permissible conditions in the directives is very small. At best, one could—in the case of threats of espionage—draw upon the “security of public networks against unauthorised access”31 or the “maintenance of the integrity of public electronic communications networks”.32 Even then, however, a company from a third country could not be prohibited from entering the market pre-emptively, even if it was foreseeable that such a condition— whichever its legal form and its content—would not be complied with. The wording of the directives does only allow for a retroactive ban, and this only in the case of “a serious breach or repeated breaches of the conditions of the general authorisation”.33 Both open investment screening and hidden investment screening are ultimately based on the idea of risk prevention. When it comes to entering the market, such a preventive concept is alien to telecommunications law and, in particular, is not compatible with the concept of a general authorisation.

27 Article 3(2) Authorisation Directive, Article 12(2) EECC-Directive; for an overview see Klotz (2013), marginal numbers 121–125. 28 Cf. Article 5(2) Authorisation Directive; Article 45 ff. EECC-Directive. 29 Cf. Article 5(2), 7(3) Authorisation Directive; Article 48(4) EECC-Directive. 30 Cf. Article 6 Authorisation Directive; Article 13 EECC-Directive. 31 Article 6(1, 3) Authorisation Directive in conjunction with Annex A No. 16; see also No. 7. 32 Article 13(3) EECC-Directive in conjunction with Annex I. B. No. 4. 33 Article 10(5) Authorisation Directive; Article 30(5) EECC-Directive.

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No Direct Action Against Mere Suppliers of Technology

Moreover, telecommunications law a priori only regulates the supply of telecommunications services and networks. Hence, direct action against mere suppliers of technology—such as Huawei—would be outside the regulatory scope anyway.

3.2

In Particular: Auction of Frequencies

Regarding the allocation of mobile frequencies, which is now subject to discussion in the case of Huawei also, the legal possibilities seem somewhat greater at first glance.

3.2.1

Conditions Linked to Individual Rights of Use

Firstly, as has been mentioned above, individual rights of use are granted. In contrast to the general authorisation, this also allows for a refusal of market entry, even towards a mere supplier of technology like Huawei. Dealing with individual rights of use, the directives allow for conditions to a somewhat greater extent than in the case of general authorisation.34 On closer inspection, however, none of the possible obligations listed in the directives is suitable for denying companies from third countries of the right to use frequencies or for prohibiting the use of certain (Huawei) technology. It is true that such obligations “which the undertaking obtaining the usage right has made in the course of a competitive or comparative selection procedure” are permissible.35 According to the wording (“has made”) and the systematics, however, this only refers to obligations that the company is willing to voluntarily accept in order to improve its chances in the selection procedure. Otherwise, it would take the form of a general clause, undermining the specific restrictions for such conditions in respective numbers.36 Further, a company may be obliged to use a “type of network or technology for which the rights of use for the frequency have been granted”.37 However, this does not justify the prohibition of certain technical components, as in the Huawei case. Such a prohibition would contradict the requirement of technological neutrality, which is frequently emphasised in the directives.38 This condition is simply an

34 Article 6(1) Authorisation Directive in conjunction with Annex B and Article 9 Framework Directive; Article 13(1), 45, 47 EECC-Directive in conjunction with Annex I. D. 35 Annex B. No. 7 Authorisation Directive; Annex I. D. Nr. 7 EECC-Directive. 36 Cf. Fetzer (2018), p. 67. 37 Annex B. No. 1 Authorisation Directive; Annex I. D. Nr. 1 EECC-Directive. 38 Article 8(1)(2) Framework Directive; Article 3(4)(c) EECC-Directive.

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instrument to ensure that the frequencies are used for the intended purpose. Furthermore, a ban of technologies that are actually suitable would be at odds with the superior regulatory purpose to ensure competition.

3.2.2

Eligibility Requirements in the Competitive Selection Procedure

Secondly, the granting of rights of use is preceded by a competitive selection procedure. In this respect, old and new directives contain only rudimentary guidelines,39 so that specific provisions can only be derived from national law. In Germany, as in many other Member States, frequencies are generally allocated by an auction procedure.40 To this end, the national regulatory agency determines in advance the “subjective, technical and material minimum requirements to be met by applicants for admission to the award procedure”.41 In substance, this corresponds to the eligibility requirements in public procurement law.42 At first sight, the broad wording appears to also allow a rejection of the application for admission to the auction procedure if a company does not offer sufficient assurance of compliance with data protection requirements43 and if there is a risk of espionage by a third country or otherwise misuse of control over the mobile network. However, in the light of secondary EU law, a more restrictive interpretation seems to be in order. According to the directives, these eligibility requirements are conditions that are only permissible to the extent expressly permitted in the Directive. As described above, the permissible conditions listed in the corresponding annexes to the directives44 do not fit the purpose of investment screenings. The conditions permitted for the general authorisation (and thus also those relating to data protection) must not be invoked again when allocating frequencies.45 Again, it becomes apparent that telecommunications law structurally serves quite different purposes than providing protection against potentially detrimental influences from third countries.

39

I.e. the above-mentioned prohibition of discrimination, cf. Article 7(3) Authorisation Directive; for a short overview see Kühling (2013), marginal number 131. 40 Sec. 61(1, 2) Telecommunications Act [Telekommunikationsgesetz], BGBl I 2004, p. 1190. 41 Sec. 61(3) 2 No. 1 in conjunction with Sec. 61(4) 5 Telecommunications Act. 42 Cf. Article 58 of the Public Procurement Directive (2014/24/EU). 43 Mentioned in passing by Hahn et al. (2018), § 61 marginal number 21. 44 Annex B. Authorisation Directive; Annex I. D. EECC-Directive. 45 Article 6(4) Authorisation Directive; Article 13(4) EECC-Directive.

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4 Conclusion The existing and new directives in the IT and telecommunications sectors do not allow for hidden investment screening for several reasons. Firstly, market access is largely liberalised and usually requires a mere notification. Accordingly, there is usually no legal basis for refusing individuals an authorisation. This is different only when allocating rights of use for scarce frequencies. Secondly, only to a very limited extent can one establish conditions, the non-fulfilment of which by the telecommunications company could lead to sanctions. It may be possible to teleologically reduce the secondary law prohibitions of discrimination in such a way that they do not protect companies and technology from third countries. However, the conditions finally permitted in the annexes to the Directive do not justify (even if only indirect) preventive investment control. This applies in any case to the special conditions permitted for the allocation of mobile radio frequencies; only their predicted disregard, not foreseeable infringements of the conditions in the general authorisation, allows for the exclusion of the bidder from the auction procedure. Thirdly and finally, the NIS Directive, which serves to prevent risks, has so far not been interlinked with the primarily competition-oriented telecommunications market access regime. Attempts for legal reform could start at this latter point. For example—as it is currently being proposed in Germany in view of the Huawei issue—IT security law could be toughened by introducing a certification process involving a security audit; this certification could in turn be made a prerequisite for market entry in telecommunications law.46 However, at the EU level, where secondary telecommunications law has just been comprehensively amended, new reforms can hardly be expected in the near future. In addition, one may question whether it seems useful to utilise such an IT security audit for hidden investment screening. Transparency, an aspect that is repeatedly emphasised, would probably be better served by a cross-sectoral control regime openly identified as such. After all, sectoral EU legislation in telecommunications law does not block the new EU Screening Regulation. To the contrary, telecommunications networks are included and might play a major role in this new general regulation as an important case of critical infrastructure.47

46

tagesschau.de (30 January 2019), Sicherheitsbehörden warnen vor Huawei. Cf. Reuters (30 January 2019), Exclusive: EU considers proposals to exclude Chinese firms from 5G networks; Frankfurter Allgemeine (2 February 2019), EU-Kommissar springt denen bei, die Angst vor Huawei haben. 47

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References Literature Epiney A (2014) Freiheit des Warenverkehrs. In: Ehlers D (ed) Europäische Grundrechte und Grundfreiheiten, 4th edn. De Gruyter, Berlin, § 8 Fetzer T (2018) Diensteanbieterverpflichtung für Mobilnetzbetreiber – Rechtmäßigkeit der Auferlegung bei Frequenzneuvergabe. Multimedia und Recht:63–68 Financial Times Online (14 April 2019) German regulator says Huawei can stay in 5G race. https:// www.ft.com/content/a7f5eba4-5d02-11e9-9dde-7aedca0a081a Frankfurter Allgemeine Zeitung Online (15 April 2019) Bundesnetzagentur hat keine Bedenken wegen Huawei. https://www.faz.net/aktuell/wirtschaft/diginomics/5g-bundesnetzagentur-hatkeine-bedenken-wegen-huawei-16141825.html Frankfurter Allgemeine Zeitung Online (2 February 2019) EU-Kommissar springt denen bei, die Angst vor Huawei haben. https://www.faz.net/aktuell/wirtschaft/diginomics/digitale-technik/ eu-kommissar-king-warnt-vor-china-und-huawei-16020108.html Gärditz K (2018) Unionsrechtliche Vorgaben. In: Scheuerl K-D, Mayen T (ed) Telekommunikationsgesetz, Kommentar, 3rd edn. C.H. Beck, München, Einf. II Grussmann WD, Honekamp R (2013) Europarechtliche Grundlagen. In: Geppert M, Schütz R (eds) Beck’scher TKG-Kommentar, 4th edn. C.H. Beck, München Hahn R, Hartl A, Dorsch M (2018) § 61 TKG. In: Scheuerl K-D, Mayen T (eds) Telekommunikationsgesetz, Kommentar, 3rd edn. C.H. Beck, München Hindelang S (2009) The free movement of capital and foreign direct investment – the scope of protection in EU law. Oxford University Press, Oxford Hindelang S, Hagemeyer T (2017) Enemy at the Gates? Die aktuelle Änderung der Investitionsprüfvorschriften in der Außenwirtschaftsverordnung im Lichte des Unionsrechts. Europäische Zeitschrift für Wirtschaftsrecht:883–890 Klotz R (2013) Der europäische Rechtsrahmen für die elektronische Kommunikation. In: Säcker F-J (ed) Telekommunikationsgesetz, 3th edn. Deutscher Fachverlag, Frankfurt a.M Kühling J (2013) Telekommunikationsrecht. In: Ruffert M (ed) Europäisches Sektorales Wirtschaftsrecht, Enzyklopädie Europarecht 5, Nomos, Baden-Baden, § 4 Müller-Ibold T (2010) Foreign investment in Germany. Restrictions based on Public security concerns and their compatibility with EU law. Eur Yearb Int Econ Law, 103–122 New York Times Online (15 May 2019) Huawei Is a Target as Trump Moves to Ban Foreign Telecom Gear. https://www.nytimes.com/2019/05/15/business/huawei-ban-trump.html? module¼inline Reuters Online (30 January 2019) Exclusive: EU considers proposals to exclude Chinese firms from 5G networks. https://www.reuters.com/article/us-usa-china-huawei-tech-europe-exclusiv/exclu sive-eu-considers-proposals-to-exclude-chinese-firms-from-5g-networks-idUSKCN1PO2MN Schäfer FA (2016) § 2c KWG. In: Boos KH, Fischer R, Schulte-Mattler H (ed) Kommentar zu Kreditwesengesetz, VO (EU) Nr. 575/2013 (CRR) und Ausführungsvorschriften, 5th edn. C.H. Beck, München Segal A (2018) When China rules the web: technology in service of the state. Foreign Aff:10–18 Süddeutsche Zeitung Online (4 January 2019) Riskanter Anschluss. https://www.sueddeutsche.de/ wirtschaft/huawei-spionage-1.4274832 Tagesschau Online (30 January 2019) Sicherheitsbehörden warnen vor Huawei. https://www. tagesschau.de/wirtschaft/huawei-telekommunikation-netzausbau-101.html von Wilmowsky P (2014) Freiheit des Kapital- und Zahlungsverkehrs. In: Ehlers D (ed) Europäische Grundrechte und Grundfreiheiten, 4th edn. De Gruyter Berlin, § 12 Witt T, Freudenberg P (2016) NIS-Richtlinie – Die Richtlinie über Maßnahmen zur Gewährleistung einer hohen gemeinsamen Netz- und Informationssicherheit (NIS) in der Union. Computer und Recht:657–663

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ZEIT Online (6 December 2018) 5G-Netz: Kontrolle ist besser. https://www.zeit.de/politik/ausland/ 2018-12/5g-netz-mobilfunk-huawei-deutschland-china-telekom-sicherheit

Legal Documents Directive 2002/20/EC of the European Parliament and of the Council of 7 March 2002 on the authorisation of electronic communications networks and services (Authorisation Directive), OJ L 108, 24.4.2002, p. 21–32 Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services (Framework Directive), OJ L 108, 24.4.2002, p. 33–50 Directive (EU) 2018/1972 of the European Parliament and of the Council of 11 December 2018 establishing the European Electronic Communications Code (Recast)Text with EEA relevance, OJ L 321, 17.12.2018, p. 36–214 Directive (EU) 2016/1148 of the European Parliament and of the Council of 6 July 2016 concerning measures for a high common level of security of network and information systems across the Union, OJ L 194, 19.7.2016, p. 1–30

Michael Fehling is a professor at Bucerius Law School in Hamburg, where he has held the Chair of Public Law and Comparative Law since 2001. He completed his legal studies in Freiburg/ Breisgau. In 1993, he got his doctorate (Concurrent Claims in the Licensing of Private Broadcasters), and in 1996 he obtained an LL.M. from the University of California, Berkeley, School of Law (Boalt Hall). In 2000, Michael Fehling received his postdoctoral degree (Habilitation) in Public Law (thesis: “The Administration Between Impartiality and Policymaking”). Until 2001, he taught at the Faculty of Law, University of Freiburg. Michael Fehling”s research interests include economic regulation and administrative law from a European perspective (particularly the reform of public services and the regulation of network industries), environmental law, media law, freedom of science and university organisation, comparative public law (USA) and the economic analysis of administrative law.

Part IV

Beyond Europe – The Screening Schemes of Major EU Trade Partners

Foreign Investment Screening in Russia Vladimir V. Talanov

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Russia’s Primary Rules on the Control of Foreign Direct Investments . . . . . . . . . . . . . . . . . . . . 3 Definition of a Foreign Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 General Definitions in Law 160-FZ and Law 57-FZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Sovereign Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Control Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Substantive Obligations of Foreign Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Definition of Strategic Sectors of the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Obligation of Prior Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Approval Procedures and Consequences of Non-compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Approval Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Consequences of Non-compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Secondary Legislation in Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 EU Rules and the Foreign Investment Control Experience of Russia: Questions for Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract The chapter reviews the mechanism of foreign direct investment controls as implemented in Russia under the auspices of the Federal Law “On Foreign Investments in Russia” No. 160-FZ and Federal Law No. 57-FZ “On the procedure for making foreign investments in companies which are of strategic importance for ensuring the country’s defence and state security”. The author examines the definition of the foreign investor provided by the laws, analyzes the types of activities deemed of strategic importance for national defence and security and describes the The views expressed in the chapter are solely those of the author and do not necessarily reflect the views of the author’s employers. The author is grateful to Kirill Nagorsky and Yana Bagrova for their support. V. V. Talanov (*) Egorov, Puginsky, Afanasiev and partners and National Research University Higher School of Economics, Faculty of Law, St. Petersburg, Russia e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 331–362, https://doi.org/10.1007/16495_2020_10, Published online: 30 May 2020

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thresholds triggering obligations of obtaining prior clearance of foreign investment transactions. A separate section of the chapter is devoted to the analysis of the procedures for obtaining clearances and the consequences of non-compliance. The paper also addresses other rules of the Russian legislation that restrict foreign direct investment to Russia. In the last section of the chapter, the author summarizes the experience of 10 years of application of foreign direct investment control mechanisms in Russia and poses questions on the possible implications of Russia’s experience for the EU Regulation establishing a framework for the screening of foreign direct investments into the Union.

1 Introduction The new EU framework for the screening of foreign direct investments has not come as a revelation to Russian businesses, politicians and legal practitioners. These same concerns, which triggered the EU Regulation of 2019, were the guiding force behind the Russian legislation’s adaptation of restrictions on foreign direct investments in the “strategic sectors” of the Russian economy in 2008. Over the past decade, the rules have significantly evolved based on an extensive administrative and court practice of their application. Russian legislation has foregone euphemisms and bluntly characterized the scheme of screening investments in the “strategic sectors” of the Russian economy with the word “control”, as this mechanism operates on the premise of compulsory prior approvals and under the wide discretion of the Governmental Commission—the body responsible for such authorizations. Nevertheless, despite dramatic predictions, this mechanism of foreign investment controls has not been used as a tool of discouraging investment or pursuing topical political interests. The experience of the application of these rules in Russia may be helpful for shaping the common EU mechanism of foreign direct investment screening, which currently looks more like a paper tiger but will undoubtedly develop to address the rising concerns of national security threats posed by foreign investments.

2 Russia’s Primary Rules on the Control of Foreign Direct Investments Foreign direct investment in the territory of modern Russia became legally possible only in 1987. With the advent of the market changes in 1990, the state chose a path of maximum non-interference in the regulation of foreign investment activities. The mechanism, which developed under the Russian Foreign Investment Law of 1991, was characterized by foreign observers as a comprehensive regime within which foreign investors can operate in the territory of the Russian Federation with relative

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ease and unprecedented flexibility.1 The need to develop a law with mechanisms of control or screening foreign investment was first expressed by the Russian Government in 1995; developing such legislation was part of the then adopted programme of stimulating domestic and foreign investments in the Russian economy.2 In 1996, the Russian Government developed and introduced into the State Duma the draft law “On the list of economic sectors, production, fields of activities and territories, in which activities of foreign investors is prohibited or restricted”. The draft law proposed complete prohibition of foreign investments in 31 sectors of the Russian economy. Prohibited sectors mainly related to defence programmes, ammunition and military equipment, the production of uranium and diamonds and also, inter alia, obligatory medical insurance and the collection of personal data from Russian citizens, as well as private detective activities. In 46 other sectors of the Russian economy, the Russian Government retained the right to restrict foreign investment either by making it necessary to obtain prior authorization from the Russian Government or by setting the maximum share of the foreign presence in the capital of Russian legal entities operating in the sphere. Proposed restricted sectors included, among others, railway transportation, the transmission of electrical energy, the extraction of precious stones, the purchase of jewellery goods from the public, developing textbooks for schools and the production of alcohol. Moreover, foreign investment could also be restricted in the territories of national parks, reserves and wildlife sanctuaries. Some of the sectors, proposed for restriction under the draft law, such as veterinary activities or the production of terrestrial globes and topographical relief models, appear ludicrous from modern perspectives. The draft law did not move further than the first reading. In June 2000, the Legal Department of the Central Office of the State Duma issued an opinion heavily criticizing the draft law for its contradictions with the laws already in force, as well as for the lack of any objective criteria explaining the choice of economic sectors subject to restrictions.3 The State Duma ultimately rejected the draft law on 20 December 2000.4 While not adopting any legal rules on investment screening, the Russian Federation nevertheless introduced a general law on investment, mainly aimed at granting investors national treatment regime, grandfather clauses and guarantees against nationalization. The Federal Law “On Foreign Investments in Russia” No. 160-FZ (Law 160-FZ) entered into force in July 1999. In the absence of detailed legislation

1

Frenkel and Sukham (1993), p. 358. For more details, see Decree of the Government of the Russian Federation of 13 October 1995 No. 1016 “On the Comprehensive programme of stimulating domestic and foreign investments in the Russian economy”. 3 Opinion of Legal Department of the Central Office of the State Duma of 5 July 2000 No. 2.2-15/ 367 “On the draft Federal Law “On the list of economic sectors, production, fields of activities and territories, in which activities of foreign investors is prohibited or restricted”. 4 Decree of the State Duma of the Federal Assembly of the Russian Federation of 22 December 2000 No. 1004-III ГД “On the draft Federal Law “On the list of economic sectors, production, fields of activities and territories, in which activities of foreign investors is prohibited or restricted”. 2

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regulating the screening of foreign investments in the most sensitive sectors of the Russian economy, the Russian Government was compelled to address the security concerns through mechanisms poorly suited for such a task—antimonopoly instruments regulating economic concentration. It is widely agreed that the most salient case—having triggered the development of extensive domestic rules on foreign investments controls—was an attempt by the German conglomerate Siemens to take control over OJSC “Siloviye Mashiny”, the Russian energy system machine-building company that produces turbines, including for nuclear power plants, and various military equipment.5 In July 2004, Siemens AG applied to the Federal Antimonopoly Service of Russia (FAS), requesting the approval of it obtaining control over 71% share capital of OJSC “Siloviye Mashiny”. Siemens also announced its plans to invest around USD 200 million in “Siloviye Mashiny” in the five years following the acquisition. FAS took substantial time to analyze the proposed transaction, requesting additional documents from the parties. Meanwhile, on 8 April 2005, eight Members of the State Duma sent an official letter to the Head of the Russian Government, i.e. the Russian Prime Minister, claiming that the proposed transaction, if approved, would cause the loss of control of Russia over its power-plant industry, a strategic industry that safeguards national defence of the country, its energy and economic safety.6 The Members of the State Duma requested that the Russian Government express a firm and unequivocal position against the proposed transaction.7 On 12 April 2005, FAS officially rejected the application. The official reason cited for the rejection was the anti-concentration rules in force and the alleged negative consequences for competition in case of a transfer to Siemens of the dominant position in the Russian power-plant industry. However, as openly stated by the Federal Antimonopoly Service in the corresponding press release: . . .the results of the analysis demonstrate that the possible positive social and economic effect of this transaction could not be fully realized, as far as the legislation in force does not permit to resolve a number of issues, relating to securing competition in the field of defence and the participation of foreign companies in the production of defence goods.8

Following this case, the new law on foreign investment of companies of strategic value was developed. In April 2008, Federal Law No. 57-FZ “On the procedure for making foreign investments in companies which are of strategic importance for ensuring the country's defence and state security” (Law 57-FZ) was finally adopted. The purpose of the law, as stipulated in its Article 1, was to protect the interests of state defence and security through the restriction of foreign investment to sectors deemed strategic.

5

Elizarov (2008), p. 6, Babkin and Khokhlov (2010), p.153, Bam (2013), p. 33. RBC (4 April 2005a), Deputaty GD prosyat M. Fradkova zapretit prodazhu “Silovykh mashin” (Members of State Duma request M. Fradkov to prohibit the sale of “Siloviye Mashiny”). 7 Ibid. 8 RBC (13 April 2005b), FAS ne razreshila Siemens kupit 74% aktsyi “Silovykh mashin” (FAS did not permit Siemens to purchase 74% of shares of “Siloviye Mashiny”). 6

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The drafters of Law 57-FZ in the Explanatory Note stated that the mechanism is based on the so-called prior approval regulation of the matter, as implemented in the US, Spain, France, Finland and other countries. They also cited the US Exon–Florio Amendment as a source of inspiration; however, they criticized the US rules for lack of any definitive criteria for rejecting applications by foreign direct investors. As stipulated in the Explanatory Note, Law 57-FZ sets out a clear and transparent mechanism on transaction clearance to avoid any subjectivism in decision-making.9 Law 57-FZ enumerated 42 types of activities considered of strategic significance for ensuring the country’s defence and state security. The list is exhaustive and, with minor amendments, has remained in force for over a decade. Restrictions introduced by Law 57-FZ are applicable to any foreign investments in Russian companies involved in the types of activities determined strategic. A special government commission, the Governmental Commission on Monitoring Foreign Investment (the Governmental Commission), was formed to review the applications of foreign investors willing to establish control over Russian enterprises operating in the strategic sectors.10 FAS is the governmental agency responsible for the administration of the procedures under Law 57-FZ and the implementation of the decisions from the Governmental Commission. Observers generally characterized Law 57-FZ as a reasonable development and emphasized that the law should not be viewed as isolationist or protectionist.11 Others have acknowledged the validity of regulatory concerns that triggered the adoption of Law 57-FZ but still called the newly created system “an expensive, time consuming, document intensive, and still less-than-transparent process that may end up discouraging, rather than promoting, foreign investment”.12 Some claimed that the adoption of the law reverberated a “further alarming bell” in Brussels as oil and gas sectors were found strategic and therefore less accessible to EU investors.13 Most of the domestic observers considered the law timely and necessary while still criticizing separate provisions and questioning the list of the sectors determined strategic.14 In concurrence with the adoption of Law 57-FZ, the general Law 160-FZ was also amended. The new Article 6 of Law 160-FZ introduced an obligation for foreign sovereign investors (foreign states, international organizations and organizations under their control) to obtain prior clearance for transactions, in which they acquire—directly or indirectly—more than 25% of the shares or any other controlling rights in any Russian legal entity, whether operating in strategic sectors or not. This provision was further amended in 2017 to expand the scope of state control over non-strategic enterprises. The 2017 amendments conferred on the Chairman of the

Draft Law № 455348-4, 2007. For more details, see Sect. 4.1 hereof. 11 Collins (2013), p. 70. 12 Pomeranz (2010), p. 219. 13 Georiou (2017), p. 159. 14 See, for instance, Doraev (2013), p. 53; Babkin and Khokhlov (2010), p. 154. 9

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Governmental Commission rights to refer any foreign investment transaction in companies not operating in strategic sectors for compulsory prior approval by the Governmental Commission should the Chairman find it necessary for national security and state defence. This right of the Chairman of the Governmental Commission, i.e. the Russian Prime Minister, to seek prior approval of any foreign investment is intended to be applicable in exceptional cases and has only been applied a few times so far.15 Curiously, the Russian legislator still does not fully separate the matters of antimonopoly controls from the control over foreign investment, though the two mechanisms are different in function and nature. Rules regulating the prior approval of transactions imposing serious antimonopoly risks are in the Federal Law of 26 July 2006 No. 135-FZ “On the protection of competition”. In November 2008, Article 33 of this law was amended to read that a transaction falling under both antimonopoly control and foreign investment control rules could not be approved for antimonopoly purposes if the Governmental Commission rejected the approval of the transaction under Law 57-FZ. Some of the authors noted that this connection of the two distinct mechanisms is regrettable as antimonopoly control should not be linked to state policy and defence concerns, unlike foreign investment control.16 Over a decade of foreign investment control functioning, FAS has received 562 applications for clearance under Law 57-FZ. Many of the applications sent for approval did not actually require prior clearance and thus were returned to the applicants, while other applications were withdrawn by applicants. In total, 253 applications were accepted by the Governmental Commission, with only 18 rejected. Since 2008, the rules of Law 57-FZ have evolved and have become more specific and transparent, though the key principles and approaches remained unchanged. Observers consider such stability in foreign direct investment regulatory approaches highly valuable for foreign investors and conclude that Law 57-FZ has not become a tool of sheer protectionism despite some negative predictions in 2008.17

3 Definition of a Foreign Investor Prior to the recent legislative changes in 2018, the definition of a foreign investor, provided in Law 160-FZ, was applicable to both general investment control under Law 160-FZ and the specific control of foreign investment in strategic entities under Law 57-FZ. However, following the recent changes, foreign investors are understood differently for the purposes of the two regimes.

15 Federal Antimonopoly Service of the Russian Federation (2019b) Definition of the Procedure— Guarantees of the Respect of Foreign Investors Rights. 16 Babkin and Khokhlov (2010), p. 154. 17 Borodushko and Kokorin (2018), pp. 195–196.

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Law 57-FZ covers transactions entered into not only by individual foreign investors but also by a group of persons, which include foreign investors. So even indirect participation of a foreign entity on the side of the acquirer would trigger the application of the rules of Law 57-FZ. The term “group of persons” is defined in Article 9 of the Federal Law “On Protection of Competition” No. 135-FZ, enumerating the hallmarks to identify two entities as forming a group of persons. These include, inter alia, ownership of 50% of voting shares in the other entity, performing of the functions of the main management body of the other entity, substantial overlapping in the management bodies of the two entities and close family relations of the controlling persons of the two entities.

3.1

General Definitions in Law 160-FZ and Law 57-FZ

The general definition of a foreign investor is provided for in part two of Article 2 of Law 160-FZ. The law defines foreign investors through an exhaustive list of persons treated as such: 1. Foreign legal entities and foreign organizations, not possessing the status of separate legal entities (e.g., partnerships in the common law system or Handelsgesellschaft and Kommanditgesellschaft in the legal system of Federal Republic of Germany), whose civil legal capacity is determined in accordance with the legislation of their state of incorporation, and which are entitled to invest in the territory of Russia in accordance with the legislation of their state of incorporation, with the exception of a foreign legal entity controlled by a Russian citizen or a Russian legal entity; 2. Foreign citizens, whose civil legal status is determined in accordance with the legislation of the state of his citizenship and who are entitled to invest in Russia in accordance with his home state legislation (in cases they don’t also hold the citizenship of Russia); 3. Persons without citizenship, permanently residing outside Russia, entitled to invest in Russia under the legislation of the state of their permanent residence; 4. International organizations, if they are permitted to exercise investment in Russia in accordance with an international treaty, which Russia is a party to; 5. Foreign states. Obtaining the status of a foreign investor in Russia depends on the ability of a person to exercise rights and obligations under their domestic law: in order to be treated as foreign investors, foreign persons should be permitted by their relevant domestic law to make investments in Russia. The nationality of foreign companies and foreign organizations not possessing the status of separate legal entities is determined by the Russian legislator based on the place of their incorporation (Articles 1202 and 1203 of the Civil Code of the Russian Federation). For natural persons, nationality is determined based on their citizenship. Therefore, if a foreign person is not vested by its domestic legislation with the rights to exercise foreign

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investments, such a person shall not fall within the definition of a foreign investor under Law 160-FZ and would not be permitted to enter into commercial relationships in Russia. Observers notice a particular complexity in the interpretation of this provision in the situation of unilateral trade sanctions imposed by some foreign states against Russia through restricting the right of their domestic companies to invest, inter alia, in the infrastructure of the Crimea peninsula.18 The relevant rules in the USA and the EU19 prohibit EU and US entities from making certain types of foreign investments in Russia, and thus a strict reading of the provisions of Article 2 of Law 160-FZ (and similar provisions of Article 3 of Law 57-FZ) may deprive EU and US investors in Crimea of the status of a foreign investor. However, the exact interpretation of this situation may be clarified by future court and administrative practice, if cases arise. Unlike Law 160-FZ, the definition of a foreign investor in Law 57-FZ is now framed in broader terms and includes all persons listed above and also a number of entities not embraced by the general definition above. For the purposes of Law 57-FZ, foreign legal entities and foreign organizations not possessing the status of separate legal entities but controlled by a Russian citizen or a Russian legal entity are nonetheless treated as foreign investors. Moreover, dual nationals holding Russian citizenship are also treated as foreign investors for the purposes of Law 57-FZ, though they were not regarded as such under the general definition. So for the purposes of foreign investment scrutiny in strategic sectors, foreign companies controlled by Russian citizens, as well as Russian companies controlled by foreign entities of any kind, shall be treated as foreign investors and may be subject to corresponding restrictions.

3.2

Sovereign Investors

Law 57-FZ and Law 160-FZ establish specific, more restrictive rules relating to investments made by foreign states or foreign state-owned enterprises. Investments by such entities, including through any organizations controlled by them, are considered by the Russian legislator as posing higher risks to state defence and national security and therefore fall under a more restraining regime. The Russian legislation does not use the term “sovereign investor”; however, in both Law 57-FZ

18

Tsyganov (2018), p. 116. See, for instance, the Executive Order of the President of the USA 13685 of 19 December 2014 Blocking Property of Certain Persons and Prohibiting Certain Transactions With Respect to the Crimea Region of Ukraine, 3 CFR 13685; Council Decision 2014/933/CFSP of 18 December 2014 Amending Decision 2014/386/CFSP Concerning Restrictive Measures in Response to the Illegal Annexation of Crimea and Sevastopol, OJ L 365, 19 December 2014, pp. 152–155; and Council Regulation (EU) No 1351/2014 of 18 December 2014 amending Regulation (EU) No 692/2014 concerning restrictive measures in response to the illegal annexation of Crimea and Sevastopol, OJ L 365, 19 December 2014, pp. 46–59. 19

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and Law 160-FZ, specific rules apply to investors controlled by foreign states or foreign state-owned enterprises. According to Law 160-FZ, transactions made by foreign states, international organizations or organizations under their control and as a result of which the right to directly or indirectly dispose of more than 25% of the total number of votes attributable to the voting stocks (shares) that make up the charter capital of any Russian company, or other possibilities to block the decisions of the management bodies of such company, are subject to preliminary approval. There is no requirement of such prior clearance with respect to investments made by commercial foreign entities not controlled by foreign states and international organizations. The procedure of the approval is discussed in detail in Sect. 4 of this chapter. Similarly, under Law 57-FZ, foreign states, international organizations or organizations under their control need a prior authorization whenever they intend to acquire more than 25% of the shares of the strategic entity or more than 5% of a company developing a subsoil mineral resource area of federal significance. Such investors are fully prohibited from establishing controlling stakes in strategic companies. Neither Law 57-FZ nor Law 160-FZ contains the definitions of foreign stateowned enterprises and sovereign wealth funds. The laws operate with the general terms of organizations controlled by foreign states or international organizations. Several international organizations have been excluded from these investment restrictions. Foreign investments by these organizations into the Russian entities, including into the strategic companies, are released from the requirement of obtaining prior clearance. These international organizations are enumerated in the Decree of the Russian Government of 03 February 2012 No. 119-P. International organizations mentioned there have been chosen as Russia is participating in their work or has concluded separate agreements on cooperation with them. The Decree mentions the International Bank for Reconstruction and Development, the International Development Association, the Multilateral Investment Guarantee Agency, the International Finance Corporation, the European Bank for Reconstruction and Development, the Black Sea Trade and Development Bank, the Eurasian Development Bank, the Interstate Bank, the International Investment Bank, the International Bank for Economic Co-operation, the Asian Infrastructure Investment Bank, the New Development Bank, as well as the European Investment Bank and the Nordic Investment Bank as excluded international organizations. Nonetheless, even such organizations are not permitted to gain effective control over the Russian strategic enterprises: for strategic enterprises, the prohibition of foreign sovereign investor control is absolute. Interestingly, the stricter regime of investments made by sovereign investors has been recently extended to include investments made by investors not disclosing their ultimate beneficiaries and controlling persons. Law 57-FZ treats such investors in the same manner as sovereign investors for clearance thresholds and control restrictions as non-disclosed ultimate controlling persons pose higher risks to state defence and security.

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Control Test

Article 5 of Law 57-FZ contains specific rules to establish foreign control over a Russian strategic enterprise. The rules differ depending on the type of enterprise: Law 57-FZ provides for additional higher protection of national defence and state security interests with respect to strategic entities—users of federal subsoil resources. The latter are considered of particular significance for the protected public values, and therefore thresholds of foreign controls in such entities are substantially lower. Effectively, areas of subsoil mineral resources of federal significance include the most important mineral resources extracted in Russia—gas and oil deposits, deposits of uranium, pure quartz, some of the rare earths metals, nickel, cobalt, tantalum, niobium, beryllium, lithium, primary deposits of diamonds and primary platinum group metals. It also includes the resources of the inland sea waters, territorial sea and continental shelf of the Russian Federation. For strategic enterprises not involved in the exploitation of subsoil mineral resources of federal significance, indications of control include (1) the right to hold directly or indirectly more than 50% of the total number of votes of the voting stocks (shares) constituting the authorized capital of the strategic enterprise, (2) the right or power to determine decisions taken by the strategic enterprise and determine the terms of its business operations, (3) the right to appoint the CEO or over 50% of the members of a collective executive body of the strategic enterprise and (4) exercising the authority of the management of the strategic enterprise. Moreover, Law 57-FZ also embodied the concept of de facto control, for instance, in cases when minority shareholders are numerous and uncoordinated or fail to show up at shareholders’ meetings. In such occasions, the majority shareholder, not possessing 50% of the voting rights of the strategic entity, may nonetheless be found in control. All such determinations are made on a case-by-case basis, and no universal threshold could be applied.20 For those strategic entities, which are users of federal subsoil resources, the control test is stricter. The total number of votes of the voting shares held by a foreign investor directly or indirectly in this case is reduced to 25% to find the entity under foreign control. As for the right to appoint the members of a collective executive body of the strategic enterprise, in the case of users of federal subsoil resources, the threshold was similarly set at 25%. The other two indications applicable to general strategic enterprises are also applicable to the users of federal subsoil resources. All these tests are applied in order to determine whether the foreign investor obtained control over a strategic enterprise. If a strategic enterprise is controlled directly or indirectly by a foreign investor under the cited rules, it could not continue its operations unless the approval of the Governmental Commission has been obtained.

20

Tsyganov (2018), p. 137.

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4 Substantive Obligations of Foreign Investors Law 57-FZ operates on the premise that a prior approval of the Governmental Commission is required for foreign investments in Russian strategic enterprises. There is no list of strategic enterprises, and they are determined based on the day-today activity performed by an entity. If a company operates in a sector mentioned in the closed list of Article 6 of Law 57-FZ, foreign investment transactions with its shares and assets, as well as any arrangements to establish control of a foreign investor over such company, are covered by the law. As discussed above, the law establishes certain thresholds of foreign participation triggering the obligation to obtain clearance, which depend on the type of the strategic enterprise at stake (stricter restrictions apply if the enterprise is the user of federal subsoil resources) and the foreign investor itself (stricter restrictions for sovereign foreign investors and investors not disclosing their ultimate beneficiaries).

4.1

Definition of Strategic Sectors of the Economy

The title of Law 57-FZ itself indicates that it concerns foreign investment in enterprises, bearing strategic significance for national defence and state security. National defence is defined in Federal Law No. 61-FZ “On defence” as a system of political, economic, military, social, legal and other measures aimed at armed defence and armed defence of the Russian Federation and its territorial integrity and inviolability. The definition of state security, as mentioned in the Strategy of State Security of Russia (as determined by Presidential Decree No. 683), includes governmental, social, informational, environmental, economic, transport, energy safety and the safety of a person. However, there is no additional explanation on the reasons why particular sectors of the economic activity were listed as strategic for national defence and state security in Law 57-FZ; Article 6 of the law introduces the strategic sectors through a simple listing. The law stipulates 47 activities of strategic importance, which could be grouped into 10 general categories: 1. Space and aviation activities (work in space, production and testing of aviation equipment, repairing of aviation equipment with the exception of repair of components for civil aviation, aviation safety services, among others) 2. Geophysical and sanitary-related activities (work on the modification of hydro-meteorological processes, modification of geophysical processes, activities using agents of infections, among others) 3. Use of nuclear and radiological materials (setting up, constructing, operating and decommissioning nuclear facilities; handling nuclear materials, radioactive substances and radioactive waste; and using nuclear materials for R&D, design and engineering of nuclear facilities and equipment for nuclear facilities, among others)

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4. Certain types of use of cryptographic devices (information encryption services, engineering maintenance of encryption (cryptographic) aids, detecting electronic bugging equipment in the premises and technical devices, among others) 5. Production and use of weapons, military equipment and ammunition (development, manufacture and repairing of weapons and military equipment; trading weapons; manufacturing firearms, shells and shell components; manufacturing explosive materials for industrial use and their distribution; and production and sale of metals and alloys having special properties and of the raw staff and materials used in the manufacture of armaments and military hardware, among others) 6. Extraction of aquatic biological resources and certain types of subsoil use (geological exploration of subsoil and/or prospecting and extraction of mineral resources in subsoil areas of federal importance and extraction (catching) of aquatic biological resources, among others) 7. Activities in the field of television, radio and mass communications (TV and radio broadcasting in the area where 50% or more of the population of a constituent territory of Russia resides; printing activity, if the entity is able to print at least 200 million printed pages per month; and publishing newspapers of certain print run depending on publication frequency, among others) 8. Certain types of activities on transport infrastructure (activities involved in assessing the vulnerability of and protecting transport infrastructure facilities and transport vehicles) 9. Services offered by an economic entity—subject of natural monopolies (railroad transport, gas and oil pipelines, services in airports and ports, water supply through centralized systems, excluding electric communication services and the public postal service, thermal energy and electric energy transmission over distribution networks and services at ports, among others) and activities exercised by economic entities holding a dominant position in certain markets (communication services, except Internet access services, and certain fixed line telephone services, among others) 10. Activities of an operator of electronic platforms used for government procurement The Russian legislator has not given any explanation on the inclusion of these sectors in the list of strategic sectors, but for reference to their “strategic significance”. S. Babkin and E. Khokhlov have expressed doubts on the inclusion of certain items (such as polygraphic and publishing activities, tele- and radiobroadcasting and fishing of water biological resources) in the list.21 M. Doraev, sharing the same concerns, stressed that the lack of any objective and clear criteria on the determination of a sector of the economy as strategic unavoidably nullifies all attempts to develop a logical classification of such sectors. He

21

Babkin and Khokhlov (2010), p. 157, fn. 36.

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further emphasized that the development of clear criteria on the identification of strategic sectors not only would limit the discretion of state officials in their determinations and ensure more predictability for foreign investors but could also provide state officials with a necessary gauge to promptly establish new and emerging sectors as strategic, in particular those related to electronic communication and the Internet.22 The text of Article 6, enumerating strategic activities, is framed in general terms and, therefore, requires interpretation and clarification when applied to specific cases. For instance, item 39 in the list of strategic services mentions geological exploration of subsoil and/or prospecting and extraction of minerals in subsoil areas of federal importance. In FAS practice, the question arose whether this wording includes services of drilling provided by Eurasia Drilling Company Limited to vertically integrated oil and gas companies, holding licenses for minerals extraction and being the actual explorers of the subsoil area. In its administrative practice, FAS has interpreted item 39 to include drilling services as, according to FAS, drilling forms an integral part of the geological exploration of the subsoil extraction of minerals. This conclusion was supported by the Ministry of Nature of Russia and the Federal Security Service.23 So, currently, the position of FAS is that products, services and works closely related to strategic activities may be also determined as strategic. To ensure transparency and predictability of the rules for foreign investors, Article 13 of Law 57-FZ conferred FAS with powers to provide interpretations of the law. A foreign investor may seek such clarifications free of charge, and interpretations shall be provided within 30 days from the receipt of the request. Though formally such interpretations are not legally binding, they may be of great value as a coordinated administrative practice and would be recognized by courts and FAS itself in cases of disputes.

4.2

Obligation of Prior Approval

Law 57-FZ introduces a requirement for foreign investors to obtain prior approval in cases when they wish to make investments in the form of (1) participation in the charter capital of the strategic entities through any transactions with their shares (stocks), (2) making transactions resulting in the transfer of control over strategic entities by a foreign investor or (3) transactions implying the acquisition by a foreign investor of ownership, possession or use of a substantial amount of fixed assets of a strategic enterprise (transactions with property of strategic enterprises). As for the transactions resulting in the participation of a foreign investor in the charter capital of the strategic entities and acquisition of control, Law 57-FZ covers situations of both

22 23

Doraev (2012), p. 80. Tsyganov (2018), p. 225.

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direct and indirect acquisition. Any ability of a foreign investor to determine the position of third parties holding shares (stock) of a strategic enterprise would be also considered foreign control. Foreign investors are obliged to obtain prior clearances if they intend to: • Obtain rights of direct or indirect control over more than 50% of the total number of votes of the voting stocks (shares) • Obtain rights of direct or indirect control over more than 25% of the total number of votes of the voting stocks (shares) or otherwise block the decisions of the management bodies of the strategic enterprise, which is the user of federal subsoil resources, as well as any further increase in the stake of the foreign investor—the user of federal subsoil resources—up to 75% maximum (with the exception of certain intragroup transactions); • Obtain rights of direct or indirect control over more than 25% of the total number of votes of the voting stocks (shares) or otherwise block the decisions of the management bodies of the strategic enterprise, in cases of sovereign foreign investors and foreign investors not disclosing their ultimate beneficiaries • Obtain rights of direct or indirect control over more than 5% of the total number of votes of the voting stocks (shares) or otherwise block the decisions of the management bodies of the strategic enterprise, which is the user of federal subsoil resources, in cases of sovereign foreign investors and foreign investors not disclosing their ultimate beneficiaries Such possible transactions with shares include an agreement on shares sale and purchase, exchange, subscription agreements, inheritance of shares and even pledges of shares, if those result in control of a foreign investor over the said numbers of votes. The requirements of Law 57-FZ also apply to the public offering of shares or any other securities (for instance, depositary receipts) granting control over the said voting rights in stock exchanges. Such transactions would require prior approval even if control is transferred to a group of persons that includes a foreign investor. Law 57-FZ does not contain an exhaustive list of transactions requiring prior clearance. Apart from transactions with stocks (shares), an illustrative list in Article 7 of Law 57-FZ gives examples of the other most frequent situations of foreign control over strategic enterprises. Those include the transfer to a foreign investor of the right to appoint the CEO of the strategic enterprise or a certain number of members of the collective management body or the right to perform the functions of the strategic enterprise manager or otherwise determine the decisions of the management bodies of the strategic enterprise. As discussed above, such transactions would require prior approval, even if control is transferred to a group of persons that includes a foreign investor and not only straightforwardly to a foreign investor himself (unless control is transferred to an entity controlled by Russia itself, by its units or by Russian citizens). As mentioned above, Law 57-FZ specifically prohibits any transactions resulting in the transfer of control over strategic enterprises to sovereign foreign investors and foreign investors not disclosing their ultimate beneficiaries.

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FAS has been actively involved in combatting attempts by foreign investors to circumvent the requirements, for instance by passing shares to the employees of the strategic enterprise and further influencing the decisions taken by the management boards under threat of non-payment of salary or bonuses.24 These situations of indirect control are also covered by Law 57-FZ and, if no prior clearance was observed, may trigger the consequences of non-compliance as discussed in Sect. 4 below. In cases when analyzing the structure of the transaction a foreign investor is not certain whether it results in the establishment of control over a strategic enterprise and requires prior approval, a foreign investor may apply to FAS, seeking clarifications. However, as making a preliminary assessment of the transaction would actually imply a significant review of the transaction and its details, in practice foreign investors sometimes prefer to apply for the prior approval of the transaction instead of seeking clarifications first as the set of documents necessary for review and clarifications is relatively similar. Should FAS determine that no prior approval is necessary, documents are returned to the applicant with corresponding clarifications, while in case prior clearance is required, the official application will be already launched, and time will be saved. In 2014, Law 57-FZ was amended to include transactions with fixed assets of strategic enterprises. Part 1.1 of Article 7 of the law covers not only title of ownership transfer but also agreements of lease, gift, barter, trust management and others. Under Law 57-FZ, any such transactions resulting in the acquisition by a foreign investor of ownership, possession or use of assets amounting to 25% or more of the overall book value of the fixed assets of a strategic enterprise are subject to prior clearance. Commentators observe that such fixed assets at stake may not necessarily be involved in the actual activities of strategic significance and may be used by a strategic enterprise in ordinary commercial activity. However, the law does not refer to the “strategic value” of the assets itself and only concerns its value, which according to the commentators may be subject to further amendment or clarification.25 Nonetheless, such an approach may be reasonable purely for ensuring the stable functioning of a strategic enterprise in the market and the maintenance of its uninterrupted operation. Should the assets concerned be of no strategic value, the Governmental Commission would have less doubts in clearing the transaction and could approve it in a prompt manner. Law 57-FZ also contains an obligation of a foreign investor to submit a postclosing notification to FAS in cases when it acquires more than 5% of the voting shares in the strategic enterprise.

24 25

Tsyganov (2018), p. 274. Tsyganov (2018), p. 270.

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5 Approval Procedures and Consequences of Non-compliance Under Law 57-FZ, foreign investors have the right to close a transaction requiring prior approval under the law only after receiving clearance. Otherwise, such transaction is null and void. Russian courts have repeatedly emphasized that the concept of “prior approval” requires that such approval must be necessarily obtained before the making of the transaction. In the approval decision, the Governmental Commission may also indicate the time span for closing the transaction, which shall also be complied with. Consequences of non-compliance are in both civil and administrative dimensions.

5.1

Approval Procedures

The approval procedures applicable under Law 57-FZ (foreign investments in the strategic enterprises) and Law 160-FZ (general investments made by foreign sovereign investors or investments identified by the Head of the Government) are similar. A foreign investor intending to implement a transaction that requires prior approval must submit an application to FAS attaching all relevant documents on the subject matter of the transaction itself and about the parties to the transaction and their controlling persons and beneficiaries, the draft business plan of a strategic enterprise, explanations of the activities of the applicant in the course of two years prior to the application, as well as other specific documents depending on the type of strategic enterprise at stake. There is no fee for filing under Laws 160-FZ and 57-FZ. All information containing company secrets and commercially classified documents is treated in the process of the review as confidential and cannot be disclosed under threats of disciplinary, criminal and civil liability. Of particular importance would be documents demonstrating the ultimate controlling persons and beneficiaries of the applicant. In practice, FAS could cooperate with Russian law enforcement agencies to collect additional information on the applicant and his controlling persons. However, in 2018, Law 57-FZ was amended to simplify the review by FAS: if an applicant does not provide information on its beneficiary owners and controlling persons, adverse inferences would be made and such investor shall be subject to a stricter regime equal to the regime of sovereign investors. In the field of foreign investment controls, FAS therefore does not require substantial cooperation with officials in other countries (though cooperation agreements of FAS with foreign officials on antimonopoly matters are plentiful). Once the complete application is received, FAS analyzes the documents and forwards the documents to the Ministry of Defence and the Federal Security Service for review. Law 57-FZ does not contain any criteria to guide these agencies in their assessment of the existence of threats to national defence and state security in the proposed transaction. Depending on the type of activities of a strategic enterprise,

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opinions of other relevant state agencies may also be required. For instance, the Interdepartmental Commission on the Protection of State Secrets will be asked to provide their opinion if the strategic enterprise operates state secrets, whereas the Ministry of Natural Resources will provide its opinion on transactions concerning strategic enterprises involved in the exploitation of natural resources of federal significance. The opinions of the state agencies are not legally binding for the Governmental Commission and do not predetermine the final decision. However, they represent the views of the most relevant regulators in the field and thus greatly influence the general position adopted by the Commission. The review process for the foreign investor often implies interaction with FAS through presenting the business plan of the enterprise and further investments in the enterprise or industry, as well as discussions of possible obligations, which may be imposed on the foreign investor by the Governmental Commission. General terms of transactions happen to be discussed between the government officials and foreign investors on major Russian economic forums, like the St. Petersburg International Economic Forum and the Eastern Economic Forum, where progress could be reached on the details of the obligations of the foreign investor in a transaction subject to clearance. Once the necessary opinions of state agencies have been collated, FAS forwards the application with the opinions received to the Governmental Commission for final decision. The Governmental Commission can (1) approve the transaction, (2) approve the transaction with conditions and additional obligations or (3) reject the transaction. The discretion of the Governmental Commission is wide, and the law does not establish any criteria that the Commission must assess in making their determinations. Any security, political, social, economic or other considerations can be taken into account. Though the exact details of the meetings of the Commission are not disclosed to the public, the decisions were previously regularly reported after each session of the Governmental Commission at a press conference. Moreover, during the course of the review, FAS officials regularly made public statements on the status and the timeline of the review, made available on FAS website. However, taking into account the current political situation and in order to avoid risks of foreign economic sanctions for investors, since 2019 the Governmental Commission has not disclosed information about transactions considered. The composition of the Governmental Commission is determined by the Russian Government. There are currently 22 members of the Commission, with the Head of Government (the Prime Minister) of Russia as chairman. The other members of the Commission include deputy heads of the government, federal ministers and heads of federal agencies related to defence and national security. The decisions of the Governmental Commission are made through majority voting with the chairman holding the casting vote. Article 12 of Law 57-FZ permits the Governmental Commission to approve a transaction subject to additional obligations imposed on a foreign investor. The practice of imposing such obligations on foreign investors is widespread.26 The

26

FAS (2018).

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list of possible obligations in Article 12 of Law 57-FZ is not exhaustive; however, it lists the most frequent examples of possible obligations imposed on foreign investors. The Governmental Commission may require that the foreign investors, inter alia, (1) compose management bodies of a strategic enterprise with Russian citizens, (2) continue the supply of goods or services by a strategic enterprise for defence purposes, (3) maintain mobilization capacities of a strategic enterprise, (4) process the mineral and biological resources possessed by a strategic enterprise within Russia, (5) maintain the overall number of personnel of the enterprise and (6) supply the services of strategic enterprises—natural monopolies at state-regulated tariffs. If the foreign investor is not ready to accept the obligations in whole and if no agreement on additional obligations was agreed between the investor and FAS 30 days following the circulation of the decision of the Governmental Commission, FAS refuses to clear the transaction. In 2019, FAS has reported that only 18 applications were rejected due to threats to national defence and state security since Law 57-FZ came into force.27 These figures, however, do not take into account cases when foreign investors disagreed to undertake obligations imposed by the Governmental Commission and voluntarily refrained from entering the transaction. Moreover, foreign investors may withdraw their applications at any stage before the decision of the Governmental Commission is taken. If a foreign investor gets informal knowledge of particular concerns of any of the Governmental Commission members with respect to the transaction, it may decide to withdraw the application and consider the modification of the terms of transaction to address the concerns. Law 57-FZ itself mentions that decisions by the Governmental Commission can be challenged before the Supreme Court of Russia, acting as a court of first instance in this case. As of summer 2019, none of the decisions of the Governmental Commission were challenged in court—neither with respect to decisions under Law 57-FZ nor with respect to decisions under Law 160-FZ. R. Shabrov rightly notices that given the broad discretion of the Governmental Commission to determine threats to national defence and security and absence of objective criteria underlying such decisions, the standard of review for the Court in such cases stands highly unclear.28 Is the Court permitted to question the merits of the decision of the Governmental Commission and issue the approval of the transaction, or, alternatively, is the jurisdiction of the Court limited solely to the review of formal compliance with decision-making procedures in the Commission? In the absence of any legislative clarifications and any court practice, these questions remain open. Law 57-FZ establishes the maximum time limits for the review of the applications for prior approval of transactions. Generally, the review of the documents shall not exceed three months from the date of the receipt of the application and the

Federal Antimonopoly Service of the Russian Federation (2019a), Press Release “Andrey Tsyganov: The Law does not Tighten Regulation, It Creates an Understandable Decision-Making Procedure”. 28 Shabrov (2009), p. 20. 27

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documents by FAS and could be extended up to 6 months in “exceptional circumstances” (Article 15 of Law 57-FZ). There is no administrative or court practice laying down the circumstances deemed exceptional, but that may include any reasons, which require additional checks by FAS and the Governmental Commission. On rare occasions, the review may take even longer if additional information or documents from the applicant are required. Some of the most complex reviews last over nine months with more and more additional documents requested, and the parties may sometimes even decide to abandon the transaction as already obsolete. In practice, the Commission meetings are not held regularly, and there are no legal consequences for the Commission for not meeting the deadlines; thus, the decisions could be postponed. Law 57-FZ and the administrative rules do not contain any provisions on “fast-track” review, and all applications are reviewed in the order of their receipt.

5.2

Consequences of Non-compliance

If the control over a strategic enterprise is acquired by a foreign investor without obtaining due clearance of the Governmental Commission, several consequences arise. Firstly, under Article 15 of Law 57-FZ, transactions implemented in violation of the law are null and void. Under Russian civil law, the primary consequence of a void transaction is mutual restitution (restoration of the position of the parties prior to the transaction). However, if the transaction is closed notwithstanding Law 57-FZ and restitution cannot be achieved (for example if the indirect control over the enterprise has been acquired outside the Russian jurisdiction), the Court, upon a lawsuit filed by FAS, rules to deprive a foreign investor or a group of persons of the voting rights at the general shareholder (members) meeting of a business entity of strategic importance. If a foreign investor or a group of persons is judicially deprived of control over a strategic entity, the voting rights that belong to such foreign investor are not taken into account when forming the quorum and calculating votes at the general shareholder (members) meeting of the enterprise.29 Russian courts upon a lawsuit filed by FAS can also invalidate decisions of the general shareholder (members) meeting or other management bodies of a strategic enterprise made after a foreign investor had established control over the enterprise contrary to Law 57-FZ. Russian courts have interpreted these provisions of Article 15 of Law 57-FZ as overriding mandatory rules: according to the courts, these rules apply to any legal relations involving Russian strategic enterprises irrespective of the legal order

29

Article 15 of Law 57-FZ.

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governing the underlying transaction. For instance, Federal Arbitrazh Court of Moscow Circuit in its Decision of 21 February 201130 was considering non-compliance with Law 57-FZ of the joint venture agreement between TeliaSonera group, Altimo Holdings and Investments Limited and Alfa Telecom Turkey Limited on the establishment of the new company, controlling one of the major Russian mobile network operators, MegaFon. The agreement was not submitted for prior approval to the Governmental Commission. The parties agreed that the English law regulated their agreement. The Court has determined that the realization of the agreement would have led to the transfer of control over MegaFon to a foreign entity and mentioned that such transfer could lead to the violation of the legitimate interests of the other shareholders of MegaFon to maintain the stability of the economic operations of MegaFon as a strategic enterprise.31 The Court applied the provisions of Article 15 of Law 57-FZ despite the fact that the agreement was regulated by the English law (which may have completely different rules on the consequences of concluding transactions contradicting the law). The Russian courts have not yet clarified the relationship of Law 57-FZ to a legal concept of public order of Russia (ordre public). Russian courts determine public order as fundamental legal rules of an overriding mandatory, universal nature and particular societal and public value, which are the basis for the construction of the economic, political and economic system of the state.32 Given the overall tendency of Russian courts to interpret the public order concept broadly, S. Babkin and E. Khokhlov believe that the courts will most likely embrace the provisions of Law 57-FZ into the concept of the public order of Russia.33 If in addition to their overriding mandatory nature rules of Law 57-FZ are found part of ordre public, a foreign court decision or an arbitral award that would contradict the provisions of Law 57-FZ shall not be recognized and enforced in Russia. The concept of overriding mandatory rules is known to EU legislation. Article 9 of the Rome I Regulation34 determines overriding mandatory provisions as “provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organization, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract”. A similar provision is embedded in Article 16 of the Rome II Regulation on the law applicable to non-contractual obligations.35 Even though the scope of ordre public is very narrow, narrower Decision of the Federal Arbitrazh Court of Moscow Circuit of 21 February 2011 in case No. А4040521/10-22-354. 31 Ibid, p. 8. 32 Information letter of the Presidium of the Supreme Arbitrazh Court of Russia of 26 February 2013 No. 156. 33 Babkin and Khokhlov (2010), p. 163. 34 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I), OJ L 177, 4 July 2008, pp. 6–16. 35 Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II), OJ L 199, 31 July 2007, pp. 40–49. 30

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than the body of overriding mandatory rules,36 in 1999, in the case Eco Swiss China Time Ltd. v Benneton Int’l NV37 the Court of Justice of the EU affirmed that European competition law has to be considered as European public policy as “necessary for the achievement of the internal market”. Would the Court of Justice of the EU employ similar logics to the framework for the screening of foreign direct investments into the Union, even if not going as far as to regard it a matter of European ordre public, but at least recognizing the overriding mandatory nature of the provisions on non-compliance, like Russian courts did? Russian civil law also permits claims to nullify the transaction violating Law 57-FZ to be brought by third parties, even if not parties to the challenged transaction, should such parties demonstrate that they possess rights or legally protected interests infringed by the challenged transaction. Commentators conclude that other shareholders of a strategic enterprise interested in its stable performance and not willing to have the value of their own shares in the enterprise decrease because of violation of Law 57-FZ may well have standing to bring claims to find transactions violating Law 57-FZ null and seek restitution.38 Violation of the requirements to submit a post-closing notification to FAS in cases when a foreign investor acquires more than 5% of the voting shares in the strategic enterprise does not entail the nullity of such transaction but results in the deprivation of the investor of the voting rights until due notification is submitted to FAS. In cases when control over a strategic enterprise is established as a result of change of ratio of votes for reasons outside the control of a foreign investor, the latter has to submit an application to FAS within 3 months. If an application was rejected, a foreign investor within three months after the refusal must alienate the possessed shares (stock) in such manner that the remaining shares (stock) do not give him rights of control. If that was not done, the court upon a lawsuit of FAS can deprive a foreign investor of the voting rights at the general shareholder (members) meeting, and the votes of a foreign investor are not taken into account for forming the quorum and calculating votes at the general shareholder (members) meeting of the strategic enterprise.39 Non-compliance with obligations to obtain preliminary clearance may be discovered by FAS on its own or with the assistance of Russian law enforcement bodies. In the case of Hong Kong based Pacific Andes International Holdings (the world major seafood company), the foreign investor managed to establish control over several Russian fishing enterprises responsible for over 60% of the pollock harvest in Russia. Control was gained through a number of secret agreements entered into by the foreign investor with the Russian shareholders, who acted as nominal holders of

36

Cordero-Moss (2017), p. 325. Judgment of the Court of 1 June 1999, Eco Swiss China Time Ltd v Benetton International NV, Case C-126/97, ECLI:EU:C:1999:269. 38 Tsyganov (2018), p. 382. 39 Article 15 of Law 57-FZ. 37

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the shares of the Russian fishing entities. The scheme was discovered by the Russian law enforcement bodies and reported to FAS. Following a cartel agreement investigation in FAS, the case was put forward before the Governmental Commission, which established that no necessary approvals were obtained. In 2013, the shares of Pacific Andes International Holdings were sold to the Russian fishing group “Russkoe More – Dobycha”.40 The other widely discussed case of FAS asking courts to nullify transactions violating Law 57-FZ relates to the control of foreign investors over JSC “Port Perm”. As was established by the Federal Security Service of Russia, British citizen Charles Butler through an additional issue of shares of the entity and related persons managed to obtain effective control over a strategic enterprise—subject of natural monopoly JSC “Port Perm”—in 2011. FAS has collected ample evidence of control of the foreign investor over Port Perm and in 2017 filed a claim to the court praying to determine share purchase transactions null and apply the consequences of transaction nullity. Respondents, in their turn, asked to dismiss the claim in entirety due to the expiry of the statutory limitation periods for invalidating illegal transactions, which is three years from the moment when the claimant—not party to transaction learnt or should have learnt about it. According to respondents, FAS has learnt about the transactions even before they were performed in 2011 as those were discussed with the local Department of FAS in Perm region, and the information on the transactions was published on the website officially approved for the publication of information on shareholding structures of the Russian companies. The court of the first instance and the appeal and cassation courts supported the respondents and disagreed to apply the consequences of null transactions due to the expiry of statutory terms. On 12 April 2019, the Supreme Court of the Russian Federation reversed the findings of the lower courts and addressed the case to the court of first instance for a complete revision.41 The Supreme Court noted that Charles Butler obtained a real effective control over JSC “Port Perm” in a chain of transactions, which started in 2011 and were finished in 2016. According to the Supreme Court, these events were not duly examined by the lower courts when considering the case and require a new examination of the matter. This case demonstrates a different angle on the consequences of non-compliance with Law 57-FZ: FAS is bound by statutory limitations to bring claims on the application of consequences of transaction nullity (under Russian civil law, within 3 years from the moment it has learnt or should have learnt about the transaction). In circumstances of scarce, incomplete or inconclusive evidence on the real beneficiaries and the controlling persons behind the formal investor, bringing a claim within the statutory period may not always be possible. In such cases, surveillance authorities need to be equipped with substantial evidence collecting and fact-finding support from the law enforcement bodies. The question of a proper balance between the values of a stable civil turnover, protected

40

Ibid, p. 230. The Order of Chamber for Commercial Disputes of the Supreme Court of Russian Federation of 12 April 2019 in the case No. 309-ЭС18-16403, А50-10758/2017. 41

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by statutory limitation periods, and the values of state defence and national security, protected by Law 57-FZ, will be clearly further discussed in court cases as it remains open-ended. In addition to civil law consequences, violations of Law 57-FZ may also trigger administrative liability. Under the Russian Code of Administrative Offences, foreign investors-legal entities may be subject to fines of up to 1 million roubles per violation. The fine is imposed by FAS following administrative inquiry. Foreign investors may participate at the inquiry and put forward explanations and evidence of the existence of mitigating circumstances, if any. Foreign investors can further challenge the fines before the Russian courts.

6 Secondary Legislation in Place In addition to the restrictions on foreign investments discussed above, one can establish a number of sector-specific laws that restrict foreign investment directly or indirectly (hereinafter referred for simplicity as “secondary legislation”). Article 4 of Law 160-FZ establishes the general rule of national treatment, extended to foreign investors. However, it mentions that restrictions of national treatment for foreign investors could be introduced by federal laws to the extent necessary for the protection of the fundamental principles of the constitutional system, morality, health, the rights and lawful interests of other people, for ensuring defence of the country and security of the state. M. Kasenova explains the choice of matters, in which such national treatment was excluded, referring to “public interest or private interests, which have public significance”.42 Interestingly, the grounds for the exclusion of foreign investors from national treatment, mentioned in Article 4 of Law 160-FZ, are a word-by-word repetition of the grounds of restricting constitutional rights of Russian citizens laid down in part three of Article 55 of the Russian Constitution. According to the said provision, the rights and freedoms of men and citizens may be limited by federal law only to such an extent necessary for the protection of the fundamental principles of the constitutional system, morality, health, the rights and lawful interests of other people, for ensuring defence of the country and security of the State. The Constitutional Court of the Russian Federation has developed abundant interpretative jurisprudence of this provision, which will be clearly relevant for the determination of the necessity of national treatment restrictions as introduced against foreign investors. In its Decision of 30 October 2003 No. 15-P,43 the Constitutional Court of the Russian Federation

42

Kasenova (2006), p. 78. Decision of the Constitutional Court of the Russian Federation of 30 October 2003 No. 15-P “On the case of verification of constitutionality of certain provisions of the Federal law “On the major guarantees of the voting rights and the rights to participate in referendum of the citizens of the Russian Federation” Article 19.1 of the Law of the Russian Federation “On mass media” in

43

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explained that the wording of Article 55 of the Constitution requires restrictions “to correspond to the requirements of fairness, be adequate, proportionate, commensurate and necessary for the protection of constitutionally significant values, including the protection of the rights and lawful interests of other people, not have retroactive effect, [. . .] the rule shall be formally definitive, precise, clear and unequivocal, not permitting broad interpretation of the established restrictions, and, consequently, not permitting their arbitrary application”.44 This guidance is fully applicable to the analysis of the restrictions imposed on the national treatment of foreign investors, introduced by the sector-specific laws discussed below. The most manifest exceptions from national treatment for foreign investors directly restrict foreign participation in the charter capital of Russian legal entities in a given sphere. For instance, under the Law on the Organization of the Insurance Business No. 4015-1, insurance organizations-subsidiaries of foreign investors or those having more than 49% of foreign shares controlled by foreign persons in their authorized capital cannot carry out life, health and property insurance with regard to citizens; insurance related to the procurement of goods, works and services for state and municipal needs; as well as insurance of property interests of public and municipal organizations. Should the overall presence of foreign investors in the Russian insurance system exceed 50%, insurance supervision authorities shall cease to issue insurance licenses for companies with any foreign participation. A similar rule is applicable to banks under the Federal Law on Banks and Banking Activities No. 395-1: foreign investments cannot exceed 50% of the authorized capital of the banks licensed to function in Russia. Such limitations in the insurance and banking sectors are part of Russia’s Schedule of Specific Commitments under the General Agreement on Trade in Services of the WTO. In 2013, Article 18 of Federal Law No. 395-1 was amended to include the right of the Central Bank of Russia to impose restrictions on banking operations for banks with foreign investments if the countries of origin of the foreign investment restrict banks with Russian investments and branches of Russian banks in their establishment and activities in their territories. One of the most debated restrictions of foreign investment relates to the Russian Law on Mass Media No. 2124-1, as amended in 2014. According to the new Article 19.1 of the law, foreign states; international organizations, as well as organizations under their control; foreign legal entities; Russian legal entities with foreign participation; foreign nationals; and Russian nationals with citizenship of another state cannot collectively or individually be a founder (a member) of mass media, an editorial office of Russian mass media or a broadcasting organization. Moreover, the said persons cannot possess, manage or control, whether directly or indirectly (including through persons under their control or by virtue of possessing in aggregate more than 20% of the share capital of any legal person), more than 20% of the share capital of a legal entity that is a member of the founder of Russian mass media

connection with the request of a group of State Duma members and the citizens S.A. Buntman, K.A. Katanyan, K.S. Rozhkov”. 44 Ibid, pp. 5–6.

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or a broadcasting organization. The drafters of the legislation have also analyzed foreign legislation on the matter and established that the maximum foreign share participation in TV channels and radio stations in the US is 25%, in Spain 25% and in Australia, Canada and Indonesia 20%.45 (Noteworthy, as discussed above, is that certain mass media are also deemed strategic for the purposes of Law 57-FZ, and thus corresponding approvals need to be obtained even if Article 19.1 of the Law on Mass Media is complied with.) Shortly after its enactment, Article 19.1 of the Russian Law on Mass Media was challenged before the Constitutional Court of the Russian Federation46 by a Russian national, E. Finkelstein, who was also holding a Netherlands citizenship and who was the owner of a radio station cut off from broadcast following the amendments of the law. Mr. Finkelstein claimed that the new Law is contrary to the Constitution of Russia as disproportionate, discriminatory and unclearly drafted restriction of foreign investment. On 17 January 2019, the Constitutional Court of Russia issued Decision No. 4-P on the matter. The Court concluded that the introduced restrictions are generally permissible under the Russian Constitution as information security forms part of national security, while national interests in the information sector are focused on the formation of a safe medium for the exchange of the veracious information and informational infrastructure prone to any influence47 for the protection of the constitutional rights of the Russian citizens and the national security of Russia. Nonetheless, the Court found the new text of the law contrary to the constitutional requirements of clarity due to the use of the terms founder and member of mass media, which were not based on the legislation in force and were confusing. To this extent, the Court determined the provisions to contradict the Constitution of Russia and obliged the federal legislator to introduce the necessary amendments to eradicate any textual confusion (as of August 2019, such amendments were not yet introduced). Remarkably, one of the judges of the Court, Judge Aranovskiy, expressed a dissenting opinion, disagreeing with the Court findings on any risks to constitutional values, placed by foreign control over mass media and broadcasting organizations. According to Judge Aranovskiy, no real evidence of threat to any constitutional values by foreign ownership of mass media has been placed before the Court, whereas the foreign origin of capital, persons or ideas itself could not be an indication of threat to constitutionally protected values. He continues: An objective threat and a real danger to the constitutionally protected values are the necessary requirements to justify the restriction of rights. The validity of risks and the realness

45

Tsyganov (2018), p. 211. Decision of the Constitutional Court of the Russian Federation of 17 January 2019 No. 4-P “On the case of verification of constitutionality of Article 19.1 of the Law of the Russian Federation “On mass media” in connection with the complaint of citizen E. G. Finkelstein”. 47 Ibid, p. 12. 46

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of the injury being caused shall be proven, when the restrictions of rights are questioned in constitutional judicial order. For it to be possible, [such realness] should be at least denoted, what was not done in this case, and we are left to guess, in which symptoms the anticipated threat exists.48 The other examples of laws restricting foreign ownership in the Russian legal entities include the Law on the Private Detective and Security Activities No. 2487-1 (foreign citizens, Russian citizens with citizenship of another State, foreign legal entities as well as organizations whose founders (members) include such persons cannot invest in the authorized capital of a private security organization) and the Air Code of Russia (the share of foreign capital shall not exceed 45% of the charter capital of the aviation company, with the head of the aviation company being only the citizen of Russia and the number of foreign citizens in the governing body of the aviation company not exceeding 1/3 of the governing body). Under the rules on government procurement, as prescribed by Federal Law No. 44-FZ, operators of the electronic platforms to place government procurement orders may be private companies, in the charter capital of which foreign presence does not exceed 25%. A substantial number of national treatment exceptions are linked to the rights of foreign investors and companies controlled by them to possess land in Russia. Under the Federal Law on Seaports No. 268-FZ, foreign citizens and foreign organizations cannot be owners of land within the boundaries of the seaport. Under the Federal Law on the Turnover of Agricultural Land No. 101-FZ, foreign citizens, foreign legal entities as well as legal entities in the authorized capital of which the share of foreign citizens or foreign legal entities is more than 50% may only have agricultural land plots on the right of lease and not in ownership. Under Article 15 of the Land Code of Russia, foreign citizens and foreign legal entities cannot own land plots located in border areas, the list of which is established by the President of Russia. The latter restriction has also been subject to challenge before the Constitutional Court of Russia in 2004. The Court confirmed the constitutionality of the restriction for state defence protection with no dissenting opinions.49 It is also worth noting that in 2011, the Ministry of Economic Development of Russia has issued Letter No. D02-7833 clarifying that this restriction does not extend to Russian citizens also holding second citizenships.50 Russian legal entities, the decisions of which may be directly or indirectly determined by foreign individuals and (or) foreign legal entities, foreign states or their bodies, are not entitled to be a private partner or participate on the side of a private partner in public-private partnership agreements of certain types. Such agreements are those concluded in respect of computer programs, databases,

48

Ibid, p. 29. Decision of the Constitutional Court of the Russian Federation of 23 April 2004 No. 8-P “On the case of reviewing the constitutionality of the Land code of the Russian Federation in connection with the request of the Murmansk regional Duma”. 50 Letter of the Ministry of economic development of the Russian Federation of 12 October 2011 No. D02-7833. 49

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information systems and websites, which include such computer programs or databases (Article 5 of the Federal Law on Public-Private Partnership and MunicipalPrivate partnership No. 224-FZ). Foreign investors, organizations whose decisions can be determined by foreign natural or legal persons, foreign states and their bodies cannot be a concessionaire if the objects of concession agreements are buildings, structures and constructions intended for the storage and repair of property of the Russian Armed Forces, computer programs, databases, information systems and objects of heat supply, centralized systems of hot water supply, cold water supply and (or) drainage (Article 40 of the Federal Law on Concession Agreements No. 115-FZ). Finally, a very particular regime is introduced with respect to access of foreign investors to Russia’s mineral resources. According to the Law on Mineral Resources No. 2395-1, unless otherwise specifically permitted by the Russian Government, it is prohibited to transfer the right to use mineral resource areas of federal significance (which constitute the majority of mineral resource areas) to a legal entity (or group) with the participation of a foreign investor that has the right to (1) dispose of more than 10% of voting shares of the total voting capital of such a legal entity, (2) determine decisions made by such a legal entity under a contract or on other grounds, (3) appoint a sole executive body and (or) more than 10% of the composition of the collegial executive body and (or) has an unconditional opportunity to elect more than 10% of the composition of the board of directors or other collegial management body of such a legal entity. This provision was introduced in Law No. 2395-1 in 2008 following the approval of Law 57-FZ, as exploitation of mineral resources constitutes a strategic sector of the Russian economy. The cited provision of the Law on Mineral Resources was drafted to reflect the features of control of a foreign investor over a company, exercising the exploitation of the mineral resource area, stipulated in Law 57-FZ in 2008. However, in 2011, the corresponding test of control in Law 57-FZ was changed, and the maximum shareholding threshold was increased from 10% to 25%; nonetheless, no changes were introduced in the Law on Mineral Resources. Therefore, the exploitation of mineral resource areas of federal significance remains the most restricted sphere for foreign direct investment, unless the Russian Government under exceptional circumstances permits otherwise. Responsibility to check compliance with these secondary restrictions is with the state agencies responsible for exercising state surveillance in the corresponding sector. The key difference of the analyzed provisions of the secondary legislation and the mechanism of Law 57-FZ is that the latter applies both to direct and indirect control of the foreign investors, whereas the secondary, sector-specific legislation deals exclusively with the restrictions of direct primary control. Commentators have observed that this peculiarity of the secondary legislation permits foreign investors to overcome the restrictions through the formation of a Russian company, which, in its turn, acts as an investor, though remaining under full foreign control.51 The implementation of the concept of indirect control may be subject to the further

51

Tsyganov (2018), p. 81.

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amendment of the secondary legislation. However, such changes either imply the transfer of competences in this field to FAS or require the development of mechanisms of determining the ultimate beneficiaries behind foreign investors, well known to FAS but currently not implemented by other controlling agencies, as well as the procedural rules of such determinations.

7 EU Rules and the Foreign Investment Control Experience of Russia: Questions for Discussion The mechanism of foreign investment controls in Russia has significantly developed since 2008. It now even forms a separate field of legal advice, with its own eminent practitioners and well-established administrative practice by FAS. FAS has been at the forefront of legislative amendments to accommodate the application of Law 57-FZ, with several examples of excessively restrictive rules removed through further amendments. However, most importantly, the key aspects of the regulation remained unchanged, including the FAS administrative practice aimed at making the mechanism more predictable and transparent. As the EU common rules on foreign investment screening are at their outset, it requires some time to pass for any impact assessment to be made, but the mechanism would require further tailoring to meet the actual needs of the European Union. On 26 April 2019, around two weeks after EU Regulation 2019/452 came into force, the Dispute Settlement Body of the WTO adopted the Panel Report in the case Russia – Measures Concerning Traffic in Transit,52 concerning a number of Russian trade restrictions on goods in transit imposed for national security reasons. Though this decision will not be directly relevant for the national and supranational legislators regulating foreign direct investment, it has nonetheless emphasized the fundamental obligation of states in the field of international economic law, which may be well overlooked in times when autarky slogans are in vogue. The Panel found that the WTO members must adhere to the obligation of good faith as a general principle of law and a principle of general international law, even applying the seemingly “self-judging” exceptions for national security. Good faith does not only imply lack of arbitrary discrimination. To use the cited position of the Constitutional Court of Russia, good faith requires measures to correspond to the requirements of fairness, to be adequate, proportionate, formally definitive, precise, clear and unequivocal, not permitting broad interpretation of the established restrictions and, consequently, not permitting their arbitrary application. Beyond doubt, the bona fide functioning of the foreign investment screening or control mechanism should be based on an exhaustive list of sectors of the economy deemed strategic. The Russian legislation provides for such a list, which is relatively

52 Panel Report, Russia – Measures Concerning Traffic in Transit, WT/DS512/R and Add.1, adopted 26 April 2019.

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specific. Nonetheless, as was discussed above, even such closed and precise lists cause interpretative disputes and difficulties in application. The more precise is the terminology used, the more transparency and predictability are established. One could hardly consider some of the terms used in EU Regulation 2019/452 of 19 March 2019 (for instance critical infrastructure, critical inputs or sensitive information) as sufficiently precise, clear and unequivocal. Foreign investors in any case remain in a weaker position in the recipient state; therefore, specific rules and uniform practice of their application are crucial for them. The right of a foreign investor to seek authoritative interpretations of the restrictive legislation and the obligation of the responsible authorities to provide swift (within 30 days for FAS in Russia) and meaningful responses have been of great value in the Russian development of the foreign investment control mechanism. The other fundamental matter for analysis is the place of the EU foreign direct investment screening rules in the milieu of the EU legal order and the legal order of the EU Member States. Russian courts have granted foreign investment control rules the status of overriding mandatory rules and have not yet clarified whether they form part of ordre public of Russia (which they will most likely find in the affirmative). This results in numerous legal consequences discussed above, from the legal rules governing foreign investment transactions to the chances of recognition of arbitral and foreign court decisions deviating from the investment screening requirements. Could the CJEU position that European competition law forms a matter of European public policy be relevant? How “common” is the new EU foreign investment screening framework, given the ultimate responsibility of the Member States to make a decision on investment clearance? A significant concern is related to maintaining restrictive rules, also aimed at national security and state defence, in secondary legislation. As was discussed, the Russian sector-specific legislation has not yet overcome the shortcomings of only “direct control” review, leaving indirect foreign investments beyond scrutiny. The abundance of agencies regulating specific sectors of the economy, as well as the intrinsic limits of powers and capacities of such agencies, may make indirect control unavailable for scrutiny at all. For Russia, the change of approach shall require the complete review of the powers of the sector-specific controlling agencies to grant them additional investigatory capacities with their own means and the means of the law enforcement bodies. The transfer of foreign investment surveillance in all these sectors to FAS may be efficient for control purposes but would deplete the state policy management in a sector of the economy and may greatly weaken the positive effects of foreign direct investments in the field. Trying to develop a set of objective and commonly used criteria for the assessment of risks related to national security posed by a foreign investor may indeed be a Sisyphean task. The concepts of national security and defence evolve over time and differ from country to country, and the governments will always remain reluctant to be bound in their powers on such sensitive matters. Over the last 10 years, the Russian Government has been acting pragmatically with respect to foreign investors and has not tried to impose political values on foreign investors through the tools of foreign investment controls. Are mechanisms of foreign investment screening

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rightly suitable for addressing not only direct security concerns but also political goals in foreign jurisdictions even if those goals were labelled with most affectionate headings of freedom and pluralism of media in foreign jurisdictions? EU Regulation 2019/452 seems to be leaning towards accepting it. Should this approach be further implemented, the new mechanism of investment screening may well turn into a new yet additional bone of contention. A different complex and unresolved matter is the extension of a possible judicial control over decisions to restrict foreign investments on security grounds. What are the appropriate standards of review of the decisions of the governments in such cases? Should courts review decisions on its merits, or should they exercise complete deference to the political decisions of the state bodies responsible for foreign investment control? Could the CJEU make its own full de novo assessment following the final decision of an EU Member State? The Russian legal order has not yet established approaches towards this aspect of the matter, and it shall remain one of the big open questions in the coming years.

References Babkin SA, Khokhlov ES (2010) Ogranichenie inostrannykh investitsyi v strategicheskie otrasli: prodolzhenie diskussii (Restriction of foreign investment in strategic sectors: discussion continued). Vestnik grazhdanskogo prava (Civil Law Review) 5:148–170 Bam J (2013) Strategic sector legislation in Russia: critique and proposal for change. Matters Russ Int Law 2:29–62 Borodushko IV, Kokorin IS (2018) Evolutsiya normativno-pravovoy bazy pryamykh inostrannykh investitsyi v Rossiikoi Federatsii (evolution of legal rules regulation foreign direct investment in the Russian Federation). Leningradskyi Yuridicheskyi Zhurnal (Leningrad Law Journal) 1:190–199 Collins D (2013) The BRIC states and outward foreign direct investment. OUP Cordero-Moss G (2017) EU overriding mandatory provisions and the law applicable to the merits. In: Ferrari F (ed) The impact of EU law on international commercial arbitration. Juris Publishing, New York, pp 317–349 Doraev MG (2012) Dopusk inostrannykh investorov v strategicheskie otrasli ekonomiki (pravovye osnovy) (Admission of foreign investors to the strategic sectors of economy (legal basics)). Infotropic Media, Moscow Doraev MG (2013) Dopusk inostrannykh investorov v strategicheskie otrasli ekonomiki kak sredstvo gosudarstvennogo regulirovaniya investitsionnoi deyatelnosti (Admission of foreign investors to the strategic sectors of economy as a means state regulation of investment activities). Predprinimatelskoe Pravo. Prilozhenie “Biznes i pravo v Rossii I za rubezhom” (Business Law. Annex “Business and Law in Russia and Abroad) 1:48–58 Draft Law № 455348-4 “On the procedure for making foreign investments in companies which are of strategic importance for ensuring the country’s defence and state security”. State Duma of the Russian Federation Legislative Work Maintenance System. https://sozd.duma.gov.ru/bill/ 455348-4 (2007). Accessed 13 July 2019 Elizarov V (2008) Gosudarstvennoe regulirovanie privlecheniya inostrannykh investitsyi v strategicheskie sektory ekonomiki RF (State regulation of the attraction of foreign investment in the strategic sectors of the economy of the Russian Federation). Korporativnyi Yurist (Corporate Lawyer) 10:6–11 Federal Antimonopoly Service of the Russian Federation (2018) Press Release “Andrey Tsyganov: The Law does not Tighten Regulation, It Creates an Understandable Decision-Making

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Procedure”. Available via http://en.fas.gov.ru/press-center/news/detail.html?id¼52979. Accessed 14 July 2019 Federal Antimonopoly Service of the Russian Federation (2019a) FAS Rossii. 15 let na strazhe konkurentsii (FAS of Russia. 15 years on guard of competition). Available via https://15years. fas.gov.ru/. Accessed 14 July 2019 Federal Antimonopoly Service of the Russian Federation (2019b) Konkretizatsiya poryadka – garantiya soblyudeniya prav inostrannogo investora (Definition of the procedure – guarantees of the respect of foreign investors rights). Available via https://fas.gov.ru/news/27769. Accessed 14 July 2019 Frenkel WG, Sukham MY (1993) New foreign investment regimes of Russia and other republics of the former U.S.S.R.: a legislative analysis and historical perspective. Boston Coll Int Comp Law Rev 16:321–423 Georiou NA (2017) Energy regulation in international trade: legal challenges in EU-Russia energy relations from an investment protection perspective. In: Adinolfi G, Baetens F, Caiado J, Lupone A, Micara AG (eds) International economic law. Contemporary issues. Springer, Heidelberg, pp 151–168 Kasenova MB (2006) Sootnoshenie publichnykh I chastnykh nachal v rossiiskom investitsionnom prave (Correlation between public and private foundations of the Russian investment law). Advocate 8:77–84 Pomeranz WE (2010) Russian protectionism and the strategic sectors law. Am Univ Int Law Rev 25 (2):213–224 RBC (4 April 2005a) Deputaty GD prosyat M. Fradkova zapretit prodazhu “Silovykh mashin” (Members of State Duma request M. Fradkov to prohibit the sale of “Siloviye Mashiny”). https://www.rbc.ru/economics/04/04/2005/5703c2209a7947dde8e097b7?from¼materials_on_ subject. Accessed 13 July 2019 RBC (13 April 2005b) FAS ne razreshila Siemens kupit 74% aktsyi “Silovykh mashin” (FAS did not permit Siemens to purchase 74% of shares of “Siloviye Mashiny”). https://www.rbc.ru/ economics/13/04/2005/5703c2269a7947dde8e0980c. Accessed 13 July 2019 Shabrov RA (2009) Investirovanie v khozyaistvennye obschestva, imeyuschie strategicheskoe znachenie dlya obespecheniya oborony i bezopasnosti gosudarstva (Investing to commercial entities, bearing strategic significance for safeguarding state defence and security). Zakonodatelstvo I ekonomika (Legislation Economics) 7:9–22 Tsyganov AG (ed) (2018) Nauchno-prakticheskyi kommentaryi k Federalnomu zakonu ot 29.04.2008 No. 57-FZ “O poryadke osuschestvleniya inostrannykh investitsyi v khozyaistvennye obschestva, imeyuschie strategicheskoe znachenie dlya obespecheniya oborony strany I bezopasnosti gosudarstva” (Scientific and practical commentary to the Federal Law of 29.04.2008 No. 57-FZ “On the procedure for making foreign investments in companies which are of strategic importance for ensuring the country’s defence and state security”. Branch of the Academic and methodological centre of the Federal Antimonopoly Service of Russia, Moscow

Vladimir V. Talanov is counsel to International Trade & Customs group of Egorov, Puginsky, Afanasiev and partners, the leading Russian national law firm. Focusing mainly on international trade, WTO rules and international commercial and investment arbitration, Vladimir acted as counsel for the Government of Russia and the major Russian manufacturing companies in ICC, LCIA, SCC, ICSID and ad hoc arbitrations. Vladimir is a faculty member at the St. Petersburg State University Law School and Faculty of Law of the National Research University – the Higher School of Economics, where he teaches courses on public international law, international trade and investment, cross-border dispute resolution and regional economic integration. Vladimir is recommended as one of the most respected Russian experts on international trade law by Who’s Who Legal and Best Lawyers.

Foreign Investment Screening in the USA Greta Lichtenbaum and David J. Ribner

Contents 1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Key Legislative Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 CFIUS Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 CFIUS Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Covered Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 CFIUS Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 CFIUS Analytical Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 FIRRMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix: 27 NAICS Code Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract As the European Union implements its new regulation on the national screening of foreign investments, it is useful to be mindful of both the contrast (in terms of jurisdiction) and similarities (in terms of substantive areas of focus) between the EU and the U.S. foreign investment review processes. This chapter provides an overview of the U.S. foreign investment review process, including how it has evolved and where it is heading following recent statutory changes.

1 Overview The Committee on Foreign Investment in the United States (CFIUS) is an interagency committee of the U.S. Government charged with assessing whether certain types of investments by foreign persons in U.S. businesses and real estate G. Lichtenbaum and D. J. Ribner (*) O’Melveny & Myers LLP, Washington, DC, USA e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 363–378, https://doi.org/10.1007/16495_2020_7, Published online: 30 May 2020

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present risks to U.S. national security. If CFIUS identifies a threat to the national security of the United States, CFIUS is authorized by law to mitigate the threat. If the threat cannot be mitigated, the President of the United States is authorized to suspend or prohibit the transaction. The following provides an overview of CFIUS’s organization, its process for reviewing investments in the United States, and recent updates to the CFIUS process.1

1.1

Key Legislative Measures

Over the last 45 years, CFIUS has evolved in response to a variety of emerging national security concerns about foreign investments in the United States. CFIUS was created by President Ford in 1975 through an executive order in response to a wave of investments from OPEC countries in U.S. Treasury securities and corporate stocks and bonds.2 In 1988, following a number of Japanese investments in U.S. technology companies (most notably, Fujitsu’s attempt to acquire Fairchild Semiconductor), Congress passed the “Exon-Florio” amendment to the Defense Production Act of 1950 (Section 721) authorizing the President to block foreign investments on national security grounds.3 In 2007, following several controversial proposed transactions, including CNOOC’s bid for Unocal and Dubai Ports World’s proposed acquisition of U.S. commercial port operations from Peninsular & Oriental Steam Navigation Company, Congress passed the Foreign Investment and National Security Act extensively amending Section 721.4 Most recently, in 2018, in response to increasing concern about Chinese investment in the United States, in particular, in technologies the U.S. Government considers critical to national security, Congress expanded CFIUS’s jurisdiction and ability to review foreign investments in the Foreign Investment Risk Review Modernization Act (FIRRMA), discussed in further detail below.5 Section 721 is codified at 50 U.S.C. § 4565, and the regulations implementing Section 721 are found at 31 C.F.R. Parts 800 to 802 (the CFIUS Regulations).

1

See also The Committee on Foreign Investment in the United States (CFIUS), Congressional Research Service, (Updated January 14, 2020), available at https://fas.org/sgp/crs/natsec/RL33388. pdf. 2 Executive Order 11858, 40 Fed. Reg. 20263 (May 7, 1975). 3 Pub. L. No. 100-418, 102 Stat. 1107 (1988). 4 Pub. L. No. 110-49, 121 Stat. 246 (2007). 5 Pub. L. No. 115-232, 132 Stat. 2184 (2018).

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CFIUS Membership

Recognizing the multifaceted nature of national security issues, the U.S. foreign investment review process involves a number of federal agencies and offices, all of which have a responsibility for some aspect of national security. CFIUS is chaired by the Secretary of the Treasury,6 and the CFIUS process is coordinated by Treasury Department staff in the Office of Investment Security. CFIUS is comprised of the following member departments and offices: Department of the Treasury (Chair), Department of Commerce, Department of Defense, Department of Energy, Department of Homeland Security, Department of Justice, Department of State, Office of the U.S. Trade Representative, and Office of Science & Technology Policy.7 The Director of National Intelligence and the Secretary of Labor are nonvoting, ex officio members of CFIUS.8 In addition, the following offices of the Executive Office of the President may also observe and participate: Office of Management & Budget, Council of Economic Advisers, National Security Council, National Economic Council, and Homeland Security Council.9

2 CFIUS Review 2.1

Authority

CFIUS implements Section 721 by reviewing “covered transactions” and assessing national security risks. The CFIUS process is largely voluntary, with limited circumstances in which there is a mandatory requirement to notify CFIUS of a transaction (discussed below). The benefit of voluntarily notifying CFIUS is that transactions that are reviewed and cleared by CFIUS enter into a “safe harbor” and are not subject to further review by CFIUS,10 whereas transactions within CFIUS jurisdiction that are not voluntarily notified remain subject to CFIUS’s review authority at any time, including the authority to order the divestiture of an investment or the unwinding of a transaction post-closing.11 When transactions are submitted for review, whether mandatory or voluntary, CFIUS evaluates national security issues related to the transaction leading to one of four possible outcomes:

50 U.S.C. § 4565(k)(3). 50 U.S.C. § 4565(k)(2); Executive Order 13456, 73 Fed. Reg. 4677 (January 25, 2008). 8 50 U.S.C. § 4565(k)(2). 9 Executive Order 13456, 73 Fed. Reg. 4677 (January 25, 2008). 10 31 C.F.R. § 800.601. 11 Ibid. 6 7

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1. CFIUS clears a transaction after finding it does not pose any risks to U.S. national security or other provisions of law address the risks. 2. CFIUS clears a transaction with mitigation. In such cases, CFIUS identifies national security risks but resolves them through agreement with the transaction parties. 3. CFIUS permits the parties to withdraw their filing without action. 4. CFIUS refers the case to the President of the United States for decision (with CFIUS’s recommendation). The President may then take action, including blocking the transaction.12 To date, only five transactions have been formally blocked by the President. The first occurred in 1990 when President George H.W. Bush directed the China National Aero-Technology Import and Export Corporation to divest its acquisition of MAMCO Manufacturing, a U.S.-based aerospace parts supplier. More than 20 years passed until the second block, which occurred in 2012, when President Obama directed the Chinese-owned Ralls Corporation to divest its acquisition of a wind farm project in Oregon due to concerns over the project’s proximity to a U.S. military facility. In 2016, President Obama also blocked the Fujian Grand Chip Investment Fund, a Chinese fund, from acquiring the U.S. assets of Aixtron, a Germany-based semiconductor company whose semiconductors are used in weapons systems. Since 2017, President Trump has blocked two transactions. The first was the 2017 attempted acquisition of Lattice Semiconductor Corp., a U.S. semiconductor company, by Canyon Bridge Capital Partners, a Chinese-funded private equity firm. The second was the 2018 attempted acquisition of Qualcomm, a U.S. semiconductor and telecom equipment company, by Broadcom, a semiconductor manufacturing company that was domiciled in Singapore at the time of the transaction. Many more transactions have not been consummated as a result of CFIUS indicating to the parties that it has identified national security concerns that cannot be mitigated. In response, the parties have withdrawn their filings and abandoned the transactions prior to a formal blocking of the transaction. CFIUS’s and the President’s decisions are entirely discretionary and are generally not subject to judicial review.13

2.2

Covered Transactions

CFIUS’s authority to review transactions extends only to “covered transactions” as defined in Section 721 and the CFIUS Regulations. Until recently, “covered transactions” were limited to transactions in which a foreign person acquired “control,”

12 13

See 50 U.S.C. § 4565; 31 C.F.R. Part 800. 50 U.S.C. § 4565(e)(1).

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directly or indirectly, of a “U.S. business.”14 (As discussed below, FIRRMA broadened “covered transactions” to include certain noncontrolling investments.) “Control” and “U.S. business” are inherently vague terms, and over time, CFIUS has adopted an increasingly expansive view of its jurisdiction in interpreting these terms. CFIUS jurisdiction also extends to transactions outside the United States involving an investment by a foreign person in a foreign company that owns or controls a U.S. business, where the investor acquires the requisite level of control of the foreign parent company (using the same broad interpretation as applied to a U.S. transaction).15 In such cases, CFIUS jurisdiction extends only to the U.S. business of the foreign target company. Certain types of U.S. investments are not considered “covered transactions.” These include greenfield investments, loan transactions (unless the lender obtains unusual governance rights), and acquisitions by a U.S. person of control of a foreign business from a foreign person, even where the foreign business owns a U.S. business.16 CFIUS determines whether a convertible debt transaction is “covered” on a case-by-case basis, taking into account (1) the imminence of the conversion, (2) whether the conversion depends on factors within the control of the acquiring party, and (3) whether the amount of voting interest and rights obtained upon conversion can be reasonably determined at the time of acquisition.17 Technology licenses are not “covered transactions” but may be a factor in determining whether a minority investment is covered. Perhaps most importantly, equity investments of 10% or less “for passive investment purposes only” are not “covered transactions.”18 Such investments in which the investor does not obtain any governance, decision-making, or rights to material nonpublic technical information are outside CFIUS jurisdiction.

2.3

CFIUS Process

CFIUS ordinarily considers “covered transactions” after the parties voluntarily file a joint notice consisting of information set forth in the CFIUS Regulations about the transaction, the foreign investor, and the U.S. business.19 It is customary (though not required) for the parties to file a draft joint notice for informal review and comment 50 U.S.C. § 4565(a)(4)(B); 31 C.F.R. § 800.204 (“control means the power, direct or indirect, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in an entity, board representation, proxy voting, a special share, contractual arrangements, formal or informal arrangements to act in concert, or other means, to determine, direct, or decide important matters affecting an entity”); 31 C.F.R. § 800.226 (“U.S. business means any entity. . .engaged in interstate commerce in the United States”). 15 31 C.F.R. § 800.301. 16 See 31 C.F.R. § 800.301-303. 17 31 C.F.R. § 800.304. 18 31 C.F.R. § 800.302(b). 19 31 C.F.R. § 800.402. 14

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by CFIUS and to engage with CFIUS on potential issues before filing a formal notice. Parties submitting a joint notice to CFIUS must certify that the information in the notice is complete and accurate in all material respects.20 Material misstatements or omissions in a notice or a false certification may subject the submitter to a civil penalty up to $250,000.21 Information provided to CFIUS is confidential and is exempt from disclosure under the Freedom of Information Act.22 The CFIUS review occurs in up to three stages that can take 120 calendar days. CFIUS initiates a formal review of a joint notice after determining it is complete. Initially, CFIUS conducts a 45-day review of the transaction, beginning on the next business day after finding the notice is complete.23 By day 30 of the review period, the Director of National Intelligence is required to provide a threat assessment of the transaction (discussed further below). The statutory deadline for completing the review is 45 calendar days after initiation.24 Upon completion of the review, CFIUS may clear the transaction or initiate a second stage “investigation,” which can last up to 45 days.25 For transactions where the investor is a foreign government or a foreign-government-controlled entity or the U.S. business is part of the critical infrastructure of the United States, there is a regulatory presumption of an investigation.26 During the review and investigation periods, CFIUS examines the transaction in order to identify and address national security concerns that arise as a result of the transaction. CFIUS may request additional information from the parties, which must be responded to within three business days of the request or within a longer time frame if an extension is granted by CFIUS.27 CFIUS may also reject joint notices, such as when the voluntary notice is not complete, the parties do not respond to follow-up information requests within the required time frame, there is a material change in the transaction, or material information comes to light that contradicts information provided in the notice by the parties.28 Parties may resubmit notices that CFIUS has rejected. At the conclusion of the investigation, CFIUS must resolve the case or refer it to the President for a final decision.29 If a case is referred to the President, the President has 15 days to take action. In “extraordinary circumstances” (for example, due to a

50 U.S.C. § 4565(n)(1). 31 C.F.R. § 800.801(a). 22 50 U.S.C. § 4565(c). 23 31 C.F.R. § 800.502. 24 50 U.S.C. § 4565(b)(1)(F). 25 31 C.F.R. § 800.503. 26 Ibid. Critical infrastructure is defined as “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security.” 50 U.S.C. § 4565(a)(5). 27 31 C.F.R. § 800.403(b). 28 See 31 C.F.R. § 800.403. 29 31 C.F.R. § 800.506. 20 21

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force majeure event), CFIUS is authorized to extend an investigation for 15 additional days.30 If the case is not ready to resolve but discussions with CFIUS are not at an impasse, it is common for the parties and CFIUS to agree that the parties will withdraw and refile their notice, thus starting a new review period.31 Such a restart can potentially occur more than once for any given transaction.

2.4

CFIUS Analytical Approach

In its earlier years, CFIUS was primarily concerned with acquisitions in the defense and certain technology sectors (such as telecommunications infrastructure). Today, other national security concerns are equally paramount, including preservation of the national security innovation base, all critical infrastructure (e.g., transportation facilities, utilities), emerging technologies (e.g., artificial intelligence, the Internet of Things, autonomous vehicles, robotics, and virtual/augmented reality), and protection of U.S. citizen data, personal identifier information, and protected health information. In determining whether a proposed transaction presents U.S. national security concerns, CFIUS considers a variety of factors regarding (i) the “threat” posed by the foreign investor and (ii) the “vulnerability” of the targeted assets or business to exploitation for national security reasons. Factors related to “threat” include the foreign investor’s nationality/country of origin; whether the foreign investor is state owned or financed; the foreign investor’s corporate compliance record, including compliance with U.S. economic sanctions; and the foreign investor’s plans for the U.S. business.32 Factors related to “vulnerability” include the target’s business, customers, technology, location, and other characteristics, including the potential effects on U.S. technological leadership, domestic production of national defense requirements, critical infrastructure, and critical technologies.33

2.5

Mitigation

If national security concerns are identified, CFIUS assesses whether there are means to resolve them. First, CFIUS looks to other existing statutory authorities to determine whether they provide a mechanism to address the concern. For example, if the concern relates to the foreign investor accessing the technology of the U.S. business,

31 C.F.R. § 800.506(e). 31 C.F.R. § 800.507. 32 See generally 31 C.F.R. § 800.402(c)(6). 33 50 U.S.C. § 4565(f). 30 31

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the export control laws and regulations34 may be sufficient to restrict the foreign investor’s access to such technology. Second, national security concerns may be addressed through “mitigation agreements.”35 Such agreements, which can take the form of letters of assurance or national security agreements,36 can cover a number of possible measures, ranging from divestiture of the segment of the U.S. business posing the national security concern to governance structures designed to isolate the influence of the foreign investor on the U.S. business to simple restrictions on access to the U.S. business’s technology and data. Often, such mitigation agreements require the appointment of corporate security officers responsible for the implementation of the agreements and third-party audits. Violations of a mitigation agreement intentionally or through gross negligence may be subject to a civil penalty of the greater of $250,000 or the value of the transaction.37

3 FIRRMA FIRRMA made a number of changes to Section 721 of the Defense Production Act, including codifying certain CFIUS practices and administrative changes, such as the introduction of a filing fee for CFIUS notices (1% of the transaction value up to $300,000).38 Substantively, FIRRMA clarified and expanded CFIUS jurisdiction and introduced a new requirement to notify CFIUS of certain transactions. To implement FIRRMA’s new authorities, CFIUS issued two sets of regulations, effective February 13, 2020. The first set of rules amends Part 800 of the CFIUS Regulations and primarily focuses on the expansion of CFIUS jurisdiction to “other investments” in certain U.S. businesses in the critical technology, critical infrastructure, and sensitive personal data industries (discussed below). The second set of rules solely addresses FIRRMA’s new jurisdiction over certain real estate transactions. As noted above, prior to FIRRMA, CFIUS’s jurisdiction extended only to investments in which a foreign person acquired “control” of a U.S. business, and the law did not require parties to notify CFIUS of covered transactions. FIRRMA made changes to both of these aspects of CFIUS jurisdiction. First, FIRRMA

34 The two primary U.S. export control regulatory regimes are the Export Administration Regulations, 15 C.F.R. Parts 730–774 et seq., administered by the Bureau of Industry and Security of the U.S. Department of Commerce, and the International Traffic in Arms Regulations, 22 C.F.R. Parts 120–130 et seq., administered by the Directorate of Defense Trade Controls of the U.S. Department of State. 35 50 U.S.C. § 4565(l)(3). 36 “Letters of assurance” are letters from the parties to CFIUS outlining the parties’ commitments to mitigate national security risks. “National security agreements” are formal contracts between the parties and CFIUS agencies setting forth the commitments the parties agree to undertake to mitigate national security. 37 31 C.F.R. § 800.801(b). 38 50 U.S.C. § 4565(p)(3)(B)(i).

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extended CFIUS jurisdiction to certain noncontrolling “other investments” in U.S. businesses involved in critical infrastructure, critical technology, or sensitive personal data of U.S. citizens,39 transactions “designed or intended to evade or circumvent” CFIUS review,40 and transactions involving real estate in close proximity to certain U.S. airports, maritime ports, and military installations.41 Second, in some circumstances, parties are required to provide notification to CFIUS of a proposed investment. The “other investments” that are now subject to CFIUS jurisdiction are investments through which the foreign investor does not acquire “control” of the U.S. business but affords the foreign investor (a) access to material nonpublic technical information of the U.S. business, (b) board representation or observership, or (c) other involvement in substantive company decision-making related to (i) “the use, development, acquisition, safekeeping, or release of sensitive personal data of United States citizens maintained or collected by the U.S. business”; (ii) “the use, development acquisition, or release of critical technologies”; or (iii) “the management, operation, manufacture, or supply of critical infrastructure.”42 FIRRMA includes several key definitions that serve to clarify the scope of this expanded jurisdiction. “Material nonpublic technical information” does not include financial information regarding the performance of the U.S. business.43 “Critical infrastructure” means physical and virtual systems and assets so vital to the United States that their incapacitation or destruction would have a debilitating impact on national security.44 “Critical technologies” are (1) defense articles and services on the U.S. Munitions List in the International Traffic in Arms Regulations administered by the State Department; (2) items controlled by the Export Administration Regulations administered by the Commerce Department for certain reasons related to national security, chemical and biological weapons proliferation, nuclear nonproliferation, missile technology, regional stability, and surreptitious listening; (3) nuclear-related equipment, material, parts, components, and technology; (4) select agents and toxins; and (5) “emerging and foundational technologies.”45 The latter are new items in various technology categories such as artificial intelligence and biotechnology that are being identified by the Commerce Department through a separate regulatory rulemaking process.46

50 U.S.C. § 4565(a)(4)(D). 50 U.S.C. § 4565(a)(4)(B)(v). 41 50 U.S.C. § 4565(a)(4)(B)(ii). 42 50 U.S.C. § 4565(a)(4)(D)(i). 43 50 U.S.C. § 4565(a)(4)(D)(ii)(II). 44 50 U.S.C. § 4565(a)(5). The CFIUS Regulations identify specific types of critical infrastructure (e.g., internet exchanges, submarine cables, airports, oil and gas infrastructure, maritime ports, defense industrial resources, public water systems). 45 50 U.S.C. § 4565(a)(6). 46 83 Fed. Reg. 58201 (November 19, 2018). 39 40

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FIRRMA also authorized an abbreviated filing process through the submission of short-form declarations, as an alternative to CFIUS’ traditional notice (discussed above).47 Declarations require basic information regarding a transaction and are intended to enable an expedited review of covered transactions. Declarations must be filed at least 45 days prior to a transaction’s completion date. CFIUS then has 30 days to take one of four actions: (1) request that the parties file a notice, (2) inform the parties that the declaration is insufficient for CFIUS to complete action and advise that the parties may file a notice, (3) initiate a formal review of the transaction, or (4) clear the transaction. Importantly, a transaction that is cleared on the basis of a declaration is eligible for the regulatory safe harbor available to parties that file a notice. As noted above, the filing of a declaration is mandatory in two circumstances: first, transactions in which a foreign government has a direct or indirect substantial interest in the foreign investor48 and, second, transactions that meet the following three elements:49 (1) the transaction must result in a controlling investment or noncontrolling “other investment” by a foreign person in a U.S. business; (2) the U.S. business must produce, design, test, manufacture, fabricate, or develop “critical technologies”; and (3) the U.S. business must fall within any one of 27 specified industry sectors, as defined by North American Industry Classification System (NAICS) codes, or design the critical technology specifically for use in one of those 27 industries.50 The 27 industries are of national security importance, in which the U.S. Government believes that foreign investment transactions are most likely to raise concerns regarding the technological superiority of the United States.51 These include aircraft manufacturing, computer and computer storage manufacturing, guided missile and space vehicle manufacturing, petrochemical manufacturing, radio and television broadcasting and wireless communications equipment manufacturing, research and development in biotechnology and nanotechnology, and semiconductor-related manufacturing, among others.52 The full list is provided in the Appendix. Parties that are required to file a mandatory declaration and fail to do so may incur a civil monetary penalty up to the value of the transaction.

50 U.S.C. § 4565(b)(1)(C)(v). 50 U.S.C. § 4565(b)(1)(C)(v)(IV)(bb)(AA). 49 The mandatory filing requirement for transactions involving “critical technology” was initially implemented by CFIUS in a “Pilot Program” in November 2018. 31 C.F.R. Part 801. The Pilot Program’s construct for mandatory declarations were essentially incorporated into the primary CFIUS regulations, 31 C.F.R. Part 800. In the future, CFIUS anticipates revising the mandatory declaration requirement for critical technology from an NAICS code-based system to one based on export control licensing requirements. 50 31 C.F.R. § 801.210. 51 83 Fed. Reg. 51325 (October 11, 2018). 52 See Annex A to 31 C.F.R. Part 801. 47 48

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4 Conclusion The CFIUS process shares many of the goals of the new EU Regulation, including transparency and predictability of process. National security concerns are inherently political, and as such, inevitably the political concerns of the presiding administration will influence the outcome of a review, as do changes to the national security threats themselves. While the CFIUS process is relatively mature, we can expect other changes to occur in the future, both to the legal instruments that govern the process and to the manner in which those authorities are implemented.

Appendix: 27 NAICS Code Industries NAICS code 336411

Industry Aircraft manufacturing

336412

Aircraft engine and engine parts manufacturing

331313

Alumina refining and primary aluminum production

Description (U.S. Census Bureau) This U.S. industry comprises establishments primarily engaged in one or more of the following: (1) manufacturing or assembling complete aircraft, (2) developing and making aircraft prototypes, (3) aircraft conversion (i.e., major modifications to systems), and (4) complete aircraft overhaul and rebuilding (i.e., periodic restoration of aircraft to original design specifications). This U.S. industry comprises establishments primarily engaged in one or more of the following: (1) manufacturing aircraft engines and engine parts, (2) developing and making prototypes of aircraft engines and engine parts, (3) aircraft propulsion system conversion (i.e., major modifications to systems), and (4) aircraft propulsion system overhaul and rebuilding (i.e., periodic restoration of aircraft propulsion system to original design specifications). This U.S. industry comprises establishments primarily engaged in one or more of the following: (1) refining alumina (i.e., aluminum oxide) generally from bauxite, (2) making aluminum from alumina, and/or (3) making aluminum from alumina and rolling, drawing, extruding, or casting the aluminum they make into primary forms. Establishments in this industry may make primary aluminum or aluminumbased alloys from alumina. (continued)

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NAICS code 332991

Industry Ball and roller bearing manufacturing

334112

Computer storage device manufacturing

334111

Electronic computer manufacturing

336414

Guided missile and space vehicle manufacturing

336415

Guided missile and space vehicle propulsion unit and propulsion unit parts manufacturing

Description (U.S. Census Bureau) This U.S. industry comprises establishments primarily engaged in manufacturing ball and roller bearings of all materials. This U.S. industry comprises establishments primarily engaged in manufacturing computer storage devices that allow the storage and retrieval of data from a phase change, magnetic, optical, or magnetic/ optical media. Examples of products made by these establishments are CD-ROM drives, floppy disk drives, hard disk drives, and tape storage and backup units. This U.S. industry comprises establishments primarily engaged in manufacturing and/or assembling electronic computers, such as mainframes, personal computers, workstations, laptops, and computer servers. Computers can be analog, digital, or hybrid. Digital computers, the most common type, are devices that do all of the following: (1) store the processing program or programs and the data immediately necessary for the execution of the program, (2) can be freely programmed in accordance with the requirements of the user, (3) perform arithmetical computations specified by the user, and (4) execute, without human intervention, a processing program that requires the computer to modify its execution by logical decision during the processing run. Analog computers are capable of simulating mathematical models and contain at least analog, control, and programming elements. The manufacture of computers includes the assembly or integration of processors, coprocessors, memory, storage, and input/ output devices into a user-programmable final product. This U.S. industry comprises establishments primarily engaged in (1) manufacturing complete guided missiles and space vehicles and/or (2) developing and making prototypes of guided missiles or space vehicles. This U.S. industry comprises establishments primarily engaged in (1) manufacturing guided missile and/or space vehicle propulsion units and propulsion unit parts and/or (2) developing and (continued)

Foreign Investment Screening in the USA NAICS code

Industry

336992

Military armored vehicle, tank, and tank component manufacturing

221113

Nuclear electric power generation

333314

Optical instrument and lens manufacturing

325180

Other basic inorganic chemical manufacturing

336419

Other guided missile and space vehicle parts and auxiliary equipment manufacturing

325110

Petrochemical manufacturing

375

Description (U.S. Census Bureau) making prototypes of guided missile and space vehicle propulsion units and propulsion unit parts. This U.S. industry comprises establishments primarily engaged in manufacturing complete military armored vehicles, combat tanks, specialized components for combat tanks, and self-propelled weapons. This U.S. industry comprises establishments primarily engaged in operating nuclear electric power generation facilities. These facilities use nuclear power to produce electric energy. The electric energy produced in these establishments is provided to electric power transmission systems or to electric power distribution systems. This U.S. industry comprises establishments primarily engaged in one or more of the following: (1) manufacturing optical instruments and lenses, such as binoculars, microscopes (except electron, proton), telescopes, prisms, and lenses (except ophthalmic); (2) coating or polishing lenses (except ophthalmic); and (3) mounting lenses (except ophthalmic). This U.S. industry comprises establishments primarily engaged in manufacturing basic inorganic chemicals (except industrial gases and synthetic dyes and pigments). This U.S. industry comprises establishments primarily engaged in (1) manufacturing guided missile and space vehicle parts and auxiliary equipment (except guided missile and space vehicle propulsion units and propulsion unit parts) and/or (2) developing and making prototypes of guided missile and space vehicle parts and auxiliary equipment. This U.S. industry comprises establishments primarily engaged in (1) manufacturing acyclic (i.e., aliphatic) hydrocarbons such as ethylene, propylene, and butylene made from refined petroleum or liquid hydrocarbons and/or (2) manufacturing cyclic aromatic hydrocarbons such as benzene, toluene, styrene, (continued)

376 NAICS code

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Industry

332117

Powder metallurgy part manufacturing

335311

Power, distribution, and specialty transformer manufacturing

335912

Primary battery manufacturing

334220

Radio and television broadcasting and wireless communication equipment manufacturing

541713

Research and development in nanotechnology

541714

Research and development in biotechnology (except nanobiotechnology)

Description (U.S. Census Bureau) xylene, ethyl benzene, and cumene made from refined petroleum or liquid hydrocarbons. This U.S. industry comprises establishments primarily engaged in manufacturing powder metallurgy products using any of the various powder metallurgy processing techniques, such as pressing and sintering or metal injection molding. Establishments in this industry generally make a wide range of parts on a job or order basis. This U.S. industry comprises establishments primarily engaged in manufacturing power, distribution, and specialty transformers (except electronic components). Industrial-type and consumer-type transformers in this industry vary (e.g., step-up or step-down) voltage but do not convert alternating to direct or direct to alternating current. This U.S. industry comprises establishments primarily engaged in manufacturing wet or dry primary batteries. This U.S. industry comprises establishments primarily engaged in manufacturing radio and television broadcast and wireless communications equipment. Examples of products made by these establishments are transmitting and receiving antennas, cable television equipment, GPS equipment, pagers, cellular phones, mobile communications equipment, and radio and television studio and broadcasting equipment. This U.S. industry comprises establishments primarily engaged in conducting nanotechnology research and experimental development. Nanotechnology research and experimental development involves the study of matter at nanoscale (i.e., a scale of about 1–100 nm). This research and development in nanotechnology may result in the development of new nanotechnology processes or in prototypes of new or altered materials and/or products that may be reproduced, utilized, or implemented by various industries. This U.S. industry comprises establishments primarily engaged in conducting biotechnology (except nanobiotechnology) (continued)

Foreign Investment Screening in the USA NAICS code

Industry

331314

Secondary smelting and alloying of aluminum

334511

Search, detection, navigation, guidance, aeronautical, and nautical system and instrument manufacturing

334413

Semiconductor and related device manufacturing

333242

Semiconductor machinery manufacturing

335911

Storage battery manufacturing

377

Description (U.S. Census Bureau) research and experimental development. Biotechnology (except nanobiotechnology) research and experimental development involves the study of the use of microorganisms and cellular and biomolecular processes to develop or alter living or non-living materials. This research and development in biotechnology (except nanobiotechnology) may result in development of new biotechnology (except nanobiotechnology) processes or in prototypes of new or geneticallyaltered products that may be reproduced, utilized, or implemented by various industries. This U.S. industry comprises establishments primarily engaged in (1) recovering aluminum and aluminum alloys from scrap and/or dross (i.e., secondary smelting) and making billet or ingot (except by rolling) and/or (2) manufacturing alloys, powder, paste, or flake from purchased aluminum. This U.S. industry comprises establishments primarily engaged in manufacturing search, detection, navigation, guidance, aeronautical, and nautical systems and instruments. Examples of products made by these establishments are aircraft instruments (except engine), flight recorders, navigational instruments and systems, radar systems and equipment, and sonar systems and equipment. This U.S. industry comprises establishments primarily engaged in manufacturing semiconductors and related solid-state devices. Examples of products made by these establishments are integrated circuits, memory chips, microprocessors, diodes, transistors, solar cells, and other optoelectronic devices. This U.S. industry comprises establishments primarily engaged in manufacturing wafer processing equipment, semiconductor assembly and packaging equipment, and other semiconductor making machinery. This U.S. industry comprises establishments primarily engaged in manufacturing storage batteries. (continued)

378 NAICS code 334210

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Industry Telephone apparatus manufacturing

Turbine and turbine generator set units manufacturing

Description (U.S. Census Bureau) This U.S. industry comprises establishments primarily engaged in manufacturing wire telephone and data communications equipment. These products may be standalone or board-level components of a larger system. Examples of products made by these establishments are central office switching equipment, cordless and wire telephones (except cellular), PBX equipment, telephone answering machines, LAN modems, multiuser modems, and other data communications equipment, such as bridges, routers, and gateways. This U.S. industry comprises establishments primarily engaged in manufacturing turbines (except aircraft) and complete turbine generator set units, such as steam, hydraulic, gas, and wind.

Greta Lichtenbaum is a partner in the Washington, DC, office of O’Melveny & Myers LLP specializing in compliance with U.S. laws that govern international business transactions and trade, including national security reviews of foreign investments led by the Committee on Foreign Investment in the United States (CFIUS), economic sanctions, export controls, anticorruption, money laundering, antiboycott, and customs laws. With respect to all of these areas of law, Greta provides counseling, assists in managing compliance (including developing corporate compliance programs), conducts internal investigations relating to potential violations of these laws, and represents companies before the relevant agencies in connection with enforcement proceedings, clearances, license requests, and government inquiries. In the CFIUS area, Greta has handled numerous foreign investment reviews. Greta has repeatedly been recognized as a leading lawyer in the area of export controls and economic sanctions by Chambers USA (Band 1), Chambers Global (Band 1), and The Legal 500 U.S. She is a frequent speaker on topics related to international trade and has written extensively on these topics as well. Greta earned her J.D. from Harvard Law School. David J. Ribner counsels U.S. and foreign clients on international trade and investment regulatory matters, including trade and anticorruption compliance. His practice focuses on advising clients seeking national security clearances of foreign investment by the Committee on Foreign Investment in the United States (CFIUS). Mr. Ribner also counsels clients on U.S. economic sanctions, export controls, customs laws, and antiboycott regulations, as well as the Foreign Corrupt Practices Act (FCPA). His clients span a variety of industries, with a focus on companies operating in the technology and energy sectors. David earned his J.D. from Georgetown University.

Foreign Investment Screening in Japan Kojiro Fujii, Noriko Yodogawa, and Marie Wako

Contents 1 Foreign Investment Regulations in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 FEFTA Restrictions on Foreign Direct Investment and Specified Acquisitions . . . . 1.3 Definition of Foreign Investor(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Definitions of “FDI” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Prior Notification and Posttransaction Report System of Foreign Direct Investment 1.6 Amendment of the FEFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 Competent Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 Procedures for Prior Notification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 Procedures for Posttransaction Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.10 Order to Modify or Discontinue the Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The J-Power Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract Japan restricts foreign investments by requiring foreign investors to submit a posttransaction report in general circumstances and a prior notification only when the investment involves certain industries or locations. The competent ministers then screen such investments to determine which are likely to impair national security, public order, or the public safety of Japan or have a significant adverse impact on the smooth operation of the Japanese economy. The most recent amendment to the Japanese regulation lowers the share or voting right acquisition threshold for prior notification from the current 10% to 1% of the total number of shares or voting rights. Although the amendment also introduces an exemption system for foreign investments that do not pose threats to national security, since the change in the threshold for prior notification is relatively large, the amendment is drawing attention from both domestic entities and foreign investors. This chapter introduces the current Japanese foreign investment regulation system and explains

K. Fujii (*), N. Yodogawa, and M. Wako Nishimura & Asahi, Tokyo, Japan e-mail: [email protected]; [email protected]; [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 379–402, https://doi.org/10.1007/16495_2020_3, Published online: 1 August 2020

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the most recent amendment of November 2019, which is expected to enter into effect next spring, along with the purpose behind the amendment.

1 Foreign Investment Regulations in Japan 1.1

Overview

Japan restricts foreign investment by way of (i) individual-sector-based regulations and (ii) the Foreign Exchange and Foreign Trade Act of Japan (FEFTA).1 Japan’s sector-based regulations, which individually restrict foreign investment, include the Broadcasting Act,2 the Radio Act,3 the Civil Aeronautics Act,4 the Consigned Freight Forwarding Business Act,5 the Mining Act,6 the Ships Act,7 and the Act on Nippon Telegraph and Telephone Corporations.8 However, the FEFTA and its subordinate regulations, namely, the “Cabinet Order on Inward Direct Investment, etc.” (the “Cabinet Order”)9 and the “Order on Inward Direct Investment” (the “Order”),10 are the intersector primary law and regulations concerning foreign investment into Japan. In principle, the FEFTA secures freedom of foreign exchange, foreign trade, and other foreign transactions. However, the FEFTA poses some restrictions on foreign investment in order to regulate foreign investments that are likely to (i) compromise national security, (ii) create a barrier to the maintenance of public order, (iii) interfere with the preservation of public safety (hereinafter collectively “national security”), or (iv) have a significantly adverse impact on the smooth operation of the Japanese economy. Specifically, the FEFTA requires “Foreign Investors”11 to either submit a prior notification or a posttransaction report when they engage in foreign investment related to certain specified industries. When Foreign Investors submit a prior notification, the Minister of Finance and the competent ministers (i.e., those with

1

Government of Japan (Hereinafter: GOJ) (1949b). GOJ (1950a). 3 GOJ (1950c). 4 GOJ (1952). 5 GOJ (1989). 6 GOJ (1950b). 7 GOJ (1899). 8 GOJ (1984). 9 GOJ (1980a). 10 GOJ (1980c). 11 As defined in the FEFTA, explained in Sect. 1.3.1. 2

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jurisdiction over the relevant specified industries) will screen the investments,12 and the Foreign Investors will not be able to consummate the transaction until a certain waiting period, usually two weeks, has passed. Hence, the prior notification system actually works as a prior approval screening system for foreign direct investment to specified industries. This exceptional restriction on foreign investment is implemented in accordance with the OECD Code of Liberalisation of Capital Movements (the “OECD Code”).13 Since 1949, until their amendment in 1991, the foreign investment regulations in Japan have required foreign investors to apply for permission to make any foreign investments. By contrast, the current FEFTA requires, as a general rule, Foreign Investors to submit a posttransaction report and requires prior notification only when certain industries or locations are involved. The FEFTA has undergone several amendments in 2019, all of which expanded the scope of foreign investment subject to prior notification. These included an amendment requiring Foreign Investors to submit prior notifications for both the acquisition of shares and the acquisition of voting rights (Sect. 1.4), as well as an amendment expanding the scope of specified industries subject to prior notification (Sect. 1.5.2.2). Further, on November 22, 2019, the Japanese Diet passed a FEFTA amendment bill lowering the share acquisition threshold for prior notification from the current 10% to 1% of the total number of shares or voting rights. This amendment also introduces an exemption system for foreign investments that do not pose threats to national security, such as portfolio investments, etc., so as to balance the drastic lowering of the threshold and avoid scaring off foreign investors (Sect. 1.6). The amended law is expected to take effect in spring 2020. As this 1% threshold is lower than those of other countries, including the US and some EU member states, this amendment has been gathering attention from both domestic entities and foreign investors. Domestic entities worry that the amendment will lower the amount of foreign investment directed into Japan. Foreign investors worry that the amendment will impose heavier burdens on their existing and potential investments in Japan. However, as described in Sect. 1.6.1 below, while the Japanese government believes that the threshold needs to be lowered to 1% to control foreign investment that may affect the management of target companies related to national security, the introduction of the exemption system and other mitigating measures will allow most foreign investors to invest in Japan using the same procedures as the current FEFTA. Much like the US and the EU, Japan is striving to pose the appropriate amount of control over foreign investment and secure the right balance between the protection of national security and facilitation of foreign investment. Since the implementation details for the amended FEFTA have not been decided, how the whole amendment

12 13

See Sect. 1.7 for further details on the competent ministers. Nakatani (2011), pp. 44–45.

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will work and whether it will actually lighten the burden for foreign investors and facilitate further foreign investments should be closely observed.

1.2

FEFTA Restrictions on Foreign Direct Investment and Specified Acquisitions

The FEFTA restricts certain “Foreign Direct Investment” (FDI) (i.e., when Foreign Investors obtain shares or voting rights from Japanese residents) and certain “Specified Acquisitions” (i.e., when Foreign Investors obtain shares or voting rights from other Foreign Investors).14 (Hereinafter, FDI and Specified Acquisitions will be collectively referred to as “Foreign Investments.”) The FEFTA requires, as a general rule, Foreign Investors to submit a posttransaction report to the relevant ministries and only requires prior notification when certain industries or locations are targeted. With regard to Specified Acquisitions, only prior notifications regarding certain industries or locations are necessary and a posttransaction report is not required. Since Specified Acquisitions and FDI are similarly regulated, our analysis will focus on FDI regulation unless otherwise specified.

1.3 1.3.1

Definition of Foreign Investor(s) Foreign Investor(s)

A foreign investor is defined under the FEFTA as one of the following persons that engages in FDI or that makes a Specified Acquisition (FEFTA para. 26(1)) (hereinafter, “Foreign Investor(s)”): (i) an individual that is a non-resident; (ii) a legal person or other organization established pursuant to foreign laws and regulations, or a corporation or other organization with a principal office in a foreign state (including Japanese branches of such corporations or other organizations); (iii) a company in which the sum total of the number of votes held directly or indirectly by persons or corporations as set forth in items (i) and (ii) make up at least 50 percent of the number of votes of all shareholders or all members; and

“Specified Acquisition” is defined as the acquisition of shares or equity in a company other than a listed company or its equivalent, through a transfer by a “Foreign Investor.” (GOJ (1949b) Art.26 (3)).

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(iv) a corporation or other organization in which non-residents constitute the majority of the officers15 or the majority of the officers with representative authority. 1.3.2

Special Related Persons

A Special Related Person is defined under the Cabinet Order as a foreign individual or entity (falling under any of (ii) through (iv) in Sect. 1.3.1 above) that is in a permanent economic relationship,16 related by kinship (i.e., spouse or lineal relative of a Foreign Investor), or a party to another special relationship, with an entity that has acquired shares in a listed company, etc. As later described in Sect. 1.4, when calculating the ratio of acquisition of shares by a Foreign Investor, if there are shares subject to discretionary investments, loans, or bond acquisitions, the amount of those executed by the Special Related Persons are also included, so as to correctly regulate the effect that the Foreign Investor may have on the target company through such Special Related Persons.

1.4

Definitions of “FDI”

FDI is currently defined as any of the following actions by a “Foreign Investor” (FEFTA Art. 26(2), Cabinet Order Art. 2(9), (i)–(vii)): (i) the acquisition of shares (or voting rights) in a listed company or its equivalent, which make up 10% or more of the total number of issued shares (or voting rights) in that company; (ii) the acquisition of shares or equity in a non-listed company (other than through a transfer from other Foreign Investors); (iii) the transfer of shares or equity in a non-listed company or its equivalent that an individual held prior to becoming a non-resident (but only a transfer from an individual that is a non-resident to a Foreign Investor); (iv) consent given for a substantial modification to a company’s business purpose (if it is a stock company, this is limited to consent given by persons holding at least one-third of all shareholders’ voting rights in that company); (v) establishment of a branch office or other such place of business (i.e. factories) in Japan or substantial modification of the type or business purpose of a branch office or other such place of business in Japan; Here, “officers” means directors or other persons equivalent thereto. Here, a permanent economic relationship includes when entities hold 50% or more of the shares or voting rights of the Foreign Investor, when 50% or more of the shares or voting rights are held by the Foreign Investor, or when an acquirer of shares has agreed to jointly exercise voting rights and other rights as a shareholder of a listed company with the Foreign Investor, etc. (GOJ (1980a) Art.2 (4), items (i)–(xvi)). 15 16

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(vi) the lending of money to a corporation having its principal office in Japan (excluding lending by a person engaged in the banking business, etc., lending made in Japanese currency by a person as set forth in item (iii) or (iv) of section I.3(2)) for a term exceeding one year, when the outstanding balance exceeds 100 million yen or satisfies other criteria; (vii) bonds issued by a domestic company for which the period between the date of acquisition and the principal redemption date is more than one year and the offering of which is made to a specific Foreign Investor, when the outstanding balance exceeds 100 million yen or satisfies other criteria; (viii) Acquisition of investment securities issued by corporations established under special laws, such as the Bank of Japan; (ix) Discretionary management of shares of a listed company in Japan with an investment ratio of 10% or more; (x) The delegation of authority to exercise the voting rights directly held by another persons in Japan (“delegation of proxy voting rights”), which falls under either (a) or (b) below. However, the delegation of proxy voting rights is only regulated when the proposals, regarding which the Foreign Investor intends to exercise their acquired voting rights, relate to issues of substantial control or that may have a material influence on the management of the company (e.g., appointment and dismissal of directors, etc.): (a) For listed companies: undertaking of proxy rights of 10% or more of the total voting rights (including the voting rights already held by such Foreign Investor). (b) For non-listed companies: undertaking of proxy rights held by a person other than other Foreign Investors; (xi) Delegation of proxy voting rights of a non-listed company in Japan, that an individual held prior to becoming a non-resident, to a Foreign Investor after becoming a non-resident;17 (xii) Obtaining consent to jointly exercise the voting rights of a listed company from other non-residents, when the aggregate of the voting rights held by (a) the non-resident who consented to jointly exercise the voting rights, (b) the Foreign Investor who obtained the consent, and (c) Special Related Persons relevant to the non-resident or the Foreign Investors amounts to 10% or more of the total voting rights for said listed company. The above definition of FDI listed in (i) (for voting rights) and (x) through (xii) were added in an amendment in October 2019 in order to widen the scope of FDI.18

17 As set forth in item (x), the delegation of proxy voting rights is only regulated when the proposals, regarding which the Foreign Investor intends to exercise their acquired voting rights, relate to issues of substantial control or that may have a material influence on the management of the company (i.e., appointment and dismissal of directors, etc.). 18 Ministry of Finance (Herinafter: MOF) (2019h), pp. 1–4; MOF (2019i).

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Note that the investment ratio of acquired shares, shares subject to discretionary investment, loans, and acquisition of bonds include the amount of the acquisition of shares/bonds, discretionary investment, and loans executed by Special Related Persons (see Sect. 1.3.2) relevant to the person or legal persons that directly acquired the shares, obtained discretionary investment, or made the loans.

1.5

Prior Notification and Posttransaction Report System of Foreign Direct Investment

1.5.1

Overview

When a Foreign Investor conducts FDI, the Foreign Investor, in general, must either (i) submit a prior notification subject to screening by the relevant ministers or (ii) submit a posttransaction report after the actual investment has been made.

1.5.2 1.5.2.1

Foreign Direct Investment Subject to Prior Notification Overview

The FEFTA requires a prior notification for FDI by a Foreign Investor where any of the following applies (Cabinet Order Art. 3(2)): (i) the nationality or country of location of the Foreign Investors is neither Japan nor among the specified white-list countries; (ii) the FDI is aimed at certain specified industries relating to national security, public order, and public safety, etc.; or (iii) when Iran-related parties engage in certain investments. The “specified countries” are the 163 white-list countries, including China and Russia, listed in the Order, which does not include countries and areas such as Iraq, North Korea, Somalia, South Sudan, etc. Also, as stated in the above paragraph, if the FDI is related to Iran, the Foreign Investor must submit a prior notification. As such, generally speaking, where the Foreign Investor’s nationality or location is listed in the specified country list, the Foreign Investor is not obliged to submit a prior notification, unless the FDI is aimed at certain specified industries. Therefore, the primary substantive test for whether prior notification is required under the FEFTA is whether the FDI, as defined in Sect. 1.4, is aimed at certain specified industries.

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Specified Industries Subject to Prior Notification

The industries subject to prior notification are specified by the Cabinet Order, the Order, and the relevant public notice by the Minister of Finance and other relevant ministers (“Public Notice”) (FEFTA Art. 27(1), Cabinet Order Art. 3(2) item (i), Order Art. 3(4)).19 These specified industries include industries related to the following: (i) National security: manufacture of arms; aircraft; items related to nuclear power, space-focused technologies, and cybersecurity;20 dual-use commodities that can be used for military purposes; etc. (ii) Public order: electricity and gas, heat supply, telecommunications, broadcasting, water, railway, passenger transport, etc. (iii) Public safety: vaccine manufacturing, private security service, etc.; and (iv) Maintenance of smooth operation of the Japanese economy: agriculture, forestry, fisheries, oil, leather, air transportation, marine transportation, etc. Industries under category (i) are further specified by the public notice to include both industries related to weapons21 and dual-use items and technologies. These dual-use items and technologies are further prescribed by ministerial orders regarding export control22 and generally correspond to those regulated under the Wassenaar Arrangement and other international export control regimes. It should be noted that since the industries related to dual-use items and technologies are specified by way of incorporation of regulations regarding the export control regime, when the export control regulations are amended, the regulations on Foreign Investment will correspondingly assume stricter or more lenient restrictions. Industries under category (iv) are industries for which Japan has lodged a reservation under Article 2-b of the OECD Code. On August 1, 2019, the scope of the specified industries was expanded, with the aim of addressing cybersecurity issues, by seeking to prevent situations that could have a serious impact on Japan’s national security, such as leakage of important technology related to security and the destruction of Japan’s defense production and technological infrastructure.23 The amendment expanded the scope of specified industries relating to information and communication technology and required the

19

MOF (2014). Cyber security related industries were added to the specified industries in the amendment on August 1, 2019, as later explained in this section. 21 Manufacture of weapons, aircraft, satellites, and nuclear power, as well as materials and parts specially designed for the manufacture of the above listed items, etc., and software related to programs specially designed for the use of weapons, aircraft, satellites, etc. 22 These orders are namely, the Export Trade Control Order (GOJ 1949a) and the Foreign Exchange Order (GOJ 1980b). Items and technologies covered by the Export Trade Control Order and the Foreign Exchange Order can be found in a matrix chart available on METI’s website at http://www. meti.go.jp/policy/anpo/matrix_intro.html. 23 MOF (2019a). 20

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submission of a prior notification when FDI is aimed at the manufacture of components and equipment related to information processing (e.g., manufacture of mobile phones, personal computers, semiconductor memory media), and the manufacture of software related to information processing. The amendment also expanded the scope of specified industries related to information and communication services (e.g., regional and long-distance telecommunications and Internet support service).

1.5.3

Foreign Direct Investment Subject to Posttransaction Reports

FDI not subject to prior notification is generally subject to a posttransaction report, except for certain cases where FDI is exempted from both prior notification and posttransaction report (FEFTA Art. 55-5, Cabinet Order Art. 6-3). Such exempted FDI includes cases where the target company’s stock or equity was acquired by inheritance or the target unlisted company’s stock or equity was acquired through a merger or division of the shareholding company, etc. (Cabinet Order Art. 3(1), Order Art. 3(3)).

1.6 1.6.1

Amendment of the FEFTA Overview

On November 22, 2019, the Japanese Diet passed a FEFTA amendment bill,24 with the purpose of further promoting foreign inward investment conducive to sound economic growth and ensuring that FDI reviews are limited to those that could pose risks to national security, etc. The new amendment revises the scope of FDI subject to prior notification by reducing the threshold for share or voting right acquisitions of listed companies from the current 10% to 1% of the total shares or voting rights, as well as adding further actions by a Foreign Investor to the definition of FDI. This amendment of the FEFTA’s threshold has been negatively received by some Foreign Investors25,26 and some analysists27,28 alike, the latter fearing it will discourage foreign investment into Japan.29 24

MOF (2019b). Reuters (6 December 2019), Japan firms back tighter foreign ownership reporting rules: Reuters poll. 26 CFA Institute (2019). 27 Financial Times (20 September 2019), Japan plans to tighten rules on foreign investment. 28 The Economist (26 October 2019), Japan’s new investment rules risk scaring off foreign investors. 29 Reuters (6 December 2019), Japan firms back tighter foreign ownership reporting rules: Reuters poll. 25

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On the other hand, a new exemption system will be introduced that will decrease the number of instances where a prior notification is required, even when there is no risk to national security. It will exempt Foreign Investors that intend to engage in FDI or Specified Acquisitions that comply with certain standards (and are deemed to pose no risk to national security, etc.) from submitting a prior notification. The amendment also revises the definition of Foreign Investors in order to mitigate the burden of prior notifications by investment funds. The amendment also introduces rules regarding the exchange of information with foreign governments. The new rules will, among other things, allow Japanese competent ministers to provide information regarding foreign investments to foreign government agencies that authorize foreign investments upon conditions such as that the information will not be used for purposes other than those related to foreign investment.

1.6.2

Revision of the Scope of FDI Subject to Prior Notification

First, the amendment reduces the threshold for share or voting right acquisitions of listed companies that are subject to prior notification. Currently, as described in Sect. 1.4, the FEFTA only requires prior notification for the acquisition of shares (or voting rights) in a listed company or its equivalent, which make up 10% or more of the total number of issued shares or voting rights in that company. The amendment lowers this threshold to 1% and controls FDI when the sum of the number of shares (or voting rights) held by the Foreign Investor and its Special Related Persons accounts for at least 1% of the total number of issued shares (or total voting rights) of the target listed company, etc. The current 10% threshold was introduced in 1979 based on the following factors:30 (i) Under the former law regarding foreign investment, foreign investors with 10% or more of the shares had been under stricter regulation. (ii) Notification of a takeover bid under the former Securities and Exchange Act31 was only exempted if less than 10% of the shares were acquired. (iii) Under systems where a company could request the return of profits when an officer or “Major Shareholder” of a listed company, etc., received profits from a short-term trading transaction of six months or less, the “Major Shareholder” was defined as a shareholder who holds 10% or more of the voting rights. (iv) In most listed companies in Japan, the largest sole shareholder held around 10% of the shares.

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MOF (2019g), p. 9. Securities and Exchange Act (Act No. 25 of 1048) was later amended and renewed as the current Financial Instruments and Exchange Act. 31

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As can be seen from the above factors, when the 10% threshold was introduced, there was not necessarily a link to whether foreign investors may influence the management of the target company. However, under the current Japanese Companies Act,32 shareholders with the following ratio of shareholding have the right (or obligation) to conduct the following actions that may influence the management of the company: (i) 1%: right to propose agenda items at a general meeting of shareholders (ii) 3%: right to request convocation of a general meeting of shareholders (iii) 5%: obligation to file a Report on Possession of Large Volume under the Financial Instruments and Exchange Act33 (iv) 10%: right to call for the dissolution of the company If a Foreign Investor has 1% or more of the overall shares of the target company, the Foreign Investor may be able to enforce its right to effect the management of the company. For example, the Foreign Investor may propose the replacement of directors at a general shareholders’ meeting of the target company. Therefore, under the new amendment, the Japanese government believes that it is appropriate to control situations where a Foreign Investor may gain the ability to influence the management of a company in industries related to national security, etc., by way of lowering the threshold of the FDI subject to prior notification to 1%.

1.6.3 1.6.3.1

Introduction of a Prior Notification Exemption System The Prior Notification Exemption System

As the new amendment drastically lowers the threshold set in 1979 (from 10% to 1%), the number of investment cases subject to prior notification is estimated to increase eightfold.34 However, it is also estimated that most of these cases will be portfolio investments, which do not affect the management of the target companies. As such, the revised FEFTA will introduce a prior notification exemption system, which aims to exempt such portfolio investments and other FDIs that do not pose a threat to national security in order to avoid a steep increase in the number of prior notifications. In particular, when Foreign Investors intend to make Foreign Investments other than those that are highly likely to qualify as Foreign Investments pertaining to national security, they are exempt from submitting prior notice, even if the acquisition of shares (or voting rights) results in obtaining 1% or more of the total shares (or voting rights) or any other FDI as defined in Sect. 1.4.

32

GOJ (1948). GOJ (2005). 34 MOF (2019g), p. 8. 33

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The detailed scope and conditions of the exemption system are to be provided in Cabinet Orders. However, such subordinate orders of the FEFTA have not yet been published as of November 25, 2019. In order to mitigate the burden for Foreign Investors, under the new amendment, certain investments are categorically exempt from prior notification. For example, irrespective of sector, stock transactions by foreign securities firms using their proprietary accounts, as well as stock transactions by foreign banks, insurance companies, and asset management companies, will be exempt from the prior notification requirement. Although such firms must still submit a posttransaction report, the threshold for the posttransaction report will be retained at the current 10%.35 The competent ministry(ies) also intend(s) to make a list that categorizes Japanese-listed companies into companies (i) that require prior notification, (ii) that may be eligible for the exemption, and (iii) that are excluded from the exemption system, when a Foreign Investor intends to invest in such Japanese companies.36

1.6.3.2

Exceptions to the Exemption System

The exemption system will not exempt Foreign Investors from submitting a prior notification under the following two situations. First, certain Foreign Investors will not be exempt from submitting a prior notification. For example, if the Foreign Investor has previously violated the FEFTA or if the Foreign Investor is a state-owned enterprise, the Foreign Investor must submit a prior notification when it intends to engage in FDI. However, it should be noted that sovereign wealth funds or pension funds may still be exempt from submitting a prior notification if such sovereign wealth funds or pension funds are deemed not to pose a threat to national security.37 Further, it should be noted that if a sovereign wealth fund or pension fund does not directly acquire the shares or voting rights but acquires them through financial institutions, etc., that are exempt from the prior notification, such sovereign wealth fund or pension fund is not obligated to submit prior notification.38 Second, Foreign Investments in certain specified industries that have a high risk of posing a threat to national security, etc., are also not exempt from submitting a prior notification. For example, Foreign Investors that intend to invest in industries related to the manufacturing of arms, nuclear power, electric power, communications, etc. must submit a prior notification.39

35

MOF (2019e), p. 2. MOF (2019c), p. 1. 37 MOF (2019c), p. 2. 38 MOF (2019c), p. 2. 39 MOF (2019d), p. 2. 36

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Conditions of the Exemption System

The amendment also intends to set out specific conditions that Foreign Investors must follow in order to be exempt from prior notification. These conditions will be established with the aim of preventing the leakage of technological information that would harm business activities related to national security. Although specific conditions will be provided in subordinate orders, the following are some examples of those conditions: (i) The Foreign Investor or associated Special Related Persons must not be appointed as officers of the target company. (ii) The Foreign Investor must not propose, in a general meeting of shareholders, the transfer or abolition of important businesses of the target company. (iii) The Foreign Investor must not access confidential technological information related to national security, etc.40

1.6.4

Other Amendments

In addition to the above-mentioned amendments, the amendment also adds the following two investment activities (which allow influence to be exercised over the target company’s management) to the definition of FDI: (i) when a Foreign Investor gives consent to a matter that may have a material influence on the management of the target company (in the case of a listed company, etc., such consent is only controlled when the Foreign Investor and its Special Related Persons hold 1% or more of the total voting rights); and (ii) acquiring a business, or succeeding to a business from a resident (limited to juridical persons). Therefore, when a Foreign Investor intends to take such actions targeting companies in the specified industries (or when the Foreign Investor does not originate in Japan or a white-list country or is Iran related), the Foreign Investor must submit a prior notification. Further, in order to reduce the burden of prior notification for FDI by investment funds, the new amendment revises the definition of Foreign Investors so that only investment funds are obligated to submit a prior notification in certain situations. Under the current FEFTA, when an investment fund, in the form of a partnership, intends to engage in FDI, each general partner or limited partner who is a non-resident must individually submit a prior notification, regardless of contribution

40

MOF (2019c), p. 2.

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amount. The new amendment will only require the partnership (i.e., the investment fund) to submit a single prior notification.41 In addition, the amendment fortifies the implementation of the FEFTA by allowing for competent authorities to recommend that a Foreign Investor that has not made a prior notification take necessary measures to comply with the abovementioned standards for being exempt from prior notification, as specified in Sect. 1.6.3.3 above. If a Foreign Investor fails to comply with the standards, the competent authorities may order the Foreign Investor to take certain measures. Further, when the Foreign Investor fails to comply with the above order and when its FDI or Specified Acquisition pertains to national security, the competent authority may order the disposition of all or a part of the shares or equity acquired through said Foreign Investments or other necessary measures (Sect. 1.10).

1.7

Competent Authorities

Although prior notification or posttransaction reports must be submitted through the Bank of Japan, the Minister of Finance, together with the ministers who have jurisdiction over the specified industries, are the competent authorities to substantially review Foreign Investments. As such, Foreign Investments will always be reviewed by at least two ministers, with the possibility for more arising from the fact that “competent authorities” may comprise more than one “ministers with jurisdiction.” The competent ministers for specified industries include the following: (i) Prime Minister: banks, trusts, security business, insurance businesses, and investment advisers (ii) Minister of Finance: import and export of precious metals and import and export of alcohol (iii) Minister of Agriculture, Forestry and Fisheries: agriculture and fisheries and the manufacture of food or drinks (iv) Minister of Health, Labour and Welfare: pharmaceutical products and medical devices; and (v) Minister of Economy, Trade and Industry: the manufacture, sales, import, and export of aircraft; the manufacture, sales, import, and export of weapons; and electricity.

41

This is limited to when the ratio of the amount of contribution by non-resident partners is 50% or more of the total amount of contribution by all partners, or when the majority of general partners are non-residents.

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Procedures for Prior Notification Prior Notification Procedure

If a Foreign Investor intends to make an FDI or a Specified Acquisition subject to prior notification, the Foreign Investor42 must submit a prior notification to the Minister of Finance and any other ministers relevant to the industry of the target company, through the Bank of Japan, within six months before the day on which the FDI or the Specified Acquisition is intended to be made (FEFTA Art. 27(1), Cabinet Order Art. 3(3)) There are no submission fees. After submission of the prior notification, there is a 30-day waiting period before the Foreign Investor can consummate the transaction. This waiting period could be shortened to two weeks. Moreover, the waiting period for prior notification regarding “green-field investment” (i.e., investments where a parent company creates a wholly owned subsidiary or a branch in Japan), “rollover investments” (i.e., investments following the same type of earlier investment by the same Foreign Investor for which a filing was made within the last six months), and “passive investments” (i.e., certain investments where the Foreign Investor undertook that it will not proactively participate in the management of the target company) could be further shortened to five business days (FEFTA Art. 27 (2)–(6) and (10), Cabinet Order Art. 10(2)). For the past five years, 90% of the prior notifications submitted had a waiting period of five business days, and only 2% were subject to a waiting period of more than two weeks.43 On the other hand, if any relevant ministers decide that they need more time to review whether the investment is likely to impair national security, impede public order, or compromise the public safety of Japan, the waiting period may be extended to up to five months. Foreign Investors that have undertaken FDI and Specified Acquisitions subject to prior notification may also be asked to report the substance of such conduct to the competent minister within 30 days of the date of the Foreign Investments (FEFTA Art. 55-8, Cabinet Order Art. 6-5, Order Art. 7(1) items (i)–(iv)).

1.8.2

Substantive Test for Clearance

The Minister of Finance and the relevant ministers will review whether the FDI is likely (i) to impair national security, to impede public order, to compromise public safety, or (ii) to have a significant adverse effect on the smooth management of the Japanese economy (FEFTA Art. 27(3)). The relevant ministers must also consider whether the restrictions on FDI will be implemented in accordance with the OECD

42 If the Foreign Investor is a non-resident, such Foreign Investor must submit the prior notification through a designated resident agent. (GOJ (1980a) Articles 3(4) and 4(4)). 43 MOF (2019g), p. 8.

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Code or the WTO General Agreement on Trade in Services (GATS) (FEFTA Art. 27 (3) item (i), Cabinet Order Art. 3(6)). Specifically, regarding FDI, the relevant ministers consider the following factors when reviewing prior notification:44 (i) National security: maintenance of the production base and technological base of national security industries (i.e., arms, aircraft, nuclear power, space, dualuse commodities that can be used for military purposes, cybersecurity, etc.) (ii) Prevention of the leakage of sensitive technologies critical to national security (iii) Maintenance of public activities in peacetime and in times of emergency: electricity and gas, heat supply, telecommunications, broadcasting, water, railway, passenger transport, etc. (iv) Maintenance of public safety: vaccine manufacturing or private security service (v) Maintenance of smooth operation of the Japanese economy, securing stable supply and sufficient stockpiling of food and fuel, national land conservation, and production activities and continuity of domestic business operators, regarding industries reserved by Japan listed in Article 2(b) of the OECD Code: agriculture, forestry, fisheries, oil, leather, air transportation, and marine transportation; and (vi) Attributes of Foreign Investors and affiliated companies and their financial plans and past investment actions and performance, etc. Specified Acquisition is reviewed from the viewpoint of whether it is highly likely to cause a situation that would compromise national security (FEFTA Art. 28 (3)). The burden of proof is on the Foreign Investor to show that the Foreign Investments do not have such effect.

1.8.3

Informal Guidance

Although there are no formal guidance procedures under which Foreign Investors may negotiate with the competent authorities, a Foreign Investor may inquire with the relevant ministries regarding their target industries prior to filing a submission. However, such prefiling inquiries are only answered in generic terms. Prior to formal submission to the Bank of Japan, upon request, the Bank of Japan conducts a formality check of the prior notification draft.

1.9

Procedures for Posttransaction Report

If FDI does not require a prior notification, the Foreign Investor is generally required to submit a post-transaction report to the Minister of Finance and any other relevant

44

MOF (2017); MOF (2019g), p. 15.

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ministers, through the Bank of Japan, by the 15th day of the month following the month in which the transaction was consummated (FEFTA Art. 55-5(1), Cabinet Order Art. 6-3(1)). Regarding Specified Acquisition, only prior notifications regarding certain industries or locations are necessary, and if a prior notification is not required, there is no need to submit a posttransaction report.

1.10

Order to Modify or Discontinue the Investment

1.10.1

Order or Recommendations to Modify or Discontinue the Investment

As stated in Sect. 1.8.2, the relevant ministers will review whether the FDI is likely (i) to impair national security, to impede public order, to compromise public safety, or (ii) to have a significant adverse effect on the smooth management of the Japanese economy (FEFTA Art. 27(3)). If the relevant ministers decide that the FDI falls under any of the above categories, the ministers have the authority to issue an order to modify or discontinue the investment. Specifically, when the relevant ministers decide that certain FDI is highly likely to cause a situation that would compromise national security, upon seeking an opinion from the Council on Customs, Tariff, Foreign Exchange and Other Transactions (the “Council”), they may make a recommendation to the Foreign Investor to modify or discontinue the investment (FEFTA Art. 27(5)). The Foreign Investor must notify the relevant ministers, within ten days of the recommendation, as to whether it will comply with the recommendation (FEFTA Art. 27(7)). If the Foreign Investor refuses to comply or does not respond, the relevant ministers may issue an order to modify or discontinue the investment (FEFTA Art. 27(10)). Furthermore, where the relevant ministers find that the FDI is likely to cause a situation that would compromise national security and falls under the following categories, they may issue an ex post facto order that the Foreign Investor dispose of all or part of the shares or equity acquired through the FDI or take other necessary measures upon hearing the opinion of the Council (FEFTA Art. 29):45 (i) When the transaction was conducted without a prior notification where it is required, or before the expiration of the waiting period; (ii) When a false prior notification was submitted; or (iii) When the Foreign Investor acts against the recommendations, to which the Foreign Investor agreed upon, or the orders to modify or discontinue the investment.

45

MOF (2019f), p. 3.

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Sanctions

When the Foreign Investor (i) completes the transactions without a prior notification where it is required or, before the expiration of the waiting period, (ii) submits a false prior notification, (iii) does not comply with the order or the recommendation, to which the Foreign Investor agreed, to modify or discontinue the investment, (iv) does not comply with the ex post facto order, the Foreign Investor will be subject to criminal penalties, including imprisonment of up to three years, a fine of up to three times the amount of the investment, or one million JPY, whichever is higher, or both (FEFTA Art. 70).

1.10.3 1.10.3.1

Challenges to the Negative Orders Prior Challenge

Although the FEFTA does not provide a specific mechanism through which individuals or entities can challenge the actions that may be taken by the competent authorities, the competent authorities’ orders to modify or discontinue the investment or dispose of all or part of the shares or equity qualify as “adverse dispositions”46 under the Administrative Procedure Act. Therefore, before such actions are taken, the competent authority shall, in principle, grant individuals or entities (i) an opportunity for a hearing where the individuals or entities may state their opinions and produce evidentiary documents or (ii) an opportunity for explanation where the individuals or entities in question may submit an explanation of their views on the subject in writing (Administrative Procedure Act,47 Art. 13).

1.10.3.2

Postorder Challenge

A negative decision can be appealed to the relevant ministry, in which Foreign Investors may challenge the competent authorities’ orders to modify or discontinue the investment or dispose of all or part of the shares or equity. An individual or entity may be able to either (i) request administrative review by the original or higher administrative agencies regarding the dispositions, under the Administrative Complaint Review Act,48 or (ii) bring an action in court for revocation of the original administrative disposition, under the Administrative Case Litigation Act.49

46 “Adverse dispositions” means a disposition whereby administrative agencies directly impose duties upon specified persons or limit their rights. (GOJ (1993) Art. 2, item (iv)). 47 GOJ (1993). 48 GOJ (2014). 49 GOJ (1962).

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2 The J-Power Case To date, Japan has had only one case involving the issuance of an order or recommendation to modify or discontinue FDI; this is referred to as the J-Power case,50 and an overview of it appears below. In 2008, a UK-based fund submitted a prior notification noting its intention to purchase up to a 20% stake in J-Power, an electricity wholesaler owning core portions of Japan’s electricity infrastructure, such as power generating facilities, including nuclear plants, and power distribution facilities, including power transmission lines. The Minister of Finance and the Minister of Economy, Trade and Industry held six hearings with the UK-based fund, in which the government asked the fund, among other things, to describe its prior investments, management policies concerning nuclear power plants, and plans for J-Power after the share acquisition.51 After hearing the Council’s opinions, the competent ministers found that the investment was “likely to disturb the maintenance of Japan’s public order” and recommended that the fund discontinue the acquisition.52 When the fund declined to follow the recommendation, the competent authorities issued an order to discontinue its investment in J-Power. The fund did not challenge the order, and the investment was ceased. The competent authorities’ reasoning behind the above decision was that “through the acquisition of shares and the exercise of shareholder rights, [the UK-based fund] may have an effect on the management of [J-Power] or the planning, operation, or maintenance of core electricity infrastructure, including nuclear plants and power transmission lines, resulting in effects on the stable supply of electricity or Japan’s policy on nuclear power and nuclear fuel cycles”.53

3 Concluding Remarks As described in the above sections, Japanese foreign investment regulation controls Foreign Investments by requiring Foreign Investors to submit prior notification when they intend to invest in specific industries. The scope of such controlled Foreign Investments has been widened in recent years, corresponding to the global trend (e.g., some EU member states have also either lowered their threshold or identified additional industries for which foreign investment is subject to prior screening). Japan’s recent amendment is significant in that it lowered the share and voting right acquisition threshold from the current 10% to 1%, which is lower than those of 50

Nakatani (2011), pp. 46–47; Kojou (2008), pp. 8–12. Kojou (2008), p. 9. 52 Ibid., pp. 9–10. 53 Nakatani (2011), p. 46. 51

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other countries, including the US and some EU member states. However, as described in Sect. 1.6.2, the new threshold gives due consideration to the Japanese Companies Act, under which shareholders may propose agenda items at a general shareholders’ meeting if the shareholder holds at least 1% of the total outstanding shares. This may give certain guidance if an EU member state were to change its threshold for regulating foreign investment, in that it would be advisable to consider the rights given to foreign investors under the relevant companies act of that EU member state if they acquire a certain percentage of shares greater than the applicable threshold. Another point of the amendment is that it introduced an exemption system in order to mitigate the burden on Foreign Investors. Due to the introduction of such exemption system, explained in Sect. 1.6.3 above, the Ministry of Finance, Subcommittee on Foreign Exchange of the Council on Customs, Tariff, Foreign Exchange and Other Transactions, does not believe that the new system will significantly increase the burden on Foreign Investors. This is because portfolio investments, the largest component of foreign investment potentially subject to this amendment, will be exempt from the prior notification requirement and because Japan intends to create lists that clarify the categories of Japanese listed companies for which prior notification is not required so that Foreign Investors will be able to easily recognize which transactions are subject to prior notification.54,55 Since the details of such exemption system have not been decided, the outcome of the whole amendment and whether its implementation will bring about the effects intended by the Japanese government (i.e., the right balance between the protection of national security and the facilitation of foreign investment) should be carefully observed.

References CFA Institute (16 December 2019) Amendments to Japan’s Foreign Exchange and Foreign Trade Act (FEFTA), Chartered Financial Analyst Asia-Pacific Research Exchange. https://www.arx. cfa/en/research/2019/11/cfa-japan-fefta-survey Financial Times (20 September 2019) Japan plans to tighten rules on foreign investment, Financial Times. https://www.ft.com/content/bd1adbea-eff9-11e9-bfa4-b25f11f42901 Government of Japan (1899) Ships Act [Act No. 46 of 1899]. https://elaws.e-gov.go.jp/search/ elawsSearch/elaws_search/lsg0500/detail?lawId¼132AC0000000046 (Japanese only). Accessed 22 Nov 2019 Government of Japan (1948) Financial Instruments and Exchange Act [Act No. 25 of 1948]. https:// elaws.e-gov.go.jp/search/elawsSearch/elaws_search/lsg0500/detail?lawId¼323AC0000000025 (Japanese); http://www.japaneselawtranslation.go.jp/law/detail/?id¼3186&vm¼04&re¼01& new¼1 (translation outdated). Accessed 22 Nov 2019 Government of Japan (1949a) Export Trade Control Order [Cabinet Order No. 378 of 1949]. https:// elaws.e-gov.go.jp/search/elawsSearch/elaws_search/lsg0500/detail?lawId¼324CO0000000378

54 55

MOF (2019g), pp. 8, 12. MOF (2019c), p. 1.

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(Japanese); http://www.japaneselawtranslation.go.jp/law/detail/?id¼3389&vm¼04&re¼01& new¼1 (translation outdated). Accessed 22 Nov 2019 Government of Japan (1949b) Foreign Exchange and Foreign Trade Act [Act No. 228 of 1949]. https://elaws.e-gov.go.jp/search/elawsSearch/elaws_search/lsg0500/detail? lawId¼324AC0000000228 (Japanese); http://www.japaneselawtranslation.go.jp/law/detail/? id¼3267&vm¼04&re¼01&new¼1 (translation outdated). Accessed 22 Nov 2019 Government of Japan (1950a) Broadcasting Act [Act No. 132 of 1950]. https://elaws.e-gov.go.jp/ search/elawsSearch/elaws_search/lsg0500/detail?lawId¼325AC0000000132 (Japanese); http:// www.japaneselawtranslation.go.jp/law/detail/?id¼2954&vm¼04&re¼02&new¼1 (translation outdated). Accessed 22 Nov 2019 Government of Japan (1950b) Mining Act [Act No. 289 of 1950]. https://elaws.e-gov.go.jp/search/ elawsSearch/elaws_search/lsg0500/detail?lawId¼325AC0000000289 (Japanese); http://www. japaneselawtranslation.go.jp/law/detail/?id¼2441&vm¼04&re¼02&new¼1 (translation outdated). Accessed 22 Nov 2019 Government of Japan (1950c) Radio Act [Act No. 131 of 1950]. https://elaws.e-gov.go.jp/search/ elawsSearch/elaws_search/lsg0500/detail?lawId¼325AC0000000131 (Japanese); http://www. japaneselawtranslation.go.jp/law/detail/?id¼3205&vm¼04&re¼02&new¼1 (translation outdated). Accessed 22 Nov 2019 Government of Japan (1952) Civil Aeronautics Act [Act No. 231 of 1952]. https://elaws.e-gov.go. jp/search/elawsSearch/elaws_search/lsg0500/detail?lawId¼327AC0000000231 (Japanese); http://www.japaneselawtranslation.go.jp/law/detail/?id¼37&vm¼04&re¼02&new¼1 (translation outdated). Accessed 22 Nov 2019 Government of Japan (1962) Administrative Case Legislation Act [Act No. 139 of 1962]. https:// elaws.e-gov.go.jp/search/elawsSearch/elaws_search/lsg0500/detail?lawId¼337AC0000000139 (Japanese); http://www.japaneselawtranslation.go.jp/law/detail/?id¼1922&vm¼04&re¼02& new¼1 (translation outdated). Accessed 22 Nov 2019 Government of Japan (1980a) Cabinet Order on Inward Direct Investment [Cabinet Order No. 261 of 1980]. https://elaws.e-gov.go.jp/search/elawsSearch/elaws_search/lsg0500/detail? lawId¼355CO0000000261 (Japanese); http://www.japaneselawtranslation.go.jp/law/detail/? id¼3385&vm¼04&re¼01&new¼1 (translation outdated). Accessed 22 Nov 2019 Government of Japan (1980b) Foreign Exchange Order [Cabinet Order No. 260 of 1980]. https:// elaws.e-gov.go.jp/search/elawsSearch/elaws_search/lsg0500/detail?lawId¼355CO0000000260 (Japanese); http://www.japaneselawtranslation.go.jp/law/detail/?id¼3383&vm¼04&re¼02& new¼1 (translation outdated). Accessed 22 Nov 2019 Government of Japan (1980c) Order on Inward Direct Investment [Order of the Prime Minister’s Office, Ministry of Finance, Ministry of Education, Science and Culture, Ministry of Health and Welfare, Ministry of Agriculture, Forestry and Fisheries, Ministry of International Trade and Industry, Ministry of Transport, Ministry of Posts and Telecommunications, Ministry of Labour and Ministry of Construction No. 1 of 1980]. https://elaws.e-gov.go.jp/search/elawsSearch/ elaws_search/lsg0500/detail?lawId¼355M50007fc2001 (Japanese); http://www. japaneselawtranslation.go.jp/law/detail/?id¼3386&vm¼04&re¼01&new¼1 (translation outdated). Accessed 22 Nov 2019 Government of Japan (1984) Act on Nippon Telegraph and Telephone Corporation, etc. [Act No. 85 of 1984]. https://elaws.e-gov.go.jp/search/elawsSearch/elaws_search/lsg0500/detail? lawId¼359AC0000000085 (Japanese); http://www.japaneselawtranslation.go.jp/law/detail/? id¼74&vm¼04&re¼02&new¼1 (translation outdated). Accessed 22 Nov 2019 Government of Japan (1989) Consigned Freight Forwarding Business Act [Act No. 82 of 1989]. https://elaws.e-gov.go.jp/search/elawsSearch/elaws_search/lsg0500/detail? lawId¼401AC0000000082 (Japanese); http://www.japaneselawtranslation.go.jp/law/detail/? id¼1998&vm¼04&re¼02&new¼1 (translation outdated). Accessed 22 Nov 2019 Government of Japan (1993) Administrative Procedure Act [Act No. 88 of 1993]. https://elaws.egov.go.jp/search/elawsSearch/elaws_search/lsg0500/detail?lawId¼405AC0000000088

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(Japanese); http://www.japaneselawtranslation.go.jp/law/detail/?id¼2874&vm¼04&re¼01& new¼1 (translation outdated). Accessed 22 Nov 2019 Government of Japan (2005) Companies Act [Act No. 86 of 2005]. https://elaws.e-gov.go.jp/ search/elawsSearch/elaws_search/lsg0500/detail?lawId¼417AC0000000086 (Japanese); http://www.japaneselawtranslation.go.jp/law/detail/?id¼3206&vm¼04&re¼01&new¼1; http://www.japaneselawtranslation.go.jp/law/detail/?id¼3207&vm¼04&re¼01&new¼1 (translation outdated). Accessed 22 Nov 2019 Government of Japan (2014) Administrative Complaint Review Act [Act No. 68 of 2014]. https:// elaws.e-gov.go.jp/search/elawsSearch/elaws_search/lsg0500/detail?lawId¼426AC0000000068 (Japanese); http://www.japaneselawtranslation.go.jp/law/detail/?id¼2984&vm¼04&re¼02& new¼1 (translation outdated). Accessed 22 Nov 2019 Kojou M (2008) The FEFTA and foreign investment regulation: acquisitions of J-Power shares by TCI fund (translation). Hougakukyoushitsu 337:8–12 (Japanese only) Ministry of Finance (2014) Business Types to Be Specified by the Minister of Finance and the Competent Ministers for the Business Pursuant to the Provisions of Article 3, Paragraph (4) of the Order on Inward Direct Investments [Public Notice of the Cabinet Office, Ministry of Internal Affairs and Communications, Ministry of Finance, Ministry of Education, Culture, Sports, Science and Technology, Ministry of Health, Labour and Welfare, Ministry of Agriculture, Forestry and Fisheries, Ministry of Economy, Trade and Industry, Ministry of Land, Infrastructure, Transport and Tourism, and Ministry of the Environment No. 1 of 2014]. https://www.mof.go.jp/international_policy/gaitame_kawase/gaitame/recent_revised/kokuji_ 01.pdf (Japanese); http://www.japaneselawtranslation.go.jp/common/data/notice/143020.html (translation outdated). Accessed 22 Nov 2019 Ministry of Finance (2017) Factors to be considered in the examination process [Press release] https://www.mof.go.jp/english/international_policy/others/170802.html. Accessed 22 Nov 2019 Ministry of Finance (2019a) Additions of Specified Industries Subject to Prior Notification Regarding Foreign Direct Investment [Press release; translation] https://www.mof.go.jp/international_ policy/gaitame_kawase/gaitame/recent_revised/20190527.htm (Japanese only). Accessed 22 Nov 2019 Ministry of Finance (2019b) Amendment Bill of the Foreign Exchange and Foreign Trade Act [Press release] https://www.mof.go.jp/english/international_policy/fdi/20191021.html. Accessed 22 Nov 2019 Ministry of Finance (2019c) Amendment Bill of the Foreign Exchange and Foreign Trade Act [Frequently Asked Questions] https://www.mof.go.jp/english/international_policy/fdi/faq_ 191031.pdf. Accessed 22 Nov 2019 Ministry of Finance (2019d) Amendment Bill of the Foreign Exchange and Foreign Trade Act [Related document; translation] https://www.mof.go.jp/international_policy/gaitame_kawase/ press_release/kanrenshiryou_191018.pdf (Japanese Only). Accessed 22 Nov 2019 Ministry of Finance (2019e) Amendment Bill of the Foreign Exchange and Foreign Trade Act [Related document]. https://www.mof.go.jp/english/international_policy/fdi/kanrenshiryou_ 191021.pdf. Accessed 22 Nov 2019 Ministry of Finance (2019f) Foreign Direct Investment Screening System [Document circulated at the 42nd sub-committee on Foreign Exchange of the Council on Customs, Tariff, Foreign Exchange and Other Transactions; translation] https://www.mof.go.jp/about_mof/councils/cus toms_foreign_exchange/sub-foreign_exchange/proceedings/material/gai20190822/06.pdf (Japanese only). Accessed 22 Nov 2019 Ministry of Finance (2019g) Foreign Direct Investment Screening System [Document circulated at the 43rd sub-committee on Foreign Exchange of the Council on Customs, Tariff, Foreign Exchange and Other Transactions; translation] https://www.mof.go.jp/about_mof/councils/cus toms_foreign_exchange/sub-foreign_exchange/proceedings/material/gai20191008/02.pdf (Japanese only). Accessed 22 Nov 2019

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Ministry of Finance (2019h) Overview of the Amendment on Orders Regarding Foreign Direct Investment, etc. [Related document; translation] https://www.mof.go.jp/international_policy/ gaitame_kawase/gaitame/recent_revised/gaitamehou_20190926_1.pdf (Japanese only). Accessed 22 Nov 2019 Ministry of Finance (2019i) Partial Amendment on Cabinet Order and Order Regarding Foreign Direct Investment etc. [Press Release; translation] https://www.mof.go.jp/international_policy/ gaitame_kawase/gaitame/recent_revised/20190926.htm (Japanese only). Accessed 22 Nov 2019 Nakatani K (2011) Recent issues related to foreign investment regulations (translation). Jurists 1418:44–51 (Japanese only). Accessed 22 Nov 2019 Reuters (6 December 2019) Japan firms back tighter foreign ownership reporting rules: Reuters poll. https://www.reuters.com/article/us-japan-companies-investment-poll/japan-firms-backtighter-foreign-ownership-reporting-rules-reuters-poll-idUSKBN1Y92SZ The Economist (26 October 2019) Capital control: Japan’s new investment rules risk scaring off foreign investors. https://www.economist.com/finance-and-economics/2019/10/26/japans-newinvestment-rules-risk-scaring-off-foreign-investors Kojiro Fujii is a partner at the largest international law firm in Japan, Nishimura & Asahi. He specializes in international trade and investment law, as well as competition law. His expertise in these areas has been frequently recognized by international legal publications, such as Who’s Who Legal, Client Choice Awards, and GCR. He is ranked second in NIKKEI’s “Most successful lawyers in 2018” in the international trade category. Noriko Yodogawa is counsel at Nishimura & Asahi. She has broad experience in the field of international trade law, including working within many types of stakeholders in the field, specifically: the negotiations of economic partnership agreements as an official of the Ministry of Foreign Affairs of Japan; working as the Legal Counsel to the Energy Charter Secretariat (i.e., the secretariat of the Energy Charter Treaty, which is a multilateral trade and investment agreement in the field of energy); and secondment to a steel manufacturing company and to the WTO Secretariat. Marie Wako is an associate at Nishimura & Asahi, who has experience in assisting private companies and government agencies with regard to foreign investment, export control, and economic sanctions, as well as international public law and international trade law matters. Prior to joining the firm, she worked with government agencies and international organizations, including the chambers division at the International Criminal Court and Office of the United Nations High Commissioner for Human Rights.

Foreign Investment Screening in China Qingjiang Kong and Cherry Kaiyuan Chen

Contents 1 Evolving Foreign Direct Investment Regime in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 A Historical Account of the Evolving Foreign Direct Investment Regime . . . . . . . . . 1.2 The Legislative Framework of the FDI Regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Determining Factors of the Evolving FDI Regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Case-by-Case Approval Approach: The Main Feature of the FDI Screening Mechanism Before 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Screening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Entry Restrictions or Prohibitions on Sectors or Industries . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Certain Areas Not Open to Foreign Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Ownership and Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Introduction of the Negative List and Amendment of the Three FIE Laws . . . . . . . . . . . . . . . 3.1 Pre-establishment National Treatment Plus Negative List Mode and the 18 Pilot Free Trade Zones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 FDI Screening-Related Issues in the 2019 Foreign Investment Law . . . . . . . . . . . . . . . . 4 Concluding Remarks on China’s FDI Screening Mechanism Vis-à-Vis the EU’s . . . . . . . . Annex 1 Relevant Articles for Part 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract When China began to institutionalize foreign direct investment in the 1980s, the foreign direct investment (FDI) regime was characterized by a case-bycase approval system in terms of FDI screening. It was later supplemented with an industry guideline for foreign investment in the mid-1990s. In recent years, with the changing situation for global FDI flow and economic landscape in China, China’s FDI regime has undergone a sweeping reform. The traditional regime of FDI screening based on the case-by-case approval and the industrial policy for FDI has given way to the “pre-establishment national treatment plus negative list” approach in the new Foreign Investment Law of the People’s Republic of China. This chapter Q. Kong (*) Academy of International Law, China University of Political Science and Law, Beijing, China e-mail: [email protected] C. K. Chen Hillary Clinton School of Law, Swansea University, Swansea, UK © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 403–432, https://doi.org/10.1007/16495_2020_6, Published online: 29 May 2020

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will examine China’s FDI screening mechanism and, in light of the current social and economic situations, explore the features of the new FDI screening regime in China vis-à-vis that of the EU.

1 Evolving Foreign Direct Investment Regime in China 1.1

A Historical Account of the Evolving Foreign Direct Investment Regime

As a developing country, China was among those who at an early stage recognized the important role of foreign direct investment (FDI) in economic development. This awareness coincided with the historical policy shift. Early in 1979, when China began shifting its emphasis from utopian ideology to pragmatic economic development,1 foreign investment policies were incorporated into the reform and opening-up policy by the then Chinese leadership. As a result, a new law was promulgated by the National People’s Congress (NPC), the Chinese national legislative body. The unprecedented law, which was named Chinese-Foreign Equity Joint Venture Law (EJV Law),2 thus initiated the process of using foreign direct investment and its regulation in China. It is not difficult to find that the first FDI law was very simple. Instead of providing practically applicable rules, it provided for the principles governing the establishment of Chinese-foreign joint ventures and the operation after their establishment. The fact reflected that the Chinese government was not accustomed to lawmaking for FDI, thus leaving much to be supplemented with the gaining of experience by, reasonably, the State Council. Unlike the case in other developing countries, the first FDI law did not intend to cover all the FDI issues.3 It was merely a law that governed one type of establishment of FDI, namely equity joint venture between foreign investors and their Chinese partners. Given that foreign control of the economy of the host country was among the very concerns of the developing host countries,4 it is understandable why the law ensured, at least, part of control of the FDI establishment by the Chinese party. In other words, the Chinese government held, more or less, the same caution against the possible negative aspect of FDI.

1 The convening of the third Session of the Central Committee of the Communist Party of China was a signal for the historical reformation. 2 For the text of the Chinese-foreign Equity Joint Venture Law of the People’s Republic of China and other laws and regulations hereinafter, see, unless otherwise indicated, Guo Wu Yuan Gong Bao (Gazette of the State Council) (1979a, b), Beijing. 3 See Meizheng (1994). 4 See Sornarajah (1994), pp. 1–20.

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Amid the outcry of foreign investors and prospective foreign investors for more room, China adopted the Wholly Foreign-Owned Enterprise Law (WFOE Law) in 1986, which allowed foreign investors to establish wholly foreign-funded enterprises without having found Chinese partners for themselves. In 1988, China adopted the Chinese-Foreign Contractual Joint Venture Law (CJV Law), thus allowing foreign investors to choose a new flexible form of enterprises based on contract in addition to the equity joint venture and wholly foreign-funded enterprises. The EJV Law, CJV Law and WFOE Law,5 which were known as “the Three Foreign Investment Enterprise laws” (the three FIE laws), and their relevant implementing regulations form the regulatory framework for FDI in China. It is notable that all the three FIE laws featured a case-by-case screening, which means that every investment proposal was subject to strict controls by the relevant administrative bodies. The FDI regime experienced certain changes as a result of China’s effort to align with the requirements of the World Trade Organization (WTO)6 and honour its commitments under the protocol of its accession to the WTO. The three FIE laws were amended in 2000 and 2001 to the effect that non-conforming articles, such as trade balance requirement and local contents, were removed. The amendments did not change the tone of China’s FDI regime. A fundamental change took place in 2013 when the Chinese government decided to make a strategic decision of opening the investment market at a higher level. On 10 July 2013, during the fifth round of China-US Strategic and Economic Dialogue, which was held in Washington, China agreed to negotiate a bilateral investment treaty (BIT) with the United States based on the provisions of pre-establishment national treatment plus negative list,7 which marked the beginning of a new system for FDI screening. Later, on 29 September 2013, China announced that the China (Shanghai) pilot free trade zone8 was established. The opening pressure of managing investment with

These three laws are known as “the Three Foreign Investment Enterprise (FIE) Laws” in China. As a result of the Uruguay Round negotiations, however, the WTO began to embody various investment-related rules. The General Agreement on Trade in Services (GATS), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) and the Agreement on Trade-Related Investment Measures (TRIMS) contain such investment provisions. 7 Pre-establishment national treatment plus negative list mode for foreign investment administration has gradually become a common international practice for foreign investment management. According to the Organization for Economic Co-operation and Development (OECD), National treatment could apply to: (a) the pre-establishment phase, i.e. the making of new investments, including the participation in existing enterprises, by foreign or non-resident investors; (b) the post establishment phase, i.e. the conditions of operation in the host country for enterprises owned or controlled by non-established or non-resident investors. See OECD (11 October 1995), Treatment of Investors and Investments (Pre/Post Establishment), available at http://www1.oecd.org/daf/mai/ pdf/ng/ng953e.pdf. A catalogue to clarify the prohibited areas for foreign investment was allowed to be adopted as an exception to the above-mentioned national treatment. 8 The pilot free trade zones in China will be introduced later in this chapter. 5 6

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a negative list mode was one of the most important research topics within the Shanghai pilot free trade zone. After a three-year operation test in the Shanghai pilot free trade zone and other later established pilot free trade zones, the first nationwide negative list for the investment market access in China was issued by the State Council to be applicable with amendments to the three FIE laws. The foreign-invested enterprise registration system and a negative list mode were intertwined. The industry guideline for foreign investment was replaced by a negative list approach and the case-by-case approval system by a mere foreign invested enterprise registration system. As a result, the FDI screening in China was characterized by a negative list approach and a foreign invested enterprise registration system. Three years later, these experiments laid down the foundation for a nationwide application of the negative list for investment and an enterprise registration system. On 3 September 2016, the 12th National People’s Congress Standing Committee amended the three FIE laws and the Law on the Protection of Investments of Taiwan Compatriots. The amendments, which took effect from 1 October 2016, officially marked China’s nationwide shift from its existing industry guidelines for foreign investment and “case-by-case approval” system to a “negative list plus filing-forrecords” approach. In line with the new regulatory regime for FDI, the first nationwide negative list for the investment market access in China was issued by the State Council in 2017. Against the above-mentioned background, the Foreign Investment Law of the People’s Republic of China (the new FIL) was adopted at the Second Session of the 13th National People’s Congress on 15 March 2019, which will be promulgated for implementation as of 1 January 2020. Following the entry into force of the new FIL, the pre-establishment national treatment plus negative list mode will be a long-term policy for FDI screening in China.

1.2

The Legislative Framework of the FDI Regime

In 1982, the Constitution of the People’s Republic of China was amended by the NPC to meet the needs of the reform.9 Exploitation of foreign investment and, consequently, its legal protection were stipulated in the new text of the Constitution.10 Foreign investment thus assumed constitutional recognition and protection.

9

Guo Wu Yuan Gong Bao (Gazette of the State Council) (1982), Beijing. Article 18 of Constitution of the PRC (1982) provided that “The People’s Republic of China permits foreign enterprises, other foreign economic organizations and individual foreigners to invest in China and to enter into various forms of economic cooperation with Chinese enterprises and other Chinese economic organizations in accordance with the law of the People’s Republic of China.”

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The adoption of the new constitutional provision concerning FDI was viewed as one of the indicators that China was sticking to the opening-up policy. The policy declaration in the Constitution laid down the foundation for the FDI legal framework. From then on, more laws and regulations have been promulgated, either exclusively applicable to FDI issues or applicable to both domestic enterprises and foreign investment enterprises. They make up the legal framework for FDI. The constitutional provision concerning foreign investment is thus the first and fundamental part of the FDI regulatory framework. The second part of the FDI framework is made up of the FDI-related laws promulgated by the NPC or its standing committee, mainly the three FIE laws (which are to be replaced by the new FIL on 1 January 2020). The FDI-related administrative regulations form the third part of the regulatory framework. These regulations are promulgated by the State Council.11 In principle, the whole FDI framework shall be based upon the constitutional provision and the above laws. But while some FDI-related administrative regulations serve as interpretations for the laws, the others supplement the laws substantially.12 It is worth noting that the Regulations on the Implementation of the Foreign Investment Law is being drafted and is scheduled to be ready and come into force on the same date as the new FIE (i.e. 1 January 2020). The fourth part is the ministerial rules adopted by the ministries subordinate to the State Council, particularly the National Development and Reform Commission (NDRC), Ministry of Commerce (MOFCOM)13 and State Administration of Market Regulation (SAML), whose predecessor before 2018 was the State Administration of Industry and Commerce (SAIC).14

11 In 1984 the Standing Committee of NPC authorized the State Council in a decision to promulgate regulations concerning economic restructuring and opening up to the outside world. Thus the State Council is in a position to enact regulations whose effect is similar to that of laws. 12 In this regard, the current administrative regulations include: the Regulations on the Administration of Company Registration (first adopted 1994, the latest amendment was in 2016), the Measures on the Establishment of Partnership Enterprises in China by Foreign Enterprises or Individuals (2009), Regulations on the Administration of Resident Representative Office Registration by Foreign Enterprises (first adopted in 2010, the latest amendment was in 2018), Measures on the Registration of the Partnership Enterprises (first adopted in 1997, the latest amendment was in March 2019). 13 The Ministry was formerly named the Commission on the Administration of Foreign Investment before 1983 and Ministry of Foreign Economic Relation and Trade from 1983 to 1994. 14 These FDI-related ministerial rules include: NDRC & MOFCOM: Special Administrative Measures on Access of Foreign Investment (2019 edition), Free Trade Zone Special Administrative Measures on Access of Foreign Investment (2019 edition) and Catalogue of Encouraged Industries for Foreign Investment (2019 edition); MOFCOM: Decree No. 3 (2016), Interim Measures on the Administration of Record-keeping for the Establishment and Change of Foreign-funded Enterprises (October 2016, amended by Decision No. 32 (2017)), Ministry of Commerce Order No. 8 of 2012, Provisional Provisions of the Ministry of Commerce on Equity Investment of Foreign-funded Enterprises (September 2012), Ministry of Commerce Decree No. 6 of 2011, Interim Measures for the Investigation and Treatment of Concentration of Business Operators Not declared in accordance with the Law (December 2011), Measures for Declaration of concentration of Operators

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Apart from these laws and regulations, the fifth part of the legislation on FDI comprises other laws and regulations that may, if appropriate, apply to FDI issues.15 When discussing the FDI framework of a country, it is desirable to incorporate the commitment of the country in international agreements, in this case relevant WTO agreements, the BITs and multilateral investment agreements.16 In accordance with Chinese law, “if any international treaty concluded or acceded to by the People’s Republic of China contains provisions differing from those in the civil laws of the People’s Republic of China, the provisions of the international treaty shall apply, unless the provisions are ones on which the People’s Republic of China has announced reservations”.17 Therefore, in this context, rules in the WTO agreements

November 2009), Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (June 2009), Measures on the Administration of Foreign-funded Mineral Exploration Enterprises (July 2008), Measures for the Management of Strategic Investment by Foreign Investors in Listed Companies (December 2005), Provisions on Foreign Investment in Establishing Investment Companies (November 2004), Measures on the Administration of Foreign Investment in Business Field (April 2004), Provisions on the Administration of Start-up Enterprises with Foreign Investment (January 2003), Measures on the Administration of Foreign Investment in International Freight Forwarding Agency Enterprises (December 2012), etc.; GAMS: Measures on the Registration of Enterprises’ Names (2012). 15 Such as General Principles of Civil Law (1986), Contract Law (1999), Regulations on Foreign Exchange Control (first adopted in 1980, amended in 1996), Environment Protection Law (first adopted in 1979, the latest amendment was in 2014), Foreign Trade Law (fist adopted in 1994, the latest amendment was in 2016), Company Law (first adopted in 1993, the latest amendment was in 2018), Urban Planning Law (1989), Income Tax Law of Enterprises (first adopted in 2007, amended in 2017), Land Administration Law (first adopted in 1986, the latest amendment was in 2019), Labour Law (first adopted in 1994, the latest amendment was in 2016), Regulations on Administration and Management of State Assets (1995), Regulations on Value-added Tax (1994), Regulations on Consumption Tax (1994), Regulations on Business (1994), Law of Guaranty (1994), Commercial Bank Law (1995), Insurance Law (1995), Securities Law (first adopted in, the latest amendment was in 2015), Law of Urban Real Estate (1995), Anti-Monopoly Law (2007), Partnership Law (2006), Electronic Commerce Law (2018), General Provisions of the Civil Code (2017), Drug Administration Law (adopted in 1984, the latest amendment was in 2018), Trademark Law (adopted in 1982, the latest amendment was in 2019), Patent Law (adopted in 1984, the latest amendment was in 2008), Product Quality Law (adopted in 1993, the latest amendment was in 2018), Advertisement Law (adopted in 1984, the latest amendment was in 2018), Law on the Protection of Consumers’ Interest (adopted in 1993, the latest amendment was in 2013), etc. 16 Official statistics showed that up to 2016, China had signed with other countries 145 bilateral investment treaties, specific lists and relevant treaties see Ministry of Commerce of the People’s Republic of China, Department of Treaty and Law (last update 12 December 2016), List of Bilateral Investment Treaties, available at http://tfs.mofcom.gov.cn/article/Nocategory/201111/ 20111107819474.shtml; and had acceded to two multilateral investment agreements, namely, the Convention Establishing the Multilateral Investment Guaranty Agency (in 1985) and Convention on Settlement of Investment Disputes between States and Nationals of Other States (in 1992). 17 See Article 142 of General Principles of Civil Law of the People’s Republic of China (1986).

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relating to investment,18 as well as rules in international investment agreements (IIAs), are integral parts of the FDI regime in China.

1.3

Determining Factors of the Evolving FDI Regime

China’s FDI regime originated from the opening-up and reform policy. Exploitation of foreign investment was made the signature part of its reform and opening-up policy. However, it is still difficult to identify all the determining factors that affect the shaping of the FDI framework in China. In this regard, several reform policies or measures are chosen for the purpose of analysis. The policies in relation to regional development strategy and urban economic restructuring particularly contributed a lot to the shaping of the FDI framework at the earlier stage. Almost hand in hand with the emergence of foreign investment legislation, an overall economic restructuring and regional development strategy was formulated by which, among other things, more economic policy-making power would be shifted from the central government to the local governments and enterprises, and the coastal areas would be the priority economic development regions. In 1980, the State Council decided to establish four special economic zones (SEZs), namely Shenzhen, Zhuhai and Shantou in Guangdong Province, and Xiamen in Fujian Province, with a view to making these areas comprehensive experimental sites for the country’s economic restructuring and opening up to the outside world and serving as a special channel for the country to use foreign investment. This strategy was heightened by later consecutive efforts in 1984 when 14 coastal cities were opened to foreign investment, in 1988 when Hainan Province was announced to be a SEZ, in 1990 when a Shanghai Pudong New Development Area was created and in 1992 when a number of “coastal open areas” and “opening cities on rivers and borders” were announced. Special economic policies, which were mainly concerned with the enlargement of local power and foreign investment promotion measures, were formulated exclusively for these areas to this end.19 As to be accounted later, most of these measures were tax related. It is fair to say that this regional development strategy resulted in the prevalence of the evolving incentive-based FDI framework. The opening-up and reform strategy was soon followed by an urban economic restructuring. The comprehensive urban economic restructuring started from 1984, aiming at, among other things, invigorating state-owned enterprises and updating obsolete infrastructure in the old cities. In this context, foreign investment and its 18

As a result of the Uruguay Round negotiations, however, the WTO began to embody various investment-related rules. The General Agreement on Trade in Services (GATS), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) and the Agreement on Trade-Related Investment Measures (TRIMS) contain such investment provisions. 19 In fact, these measures were viewed as signs of the demonstration of the government’s continuous commitment to an opening-up policy and, particularly, to the policy of “using foreign investment”.

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accompanying technology and management were deemed as a means to the end. Therefore, absorption of FDI began becoming one of the priorities of the governments at different levels.20 Governments, particularly local governments with a mandate to regulate their own economic affairs, promulgated a quantity of FDI promotion policies, with a view to attracting foreign investment. As a consequence, foreign investment promotion and incentives,21 characteristic of fiscal incentives, whose application was not limited to the SEZs and coastal areas, were widely adopted by, firstly, the State Council and, subsequently, the local governments. Thus, the incentive-based FDI regime was further strengthened by the new reform. Meanwhile, the issue of the economic development imbalance between the eastern costal area and the middle and western inland area,22 which resulted partly from the majority of investment’s being made in the coastal area, became ever prominent. Therefore, a new regional development strategy was promulgated in order to narrow the economic development gap. A pressure arose again to abolish the incentives granted to foreign investment enterprises in coastal areas. Finally, it is noticeable that the FDI inflow and investors’ behaviour may have an impact upon the reshaping of the FDI framework. For instance, in order to reverse the trend of decline in the inflow of FDI in 1989, the Chinese government, particularly the local governments, again resorted to incentive measures to attract foreign investment. When the inflow of FDI to China reached a yearly record in 1993, 1994

20 For example, in the working reports made to the NPC and its counterparts at the local level by governments, the absorption of FDI was always mentioned as their task and achievement. For evidence, see, for instance, The Reports on the Work of State Council, made by the Premiers at each session of the NPCs, Beijing. 21 Incentive was the preferential treatment granted to foreign investment and FIES. In order to attract foreign investment, China implemented a dual-track tax system whereby domestic enterprises and FIES were levied different income taxes. FIES located in SEZS or the Economic and Technical Development Zones of open coastal cities were entitled to a corporate income tax rate of 15% (the normal income tax was 33%). Profits remitted abroad by foreign investors were exempted from income tax. The preferential income tax rate of 15% was applicable to hi-tech items or projects with foreign investment of over US$ 30 million, as well as to enterprises that operated in the fields of energy, transport and port construction. The income tax concessions extended to FlEs were not granted to domestic enterprises. As for circulation-related taxes, FIES could enjoy rebates on their tax burden resulting from the replacement of the consolidated industrial and commercial tax and special consumption tax by a value-added tax (VAT), consumption tax and business tax, which domestic enterprises were not entitled to. With regard to tariffs, foreign enterprises were exempt from tariffs on the import of production equipment, parts and components as well as raw materials, auxiliary materials, components, parts and packaging materials imported for the production of goods for export in accordance with law (this measure was abolished in 1996 but reinstated in 1998). Export-oriented and hi-tech foreign investment projects were entitled to governmentassigned land-use rights for a given period. SEZS and the Economic and Technical Development Zones of open coastal cities used to offer considerable concessions to foreign firms on land-use fees. Foreign investment projects in education, culture, science and technology, medical and health care, and public facilities, as well as export-oriented and hi-tech projects, enjoyed even more favourable terms. FlEs had the privilege of recruiting talent from other cities. They were also granted import and export rights, management autonomy and a freer hand in forex management. 22 Actually, this issue was heatedly debated at each Sessions of the eighth NPC.

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and 1995 (USD 27.5, 33.8 and 37.5 billion, respectively23), China began to adjust its FDI regime because it perceived that incentives should be used to orient FDI towards particular sectors rather than to attract FDI per se. It is also not difficult to see that some changes in the FDI regime were, ironically, a result of the continuous appeal for national treatment on the part of foreign investors.24 The unification of the tax system (since January 1994) and the elimination of the exemption of import duties (since April 1996) granted to foreign investment enterprises were two signifying examples in this regard. When discussing the role of reform measures in the shaping of an FDI framework, it is helpful to remember that the whole picture of this process lies in the interaction of these measures, each fuelling another. For example, when China began to push the economic development of the coastal areas, it laid down the incentivebased policies for FDI to serve its objective, and this contributed partly to the setting up of SEZs. As a result of its bid to join the WTO, China’s FDI regime was upgraded to become more market friendly. When it came to the preparation of a unified foreign investment law, the need for a unified foreign investment law was not only due to higher demands from foreign investors for more transparency and certainty in foreign investment facilitation and protection, and the need of the government for foreign investment management, but also attributable to the need for deepening reform and wider opening up, which the 18th Party Congress in 2012 advocated. An important agenda of the country for the post-18th Party Congress was to build a new open economic system with a view to promoting and speeding up legal institutionalization, improving environment for business and innovation, reducing market operation cost, improving operational efficiency and enhancing international competitiveness. In this context, the unified FIL was put on the legislative agenda.25

23 See United Nations Conference on Trade and Development (UNCTAD) (1993–1995) World Investment Reports, New York and Geneva. 24 See in this Sect. 3. 25 President Xi Jinping’s speech on 29 July 2017 entitled “Creating a stable, fair and transparent business environment and speeding up the construction of a new open economic system” was a clear evidence. “We should speed up the unification of domestic and foreign laws and regulations and formulate new basic laws for foreign investment. In order to clear up the laws, regulations, rules and policy documents concerning foreign investment, laws, regulations or provisions that are inconsistent with the general direction and principles of the country’s opening up to the outside world should be repealed or amended within a time limit.”

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2 Case-by-Case Approval Approach: The Main Feature of the FDI Screening Mechanism Before 2016 Interestingly, the original EJV Law did not have any provisions regarding sectors prohibited or restricted to foreign investment; instead, this law merely provided that the technology and equipment contributed by an equity joint venture’s foreign partner as its investment must really be “advanced technology and equipment that suit China’s needs”.26 The Implementing Regulations of the Chinese-Foreign Equity Joint Venture Law (EJV Regulations), which were promulgated by the State Council on 20 September 1983, listed the sectors where foreign investment participation was allowed and provided guidance for allowing such foreign investment participation.27 Similarly, the Wholly Foreign-Owned Enterprise Law (WFOE Law) and the Detailed Rules for the Implementation of the WFOE Law (WFOE Rules) provided specifically for the sectors that denied or restricted foreign investment admission.28 In 1995, with a view to proving a guideline concerning how to screen the foreign investment proposals, an industrial policy was adopted, which was applied specifically to FDI. As a result, case-by-case approval and the evolving industry policies for FDI became the core of the FDI screening mechanism. It is not difficult to see that the EJV Regulations, the WFOE Law and the WFOE Rules established general requirements for foreign investment admission, i.e. that foreign investment should be admitted in such a manner as to help the development of China’s national economy and that foreign investors should use advanced technology or market all or most of their products outside China.29 In this regard, it is noteworthy that the regime on the admission of foreign investment was often supplemented by selective “pilot licenses”. The Chinese government launched several pilot projects to experiment with allowing foreign investment in such previously restricted sectors as retailing, media and telecommunications services,30 basically as a gesture, although the practice opened a gateway for foreign investment. Nevertheless, what is notable is that, in relation to foreign investment admission, China had not had any formal and systematic industrial policy up until the 26

EJV Law, Article 5. See, respectively, Articles 3, 4 and 5 of the Regulations for the Implementation of the EJV Law. 28 The NPC Standing Committee promulgated the WFOE Law on 12 April 1986. This Law, for the first time, provided that China restrict and prohibit foreign investment in certain sectors (Article 3). The WFOE Rules specify, in Articles 4 and 5, the sectors in which foreign investment was prohibited or restricted. 29 See, respectively, Article 4 of the EJV Regulations, Article 3 of the WFIE Law, and Article 3 of the WFOE Rules. 30 For example, on several occasions China allowed the entry of large international retailers into the Chinese market, such as Wal-Mart in Shenzhen and Carrefour and Metro in Shanghai. These moves were aimed at encouraging the development of large retail chain stores along the Wal-Mart model and were said to be intended as a solution to the moribund condition of many State-owned department stores. 27

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promulgation of the Provisional Regulations on Foreign Investment Guidelines (Provisional Guidelines) and the Provisional Catalogue of Industries for Guiding Foreign Investment (Provisional Catalogue) in 1995.31 Two points need to be emphasized. First, the industrial policies, as embodied in the Provisional Guidelines and Provisional Catalogue, stressed the hi-tech and export-oriented policies. Second, the comprehensive framework for the admission of foreign investment occurred with the Provisional Guidelines and Provisional Catalogue, representing a new attitude towards foreign investment. The Provisional Guidelines laid down the principles of industrial policies for foreign investment. Basically, industries were divided into four categories: – – – –

Industries where foreign investment was encouraged Industries where foreign investment was permitted Industries where foreign investment was restricted; and Industries where foreign investment was prohibited

In general, while China encouraged foreign investment in such priority infrastructure sectors as energy production, communications, agriculture, forestry, environmental protection and transportation, potential foreign investors are barred from investing in sectors such as the telecommunications services, news media, broadcasting and television sectors, which were considered sensitive from a national security perspective, and they were restricted in participating in sectors such as services and the automotive sector, where there was a desire to protect a domestic industry.32 In many cases, foreign investors must form a joint venture with a Chinese company and restrict their equity ownership to a minority share in order to invest in these restricted sectors. Take the services sector as an example. During the case-by-case-approval era, foreign service providers were largely restricted to operations under the terms of selective “pilot licenses”. The strict operational limits on the forms of establishment for entry, and restrictions on the geographic scope of activities, severely limited the growth and profitability of these operations.33 The FDI regime imposed a great deal of measures concerning foreign investment. They meant to maintain a government’s freedom of action to enhance the country’s economic development. In particular, the regulatory framework provided provisions on the admission and establishment, ownership and control, incentives, investment-related measures, treatment standard, investment protection, dispute settlements and other special issues, e.g. restrictive business practices, transfer of technology, employment and

31

The Catalogue was amended in 1997, 2001, 2004, 2011, 2015 and 2017. China restricted investment in a wide range of the services sector, including distribution, construction, tourism and travel, shipping, advertising, legal services, and others. 33 For instance, foreign law firms could provide legal services only in the form of representative offices in Beijing, Shanghai, Guangzhou, Shenzhen, Haikou, Dalian, Qingdao, Ningbo, Yantai, Tianjin, Suzhou, Xiamen, Zhuhai, Hangzhou, Fuzhou, Wuhan, Chengdu, Shenyang and Kunming. 32

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environment issues, of which the first two aspects were the most relevant to FDI screening. Under the FDI regime, no foreign investment was entitled to unconditional entry or establishment. Measures on admission and establishment under the FDI regime included screening, authorization and registration requirements, closing certain sectors, industries to FDI, minimum capital requirements, quantitative restrictions on the number of areas open to foreign investment in specific sectors or industries, conditional entry upon investment meeting certain criteria, restrictive forms of establishment for foreign investment and security, and public interest requirements.

2.1

Screening

Examination and approval procedures were integral parts of the practice for screening of foreign investment. Each foreign investment initiative should be subject to the screening requirements stipulated in the FDI laws. The screening procedures, namely reviewing and approval procedures, were administered by MOFCOM34 and the provincial and municipal commissions of foreign trade and economic relations, while the environment protection administration, land administration, urban planning administration and state asset administration agencies participated separately in the screening process. As far as MOFCOM and its counterparts were concerned, they should decide whether to grant the approval or not within three months upon submission of the establishment application by the foreign investor or its Chinese partner, in the case of joint ventures. A dominant weakness in the previous China’s FDI regime lay in the fact that examination and approval procedures were excessively complicated and insufficiently transparent. In fact, they could be used to dissuade unwanted foreign investment projects. For example, it was often discouraging that any foreign investment project with an investment of more than US$ 30 million must obtain final approval from the State Council, even though they might have gone through the approvals by various authorities at different levels. In practice, fortunately, most of the applications for foreign investment establishment were approved in the 1980s and 1990s because the ratification authorities used to be under pressure to promote foreign investment.

34

See Footnote 12.

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Entry Restrictions or Prohibitions on Sectors or Industries

For an application for investment establishment to be approved, the investment project, as explained later, should meet the criteria or avoid falling under the scope of restriction or prohibition, as stipulated in the relevant laws and regulations. According to Article 6 of Provisional Regulation on the Guidelines of Foreign Investment and Catalogue of Projects in Which Foreign Investment is Encouraged (1995), foreign investment in the following areas were restricted: (i) using technology that has already been developed in China or introduced into China, for which the existing production capacity in the relevant field can already satisfy domestic demands; (ii) falling under the experimenting industries of the State for absorption of foreign investment or under the monopoly industries by the State; (iii) for exploring and exploiting rare or valuable mineral resources; (iv) falling under the industries subject to the overall arrangement and planning of the State; and (v) falling under other items stipulated as restricted by the State laws and regulations. According to Article 7 of the same regulation, foreign investments were prohibited in the following circumstances: (i) jeopardizing national security or social and public interest; (ii) polluting environment, destroying natural resources or causing harm to public health; (iii) occupying large amounts of farmland and against the protection and exploitation of land resources, harming the security and effectiveness of military appliances; (iv) manufacturing products with peculiar craft or technology which China owns; and (v) other projects stipulated as prohibited by the State laws and regulations.

2.3

Certain Areas Not Open to Foreign Investment

While certain areas were announced to be opened to foreign investment in specific sectors or industries, the other areas were left closed to the entry of foreign investment as far as the specific sectors or industries were concerned. A typical example was the Provisional Measures on the Establishment of Chinese-Foreign JointVenture Trading Companies on a Pilot Basis (1996). Article 16 of the regulation stated that “for the purpose of this administrative regulation, Shanghai Pudong New Development Area and Shenzhen SEZ are the places where the Chinese-foreign joint venture trading companies could be established on a pilot basis”. The regulation

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above was replaced by Provisional Measures on the Establishment of ChineseForeign Joint-Venture Trading Companies in 2003, when more sectors and industries were made open to foreign investment nationwide.

2.4

Ownership and Control

There were many different kinds of ownership-and-control restrictions, including restrictions on foreign ownership, restrictions on the nationality of the chairperson of the board of directors. Under the previous FDI framework, ownership and control requirements could be found only in the provisions concerning specific sectors or industries. Article 16 of Provisional Measures on the Establishment of ChineseForeign Joint-Venture Trading Companies (2003) provided that the registered capital contribution to a joint venture trading company from the Chinese party of less than 51% would not be entertained, thus ensuring the control of the joint venture by the Chinese part of the venture. From the discussions above, it is not difficult to perceive the architectural shortcomings of China’s FDI regime before 2016: lack of definitional clarity, failing to generate adequate transparency and not inherently liberalizing. As an incentivebased mechanism, it was made up of complicated fiscal incentives and other incentives. However, it was the emergent trend of the evolution of the FDI regime that was of most importance. The trend was characterized by a number of far-reaching changes in rule-making with respect to foreign investment, e.g. the gradual removal of incentives, move towards national treatment, more transparency and evolving liberalization of China’s FDI regime. However, from time to time, these trends were counterbalanced by the intentions to keep FDI in compliance with the economic development objectives of China, which were always subject to change.

3 Introduction of the Negative List and Amendment of the Three FIE Laws As the three FIE laws were amended in 2016, the amendments entered into force on 1 October 2016, a “negative list plus filing-for-records” approach35 with respect to China’s administration of foreign investment, and FIEs was officially introduced into the nationwide FDI screening legal system.

Both the “negative list plus filing-for-records” approach and the “negative list plus pre-establishment national treatment” approach were referred to as the FDI screening approach during the FDI legal transition period between 2013 to 2019. In the amendments to the three FIE laws in 2016, “fill-for-records” was highlighted while in the new FIL in 2019, “pre-establishment

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These regulatory changes were as a result of the successful trial in the Shanghai pilot free trade zone since 2013. It is worth noticing that before the amendments to the three FIE laws in 2016, on 19 January 2015, MOFCOM published a comprehensive draft Foreign Investment Law (Draft for Comments), which, if adopted, would have radically transformed the handling of foreign-related investment and abolish the comprehensive approval system that had been applicable to foreign investment in the three FIE laws. The “pre-establishment national treatment plus negative list” approach for foreign investment management was proposed in the Draft 2015. Although this draft was not smoothly promoted in the end, it showed that the Chinese government had begun to open the investment market at a legislative level. Consequently, the amendments of the three FIE laws in 2016 were adopted as temporary legal support for the transforming period. Although the amendments in 2016 had provided a legal basis for the “negative list plus filing-for-records” approach,36 the legislation still lagged behind the FDI practice. A unified foreign investment law with its implementing laws and regulations were urgently needed for a comprehensive reform on the FDI regime. Thus, the Foreign Investment Law was adopted in 2019 for such a purpose.

3.1

Pre-establishment National Treatment Plus Negative List Mode and the 18 Pilot Free Trade Zones

For most of the countries adopting the “pre-establishment national treatment plus negative list” approach for foreign investment management, negative lists used to be found as annexes to bilateral investment treaties (BITs) or free trade agreements (FTAs). The lists were provided as exceptions to the national treatment and mostfavoured-nation treatment. The United States and Canada are at the forefront of the pre-establishment national treatment obligation. In the 1980s, the United States introduced pre-establishment national treatment into bilateral investment agreements. The European Union (EU) became open to extending national treatment to the pre-establishment phase later in early twenty-first century, as demonstrated by the

national treatment” is highlighted. Substantially, negative list plus pre-establishment national treatment” approach is a fill-for-records-based approach, which means that for industries not included in the negative list, foreign and domestic investors shall enjoy equal access under the law, save for record-filing requirements. Different expressions were quoted in the article to reflect the different major concerns during different periods. 36 Article 15 of EJV (amendment 2016) provided that “Where the establishment of a joint venture does not involve the implementation of Special Administrative Measures for access stipulated by the State, the examination and approval matters stipulated in Articles 3, 13 and 14 of this Law shall be subject to the filling-for-records management. Special administrative measures for access stipulated by the State shall be promulgated or approved by the State Council.”

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EU-Montenegro Stabilization and Association Agreement (2007), which provides for the establishment of companies pursuant to the national treatment standard.37 In the 2012 US Model Bilateral Investment Treaty, pre-establishment national treatment was provided in Article 3 while paragraph 2 of Article 14 made it clear that negative list worked as exceptions to the national treatment and most favoured nations.38 Such system design means that every investment treaty or free trade agreement concluded by the United States can be with two exclusive negative lists from each contractual party. Negative lists attached to different agreements will not influence the validity of each other. It can be seen that the upcoming Chinese practice on pre-establishment national treatment plus negative list mode will be different from the most common practice mentioned above since the Chinese government is trying to promote a universal negative list that will be applicable nationwide. In fact, such practice has already been put into pilot implementation since the establishment of the Shanghai free trade zone in 2013. Since establishing the first China free trade zone in Shanghai in 2013, Chinese authorities have moved swiftly and established a further 17 zones. All of the 18 free trade zones are seen as testing grounds for economic reforms in the country.39 China introduced a negative list effective nationwide in 2017.40 From then on, the NDRC and MOFCOM released two different negative lists for FDI every year; one was applicable nationwide, and the other one was for all the free trade zones. The later negative list used to be briefer than the former. The most recent negative lists were released in 2019. On 30 June 2019, the NDRC and MOFCOM jointly issued two negative lists and one encouraged

37 See Article 53 of Council and Commission Decision of 29 March 2010 on the conclusion of the Stabilisation and Association Agreement between the European Communities and their Member States, of the one part, and the Republic of Montenegro, of the other part, OJ L 108, 29.4.2010, pp. 1–354. 38 Paragraph 1 of Article 3: “Each Party shall accord to investors of the other Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.” Paragraph 2 of Article 14: “Articles 3 [National Treatment], 4 [Most-Favored-Nation Treatment], 8 [Performance Requirements], and 9 [Senior Management and Boards of Directors] do not apply to any measure that a Party adopts or maintains with respect to sectors, subsectors, or activities, as set out in its Schedule to Annex II.” See Office of the United States Trade Representative (2012), 2012 U.S. Model Bilateral Investment Treaty, available at https://ustr.gov/sites/default/files/BIT%20text%20for%20ACIEP %20Meeting.pdf. 39 The 18 FTZs are Shanghai, Guangdong, Tianjin, Fujian, Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan, Shaanxi, Hainan, Shandong, Jiangsu, Hebei, Yunnan, Guangxi and Heilongjiang. 40 In fact, there had been lists for prohibited or restricted items on access to foreign investment since 2011. However, the lists before 2017 did not work with a negative list plus filling-for-records mechanism.

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catalogue to replace their respective 2018 and 2017 versions, all three of which have taken effect since 30 July 2019.41 Compared with the 2018 version, the number of items on the 2019 foreign investment negative lists were reduced from 48 to 40 in the national list and 45 to 37 in the list for the free trade zones. No new item has been added. Specifically, the 2019 foreign investment national negative list further opens up the service, agriculture, mining and manufacturing sectors. New opening-up measures allow majority foreign ownership or wholly owned foreign enterprises in sub-sectors, such as the exploration and development of oil and natural gas, production and supply of heat and gas, value-added telecommunications, shipping business, manufacturing of Xuan paper and ink ingots, exploitation of wildlife resources and operation of cinemas.42 Although there was no official document being released alongside the new negative list to interpret the legislative purpose of the changes compared to the previous negative list, it is reasonable to infer that such changes could be a result of the marketization of China’s economy. Following the China-US trade war, which was triggered in 2018, China has accelerated the process of the market economy reform. Consequently, the restrictions on market access have been largely lifted. Because of such reflection on FDI laws, the negative lists were essentially shortened. As over the last several years, both the national list and FTZ list have been greatly shortened—the number of items in the national list fell from 180 in 201143 to 40 in 2019, and items on the FTZ list fell from 190 in 2013 to 37 in 2019. Currently, as the national treatment provisions in most of the BITs and investment chapters of FTAs that were concluded by China make reference to the domestic law,44 the future negative lists can be applicable to all the trading partners of China if there is no more preferential treatment available in the BIT.45

41

The three lists refer to Special Administrative Measures on Access of Foreign Investment (2019 edition), Free Trade Zone Special Administrative Measures on Access of Foreign Investment (2019 edition) and Catalogue of Encouraged Industries for Foreign Investment (2019 edition). 42 See MOFCOM (2019) Special Administrative Measures on Access of Foreign Investment (2019 edition), available at http://images.mofcom.gov.cn/wzs/201906/20190629212130154.pdf. 43 See Footnote 38. 44 Specifically, there used to be provisions providing that “national treatment shall be applied without being conflict with the domestic law”. Expressions varied from treaty to treaty. However, some treaties were concluded without national treatment provisions. 45 Based on Article 4 of the new FIL adopted in 2019, “if more preferential treatment concerning access is offered to a foreign investor under any international treaty or agreement that the People’s Republic of China concludes or joins in, relevant provisions in such treaty or agreement may prevail.” Relevant issues will be discussed further in the chapter.

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FDI Screening-Related Issues in the 2019 Foreign Investment Law46

As the basic law for foreign investment in China, the new FIL focuses on the promotion, protection and management of foreign investment. Aiming at establishing the basic legal principles for foreign investment administration, there are only 39 articles in the main body of the law. Some specific implementation issues will rely on the subsequent implementation rules and relevant legislative interpretative documents. For the definition of foreign investment, as provided in Article 2 of the law, both direct and indirect investments made by a foreign natural person, enterprise or other organizations are included. The above-mentioned provision provided four circumstances47 as examples of foreign investment activities. For the purpose of the law, a foreign-funded enterprise refers to “an enterprise that is incorporated under the Chinese laws within the territory of China and is wholly or partly invested by a foreign investor”. For the FDI screening mechanism established by the new FIL, the most relevant provisions can be found in three chapters: Article 4 and Article 7 in Chapter I General Provisions, Articles 28 to Article 35 in Chapter IV Investment Management and Articles 36 to 39 in Chapter V Legal Liability. Among them, Article 4 introduces a pre-establishment national treatment plus negative list mode and discusses the relationship between such treatment and the potential for more preferential treatment in international agreements, Article 7 provides information on the relevant authorities for foreign investment in different hierarchies of the current administrative system, Chapter IV gives more detail on how the investment managing mechanism works under the new Foreign Investment Law and Chapter V ensures the enforcement of relevant systems.48

46 The legislative background of foreign investment law has been described earlier in the chapter, which will not be repeated here. See the preamble of part 3. 47 The four circumstances are provided as follows: 1. A foreign investor establishes a foreign-funded enterprise within the territory of China, independently or jointly with any other investor; 2. A foreign investor acquires shares, equities, property shares or any other similar rights and interests of an enterprise within the territory of China; 3. A foreign investor makes investment to initiate a new project within the territory of China, independently or jointly with any other investor; and 4. A foreign investor makes investment in any other way stipulated by laws, administrative regulations or provisions of the State Council. 48 The Foreign Investment Law quoted in the chapter is from the official release, available at http:// www.fdi.gov.cn/1800000121_39_4872_0_7.html. Relevant articles are provided in Annex 1 of the chapter.

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Article 4 of the Foreign Investment Law

The first three paragraphs of this article focus on the pre-establishment national treatment plus negative list mode, while the last paragraph focuses on the relationship between such mode and the relevant treatments in the applicable international investment agreements. As the specific mechanism of the pre-establishment national treatment plus negative list mode is further interpreted in Chapter IV of the law, relevant issues will be discussed later. Based on the last paragraph of Article 4, the relevant provisions with more preferential treatment in certain international agreements may be directly applicable in the domestic judicial system of China with the entry into force of the Foreign Investment Law. Such regime can be retrieved from both legislation and judicial precedents in the current legal system of China. Different from the situation of the domestic application of the WTO agreements,49 some provisions in China-participated international agreements regarding civil and commercial issues can be applied in a domestic court or arbitration institution directly without transformation.50 Apart from the earlier mentioned Article 142 of the General Principles of the Civil Law of the People’s Republic of China, similar provision is provided in Article 260 of the Civil Procedure Law of PRC (2017). In addition, in some judicial interpretations published by the supreme court of China,51 it has been clarified that some provisions in international agreements could be applied as direct legal basis in judgments from Chinese national courts. Notice on Several Issues Needing Attention in Trial and Execution of Foreign-Related Civil and Commercial Cases Published in 200152 was such an example. In practice, judicial precedents concerning the direct application of international treaties in relevant civil and commercial cases during the court procedures are common in China.53 49 WTO agreements could not be applied directly in the domestic judicial system of China. Instead, the need to be transferred into domestic laws for domestic applications. 50 In China, WTO agreements shall not be directly applied. But domestic laws shall be amended if they are regarded contradictory with the relevant WTO agreements. In other words, WTO agreements have to be transformed into a corresponding domestic law. 51 In Chinese legal system, judicial interpretations published by the Supreme People’s Court are as binding as national laws. 52 Details of the Notice are available at http://www.law-lib.com/law/law_view1.asp?id¼15064. 53 For example, in Abdul Waheed v. China Eastern Airlines Corporation Limited, A Dispute over a Contract for the Carriage of Passengers by Air, Article 19, Article 20, and Article 24, Paragraph 1 of the Convention for the Unification of Certain Rules Relating to International Carriage by Air signed at Warsaw in 1929, amended at The Hague in 1955 and Article VII of the Convention, Supplementary to the Warsaw Convention, for the Unification of Certain Rules Relating to International Carriage by Air Performed by a Person Other Than the Contracting Carrier were applied as legal rules by the court based on Article 142 of General Provisions of the Civil Code of the People’s Republic of China (2009). Seehh阿卜杜勒•瓦希德诉中国东方航空股份有限公司航空旅客运输

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Article 7 of the Foreign Investment Law

Under the current administrative system, “the competent departments for commerce and investment under the State Council” provided in the first paragraph of Article 7 refer to the NDRC and MOFCOM, which are the central ministries for the FDI administration. Below the central ministries, the relevant department under the local people’s government at or above county level are the local authorities for the FDI administration. As part of the general provisions under a framework law, Article 7 does not clarify “the relevant department under the local people’s government at or above the county level”. However, it can be an efficient reference for the further implementing regulations to be enacted.

3.2.3

Chapter IV Investment Management

In Chapter IV, four basic issues regarding investment management are outlined as legislative guidance for future implementation.

3.2.3.1

Pre-establishment National Treatment Plus Negative List Mode

The pre-establishment national treatment plus negative list mode shall be understood as Article 28 per se. Due to the third paragraph, i.e. “fields not included in the negative list shall be managed under the principle that domestic investment and foreign investment shall be treated uniformly”, apart from the negative lists directed at foreign investors, general negative lists, which are applicable to all enterprises, including domestic enterprises, need to be kept track of. To conclude, currently there are two negative lists directly relevant to foreign investors, i.e. the Special Administrative Measures (Negative List) for the Access of Foreign Investment (2019), which are applicable nationwide, and the Special Administrative Measures (Negative List) for the Access of Foreign Investment in Free Trade Zones (2019), which are applicable in all the 18 free trade zones alone. Apart from the negative lists, there is also an “encouraged list” for foreign investment, i.e. Foreign Capital Is Encouraged to Enter the Sectors Listed in the Catalogue of Encouraged Industries for Foreign Investment (2019 Edition). Foreign investment on the list may be able to enjoy preferential treatment from respective local governments, such as tax incentives, streamlined approval procedures and discounted land prices. 合同纠纷案ii(Abdul Waheed v. China Eastern Airlines Corporation Limited, A Dispute over a Contract for the Carriage of Passengers by Air), CHINA GUIDING CASES PROJECT, English Guiding Case (EGC51), Nov. 15, 2015 Edition, available at http://cgc.law.stanford.edu/guidingcases/guiding-case-51.

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Relevant Laws and Regulations Involved in the New FDI Framework

As noted earlier, the new FIL aims at establishing a legal framework for the FDI in the new era. Thus, provisions regarding the implementation are included in other Chinese laws and regulations. Article 29 to Article 33 of the new FIL are functional as references for relevant legislation and legal retrievals. Generally, issues regarding verification and record filing of a foreign investment, licensing formalities, the organizational form, institutional framework and standard of conduct of a foreign-funded enterprise, tax, accounting, foreign exchange, mergers and acquisitions are involved in the above-mentioned articles. As redirected by the relevant articles, the following legal documents need to be highlighted in the current Chinese legal system (updated to 17 September 2019). Article in the Foreign Investment Law Article 29

Article 30 Article 31 Article 31 Article 33

Relevant legal document Order of the Ministry of Commerce [2018] No. 6 Decision on Revising the Interim Administrative Measures for the Record-Filing of the Incorporation and Change of Foreign-Invested Enterprises54 The Administrative Licensing Law of the People’s Republic of China55 The Company Law of the People’s Republic of China (2018 Revision)56 Partnership Enterprise Law of the People’s Republic of China (Amended in 2006)57 Anti-Monopoly Law of the People’s Republic of China58

It is not difficult to see that Order of the Ministry of Commerce [2018] No. 6 Decision on Revising the Interim Administrative Measures for the RecordFiling of the Incorporation and Change of Foreign-Invested Enterprises in the form above is functional as an implementing measure for the record-filling system in the new FIL era in China. According to the Order, it is to be applied when “the incorporation and change of a foreign-invested enterprise do not involve the implementation of special access

54 Available at http://english.mofcom.gov.cn/article/policyrelease/aaa/201807/20180702765887. shtml. 55 Available at https://www.cecc.gov/resources/legal-provisions/administrative-licensing-law-chi nese-and-english-text. 56 Official Chinese version available at http://www.fdi.gov.cn/1800000121_23_74633_0_7.html. No official English version available by 17 September 2019, however, an unofficial translation can be found at http://www.ghiplegal.com/laws/company.html. 57 Available at http://www.fdi.gov.cn/1800000121_39_4109_0_7.html. 58 Available at http://english.mofcom.gov.cn/article/policyrelease/Businessregulations/201303/ 20130300045909.shtml.

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administrative measures prescribed by the state” (Article 2). The record-filing institutions are MOFCOM and “the competent commerce departments of all provinces, autonomous regions and municipalities directly under the Central Government, cities specifically designated in the state plan and Xinjiang Production and Construction Corps, cities at the deputy provincial level, the relevant institutions of pilot free trade zones and state-level economic and technological development zones”, while “record-filing institutions shall carry out the record-filing work through the foreign investment comprehensive administration information system” (Article 3). Meanwhile, there are time limits for both foreign investors and the record-filing institutions. For the designated representatives or entrusted agents of foreigninvested enterprises to submit the record-filling procedure, the relevant documents are required to be filled out “within 30 days upon the occurrence of the change via the comprehensive administration system, and handle the recording-filing procedures” (Article 6). After the submission, “the record-filing institutions shall complete the record-filing within three working days; otherwise, record-filing institutions shall inform, within three working days, the foreign-invested enterprises or their investors online to handle them in accordance with the relevant provisions and inform the relevant departments to handle them in accordance with the law. If recording-filing institutions find out any incompleteness or inaccuracy in the information filled in by foreign-invested enterprises or their investors in the form, or further explanation is necessary in connection with their business scope, they shall inform them online at one time to supplement the relevant information online within 15 working days. The time for supplementing the relevant information shall not be included in the recordfiling time limit set by record-filing institutions. If foreign-invested enterprises or their investors cannot supplement the relevant information within 15 working days, record-filing institutions shall inform foreign-invested enterprises or their investors online that they have failed to complete the record-filing. Foreign-invested enterprises and their investors shall make a separate application with additional recordfiling information in connection with the same incorporation or change matters within five working days” (Article 11).

3.2.3.3

Foreign Investment Information Reporting System

Although establishing a foreign investment information reporting system has been put on the agenda by the new FIL, it is still at an early stage in China. On 12 March 2019, MOFCOM, the Ministry of Finance (MOF), the State Administration of Taxation (SAT), the National Bureau of Statistics (NBS) and the State Administration of Foreign Exchange (SAFE) jointly released the Notice on

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Conducting the Joint Reporting of Annual Investments and Operations Information of Foreign-Invested Enterprises (FIEs) in 2019.59 Based on the notice, foreign investors are required to submit annual operating information via the Foreign-Invested Enterprise Annual Investment Operation Information Joint Report System,60 which is separate from the enterprise filing system.61

3.2.3.4

National Security Review System

The national security review system has started operations before the adoption of the new FIL, which is re-emphasized in Article 35 of the law. The second paragraph of Article 35 has made it clear that “the decision made upon the security review in accordance with the law shall be final”, which means that there will be no relevant appeal procedure regarding the issue. According to Article 31 of the Anti-Monopoly Law of the People’s Republic of China, “where a foreign investor participates in the concentration of undertakings by merging and acquiring a domestic enterprise or by any other means, which involves national security, the matter shall be subject to review on national security as is required by the relevant State regulations, in addition to the review on the concentration of undertakings in accordance with the provisions of this Law”. In 2011, in the Circular of the General Office of the State Council on the Establishment of Security Review System Regarding Merger and Acquisition of Domestic Enterprises by Foreign Investors,62 the scope of security review of mergers and acquisitions was provided as “the merger and acquisition by foreign investors of domestic military-industrial and military related enterprises, neighboring enterprises of key and sensitive military facilities and other units concerning national security; and such domestic enterprisers as major farm products, energy and resources, infrastructures, transportation services, key technologies and major equipment manufacturing involving in the national security and whose actual control right may be gained by foreign investors”. Apart from the scope of security review, the Circular also provided provisions on the content of security review of merger and acquisition, the working mechanism of security review of merger and acquisition, the procedures for security review of mergers and acquisitions, as well as other provisions. The timeline for the national security procedures can be found in the fourth part of the Circular. The Ministerial Panel was introduced as the main authority for the security review.

59

The document is available in Chinese at http://www.mofcom.gov.cn/article/b/f/201903/ 20190302844518.shtml. 60 The System is accessible at http://www.lhnb.gov.cn/. 61 The information collected is to be published at http://lhnbgs.mofcom.gov.cn/. 62 The Circular is available at http://english.mofcom.gov.cn/article/policyrelease/aaa/201103/ 20110307430493.shtml.

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Based on the Circular published by the General Office of the State Council, MOFCOM further improved and clarified some relevant implementing issues and published Announcement No. 53 of 2011 of the Ministry of Commerce of the People’s Republic of China Concerning the Provisions of the Ministry of Commerce for the Implementation of the Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors63 in the same year. After the establishment of the pilot free trade zones, trial procedures for a national security review of foreign investment in all free trade zones in Shanghai, Tianjin and the provinces of Guangdong and Fujian64 was published by the State Council’s General Office on 20 April 2015. In the relevant notice, the scope of national security review was stipulated as “investment by foreigners in military-related fields, or in key agricultural products, energy, infrastructure, transportation, culture, information technology and equipment manufacturing that concern national security”. The procedure introduced in Circular of the General Office of the State Council on the Establishment of Security Review System Regarding Merger and Acquisition of Domestic Enterprises by Foreign Investors has been quoted as the effective procedure for the national security review in the free trade zones. Apart from the above-mentioned legal documents, no new law or regulation on nation security review was released by 17 September 2019. However, as the national security review system is one of the most significant concerns in the new FIL, it is reasonable to expect more renewed implementing regulations to be released in due course.

3.2.4

Chapter V Legal Liability

This chapter makes the provisions of the foreign investment law enforceable, which also means that the review of the filing system is a compulsory, rather than an optional, measure. As the articles in this chapter have clearly stated the legal consequences for the breach of different provisions, no further analyses will be launched here.

63

The Announcement is available at http://english.mofcom.gov.cn/article/policyrelease/aaa/ 201112/20111207869355.shtml. 64 The notice for the trail measures is available in Chinese at http://www.gov.cn/zhengce/content/ 2015-04/20/content_9629.htm.

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4 Concluding Remarks on China’s FDI Screening Mechanism Vis-à-Vis the EU’s From 1978 to the present, the FDI legal system in China has undergone tremendous changes. With the enactment of the new FIL and the improvement of the relevant implementing rules, China’s FDI screening system will gradually enter into a new era. Almost synchronized with China, the FDI legal system in the EU is experiencing a new round of reform. The EU FDI screening regulation, officially titled 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 Union65 (hereafter the EU Screening Regulation), is a critical component of such reform. Unlike the situation in China, the only two grounds provided by the EU Screening Regulation are security and public order. In China, under the new FIL, apart from foreign investments that are considered to influence national security, foreign investments falling in the restricted areas on negative lists66 may be subject to a case-by-case screening mechanism, while foreign investments outside the negative lists are subject to a fill-for-records mechanism. When it comes to the national security review systems, China and the EU provide the objects of such review from different dimensions: the objects provided in Chinese administrative regulations are as general areas, while the EU Screening Regulation specifies “foreign direct investments likely to affect projects or programmes of Union interest” in a list of projects or programmes. Although the national security review system has been established in China since 2011, it is difficult to analyze the system via a case study at the moment.67

65

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 79I, 21.3.2019, pp. 1–14. 66 “Negative lists” here refer to the four negative lists discussed in 3.2.3, i.e., The Special Administrative Measures on Access to Foreign Investment (2019 edition); The Free Trade Zone Special Administrative Measures on Access to Foreign Investment (2019 edition); The Negative List for Market Access (2018 edition); and The Guidance Catalogue of Industrial Structure Adjustment (2011 edition). 67 Yonghui Supermarket is in the process of raising its stake in Wuhan Zhongbai Group—a local state-invested retailer—to 40%. On 21 August 2019, the National Development and Reform Commission of China asked Yonghui to file for a foreign investment security review and to submit supplementary documents. This is the first case of mergers and acquisitions involving national security review reported publicly by the National Development and Reform Commission (NDRC) after taking over the responsibility of foreign investment security review from the MOFCOM in April 2019. However, under the current “pre-establishment national treatment plus negative list” mode, some administrative actions against foreign investors may be challenged in accordance with China’s administrative law. Although there was no official report of the security review case in the past, the publication of the Yonghui Supermarket case is a good starting point for a more transparent FDI legal system.

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It is obvious that there are differences in investment markets between China and the EU. This is also one of the most important reasons why different regimes regarding FDI screening were deployed in the two markets. Indeed, the FDI screening systems in the EU and China follow different routines throughout history; however, it is still possible that China and the EU could learn from each other’s regimes in the new era. For instance, the management of filing will act as an important segment for EU FDI screening, while the administrative regulation on the filing measures in China, i.e. Interim Administrative Measures for the RecordFiling of the Incorporation and Change of Foreign-Invested Enterprises, have been revised three times since it was initially issued in October 2016. Thus, relevant procedural provisions in the regulation may be a useful reference for the EU or its members when establishing a filing system for the FDI screening on the grounds of security or public order. The 20th negotiation round on the EU-China investment agreement took place in Brussels from 25 to 27 February 2019. At the 21st EU-China Summit on 9 April 2019, the EU and China committed themselves to achieving in the course of 2019 the decisive progress required for the conclusion of an ambitious agreement in 2020.68 As FDI legal reforms are taking place in both EU and China, the commitment of the EU-China investment agreement is becoming more promising. Back in 2013, the EU listed an “increase [of] the transparency and predictability of controls or screening of European investment into China that are based on unclear or excessively wide definitions of national interest beyond narrow national security concerns” as one of the operational objectives on the EU-China investment agreement negotiations.69 How the above-mentioned operational objective could be achieved has been gradually unveiled following the publication of the national security review system in the EU regulation. With the ongoing reform of the FDI regime in both EU and China, a solution on the issue has to be worked out to promote the negotiation of the BIT between EU and China.

Annex 1 Relevant Articles for Part 3 Chapter I General Provisions Article 4 The State shall implement the management systems of pre-establishment national treatment and negative list for foreign investment. For the purpose of the preceding paragraph, pre-establishment national treatment refers to the treatment given to foreign investors and their investments during the investment access stage, which is not lower than that given to their domestic counterparts; negative list refers to special administrative measures for the access of (continued) 68

See EU-China Summit Joint Statement, Brussels, 9 April 2019, available at https://www. consilium.europa.eu/media/39020/euchina-joint-statement-9april2019.pdf. 69 See European Commission (23 May 2013) Commission Staff Working Document Impact Assessment Report on the EU-China Investment Relations, SWD(2013) 185 final, page 20.

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Chapter I General Provisions foreign investment in specific fields as stipulated by the State. The State shall give national treatment to foreign investment beyond the negative list. The negative list will be issued by or upon approval by the State Council. If more preferential treatment concerning access is offered to a foreign investor under any international treaty or agreement that the People’s Republic of China concludes or joins in, relevant provisions in such treaty or agreement may prevail. Article 7 The competent departments for commerce and investment under the State Council shall, pursuant to the division of duties, promote, protect and manage foreign investment; other relevant departments under the State Council shall take charge of the relevant work in the promotion, protection and management of foreign investment within the scope of their respective duties. The relevant department under the local people’s government at or above the county level shall carry out the work relating to promotion, protection and management of foreign investment in accordance with laws and regulations and in line with the division of duties determined by the people’s government at the same level. Chapter IV Investment Management Article Foreign investors shall not invest in any field forbidden by the negative list for access 28 of foreign investment (hereinafter referred to as the “negative list”). For any field restricted by the negative list, foreign investors shall conform to the investment conditions provided in the negative list. Fields not included in the negative list shall be managed under the principle that domestic investment and foreign investment shall be treated uniformly. Article During the process of foreign investment, where verification and record-filing of a 29 foreign investment project are required, relevant provisions of the State shall be followed. Article If a foreign investor invests in an industry or field where license is required in 30 accordance with the law, relevant licensing formalities shall be handled as stipulated by law. Unless otherwise provided by laws or administrative regulations, relevant competent department shall review the application for license filed by the foreign investor based on the same conditions and procedures as those for domestic investment. Article The organization form, institutional framework and standard of conduct of a foreign31 funded enterprise shall be subject to the provisions of the Company Law of the People’s Republic of China, the Partnership Law of the People’s Republic of China, and other laws. Article In carrying out production and operation activities, foreign-funded enterprises shall 32 conform to relevant provisions on labor protection and social insurance stipulated in laws and administrative regulations, handle tax, accounting, foreign exchange and other matters in accordance with laws, administrative regulations and relevant provisions of the State, and shall be subject to the supervision and inspection conducted by relevant competent departments in accordance with the law. Article Foreign investors who acquire a company within the territory of China through 33 mergers and acquisitions or participate in the concentration of undertakings by other means shall be subject to the examination for concentration of undertakings as stipulated by the Anti-Monopoly Law of the People’s Republic of China. Article The State shall establish a foreign investment information reporting system. Foreign 34 investors or foreign-funded enterprises shall submit the investment information to competent departments for commerce through the enterprise registration system and the enterprise credit information publicity system. The contents and scope of foreign investment information to be reported shall be (continued)

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Chapter I General Provisions determined under the principle of necessity; investment information that is available through interdepartmental information sharing will not be required to be submitted again. Article The State shall establish a safety review system for foreign investment, under which 35 the safety review shall be conducted for any foreign investment affecting or having the possibility to affect national security. The decision made upon the safety review in accordance with the law shall be final. Chapter V Legal Liability Article Where a foreign investor invests in a field forbidden by the negative list, relevant 36 competent department shall order the said investor to stop its investment activity, dispose of the shares and assets thereof or take any other necessary measures within a prescribed time limit, and restore the state to what it was prior to the investment; if there is any illegal gain, such gain shall be confiscated. Where an investment activity of a foreign investor breaches any special administrative measures for restrictive access provided in the negative list, relevant competent department shall order the investor to make corrections within a prescribed time limit, and take necessary measures to meet the requirements of the aforesaid measures; if the foreign investor fails to make corrections within the time limit, measures specified in the preceding paragraph shall be taken. Where an investment activity of a foreign investor violates any provision in the negative list, the said investor shall bear corresponding legal liability in accordance the law, in addition to being subject to measures specified in the preceding two paragraphs. Article Where any foreign investor or foreign-funded enterprise violates the provisions herein 37 and fails to report their investment information as required by the foreign investment information reporting system, competent department for commerce shall order it to make corrections within a prescribed time limit; if such corrections are not made in time, a penalty of not less than CNY100,000 yet not more than CNY500,000 shall be imposed. Article Foreign investors and foreign-funded enterprises violating any law or regulation 38 shall be subject to investigation and measures by relevant departments in accordance with the law and shall be included in the credit information system pursuant to relevant provisions of the State. Article Where a staff member of an administrative department abuses his/her functions and 39 powers, neglects his/her duties or engages in malpractice for personal gain during the work relating to promotion, protection and management of foreign investment, or divulge or illegally provide to others any trade secret he/she is aware of during the performance of duties, a penalty will be imposed upon him/her in accordance with the law; if a crime is constituted, he/she will be held criminally liable.

References hh阿卜杜勒•瓦希德诉中国东方航空股份有限公司航空旅客运输合同纠纷案ii(Abdul Waheed v. China Eastern Airlines Corporation Limited, A Dispute over a Contract for the Carriage of Passengers by Air), CHINA GUIDING CASES PROJECT, English Guiding Case (EGC51), Nov. 15, 2015 Edition, available at http://cgc.law.stanford.edu/guiding-cases/guiding-case-51

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Circular of the General Office of the State Council on the Establishment of Security Review System Regarding Merger and Acquisition of Domestic Enterprises by Foreign Investors, available at: http://english.mofcom.gov.cn/article/policyrelease/aaa/201103/20110307430493.shtml Council and Commission Decision on the conclusion of the Stabilization and Association Agreement between the European Communities and their Member States, of the one part, and the Republic of Montenegro, of the other part, March 29 2010 Council of the European Union (9 April 2019) EU-China Summit Joint Statement, Brussels European Commission (23 May 2013) Commission Staff Working Document Impact Assessment Report on the EU-CHINA Investment Relations, SWD(2013) 185 final, Brussels Foreign Investment Law of People’s Republic of China, available at: http://www.fdi.gov.cn/ 1800000121_39_4872_0_7.html Guo Wu Yuan Gong Bao (Gazette of the State Council) (1979a) Chinese-foreign Equity Joint Venture Law of the People’s Republic of China. Beijing Guo Wu Yuan Gong Bao (Gazette of the State Council) (1979b) Regulations for the Implementation of Chinese-foreign Equity Joint Venture Law of the People’s Republic of China. Beijing Guo Wu Yuan Gong Bao (Gazette of the State Council) (1982) Constitution of the People’s Republic of China. Beijing Guo Wu Yuan Gong Bao (Gazette of the State Council) (1986) General Principles of Civil Law. Beijing Guo Wu Yuan Gong Bao (Gazette of the State Council) (1986) Wholly Foreign-Owned Enterprise Law. Beijing Meizheng Y (1994) A comparative study of foreign investment law. Wuhan University Press, Wuhan No. 53 of 2011 of the Ministry of Commerce of the People’s Republic of China Concerning the Provisions of the Ministry of Commerce for the Implementation of the Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors, available at: http:// www.gov.cn/zhengce/content/2015-04/20/content_9629.htm Notice on Conducting the Joint Reporting of Annual Investments and Operations Information of Foreign-Invested Enterprises (FIEs) in 2019, available at: http://www.mofcom.gov.cn/article/b/ f/201903/20190302844518.shtml Notice on Several Issues Needing Attention in Trial and Execution of Foreign-related Civil and Commercial Cases published in 2001., available at: http://www.law-lib.com/law/law_view1. asp?id¼15064 Sornarajah M (1994) The international law on foreign investment. Cambridge University Press, Cambridge Special Administrative Measures on Access of Foreign Investment (2019 edition), available at http://images.mofcom.gov.cn/wzs/201906/20190629212130154.pdf United Nations Conference on Trade and Development, World Investment Reports 1993-1995, New York and Geneva 2012 U.S. Model Bilateral Investment Treaty, available at: https://ustr.gov/sites/default/files/BIT% 20text%20for%20ACIEP%20Meeting.pdf

Qingjiang Kong has been a full professor of law since November 2002. He is currently the dean of the School of International Law, China University of Political Science and Law. He is the editor-inchief of The Chinese Journal of Global Governance (Leiden and Boston: Brill). Specializing in international economic law, the WTO law and China issues, he has published more than 40 articles with international journals such as Journal of International Economic Law, Journal of World Trade and International and Comparative Law Quarterly. His recent book is Interpretation of the Foreign Investment Law of the People’s Republic of China (The Law Press, May 2019). He was heavily involved in the consultation process regarding the formulation of the Foreign Investment Law of the People’s Republic of China. He teaches international economic law, international trade law,

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international law on intellectual property rights and related subjects, etc. (email: qkong2000@cupl. edu.cn). Cherry Kaiyuan Chen is currently a PhD candidate in Swansea University, sponsored by Chinese Scholarship Council (CSC) and Hillary Rodham Clinton School of Law. She got her degrees of bachelor and master in law from China University of Political Science and Law and her LL.M from Université de Montréal. She participated in the research projects of Recent Developments in Out-of-Court-Mediation in Europe and China – Implications for Trans-Boundary EU-Chinese Business Activities in 2015. Cherry was invited to present her papers at Dundee International Energy Forum in 2018 and 2019. Her publications include Some Implications of the WTO Panel Report on China – Certain Measures Affecting Electronic Payment Service, Journal of WTO and China, 2013(6), University of International Business and Economics Press; Analyses on Chinese Notion to Cope with Territorial Disputes – Focusing on the China-Tajikistan Case, Journal of Beijing Institute of Technology (Social Science Edition), 2012(S2), Beijing Institute of Technology Press; Challenges and Solutions of the VIE in the Context of Chinese Foreign Investment Law Reform, 2016, Collection of the Excellent Papers of the Fourth Legal Papers Competition for Chinese Postgraduates; Legislation Suggestion to Amend Article 4 of the Draft Foreign Investment Law of the People‘s Republic of China (2018) (collaborated with Professor Qingjiang Kong), Foreign Investment in China-Journal of Ministry of Commerce of PRC, 2019(3); Interpretation of Foreign Investment Law of PRC (collaborated with Professor Qingjiang Kong, etc.), Law Press (China), May 2019.

Part V

EU Constitutional Preconditions and Limits

Exploring the Possibilities and Limits of the EU and Member States to Set Up an Investment Screening Mechanism in the Light of Union Law Stefan Korte

Contents 1 Terminology and Risk Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Relevant Investments of Capital for Screening Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Risks Connected to Capital Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Screening Mechanisms in National (Member State) Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Applicability of Article 345 TFEU and Article 346 Para 1 Lit. b) TFEU . . . . . . . . . . . 2.2 Direct Investments Out of Third States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Direct Investments Out of Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Portfolio Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Screening Mechanisms in Union Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Direct Investments Out of Third States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Direct Investments Out of Other Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Portfolio Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Result . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract An examination of the respective roles of Member States and the EU in establishing investment screening mechanisms must consider several aspects. On the one hand, investments are an important source of growth, jobs and innovations. On the other, investments can be detrimental to the security of supply in relation to services essential for Member States – for example, when a state-owned company, which is located in a third state, gains control over the only electricity station in a region through investment. This could possibly lead to Member States getting exposed to the risk of being blackmailed or being entirely dependent on other states or foreign companies. To mitigate such risks, the German Federal Ministry for Economic Affairs and Energy lowered the threshold for the national screening mechanism to 10% for investments in certain companies that own critical infrastructure. Simultaneously, the European Union has adopted Regulation 2019/452 establishing a framework for screening of foreign direct investments (hereafter the

S. Korte (*) Technische Universität Chemnitz, Chemnitz, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 435–466, https://doi.org/10.1007/16495_2020_30, Published online: 11 September 2020

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EU Screening Regulation). These events pose the question of whether the Union itself or the Member States are vested under Union law with the power to adopt investment screening mechanisms, and also which additional legal requirements must be considered in that respect. These questions are answered in three steps. First, an overview of the essential terminology and the intensity of the risks of investments out of third states can cause for the Member States is provided. Second, the competences of the Member States in this area must be examined in light of the fundamental freedoms and the exclusive competence of the Union for the Common Commercial Policy. Third, a closer look will be taken as to the conformity to primary law of the EU Screening Regulation, against the backdrop of the principle of conferral and EU fundamental rights. The analysis will show that Member States are only allowed to adopt rules dealing with direct investments out of third states; the European Union enjoys a wider scope to introduce investment screening mechanisms. However, the conditions provided in the specific provision providing for legislative power may not be disregarded. With this in mind, the EU Screening Regulation is built on uncertain ground, as it allows the Member States to establish individual “commercial policies”, which is contrary to the spirit of Article 207 para 2 TFEU on which this secondary legislation is based.

1 Terminology and Risk Analysis To answer the question of which options the EU and the Member States have in the light of Union law to protect the population from dependencies resulting from investments in strategic supply companies by investors from other states, the terms “movement of capital” and “investment” must be explained (Sect. 1.1). Only from these points of reference is it possible to shed light on the risks of such investments or capital movements, especially in critical infrastructures and/or services of general interest (Sect. 1.2). Knowledge of these risks is important because the design of effective EU and national protection mechanisms in this area depends on them.

1.1

Relevant Investments of Capital for Screening Mechanisms

Each of the currently existing screening mechanisms of the EU and the Member States refers to the investment of capital of some sort. This term is based on Article 63 et seq. TFEU and is used at several places in the Treaty. In principle, the term “investment of capital” covers any transfer of economic value in the form of tangible and financial assets for investment or financing purposes. As a rule, these requirements are fulfilled by transfers of value that are independent of a movement of goods

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or a provision of services,1 and in this respect are unilaterally or (probably better) related to a capital transaction as underlying transaction.2 In terms of freedom of capital movement, it is irrelevant whether an investment originates in another Member State or a third state. This is an expansion of the scope of protection, which is rather unusual for the fundamental freedoms.3 It is based on the idea, or hope, of strengthening the confidence of other states in the Euro as an important global currency.4 Basically, two forms of capital investment are conceivable, depending on how strong its influence on the investment object is. While portfolio investments are only aimed at a short-term capital return, the objective of direct investments is to establish or retain control over a company or at least a certain level of influence. The exact difference between portfolio and direct investment is not always that easy to make, since the distinction is based on vague legal terms that result in uncertainties in borderline cases. To overcome this problem, it often is suggested to use abstract percentage thresholds, for example, 10% or 15% of the company shares.5 However, this is unsuitable, for it neglects the concrete circumstances of each case and offers a one-size-fits-all-solution for a highly complex topic.6 A more appropriate way could be to put a stronger analytical focus on the investors and the companies themselves as well as their individual corporate structures and arrangements.7 If this is appreciated, the design of the national company law, the articles of association or/and the concrete distribution of the company shares could become relevant and make the jurisprudence fairer in particular cases.

1.2

Risks Connected to Capital Investments

The different forms and sources of capital movement play an important role in addressing the risks of dependency resulting from capital investment by foreign companies in another Member State. Primarily, risks exist in economic areas where a Member State is heavily reliant on the goods or services the investment object produces. In this respect, the takeover of most companies does not create such 1

Gramlich in: Pechstein et al. (2017), Art. 63 para. 17. Ress/Ukrow in: Grabitz et al. (2017), Art. 63, para. 131; see also Herrmann (2010a), supp. 1, 195, 207. 3 Sedlaczek/Züger in: Streinz (2018), Art. 63, para. 4 for further information and critical remarks. 4 Ibid.; Judgment of the Court (Grand Chamber) of 18 December 2007, Skatteverket v A., C-101/05 ECLI:EU:C:2007:804, para. 31 et. seqq. 5 See 12th Regulation of the German Federal Ministry for Economic Affairs and Energy to change the Außenwirtschaftsverordnung, 19th of December 2018, BAnz AT 28th of December 2018, part A I. 6 To further grasp the arbitrariness of such percentage quotations, see e.g. Frenz (2011), para. 5040. 7 A sign towards that approach can be found at Judgment of the Court (Fifth Chamber) of September 2018, EV v Finanzamt Lippstadt, C-685/16, ECLI:EU:C2018:743, para. 36 et seq. 2

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risks for the Member State, even if the company may create jobs or tax revenue. Instead, only investments are meant in those companies that, because of their impact on downstream companies or social and territorial cohesion and coherence in a Member State, are relevant to the provision of public services,8 security, or plurality of the media. Thus, it is important to note that not only companies that provide electricity, gas or water9 need to be considered. Media companies need to be mentioned in this context due to the key position they hold when it comes to information, since suggestive, dysfunctional or even wrong reporting can have a direct impact on the formation of public opinion up to the point of elections.10 In addition, the risks of dependencies for Member States that capital investments of foreign companies can cause depend on the source and the form of the investment. Direct investments are more dangerous than portfolio investments, due to the possibility of the investor exerting influence on the company.11 Furthermore, third state investments are more dangerous than investments from other Member States, because there is no coherent legal system built on the principle of mutual trust, like the EU legal order. Article 4 para 3 TEU especially makes clear that EU Treaties do not only bind the Member States towards the EU but also among each other.12 This provision demands mutual consideration and stipulates obligations of mutual support among the Member States. Thus, a Member State must exert influence on stateowned companies and must at least mediate if an investor established on its territory poses a risk to the security of supply in services or the pluralism of the media in another Member State, because Article 14 TFEU and Article 11 para 2 EFRC obliges the Member State to fulfil these obligations.13

2 Screening Mechanisms in National (Member State) Law The different forms and risks of capital investments described above influence the possibilities and boundaries of the Member States which are laid down in the Union law to establish screening mechanisms for foreign investments in their own legal systems. Such boundaries may result out of the fundamental freedoms (Sect. 2.2.1.) and the system of competences in the Treaties (Sect. 2.2.2.), except for cases falling within the scope of Articles 345 f. TFEU (Sect. 2.1).

8 For further details on these specific terms, see Jung in: Callies and Ruffert (2016), Art. 106, para. 36 et seq. 9 Schuelken (2018), pp. 577–578. 10 Slobodenjuk (2019), pp. 202–203. 11 Weller (2008), pp. 857–858. 12 Classen/Nettesheim in: Oppermann et al. (2018), § 4, para. 28. 13 See Korte (2019), pp. 78, 82 for further information.

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Applicability of Article 345 TFEU and Article 346 Para 1 Lit. b) TFEU

It must therefore first be determined whether Article 345 TFEU and Article 346 para 1 lit. b TFEU apply to the situation at hand. If that is the case, questions concerning the fundamental freedoms or the competences would not arise, due to the lack of applicability of Union law.

2.1.1

System of Property Ownership, Article 345 TFEU

Under Article 345 TFEU, the law of the European Union must not prejudice the rules in Member States governing the system of property ownership. However, this provision only deals with the allocation of property, i.e. the decision to privatise or nationalise an industrial sector.14 But Article 345 TFEU does not cover legal acts, e.g. in the form of national laws, that follow a privatisation or are independent of the decision on privatisation or nationalisation. This is precisely the situation, however, in the case of the acquisition of company shares by investors from third countries. Thus, Article 345 TFEU is not applicable in this context.

2.1.2

Interests of National Security, Article 346 Para 1 Lit. b) TFEU

Article 346 para 1 lit. b) TFEU allows Member States to derogate from Union law if they consider this necessary to safeguard their essential security interests in connection with the production of or trade in arms, munitions and war material. However, the national law based on this standard may not affect the conditions of competition for goods which are not specifically produced for military purposes (so-called dualuse products). In its legal effects, Article 346 para 1 lit. b) TFEU does not limit the competences of the European Union and does not function as an absolute reservation of European integration. Rather, this provision gives the Member States the possibility to free themselves from obligations under Union law in rare and specific cases.15 The Member States’ willingness to take account of national protection mechanisms can therefore indeed be a justification for rules on investments from other Member States or third states if the strict conditions of Article 346 (1) (b) TFEU are met.

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See in this volume Eisenhut, The Hidden European Investment Screening Mechanism Already in Place – Existing EU Secondary Legislation on Discriminatory Treatment of Third Country Investments – Defence, Military, Dual Use for further information. 15 Callies and Korte (2011), § 5, para. 247 et seq.; Judgment of the Court (Grand Chamber), 22 October 2013, Staat der Nederlanden v Essent NV and others, joined cases C-105/12, C-106/ 12 and C-107/12, EU:C:2013:677, para. 30 et seq.

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Direct Investments Out of Third States

If the Treaties are in principle applicable to screening mechanisms in the national law, the national rules in this area must conform with the fundamental freedoms and the system of competences in the Treaties.

2.2.1

Violation of the Fundamental Freedoms

Direct investments out of third states are in principle covered by the free movement of capital – the only fundamental freedom that is not only limited to economic processes in the Member States but also protects third-state cases.16 However, direct investment is also covered by the freedom of establishment, since this fundamental freedom covers any autonomous economic activity aimed at lasting integration in another Member State.17 This is because, if the investor wishes to influence the company with an investment, he is aiming for a permanent autonomous activity at the place of business.18 This objective is hindered by national provisions that, in the form of a screening mechanism, entail control of the investment because the associated monitoring process may lead to a loss of influence or at least a loss of time.19 Since, unlike the free movement of capital, the freedom of establishment does not apply to third-state cases, it is necessary to delimit the scope of protection of both fundamental freedoms. The Court of Justice of the European Union (CJEU) acts in these cases on the assumption that there is a primacy of Article 49 TFEU if the national rule only applies to direct investments.20 Thus, Article 63 para 1 TFEU is not applicable in such cases, and investors from third states normally cannot invoke fundamental freedoms because the freedom of establishment does not apply to non-EU investors. This demarcation based on the investment objective is appropriate for two reasons. First, it refers to the objective scope of protection of the conduct covered by the freedoms,21 as personal aspects are a less appropriate way to define the scope of protection of an object-related freedom22 like the freedom of capital movement. Second, a demarcation based on the investment objective reflects the principles that characterise the distinction between the freedom to provide services and the freedom of establishment. This is because in this area it is recognised that temporary 16

Kotzur in: Geiger et al. (2017), Art. 63, TFEU. para. 1. Korte in: Callies and Ruffert (2016), Art. 49, para. 24 et seq. 18 Judgment of the Court (Fourth Chamber), 8 November 2012, European Commission v Hellenic Republic, C-244/11, ECLI:EU:C:2012;694, para. 27 et seq. 19 Similar Behme (2013), pp. 161–162. 20 Judgment of the Court (Fourth Chamber), 8 November 2012, European Commission v Hellenic Republic, C-244/11, ECLI:EU:C:2012;694, para. 19 et seq. 21 See also Callies and Korte (2011), § 3, para. 37 et seq. 22 Hindelang (2014), Art. 63, para. 221 et seq. 17

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economic activity in the target state is subject to Article 56 TFEU, while permanent activity therein falls under Article 49 TFEU. This fundamental freedom is less restrictive than the freedom to provide services, so the pressure of integration for Member States is reduced to a certain extent where the freedom of establishment is applicable. The reason for this is that someone who settles down in another Member State has chosen the law of the target state as a location factor, so he is expected to adapt more to the local situation than in situations covered by the scope of the freedom to provide services.23 However, this distinction between permanent and temporary involvement in the target state now also characterises the relationship between Article 63 TFEU and Article 49 TFEU, because direct investments are made on a permanent basis. Thus, freedom of establishment must apply here, while portfolio investments are as easy to move as services24 so that the freedom of capital movement must apply in this respect. Thus, it is correct to let direct investments from third states fall under the freedom of establishment, so the fundamental freedoms do not apply in this case.

2.2.2

Violation of the System of Competences in the Treaties

Instead of a violation of the fundamental freedoms, national rules for direct investment out of third states can come in conflict with the system of competences laid down in the Treaties because, in certain areas or under certain conditions, it deprives the Member States of their powers of action, leaving only the Union to act.

2.2.2.1

The Meaning of Article 207 Para 2 TFEU

In the present case, Member States no longer have the power to act because Article 207 para 2 TFEU, particularly in the light of Article 3 para 1 lit. e) TFEU, gives the Union exclusive competence in the field of the Common Commercial Policy, which also relates to the establishment of screening mechanisms for “foreign direct investment”.25 In cases of an exclusive competence, competence belongs fully and definitively to the Union.26 The Treaty prohibits Member States from adopting their own rules because it wants to ensure that only the interests of the Union in the enumerated areas in Article 3 para 1 TFEU are respected. Keeping that in mind, a

23

Judgment of the Court of 30 November 1995, Reinhard Gebhard v Consiglio dell’Ordine degli Avvocati e Procuratori di Milano, C-55/94, ECLI:EU:C:1995:411, para. 25 et seq.; Judgment of the Court (Fifth Chamber) of 11 December 2003, Bruno Schnitzer, C-215/01, ECLI:EU:C:2003:662, para. 30 et seq. 24 A similar approach on national law however is provided by Sedlaczek/Züger in: Streinz (2018), Art. 63, para. 35. 25 Hahn in: Callies and Ruffert (2016), Art. 207 para 23 et seq. 26 Frenz (2011), para. 5062.

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uniform approach through Union law is needed; individual approaches by the Member States are normally counterproductive. Particularly in the area of Common Commercial Policy, in terms of Article 3 para 1 lit. e) TFEU, this uniform approach is important, as a separate action by each Member State carries the danger to circumvent union-wide standards.27 This is because companies from third states may find it easier to establish themselves in a certain Member State that pursues its own external trade policy; these companies may export their goods or services from the said Member States’ territory to the rest of the Union, possibly relying on Union law. Ultimately letting commercial policies be set by a single Member State, along with open borders, can result in a “race to the bottom” of relevant safeguards. Deviating from the ideal of an exclusive Union legislation, Article 2 para 1 clause 2 TFEU states that the Member States exceptionally can create their own rules if empowered accordingly by the Union.28 This empowerment by the EU must, at the same time, set content-related and at least objective limits.29 A blanket authorisation is inadmissible. The reason for this strict requirement is Article 2 para 1 TFEU, which wants to ensure a uniform standard of law across the Union. Indeed, to establish such a consistent system of law, it is clearly necessary to limit Member State empowerment, such that Member States may only be authorised in peripheral areas and the main competence must remain with the Union.30 Before the EU Screening Regulation was adopted, there were no rules in Union secondary law in the field of the Common Commercial Policy to help conform these requirements for empowerment of screening mechanisms for direct investment. The EU Screening Regulation on the one hand wants to close this gap by providing legal certainty for Member States due to the exclusive competence of the Union for the Common Commercial Policy. On the other hand, this act of secondary EU legislation states that it has to be seen as a confirmation of the competences Member States have in this area, although there are no remaining national competences in the field of an exclusive competence of the Union. Thus, these points are contradictory, as the last statement fits a shared competence under Article 2 para 2 TFEU. Moreover, the adopted regulation only sets a framework for Member States that already have or want to establish a screening mechanism, and creates a cooperation mechanism among the Member States and the Commission with the possibility to give a non-binding statement, where interests of the Member States or the Union

27

Nettesheim in: Grabitz et al. (2017), Art. 3 TFEU, para. 19. Especially referring to screening mechanisms in cases of direct investments, Bungenberg et al. (2010), pp. 81, 95 et seq.; see also Preisser (2013), p. 332. 29 Judgment of the Court of 18 February 1986, Bulk Oil (Zug) AG v Sun International Limited and Sun Oil Trading Company, C 174/84, ECLI:EU:C:1986:60, para. 23 et. seq.; see also Schaefer (2008), pp. 721, 724 et seq. 30 Häde in: Pechstein et al. (2017), Art. 2, TFEU, para. 30; Herrmann (2010b), pp. 207, 211; Schaefer (2008), pp. 721, 735. 28

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itself are being affected.31 These rules indeed consider the diversity of national screening mechanisms, but they are only optional for the Member States while giving them the broadest room for manoeuvre imaginable; Member States can even refuse to adopt a screening mechanism for direct investments in general. This approach is not an empowerment in terms of Article 2 para 1 clause 2 TFEU, because there are no content-related limits;32 rather it can be seen as a kind of blanket authorisation.

2.2.2.2

Unacceptable Attempts to Explain National Screening Mechanisms

Since Article 2 para 1 clause 2 TFEU cannot be used as a basis to explain the existence of screening mechanisms for direct investments from third states in national law, other ways must be found to justify such provisions despite Article 207 para 2, 3 para 1 lit. e) TFEU. Exclusive Competences “ex nunc” Some authors say that the exclusive competence of the Union in the area of Article 207 para 2 TFEU should only take effect “ex nunc”, meaning the Member States have the competence up until the moment that the EU first took action.33 However, it remains unclear from exactly when this is the case, although the CJEU affirms an exclusive competence for parts of the Common Commercial Policy since the middle of the 1970s.34 Moreover, this argument is at odds with the fact that the loss of national competence is fully and definitively in the area of an exclusive competence of the EU,35 with no possibility of derogation in this respect. This is because derogations comparable to Article 351 TFEU are lacking within the system of competences laid down in the Treaties. Exclusive Competences Only for Treaties Another attempt to explain national screening mechanisms is to reduce the scope of application of Article 207 para 2 TFEU to the Common Commercial Policy based on treaties with other states or international organisations.36 However, what speaks against this proposal is that only a few areas in Article 207 para 1 TFEU are limited

31

Ackerman (2018), pp. 373, 381; Carnegie et al. (2018), pp. 296, 299; for a complete overview, see de Kok (2019), pp. 24, 40 et. seq. 32 Günther (2018), p. 34. 33 Bayer and Ohler (2008), pp. 12, 26. 34 See Korte (2019), pp. 78, 95 for further information. 35 Calliess in: Callies and Ruffert (2016), Art. 2, TFEU, para. 3 et seq. 36 Schaefer (2008), pp. 721, 735; a similar approach is taken by von Bogdandy and Bast (2001), pp. 441, 447.

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in this way, and these limits do not relate to the field of foreign direct investments but rather the conclusion of tariff and trade agreements relating to trade in goods and services. Thus, an inverse conclusion shows that the area of foreign direct investments should not be constrained in this manner. No Barrier Effect by Articles 52, 65 TFEU Many authors interpret Articles 52, 65 TFEU as universally valid caveats which are supposed to be applicable in the scope of exclusive competences, so they allow national rules especially based on public order and security.37 However, some relevant arguments seem to be neglected by this proposal. First, there is no superiority of these provisions in the face of Articles 2 para 1, 3 para 1 lit. e) TFEU. Simply, all the aforesaid rules, including, in particular, the blocking effect of exclusive competences at the expense of the Member States, are part of the EU primary law. Second, Articles 52, 65 TFEU are not the result of an authorisation of the Union or a Union institution within the meaning of Article 2 para 1 clause 2 TFEU. Instead, Articles 52, 65 TFEU – as much as Article 2 para 1 clause 2 TFEU – are the result of the Member States having drawn up the TFEU. Because of this, Article 2 para 1 clause 2 TFEU and Articles 52, 65 TFEU enjoy equal status. This and the wording of Article 2 para 1 clause 2 TFEU show that the Member States as the “Masters of the Treaties” have chosen not to style Articles 52 and 65 TFEU as exceptions to the blocking effect enshrined in Article 2 para 1 clause 2 TFEU.38 Third, it must be considered that Article 65 TFEU and Article 52 TFEU (mainly) are part of the provisions in the Treaty that deal with matters of negative integration, while the range of exclusive competences is a question of positive integration. Both forms of integration must be differentiated carefully because of their divergent functions. In detail, positive integration through secondary law creates a level playing field for the whole of the internal market. It is the consequence of a political decision of the European legislature, which must meet the requirements of the division of competences and the fundamental rights. In contrast, in the context of negative integration, the question of whether the decisions of the national legislatures are compatible with the fundamental freedoms becomes relevant. Negative integration therefore selectively overrides Member State law and thus does not directly create homogeneous standards throughout the internal market. Positive and negative integration are therefore based on different political interests, refer to different subjects of examination and work with different tools and measures. Due to these differences, Articles 52, 65 TFEU cannot be used to explain national screening mechanisms.

37 38

Beuttenmüller (2011), pp. 281, 287 et seq.; Brauneck (2018), pp. 188, 193. This is an argument neglected by Brauneck (2018), pp. 188, 195.

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No Barrier Effect by Article 4 Para 2 Sent 2 TEU As Articles 52, 65 TEU refer specifically to the fundamental freedoms, perhaps the generally applicable Article 4 para 2 sent 2 TEU can be used instead to explain national screening mechanisms in Member State law despite the exclusive competence of the Union for the Common Commercial Policy. This provision obliges the EU to respect the essential functions of the Member States, including maintaining law and order and safeguarding national security without any references to the fundamental freedoms or other special areas of the Treaties. Certainly, this approach neglects the following point: Article 4 para 2 TEU does not lead to an absolute right of the Member States, but demands a weighting of the values respectively interests of the Member States and the Union, which are effected in the concrete situation.39 However, this weighting is not compatible with the allocation of powers to a public authority, as it must be clearly defined for reasons of legal certainty and is therefore inaccessible to a weighing-up process.40

2.2.2.3

Eligible Attempts to Explain National Screening Mechanisms

Against this background, another way must be developed to explain that national screening mechanisms are admissible despite the exclusive competence of the Union in the field of Common Commercial Policy under Articles 2 para 1, 3 para 1 lit. e) TFEU. In this respect, the competences in Article 64 para 2 and 3 TFEU must be considered. These rules also concern foreign direct investments and contain competences, which are not a part of the Common Commercial Policy but are to be assigned to competences shared between the Union and the Member States. The reason for this is the catch-all function which Article 4 para 2 TFEU has because of its wording (“principal areas”).41 This leads to the possibility that national screening mechanisms are admissible if there is no or only incomplete Union law.42 However, all three steps must be followed to get this result. Applicability of Article 64 Para 2 and 3 TFEU Despite Article 49 TFEU First, it must be argued why Article 64 paras 2 and 3 TFEU are applicable, although it was pointed out that the freedom of establishment blocks out the freedom of capital movement in cases of direct investments out of third states.43 Again, the reasons for this are the different functions that the rules of positive and negative integration have in the Union law. Thus, the decisions of the CJEU, which postulate a barrier effect of 39

Puttler in: Callies and Ruffert (2016), Art. 4, TEU, para. 22. Ludwigs, Rechtsangleichung nach Art. 94, 95 EG-Vertrag (2004), S. 273 ff. 41 Calliess in: Callies and Ruffert (2016), Art. 4, TFEU, para. 2. 42 Streinz in: Streinz (2018), Art. 2 TFEU, para 8 ff. 43 Such an approach is for example taken by Brauneck (2018), pp. 188, 195 in section 3 b) of his conclusion. 40

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the freedom of establishment are only applicable to cases of negative integration.44 Moreover, the wording of Article 64 para 2 and 3 TFEU, which gives the Union the power to adopt secondary law concerning direct investments out of third states, only makes sense if these provisions are applicable in the present context. Applicability of Article 64 Para 2 and 3 Despite Article 207 Para 2 TFEU Second, it must be explained why Article 64 para 2 and 3 TFEU and Article 207 para 2 TFEU can, at least in principle, apply equally when it comes to creating secondary law, for instance the EU Screening Regulation. The reason for this is that the content of Article 64 para 2 and 3 TFEU is similar to part of the content of Article 207 para 2 TFEU, which allows adopting secondary law on foreign direct investment. In so far, the scope of both powers overlaps in particular areas. This intersection is a special phenomenon in the Common Commercial Policy, because in its other fields there is no comparable overlap with another competence. This shows that the exclusive competence for foreign direct investment laid down in Articles 2 para 1, 3 para 1 lit. e) TFEU is not so important for the integration through Union law than in other fields of the Common Commercial Policy. Furthermore, the practical effect of Art. 64 paras 2 and 3 TFEU, which primarily treat direct investment in or out of third states, could be endangered if these powers would be generally overruled by Article 207 para 2 TFEU. Moreover, the following must be considered: Although Article 4 para 2 sent 2 TFEU does not apply, it contains a legal notion, that Member States should not be blocked out in areas that affect their main interests, if the Union does not act. However, precisely this situation could exist if the enactment of secondary legislation on direct investment fell solely under Articles 2 para 1, 3 para 1 lit. e) TFEU. For if the Union does not adopt rules in this area, the essential functions of the Member States would be ignored because of the Union’s exclusive competence in the field of direct investments, as the Member States are blocked out of it. All this shows that the exclusive competences from Articles 207 para 2, 2 para 1, 3 para 1 lit. e) TFEU do not supplant the shared competences from Article 64 paras 2 and 3 TFEU. Relationship Between Those Titles of Competence in “Screening Cases” Third, the question arises whether Article 207 para 2 TFEU or Article 64 para 2 and 3 TFEU reflect the relevant title of competence of screening mechanisms for direct investments from third states. General Principals of Classification Normally, where a regulatory area is equally covered by two or more applicable titles of competence (for further details of the conditions of Article 64 para 2, 3 and Article

44

See also Benyon (2010), pp. 78 et seq.

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207 para 2 TFEU see 3.1.1.1), the focus of the regulation45 is considered. Therefore, Article 64 para 2 and 3 TFEU supersede Article 207 para 2 TFEU where they are mainly or primarily addressed. However, when it comes to the creation of screening mechanisms for direct investment, such a focus can hardly be identified, because these mechanisms may usually both provide a framework for the implementation of the Common Commercial Policy within the meaning of Article 207 para 2 TFEU and contain measures on the movement of capital to third states within the meaning of Article 64 para 2 and 3 TFEU. In the absence of a main focus, the CJEU, at least in the case of the delimitation of shared competences, will use statements in the Treaties to determine the relevant title of competence. For example, if the legislative procedures differ, in the light of Articles 2, 10 TEU the norm of competence is used, which offers a higher degree of democratic legitimacy at Union level.46 Meaning of Article 64 Para 3 TFEU Against this backdrop, at first the relationship between Article 207 para 2 TFEU and Article 64 para 3 TFEU can be examined if both titles of competence are equally applicable because their conditions are met and there is no focal point to one or the other competence. In those cases, Article 207 para 2 TFEU takes precedence because it does not limit the European Parliament to a right to be consulted but establishes the co-decision procedure which entails a higher degree of democratic legitimacy at Union level. Consequently, solely Article 207 para 2 TFEU is applicable if a step backwards for the liberalisation of capital movements is intended. Thus, Article 64 para 3 TFEU is blocked out, so there is only one competence title left to adopt such acts of secondary law. As Article 207 para 2 TFEU provides an exclusive competence in favour of the Union, in those cases the Member States would be prevented from legislation by the Treaty (Article 2 para 1 TFEU). The crucial question is therefore when a measure under Union law constitutes a step backwards for liberalisation within the meaning of Article 64 para 3 TFEU. It is recognised that the step backwards must be understood objectively and must be related to the degree of liberalisation achieved in the relevant sector.47 The reference point for such a step backwards must be a measure under secondary law.48 This refers only to secondary legislation derived from the Treaties, not to the free movement of capital itself laid down in the Treaty.49 The fact that the free movement of capital, because it is primarily addressed to the Member States,50 does not provide

45

See Korte (2019), pp. 78, for further information especially concerning the question if there is a primacy of exclusive competences to avoid the risk of their circumvention. 46 Judgment of the Court of 23 February 1988, United Kingdom of Great Britain and Northern Ireland v Council of the European Communities, Case 68/86, ECLI:EU:C:1988:85. 47 Wojcik in: von der Groeben et al. (2015), Art. 64, para. 18. 48 Bröhmer in: Callies and Ruffert (2016), Art. 64, para 8. 49 In this direction Sedlaczek/Züger in Streinz (2018), Art. 64, para. 20. 50 Callies and Korte (2011), § 4 para 98 et seq.

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a “framework” for Union measures as required by Article 64 para 3 TFEU already speaks for this. In addition, it is difficult to anticipate the level of liberalisation that can be derived from this fundamental freedom, because this state of liberalisation is the result of a proportionality test carried out by the CJEU at the level of justification. Therefore, it is much more case-dependent and open-ended than the determination of a positive internal market effect, e.g. within Article 114 para 1 TFEU, whose existence depends primarily on whether secondary legislation removes obstacles to market access in national law.51 Finally, it must be considered that Article 64 TFEU also serves primarily to justify exceptions to the free movement of capital in thirdstate cases. Thus, in these cases secondary legislation could only be adopted based on paragraph 3 of this provision, because it would in any case normally entail a step backwards in this respect, although paragraph 2 contains, according to the logic of Article 64 TFEU, the fundamentally relevant title of competence, from which paragraph 3 constitutes the derogation or exception (“notwithstanding”).52 These conditions are not met respecting the EU Screening Regulation, because Article 64 para 3 TFEU needs an act of secondary law with content-based preconditions in the relevant sector. This requirement is currently missing, as the EU Screening Regulation as shown above gives the Member States and the Commission only the possibility of setting up non-binding statements. In addition, this act of secondary law is only facultative for the Member States because these options are not a suitable point of reference to create a step backwards, as they contain no valid standard of liberalisation of capital movement. National rules alone (if they exist at all) still form the relevant framework for the screening of direct investment from third states, because the EU Screening Regulation refers to the legal systems of the Member States on substantive standards. This gap in subject matter is also not filled by the fact that the participation rights contained in the EU Screening Regulation cost time because they do not set a standard in terms of content. Such content-based rules would, however, be necessary to justify a state of liberalisation such as that required by Article 64 para 3 TFEU for a step backwards. Meaning of Article 64 Para 2 TFEU Considering Article 207 para 2 and Article 64 para 2 TFEU, both titles of competence are based on the co-decision procedure so that Articles 2, 10 TEU have no influence on the demarcation of those competences. Instead, Articles 4 para 2 sent 1, 5 para 2 sent 2 TEU come into view. These provisions are aimed at the preservation of national competences as far as possible53 as they state that each competence, which is not conferred upon the Union, remains the Member States. Because the therein contained a legal notion that there is an assumption for national competences in cases of doubt, is not only relevant for the conferral of competences, but

51

Korte in: Callies and Ruffert (2016), Art. 114, para 39 et seq., 46. Sedlaczek/Züger in: Streinz (2018), Art. 64, para. 20. 53 Calliess in: Callies and Ruffert (2016), Art. 4, TEU, para. 2 and Art. 5, TEU, para. 7. 52

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also – to some extent in an “argumentum a fortiori” – for their delimitation in the vertical dimension between the legislation of the Union and the Member States. Especially this point argues, in case of doubt, for the primacy of Article 64 para 2 TFEU and can be used as an argument for the division of powers between the Member States and the Union, when two competences with different barrier effects on Member States’ account are applicable and there is no single focus on one or the other. Accordingly, Article 64 para 2 TFEU supplants Article 207 para 2 TFEU when Article 64 para 2 TFEU is the mainly or equally relevant competence. Consequently, in those cases, where the Union adopts secondary law dealing with screening mechanisms for direct investments out of third states, Article 64 para 2 TFEU is regularly relevant to determine the barrier effect of the used competence on national legislators’ account. As Article 64 para 2 TFEU gives the Union shared competences under Article 2 para 2, 4 para 1 TFEU, national screening mechanisms can stay in force until the Union has used this competence in a concluding way.54 In so far, the barrier effect of the use of Article 64 para 2 TFEU depends on the design of secondary law and is not entailed by the Treaty. Having in mind that the EU Screening Regulation will not hinder the effectiveness of national screening mechanisms, as it only establishes cooperation mechanisms and several suggestions for preconditions. Thus, the existence of screening mechanisms for direct investments from third states in national law can be explained with the help of Article 64 para 2 TFEU, despite the existing-in-principle exclusive competence of the EU for the Common Commercial Policy.

2.2.3

Preliminary Result

As a preliminary result, it can therefore be stated that the Member States are entitled, in the light of Union law, to subject direct investments from third states in companies of strategic importance for supply to control mechanisms. The design of these mechanisms is then a question of national law, beyond any international legal obligations.

2.3

Direct Investments Out of Member States

The question arises about how to handle direct investments out of other Member States. National rules in this area primarily must meet the requirements of the freedom of establishment. Provisions dealing with direct investments out of other Member States restrict the scope of protection of this fundamental freedom along the lines above, too. If these national provisions are not directly based on the nationality

54

Calliess in: Callies and Ruffert (2016), Art. 2, TFEU, para. 13 et. seq.

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of the investor, they can be justified by a compelling reason relating to the general interest. In matters of the protection of companies, which are relevant for public services, especially the rights, which are mentioned in Article 52 para 1 TFEU, could be considered. Furthermore, Article 14 TFEU and Article 11 para 2 EFRC may be relevant to justify national rules dealing with direct investments out of other Member States. There are many potential justifications why the CJEU interprets the principle of proportionality in such cases of direct investments out of other Member States very strictly.55 Thus, a prior checking of a share purchase by a Member State authority is usually not permissible.56 Instead, the Member States are only allowed to adopt provisions that apply to an interference after the share purchase took place and refer to a limited class of concrete strategic decisions of the companies relevant for public services, by establishing sovereign powers of interference in terms of a time-limited right to oppose these decisions. These exercises of public authority must be judicially reviewable and must to be based on clear and transparent conditions without any administrative discretion.57 Through this jurisprudence, the CJEU deprives the Member States of the possibility to consider prognostic elements in their national screening mechanisms. This is the consequence of the generally restrictive interpretation of the fundamental freedoms by the CJEU.

2.4

Portfolio Investments

Portfolio investments can be only measured against the freedom of movement of capital. They are within the scope of protection and are already impaired when the Member States establish a screening mechanism, whose application causes an expenditure of time – which is no doubt the case with most of the governmental control systems. Insofar, portfolio investments from third states and other Member States are addressed equally. These impairments cannot be justified by the reasons that have just been considered because portfolio investments by definition have no enduring effect on the market strategy of companies. Thus, any impairment of transnational portfolio investments is only justifiable by reasons relating to the balance of payments or fair taxation.58 If these aspects become relevant, the measure must be scrutinised under the principle of proportionality.

55 Judgment of the Court (Fourth Chamber), 8 November 2012, European Commission v Hellenic Republic, C-244/11, ECLI:EU:C:2012:694, paras. 65, 73. 56 See Brauneck (2018), pp. 188, 194 for a different approach. 57 Judgment of the Court of 4 June 2002, Commission v Kingdom of Belgium, C-503/99, ECLI:EU: C:2002:328, para. 49 et. seqq.; see also Schmidt (2018), pp. 205, 208; Johannsen (2018), pp. 247, 249; Martini (2008), pp. 314, 320. 58 Korte in: Callies and Ruffert (2016), Art. 49 para. 99 et. seqq.

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3 Screening Mechanisms in Union Law As the possibility of the Member States to establish screening mechanisms in national law is partially limited, it seems adequate to examine the authority of the Union.

3.1

Direct Investments Out of Third States

The competences of the Union to adopt rules for direct investments out of third states into the internal market could be challenged if one considers the EU Screening Regulation. Its content establishes a framework for the existing national screening mechanisms and a cooperation mechanism between the Member States and the Commission. However, the regulation in question contains no binding rules that have any compulsory character. As mentioned before, even any concrete concerns expressed by the Commission are not binding. Against this background, the question arises whether the EU Screening Regulation is compatible with the division of competences in Union law – especially because of its non-binding provisions, in so far as a legal basis for the EU Screening Regulation is required and the restrictions for the use of Union competences must be met.

3.1.1

Principle of Conferral

Due to the principle of conferral, which is laid down in Article 5 para 2 TEU, the Union needs the competence to adopt a particular act of secondary law.

3.1.1.1

Common Commercial Policy, Article 207 Para 2 TFEU

Article 207 para 2 TFEU must be considered to the extent that it allows the Union to adopt the measures defining the framework for implementing the Common Commercial Policy, which refers to foreign direct investments as stated in paragraph 1 of the provision. Purpose of the Competence The purpose of this competence is to give the Union the option to adopt an independent Common Commercial Policy.59 This is necessary to ensure that there is only one voice in the external trade, which makes the actions of the Union more

59

Hahn in: Callies and Ruffert (2016), Art. 207, para. 123.

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reliable.60 The enhancement of a common approach directed by the Union in the area of external trade is the leading reason for the classification of Article 207 TFEU as an exclusive competence.61 Thus, the force of the Union in the Common Commercial Policy is strengthened, as there is no obligation for cooperation with the Member States, at least as long as there are no other policy areas affected. In sum, Article 207 TFEU is aimed at the protection of the common interests of the Union, in which the particular interests of Member States must fit. Thus, they are not allowed to claim room for satisfying their own interests in external affairs, because this approach would entail the risk of compromising the effective defence of the common interests of the Union.62 The purpose of a uniform perception of interests, on which the Common Commercial Policy is based, is expressed in the wording and the structure of Article 207 TFEU as para 1 of this provision demands uniform principles. Furthermore, Article 207 para 2 of TFEU limits the possible forms of action to regulations, which allow the Member States less room for their own political decisions contrary to directives.63 In addition, this provision requests the creation of a framework for implementing the Common Commercial Policy in secondary law. This requirement needs abstract general elements in the intended regulation that determine the possible external trade measures in each individual case within the meaning of a basic responsibility. If secondary law based on Article 207 para 2 TFEU is built in this way, these measures can be taken by the Member States as well, as if they are only an extended arm of the Union and have no or only marginal room for autonomous activity. All these preconditions show that secondary law based on Article 207 para 2 TFEU must cause a uniform perception of interests. Screening the EU Screening Regulation The EU Screening Regulation must meet these requirements, as it is based on Article 207 para 2 TFEU. As seen above this act consists of three basic provisions.64 First, there are only a few criteria that the Member States can insert in their national screening provisions, if they have or want to install them in their national law. Second, other Member States can make a non-binding statement if a direct investment out of a third state touches on their national interests of supply in services. Third, the commission is allowed to give an opinion to which the responsible Member State should take the utmost account, such that the Member State must give an explanation if it does not follow the opinion of the commission. None of these elements expresses a uniform general interest which is needed for a Common

60

Weiß in: Grabitz et al. (2017), Art. 207, para. 8. Khan in: Geiger et al. (2017), Art. 207, TFEU, para. 13. 62 Opinion of the Court of 11 November 1975, Opinion given pursuant to Article 228 (1) of the EEC Treaty, Avis 1/75, ECLI:EU:C:1975:145, pp. 1355, 1363 et. seq. 63 Cottier/Trinberg in: von der Groeben et al. (2015), Art. 207, paras. 103 and 110. 64 For further information, see Günther (2018), p. 34; see also Korte (2019), pp. 78, 85 et. seq. 61

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Commercial Policy.65 It is not even said that the Member States must have a screening mechanism. Thus, they could theoretically implement and follow their very own commercial policy. However, this can be regarded as the direct opposite of the spirit of the competence laid down in Article 207 para 2 TFEU.66 One could say that this is a real hard consequence, although the case-law of the CJEU often states that a step in the right direction is enough to activate a competence of the Union.67 However, this is only an appropriate way for the use of shared and not of exclusive competences, as the latter are not aimed at harmonisation but on the creation of a uniform approach throughout the Union. This is because both ways of legislation work completely differently: While a shared competence lets room for national law, when there remain gaps in secondary law, an exclusive competence only allows Union Law and no empowerment of Member States.68 Thus, the EU Screening Regulation cannot be seen as a minus to the Common Commercial Policy in terms of Article 207 para 2 TFEU, which prepares a later common approach. Instead, the EU Screening Regulation is indeed something completely different, in light of the exclusive competence laid down in Article 3 para 1 lit. e) TFEU.69 Comparable Regulations The approach to not consider Article 207 para 2 TFEU as a valid basis for the EU Screening Regulation in question is backed up by an examination of other regulations that were based upon this provision. Grandfathering-Regulation The so-called Grandfathering-Regulation seems to be the act of European Union secondary law that content-wise is the most comparable to the EU Screening Regulation. It deals with a transitional arrangement concerning agreements on the protection of investment with a bilateral character.70 The Grandfathering-Regulation is a legislative reaction to the fact that the Common Commercial Policy on foreign direct investments has been an exclusive competence of the Union since the Lisbon Treaty. According to its recitals (7 et seq.), the regulation contains statements on the validity of agreements on the protection of investment already existing. Furthermore,

65

Ackerman (2018), pp. 373, 380. See Korte (2019), pp. 78, 119 et. seq. For further information. 67 Judgment of the Court of 5 October 2000, Federal Republic of Germany v European Parliament and Council of the European Union, C-376/98, ECLI:EU:C:2000:544, para. 95 et. seqq. 68 See also Bast in: Grabitz et al. (2017), Art. 4 TEU, para. 10. 69 See Korte (2019), pp. 78, 119 et. seq. For further information. 70 Regulation (EU) No. 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries, OJ L 351, 20.12.2012, p. 40–46. 66

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it contains statements dealing with the competence of Member States to put new agreements on the protection of investments into effect.71 The regulation obliges the Member States to notify the Commission about bi- or multilateral agreements on the protection of investments that either already exist (Article 2) or are intended to exist in the future and subject to negotiations at the time of the notification (Article 8 para 1). Subsequently, a control procedure will be executed. This procedure results in a review and assessment of the agreements that already exist, asking whether they contain serious obstacles to the negotiation or conclusion by the Union of bi- or multilateral investment agreements with third states with a view to the progressive replacement of the bilateral investment agreements notified under Article 2 (Article 5). In cases of agreements that are not yet in existence but already subject to negotiations, the agreements need authorisation by the Commission. However, this authorisation may be denied if (parts of) the agreements conflict with European Union law. It may also be denied if the agreement endangers (other) negotiations by the Union or is not in accordance with the trade policy of the Union in general (Article 9 para 1).72 The Grandfathering-Regulation thus offers the Union the opportunity to intervene in order to examine the compatibility of any investment agreements of Member States with the Union legal or political framework and, if necessary, to reduce them to an acceptable level or even to prohibit the conclusion of such agreements.73 The exercise of these powers by the Commission is thus an expression of a Common Commercial Policy of the Union, based on the framework set out in the regulation. In this respect, it differs from the EU Screening Regulation, which, as already mentioned, relies largely on voluntary action and, consequently, non-binding opinions. Due to these considerable differences, it is justified to include the GrandfatheringRegulation under Article 207 para 2 TFEU and not to include the EU Screening Regulation under this provision. Trade Barrier Regulation Another act of secondary law based on Article 207 para 2 TFEU is the so-called Trade Barrier Regulation.74 This regulation determines the procedure that must be followed by the European Union in the field of the Common Commercial Policy in cases of damages resulting from trade barriers that were initiated by third states (Article 1). The Trade Barrier Regulation bears on the opportunity for Member States, companies and branches of the economy to ask the Commission to initiate

71

See also Bungenberg (2014), pp. 382, 384. Keller/Schmidt in: Krenzler et al. (2015), Nr. 120 G, para. 47 et seq. 73 Herrmann and Müller-Ibold (2016), pp. 646, 647. 74 Regulation (EU) 2015/1843 of the European Parliament and of the Council of 6 October 2015 laying down Union procedures in the field of the Common Commercial Policy in order to ensure the exercise of the Union’s rights under international trade rules, in particular those established under the auspices of the World Trade Organization (codification), OJ L 272, 16.10.2015, pp. 1–13. 72

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this procedure if certain requirements are given (Articles 3 et seq.). If the Commission finds that there is enough evidence to act upon, it launches an investigation (Article 9) that can lead to further measurements by the Commission (Article 14).75 In sum therefore it can be stated that the Trade Barrier Regulation establishes a frame of action for the Union. The commission as the executive organ takes a stance concerning the International Business Law to express the Union’s interests and thus represent the Common Commercial Policy.76 This emphasises its difference from the EU Screening Regulation, which does not leave any option for the Commission to intervene towards third states or take any actions with an obligatory character in general. All these differences show that one can base the Trade Barrier Regulation, unlike the EU Screening Regulation, on Article 207 para 2 TFEU. Regulation on the Export of Cultural Goods The Regulation on the Export of Cultural Goods77 further backs up this preliminary result, as this act of secondary law can be distinguished from the EU Screening Regulation, as well. The regulation is not based on Article 207 para 2 TFEU but on Article 133 para 2 EC-Treaty. This provision was replaced by Article 207 para 2 TFEU and had a wording which in comparison can be described as broader and more liberal, since Article 133 para 2 EC-Treaty did not demand a framework for the Common Commercial Policy.78 Instead, this provision allowed to adopt rules dealing with the execution of the Common Commercial Policy. According to the recitals (1 et seq.), the purpose of the Regulation on the Export of Cultural Goods is to install a standardised control system on the external borders of the European Union to secure those cultural goods listed in the first annex. Moreover, the Member States have the option to declare further national goods as worthy of protection. They can introduce further control mechanisms, but these need to be in accordance with the principle of free movement of goods.79 Considering the goods listed in the first annex of the regulation, this establishes a control mechanism in this act of secondary law that is in force throughout the whole European Single Market. It ensures that cultural goods which fall under the scope of the first annex may only be exported if the requisite approval is in existence. Although this approval needs to be given by the competent administrations of the individual Member States, there is a common legal framework in the regulation which defines the scope of the relevant culture goods that need protection. The framework furthermore establishes the preconditions under which an approval or

75

Herrmann and Müller-Ibold (2016), pp. 646, 651. Karmann in: Streinz (2018), Art. 31, para. 26. 77 Council Regulation (EC) No 116/2009 of 18 December 2008 on the export of cultural goods, OJ L 39, 10.2.2009, pp. 1–7. 78 Especially on the changes of the wording to the Lisbon Treaty, see Müller-Ibold in: Bungenberg and Herrmann (2011), p. 85 et seq. 79 See also Elmenhorst and Heimann (2016), pp. 3398, 3400. 76

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denial may be given by national authorities that have the appropriate competency. Against this backdrop, the individual decisions of the national authorities are based on reasons which are valid for all responsible national authorities in all Member States. The common goal of the regulation remains the standard even in those areas where the national law of the Member States becomes relevant (Article 2 para 2). Hence the margin of discretion for the responsible national authorities is extremely small, which guarantees a Common Commercial Policy.80 This again is a major difference to the EU Screening Regulation, which in fact does not limit the Member State’s margin of discretion. In summary, the Regulation on the Export of Cultural Goods would likely have been based on Article 207(2) TFEU too, if it had to be adopted today. Dual-Use-Regulation The Dual-Use-Regulation81 has its legal basis in Article 133 para 2 of the EC-Treaty as well. This act of secondary law contains rules concerning goods that can serve two purposes, hence the name. It deals with the export of goods which are usable in the military context as well as a non-military context. The regulation especially deals with the initiation of trades of such goods in question and the execution afterwards. Jurisdiction by the CJEU generally classifies economic activities in connection with dual-use-items as part of the Common Commercial Policy and thus not as part of the common foreign and security policy.82 Thus, the Dual-Use-Regulation contains provisions that are part of an area of conflict. On the one hand, economic interests need to be regarded which includes having a strong European Single Market. On the other hand, the security policy plays a major role as well. Thus, the different concerns need to be carefully weighed against each other; an internal marketfriendly harmonisation can only take place while regarding national interests in terms of national security. Therefore, the Dual-Use-Regulation establishes obligations for the Member States’ competent authorities to inform each other. Moreover, it introduces a union-wide system of licensing requirements. While this act of secondary law is considered to be a regulation that sets a legal framework for all Member States, it also leaves a great deal of room concerning application and execution of its provisions to national authorities.83 This might lead to significant differences between the policies of Member States. To this extent, the Dual-UseRegulation seems to be quite similar to the EU Screening Regulation. From this, it makes sense to further compare these two acts of secondary law.

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Similar Weiß in: Grabitz et al. (2017), Art. 207, Para. 150. Council Regulation (EC) No 428/2009 of 5 May 2009 setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items, OJ L 134, 29.5.2009, p. 1–269. 82 Judgment of the Court of 17 October 1995, Fritz Werner Industrie-Ausrüstungen GmbH v Federal Republic of Germany, C-70/94, ECLI:EU:C:1995:328, para. 10. 83 Karpenstein/Kottmann in: Krenzler et al. (2015), Art. 1, para. 6 and Art. 4, para. 2. 81

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On the content, the Dual-Use-Regulation establishes a system of licensing requirements for the goods listed in the first Annex and for those goods that can be put to use in the way described in the Article 4 paras 1–3 of the regulation.84 Articles 3, 4 and 8 of the regulation85 contain the requirements concerning the question of whether the necessary permission for export of the dual-use-items may be given. Inside those provisions, however, are rules that create scope for manoeuvre in favour of the Member States. Especially Article 4 para 8 needs to be mentioned according to which Article 11 of the so-called Common Export Rules Regulation (Reg. EEC No 2603/69)86 remain untouched. This provision embodies the justification for Member States to limit their exports if they consider it necessary in terms of, e.g. national security. What is more, Member States may even install further obligations concerning licensing requirements according and subject to the preconditions of Article 8 of the Dual-Use-Regulation.87 But notwithstanding the above, Article 9 details how the licensing requirements can be given.88 For instance, about 70% of the cases fall under the scope of Article 9 para 1, which describes the general permission to export dual-use-items. This provision offers the exporters freedom from national provisions under certain preconditions in cases where there only is a small risk for the national security policy. Member States are only allowed to prohibit exports in cases of unreliability by the exporter (Article 9 para 1).89 If there is no general permission to export dual-use items, the Member States may give permission, which then is valid in the entire European Union (Article 9 para 2). Comparing these rules to the EU Screening Regulation shows that there are certain freedoms and competences for the Member States in the Dual-Use-Regulation. Especially the option to introduce further reservations for approval should be referred to. Additionally, there is a large degree of room for individual action when it comes to a prognosis in the sense of Article 3. Nonetheless, the differences that result from this face a certain pressure to further harmonise. Although undefined legal terms are being used, these terms are interpreted by the CJEU in a way that honours the goals of the European Single Market. What is more, the Dual-Use-Regulation successfully manages to set a minimum standard for economic development in an area that bears a great deal of risks for areas of the security policy. That standard is legally binding for the handling of many dual-use-items (about 70%). It may only deviate from that standard if the exporter is unreliable. Apart from the general permission to export dual-use items laid down in Article 9 para 1, the room for individual actions by the Member States in fact is broader. However, once they intend to establish individual procedures

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Bungenberg in: Pechstein et al. (2017), Art. 207, para. 61 et seq. Lux in: Dorsch (2012), Art. 9, para. 1. 86 Council Regulation (EC) No 1061/2009 of 19 October 2009 establishing common rules for exports, OJ L 291, 7.11.2009, pp. 1–7. 87 Karpenstein/Kottmann in: Krenzler et al. (2015), Art. 8, para. 3 et seq. 88 Lux in: Dorsch (2012), Art. 9, para. 1. 89 Karpenstein/Kottmann in: Krenzler et al. (2015), Art. 9, paras. 1, 4. 85

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dealing with permissions for such exports, they need to comply with the Union’s specifications which must be included in their individual provisions. This is a major difference that shows that the Dual-Use-Regulation and the EU Screening Regulation are not fully congruent in terms of obligations for the Member States. This act of secondary law does not contain a comparable duty, so the Dual-Use-Regulation can be based nowadays on Article 207 para 2 TFEU in contrast to the EU Screening Regulation. Preliminary Result As a preliminary result, it can be stated that the EU Screening Regulation does not correspond to the preconditions of Article 207 para 2 TFEU as the relevant competence basis, particularly because the CJEU uses severe standards to control these requirements and allows no margin of appreciation therein. The recommendations for preconditions in national screening mechanisms in this act of secondary law and the therein contained right to give a statement in favour of the other Member States and the Commission, which must be considered in a more or less extensive way, may probably promote the development of common frame conditions inside the Union for the affected institutions, but will not lead to a Common Commercial Policy outwards the Union, as the Member States are still the relevant deciding actors there.

3.1.1.2

Secondary Law Based on Article 64 Para 2, 3 TFEU

An alternative way to adopt rules for direct investments out of third states is to activate Article 64 para 2, 3 TFEU, particularly as these competence empowerments are applicable despite the barrier effects of the freedom of establishment, as mentioned before. However, if one were to use Article 64 para 3 TFEU as the basis for the EU Screening Regulation, two problems would arise. First, this provision requires, by its clear wording, Union law in the field of direct investments out of third states, which is currently missing as shown above. Second, Article 64 para 3 TFEU needs a unanimous decision in the council of ministers, which would have been hard to get at the time of adoption of the EU Screening Regulation as there were some Member States that had a more urgent need for direct investments than others, especially given the existing debts of some Member States.90 Against this backdrop, only Article 64 para 2 TFEU could have been consulted to adopt the EU Screening Regulation. The use of this competence title can lead to a restriction for free capital movement in third state cases91 but has to achieve its

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Concerning the problems of struggling national economies in this context see Opinion of Advocate General Kokott, Final Application in the case Commission v Council, C-13/07 ECLI: EU:C-2009:190, para. 113. 91 Obviously limited to this content Sedlaczek/Züger in: Streinz (2018), Art. 64, para. 19 et seq.

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objectives to the greatest extent possible92 – for example by harmonising the restrictions for the freedom of capital movement in national law dealing with third-state cases93 such as the provisions addressed in Article 64 para 1 TFEU.94 The EU Screening Regulation does not meet these requirements for two reasons. First, this secondary legislation establishes an additional time-consuming procedure that prolongs the control process, so the Regulation in this respect does not seek to achieve free movement of capital. Second, the examination criteria contained in the regulation are not mandatory but only recommendatory in nature, so they lack any harmonising character.

3.1.1.3

Remaining Possibilities for the Union to Adopt Screening Rules

Although the EU Screening Regulation could thus be based neither on Article 207 para 2 TFEU nor on Article 64 para 2, 3 TFEU, there are many possibilities to adopt rules for direct investments from third states based on these two titles of competence. This is because both authorisations have in part the same scope – for example, if the Union were to adopt a regulation similar to state aid control by authorising the Commission to examine and authorise direct investment from third states on the territory of the European Union. In this and similar constellations, Articles 64 para 2 and 3 TFEU and Article 207 para 2 TFEU may apply equally, so the question of their relationship arises in this respect if the focus of the legislative project envisaged cannot be assigned to either of the two bases of competence. In so far, the results determined above are valid accordingly.

3.1.2

Restrictions for the Use of Union Competences

Depending on its specific content secondary law dealing with direct investments out of third states can be based on Article 207 para 2 and/or Article 64 para 2 TFEU. In contrast, Article 352 TFEU or the doctrine of implied powers are not applicable, because there is a unanimous decision or a meaningful addition of a written competence needed. Given the competences, which can be used to create screening mechanisms at the Union level, the question arises as to what restrictions apply to the use of those competences. There are many laid down in the Treaty; however, the most relevant ones are the principle of proportionality and fundamental rights. These rules are examined below.

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Wojcik in: von der Groeben et al. (2015), Art. 64, para. 21. Gramlich in: Pechstein et al. (2017), Art. 64 para. 19. 94 Wojcik in: von der Groeben et al. (2015), Art. 64, paras. 10, 15. 93

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Violation of the Principle of Proportionality

The principle of proportionality is laid down in Article 5 para 4 TEU. It requires provisions that are adequate, necessary and appropriate in the light of the autonomy of the Member States and refers to the form and the content of the secondary law of the Union.95 Normally, there is a big margin of appreciation for the European legislature so that the CJEU only invalidates obvious violations of Article 5 para 4 TEU contrary to Union law.96 Against this background, the requirements of the principle of proportionality for an investment screening mechanism in the Union law are rather low. However, it must at least consider that the object of the investment is located in the territory of the Member States, because the screening competences must therefore be divided between the Union and the Member States – for example depending on the relevance of the company for the security of supply and its transnational significance. Besides, Article 4 para 2 sent 2 TEU is relevant in this context as well. Because of the obligation of the Union to respect the essential functions of the Member States they must have a voice in cases that affect their security. Seeing this, a veto right could be possible in cases where their interests are affected, so a screening mechanism on the Union level could have several accumulative steps to refuse an investment – namely from the Member State, where the company is located, over the other Member States, which are affected by a planned investment, to the Union. Moreover, the principle of proportionality seems to be the right connecting point to limit the competences of the Union to adopt rules for the conditions behind the borders of the Member States, as it demands an appreciation of the national claim of autonomy and the regulatory interests of the Union. Thus as an approximate rule, the Union is not allowed to adopt any market conduct rules but only those provisions whose cross-border implications are sustainable enough – so for example because of the item or the range of the addressed direct investment.

3.1.2.2

Violation of Fundamental Rights

If one regards the basic rights on Union level, screening mechanisms in the Union law will entail restrictions for the Articles 15, 16 EFRC, as such provisions enable the control of direct investments out of third states, because these basic rights refer to the freedoms to choose an occupation and to conduct business. They are also applicable even if the investors have their registered office in a third state because the wording of Articles 15, 16 EFRC is not limited to Union citizens or companies

95 96

Geiger in: Geiger et al. (2017), Art. 5, TEU, para. 20. Calliess in: Callies and Ruffert (2016), Art. 5, TEU, para. 65 et. seqq.

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from the Union territory.97 That conclusion is borne out by the fact that these basic rights should per se protect corporate conduct against governmental intervention, so that their essence applies to every commercial company – in fact even those that are controlled of a third state, as they are not bound by the basic rights laid down in the EFRC. At the level of justification, it must be considered that the CJEU normally concedes the Union legislator a larger margin of appreciation in the area of the basic rights than in the area of fundamental freedoms.98 This generous interpretation of the basic rights is regularly justified with the complexity of economic connections.99 It is rather surprising that this is no argument in terms of the scope of the fundamental freedoms although they deal with economic cases as well. Against this background, the actual reason seems to be that a homogenous legal situation throughout the Union (and thereby the standard of review of the basic rights) fits better with the aim of establishing and ensuring the functioning of the internal market than sole national solutions, which build the standard of review of the fundamental freedoms. Moreover, there is the danger to undermine the compromise, which the Member States negotiated sometimes in a very hard way in the legislative procedure on Union level, if the CJEU uses a severe standard of review concerning basic rights.100 Considering this generous interpretation of the basic rights on Union Level there are plenty of indications that the CJEU will not declare a screening mechanism contrary to the Union law that allows control of direct investments out of third states. However, the scope of such an act of secondary law must be limited to those cases that carry realistic dangers especially for the security of supply in at least one Member State – for example when the investment can apply pressure adverse to Member States that have a very fragile economic situation. A similar problem is when the investor has very sensible information because of his direct investment and can sabotage the entire supply of a Member State by disclosing that information. In those and equivalent cases the Union may be allowed to implement prognostic elements at the time of the share purchase in their screening mechanism – for example in matters of the governmental origin of the investment or factual pressure because of the acquisition.

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Kühling in: Pechstein et al. (2017), Art. 15, paras. 6, 9; Judgment of the Court (Second Chamber) of 30 June 2016, Lidl GmbH & Co. KG v Freistaat Sachsen, C-134/15, ECLI:EU:C:2016:498, para. 26 et seq. 98 Kingreen in: Callies and Ruffert (2016), Art. 52, para. 65. 99 Kühling in: Pechstein et al. (2017), Art. 16, para. 14. 100 See Korte (2019), pp. 78, 132 et seq. For further information.

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Direct Investments Out of Other Member States

Apart from direct investments out of third states, the Union may be able to adopt provisions for direct investments out of other Member States. The correct competence title for such an approach is Article 53 para 1 TFEU, which gives the right to adopt directives for the coordination of the provisions laid down by law in Member States, in so far as a positive effect on the internal market is needed as well. Its existence depends on the designs and the differences in the national screening mechanisms. On the requirements of the Union’s basic rights, the comments just made apply accordingly in principle.

3.3

Portfolio Investments

Union measures for portfolio investments out of third states can be based on Article 64 para 2 et seq. TFEU (if applicable) or Article 114 para 1 TFEU if gaps remain.101 This provision is not blocked out because the Article 64 paras 2, 3 TFEU does not refer to the internal market. Article 114 para 1 TFEU is applicable, as third–state cases can have an impact on the internal market. In certain cases, this source of competence is the only possible empowerment for the Union if provisions for portfolio investments out of other Member States are intended and Article 64 para 2 et seq. TFEU is not applicable. Apart from the right empowerment, each Union measure for portfolio investments must meet the requirements of the principle of proportionality and the Union’s basic rights. Considering these standards, a justification for possible impairments is normally hard to find, as those investments by definition have no enduring effect on the market strategy of companies. These severe conditions have consequences for the EU Screening Regulation if it applies to portfolio investments. This could be indicated due to its Article 2 Nr. 1 as the definition found therein covers a range of investments “including investments which enable effective participation in the management or control of a company”. Because this wording creates the impression that the scope of direct investments is reaching further (“including”) and captures at least partially portfolio investments, too. However, this interpretation neglects the recitals of the regulation that show that no portfolio investments and only direct investments with the option of exertion of influence on companies shall be addressed, so the regulation must be interpreted or reduced in this way. As a large scope of direct investments should be included by the regulation, there are many reasons that greenfield investments are addressed, too.

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See also Classen in von der Groeben et al. (2015), Art. 114, para. 93; Herrmann (2010b), pp. 207, 210.

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4 Result The outcome of the analysis has emphasised that the competences of the Union reach further than those of the Member States. However, both entities can adopt provisions dealing with direct investments out of third states, as these investments carry dangers for the security of supply and the political decision process. In these cases, the Member States and the Union must work hand in hand considering that the national possibilities to react are less comprehensive due to the fundamental freedoms.

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Herrmann C (2010a) Die gemeinsame Handelspolitik der EU im Lissabon-Urteil. In: Hatje A, Terhechte JP (eds) Europarecht, Beiheft 1. Nomos, Glashütte Herrmann C (2010b) Die Zukunft der mitgliedsstaatlichen Investitionspolitik nach dem Vertrag von Lissabon. Europäische Zeitschrift für Wirtschaftsrecht 6:207–211 Herrmann C, Müller-Ibold T (2016) Die Entwicklung des europäischen Außenwirtschaftsrechts. Europäische Zeitschrift für Wirtschaftsrecht 17:646–653 Hindelang S (2014) Kommentierung der Vorschriften zum Kapital- und Zahlungsverkehr im AEUV, WHI-Paper 02/2014 Johannsen SLE (2018) Die europarechtliche Bewertung der beabsichtigten erneuten Reform des Außenwirtschaftsrechts zur Kontrolle ausländischer Beteiligungen an Betreibern kritischer Infrastrukturen (Teil 2). Inf Dent 10:247–249 Korte S (2019) Regelungsoptionen zum Schutz vor Fremdabhängigkeiten aufgrund von Investitionen in versorgungsrelevante Unternehmen. Wirtschaft und Verwaltung 2:79–140 Krenzler HG, Herrmann C, Niestedt M (2015) EU-Außenwirtschafts- und Zollrecht, vol 2. C.H. Beck, Munich Lux M (2012) In: Dorsch E (ed) Zollrecht - Recht des grenzüberschreitenden Warenverkehrs. Stollfuß, Bonn Martini M (2008) Zu Gast bei Freunden? Staatsfonds als Herausforderung an das europäische und internationale Recht. Die Öffentliche Verwaltung 7:314–322 Oppermann T, Claassen C-D, Nettesheim M (2018) Europarecht, 8th edn. C.H.Beck, Munich Pechstein M, Novak C, Häde U (2017) Frankfurter Kommentar zu EUV - GCH - AEUV, vol. 2: AEUV, Präambel, articles 1-10. Mohr Siebeck, Tübingen Preisser MM (2013) Sovereign wealth funds. Mohr Siebeck, Tübingen Schaefer C (2008) Die Ermächtigung von Mitgliedsstaaten bei ausschließlicher Gemeinschaftszuständigkeit: Regelwidrigkeit in der Kompetenzordnung. Eur Secur 5:721–735 Schmidt J (2018) Golden shares – VW and beyond. Der Gesellschafter 4:205–213 Schuelken T (2018) Der Schutz kritischer Infrastrukturen vor ausländischen Direktinvestitionen in der Europäischen Union. Zum Vorschlag der EU-Kommission zu einer Verordnung zur Schaffung eines Rahmens für die Überprüfung ausländischer Direktinvestitionen - (Kom) 2017 487 endg. Eur Secur 5:577–592 Slobodenjuk D (2019) Weitere Verschärfung der Investitionskontrolle in Deutschland – ein praxisrelevanter Überblick. BetriebsBerater 5:202–205 Streinz R (2018) EUV/AEUV, 3rd edn. C.H.Beck, Munich von Bogdandy A, Bast J (2001) Die vertikale Kompetenzordnung der Europäischen Union: Rechtsdogmatischer Bestand und verfassungspolitische Reformperspektiven. Europäische Grundrechtezeitschrift 28:441–458 von der Groeben H, Schwarze J, Hatje A (2015) Europäisches Unionsrecht, vol 4, 7th edn. Nomos, Glashütte Weller M-P (2008) Ausländische Staatsfonds zwischen Fusionskontrolle, Außenwirtschaftsrecht und Grundfreiheiten. Zeitschrift für Wirtschaftsrecht 19:857–865

Stefan Korte (*1975 in Walsrode, Germany) is a professor of law at the University of Technology in Chemnitz. He holds a Chair in German Public Law at the faculty of economics since 2015. Korte studied law at the University of Göttingen and was supported with a scholarship from the Konrad Adenauer Foundation. He graduated in 2001 with his first state examination and 2006 with his second state examination in law. Korte received a doctor’s degree in 2004 from the University of Hamburg for his thesis on the state’s gambling regime. In 2013 he received his venia legendi for his habilitation thesis on public law as a location factor. Parallel to his activities in the field of law, Korte was studying at the Universities of Göttingen and Hamburg in order to receive additionally a degree in business administration. He graduated in 2008. As an academic, Korte was awarded several prizes for both excellence in teaching (e.g. the Teaching Award by the faculty of law of the Freie Universität Berlin, 2009) and research (e.g. the

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Interdisciplinary Jean Monnet Award for habilitation by the Friedrich Schiller University of Jena, 2015). He holds several memberships and fellowships to national as well as international associations such as the “Vereinigung Deutscher Staatsrechtslehrer”, “the German-Taiwanese Working Group on Administrative Law” or the “Gesellschaft für das gesamte Regulierungsrecht”. On the one hand Korte’s research is focused on European economic law, especially on the European Single Market with its fundamental freedoms as well as the state aid law. On the other, he takes part in the legal discussion on national administrative economic law, where he is a leading expert on the topics of the German gambling law and the Trade, Commerce and Industry Regulation Act.

Comment on “Exploring the Possibilities and Limits of the EU and Member States to Set Up an Investment Screening Mechanism in the Light of Union Law” Bugge Thorbjørn Daniel Contents 1 Screening Mechanisms and Article 207 TFEU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Scope of the Common Commercial Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Principles for the Common Commercial Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Realization of the Common Commercial Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The Question of Compatibility of Article 65 TFEU and National Screening Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Nonconferral of Member States’ Right to Take Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Qualification of Member States’ Right to Take Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Tension in the Motivation for Regulation 2019/452 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Article 207 TFEU Revisited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Allocation of Competences in Article 64 TFEU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 The Grandfather Clause and Deliberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Realization of the Free Movement of Capital: Foreign Direct Investments . . . . . . . . . 4 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract The following comments are inspired by the thoughtful analysis by Stefan Korte: “In Search for an EU Competence to Establish an Investment Screening Mechanism and Restricting Effects Flowing from Fundamental Freedoms, Fundamental Rights, and Other EU Primary Law” (Korte, Stefan, In Search for an EU Competence to Establish an Investment Screening Mechanism and Restricting

The original version of this chapter was revised for an incorrect chapter 28, title as ‘Comment on “In Search for an EU Competence to Establish an Investment Screening Mechanism and Restricting Effects Flowing from Fundamental Freedoms, Fundamental Rights, and Other EU Primary Law” whereas it has been updated to ‘Comment on “Exploring the Possibilities and Limits of the EU and Member States to Set Up an Investment Screening Mechanism in the Light of Union Law”. The correction to this chapter can be found at https://doi.org/10.1007/978-3-030-43757-2_32

B. T. Daniel (*) Department of Law, University of Southern Denmark, Odense, Denmark e-mail: [email protected] © Springer Nature Switzerland AG 2020, corrected publication 2021 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 467–478, https://doi.org/10.1007/16495_2020_28, Published online: 18 August 2020

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Effects Flowing from Fundamental Freedoms, Fundamental Rights, and Other EU Primary Law, in this volume.). It should be made clear that the ambition and scope of these comments is not to address all issues or arguments presented by Korte; rather, the comments are limited to three distinct but interlinked issues: the structure and function of Article 207 of the Treaty on the Functioning of the European Union (TFEU), which leads to an analysis of the role of Article 65 TFEU in explaining national screening mechanisms, and finally the legal basis for Union measures found in Article 64(2) TFEU.

1 Screening Mechanisms and Article 207 TFEU This section addresses the structure and function of Article 207 of the Treaty on the Functioning of the European Union (TFEU) with specific reference to inclusion of foreign direct investment by looking at the scope of the common commercial policy, the underlying principles guiding the common commercial policy, as well as the system for realization of the common commercial policy established in the treaties.

1.1

Scope of the Common Commercial Policy

In the preamble to the TFEU, the common commercial policy is presented as a means to achieve the progressive abolition of restrictions on international trade. Mirroring the internal importance of the internal market, external trade relations are of the highest importance: according to Article 3(1)(e) TFEU, the common commercial policy is one of the areas where the Union has exclusive competence (and where the principle of subsidiarity therefore does not apply, Article 5(3) TEU). In the treaties, the common commercial policy is regulated in Articles 206–207 TFEU, and there seems to be no doubt that foreign direct investment as a general notion falls within the common commercial policy.1 It is not clear however, that all aspects of foreign direct investment are covered by the exclusive Union competence, a point that will be elaborated further below. Article 206 TFEU generally links the establishment of the customs union in Articles 28–32 TFEU to the Union’s contribution towards the harmonious development of world trade, the abolition of restrictions on international trade, the abolition of restrictions on foreign direct investment, and the lowering of trade barriers. The specific content of the common commercial policy is not developed any further in this provision.2 Neither is the link between the customs union and the abolition of restrictions on foreign direct investment explained in any detail, which is of specific relevance to the current theme.

1

On the inclusion of FDI in the Common Commercial Policy: Ceyssens (2005), pp. 259–291; Wu (2012); Meunier (2017), pp. 593–610. 2 For a discussion on the distribution of competences between the EU and Member States, see Reinisch (2011), pp. 43–54.

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Article 207(1) TFEU contains an open list of areas falling within the common commercial policy: tariffs, trade agreements on goods and services and intellectual property rights, foreign direct investment, measures of liberalization, export policy, as well as trade protection against subsidies and dumping. Again, while foreign direct investment is explicitly mentioned among components of the common commercial policy, the content of the notion is not developed in the provision. Importantly, the question of what exactly is meant by the references to foreign direct investment in Articles 206 and 207 TFEU is unresolved.3

1.2

Principles for the Common Commercial Policy

Article 207(1) TFEU prescribes that the common commercial policy shall be based on uniform principles, albeit without explaining further the content or bearing of those principles. Article 206 TFEU is of some assistance in this regard and mentions abolition of restrictions and lowering of trade barriers, which at least provides some degree of direction in the pursuance of the common commercial policy. Likewise, Article 21(2)(e) TEU presents reduction of barriers to trade as a Union goal in its external relations. Similar direction can be found in Article 3(5) of the Treaty on European Union (TEU), which requires that the Union contribute, to inter alia, “free and fair trade.” Another principle behind the common commercial policy is allegiance to a rulebased international trading system. Implicitly, Article 207(1) TFEU, by referring to the conclusion of international agreements, includes pursuance of international cooperation as a relevant principle upon which the common commercial policy builds. This reflects the aims expressed in Article 21(2)(e) and (h) that all countries should be integrated into the global economy and that the international system should be based on multilateral cooperation. Harmonious development of world trade, as mentioned in Article 206, arguably expresses a comparable, if not quite similar, principle. In addition, Article 207(1) TFEU, importantly, expressly links the common commercial policy to the wider context of the Union’s external action by requiring that it be conducted in the context hereof. In this regard, Article 3(5) TEU requires the Union to “uphold and promote its values and interest,” and in a similar vein Article 21(1) TEU instructs the Union in the context of the Union’s external policies and actions to aim for the safeguarding of “its values, fundamental interests, security, independence and integrity.” The underlying values are specified in Article 2 TEU, “respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights,” and Article 21(1) and 21(2)(b) TEU similarly lists consolidation and support of “democracy, the rule of law, human rights and the

3 For examples of the discussions of the scope of the Common Commercial Policy in relation to foreign investment see Bungenberg (2011), pp. 29–42; Dimopoulos (2012), pp. 401–422.

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principles of international law” as important values to be pursued by the Union. These values are to be pursued at national, Union, and international levels. It seems clear at this level of generalization – i.e., the references to values, interests, and principles – that clashes and tension may arise between different values, interests, and principles. Particularly in the context of screening of foreign direct investment as envisaged in Regulation 2019/452, there seems to be potential tension between, on the one hand, avoidance of restrictions on trade and, on the other hand, notably democracy, rule of law, and perhaps also human rights. Such tension is of particular relevance where the values are found at different levels – EU and national – and where the balancing exercise is therefore confronted with further complexities.4

1.3

Realization of the Common Commercial Policy

Obviously, the common commercial policy as such is external in its general orientation. Realization of the common commercial policy, however, has internal as well as external dimensions.5 The two dimensions are regulated separately. For the present purposes, the internal dimension thus constitutes internal Union trade policy instruments implemented in pursuance of the common commercial policy, while the external dimension refers to negotiation and conclusion of agreements with non-EU states and organizations. Internally, it is the responsibility of the Parliament and Council to adopt regulations defining the “framework implementing the common commercial policy” under Article 207(2) TFEU. Such regulations are adopted under the normal legislative procedure, Articles 289(1) and 294 TFEU. This is the legal basis for a range of regulations on matters such as trade barriers, import and export arrangements, measures directed against dumping and subsidies, and dual use. Interestingly, no specific reference is made to foreign direct investment. The external dimension of the common commercial policy is to be pursued through agreements with third countries and/or international organizations subject to Article 207(3)–(4) TFEU; negotiation and conclusion of such agreements are subject to Article 218 TFEU. Article 207(4) TFEU specifies that international agreements are to be negotiated and concluded by the Council, generally subject to qualified majority; however, specifically in the area of foreign direct investment, the requirement is unanimity “where unanimity is required for the adoption of internal rules.” In contrast to the internal dimension, the external dimension contains a specific reference to foreign direct investment. It is not specified exactly what is alluded to with this reference to areas where unanimity is required, but in the context

4 For a discussion of the vertical allocation of powers in the Constitution Treaty see Krajewski (2005), pp. 91–127. 5 On the internal and external potential of the Regulation: Schill (2019), pp. 105–128.

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of foreign direct investment, Article 64 TFEU seems relevant. Article 64 TFEU distinguishes between “measures on the movement of capital to or from third countries involving direct investment” in Article 64(2) and “measures which constitute a step backwards” from liberalization, as mentioned in Article 64(3). The former can be adopted under the normal legislative procedure by the Council and Parliament, while the latter can only be adopted by the Council by unanimity under a special legislative procedure. In other words, while agreements between the Union and other states/organizations on foreign direct investment are to be negotiated and concluded with majority in the Council whenever such agreements involve deliberalization, the requirement in the Council is unanimity. Arguably, the link between the internal market and the common commercial policy suggests that it is fundamentally important that the external aspect of the latter is a matter of exclusive Union competence. This contrasts the establishment of an internal framework for the common commercial policy.

2 The Question of Compatibility of Article 65 TFEU and National Screening Mechanisms Having brought Article 64 TFEU into the analysis, it would appear logical to turn the attention to this provision. On the other hand, the special character of Article 65 TFEU adds an important dimension to the understanding of Article 207 TFEU, which must be addressed first. The following remarks relate to the question whether national screening mechanisms may be explained with reference to Article 65 TFEU. In this regard, it is important to note as a preliminary point that the term “explained” is employed here to describe the relationship between national screening mechanisms and Union law, as opposed to the term “justified.” The essence of the argument is that Article 65 TFEU is to be understood as an exemption from Union law rather than an exception to Union law. This point is elaborated first as it has important implications for determining and understanding the relationship between the Member States’ rights and Union policies. Attention is then given to the qualifications of the exemption in Article 65(3) TFEU. Next, it is illustrated that the preambular considerations of Regulation 2019/452 reflect the tension between the Union’s interest in free movement and Member States’ interests in the protection of public order and public security. Finally, Article 207 is revisited in order to address the extent of the carve-out from the treaties in Article 65 TFEU.

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Nonconferral of Member States’ Right to Take Measures

In the context of free movement of capital and payments as established in Article 63 TFEU, the wording of Article 65(1)(b) TFEU provides that the former provision “shall be without prejudice” to the “right of Member States” to “take measures which are justified on grounds of public policy or public security.” Arguably, this wording suggests that the right of Member States to take such measures differs qualitatively from the exceptions in Articles 36 and 52 TFEU, in that the treaty does not take away that (sovereign) right. In comparison and contrast, Article 36 TFEU ensures that certain types of measures – prohibitions and restrictions – in pursuance of a fairly wide range of purposes are not precluded, while Article 52 TFEU “does not prejudice the application of provisions” in pursuance of three distinct policies: public policy, public security, and public health. There is in these two provisions no reference to the “rights of Member States,” but rather to measures (of certain types or generally). Article 65 is narrowly confined to central state interests: public policy and public order. Along similar lines, Article 4(2) TEU instructs the Union and assures the Member States that national security “remains the sole responsibility of each Member State.” To the extent that such right is preexisting, the relationship between different provisions of the treaties and the respective categories of competences seems to be irrelevant. In other words, the right to take such measures to protect public order or public security in the context of free movement of capital and payments reflects the application of the principle of conferral (or perhaps more precisely in the negative sense: nonconferral) as laid down in Article 5(1)-(2) TEU, as opposed to the categories of competences mentioned in Article 2 TFEU. In this connection, it is relevant to mention that Article 207(6) TFEU safeguards the allocation of competences between the Union and its Member States providing that the Union’s exercise of the competences in the common commercial policy “shall not affect the delimitation of competences.”

2.2

Qualification of Member States’ Right to Take Measures

While the right to take such measures rests with Member States, this does not suggest that the Member States’ right to take measures for the protection of public policy or public security is unlimited or unqualified. On the contrary, Article 65(3) TFEU provides that such measures “shall not constitute a means of arbitrary discrimination or a disguised restriction” on the free movements established in Article 63 TFEU. This includes breaches of the national treatment principle – i.e., “between Member States” – as well as the most-favored-nation principle – i.e., “between member States and third countries.” Arguably, this requirement somewhat vaguely reflects the notion envisaged in Article 3(5) TEU that the Union shall contribute to free and fair international trade by excluding the use of discriminatory national measures. The

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purpose is not to interfere in the right of Member States as such but to make sure that the exercise of this right does not pursue discriminatory purposes beyond the protection of public order or public security. Whether a national screening mechanism falls outside the scope of the treaties in this sense would therefore require scrutiny of its (potentially discriminatory) effects. This scrutiny would presumably be undertaken by the Court of Justice of the European Union (CJEU) patrolling the borders of the treaties. Curiously, there is an element of uncertainty in the standards implied in Article 65 (3) TFEU. On the one hand, the terms are similar to those found in Article 36 TFEU. Arguably, the standards implied in this nondiscrimination clause in Article 65 (3) TFEU could be seen not from a Union perspective but from the perspective of international trade. In the General Agreement on Tariffs and Trade/World Trade Organization (GATT/WTO) context (prominently Article XX GATT), such wording refers to de jure and de facto discrimination, respectively.

2.3

Tension in the Motivation for Regulation 2019/452

Finally, it is of interest to note that the suggested interpretation and view of the relationship between the freedom of movement of capital in Article 63 TFEU and Member States’ rights under Article 65 TFEU is reflected in the preambular text to Regulation 2019/452, albeit admittedly not unequivocally. On the one hand, reflecting the view that such measures fall within the scope of retained Member State sovereignty, consideration (4) in the preambular text refers to the Member States’ right in Article 65(1)(b) as a derogation from the free movement of capital and not as an exception; arguably, therefore, the right is seen as an exemption rather than an exception. Furthermore, the preambular text refers in consideration (3) to the right of “the Union and the Members States to adopt restrictive measures relating to foreign direct investment on the grounds of security or public order” pursuant to international commitments; in the same vein, consideration (7) adds reference to Article 4(2) TEU as well as Article 346 TFEU. The inclusion of the reference to the Union interests blurs the picture somewhat; however, as indicated above, interests may be manifest at different levels (Union and Member State). Finally – reflecting on the notion that this is a sovereign right of Members States outside their Union obligations – consideration (4) refers to existing screening mechanisms as reflecting “the objectives and concerns of Member States with respect to foreign direct investments” and adds that future national mechanisms could “take into account the functioning, experiences and best practices of existing mechanisms.” On the other hand – apparently inexplicably and to some extent contradictorily – consideration (6) of Regulation 2019/452 briefly holds that foreign direct investment falls within the common commercial policy and as such is an exclusive Union competence. The mentioned reference to the Union’s right to adopt restrictive

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measures relating to foreign direct investments could also seem to reflect a similar view. Thus, it would seem that the drafters of Regulation 2019/542 adhere to the view that investment screening as such does not fall entirely within the scope of the treaties – or at least that certain elements of investment screening remain within the competence of the Member States. The persuasiveness of this position would depend on the specific content of the common commercial policy – in this regard, it is noteworthy that it is the responsibility of the Council and Parliament to establish the internal framework for the common commercial policy.

2.4

Article 207 TFEU Revisited

The two dimensions – internal and external – of the common commercial policy are relevant in understanding the relationship between Article 207 TFEU and Article 65 (3) TFEU. Thus, the key to understanding the apparent contradiction in the relationship between the two provisions can be found in the reference in Article 207(2) to the establishment of a Union framework balanced against the right of Member States to protect vital state interest under the notions of protection of public order and public security. Conceivably, a framework could capture both Union and Members State interest simultaneously by ensuring (Member State) freedom of implementation but (Union) transparency and coordination of measures.

3 The Allocation of Competences in Article 64 TFEU Turning now to the arrangements regarding movement of capital to or from third states found in Article 64 TFEU, the structure of the provision is interesting. The provision has a broad scope referring to “the movement of capital to or from third countries involving direct investment – including investment in real estate,” as well as “establishment, the provision of financial services or the admission of securities to capital markets”; however, for the present purposes, only foreign direct investment from third countries into the Union is relevant. This section will look briefly at the introductory grandfather clause in the first paragraphs and more in depth at the system for realization of free movement of capital, more specifically the legal basis for Union action contained in the second paragraph. As indicated above, the third paragraph of Article 64 TFEU provides a special legal basis for deliberalization, but this will not be subject to further scrutiny here.

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The Grandfather Clause and Deliberalization

The first paragraph of Article 64 TFEU establishes a grandfather clause allowing for the continuation of existing restrictions both of Member State and of Union origin. The immediate effect is obviously to allow such existing restrictions; however, this grandfather clause also more subtly signals that there is a special relationship – a special allocation of competences – between Member State and Union competences in this field, including foreign direct investments. This is in line with the points made above on the nature of the exemption in Article 65 TFEU.

3.2

Realization of the Free Movement of Capital: Foreign Direct Investments

The second paragraph contains the legal basis for Union action providing that the Parliament and the Council may adopt measures in accordance with the ordinary legislative procedure. Article 64 TFEU constitutes part of the Union internal market and is therefore a shared competence in accordance with Article 4(2)(a) TFEU. Accordingly, in the exercise of this competence, the principle of subsidiarity in Article 5(3) TEU qualifies Union regulation “if and to the extent the goals cannot be achieved by the Member States.” To the extent that common Union rules are adopted, the scope for Member State regulation is correspondingly limited. Interestingly, this – otherwise quite inconspicuous – legal basis is preceded by two distinct and important qualifications that are relevant in the present context. Firstly, it is recognized that the realization of the objective of free movement of capital between Member States and third countries will take place to the “greatest extent possible.” This qualification is different from the principle of subsidiarity. In this, it is recognized that some restrictions of free movement of capital may be warranted. It is not detailed what would constitute the “impossible” in this context, but arguably this could include restrictions founded in practicalities as well as policy, including the protection of the Union public order and/or the Union public security. Arguably, this is reflected in the Commission’s access, in the EU Screening Regulation, to bring Union matters to the attention of national screening mechanisms. Secondly, the attainment of the objective must take place without prejudice to the other chapters of the treaties. This qualification is important in two ways. Firstly, it refers to the relationship between the free movement of capital and, for instance, the common commercial policy as established by the treaties. In this connection, the qualification serves to preserve the basic structure of the treaties, the political choices made, and the balances achieved in the various areas of the treaties. Secondly, flowing from this maintenance of the treaty system, the qualification also serves to preserve the allocation of competences between Union and Member States in the treaties.

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Finally, while serving comparable purposes of balancing free movement against competing interests, these qualifications added to the legal basis must be seen to exist alongside the rights of individual Member States in Article 65 TFEU. Parallel to the relationship between Articles 65 TFEU and 207 TFEU, Article 65 TFEU defines the scope of conferred powers, while Article 64 TFEU is addressed to the Union in the exercise of conferred competences.

4 Concluding Remarks6 The screening of foreign direct investment pits two competing interests against each other: free movement of capital and essential interests of states in protecting public order and public security. It is suggested that in answering the question of what the roles are of Member States and the Union, respectively, in relation to the screening of foreign direct investment, two distinctions are helpful. Firstly, a distinction must be made between internal and external dimensions of the common commercial policy. Secondly, this must be complemented by consideration of the level at which the interests compete, that is, Union or Member State. In this regard, the treaties maintain a basic allocation of competences protecting the Member States’ right to take action to protect specific interest while simultaneously allowing for Union coordination.

References Bungenberg M (2011) The division of competences between the EU and its member states in the area of investment politics. In: Bungenberg M, Griebel J, Hindelang S (eds) International investment law and EU law. Springer, Berlin, pp 29–42 Ceyssens J (2005) Towards a common foreign investment policy? – Foreign investment in the European Constitution. Legal Iss Econ Integr 32(3):259–291 Dimopoulos A (2012) Creating an EU investment policy: challenges for the post-Lisbon era of external relations. In: Cardwell PJ (ed) EU external relations law and policy in the post-Lisbon era. Asser Press, The Hague, pp 401–422 Krajewski M (2005) External trade and the constitution treaty: towards a more federal and more democratic common commercial policy? Common Market Law Rev 42(1):91–127 Meunier S (2017) Integration by stealth; How the European Union gained competence over foreign direct investment. J Common Market Stud 55(3):593–610 Meunier S, Nicolaïdis K (2019) ‘The geopoliticization of European trade and investment policy. J Common Market Stud 57:103–113 Reinisch A (2011) The division of powers between the EU and its member states “After Lisbon”. In: Bungenberg M, Griebel J, Hindelang S (eds) International investment law and EU law. Springer, Berlin, pp 43–54

6 On the geopolitics of investment policy in general see Meunier and Nicolaïdis (2019), pp. 103–113.

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Schill SW (2019) The European Union’s foreign direct investment screening paradox: tightening inward investment control to further external investment liberalization. Legal Iss Econ Integr 46 (2):105–128 Wu C-H (2012) Foreign direct investment as common commercial policy: EU external economic competence after Lisbon. In: Cardwell PJ (ed) EU external relations law and policy in the postLisbon Era. Springer, Berlin, pp 375–400

Part VI

Possible Functions of a Common European Law on Investment Screening

Screening for What Threat: Preserving “Public Order and Security”, Securing Reciprocity in International Trade, or Supporting Certain Social, Environmental, or Industrial Policies? Martin Nettesheim

Contents 1 New Geopolitical and New Geoeconomic Conditions: Diffuse Fears . . . . . . . . . . . . . . . . . . . . . 2 Terminology: Use and Abuse of the Concept of Security and Order . . . . . . . . . . . . . . . . . . . . . . 3 The Empirical Dimension: Expansion and Reformulation of the Regulatory Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Shifts in Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 From the Defense of Territorial Security to the Management of Economic Structures 3.3 Changes in the Concept of Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Normative Dimension: Coherence and Rationality of Investment Screening . . . . . . . . 4.1 Securing the Provision of Public Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Combating the Brain Drain, Technology, and Jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Opening Up of Foreign Investment Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Other Objectives (e.g. Fairness in the Markets) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Cumulative Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract Investment protection is currently pursued for reasons of strategic economic policy. It is the expression of a new geoeconomic rivalry that has created antagonisms and displaced the previous belief in the value of unlimited freedom of movement of capital and freedom of establishment. The paper examines how the new investment protection policy is conducted with recourse to the concepts of “security” and “order.” The paper develops a normative framework with which the rationality of this policy can be assessed and criticized. The resulting picture is ambivalent. There are good reasons to protect investments. However, the existing mechanisms identify these reasons only insufficiently, and the mechanism is only partially “fit for purpose.”

M. Nettesheim (*) University of Tübingen Law School, Tübingen, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 481–504, https://doi.org/10.1007/16495_2020_8, Published online: 7 July 2020

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1 New Geopolitical and New Geoeconomic Conditions: Diffuse Fears In the twenty-first century, geopolitical and geoeconomic conditions will emerge in which Europe will no longer assume the dominant role it has played over the last three centuries. The constellations of forces are shifting, and new and powerful actors are moving forward. At the same time, a technological change is taking place that will revolutionize the structures of economic prosperity production. The result will be a loss of certainty and the emergence of uncertainty. No one can really predict what the world will look like in 50 years’ time. The uncertainties are particularly tangible in the European Union. In all Member States, there is political concern about how the “old continent” will prove itself in the new circumstances. And everywhere politicians are looking for answers as to how the EU Member States should wisely position themselves strategically in this situation. In some areas, activity is almost hectic. Special attention is currently being paid to government instruments designed to monitor and screen foreign direct investment (“investment screening”).1 A change in thinking can already be observed in the treatment of cross-border capital movement per se. The fundamental willingness of Western countries to fight for freedom of foreign direct investment (FDI) is in any case in decline.2 It is probably exaggerated to speak of a backlash against FDI. However, many certainties and beliefs, which until not too long ago provided the basis for the political principles in dealing with direct investment, are now in the process of being reconsidered; some are even discarded. It was always apparent for political observers that the extremely positive assessment of FDI3 (and the resulting regulatory “environment”, e.g., in Art. 63 TFEU4) was conditioned by a certain understanding of the world and a certain view on the role of the European states in this world. European states regarded the free movement of capital from a position of strength, from the perspective of an actor that was a capital exporter. This has since changed. Everywhere there is now distrust of the promises of globalization that had until quite recently been the common vision of a shared future.5 There is also widespread distrust of the new global actors that do not simply want to submit to the liberalWestern paradigm of open capital markets—actors that pursue their own agenda, have specific interests, and do not fit into the geostrategic order that has emerged

1

See, e.g. Schill (2019), p. 105. OECD (2009), Sachs (2011), Sauvant (2008, 2009) and Thomsen and Mistura (2017); see also Waymouth (2010). 3 See Pollan (2006), Dimopoulos (2011), Dolzer and Schreuer (2012), Sornarajah (2010), Salacuse (2013) and Sauvant et al. (2012). 4 Mohamed (1999); Nettesheim (2008), p. 729; Herrmann (2010), p. 207; Hindelang (2009a), p. 829; Hindelang (2009b); Stoll and Holterhus (2016), p. 339. As to the constitutional law dimension: Nettesheim (2018) and Stoll et al. (2019). 5 OECD (2009), p. 1 et seq.; Bitzenis (2012), p. 9. 2

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over the last decades that is now decaying. Developments such as those observed in the 1980s following the emergence of East and Southeast Asian competitors in the goods trade sector are now repeating themselves in the area of capital movements. In some circles, the new competitors are viewed as an economic threat. EU Member State governments have recently drawn up a response.6 As a consequence, a new “regionalism” is emerging.7 It is well known that no state has ever granted unrestricted entry to foreign investors. However, today doubts have emerged as to whether Western states have relinquished too much economic room for maneuver or opened the gates too widely. There is no doubt that the political economy has become more hostile to FDI8 and that protectionism is on the rise.9 At the same time, attempts to create a multinational framework10 have come to a stop. More and more countries are tightening their screening mechanisms.11 The expansion of investment screening has aroused ambivalent feelings. Against the background of intensifying systemic competition between the states of the Atlantic West and new competitors, there is a reason to review the basic decision in Art. 63 TFEU in favor of open capital markets. And there is also reason to examine the potential effects of foreign direct investment. Not every foreign direct investment proves to be exclusively positive for the target country in economic or sociopolitical terms. Sovereign funds pursue objectives that diverge from classical private actors.12 The emergence of actors in the global economic system operating a steroidal state capitalism damages the basic operation principles of the current system and may pose a threat to security.13 There is simply no role for countries with an activist government injecting money into globally operating state firms, which at the same time severely restricts the commercial freedoms of foreign investors within its one market.14 There is more cause for concern.15 Investment screening can be exploited populistically. It can be captured and abused by protectionist interests. It can be used in a way that seriously damages the target state itself or the entire trading system. Even if one agrees that the Atlantic West is facing new competition and that 6 See, e.g., Bundeswirtschaftsministerium (2019); Altmeier and Le Maire (2019). Critical: Bundesverband der Deutschen Industrie (2017); Bundesverband der Deutschen Industrie (2019); Fuest (2019). 7 Trakman and Ranieri (2013). 8 Sauvant (2008), p. 215. 9 Sauvant (2009), p. 3 et seq.; Waymouth (2010), p. 35; Thomsen and Mistura (2017). 10 See Leal-Arcas (2009), p. 865; Salacuse (2013); Sachs (2011). 11 Pohl et al. (2019); OECD (2019); Copenhagen Economics (2018); The German case is described by: Hindelang and Hagemeyer (2017), p. 882; Asbrand and Nehring-Köppl (2018), p. 63; other countries are described by: Bellinger and Townsend (2011); Bath (2012); Li (2016), p. 255; Carnegie et al. (2018), p. 296; Esplugues Mota (2018c). 12 See, e.g., Schmit and Wouter (2012); Chaisse et al. (2011), p. 837. 13 Sauvant and Nolan (2015). 14 Hanemann and Rosen (2012). 15 Heinemann (2012), p. 843; Tavassi (2012), p. 645.

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some new competitors are driven by values and principles that are sometimes at odds with those of Western liberal democracies, it is extremely challenging to determine whether a particular case of FDI is in the best interest of the target state in the short and medium terms, and even more so in the long run.16 The use of weasel words in the relevant legal instruments tries to obfuscate the profound uncertainty on the side of the lawmaking authorities. The purpose of the following study is to describe and criticize the use of the normative concept of investment protection for reasons of “security” and “order.” Under Sect. 2, the use of this terminology in the recently created EU Regulation is described. Under Sect. 3, it is then shown how the actual and practical scope of application of investment protection has gradually expanded and today no longer covers only direct state security interests. Under Sect. 4, it is shown that this gives rise to inconsistencies that call into question the normative rationality of the approach. The article ends with a summary (Sect. 5).

2 Terminology: Use and Abuse of the Concept of Security and Order At heart, investment screening today is about political and economic competition. The Member States of the EU today face geostrategic and economic policy challenges, which make it indeed sensible to subject investments from third countries into the European Union to review. However, even if the point is to defend the economic-political (above all industrial) position of the European states in a rapidly developing world, this is not illustrated in the language of the instruments. While investment screening is of a political-strategic nature, the challenge is discussed in the relevant political documents under the heading of defending “security” and “order.” Certainly, foreign direct investments have always been able to affect certain sectors of state activity that had a direct relevance for military and police security. The fact that states controlled or even prohibited foreign direct investments in these sectors has also long been observable. What is new, however, is that strategic economic policy efforts are being discussed under the headings of “security” and “public order.” A “militarization” or “securitization” of public, especially political, discourse can be observed, which is neither appropriate nor wise. In substance, the political-economic function of investment screening is treated under a misleading term. It is simply not appropriate to treat the challenges posed by FDI and tackled by investment screening under police terminology. Or is it just a matter of political spin, with which the new policy is to be sold as an unsuspicious continuation of proven foreign trade policy? In the positive legal realm, too, a use of terminology can be observed that is misleading—to say the least. Many legal instruments are using standards of review 16

Williams (2018a, b); see also Xu et al. (2015).

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based on the notion of “security and public policy.” This aberration can currently be seen particularly clearly in the example of the European Union. In the spring of 2019, the EU adopted a regulation that is intended to lend the EU Member States’ monitoring instruments a substantive and procedural framework.17 According to Art. 3 para. 1 of Regulation (EU) No 2019/452 of establishing a framework for screening of foreign direct investment into the European Union,18 which has entered into force on April 19, 2019,19 the following applies: In accordance with the provisions of this Regulation, Member States may maintain, amend or adopt mechanisms to screen foreign direct investments in their territory on the grounds of security or public order.

The power and freedom of the Member States to control cross-border investments (investment screening) is thus limited to two objectives. A Member State may assess and, where appropriate, prohibit foreign direct investments for reasons of protection of its security, and it may intervene on grounds of public policy. In practice, no distinction is made between the two concepts. Further protection cannot be pursued by a Member State (at least according to the wording of the forthcoming Regulation). The very text of the Regulation itself, however, makes it clear that investment screening is meant to serve objectives and answer political concerns, which go far beyond what the traditional, well-established and proven terminology of European Union law refers to as “security” and “public order.” In the doctrine of EU law (especially that of the fundamental freedoms), there is no question that so-called economic, especially industrial, policy or protectionist objectives can never be cited as considerations of “security” or “public order.” And yet the investment screening policy of the EU Member States is driven by the will to have an industrial policy response to the new challenges in hand. The framework set by the EU with the regulation accepts and supports this basic decision. But what should be the appropriate geopolitical and geoeconomic standards instead? Article 4 of the EU investment screening regulation20 makes clear how uncertain one is at EU level in the design of the framework. Indeed, the provision might be read as an indication that

17

See e.g., Brauneck (2018), p. 188; Snell (2019), p. 137; de Kok (2019), p. 24; Esplugues Mota (2018b), p. 8; Schuelken (2018), p. 577; Grieger (2017). 18 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 2019 LI 79, p. 1. The regulation does not create a supra-national and deep EU-wide screening mechanism. The EU Commission does not have to power to issue binding decisions. The EU Member States continue to decide whether they open their market to FDI. The focus of the regulation is on the coordination of Member State action, creating a framework for cooperation and collaboration. Some observers expect the regulation to be the first step on the way to the creation of a genuine supra-national and robust EU screening instrument. 19 The regulation will apply to transactions from October 11th, 2020 onwards. Member States will be able, however, to screen transactions after that date that have not been completed before or on July, 11th, 2019. 20 See footnote 18.

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one may even be at a loss. It contains a far-reaching, seemingly arbitrary, and unfinished catalogue of criteria, which are intended to provide orientation when examining the question of whether an investment can potentially impair security or public order. Even an experienced observer will have a hard time to discern a clear and workable normative framework for Member State action.21 There is no compelling legal reason to pursue an investment screening policy solely under the pretext of protecting state “security” and “public order”: under GATS rules, no Member State is directly obliged to grant investors from a third country market access. Such a right only arises on the basis of a specific concession. GATS Member States could thus adopt, at least in principle, investment screening policies with much wider objectives. The recourse to a misleading denomination would therefore in any case not have been necessary in principle. The use of the concepts of “security” and “public order” might only be necessary where a state wishes to impose restrictions in an area in which it has committed itself to market access or accepted commitments in the area of “post accession.”22 In these cases, there might indeed be treaty exemptions based on the notion of security and order. However, the basic structures of international economic law are challenged and possibly damaged when protectionist industrial policy is pursued under the pretext of defending security and order. Is it consistent on the one hand to defend the multilateral order against critics and skeptics but on the other hand to soften the concept of security and order by applying it to general economic policies?

3 The Empirical Dimension: Expansion and Reformulation of the Regulatory Approach So the issue at stake is industrial policy strategy.23 In a document presented by the German Economics Minister on 5 February 2019, this is also openly and explicitly referred to as such.24 It is well known that there is no consensus among states on the question of whether the geopolitical, geoeconomic, and technological challenges should be responded to with investment review. In the group of economically leading states, at most half have so far introduced a mechanism for investment screening. It can be seen, however, that the number of states has increased in recent years. In addition, there has been a continuous expansion in the scope of application of the instruments. It is well known that investment screening covers a wide area of “risk” today.25 From the point of view of classification, numerous attempts have been made in 21

Clodfelter and Guerrero (2012), p. 173. The term applies to mechanisms that regulate the activity of foreign investors after market access. 23 See Pachnou (2016). 24 Bundeswirtschaftsministerium (2019). 25 See Esplugues Mota (2018a); Jackson (2013); Milner (2014), p. 8. 22

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political-economic and academic documents to structure investment screening into different categories. For example, in many papers, a distinction is made between “target risks” and “investor risks.” In some cases, further differentiations are made: in the United Kingdom, an attempt has recently been made to identify three risk situations and, in this respect, to describe more precisely when a relevant risk can be observed.26 However, here, too, the concrete hazard or damage events for which investment screening is intended are not systematically developed. This is no more than an exemplary listing of some examples. These classifications make clear that investment screening can be aimed at perceived or actual risks originating in the home country of the investor, in the investor itself, or in conditions in the host country. This paper does not have the purpose of delivering a thorough comparative overview over the structure of the instruments and mechanisms used by the major economic forces in the world today. Some general trends, however, are worth mentioning.27 Three major shifts can be observed:

3.1

Shifts in Objectives

The first major shift concerns the objectives of the investment screening.28 The traditional protective instruments were used to ward off disturbances in the core area of the state’s fulfilment of tasks, above all to guarantee military security vis-à-vis challenges from outside the state and police order inside. Here, profound shifts can be observed. The focus is no longer only on the protection against disruptions and impairments of state activity in the narrower sense of security. Rather, the state is endeavoring to intervene directly in market activities. The intention is to ensure that economic developments that promote the common good are set in motion or maintained. Instead of setting a frame for free economic activity, public authorities are engaging in the (micro)management of markets. The state is no longer content with merely setting a framework for market operations but intervenes directly in the decisions of the market players. Traditional and classical concerns about ensuring security are replaced by efforts of “activist” state actors to ensure a prosperous economic future.29 The concrete and specific vision behind these efforts remains fussy, however. The normative aspirations and visions that are pursued are only vaguely defined by law and open up far-reaching scope for political and administrative discretion. In many of the codifications of an investment screening regime, no conclusive normative program is laid down that could be used to determine what economic or political

26

UK Department for Business, Energy and Industrial Strategy (2018). See Sauvent (2010–2011), p. 1. 28 See Alvarez and Sauvant (2011); Economou and Sauvant (2010–2011), p. 3. 29 See, e.g., the description in: OECD (2019), p. 9 et. sub. 27

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structures of the target state are problematic or what type of investment should be prohibited in concreto. Usually, the legal framework is limited to exemplary clauses. Even taking into account the need for legislative abstraction, this openness is highly problematic. It indicates a fundamental uncertainty about one’s purposes among the proponents and creators of the instruments. Normative openness implies that decision-making power is delegated to administrative authorities. Moreover, it is to be feared that populist pressure and daily political activism will guide decisionmaking. The history of investment screening law knows enough examples that show how susceptible decision-making processes are to populist or paternalistic reflexes.

3.2

From the Defense of Territorial Security to the Management of Economic Structures

A further shift then concerns the subject of the investment review. It has already been noted that states, in the past, always took protective measures in the area of military procurement policy to safeguard their defense capabilities.30 For large and mediumsized states, self-sufficiency in defense policy was a widespread goal; the shielding, securing, and supporting of supplier industries were often the subject of sectorspecific control instruments. In substance, the aim was to secure strategic-military security interests and maintain the defense capability of a state—a territorial concern that is situated within the core area of a sovereign state’s understanding of tasks and functions. This dominating point of reference has been lost in recent years. Instead of applying a sector-specific focus, more and more states are now monitoring investment activities in their whole breadth and as a whole, with the state claiming to be able to manage the development of economic structures in the public interest. This cannot be simply explained by a shift in the perception of what it means to be selfsustaining in a strategic military sense. Indeed, it is a reflection of an emerging geoeconomic competition, well beyond the realm of security. The consequence of this reformulation of the screening program is that control is often no longer limited to the investor’s access to the market but also includes postaccession monitoring. In some cases, the establishment of elaborate economic policy “programs” can be observed. One has to look at these developments in light of their context. Some steps are due to technological developments. The clear dividing lines between military technology and civil technology have become increasingly blurred. In the future, military conflicts will certainly no longer be fought only on the battlefield but also through efforts to disrupt the performance of state functions and tasks. Critical infrastructure has always been a military target; the means of interruption, however, have changed. Moreover, interrelations between different fields of state function fulfillment have as 30

Graham and Marchick (2006).

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a consequence the possibility that attempts to disrupt the performance of state functions in one area can wave out into other sectors. Additionally, more and more areas and sectors of governmental and administrative responsibility have become security relevant. As a result, clear boundaries and criteria dissolve: What is “critical technology”? What are “emerging and foundational technologies”? Which governmental activities and responsibilities are of fundamental nature and must be protected against interference from foreign investors? Nevertheless, one might argue that we are currently facing an overreaction. In a certain way, every economic sector that is progressive, important, and embedded in larger (network) contexts today tends to become relevant to investment screening law. Liberal skeptics do not claim without reason that state officials are not particularly competent in the management of economic structures. Confidence that state officials are particularly qualified to assess which branches of the economy are particularly important for the future economic prosperity of a state is misguided. Industrial policy driven by politicians or by the administration is regularly backward-looking, extrapolates inadequately past developments into the future, and shows no particular prognostic or even visionary ability. It must arouse concern when politicians claim to be able to replace the market as a force of discovery (Hayek); it would be worrying if they (or an administration commissioned by them) believe to have questionable steering skills and a dubious feeling for economic and industrial future developments. In fact, the legal catalogues, in which particularly important (critical) technologies and economic sectors are listed, regularly imply that inward-looking and present-oriented descriptions of what today is regarded as particularly promising can serve as a guide into the future. They do not have a visionary depth.

3.3

Changes in the Concept of Risk

A third evolution deserves mention. It relates to the handling of hazards and risks. The traditional investment screening instruments were concerned with defending against disruptions in the provision of government services. The yardstick was the undisturbed state supply of public services, especially in the area of military and internal security.31 Disruptions could be identified by the fact that they led to an impairment of the politically defined and administratively achieved level of performance. In the new world of investment screening, on the other hand, the political and legal aim is to realize certain future economic conditions of proving oneself in the geopolitical and geostrategic struggle between the states of the world. What constitutes an impediment, a danger, or a risk remains vague. The terms could encompass all scenarios that could prevent a community from achieving a desired target situation sometimes in the future. Ultimately, it is no longer a question of identifying

31

Esplugues Mota (2018a, b, c).

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predescribed damage scenarios. Rather, it is a matter of defining an optimal path into the future and identifying events that could have the consequences that the formulated goal will not be achieved. Obviously, this has little to do with the classic concept of danger or risk. It is a consequence of this new hazard concept that the scenario of a migration of knowledge or intellectual property can also be made the object of investment screening (e.g., in the area of “joint ventures” or mere user contracts). Ultimately, this protective concept is limitless in the sense that every decision of an investor in the market must be subject to investment control. In fact, individual states have decided to apply their monitoring regime to investment decisions by their own nationals.

4 The Normative Dimension: Coherence and Rationality of Investment Screening It is not the task and purpose of this study to make concrete proposals as to which goals a “good” investment screening regime should pursue. The definition of these goals is a political task, and the concrete decision by the lawmaking authorities of a state reflects the views on how the respective common good is to be defined.32 For an academic observer, however, it is at least possible to sketch out normative standards, which a coherent and rational mechanism of investment screening must satisfy. As will be shown in the following paragraphs, it can be demonstrated that the screening program laid down in many national review instruments is rather underdeveloped and sometimes even incoherent. As a consequence, one could posit that the legislative technique is normatively deficient here. Such deficits are, for example, clearly reflected in Article 4 of the future EU regime. The development of a normative framework for evaluating and criticizing state investment protection policy raises difficult questions. Ultimately, it is a question of how a state should pursue reasonable and good policies. Decisions on this must be made first and foremost in the democratic process. An observer may note that three main objectives are currently under discussion (stability of the provision of public services, the fight against brain drain, the transfer of technology and the loss of jobs, and the opening of foreign markets).33 Other objectives, such as the fairness of the trading environment, seem to be of secondary political importance. It cannot be the task of the academic scientific contribution to check such political decisions for their correctness. From the point of view of an academic observer, it is, however, possible to assess the rationality of a government policy, especially whether a particular goal is plausible and whether the means taken represent an appropriate and adequate response. In particular, any analytical examination and any 32 33

See Moran (2009a, b); Moran (2013), p. 378. See, e.g., UK Department for Business (2018).

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normative evaluation of the rationality of investment screening must ask whether the response is “fit for purpose.” Such inquiry makes it necessary to define clearly the relevant political aim or responsibility, define possible damage scenarios and identify the concrete risk exposure, and then ask what a rational and an appropriate response would be. As a consequence, a coherent program must pass a four-step test:34 (1) (2) (3) (4)

Areas and extent of governmental political responsibility Definition of possible damage scenarios Identification of a risk exposure Formulation of an appropriate response

In the following, the four areas of governmental political responsibility will be examined to determine whether and to what extent investment protection is suitable, necessary, and appropriate: provision of public services (Sect. 4.1), combating brain drain, the loss of technology and jobs (Sect. 4.2), and the political aim of opening foreign markets (Sect. 4.3). Other objectives are of no relevance (Sect. 4.4).

4.1

Securing the Provision of Public Services

A first protective concern of investment screening is to combat disruptions and interruptions in the provision of government services.35 The task and objective of investment screening in this respect is to protect the state from the risk of interference of an investor with the performance of the state’s tasks.

4.1.1

Relevant Sectors: Areas and Extent of Political Responsibility

Investment screening has traditionally been used in sectors where the state has assumed responsibility for the uninterrupted provision of services. In principle, both the legitimacy and the political necessity of this protection concern is undisputed.36 It stands behind traditional forms of investment screening. However, the definition of state services in need of protection has traditionally been limited to a core area of military security.37 The relevant areas and sectors of governmental responsibility have been gradually expanded in recent years. Today, “critical sectors” are defined as many other areas of state responsibility—from ensuring the functioning of telecommunications and transport, energy, water, and food supplies to health care.38 The UK

34

For an alternative approach, see Moran (2009a, b); Heinemann (2012), p. 843. OECD (2008). 36 OECD (2008). 37 Moran (2013), p. 378; Dammann de Chapto and Brüggemann (2018), p. 412. 38 Wehrlé and Pohl (2016). 35

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Government today designates 13 “national infrastructure sectors” relevant to investment protection law (“chemicals, civil nuclear, communications, defence, emergency services, energy, finance, food, government, health, space, transport and water”).39 This expansion is mainly due to the fact that today the state is attributed ever widening political responsibility for the smooth functioning of a large number of economic sectors. Disruptions that affect the good life of the citizens are interpreted as failures of the state. Some lawyers tend to look for a definition of relevant sectors and areas in the constitution of the state. Ultimately, however, decision-making power lies with the legislature; delegation to administrative positions should in principle not take place. In substance, it is a question of the political self-image of a community to determine the public services it regards as so important that their continuous fulfillment should be guaranteed by investment screening law.

4.1.2

Definition of Hazard and Damage Scenarios

Not all FDI necessarily impedes the provision of governmental services. A coherent application of an investment screening mechanism implies the need to define hazard and damage scenarios. In practice, an impairment of the state provision of services is feared in various situations. In areas where the service is provided by the state itself, investment risks can only be feared in the area of procurement. This can be clearly illustrated in the area of military security: here, investment screening served and serves primarily to prevent the state’s arms suppliers from coming under foreign control, thereby creating the danger of supply interruptions and disruptions. But this concern is not limited to military security any longer. Today, other areas have also gained relevance here. If the state purchases the technology to conduct elections from private undertakings, it must ensure that there are no interruptions or disruptions. The situation is different in areas where the state only bears responsibility for ensuring that private individuals provide a relevant service in a market. One might think of transport or water supply, for example. The importance of “critical sectors,” in which private providers provide significant services, has increased sharply in the course of the waves of privatization in the 1980s and 1990s. Here, investment screening must focus on individual service providers, ensuring that no interruption in services and disruption in the access to these services will happen. Disruptions could be caused by individual service providers either by discontinuing their services or by making them more difficult to access. The use of investment screening legislation in these “critical sectors” only makes sense and is necessary, however, if the population is highly dependent on the respective service, if there is only little competition in the market, and if there are considerable barriers to market access,

39

UK Department for Business, Energy and Industrial Strategy (2018).

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with the result that the failure of a supplier cannot be absorbed quickly and smoothly by new suppliers. Whether the use of investment screening law is necessary does not only depend on the market structure. One must also ask oneself whether every conceivable negative development should easily be made a “trigger” for the use of these instruments. The media sector offers an illustrative example of this. Even if one assumes that the state bears responsibility for the existence of a functioning media landscape for political and democratic reasons, this does not mean that any possibility of a distortive development could justify the use of investment screening law. Does it constitute a risk relevant to investment screening law that the foreign investor might decide to discontinue the operation of a media company or of one of several outlets? How should propaganda or the dissemination of “fake news” be judged? Not every problematic development justifies the assumption that damage will occur, which must be counteracted by using the investment screening law.

4.1.3

Identification of Specific Risk Exposure

Investment screening is not a general regulatory instrument. The use of this instrument must be aimed at identifying and combating specific risks caused by a foreign investor. It must therefore be demonstrated in concrete terms that the acquisition by a foreigner involves greater or different risks than would be the case if the asset were acquired by a national. Political statements on this point often contain considerable ambiguities and vagueness. Some people seem to mistrust foreigners per se and to attribute to them a general will to harm or disrupt, which is assumed not to be the case with nationals. Obviously, this is rarely pronounced openly. And obviously, this is erroneous. Interestingly, in other contexts, a prohibition against differentiation has been established, for example, in the context of the European Union. EU law prevents the Member States from formulating mistrust of intra-EU foreign investments: it is simply inadmissible, from a normative point of view, to take the position that FDI by EU investors might cause negative consequences and thus warrants investment screening. However, the prohibition only applies if there is no circumvention. This clearly shows the extent to which investment screening instruments are characterized by political-normative considerations. In some critical sectors, many countries have bans on acquisitions or takeovers. Such regulations are based on the irrefutable assumption that foreign investors entail a risk of disruptions and interruptions to services that is so great that it is unacceptable under any circumstances. On the substance, a decision is made in favor of selfsufficiency, even if this leads to inefficiencies and loss of prosperity. If, on the other hand, the admissibility of an investment is decided discretionarily, it must be demonstrated that the person of the investor is giving reason to assume that special disturbances will occur. In the political discussion, there is—more or less openly— the assumption that this is above all the case with investors from states that are in geopolitical or geoeconomic systemic competition with the EU Member States.

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However, it is difficult to justify this general and unspecific assumption; a concrete evaluation is warranted in any specific case. In this context, it is conceivable to set the relevant risk threshold very low, in the sense that every risk must be excluded. However, the lower the risk threshold is set, the more difficult it is to justify why takeovers from “friendly” countries are not subjected to the same mistrust. In addition, if we actually enter a new era of geopolitical and economic battles, then a realistic assessment of the situation and caution in dealing with investors from competing countries will certainly not be inappropriate. But it is precisely then that the EU legislator’s stipulation that investment screening mechanisms must be designed in a nondiscriminatory manner would be incoherent, especially if the administrative authority carrying them out would have to make a differentiated assessment. If a discretionary decision is taken on the admissibility of an investment, it is not only the question of whether investors from certain countries have a particular potential risk that arises. The question may also arise as to whether state-owned or state-controlled investors are particularly prone to causing damage or disruption. In many political statements, this question is answered in the affirmative. China’s stateowned enterprises, in particular, are accused of being unreliable as investment partners, of following rules other than “normal” rules, or of obeying political imperatives. However, the evidence is not always entirely clear, and it is difficult to distinguish between a “normal” and an “externally determined” behavior.

4.1.4

Definition of Adequate Response

In the discussion about investment screening, it is often overlooked that in many cases market access bans are only a second-best option. The instrument of choice is the regulatory supervision of a company in a critical sector in a nondiscriminatory way for domestic and foreign owners. In the case of manifest and intolerable undesirable developments, this supervision must include the right to intervene—up to and including the takeover of the business activity. Excluding investors from the market because of unspecific concerns does not usually meet the particular challenge. However, there is still room for a mechanism for monitoring investments. Investment screening can be used to mitigate identifiable risk situations through specific commitments. In substance, this amounts to the introduction of a specific regulatory supervisory regime—through the backdoor of investment screening. As a result, however, there are considerable conceptual doubts about the use of an investment screening mechanism for the purpose of combating impairments and disruptions of so-called critical functions or critical infrastructures. Regulatory mechanisms (postaccession40), civil damages, and punitive criminalization can provide more

40

See footnote 22 above.

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targeted and effective protection than the rough assessment at the time of market access is ever able to provide. To conclude, these considerations make it clear that mechanisms of investment screening, as they stand today, do protect a state’s capacity to provide public services in a suboptimal way. In order to be “fit for purpose,” they would have to be reframed and specified. At least, there is a need for stringency and coherence in the interpretation and application.

4.2

Combating the Brain Drain, Technology, and Jobs

The fight against the transfer of knowledge and technology is usually also mentioned as one of the protection concerns of investment monitoring. Such scenarios are perceived as a threat, in particular, in a situation of system competition and geopolitical or geoeconomic competition. Social policy also argues with the fight against emigration of job opportunities: there is concern that foreign investors could relocate production abroad and thus “destroy” jobs.

4.2.1

The Political Aim of Securing Relative Advantages in System Competition

The increased importance and expansion of investment screening is largely due to the new geopolitical and geoeconomic conditions facing the Atlantic West in the new millennium. Until the fall of the Berlin Wall, investments from the competing Soviet-dominated camp were unthinkable; they were also categorically suppressed. Foreign direct investment came almost exclusively from the “friendly camp.” Investments from other parts of the world played no practical role. With the emergence of new Asian competitors, the Western liberal states see themselves in a new competitive situation in which the protection of knowledge and technological skills can be a useful reason for restricting foreign investment. The economic value of capital injected by a foreign investment may be less than the “damage” caused by a foreign investor transferring the acquired knowledge to his home country and using it there. It should not be overlooked in this context that the free circulation of knowledge in all directions is often economically more efficient than efforts to secure one’s own advantages. In individual cases, however, a strategic policy can bring prosperity gains for the prosperity of the state in question.

4.2.2

Definition of Damage Scenarios

In any case, the use of investment screening mechanisms is only rational here if the investor actually intends to acquire a company that has such a scientific and technological lead. This question must be examined closely in each case; it must

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be explained that the target possesses knowledge whose transfer will entail a tangible and relevant disadvantage in system competition. The interrelationships are likely to be rather unclear here in a typical case. Even if it is easily possible in the abstract to speak of the legitimacy of securing special technical skills or of preserving special knowledge, the leakage of which is against the state interest, it is difficult to judge in individual cases when intervention against a foreign investor and his capital makes sense. The “economic patriotism” is likely to turn into damaging protectionism only too quickly. The ability of politicians or a legally appointed administration to make viable assessments here is limited. There are probably particularly good reasons for intervention in this context where the conflict situation is particularly tangible—such as in the military sector. Here, knowledge and technology transfers lead directly to the strengthening of the opponent and to a change in the power situation. In other markets, the conflict situations are much more diffuse, and there is also no clear distinction between “friendly” and other states. For the sake of a coherent argument, concerns about the abandonment of high technology and fears of “falling behind” would also have to be expressed to investors from other Western countries in these sectors. It is also difficult to assess the effectiveness of combating foreign direct investment to protect domestic jobs. Any prognosis is confronted with difficult questions here: hardly any investor will associate an investment with the announcement that the acquired production will be closed in the short or medium term. In a liberal economic system, domestic investors are also not prevented from relocating production abroad. A policy that claims to preserve jobs in areas in which they are not internationally competitive also leads to a loss of prosperity—even if there may be good sociopolitical reasons to accept this in individual cases. Only in passing, it is worth mentioning the trivial fact that the approval of FDI creates jobs at home. Mechanisms to ward off FDI are therefore always a double-edged sword. An effective use of investment screening mechanisms can only be envisaged in an area where a relocation of production locally or regionally would cause so much damage to the texture of social coexistence that it would be unacceptable for the community to thrive. The fight against job relocation is not an end in itself. In a capitalist economic system, job creation, relocation, and job losses are first and foremost an inherent and acceptable consequence of competition. There may, however, be isolated circumstances in which state measures to safeguard the continued existence of employment appear necessary.

4.2.3

Identification of Risk Situations

If the transfer of knowledge and technology in a given sector is identified as a damaging event, then it is clear that a foreign direct investment in a company that has this knowledge is a risk event. This applies in any case if the investor gains control of the company and thus has access to the knowledge. However, under indirect control, the risks are likely to be small. Furthermore, it is a normative decision whether the transfer to countries that are not in systemic competition should also be monitored

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and, if necessary, prevented or whether the reciprocity of open markets should be assumed here. As far as protection against job migration is concerned, risk assessment appears to be even more difficult. Whether it is worthwhile for an investor to relocate production abroad and subsequently reduce domestic jobs depends on the relative competitiveness of the respective production. In any case, the investor’s nationality plays no role here. Even a rationally acting domestic investor would relocate a production that is no longer competitive in global competition, albeit perhaps more hesitantly and more slowly (due to certain effects such as stickiness).

4.2.4

Adequate Response

In contrast to the fight against impairments and disruptions described under Sect. 4.1 above, there are no effective regulatory approaches in the risk situation discussed here. It does not seem inconceivable to use conditions and specifications (the establishment of “Chinese walls,” etc.) to ensure that the investor does not gain access to the knowledge and technology of the acquired company. However, the practical effectiveness of such incentives is likely to be low. In the final analysis, the scientific and technological lead of a state in system competition can only be achieved by denying foreign investors any form of access. However, this has nothing to do with “security” or “order.” What is at stake here is a form of protectionist corporate and industrial policy. It would demonstrate and suffer from the weaknesses and problems of any industrial policy pursued by state officials. On the other hand, the situation in the struggle to preserve jobs is different. Here, investment screening instruments can be used to negotiate commitments to safeguard jobs in the short or medium term. However, exaggerated demands for the preservation of noncompetitive jobs may lead the foreign investor to forego the investment—the target state would then have suffered a welfare loss. Gambling too high might lead to self-harm. To conclude, these considerations illustrate that mechanisms of investment screening, as they stand today, can fulfill an important function in the fight against brain drain and technology drain. Much will depend on the concrete case whether their application will indeed effective results.

4.3

Opening Up of Foreign Investment Markets

In recent years, the literature on investment law has increasingly discussed whether instruments of investment screening should be used to produce reciprocity.

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System Competition and Openness of Markets

The political aim for reciprocity of investment conditions is an expression of the new geopolitical and geoeconomic conditions in which states with different economic systems meet. It can be observed that the almost euphoric belief of the EU and its Member States in the value of open capital markets is not shared everywhere. Even in the EU, it is by no means clear whether a regulation such as Art. 63 TFEU would still be formulated today in such a way as to guarantee the free movement of capital with third countries comprehensively and in accordance with primary law. This is where investment screening comes into play: it is not irrational to expect that the restriction of one’s own capital market could induce trading partners to open their own capital and investment markets. The aim is to establish reciprocity in an area that has not yet been harmonized or liberalized under international law. However, this concern is not clearly reflected in investment screening law.

4.3.2

Definition of the Damage Scenario

The ethical integrity of a trading system depends not least on the stakeholders feeling treated equally. In any case, a multilateral, rule-based system will prove to be unsustainable in the medium and long term if unequal treatment is observed unless based on good reasons that can be communicated. In this respect, the observation that access to capital markets is unevenly structured by trading partners and that there is no material reciprocity is a serious issue—even though, as has already been said, the EU has long held the position that it would benefit from the openness of its capital market even if its trading partners did not pursue the same policy. It is significant that Art. 63 TFEU does not provide for a reciprocal opening for capital from third countries. In fact, first, you harm yourself by closing your own market to FDI only because there is no reciprocity—even if you hope that this will result in the other side’s moving. The assessment will only change if the use of an investment screening mechanism subsequently results in an opening of foreign capital markets. That is anything but certain.

4.3.3

Identification of Risk Situations

Assuming that a lack of reciprocity in the openness of capital markets is a damaging situation that must be combated by means of normative measures, there is no doubt that the EU and its Member States are currently confronted with a challenging situation in their economic exchanges with many countries of the world. Reciprocity, in other words, simply does not exist.

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Adequate Response

However, there are particularly strong doubts on the side of how to deal with this observation. Some observers talk about a “paradox.”41 Does it really make sense to threaten with the prospect of closing one’s own investment market? The argument that the use of an investment screening instrument will force reciprocity upon the economic exchange partners and result in the mutual opening of capital markets stands on weak legs. There is no resilient systematic evidence that competing states will indeed open their capital markets if one of their companies is denied an investment. Even the anecdotal evidence is weak. The current situation rather suggests that the introduction and expansion of investment protection instruments will be answered by other states with similar countermeasures. An effect of building up of mutual confidence can be observed. Moreover, it is not the case that trade policy-strategic considerations are integrated into the operation of today’s investment screening instruments. If it were really a question of opening up the capital markets of other countries, there would have to be scope for transnational negotiations in a monitoring procedure. In addition, the relative openness of the capital market of the country of origin would have to be represented in the operation of the investment screening instrument. But neither is the case. In addition, if it were really a question of reciprocity, there would be better trade policy options than tentative restrictions on one’s own capital market.42 “Crossretaliation” through the introduction of import restrictions for goods or services will—depending on the empirical trade situation—create more pressure than the prevention of investments. However, the legal scope here is usually smaller than in the investment sector due to restrictions imposed by multilateral and unilateral legal commitments. These considerations make it clear that the mechanisms of investment screening, as they stand today, cannot be meaningfully justified by reference to the reciprocity argument.

4.4

Other Objectives (e.g. Fairness in the Markets)

In addition to the main objectives discussed above, other concerns are attributed to investment monitoring. Some want to use the instrument to combat investors that behave “unfairly” in the market, for example, by receiving state subsidies.43 Particularly with regard to foreign state-owned enterprises, there are many fears that the level playing field could be disrupted. Others want to monitor investments in order to 41

Schill (2019), p. 105. See, e.g., Fontagné (1999); Lee (2005), p. 701; Preisser (2013). 43 See Waymouth (2010). 42

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protect national economic structures—in this case, it is a matter of open protectionism. Still others see investment screening as an instrument with which the Atlantic West can defend itself in the “clash of civilizations.” Again and again, xenophobic undertones can be heard. There is no reason for an individual and specific analysis of these arguments in this study. What they have in common is that they cannot rationally justify the existence and use of an investment screening instrument. The objective of fair conduct in the market must be the task and the application of competition law and unfair competition law. Consumer protection can be guaranteed with the specific instruments of consumer protection law. And there is certainly no normative reason for open protectionism. In a liberal economic order, the preservation of economic structures cannot be an end in itself, nor can it be achieved with the instrument of investment monitoring. And if the systemic competition in which the states of the Atlantic West operate should intensify, investment screening will simply be too short-sighted. In such a case, the legal structure of the international economic system as such would have to be considered.

4.5

Cumulative Objectives

The above analysis is based on the distinction between different policy objectives. In a specific situation, it is possible that the investment of a foreign investor in a domestic company may affect several objectives at the same time. Even then, however, it makes sense to make a differentiated assessment and to ask separately each time how the respective danger scenarios can be combated. As is so often the case, it makes more sense to respond to specific challenges with specific instruments. Regulatory measures to ensure functioning public services must be structurally distinguished from measures to ward off technology transfers; strategic economic policy has other forms.

5 Conclusion The above considerations have shown that there are good reasons for investment protection but that the current regulatory approach does not meet the requirements for sufficiently coherent and targeted legislation. Precisely because investment screening is a double-edged instrument that is not harmless in its use, it would be the task of the legislator to provide clear guidelines for use and the relevant evaluations. Unfortunately, such guidelines cannot be found in most cases. To name just two examples: the EU legislative authorities have not undertaken more than a rather arbitrary, exemplary enumeration of possible scenarios. Also, in German law, much remains unclear. The fact that an (in principle legitimate)

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industrial and economic policy is conducted under the headings of “security” and “public order” must be regarded as a misconception and misleading. For a coherent and rational application of the law of investment monitoring, it is important (a) to identify legitimate protection interests, (b) to work out which concrete impairments are to be legally averted, (c) to explain the extent to which a cross-border direct investment carries a specific risk potential in this respect, and (d) to look for appropriate and problem-specific (first best) answers. Only if this program is implemented can it be ruled out that investment screening may lead to suboptimal or even harmful effects. The above considerations have shown that it may make sense to intervene against foreign investors to a limited extent but that the use of current investment screening law is often only a second best option and will lead to damaging effects.

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Nettesheim M (2008) Unternehmensübernahmen durch Staatsfonds - Europarechtliche Vorgaben und Schranken. Zeitschrift für das gesamte Handelsrecht (ZHR) 172:729 Nettesheim M (2018) Umfassende Freihandelsabkommen und Grundgesetz. Duncker & Humblot OECD (2008) Protection of “critical infrastructure” and the role of investment policies relating to national security OECD (2009) Building trust and confidence in international investment. Report by countries participating in the “Freedom of Investment” Process OECD (2019) Acquisition- and ownership-related policies to safeguard essential security interests: current and emerging trends. Research note by the OECD Secretariat Pachnou D (2016) Public interest considerations in merger control – Background Paper by the Secretariat, OECD, DAF/COMP/WP3(2016)3 Pohl J, Wehrlé F, Rosselot N (2019) Acquisition- and ownership-related policies to safeguard essential security interests. Current and emerging trends, preliminary research note by the OECD secretariat Pollan T (2006) Legal framework for the admission of FDI. Eleven International Publishing Preisser MM (2013) Sovereign wealth funds. Mohr Siebeck Sachs JD (2011) Foreign investment and the changing global economic reality. In: Alvarez JE et al (eds) The evolving international investment regime expectations. Oxford University Press, New York Salacuse JW (2013) The three laws of international investment. National, contractual and international frameworks for foreign capital. Oxford University Press Sauvant KP (2008) Driving and countervailing forces: a rebalancing of national FDI policies. Yearbook on International Investment Law & Policy, p 215 Sauvant KP (2009) FDI protectionism is on the rise. Policy Research Working Paper 5052. The World Bank Poverty Reduction and Economic Management Network, International Trade Department World Bank, Washington Sauvant KP, Nolan MD (2015) China’s outward foreign direct investment and international investment law. J Int Econ Law 18:893 Sauvant KP, Sachs LE, Schmit J, Wouter PF (eds) (2012) Sovereign investment. Oxford University Press Sauvent KP (2010–2011) Recent trends and issues in foreign direct investment. In: Yearbook on international investment law & policy, vol 1. Oxford University Press, New York Schill SW (2019) The European Union’s foreign investment screening paradox. Leg Issues Econ Integr 46(2):105 Schmit J, Wouter PF (eds) (2012) Sovereign investment Schuelken T (2018) Der Schutz kritischer Infrastrukturen vor ausländischen Direktinvestitionen in der Europäischen Union. Zum Vorschlag der EU-Kommission für eine Verordnung zur Schaffung eines Rahmens für die Überprüfung ausländischer Direktinvestitionen – KOM (2017) 487 endg. Europarecht 53(5):577–592 Snell J (ed) (2019) EU foreign direct investment screening: Europe qui protège? Eur Law Rev 44 (2):137–138 Sornarajah M (2010) The international law on foreign investment, 3rd edn. Cambridge University Press Stoll PT, Holterhus TP (2016) The ‘generalization’ of international investment law in constitutional perspective. In: Hindelang S, Krajewski M (eds) Shifting paradigms in international investment law - more balanced, less isolated, increasingly diversified. Oxford University Press, p 339 Stoll PT, Holterhus TP, Gött H (2019) Investitionsschutz und Verfassung. Mohr Siebeck Tavassi J (2012) The EU investment policy: how to ensure a fair regulation of the concerned interests. J World Invest Trade 13:645 Thomsen S, Mistura F (2017) Is investment protectionism on the rise? Evidence from the OECD FDI Regulatory Restrictiveness Index. OECD Global Forum on International Investment Trakman LE, Ranieri NW (eds) (2013) Regionalism in international investment law. Oxford University Press

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Martin Nettesheim has been Professor of Law at the University of Tübingen Law School since 2000. He is chaired Professor for German Public Law, Public European Community Law, International Law, and International Political Theory and serves as director of the Tuebingen University Center for International Economic Law (TURCIEL). He studied law at the Universities of Freiburg, Berlin, and Ann Arbor (MI). He also holds a degree in Economics. Professor Nettesheim has taught courses at various universities (Berkeley, Miami, Nanjing, Kyoto). He has served as Dean of the Law School (2003–2005). Professor Nettesheim has published comprehensively in the areas of EU law, International Economic Law, and German Constitutional Law. He is editor of a multivolume commentary on the Treaties on the European Union (Grabitz/Hilf/Nettesheim, Das Recht der Europaeischen Union, 2020) and author of a comprehensive introduction to EU law (Oppermann/ Classen/Nettesheim, Europarecht, 8th ed. 2018).

Part VII

The EU Screening Regulation in Perspective

What Is a Foreign Direct Investment? Understanding Third Country Direct Investments Conceptually and in Practise Lars S. Otto

Contents 1 The Times They Are A-Changin’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 FDI Restrictions Embedded in Fundamental Global Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Third Country Direct Investments Under EU Secondary and Primary Law . . . . . . . . . . . . . . . 3.1 Direct Investments as Defined in the Screening Regulation . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Direct Investments in EU Primary and Secondary Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Approaching a Common Understanding of Third Country Direct Investments . . . . . . . . . . . 4.1 A Common European Screening Law and Politics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Interpreting the Screening Regulation in Uneasy Contexts . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Interpreting the Screening Regulation by a Strictly Legal Approach . . . . . . . . . . . . . . . . 4.4 International Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Approaching Specific Elements of Third Country Direct Investments . . . . . . . . . . . . . . . . . . . . 5.1 Investments Aiming to Establish or Maintain Lasting and Direct Links . . . . . . . . . . . . 5.2 Ex Post Screening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Circumvention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Third Country Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Concluding Remarks: Is Winter Coming? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract The qualification of a transaction as ‘foreign direct investment’ (FDI) and, more specifically under Regulation (EU) 2019/452 (Screening Regulation), as third For their valuable suggestions, comments, and patience, the author wishes to thank Steffen Hindelang, Professor of Law (WSR) at the University of Southern Denmark; Andreas Moberg, Associate Professor of International Law at the University of Gothenburg; Dr. Denise Peter; Michael Schwarz; Kelsey M. Quigley; Hyun-Soo Lim; Asja K. Kalnins, Esq.; Su Şimşek, LL.M.; Alessia Varieschi, LL.M.; Vincent Pál, LLM (LSE); Professor Halvard Haukeland Fredriksen; Dr. phil. Barbara M. Eggert, M.A., MA; and Dr. rer. nat. Dipl.-Psych. Anna Ewa Pajkert. However, the views expressed in this contribution reflect the personal opinions and arguments of the author only. Especially, they do not necessarily reflect the views of Wilmer Cutler Pickering Hale and Dorr LLP (WilmerHale). Any errors are contributed to the author. L. S. Otto (*) Rechtsanwalt with Wilmer Cutler Pickering Hale and Dorr LLP (Berlin Office), Berlin, Germany © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 507–588, https://doi.org/10.1007/16495_2020_31, Published online: 12 January 2021

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country direct investment opens—or closes—the scope of application of the Screening Regulation. Yet the Screening Regulation leaves many questions on that concept open. Therefore, this contribution aims at tackling some of the questions. It comes with two major parts: Sections 2–4 embed FDI in general and the Screening Regulation specifically in broader political and legal contexts, and Section 5 analyses specific legal elements of third country direct investments under the Screening Regulation. Section 2 outlines general fundamental global challenges that affect FDI law and politics. Section 3 contextualises third country investments within relevant EU law. The analysis shows that the Regulation’s definition of direct investments is just transplanted from the three-decades-old Capital Movements Directive. Also, this contribution argues that all third country investments are protected by the freedom of capital movement. They also fall within the scope of protection of EU fundamental rights. Section 4 argues for a very fundamental approach: the EU and its EU Member States should strive for a common European screening law and politics. Such a common European understanding goes beyond hard law: it includes the political and legal willingness to discourse and cooperation in order to develop a coherent FDI policy even without a legal obligation under EU law to do so. Yet this section emphasises that the Screening Regulation is set in uneasy contexts. The Regulation is a new policy, it is a key concept in the global struggle for adequate rules, it comes with the temptation of being used as a bargaining chip in international negotiations, and it may generate spillover effects on the internal market. One facet to tackle these uneasy contexts is to apply a strictly legal approach to the Regulation, not to fall prey to ‘reciprocity arguments’, and to consider international law more seriously. Section 5 is the legal centrepiece of this contribution. It starts with an analysis of the Regulation’s definition of direct investments as ‘aiming to establish or to maintain lasting and direct links’ between the investor and target. Whether a transaction qualifies as direct investment or as (mere) portfolio investment should be reviewed under an objective test; the investor’s subjective intentions on how to use the acquired shares do not constitute a legally sound basis. Next, this contribution argues that transactions also qualify as third country ‘direct’ investments if the transaction results in indirect links between a third country investor and an EU target; this would be the case in parent-subsidiary structures on the acquirer’s side. A further focus lies in the analysis of what it means for an investment to bring the opportunities for ‘effective participation in the management or control’ of the target. This contribution argues that an understanding of ‘control’ should seek inspiration from other EU law areas such as the EU merger control law, that ‘management’ should be interpreted in a broad manner (which could include ‘supervisory bodies’) and that the investment-management/control nexus should be fleshed out by a common European quantitative-qualitative approach. Furthermore, this contribution considers ex post screening challenges and the Regulation’s anticircumvention clauses. The section closes with discussions on third country investors and third countries. While the nationality of the investor’s shareholders must not be taken into consideration, this contribution argues that ‘doubly organised undertakings’ (which have essential corporate relationships to both an EU Member State and a third country) should be qualified as third country investors.

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Lastly, several categories of countries are analysed regarding their third country qualification: the Organisation for Economic Co-operation and Development (OECD) countries, overseas countries and territories, the European Economic Area states, Switzerland, and the post-Brexit UK.

1 The Times They Are A-Changin’ Tempora mutantur, nos et mutamur in illis:1 the winds are blowing harder for crossborder investments. For the period from 2011 to 2019, the United Nations Conference on Trade and Development (UNCTAD)2 listed in its recent analysis of the rise of investment screening regulation making 13 countries that introduced new regulatory frameworks and at least 45 significant amendments to existing screening systems in 15 jurisdictions.3 These tightenings are no empty threats: from 2016 to 2019, at least 20 planned major4 foreign takeovers with an aggregated value of more than USD 162 billion were blocked or withdrawn for national security reasons.5 And, of course, the chilling effect of screening regulations resulting in early-stage cancellations of planned transactions can hardly be quantified.6 One of these new regulatory frameworks is ‘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’ (Screening Regulation or Regulation). This Regulation is the centrepiece of a new policy of the European Union (EU), as then-President of the European Commission (Commission) JeanClaude Juncker stated in his State of the Union Address 2017: ‘Let me say once and for all: we are not naïve free traders. Europe must always defend its strategic interests.’7

‘Times are changed; we, too, are changed within them.’; Latin 16th-century Germany adage basing on a thought of Ovid, Wikipedia: The Free Encyclopedia (2020) Tempora mutantur. 2 United Nations Conference on Trade and Development, a permanent intergovernmental body and part of the UN Secretariat; see UNCTAD (2020) About UNCTAD, available at https://unctad.org/ en/Pages/aboutus.aspx. 3 UNCTAD (2019) National Security-Related Screening Mechanisms for Foreign Investment, pp. 1, 4. 4 That is, with a value exceeding USD 50 million; see UNCTAD (2019) National Security-Related Screening Mechanisms for Foreign Investment, pp. 1, 2, 13 ff. 5 Ibid. 6 Cf. on some aspects of uncertainty Rytter Sunesen and Henriksen in Bourgeois (2020), pp. 17–19. 7 Juncker J-C (13 September 2017) State of the Union Address 2017, p. 3 (emphasis omitted), available at https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_17_3165. For further citations of the ‘we are not naïve free traders’ statement, see Hindelang and Moberg (2020) (forthcoming), 2 f. 1

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Still, the EU and the EU Member States (Member States) remain relatively open to foreign direct investments (FDI)8 compared to other jurisdictions.9 FDIs contribute significantly to the European economy.10 In Germany, for example, FDI accounted for about 9,000 undertakings, nearly 1.3 million employees, and an annual turnover of more than EUR 700 billion in 2018.11 And high-level political statements from both the EU level12 and the national level13 emphasise the importance of FDI, such as the Commission recently: The European Union is open to foreign investment, which is essential for our economic growth, competitiveness, employment and innovation. Many European companies are fully

8 On some terms in this contribution: ‘FDI’ refers to a direct investment by any non-domestic (foreign) investor, while ‘third country direct investment’ refers to a direct investment by non-EU investors. This contribution deals mainly with third country direct investments since the Screening Regulation applies only to such extra-EU direct investments. The terms ‘EU undertaking’, ‘EU target’, ‘EU investor’, etc. mean an undertaking, target, investor, etc. that is constituted or otherwise organised under the laws of an EU Member State. The same applies mutatis mutandis to ‘third country undertakings’, ‘OECD undertakings’, ‘UK undertakings’, etc. The terms are used for semantic reasons and do not imply that the respective undertaking, target, investor, etc. is state-owned. 9 OECD (2020d) FDI restrictiveness (indicator): for 2019, the OECD comes with an index of 0.064. The United States of America (US) is at 0.089, while China exceeds even this number with 0.244. Most EU-27 Member States are less restrictive even than the OECD average, ranging from Luxembourg’s 0.004 to Austria’s 0.106 (no figures are available for Bulgaria, Cyprus, and Malta). For the FDI restrictiveness index, see OECD (2020) FDI restrictiveness (indicator): the OECD index gauges the restrictiveness of a country’s FDI rules by looking at four main types of restrictions—foreign equity restrictions, discriminatory screening or approval mechanisms, restrictions on key foreign personnel, and operational restrictions. Values range from 0 for open to 1 for closed. Data available at https://data.oecd.org/fdi/fdi-restrictiveness.htm. 10 For example, see European Commission, Commission Staff Working Document, Accompanying the document Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union, SWD (2017) 297 final, 13.9.2017, pp. 3 f. Hereinafter European Commission, Commission Staff Working Document, SWD (2017) 297 final, 13.9.2017. Rytter Sunesen and Henriksen in Bourgeois (2020), pp. 3–9. 11 Deutsche Bundesbank (2020) Direktinvestitionsstatistiken, p. 83, available at https://www. bundesbank.de/resource/blob/832150/d769909feb4add6d2a5fe131e7aff491/mL/2020-04-30-1336-38-direktinvestitionsstatistiken-data.pdf (the figures reflect undertakings with foreign capital directly invested). 12 For example, European Commission (2017) Reflection Paper on Harnessing Globalisation, COM (2017) 240 final, 10.5.2017, p. 18: ‘Openness to foreign investment remains a key principle for the EU and a major source of growth’, reiterated in Proposal for a Regulation establishing a framework for screening of foreign direct investments into the European Union, COM(2017) 487 final, 13.9.2017, p. 2. Hereinafter Proposal for the Regulation, COM(2017) 487 final, 13.9.2017. 13 German Bundestag Legislative Material 19/645 of 6.2.2018, p. 2 (own translation): ‘Germany is an open economy. The Federal Government welcomes foreign investments that are compatible with German and European law.’

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integrated in global supply chains, which need to be kept functioning. The EU wants to and will remain an attractive destination for foreign direct investment (FDI).14

Yet we are currently witnessing a ‘nascent’15 EU FDI screening law. Political, economic, and academic debates on FDI will intensify. Their focus will be on the issue of sensitive targets (Art 4(1) of the Screening Regulation16) and precarious investors (Art 4(2)). The concept of third country direct investments, however, is at risk of missing the attention it deserves. This would continue the lack of interest in the legislative procedure: the legislator more or less copy-pasted the definition of direct investments from the over three-decades-old Directive 88/361/EEC (Capital Movements Directive) and hardly dealt with any of the elements of a third country investment. This contribution argues that such neglect is unjustified. The notion of ‘third country direct investment’ is a rudder for investment screening policies. The qualification of a transaction as third country direct investment opens—or closes— the scope of application of the Screening Regulation. What is more, the term and concept ‘third country direct investment’ comes with many legal and political questions that are relevant both for theoretical and for practitioners’ considerations. The structure of this contribution to tackle some of these questions shall be as follows: Sections 2–4 embed FDI in general and the Screening Regulation specifically in broader political and legal contexts. Subsequently, Section 5 analyses specific legal elements of third country direct investments under the Regulation. Section 2 outlines general fundamental global challenges that affect FDI law and politics. Section 3 contextualises third country investments within relevant EU law: the Screening Regulation adds little to a common European understanding of third country direct investments (below Section 3.1). Therefore, the Regulation is put into the context of EU primary and secondary law (below Section 3.2). This shows that the Regulation’s definition of direct investments is just transplanted from the Capital Movements Directive (below Section 3.2.1). To fully understand the Regulation, however, one must consider that all third country direct investments are protected by the freedom of capital movement (below Section 3.2.2). They also fall within the scope of protection of EU fundamental rights (below Section 3.2.3). The section ends with considerations on legislative competences: the Regulation has been based on the EU competence for Common Commercial Policy (below Section 3.2.4), which has unexpected effects—for example regarding the question whether Norway qualifies as a third country.

14

Communication from the Commission Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452 (FDI Screening Regulation), C(2020) 1981 final, OJ C 99 I/1, 26.3.2020, pp. 1–5. Hereinafter FDI Screening Regulation Guidance, C(2020) 1981 final. 15 Cf. Hindelang and Moberg (2020) (forthcoming), p. 19. 16 In this contribution, Articles cited refer to the Screening Regulation unless stated otherwise.

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Section 4 argues for a very fundamental approach: the EU and its EU Member States should strive for a common European screening law and politics (below Section 4.1). Such a common ‘European’ understanding refers to the idea of both the EU and the EU Member States cooperating in the field of FDI law and politics. Hard law (e.g. cooperation in the context of the Screening Regulation) is part of such a ‘European’ understanding, but a common European approach goes beyond hard law: it includes the political and legal willingness to discourse and cooperation in order to develop a coherent FDI policy even without a legal obligation to do so. Next, the Screening Regulation must acknowledge its uneasy contexts. The Regulation is a new policy, it is a key concept in the global struggle for adequate rules, it comes with the temptation of being used as a bargaining chip in international negotiations, and it may generate spillover effects in the internal market (below Section 4.2). One facet to tackle these uneasy contexts is to apply a strictly legal approach to the Regulation (below Section 4.3) and to consider international law more seriously (below Section 4.4). Section 5 is the legal centrepiece of this contribution. Analysing the Regulation’s definition of third county direct investment, this section discusses elements that constitute investments ‘aiming to establish or to maintain lasting and direct links’ (below Section 5.1). A focus lies in understanding such links by a quantitativequalitative approach. This approach is meant to identify factors that should be taken into consideration when fleshing out what enables ‘effective participation in the management or control’ of the target in the meaning of the Regulation. Some remarks on ex post screenings (below Section 5.2) and anti-circumvention provisions (below Section 5.3) aim at putting third country direct investments into a broader legal context. The section closes with a discussion on which investors qualify as ‘third country investor’ (below Section 5.4) with a special focus on the seemingly easy task of defining ‘third countries’ (below Section 5.4.3). The latter comes with partially surprising results: Norway, for example, is a third country falling within the scope of the Screening Regulation, despite being a country of the European Economic Area (EEA). Overseas countries and territories (OCTs) such as Aruba or Curaçao, on the other hand, do—in principle—not qualify as third countries. The section closes with discussions on post-Brexit screenings in the United Kingdom (UK) and affecting the UK; the analysis shows a rather complex situation, which investors are advised to keep in mind. This contribution comes full circle with the concluding remarks in Section 6. This section dovetails the regulatory choices regarding future European FDI screening law and politics with national and global economic challenges.

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2 FDI Restrictions Embedded in Fundamental Global Challenges Various complex security and competition interests fuel the global tightening of FDI screening rules. This includes China’s Belt and Road Initiative as part of its efforts to ‘become a global leader in terms of composite national strength and international influence’ until 2050;17 conflicting expectations towards a rule-based exercise of political power and notions of reciprocity; the West struggling with Westlessness;18 reduced international mutual trust, combined with the global rise of souverainism and nationalism; and a rapid technological change, together with fundamental uncertainties about emerging technologies.19 As UNCTAD summarises: Several reasons may explain these developments: First, cutting edge technologies and knowhow have become a key factor for the international competitiveness of countries. States in possession of such assets may therefore have a strong interest in ensuring that they remain in domestic hands. Second, many countries may find it necessary or desirable that other companies of strategic importance and critical infrastructure are not foreign controlled. Third, governments may consider FDI screening as a necessary counterweight to earlier privatizations of State-owned companies and infrastructure facilities. Fourth, extending the scope of screening is in part also a reaction to the increasing investment activities of foreign State-owned or -controlled enterprises and sovereign wealth funds. There are concerns that these activities might result in foreign state control over key companies or critical infrastructure.20

These developments take place in a world where national economies are deeply interlinked. This also makes them fragile. This characteristic has become most tangible during the COVID-19 pandemic, not least by an expected 30% FDI flow decline for 2020.21 Moreover, special COVID-19 related regulatory frameworks were enacted on short notice. The EU, for example, introduced guidelines on existing laws, such as the FDI Screening Regulation Guidance,22 and introduced

17

Xi (2017), p. 25. I.e., with a world that is becoming less Western and the West itself becoming less Western, too, see Munich Security Conference (2020) Munich Security Report 2020—Westlessness, p. 6, available at https://securityconference.org/publikationen/munich-security-report-2020/. 19 On challenges to export control law by emerging technologies, cf. Mousa (2020), pp. 228–230; Borman (2020), pp. 231–233. 20 UNCTAD (December 2019) National Security-Related Screening Mechanisms for Foreign Investment—An Analysis of Recent Policy Developments, Investment Policy Monitor, Special Issue, available at https://unctad.org/en/PublicationsLibrary/diaepcbinf2019d7_en.pdf, p. 2. 21 OECD (4 May 2020a) Foreign direct investment flows in the time of COVID-19, p. 1, available at https://read.oecd-ilibrary.org/view/?ref¼132_132646-g8as4msdp9&title¼Foreign-direct-invest ment-flows-in-the-time-of-COVID-19. 22 FDI Screening Regulation Guidance, C(2020) 1981 final, OJ C 99 I/1, 26.3.2020. On this Communication, see WilmerHale (27 March 2020a) COVID-19: EU Issues Guidelines Regarding Screening Foreign Investment in Connection with Industries Critical for Combating COVID-19, available at https://www.wilmerhale.com/en/insights/client-alerts/20200327-eu-issues-guidelines18

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new competition law (e.g. the EU’s Temporary Framework for State aid measures23 and the EU’s Temporary Framework for assessing antitrust issues24). And just after these measures were introduced, fears of their distorting effect on the internal market competition when used by deep-pocket nation states came up.25 At the same time, the EU used in its FDI Screening Regulation Guidance a narrative of ‘predatory buying’,26 i.e. the threat that ‘strategic assets fall prey of hostile takeovers’.27 FDIs, therefore, are much more than mere economic transactions. Despite some FDI liberalisation, as recently occurred in the United Arab Emirates,28 a new global ‘security-restricted’ approach towards FDI is on the rise.29 China—the ‘dragon in the room’30—is one central point of reference for such restrictions. And China’s relevance will persist. A recent survey on the opinions in France, Germany, and the US shows that China’s perceived influence on global affairs has risen significantly during the COVID-19 pandemic. Between January and May 2020, the proportion of survey respondents who said that China was the most influential actor in global affairs doubled (from 13% to 28% in France, from 12% to 20% in Germany, and from 6% to 14% in the US).31 At the same time, negative views of China’s rising influence have increased significantly as well (from 48% to

regarding-screening-foreign-investment-in-connection-with-industries-critical-for-combatingcovid-19. 23 Communication from the Commission, Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak, 2020/C 91 I/1, 20.3.2020. This Communication was amended several times. 24 Communication from the Commission, Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak 2020/C 116 I/07, 8.4.2020. On the Communication, see WilmerHale (14 April 2020b) COVID-19: EU Temporary Antitrust Framework For Essential Cooperation, available at https://www.wilmerhale.com/en/insights/client-alerts/covid19-eu-temporary-antitrust-frameworkfor-essential-cooperation. 25 See with respect to Germany EURACTIV (15 May 2020b) Mitgliedsstaaten fürchten Marktverzerrungen durch massive deutsche Staatshilfen, available at https://www.euractiv.de/ section/finanzen-und-wirtschaft/news/mitgliedsstaaten-fuerchten-marktverzerrungen-durch-mas sive-deutsche-staatshilfen/. 26 FDI Screening Regulation Guidance, C(2020) 1981 final, OJ C 99 I/5, 26.3.2020. 27 Wilmès et al. (25 March 2020) Joint letter to the President of the European Council Charles Michel, available at http://www.governo.it/sites/new.governo.it/files/letter_michel_20200325_eng. pdf. 28 Frank-Fahle (2019). 29 For a current global picture, cf. OECD (2020b) Acquisition- and ownership-related policies to safeguard essential security interests: Current and emerging trends, observed designs, and policy practice in 62 economies, available at http://www.oecd.org/investment/OECD-Acquisitionownership-policies-security-May2020.pdf. 30 Hindelang and Hagemeyer (2017). 31 Bertelsmann Foundation/The German Marshall Fund of the United States/Institut Montaigne (2020) Transatlantic Trends 2020—Transatlantic opinion on global challenges before and after COVID-19, p. 8, available at https://www.institutmontaigne.org/ressources/pdfs/publications/ transatlantic-trends-2020.pdf.

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58% in France, from 51% to 61% in Germany, and from 46% to 57% in the US).32 Yet the full picture should include the fact that China’s recent reforms to improve the investment environment have been recognised as a substantial regulatory commitment by the Chinese Government to lower market entry barriers, though significant concerns still remain.33 Besides, one should not turn a blind eye on the West: The US just recently increased its scrutiny of foreign investments by the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA)34 and by subsequent reforms to expand the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS).35 And as a European example, Germany tightened its screening law in 2017,36 in 201837 and, again, in 2020,38 and pre-emptively approved for the first time the prohibition of the planned acquisition of Leifeld Metal Spinning AG by Chinese investors in 2018.39 It is no surprise then that Germany was a driving force behind the Screening Regulation.40 This Screening Regulation comes with one fundamental advantage: its converging effect that gives the EU Member States’ screening policies a framework. This goes notwithstanding the potential legal, economic, or political criticism that the Regulation may provoke. The Regulation as a ‘new policy initiative [where there]

32

Ibid., p. 30 f. WilmerHale (29 October 2019b) New Chinese Regulations on Improving the Investment Environment, available at https://www.wilmerhale.com/en/insights/client-alerts/20191029-new-chi nese-regulations-on-improving-the-investment-environment. 34 Cf. for details and on the background WilmerHale (2 August 2018a) Congress Expands US Government Review of Foreign Investments, available at https://www.wilmerhale.com/en/insights/ client-alerts/20180802-congress-expands-us-government-review-of-foreign-investments. 35 Cf. for details and on the background WilmerHale (26 September 2019a) CFIUS Publishes New Proposed Regulations, available at https://www.wilmerhale.com/en/insights/client-alerts/ 20190926-cfius-publishes-new-proposed-regulations. 36 Ninth Ordinance to Amend the German FTPO of 14.7.2017. On this amendment, see WilmerHale (24 July 2017) German Government Amends German Foreign Trade and Payments Ordinance to Widen Control of Foreign Takeovers of Critical German Companies, available at https://www. wilmerhale.com/en/insights/client-alerts/2017-07-24-german-government-amends-german-for eign-tradea-and-payments-ordinance-to-widen-control-of-foreign-takeovers-of-critical-germancompanies. 37 Twelfth Ordinance to Amend the German FTPO of 19.12.2018. On the Ordinance, see WilmerHale (20 December 2018b) EU and Germany Move to Further Tighten FDI Screening Process, available at https://www.wilmerhale.com/en/insights/client-alerts/20181220-eu-and-ger many-move-to-further-tighten-fdi-screening-process. 38 Fifteenth Ordinance to Amend the German FTPO of 25.5.2020; First Act to Amend the German FTPA and other Acts of 10.7.2020. 39 In the end, the prohibition was not issued since the Chinese investor withdrew. Cf., for details and the context of German screening law, Dammann de Chapto and Brüggemann (2018); German Federal Government (2018) Press conference of the Government of 1 August 2018, available at https://www.bundesregierung.de/breg-de/aktuelles/pressekonferenzen/regierungspressekonferenzvom-1-august-2018-1507608. 40 German Bundestag Legislative Material 19/645 of 6.2.2018, p. 3; German Bundestag Legislative Material 19/18895 of 4.5.2020, p. 1. 33

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has been no existing legislation on foreign investment screening at EU level so far’41 is the first step towards a more comprehensive European screening regulation law. Consequently, the Regulation has been described as a ‘nascent EU investment screening mechanism’.42 The Screening Regulation and the national legislative initiatives triggered by the Regulation will not result in Europe speaking with one voice on FDI screening rules. Rather, the Regulation supports setting up a choir with everyone singing in their own voice but (ideally) in harmony with the others. Such a framework contributes to creating more of a level playing field amongst the national FDI screening rules. Such a level playing field constitutes a relevant factor both for the external perspective of third country investors to the EU’s internal market and for the Member States’ internal perspective on national screening law as intra-EU competitive factor.

3 Third Country Direct Investments Under EU Secondary and Primary Law The Screening Regulation’s legislative procedure did not pay much attention to the notion of ‘third country direct investment’ itself.43 Therefore and as a background for further analyses in this contribution, the Regulation’s definition of ‘direct investment’ (below Section 3.1) is briefly contextualised in EU primary and secondary law (below Section 3.2). The Regulation transplants the definition of direct investments from the Nomenclature annexed to the Capital Movements Directive44 (Capital Movements Directive Nomenclature) and its Explanatory Notes (Capital Movements Directive Explanatory Notes)45 (below Section 3.2.1). Though disputed, third country direct investments are protected by the fundamental freedom of capital movement (below Section 3.2.2). They are also protected by EU fundamental rights, although the relevant fundamental rights offer relatively weak protection (below Section 3.2.3). Regarding the EU legislative competence, the Screening Regulation is considered to be part of the Common Commercial Policy (below Section 3.2.4)—a construction that becomes relevant when discussing the status of Iceland, Liechtenstein, and Norway.46

Proposal for the Regulation, COM(2017) 487 final, 13.9.2017, p. 9. Hindelang and Moberg (2020) (forthcoming) (emphasis omitted), p. 19. 43 For some minor aspects of the discussion, see Neergaard in Bourgeois (2020), p. 154. 44 Council Directive 88/361/EEC of 24 June 1988 for the implementation of Art 67 of the Treaty, OJ L 178, 8.7.1988, pp. 5–18. Hereinafter the Capital Movements Directive. 45 Basis for both Nomenclature and Explanatory Notes: Art 1(1) sentence 2 in conjunction with Annex I of the Capital Movements Directive. 46 See below Sect. 5.4.3.3. 41 42

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Direct Investments as Defined in the Screening Regulation

The Screening Regulation’s catalogue of definitions begins in Art 2(1) with the definition of inward extra-EU47 direct investments: ‘foreign direct investment’ means an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in a Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity[.]

The recitals add little to a deeper understanding of that definition when stating in Recital 9 of the Screening Regulation:48 A broad range of investments which establish or maintain lasting and direct links between investors from third countries including State entities, and undertakings carrying out an economic activity in a Member State should be covered by this Regulation. It should, however, not cover portfolio investment.

These provisions were not a focus of the legislative procedure. As far as these provisions are concerned, the Commission’s Proposal for the Regulation turned into law virtually without alterations.49 In addition to the Proposal, the Regulation only explicitly excludes portfolio investments from the Regulation’s scope of application (Recital 9 sentence 2).50 This just codifies the undisputed pre-existing legal understanding of direct investments.51

3.2

Direct Investments in EU Primary and Secondary Law

The Court of Justice of the European Union (CJEU) has defined in settled case law that direct investments are a ‘form of participation in an undertaking through the holding of shares which confers the possibility of participating effectively in its

47 The Screening Regulation covers FDIs from other countries into the EU (inward FDIs) but not EU FDIs to other countries (outward FDIs). The Regulation further only covers FDIs from third countries (extra-EU FDIs) but not from one EU Member State to another EU Member State (intra-EU FDIs). 48 In this contribution, Recitals cited refer to the Screening Regulation unless stated otherwise. 49 Cf. Proposal for the Regulation, COM(2017) 487 final, 13.9.2017, p. 19 (the slight change from the Proposal’s plural wording ‘means investments of any kind’ to the Regulation’s singular wording ‘means an investment of any kind’ does not contain substantial value). 50 Cf. Proposal for the Regulation, COM(2017) 487 final, 13.9.2017, p. 17, on the proposed Recital 9. The amendment was proposed by the European Parliament (Legislative resolution of 14 February 2019, P8_TA-PROV(2019)0121, p. 6). 51 Cf. Proposal for the Regulation, COM(2017) 487 final, 13.9.2017, p. 12.

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management and control’.52 This definition follows the same concept as applied in Art 2(1) since both Art 2(1) and CJEU case law transplant definitory elements from the Capital Movements Directive Nomenclature and its Explanatory Notes (below Section 3.2.1). Though disputed, all third country direct investments (including those that come with a ‘definite influence’ on the target) should be interpreted as falling within the scope of the fundamental freedom of capital movement (below Section 3.2.2). Third country direct investments are also protected by EU fundamental rights (below Section 3.2.3). And for the full picture, conceptualising third country direct investments requires addressing the issue of the legal basis for the Regulation (below Section 3.2.4).

3.2.1

Direct Investments as Defined by the Capital Movements Directive

In its spirit of liberalising capital movements, EU secondary law defined in 1988 direct investments in the Capital Movements Directive Nomenclature and added Explanatory Notes. According to the Directive, direct investments are [i]nvestments of all kinds by natural persons or commercial, industrial or financial undertakings, and which serve to establish or to maintain lasting and direct links between the person providing the capital and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity. This concept must therefore be understood in its widest sense.53

More specifically, the Directive classifies as direct investments 1. Establishment and extension of branches or new undertakings belonging solely to the person providing the capital, and the acquisition in full of existing undertakings. [Explanatory Note: The undertakings mentioned [. . .] include legally independent undertakings (wholly-owned subsidiaries) and branches.] 2. Participation in new or existing undertaking with a view to establishing or maintaining lasting economic links. [Explanatory Note: As regards those undertakings [. . .] which have the status of companies limited by shares, there is participation in the nature of direct investment where the block of shares held by a natural person of another undertaking or any other holder enables the shareholder, either pursuant to the provisions of national laws relating to companies limited by shares or otherwise, to participate effectively in the management of the company or in its control.] 3. Long-term loans with a view to establishing or maintaining lasting economic links. [Explanatory Note: Long-term loans of a participating nature [. . .] means loans for a period of more than five years which are made for the purpose of establishing or maintaining lasting economic links. The main examples which may be cited are loans granted by a company to its subsidiaries or to companies in which it has a share and loans linked with a profit-sharing arrangement. Loans granted by financial institutions with a view to establishing or maintaining lasting economic links are also included under this heading.] 4. Reinvestment of profits with a view to maintaining lasting economic links.

52 Judgment of the Court of 17 September 2009, Glaxo Wellcome GmbH & Co. KG v Finanzamt München II, C-182/08, ECLI:EU:C:2009:559, para. 40. 53 Capital Movements Directive Explanatory Notes on direct investments, first subpara.

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A. Direct investments on national territory by non-residents B. Direct investments abroad by residents54

When interpreting questions on direct investments, the CJEU still recognises ‘indicative value’ of this Capital Movements Directive Nomenclature.55

3.2.2

All Third Country Direct Investments Are Protected by Art 63(1) TFEU

Though disputed, this contribution argues that all third country direct investments are protected under the fundamental freedom of capital movement. Following the Capital Movements Directive Explanatory Notes,56 the CJEU understands direct investments as a ‘form of participation in an undertaking through the holding of shares which confers the possibility of participating effectively in its management and control’.57 Such a direct investment falls within the scope of Art 63(1) TFEU (as does a portfolio investment, i.e. ‘the acquisition of shares on the capital market solely with the intention of making a financial investment without any intention to influence the management and control of the undertaking’58). Since third country investors fall within the personal scope of the freedom of capital movement,59 third country direct investments are protected by the freedom of capital movement—‘in principle’, in CJEU words.60 This principle gets challenged in cases of ‘definite influence’ direct investments. Investments that give the investor ‘definite influence over the company’s decisions and allows him to determine its activities’ also fall within the scope of the

54

Capital Movements Directive Nomenclature (I—Direct investments) and Capital Movements Directive Explanatory Notes on direct investments. 55 See only Case Judgment of the Court of 12 December 2006, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, C-446/04, ECLI:EU:C:2006:774, para. 180; Judgment of the Court of 17 September 2009, Glaxo Wellcome GmbH & Co. KG v Finanzamt München II, C-182/08, ECLI:EU:C:2009:559, para. 39. 56 Capital Movements Directive Explanatory Notes on direct investments, third subpara. 57 Judgment of the Court of 17 September 2009, Glaxo Wellcome GmbH & Co. KG v Finanzamt München II, C-182/08, ECLI:EU:C:2009:559, para. 40; Judgment of the Court of 21 October 2010, Idrima Tipou AE v Ipourgos Tipou kai Meson Mazikis Enimerosis, C-81/09, ECLI:EU:C:2010:622, para. 48; similar in Judgment of the Court of 13 November 2012, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, C-35/11, ECLI:EU:C:2012:707, para. 102. 58 Judgment of the Court of 17 September 2009, Glaxo Wellcome GmbH & Co. KG v Finanzamt München II, C-182/08, ECLI:EU:C:2009:559, para. 40. 59 See Hindelang (2009), pp. 204–206. 60 Judgment of the Court of 13 November 2012, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, C-35/11, ECLI:EU:C:2012:707, para. 102.

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fundamental freedom of establishment (Art 49 TFEU).61 There is where things get complicated.62 In a nutshell, recent CJEU case law reviews national laws on direct investments only by the standard of one of the two freedoms. If the national legislation is applicable in situations of ‘definite influence’ FDI, this legislation is reviewed (arguably) only against the freedom of establishment. This approach has crucial consequences for third country direct investments since Art 63(1) TFEU and Art 49 TFEU differ fundamentally with respect to their personal scope of application. Third country investors fall within the personal scope of the freedom of capital movement63 but not within the personal scope of the right of establishment.64 A third country direct investment that brings definite influence on the target (definite influence third country direct investment) risks lacking the protection of fundamental freedoms altogether. Such an investment falls within the substantive scope of Art 49 TFEU but misses its personal scope. At the same time, Art 63(1) TFEU offers its personal scope of application and ‘in principle’ (as the CJEU puts it) also its substantive scope, but (arguably) the given substantive scope of application of the freedom of establishment could bar the application of the free movement of capital. This gap in protection is neither a mere scholarly debate nor a hypothetical question. Instead, this consequence of being left without fundamental freedom protection was the legal consequence in the Scheunemann (tax) case.65 61 Judgment of the Court of 13 April 2000, C Baars v Inspecteur der Belastingdienst Particulieren/ Ondernemingen Gorinchem, C-251/98, ECLI:EU:C:2000:205, paras. 22, 26; see also Judgment of the Court of 12 September 2006, Cadbury Schweppes plc, Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, C-196/04, ECLI:EU:C:2006:544, para. 31; Judgment of the Court of 13 March 2007, Test Claimants in the Thin Cap Group Litigation v Commissioners of Inland Revenue, C-524/04, ECLI:EU:C:2007:161, para. 27; Judgment of the Court of 17 September 2009, Glaxo Wellcome GmbH & Co. KG v Finanzamt München II, C-182/08, ECLI:EU: C:2009:559, para. 47; Judgment of the Court of 21 October 2010, Idrima Tipou AE v Ipourgos Tipou kai Meson Mazikis Enimerosis, C-81/09, ECLI:EU:C:2010:622, para. 47; Judgment of the Court of 19 July 2012, Marianne Scheunemann v Finanzamt Bremerhaven, C-31/11, ECLI:EU: C:2012:481, para. 23; Judgment of the Court of 13 November 2012, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, C-35/11, ECLI:EU:C:2012:707, para. 91; Judgment of the Court of 3 September 2020, Vivendi SA v Autorità per le Garanzie nelle Comunicazioni, C-719/18, ECLI:EU:C:2020:627, para. 40. 62 The relationship between the right of establishment and the free movement of capital is significantly disputed among scholars. Conceptions range from mutually exclusive scopes of application over primacy/subsidiarity to parallel applicability; see Lutter et al. (2018), § 4, para. 25, with further references. 63 See Hindelang (2009), pp. 204–206. 64 Judgment of the Court of 24 May 2007, Winfried L. Holböck v Finanzamt Salzburg-Land, C-157/05, ECLI:EU:C:2007:297, para. 28; Judgment of the Court of 19 July 2012, Marianne Scheunemann v Finanzamt Bremerhaven, C-31/11, ECLI:EU:C:2012:481, para. 33; Judgment of the Court of 13 November 2012, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, C-35/11, ECLI:EU:C:2012:707, para. 97. 65 See Judgment of the Court of 19 July 2012, Marianne Scheunemann v Finanzamt Bremerhaven, C-31/11, ECLI:EU:C:2012:481, paras. 17–35. The CJEU reviewed a German tax clause (applicable on ‘definite influence’ shareholdings) with respect to the freedom of establishment.

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Excluding definite influence third country direct investments from the protection of any fundamental freedom, however, is not persuasive. While their exclusion has never been convincing in the first place, it would become unacceptable under the structural changes under the Screening Regulation. Upholding the protection of fundamental freedoms for every form of direct investment seems to be a view that is shared by the Commission: its fundamental freedom assessment of the Proposal states that foreign direct investments were capital movements under Art 63 TFEU and that the Regulation was consistent with the requirements on restricting the freedom of capital movement.66 Thus, the Commission does not differentiate between definite influence and non-definite influence direct investments, so it seems fair to argue the Commission understands all direct investments to be protected by the freedom of capital movement. Likewise, in its FDI Screening Regulation Guidance, the Commission argues how the EU screening law is justified with respect to the freedom of capital movement.67 Nothing in the Commission’s analyses indicates an understanding according to which FDIs (where they also fall within the substantive scope of the freedom of establishment) would lose the protection of Art 63 TFEU.68 Fortunately, there are strong arguments in favour of avoiding such a gap in protection.69 First, the CJEU could easily apply the method of distinguishing the protection for third country direct investments under the Screening Regulation from previous cases rather than having to overrule its previous case law. The CJEU case law on the relationship between the fundamental freedoms of capital movements and of establishment lacks clear lines anyway;70 even more, the judgments originated from different types of cases (‘golden shares’71 cases v direct taxation cases), which impedes inducing a general rule.72 Second (also allowing to distinguish from the previous case law), the Screening Regulation covers a complete policy area. This results in not only a quantitative but also a qualitative difference to previous cases: it is not about specific cases of national law that would be assessed neither by Art 49 TFEU nor by Art 63(1) TFEU (as in the Scheunemann case); under such circumstances, the vacuum of fundamental freedom protection may be acceptable. Instead, the applicability of Art 63(1) TFEU

Ms. Scheunemann’s shares of a capital company established in a third country, however, did not fall within the personal scope of application of the freedom of establishment. The Court did not (re)consider the freedom of capital movement and, thus, did not address the protection gap issue. 66 Proposal for the Regulation, COM(2017) 487 final, 13.9.2017, pp. 4, 28 f. 67 FDI Screening Regulation Guidance, C(2020) 1981 final, OJ C 99 I/4 f of 26.3.2020. 68 See especially the lack of any such statements in the Proposal for the Regulation, COM(2017) 487 final, 13.9.2017, pp. 4 f., 29 (discussing the personal scope of both fundamental freedoms). 69 Other scholars do not deal with these arguments but rather accept the gap; see Zwartkruis and de Jong (2020), p. 456. 70 Hindelang (2013), p. 77 f.; Lutter et al. (2018), § 4, para. 26; Schmidt and Meckl (2020), p. 1224; see also Herrmann (2019), p. 441 f. 71 On ‘golden shares’ in general, see Lutter et al. (2018), § 15. 72 Hindelang and Hagemeyer (2017), p. 886.

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in the scope of the Screening Regulation is about a general rule in EU law, where such a vacuum would be unacceptable. Third, it is a paradox that a third country portfolio investment is protected by Art 63(1) TFEU but a more intense capital movement in the form of a direct investment should not be.73 Fourth, it is not comprehensible how Art 49 TFEU—which is not applicable by its personal scope in cases of third country direct investments—should have the effect of barring Art 63(1) TFEU.74

3.2.3

Third Country Direct Investments Are Protected by EU Fundamental Rights

Third country direct investments in the meaning of the Screening Regulation fall within the scope of protection of EU economic fundamental rights. This may turn out to be especially relevant if the CJEU should deny third country ‘definite influence’ direct investments the protection of the fundamental freedom of capital movement (despite the arguments presented above in Section 3.2.2). EU fundamental rights, including economic fundamental rights in Art 15–17 of the Charter of Fundamental Rights of the EU (CFR), protect third country direct investments.75 The applicability of the Screening Regulation as EU law entails the applicability of the fundamental rights guaranteed by the CFR (cf. Art 51(1) sentence 1 of the CFR),76 though the Member States enjoy a wide discretion with respect to their FDI screening.77 At least as far as the national screening is covered by the Screening Regulation,78 a national FDI screening must comply with the CFR.

73

Ibid., p. 885. Hindelang (2013), p. 80; Hindelang and Hagemeyer (2017), p. 885. 75 This section only discusses (non-extensively) the rights of the investor. It leaves out possible rights of the target or the vendor (a screening decision also touches upon their rights, of course). Besides, the discussion of the fundamental rights under the CFR (as guaranteed via Art 6(1) TEU) is without any prejudice to the rights guaranteed by the European Convention for the Protection of Human Rights and Fundamental Freedoms and to rights resulting from the constitutional traditions common to the Member States (cf. Art 6(3) TEU). 76 Cf. Judgment of the Court of 26 February 2013, Åklagaren v Hans Åkerberg Fransson, C-617/10, ECLI:EU:C:2013:105, para. 21; Judgment of the Court of 26 September 2013, Texdata Software GmbH, C-418/11, ECLI:EU:C:2013:588, para. 73; Judgment of the Court of 16 May 2017, Berlioz Investment Fund SA v Directeur de l’administration des contributions directes, C-682/15, ECLI: EU:C:2017:373, para. 49. 77 See, e.g., Art 1(3), Recital 8 sentence 2, Recital 17 second subpara, or Recital 19 second subpara sentence 2. 78 Cf. Judgment of the Court of 26 February 2013, Åklagaren v Hans Åkerberg Fransson, C-617/10, ECLI:EU:C:2013:105, para. 19; Judgment of the Court of 26 September 2013, Texdata Software GmbH, C-418/11, ECLI:EU:C:2013:588, para. 72. 74

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Art 16 of the CFR79 as a fundamental right80 seems especially relevant for third country direct investors. Yet this freedom to conduct a business is not absolute but must be viewed in relation to its social function.81 This freedom may, therefore, be subject to a broad range of interventions that may limit the exercise of economic activities in the public interest.82 Consequently, Art 16 of the CFR offers a rather thin protection. The freedom to conduct a business is a relatively weak right under current CJEU case law.83 This is hardly surprising since economic ‘basic’ rights under EU law are primarily guaranteed by fundamental freedoms, which usually come with a stronger substance.84 Again, this shows the importance of recognising third country direct investments as being protected by the freedom of capital movement. On the other hand, economic fundamental right protection does offer at least some level of protection. Besides, where third country investments are protected under the free movement of capital, Art 16 of the CFR (also) serves as a limitation to national restrictions on this fundamental freedom (in an ERT constellation85).86

79 On the basics of Art 16 of the CFR, see the Explanations relating to the Charter of Fundamental Rights (2007/C 303/02), OJ C 303/23, 14.12.2007 (that must be given due regard when interpreting the CFR pursuant to Art 6(1) third subpara TEU and Art 52(7) of the CFR). 80 Art 16 of the CFR is not a mere principle in the meaning of Art 52(5) of the CFR but a right; see Oliver in Bernitz/Groussot/Schulyok (2013), pp. 295–296; Groussot et al. in Douglas-Scott/Hatzis (2017), p. 331. This is implicitly accepted in Judgment of the Court of 6 September 2012, Deutsches Weintor eG v Land Rheinland-Pfalz, C-544/10, ECLI:EU:C:2012:526, paras. 54–60, and in Judgment of the Court of 22 January 2013, Sky Österreich GmbH v Österreichischer Rundfunk, C-283/11, ECLI:EU:C:2013:28, paras. 41 ff. 81 Judgment of the Court of 6 September 2012, Deutsches Weintor eG v Land Rheinland-Pfalz, C-544/10, ECLI:EU:C:2012:526, para. 54; Judgment of the Court of 22 January 2013, Sky Österreich GmbH v Österreichischer Rundfunk, C-283/11, ECLI:EU:C:2013:28, para. 45. 82 Ibid., para. 46. The limitation must be proportional pursuant to Art 52(1) sentence 2 of the CFR; see id., paras. 47 ff. 83 Cf. Oliver in Bernitz/Groussot/Schulyok (2013), pp. 298. f.; Groussot et al. in Douglas-Scott/ Hatzis (2017), pp. 327–336. 84 Jarass (2016), Art 16 EU-Grundrechte-Charta, para. 6. 85 That is, national restrictions to EU fundamental freedoms must be compliant with EU fundamental rights; cf. the landmark case Judgment of the Court of 18 June 1991, Elliniki Radiophonia Tileorassi Anonimi Etairia (ERT AE) and Panellinia Omospondia Syllogon Prossopikou ERT v Dimotiki Etairia Pliroforissis (DEP) and Sotirios Kouvelas and Nicolaos Avdellas and Others, C-260/89, ECLI:EU:C:1991:254, para. 43. 86 Judgment of the Court of 21 December 2016, Anonymi Geniki Etairia Tsimenton Iraklis (AGET Iraklis) v Ypourgos Ergasias, Koinonikis Asfalisis kai Koinonikis Allilengyis, C-201/15, ECLI:EU: C:2016:972, paras. 63–66.

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EU Competence for Rules on Third Country Direct Investments

The Screening Regulation is explicitly based on the EU’s exclusive competence of the Common Commercial Policy (CCP) pursuant to Art 3(1)(e) TFEU87 in conjunction with Art 207(1) TFEU.88 Just a few months before the Proposal for the Regulation was presented, the CJEU had rendered its Opinion on the Free Trade Agreement between the European Union and the Republic of Singapore. The CJEU decided that the EU had the exclusive competence for international agreements concerning third country direct investments89 but not for international agreements concerning third country portfolio investments.90 The CJEU followed the definition of direct investments from the Capital Movements Directive Nomenclature.91, 92 Besides Art 3(1)(e) TFEU in conjunction with Art 207(1) TFEU, other potential legal bases have been discussed: Art 64(2) TFEU and Art 64(3) TFEU.93 For the purposes of this contribution, it shall remain open whether one of these legislative competences from the internal market context would have provided a sound basis for the Screening Regulation.

4 Approaching a Common Understanding of Third Country Direct Investments This section wishes to dovetail third country direct investments with the broader picture of EU law and politics, before turning to specific elements of third country direct investments in Section 5. Waiving the chance of outlining such a thicker understanding would mean wasting the current time window. The common European screening law is just about to be developed, and the most promising time to discuss basics is at the beginning of a long and winding road.

87

Recital 6 sentences 1 and 2. Proposal for the Regulation, COM(2017) 487 final, 13.9.2017, p. 8. 89 Pursuant to Art 3(1)(e) in conjunction with Art 207(1) TFEU, see Opinion procedure 2/15, Free Trade Agreement with Singapore, Opinion of the Court of 16 May 2017, ECLI:EU:C:2017:376, paras. 81 f., 243. 90 Opinion of the Court of 16 May 2017, Free Trade Agreement with Singapore, Opinion 2/15, ECLI:EU:C:2017:376, paras. 83, 238, 243. 91 Cf. ibid., para. 80. 92 On the relationship between CCP and FDI regulation, including an analysis of the CJEU’s Opinion 2/15, see Cremona in Bourgeois (2020) EU Framework for Foreign Direct Investment Control, pp. 31–55; for further discussions of Art 207(1) TFEU as legal basis for the Regulation, see Zwartkruis and de Jong (2020), p. 458 f. 93 See Herrmann (2019), p. 462 f.; Hindelang and Moberg (2020) (forthcoming), pp. 7–10; for a discussion of the legal basis, see also Bismuth in Bourgeois (2020) EU Framework for Foreign Direct Investment Control, pp. 108, 111 f. 88

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Tesserae to a thick understanding include the argument for a common European screening law and politics (below Section 4.1) and the awareness of the uneasy contexts, within which third country direct investments are set to operate in (below Section 4.2). The Screening Regulation is a new policy. The general troubles of implementing new policies are amplified by FDI rules being a core issue of current global regulatory and political struggles. Besides, from a political perspective, the interpretation of the Regulation as a bargaining chip in the global context has merits. At the same time, an analysis must not ignore ‘domestic’ effects of the Regulation, such as spillover effects on the internal market. Against the backdrop of these complex layers, this contribution argues for applying a strictly legal interpretation of the Regulation to avoid yielding to the temptations of a ‘political’ interpretation (below Section 4.3). Such a strictly legal interpretation includes the awareness of the risks resulting from legal terms of the Screening Regulation that are open to interpretation. Moreover, such an interpretation requires an understanding of accommodating notions of reciprocity into the Regulation as well as grasping the paradigm shift of the Regulation as a restriction on the free movement of capital. Lastly, international law should be taken into consideration for future developments to a higher degree than has been the case so far (below Section 4.4).

4.1

A Common European Screening Law and Politics

The Screening Regulation has the potential of triggering the development of a common European screening law. A common European screening law does not mean a single piece of hard law, such as a revised and extended Screening Regulation. Instead, the idea is that of a legal framework allowing a convergent development of screening law and politics of both European and national actors without (necessarily) aiming at harmonisation by EU law. Such a common European understanding would be embedded in national experiences and international legal obligations. The Screening Regulation bears in many parts features of soft law. It is a ‘“lighttouch” harmonisation of the Member States’ screening mechanisms if they choose to entertain such mechanism’.94 Most provisions do not require an adaptation of national screening law. Instead, the Regulation enables the Member States to link national screening mechanisms with a transnational perspective. It encourages the Member States to consider certain screening aspects while stressing a very broad range of discretion.95 Such instruments that resemble soft law include the

94

Hindelang and Moberg (2020) (forthcoming), p. 10. Cf. Art 1(3), Recital 8 sentence 2, Recital 17 second subpara, or Recital 19 second subpara sentence 2. On the ‘optional nature’ of the Regulation, see Neergaard in Bourgeois (2020), p. 154 f. 95

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cooperation mechanism to share information and provide national/EU assessments;96 the strengthening of the Commission group of experts on the screening of FDI into the EU to discuss issues related to FDI screening, share lessons learned, exchange views on trends and issues of common concern, and advise the Commission;97 notifications and annual reports of the screening mechanisms;98 or the application of best practice approaches.99 Such a cooperative approach especially reserves the Member States the competence to integrate their screening mechanism into their respective national economic and legal order. In the spirit of the principle of subsidiarity,100 a common European approach to FDI screening does not necessarily call for more EU secondary law (for which the political will seems to lack, anyway101). It is hard to imagine that the very heterogeneous screening law situation in the Member States could be harmonised in near future, even if a level playing field for FDI would be desirable. Instead, a common European screening law would offer the chances of coordinated and informed developments of the respective EU and national politics. To that end, a common European screening law would benefit from further contributions by additional stakeholders. The national contact points could allow business organisations to have their say or invite practising lawyers to share their experiences with screening law and politics, instead of only being the contact points for Member State cooperation.102 Such a policy is even more urgent since the Regulation does not prescribe to publish (in an anonymised form) the outcome of screenings or the principles guiding the decision to serve as guidance for other market participants.103 A common European screening law would be built on an overlapping consensus on the elements of FDI screening. It would aim at convergent developments while

96

Arts. 6–10. Art 23, Recital 28 sentences 2 and 3. Cf. Commission Decision of 29 November 2017 setting up the group of experts on the screening of foreign direct investments into the European Union, C(2017) 7866 final, 29.11.2017. For details on this expert group, see European Commission (2020b) Commission expert group on the screening of FDI into the EU. 98 Art 3(7), Art 5, Recital 22. 99 Cf. ‘Member States wanting to put in place such mechanisms in the future could take into account the functioning, experiences and best practices of existing mechanisms’ (Recital 4 sentence 4). 100 Art 5(3) TEU in conjunction with Protocol No 2. 101 See, however, an interesting obiter dictum of a recent statement of the Commission: ‘At present, the responsibility for screening FDI rests with Member States.’ FDI Screening Regulation Guidance, C(2020) 1981 final, OJ C 99 I/2, 26.3.2020 (emphasis added). Moreover, during the legislative procedure of the Screening Regulation, the European Economic and Social Committee argued that ‘the EU should make use of its competence in terms of foreign direct investment, where the investment has a cross border impact on whole EU or parts of it. The Commission needs to be able to both screen investments and decide whether they are permissible’ (European Economic and Social Committee, Opinion, OJ C 262/94, 25.7.2018, p. 98). 102 Pursuant to Art 6(10), Art 7(9). During the legislative procedure, the European Economic and Social Committee recommended involving the social partners and civil society in an appropriate way in the contact points (ibid.) 103 Hindelang and Moberg (2020) (forthcoming), p. 11. 97

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making the different perspectives on a planned direct investment visible and give them a voice.104 This is the very idea of the Regulation: smoothly synchronising these differences and trying to work as a gear unit. Such an approach would address the issue of EU-internal regulatory competition. The respective regulatory framework is a factor for investments; national regulatory frameworks are competition factors.105 But the Screening Regulation is about security and public order, and FDI screening cannot legitimately be used as a regulatory competition advantage.106 One must, however, not pretend to be naïve. For example, not all EU Member States share the same attitude towards investors from China. Hungary,107 Poland,108 or Greece109 shows a rather welcoming attitude to significant Chinese investments. Investors may strategically use such differences.110 In the words of the European Economic and Social Committee in the Regulation’s legislative procedure: If the Member States are largely responsible for screening foreign direct investment, then there is a risk that a foreign investor that wants to take over important businesses and entities will select the country that is most vulnerable to such investments as an entry point to make their first investment, thus gaining access, via the internal market, to countries with stronger investment protection.111

Such risks could turn into problems analogous to the issue of ‘golden passports’. Some Member States sell such ‘golden passports’ to third country individuals as entry tickets to the European citizenship.112 Golden investments in the Member States with the sole aim of getting an entry ticket to the internal market to benefit from that position with respect to other Member States’ screening legislation must be avoided.113 But the more convergent the Member States’ screening law is (including a common European understanding of direct investment), the less can strategic

104

Cf. only Art 6–9 and Art 12. Eidenmüller (2009), p. 641 f. and passim; Kersten in Isensee and Kirchhof (2013), pp. 325 f. (cf. also id., pp. 305–331, for a broader analysis on the competition between legal orders). 106 See on economic grounds in the context of the Screening Regulation Bourgeois and Malathouni in Bourgeois (2020) EU Framework for Foreign Direct Investment Control, pp. 178, 188–190. 107 Cf. EURACTIV (23 September 2019b) Budapest-Belgrade railway: Orbán flirts with China, available at https://www.euractiv.com/section/eu-china/interview/budapest-belgrade-railwayorban-flirts-with-china/. 108 Cf. only Schulz (2018), p. 59. 109 Cf. only Schladebach and Becker (2019), p. 1079. 110 Schmidt (2020), p. 301. 111 European Economic and Social Committee, Opinion, OJ C 262/94, 25.7.2018, p. 98. 112 Cf. only EURACTIV (27 March 2020a) Golden visas and passports still widespread in Europe, study finds, available at https://www.euractiv.com/section/justice-home-affairs/news/goldenpassports-still-widespread-in-europe-study-finds/. 113 While not ignoring, of course, that in such cases the Regulation’s anti-circumvention clause may be applicable, cf. below Sect. 5.3. 105

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investors identify the ‘most vulnerable’ Member State and the fewer dangers of a regulatory ‘race to the bottom’.114 A common European approach towards FDI screening that comes with a framework for a convergent development right from the beginning would also have the advantage of mitigating potential diverging effects. To name some: (i) The Regulation only covers extra-EU direct investments, i.e. one out of four investment categories (the others being intra-EU direct investments, intra-EU portfolio investments, and extra-EU portfolio investments). Developments should keep the other three categories in mind to preserve the chances of a more comprehensive EU screening law. (ii) Different substantial rules may be applied for third country and EU direct investments, as the CJEU has decided: ‘[I]t may be that a Member State will be able to demonstrate that a restriction on capital movements to or from non-member countries is justified for a particular reason in circumstances where that reason would not constitute a valid justification for a restriction on capital movements between Member States[.]’115 The Commission has just recently emphasised this argument in its COVID-19 Guidance.116 Such a potential split in the reasons for justification may cause further diversions that may impede a coherent and convergent overall screening law. The longer a potentially divergent understanding of direct investment develops, the harder it will be to find political solutions in this policy area in years to come. A common European convergent approach would reduce potential future disruptions.

4.2

Interpreting the Screening Regulation in Uneasy Contexts

The interpretation of the Screening Regulation must follow a strictly legal interpretation (below Section 4.3). Yet one must not be naïve and ignore the uneasy contexts of the Regulation. To avoid turning a blind eye on these contexts, some facets shall be explicated.

See the issue of a regulatory ‘race to the bottom’ in general Eidenmüller (2009), p. 648 f.; Kersten in Isensee/Kirchhof (2013), pp. 313–315. 115 Judgment of the Court of 12 December 2006, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, C-446/04, ECLI:EU:C:2006:774, para. 171; see also Judgment of the Court of 10 February 2011, Haribo Lakritzen Hans Riegel BetriebsgmbH (C-436/08), Österreichische Salinen AG (C-437/08) v Finanzamt Linz, joined Cases C-436/08 and C-437/08, ECLI:EU:C:2011:61, paras. 119 f.; Judgment of the Court of 28 October 2010, Établissements Rimbaud SA v Directeur général des impôts, Directeur des services fiscaux d’Aix-en-Provence, C-72/09, ECLI:EU:C:2010:645, para. 40. On this topic of an interpretation more tolerant to third country investment restrictions, see also Herrmann (2019), pp. 451–454. 116 FDI Screening Regulation Guidance, C(2020) 1981 final, OJ C 99 I/5, 26.3.2020. 114

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The Screening Regulation as New Policy

European FDI screening is a highly political matter, which makes a strictly legal interpretation challenging. The Screening Regulation is a ‘new policy initiative’,117 and it is an open question what shape the ‘nascent EU investment screening mechanism’118 will develop into. The effects of the Regulation are even harder to forecast since ‘[i]n view of the rapidly changing economic reality, growing concerns of citizens and Member States’, the Regulation was ‘exceptionally [proposed] without an accompanying impact assessment’.119 These accompanying risks must be taken seriously. The Member States (and the Commission) should, thus, not be hasty: early decisions under the Regulation will serve as precedents and will have a long-lasting impact. Therefore, they should be carefully scrutinised with respect to whether the underlying rationale may indeed serve as a general principle for future cases.

4.2.2

Screening Law and Politics as Key Concepts in the Global Struggle for Adequate Rules

Screening law and politics are a core tool for regulating the global economy. National governments and the Commission frequently face intense pressure from politicians, businesses, private interest groups, and the public to exercise their regulatory competences and so protect the national or public interest (as interpreted by the respective stakeholders). This has been observed regarding antitrust law,120 and these risks are by no means limited to antitrust law. In other words, screening decisions may quickly end up being ‘political questions’. It is enlightening to see how acquisitions have been repelled even without adequate FDI provisions: when a 20% share of the German transmission system operator for electricity 50Hertz Transmission GmbH was at risk of being purchased by Chinese state-owned State Grid Corporation of China (SGCC), that acquisition was averted by German state-owned bank Kreditanstalt für Wiederaufbau (KfW), which purchased that share—to fill the gap of a then-missing legal instrument to avoid said

Proposal for the Regulation, COM(2017) 487 final, 13.9.2017, p. 9. Hindelang and Moberg (2020), p. 19 (forthcoming) (emphasis omitted). 119 Proposal for the Regulation, COM(2017) 487 final, 13.9.2017, p. 10. In the subsequent legislative procedure, the European Committee of the Regions regretted ‘the fact that such an important proposal is presented by the Commission without an impact assessment’ (European Committee of the Regions, Opinion, OJ C 247/36, 13.7.2018). 120 Jones and Davies (2014), p. 467. 117 118

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Chinese investment.121 Similarly, scholars have already argued that EU company law may be used for FDI screening.122 One may also want to consider the similar political situation in merger control law: when the Commission prohibited German company’s Siemens proposed acquisition of French enterprise Alstom in 2019,123 German and French ministers of the economy Mr Altmaier and Mr Le Maire immediately called for changes in EU competition law.124 Shortly afterwards, they presented ‘A Franco-German Manifesto for a European industrial policy fit for the twenty-first Century’125 to create ‘European champions’.126 In light of this, little imagination is needed for picturing how existing FDI screening law competences may be used for political means.

4.2.3

Use of Screening Law as a Bargaining Chip

So screening mechanisms come with significant political weight. Against that backdrop, it has been argued that a robust European investment law could serve as a bargaining chip.127 The EU can use the restrictions resulting from the Screening Regulation as lever in its negotiations with countries such as the US or China.128 In this interpretation, the Screening Regulation supports the EU external economic policy: in return for limiting the screening competences as specified by the Screening Regulation, third countries should enter into international agreements that would

121

Cf. Bundestag Legislative Material 19/4382 of 18.9.2018, p. 2. The FDI screening tools at that time were only applicable to direct investments that would result in at least 25% of the voting rights. Under current German law, the threshold would be 10% of the voting rights; see section 56(1) no 1 in conjunction with section 55(1) sentence 2 no 1 of the German FTPO. 122 Papadopoulos (2019). 123 Cf. the Summary of Commission Decision of 6 February 2019 declaring a concentration to be incompatible with the internal market and the functioning of the EEA Agreement (Case M.8677— Siemens/Alstom), OJ C 300/14, 5.9.2019; European Commission (2019) Mergers: Commission prohibits Siemens’ proposed acquisition of Alstom. Press release of 6 February 2019. 124 Cf. Reuters (6 February 2019) Germany presses for changes in EU competition rules after Siemens/Alstom deal blocked, available at https://www.reuters.com/article/us-alstom-m-asiemens-eu-germany/germany-presses-for-changes-in-eu-competition-rules-after-siemens-alstomdeal-blocked-idUKKCN1PV1BO. 125 German Federal Ministry for Economic Affairs and Energy, French Ministry of the Economy and Finance (19 February 2019) A Franco-German Manifesto for a European industrial policy fit for the twenty-first century, available at https://www.bmwi.de/Redaktion/DE/Downloads/F/francogerman-manifesto-for-a-european-industrial-policy.pdf?__blob¼publicationFile&v¼2. 126 Stam (19 February 2019a) France, Germany call for a change of European regulatory rules. EURACTIV, available at https://www.euractiv.com/section/competition/news/france-germanycall-for-a-change-of-european-regulatory-rules/. 127 Schill in Bourgeois (2020), p. 57. 128 Ibid.

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provide EU investors access to these third country markets based on the principle of reciprocity.129 This interpretation offers a convincing argument from a political point of view. Indeed, the argument of the lack of reciprocity has been a recurring theme in the legislative procedure of the Regulation130 and plays a significant role both in national131 and in current EU policies.132 Yet this bargaining chip idea comes with a serious risk of mixing two different questions: that of the economic access to third country markets for EU direct investments and that of the protection of the security and public order of the EU and its Member States. To give an example: If a third country investor gained control over the Spanish power grid system, security concerns may arise. These concerns can hardly be met by the fact that Spanish investors have access to the respective third country market on the basis of reciprocity. While the bargaining chip idea without doubt remains tempting in negotiations to come, that negotiation lever adds to the unease context that the Screening Regulation as a legal instrument finds itself in.

4.2.4

Potential Spillover Effects of Third Country Investment Screening on the Internal Market

Another tessera of the full mosaic of the Screening Regulation is the potential spillover effects of national screening law for the Internal Market: a genuine133 third country direct investment into an EU-based target transforms the target to a somewhat hybrid undertaking. Assuming a Russian investor acquires Italian A S.r.l. and A S.r.l. now intends to acquire Germany-based B GmbH. As an EU-based company, A S.r.l. enjoys the freedom of establishment. Without its third country investor, A S.r.l. would not be subject to third country screening law. Due to this third country investor, however, the acquisition of B GmbH now is subject to the Screening Regulation.134 The legal situation of such ‘hybrid undertakings’ still needs to be discussed in detail. Whatever the results of this discussion may be, it seems reasonable to assume that third country direct investments will come for EU undertakings with the price of competitive burdens and hindering its EU fundamental freedoms. The Screening Regulation, thus, comes with a potential spillover effect on the internal market.

129

Ibid., pp. 58 f., 70, 73–75. Cf. below Sect. 4.3.2. 131 Hochstatter (2019), p. 290. 132 Cf. European Commission, White Paper on levelling the playing field as regards foreign subsidies, COM(2020) 253 final, 17.6.2020, p. 7. 133 On the situation of investments made to circumvent screening decisions, see below Sect. 5.3. 134 On indirect foreign investments, see below Sect. 5.1.4.2. 130

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Interpreting the Screening Regulation by a Strictly Legal Approach

To tame these uneasy contexts to a certain degree, one must apply a strictly legal approach when interpreting the Screening Regulation. The interpretation must not pursue a (more or less camouflaged) hidden political agenda. Calling for a strictly legal interpretation of an EU regulation is not as trivial as it seems. The legal interpretation of the Regulation takes place in a complex and complicated context. Screening decisions will very often be in the spotlight of high-level politics. And while political considerations on screening politics are legitimate, they must be restricted to the political arena. Bringing them into the legal interpretation of screening law in a backdoor manner is not an option. As hard as it is, the legal interpretation and the political development of third country direct investments should be distinguished sharply. Three examples shall illuminate some challenges to a strictly legal approach.

4.3.1

Legal Terms Open to Interpretation

Many central terms of the Screening Regulation leave considerable room for interpretation. Terms such as ‘public order’ provide a wide margin of discretion for the Member States. To give an example: settled CJEU case law states that purely economic grounds cannot serve as justification for restrictions to fundamental freedoms;135 such purely economic grounds include the promotion of the national economy.136 But what about not-purely-but-also economic grounds? Or may the third country status of investors allow adaptations to the ‘economic grounds’ justification?137 135

Cf. with further citations Judgment of the Court of 14 March 2000, Association Église de Scientologie de Paris, Scientology International Reserves Trust v The Prime Minister, C-54/99, ECLI:EU:C:2000:124, para. 17; Judgment of the Court of 21 December 2016, Anonymi Geniki Etairia Tsimenton Iraklis (AGET Iraklis) v Ypourgos Ergasias, Koinonikis Asfalisis kai Koinonikis Allilengyis, C-201/15, ECLI:EU:C:2016:972, para. 72. Cf., however, also the earlier decision in Judgment of the Court of 4 June 2002, Commission of the European Communities v Portuguese Republic, C-367/98, ECLI:EU:C:2002:326, para. 52: ‘It is settled case-law that economic grounds can never serve as justification’, lacking the ‘purely’ economic ground qualification. 136 Judgment of the Court of 21 December 2016, Anonymi Geniki Etairia Tsimenton Iraklis (AGET Iraklis) v Ypourgos Ergasias, Koinonikis Asfalisis kai Koinonikis Allilengyis, C-201/15, ECLI:EU: C:2016:972, para. 72. 137 On economic considerations and third country direct investments, cf. also Herrmann (2019), p. 447 f.; cf. in general also Judgment of the Court of 12 December 2006, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, C-446/04, ECLI:EU:C:2006:774, para. 171: ‘[I]t may be that a Member State will be able to demonstrate that a restriction on capital movements to or from non-member countries is justified for a particular reason in circumstances where that reason would not constitute a valid justification for a restriction on capital movements between Member States[.]’

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And, of course, open concepts facilitate naming legitimate reasons for a certain screening decision while following other or further considerations.

4.3.2

Considering Notions of Reciprocity as Part of the Screening Decision

To give another example where a legal interpretation of the Regulation may face challenges: let us assume that an investor is constituted under the laws of a third country that does not provide the same investment opportunities for EU-based acquirers. A screening decision may feel inclined to consider notions of reciprocity as part of its decision and give further weight to the European screening law bargaining chip.138 As legitimate as the bargaining chip approach may be in explicit political negotiations, in a legal context, this is a temptation that a strictly legal interpretation of the Screening Regulation must not yield to. The fundamental freedom of capital movement is not based on reciprocity, nor is the issue of reciprocity a legal element of the Screening Regulation. The point of reciprocity was discussed in the legislative procedure time and again,139 but an amendment to include reciprocity in the screening factors was rejected.140 So even where reciprocity considerations would be admissible under international law,141 such considerations are not connected to protecting a Member State’s security or public order. In a strictly legal interpretation of the Screening Regulation, such considerations must not be taken into consideration in any context of the Screening Regulation.

4.3.3

Understanding the Paradigm Shift: The Screening Regulation as Restriction of Free Capital Movements

The Screening Regulation brings a paradigm shift. The definition of direct investments in Art 2(1) of the Screening Regulation has been transplanted without further

138

Cf. above Sect. 4.2.3. For example, Proposal for the Regulation, Proposal for the Regulation, COM(2017) 487 final, 13.9.2017, p. 2: ‘While the Union’s openness to foreign direct investment will not change, it has to be accompanied by vigorous and effective policies to, on the one hand, open up other economies and ensure that everyone plays by the same rules, [. . .].’; see also ‘Although the issue of reciprocity is not addressed in the proposal for the Regulation, the [European Economic and Social Committee] calls on the Commission to apply the principle of reciprocity in all cases of the EU negotiations with the third countries on FDI as more non-EU investors purchase EU businesses and entities while the EU investors often are facing barriers to investing in other countries. Above all the Committee calls for the speed-up of the negotiations about the investment agreement with China’ (European Economic and Social Committee, Opinion, OJ C 262/94, 25.7.2018, p. 95). For further references, see Hindelang and Moberg (2020), p. 3 (forthcoming). 140 Zwartkruis and de Jong (2020), p. 465. 141 On that topic, cf. Schmidt and Meckl (2020), pp. 1225–1226. 139

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ado from EU primary law142 that liberalises the movement of capital into EU secondary law that restricts the movement of capital.143 In the context of the restricting Screening Regulation, the broad concept of direct investments that must ‘be understood in its widest sense’144 now turned from its liberalising origins into an opposite effect. This effect has not been discussed in the legislative procedure—an omission that should be rectified in discussions to come. This restriction paradigm of the Screening Regulation must be reflected in its interpretation. A justification-oriented approach should serve as a guideline: EU and national screening laws and politics are not legitimised for commercial interests but for avoiding ‘disruption, failure, loss or destruction’ of facilities ‘which are essential for security or the maintenance of public order’ (Recital 13 sentence 1).

4.4

International Law

Any (political and legal) developments of European investment law should take seriously not only the national experiences of the EU Member States but also international investment law: as a source of experience and, of course, as binding legal obligations.145 The concept of ‘investment’, for example, has been discussed in multi- and bilateral investment treaties, as well as under Art 25(1) sentence 1 of the 142

The Capital Movements Directive, of course, is an EU secondary law, but the Court applies its Nomenclature and Explanatory Notes to define direct investments as part of the free movement of capital in the meaning of Art 63(1) TFEU. 143 The Screening Regulation, of course, does not require the Member States to introduce a screening law. Yet it encourages to do so, as reflected in Recital 17 first subpara: ‘[The Member State] should give such comments [of other Member States] or opinion [of the Commission] due consideration through, where appropriate, measures available under its national law, or in its broader policy-making[.]’; see also FDI Screening Regulation Guidance, C(2020) 1981 final, OJ C 99 I/2 of 26.3.2020 (emphasis added): ‘To this end, the European Commission calls upon Member States to: [. . .] For those Member States that currently do not have a screening mechanism, or whose screening mechanisms do not cover all relevant transactions, to set up a full-fledged screening mechanism and in the meantime to use all other available options to address cases where the acquisition or control of a particular business, infrastructure or technology would create a risk to security or public order in the EU, including a risk to critical health infrastructures and supply of critical inputs.’ 144 Capital Movements Directive Explanatory Notes on direct investments, first subpara sentence 2. The same understanding is applicable to direct investments as part of capital movements in the meaning of Art 63 TFEU (since the Explanatory Notes still have indicative value for interpreting the EU primary law of Art 63 TFEU, see only Judgment of the Court of 12 December 2006, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, C-446/04, ECLI:EU:C:2006:774, para. 180). 145 On that topic, cf. also a notable statement by the European Committee of the Regions during the legislative procedure of the Regulation. It pleads ‘for entering into dialogue on investment screening with the EU’s main trade partners. International approximation of rules on screening foreign direct investment would indeed limit conflicts and promote investment certainty’ (European Committee of the Regions, Opinion, OJ C 247/37, 13.7.2018). For a similar statement, see

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ICSID Convention.146 A common European screening law should apply a more comprehensive and constructive relationship towards international law. Currently, the Screening Regulation limits its reference to international law by the mere statement without any nuances that the Screening Regulation was compliant with international law (Recital 3 sentence 1). To give another example of how international investment law should be taken more seriously: the Organisation for Economic Co-operation and Development (OECD) provides for its 37 Members the twin Codes of Liberalisation: the OECD Code of Liberalisation of Capital Movements and the OECD Code of Liberalisation of Current Invisible Operations. Twenty-two OECD Members are EU Member States,147 and fifteen OECD Members are non-EU Member States;148 the EU itself is not a Contracting Party to the OECD Convention despite the unique status of the Commission within the OECD.149 Yet under the principle of sincere cooperation between the EU and its Member States,150 the EU must undertake utmost efforts to avoid a legal situation where EU law would conflict with the international law obligations of the EU Member States. Against this background, the Screening Regulation lacks a sufficient analysis of its relations to OECD rules. The Proposal of the Regulation simply states in one sentence without further explanations: ‘When making its proposal, the Commission ensured that it is in line with the best practices of the OECD as enshrined in its Guidelines for Recipient Country Investment Policies Relating to National Security.’151 This does not seem sufficient, considering that the OECD Code of Liberalisation of Capital Movements offers a range of provisions that are relevant for the Screening Regulation, including a definition of direct investments.152 Hence, the OECD Codes of Liberalisation are not only binding for the OECD Member countries. The Codes could also open the EU mind for experiences and rules beyond

European Economic and Social Committee, European Economic and Social Committee, Opinion, OJ C 262/94, 25.7.2018, p. 99. 146 Cf. for details Dolzer and Schreuer (2012), pp. 60–76. 147 Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, the Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain, and Sweden; see OECD (2020e) List of OECD Member countries, available at https://www.oecd.org/about/document/list-oecd-member-countries.htm. 148 Australia, Canada, Chile, Colombia, Iceland, Israel, Japan, Korea, Mexico, New Zealand, Norway, Switzerland, Turkey, United Kingdom, and the United States; see ibid. 149 The Commission has almost the same rights as the OECD Members; see OECD (2020c) Status of the European Commission within the OECD, available at https://www.oecd.org/legal/ europeancommissionstatus.htm. 150 Art 4(3) first subpara TEU. 151 Proposal for the Regulation, COM(2017) 487 final, 13.9.2017, p. 10. 152 Annex A, List A, I. Direct Investment of the OECD Code of Liberalisation of Capital Movements.

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its own regional perspective. Yet this Code has hardly ever played a role in EU case law.153 This attitude raises legal concerns.154

5 Approaching Specific Elements of Third Country Direct Investments This section starts with a disillusioning finding: the concept of ‘third country direct investments’ neither has been concretised under EU case law (beyond citing the Capital Movements Directive Nomenclature),155 nor did it attract substantial attention during the legislative procedure of the Screening Regulation. Things ended where they started: leaving the specification of this crucial concept to the Member States’ broad discretion. The nonchalant attitude in the Opinion of Advocate General Wathelet in the EV case may serve as an example for the EU’s lack of willingness to guide the concept of foreign direct investment: Since Paragraph 9(7) of the GewStG provides for a minimum shareholding of 15% (initially 10%), I think that that provision is concerned with direct investment because such shareholdings, in the event that they fail to provide an opportunity to control a company, certainly provide an opportunity to participate effectively in its management.156

But with the Screening Regulation, things have changed: neither the EU nor the Member States can afford this nonchalant attitude any longer. Against this background, this section analyses several facets of ‘third country direct investments’. It discusses elements of the term of investments ‘aiming to establish or to maintain lasting and direct links’ (below Section 5.1). A particular focus of this analysis lies in the ‘lasting and direct links’ elements. This contribution argues that such links must be qualified by an objective test and that ‘direct’ links may also exist in indirect

153

Pursuant to the InfoCuria case law database, the OECD Code of Liberalisation of Capital Movements was only mentioned three times: Opinion of Advocate General Darmon delivered on 29 September 1987, Commission of the European Communities v Hellenic Republic, Case 194/84, ECLI:EU:C:1987:389, para. 7; Opinion of the Court of 24 March 1995, Competence of the Community or one of its institutions to participate in the Third Revised Decision of the OECD on national treatment, Opinion 2/92, ECLI:EU:C:1995:83 (the Code is mentioned as mere background information); and Opinion of Advocate General Geelhoed delivered on 10 April 2003, Margarethe Ospelt and Schlössle Weissenberg Familienstiftung v Unabhängiger Verwaltungssenat des Landes Vorarlberg, C 452/01, ECLI:EU:C:2003:232, paras. 42 f. 154 As an example to bring international law into effect, see Schmidt and Meckl (2020), pp. 1225–1226, who apply reciprocity issues under OECD rules to the Screening Regulation. Note, however, that this contribution argues that notions of reciprocity cannot be applied in the interpretation of the Screening Regulation at all; cf. above Sect. 4.3.2. 155 See only Judgment of the Court of 24 May 2007, Winfried L. Holböck v Finanzamt SalzburgLand, C-157/05, ECLI:EU:C:2007:297, para. 33. 156 Opinion of Advocate General Wathelet delivered on 7 February 2018, EV v. Finanzamt Lippstadt, C-685/16, ECLI:EU:C:2018:70, para. 83.

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holding structures. A quantitative-qualitative approach should be applied to determine what qualifies ‘effective participation in the management or control’. Next, this section discusses two special constellations: the legal framework of ex post reviews (below Section 5.2) and ‘artificial arrangements’ to circumvent FDI screening (below Section 5.3). The section closes with an emphasis on the element of ‘third countries’ (below Section 5.4). After the clarification that the citizenship of the corporate investor’s shareholders is of no relevance, it deals with investors that show essential corporate relationships to both an EU Member State and a third country legal order. This section ends with an evaluation of a number of country types that do not evidently qualify or disqualify as third countries: OECD countries, OCTs, European Economic Area states, Switzerland, and the post-Brexit UK.

5.1

Investments Aiming to Establish or Maintain Lasting and Direct Links

Guided by the Capital Movements Directive Explanatory Notes, Art 2(1) of the Screening Regulation defines a foreign direct investment as an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the [target], including investments which enable effective participation in the management or control of a company carrying out an economic activity.

A legal assessment shows that EU law accepts a relatively low threshold to have a transaction qualified by the Member States as a direct investment. Or as the Capital Movements Directive Explanatory Notes put it: ‘This concept [of direct investments] must therefore be understood in its widest sense.’

5.1.1

Subjective or Objective Test?

The question arises whether the qualification of an investment as direct investment (as opposed to a portfolio investment) should be based on an objective test. Such an objective test would reflect the assessment of the legal (or factual) position that the investor will objectively gain due to the transaction. According to this approach, the individual investor’s subjective intentions, strategic aims, or business strategies pursued by the investment (subjective test) are irrelevant. Assuming a subjective test to qualify transactions as direct investments would not be flatly absurd, as a comparison proves. CJEU case law on a general anti-avoidance rule (GAAR) in the context of tax law knows both an objective test and a subjective

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test (leading to significant uncertainties and scholarly discussions).157 And the wording of both Art 2(1) and settled CJEU case law could give reasons to apply a subjective test to determine whether a transaction qualifies as a direct investment. Art 2(1) refers to the investor’s aims when defining a direct investment as an investment ‘aiming to establish or to maintain lasting and direct links’. ‘Aim’ is a subjective concept, synonymous to ‘intention’.158 While one investor may ‘aim’ to use a 25% voting rights share purely as a financial investment to achieve the best return on investment without any intention to influence the management of the target, another investor may use its 25% voting rights share of the very same company to influence the target’s management. Therefore, by a semantic interpretation, ‘aim’ would allow taking into consideration (short-term, mid-term, or longterm) business strategies when differentiating between direct and portfolio investments. Interestingly, qualifying an investment according to the investor’s intentions cannot be traced back to the Capital Movements Directive. Yet a subjective approach is also reflected in settled CJEU case law: Movements of capital covered by that provision include, in particular, direct investments in the form of participation in an undertaking through the holding of shares which confers the possibility of effectively participating in its management and control (‘direct’ investments) and the acquisition of shares on the capital market solely with the intention of making a financial investment without any intention of influencing the management and control of the undertaking (‘portfolio’ investments).159

But still, national law meant to determine lasting and direct links in the meaning of Art 2(1) should be based on an objective test for several reasons. First, from a semantic perspective, by stating that ‘investments which enable effective participation’, Art 2(1) also provides wording referring to the objective legal position that comes with the acquisition. Second, the CJEU apparently never actually applied any form of assessment taking the investor’s aims into consideration; it even seems that the Court does not give any specific meaning to its objective and subjective expressions.160 Third, the Court seems to somewhat mix up the

157

See Chen (2018), pp. 105–117. OED Online (2020a) ‘aim, n.’, meanings 1.b. and 6, available at https://www.oed.com/view/ Entry/4347. 159 Judgment of the Court of 26 February 2019, X GmbH v Finanzamt Stuttgart—Körperschaften, C-135/17, ECLI:EU:C:2019:136, para. 26 (emphasis added). 160 See Opinion of the Court of 16 May 2017, Free Trade Agreement with Singapore, Opinion 2/15, ECLI:EU:C:2017:376, para. 80 on the one hand (‘direct investment where the shares held by the shareholder enable him to participate effectively in the management of that company’) and para. 227 on the other (‘acquisition of company securities with the intention of making a financial investment without any intention to influence the management’). 158

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purpose and intention of the national legislation161 with the intention of the investor.162 This seems an imprecision: the subject of the CJEU analysis is the national legislation and not the intentions of the investors.163 Fourth, the CJEU case law does not only apply a linear subjective approach but also refers to the objective influence that comes with a holding.164 Fifth, it would create hardly manageable difficulties to assess the investor’s aims (by what standards? with respect to which kind of timeline?), let alone the fundamental freedom and fundamental rights issues for the investor to reveal its business strategy. Fifth, even if an investor has no intention to influence the management and control of the target at the time of the investment, this may change afterwards; the investor can hardly be obliged to stick to these original intentions forever or even waive the legal rights that come with the investment.

5.1.2

Types of Investment

Direct investments may come in various forms. This includes the incorporation of a company, the acquisition of shares (for cash, for shares, each by an increase of capital or without, etc.), or the purchase of certain assets.165 According to the

It is ‘well established case-law that the purpose of the legislation concerned must be taken into consideration’ (Judgment of the Court of 13 November 2012, Test Claimants in the FII Group Litigation, C-35/11, ECLI:EU:C:2012:707, para. 90, and the case law cited; emphasis added); cf. also Judgment of the Court of 19 July 2012, Marianne Scheunemann v Finanzamt Bremerhaven, C-31/11, ECLI:EU:C:2012:481, para. 23; Judgment of the Court of 10 June 2015, X AB v Skatteverket, C 686/13, ECLI:EU:C:2015:375, paras. 18 f. 162 Cf. Opinion of Advocate General Campos Sánchez-Bordona of 18 December 2019, Vivendi SA v Autorità per le Garanzie nelle Comunicazioni, C-719/18, ECLI:EU:C:2019:1101, para. 32: the ‘acquisition of a significant proportion of [the target’s] shares would fall either within the free movement of capital (if [the acquirer’s] intention was simply to make a financial investment) or with the freedom of establishment (if [the acquirer] sought to intervene in [the target’s] management)’. 163 Cf. Judgment of the Court of 13 November 2012, Test Claimants in the FII Group Litigation, C-35/11, EU:C:2012:707, paras. 91 f.; Judgment of the Court of 3 September 2020, Vivendi SA v Autorità per le Garanzie nelle Comunicazioni, C 719/18, ECLI:EU:C:2020:627, paras. 40 f. Yet the CJEU still considers the investor’s intentions; see, ibid., para. 44 (emphasis added): ‘Furthermore, first, the acquisition of 23.94% of Telecom Italia’s capital enabled Vivendi to obtain a majority of the voting rights in Telecom Italia’s shareholders’ meetings and, subsequently, to acquire control of that undertaking, a situation which comes within the scope of freedom of establishment. Second, it is apparent from the file before the Court that the objective pursued by Vivendi when it acquired Mediaset’s shares was not to make a mere financial investment, but to intervene in the management of Mediaset and to acquire a significant share of the Italian media sector.’ 164 See Judgment of the Court of 12 December 2006, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, C-446/04, ECLI:EU:C:2006:774, para. 81: ‘[T]o the extent to which the holdings in question confer on their owner a definite influence over the decisions of the companies concerned and allow it to determine their activities, it is the provisions of the Treaty relating to freedom of establishment which apply.’ 165 One remark on German FDI law: asset deals are covered by German FDI regulation law. This has previously been discussed (cf. Voland (2009), p. 520 f.; Söhner (2011), p. 460, with further 161

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examples given in the Capital Movements Directive Nomenclature, direct investments may also come in the form of long-term loans.166 Moreover, the scope of direct investments may be enlarged to include what the OECD in a recent study called non-ownership transactions, including the lease of infrastructure or joint research activities.167 The specific details whether a transaction qualifies as a direct investment depends, of course, very much on national company law. The relevant reference point under German screening law, for example, is the share of voting rights that will be acquired;168 preferential stocks without voting rights,169 in that example, do not qualify as direct investments.170

5.1.3

Targets and Transactions, Especially Greenfield Investments

The target of the investment is ‘the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in a Member State’ (Art 2(1)). These targets are shaped primarily by national company law, which are, however, influenced by a wide range of EU company law. As a heuristic first approach, EU company law such as Directive 2017/1132/EU171 may offer guidance in dealing with the different national types of targets.172 Questions about targets and transactions are worth being discussed in detail: should start-ups be exempt from FDI screening (as is often the case in Austria173) despite the Commission’s recent emphasis on the potential strategic importance of start-ups in the research or technology sector?174 Should a transaction only be

citations) but was recently clarified by the new section 55(1a) and section 60(1a) of the German FTPO; see Circular Foreign Trade No 3/2020 of 25.5.2020, pp. 1, 3. 166 Cf. above Sect. 3.2.1; see also Zwartkruis and de Jong (2020), p. 462. 167 OECD (2020) Acquisition- and ownership-related policies to safeguard essential security interests: Current and emerging trends, observed designs, and policy practice in 62 economies, pp. 31 ff., available at http://www.oecd.org/investment/OECD-Acquisition-ownership-policies-securityMay2020.pdf. 168 Section 56 and section 60a of the German FTPO. 169 Section 140(1) of the German Stock Corporation Act. 170 Pottmeyer in Wolffgang/Simonsen/Rogmann/Pietsch (2019). 171 Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law (codification), OJ L 169, 30.6.2017, pp. 46–127. 172 See, for example, the national forms of public liability companies listed in Annex I. 173 See the de minimis exemption in section 2(2) of the Austrian Investment Control Act: no authorisation of the FDI is required where the target company is a micro-enterprise, including start-up companies, with fewer than ten employees and an annual turnover or annual balance sheet total of less than EUR 2 million. 174 FDI Screening Regulation Guidance, C(2020) 1981 final, OJ C 99 I/3, 26.3.2020. Start-ups in general have been in the Commission’s focus recently; cf. Communication from the Commission, An SME Strategy for a sustainable and digital Europe, COM(2020) 103 final, 10.3.2020, passim; Stöbener de Mora (2020), p. 302.

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subject to FDI screening if it comes with a volume above EUR 1 million (as is currently the case in Italy175)?176 Are lessons to be learned from antitrust analyses of ‘killer acquisitions’?177 While these issues are not the focus of this contribution, there shall be a quick word on one particular situation: the case of greenfield investments. Greenfield investments are the creation of companies from scratch by non-resident investors.178 They are one form of direct investments (next to mergers and acquisitions (M&A)179). Though their economic value remains several times lower than M&A investments,180 greenfield investments in high-technology companies have increased in the past years.181 Greenfield investments are covered by the Screening Regulation, as the Commission FAQ sheet on the Regulation finds important to confirm.182 This scope of application causes tensions with national screening law that (as does Germany183) excludes greenfield direct investments from its scope of application. Such an exclusion faces serious concerns. Under the primacy of EU law, every Member State must

175

Art 15 of the Italian Decree-Law of 8 April 2020, no 23. Cf. FDI Screening Regulation Guidance, C(2020) 1981 final, OJ C 99 I/3, 26.3.2020: ‘The need to screen a transaction may indeed be independent from the value of the transaction itself.’ During the legislative procedure of the Regulation, the European Economic and Social Committee expressed a similar thought: ‘So as to avoid an additional administrative burden, there is a need to examine whether a minimum investment amount—above which investments must be screened— should be set. The fact that start-ups can also be of considerable significance to key technologies needs to be taken into account’ (European Economic and Social Committee, Opinion, OJ C 262/94 of 25.7.2018, p. 100). 177 Cf. Cunningham et al. (2020) (forthcoming). This antitrust study argues that investors may acquire innovative targets solely to discontinue the target’s innovation projects and pre-empt future competition; such acquisitions disproportionately occurred just below the thresholds for antitrust scrutiny. 178 Canton and Solera (2016), p. 3. 179 M&As sometimes are synonymously referred to as ‘brownfield investments’ (e.g. European Commission, Commission Staff Working Document, SWD(2017) 297 final, 13.9.2017, p. 5), while others denote with ‘brownfield investment’ a hybrid situation between greenfield and M&A where the foreign investor acquires a company but almost completely replaces plant and equipment, labour, and product line (see UNCTAD (2000) World Investment Report 2000—Cross-border Mergers and Acquisitions and Development, p. 135, available at https://unctad.org/en/Docs/ wir2000_en.pdf). 180 European Commission, Commission Staff Working Document, SWD(2017) 297 final, 13.9.2017, pp. 5, 17. 181 Ibid., pp. 7, 11. 182 European Commission (2020) MEMO—Frequently asked questions on Regulation (EU) 2019/ 452 establishing a framework for the screening of foreign direct investments into the Union, p. 2, available at https://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157945.pdf. 183 German Federal Ministry for Economic Affairs and Energy (2019) FAQ on Investment Screenings of 13 May 2019, p. 1. 176

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give due consideration to comments of the other Member States184 that refer to greenfield direct investments.

5.1.4

Lasting and Direct Links

A common European approach towards investments ‘aiming to establish or to maintain lasting and direct links’ will have to focus on the notion of ‘lasting and direct links’.

5.1.4.1

Lasting Links

‘The notion of a lasting economic link is of major importance, especially in strategic sectors’, as the Committee on International Trade of the European Parliament correctly stated during the legislative procedure.185 Yet this notion was not fleshed out in the legislative procedure, nor are there quantitative or qualitative criteria from the CJEU’s case law on direct investments that could serve as guidance. ‘Lasting’ does not equal to ‘long term’. ‘Lasting’ does not require a minimum investment period of five years (if one would apply the definition of ‘long-term loans of a participating nature’ pursuant to the Capital Movements Directive Explanatory Notes186). ‘Lasting’ should not be understood as referring to a minimum period of investment at all. Any ex ante assessment of such requirement of a minimum period would face the same difficulties as explained above with respect to the ‘intentions’ of investors.187 Instead, ‘lasting links’ should be understood as a reference to transactions that generally and categorically result in effective participation in the management or control of a company. The specification with respect to the national company context is up to the Member States, allowing an empirical and economic point of view that the Member States should apply. Thus, screening Member States are not legally required to define a minimum time for an investment to be ‘lasting’.

184

Cf. Art 6(9) sentence 1. Where this contribution refers to the comment of a Member State and/or the opinion of the Commission, this includes all variations of the cooperation mechanisms of Art 6–9 of the Screening Regulation, unless stated otherwise. 185 European Parliament, Committee on International Trade, Report on the proposal, A8-0198/2018, 4.6.2018, p. 49. 186 Explanatory Notes on direct investments, fourth subpara sentence 1. 187 Cf. above Sect. 5.1.1.

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Direct Links

As part of the definition in Art 2(1), a direct investment requires that the investor aims to establish or maintain ‘direct’ links.188 Despite this rather unfortunate wording, this contribution argues that transactions also qualify as third country ‘direct’ investments in the meaning of the Screening Regulation if the transaction results in indirect links between a third country investor and an EU target. The Screening Regulation is aware of indirect investments—but only in the context of illegitimate circumvention structures of ‘artificial arrangements that do not reflect economic reality’ (Recital 10 sentence 2) that are meant to circumvent screening (Art 3(6)).189 Yet the international M&A business is characterised by (often complex) parent-subsidiary structures. Indirect links between a third country investor and an EU company, thus, are the rule and not the exception. In principle, such indirect links are genuine and legitimate, and national investment screening rules do reflect that.190 To avoid an interpretation that would distort legitimate investment relations, genuine indirect links must not be interpreted to fall within the scope of the circumvention provision (Art 3(6)).191 Exemption clauses, such as Art 3(6), are to be interpreted narrowly. Hence, Art 3(6) should remain reserved for illegitimate constructions, while indirect links in principle do reflect a genuine economic reality. Instead, ‘direct links’ in Art 2(1) may be interpreted to cover links beyond third country investors being the acquirer and an EU company being the target. The element of ‘direct links’ should be understood as a mere copy error from the Capital Movements Directive.192 The EU legislator would have been well advised to check this 1988 Directive wording against the background of modern EU company law: Art 67(1) first subpara 2017/1132/EU, for example, equates direct and indirect holding of a majority of the voting rights. Fortunately, the Screening Regulation allows an interpretation according to which ‘direct links’ in the meaning of Art 2(1) can be established by intermediate corporations. This interpretation concurs with CJEU case law that equalled directly 188

Zwartkruis and de Jong (2020), p. 461 f., mention another very relevant topic that can be considered to be part of the ‘direct links’ element: the situation of investors that act in concert. This topic shall not be further discussed in this contribution. 189 On this anti-circumvention clause, see below Sect. 5.3. 190 On FDI taking place indirectly, see section 56(2), (3) and section 60a(2), (3) of the German FTPO; section 1(3) and section 5(2) of the Austrian Investment Control Act. 191 Zwartkruis and de Jong (2020), p. 466, discuss indirect investments in the context of circumvention. This all-inclusive approach is not consistent with the requirement of circumventions being ‘artificial arrangements that do not reflect economic reality’ in Recital 10 sentence 2; for further details, see below Sect. 5.3. 192 Capital Movements Directive Explanatory Notes on directs investments, first subpara sentence 1 (emphasis added): ‘Investments of all kinds by natural persons or commercial, industrial or financial undertakings, and which serve to establish or to maintain lasting and direct links between the person providing the capital and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity.’

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and indirectly held shares without further ado (to open the scope of application for the freedom of establishment).193 There is no compelling argument to the effect that direct investments in the meaning of the Screening Regulation could not occur via a transaction creating indirect links. A more adequate interpretation of ‘direct links’ is available. This interpretation considers the context of Art 2(1) and its pursued objective.194 The context and the objective of the term ‘direct investment’ is a rather broad scope of application for the Screening Regulation: according to Recital 9 sentence 1, a ‘broad range of investments’ shall be covered by the Screening Regulation. It would go against that very purpose of the Screening Regulation to exclude transactions from its scope of application just because they come in the form of an indirect investment or to construct indirect investments as per se circumventions.195 Consequently, the Member States should provide screening regulations for transactions that result both in direct or in indirect relations between an (ultimate) third country investor and an EU undertaking. Such indirect links may occur in different forms, for example (i) a third country investor (A) intends to acquire a (third country or EU) target (B), and B itself has lasting and direct (or indirect) links to an EU undertaking (C)—which creates an indirect A–C link; (ii) a third country undertaking (A) has a lasting and direct (or indirect) link to a (third country or EU) undertaking (B), and B intends to acquire an EU target (C)—which also results in an indirect link from A to C; or (iii) a third country investor (A) holds via its subsidiary (B) shares of an EU target (C), and A intends to acquire another share of C directly; thus, the

193

Judgment of the Court of 6 December 2007, Columbus Container Services BVBA & Co. v Finanzamt Bielefeld-Innenstadt, C 298/05, ECLI:EU:C:2007:754, paras. 31 f.: ‘[A]ll shares in Columbus are held, either directly or indirectly, by members of one family. [. . .] It follows that the Treaty provisions on the freedom of establishment apply to a situation such as that in the main proceedings.’ 194 On these methods to interpret EU law, see Judgment of the Court of 26 May 2016, Envirotec Denmark ApS v Skatteministeren, C-550/14, ECLI:EU:C:2016:354, para. 27, and the case law cited. 195 Admittedly, the legislative materials of the Screening Regulation seem to challenge that interpretation. The European Parliament’s Committee on International Trade proposed to amend Recital 9 to explicitly include indirect links: ‘This Regulation should cover a broad range of investments [. . .] which establish or maintain lasting direct or indirect links between a foreign investor, whether or not such investor is the ultimate investor, and undertakings [. . .]’ (European Parliament, Committee on International Trade, Report on the proposal, A8-0198/2018, 4.6.2018, p. 9; emphasis in original, clarifying the changes with respect to the Commission’s Proposal). Correspondingly, an amendment of Art 2(1) was proposed (id., p. 20 f.). However, these proposed amendments were not endorsed by the European Parliament (cf. European Parliament, Legislative resolution of 14 February 2019, P8_TA-PROV(2019)0121, pp. 6, 20), nor did they make it into the Regulation. Yet this does not allow the conclusion that the Regulation would exclude indirect investments from its scope or deal with it only via Art 3(6). Such an understanding would be incompatible with the broad range of investments that shall be covered by the Regulation (Recital 9 sentence 1). Instead, the non-endorsement can be explained by the intention to just stick to the decade-long established definition from the Capital Movement Directive Explanatory Notes on direct investments, first subpara sentence 1 (‘to establish or to maintain lasting and direct links’).

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assessment of the A–C relationship requires a combination of the intended direct A–C relationship and the existing indirect A–C relationship. Including indirect links into the scope of application of screenings does not, however, prevent the Member States from prescribing special rules on indirect acquisitions. To give an example: when calculating the voting rights that come with an acquisition, German FDI screening law is indifferent to the number of intermediate undertakings that are involved.196 A third country investor’s (A) 10% share of the intermediary company (B) that itself acquires a 10% share of the EU target (C) counts (still) as a 10% share of A in C (instead of a pro rata calculation: 10% of 10% ¼ 1%).197

5.1.4.3

Effective Participation in the Management or Control

Direct and lasting links include investments that enable effective participation in the management or control of the target (Art 2(1)). This investment-management/control nexus is meant to exemplify the kind of investments that qualify as direct investments. The Screening Regulation does, however, not give any further specifications on that legal element other than excluding portfolio investments from its scope of application (Recital 9 sentence 2).198 Effective participation in the management or control can occur much more subtly than just by acquiring the ‘controlling stakes’ (as the Commission’s 1997 Communication on Certain Legal Aspects Concerning Intra-EU Investment seemed to suggest199). This section argues that the Screening Regulation does not set significant thresholds for the investment-management/control nexus. Consequentially, the Directive and CJEU case law leave a wide range of discretion as to how such a nexus could be constituted ‘either pursuant to the provisions of national laws relating to companies limited by shares or otherwise, to participate effectively in the management of the company or in its control’.200 This section, hence, argues that the Member States are called to fill this gap and cooperate to commonly develop a thicker understanding of the investment-management/control nexus.

196

Cf. Section 56(2), (3) and section 60a(2), (3) of the German FTPO. Cf. Pottmeyer in Wolffgang/Simonsen/Rogmann/Pietsch (2019). Remarkably, this calculation principle is not discussed in Germany. 198 On Recital 9 sentence 2, see above Sect. 3.1. 199 Communication of the Commission on Certain Legal Aspects concerning Intra-EU Investment (97/C 220/06), OJ C 220/15, 19.7.1997, p. 16: ‘Thus, the acquisition of controlling stakes, as well as the full exercise of the accompanying voting rights, in domestic companies by other EU investors is also [next to portfolio investments] considered to be a form of capital movement.’ 200 Capital Movements Directive Explanatory Notes on direct investments, third subpara (emphasis added). For the same approach under CJEU case law, cf. Judgment of the Court of 20 September 2018, EV v. Finanzamt Lippstadt, C-685/16, ECLI:EU:C:2018:743, para. 68, and the case law cited. 197

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Waiving this chance would also bear the risk of the element of ‘direct investment’ losing any meaning. This is not a hypothetical risk, as a statement of the European Parliament’s Committee on International Trade during the legislative procedure proves: There are various different ways of taking over control of an undertaking (acquisition, a shareholders’ agreement, governance rights, choice of directors, targeting of the shareholders’ meeting, ‘activist’ funds), whatever the assets in the hands of the investor, even in the case of portfolio investments.201

In other words (only slightly exaggerating), even portfolio investments could qualify as direct investments! This perception would match a recent trend: the OECD observes that ‘some countries are recognising that non-ownership transactions may create exposure similar to that generated by ownership relations. Leases, procurement, use of certain equipment in critical infrastructure, and international research cooperation are among these types of economic interaction’.202 Participation in the Control Acquiring the possibility to participate in the control of the target is one form of direct investment according to Art 2(1).203 Control over a company is a wellestablished concept in EU law. It is, for example, known from EU company law204 or from EU competition law, notably from the EC Merger Regulation. As the EC Merger Regulation shows, control may come in many forms: pursuant to Art 3(2) of the EC Merger Regulation, ‘[c]ontrol shall be constituted by rights, contracts or any other means which, either separately or in combination and having regard to the considerations of fact or law involved, confer the possibility of

201

European Parliament, Committee on International Trade, Report on the proposal, A8-0198/2018 of 4.6.2018, p. 49 (emphasis added). 202 OECD (2020) Acquisition- and ownership-related policies to safeguard essential security interests Current and emerging trends: Observed designs, and policy practice in 62 economies, p. 11 (emphasis added), available at http://www.oecd.org/investment/OECD-Acquisition-ownershippolicies-security-May2020.pdf. 203 Several language versions of Art 2(1) leave semantically open whether the element ‘effective participation in the’ also refers to control (or only to management), e.g. the English version ‘investments which enable effective participation in the management or control’ or the German version ‘Investitionen, die eine effektive Beteiligung an der Verwaltung oder Kontrolle eines Unternehmens ermöglichen’. However, the ‘participation in the’ element should be interpreted to refer also to ‘control’ for various reasons. First, the German and English languages allow (though not require) to interpret ‘participation in the’ as also referring to ‘control’. Second, other language versions textually explicitly state the reference on ‘control’, e.g. the Italian version (‘investimenti che consentono una partecipazione effettiva alla gestione o al controllo’, emphasis added) or the French version (‘les investissements permettant une participation effective à la gestion ou au contrôle’, emphasis added). Fourth, the interpretation of ‘participation in the control’ is supported by the recent Opinion in Opinion of Advocate General Wathelet delivered on 7 February 2018, EV v. Finanzamt Lippstadt, C-685/16, ECLI:EU:C:2018:70, para. 82. 204 See Lutter et al. (2018), § 23, paras. 44 ff. regarding financial statements.

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exercising decisive influence on an undertaking’. Therefore, control may be based on holding legal rights205 or on having the power to exercise such rights.206 In other words, the notion of ‘control’ can be assessed by a number of legal and/or factual elements.207 To concretise the notion of ‘participation in the control’ in the meaning of the Screening Regulation, the Member States should seek inspiration by established specifications of the notion of ‘control’. The Commission’s Consolidated Jurisdictional Notice on the EC Merger Regulation208 or existing merger control decisions209 may serve as a source of inspiration. Inspiration in this sense does not mean transplanting these specifications: not only would such a transplant lack the legal competence, but the threshold of ‘participation’ in the control under the Screening Regulation is lower than the control itself, as defined in the EU merger law. Participation in the Management Both EU secondary law and CJEU case law offer hardly any criteria to specify the EU framework for ‘participation of the management’. The term ‘management’, once again, reflects just a transplant from the Capital Movements Directive.210 When assessing national provisions that restrict foreign investments, the CJEU concedes a relatively wide margin of concretisation for the Member States. As this contribution has argued with respect to the element of ‘control’,211 a common European understanding should start from existing EU law. Despite the lack of a general harmonised EU law definition of ‘management’, EU company law applies the concept of management in various contexts. This may serve as inspiration. Art 39(1) sentence 1 of the SE Regulation, for example, states on two-tier system SEs: ‘The management organ shall be responsible for managing the SE.’ To give an example of using such an inspirational approach, modern EU company law knows more nuanced concepts such as ‘administrative, management or supervisory bodies’ (e.g. as in Art 2(i)(i) of the Directive 2007/36/EC, ‘“director”

205

Art 3(3)(a) of the EC Merger Regulation. Art 3(3)(b) of the EC Merger Regulation. 207 Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (2008/C 95/01), OJ C 95/1, 16.4.2008, p. 7. 208 Ibid., p. 1; on the concept of control, see ibid., p. 5. 209 See, for example, European Commission, Case M.8465 – Vivendi/Telecom Italia, C(2017) 3834 final, 30.5.2017, p. 11, para. 49: to assess whether the acquiring undertaking has control over the target company, the Commission scrutinises factors of holding the share capital, holding the majority of the voting rights in certain previous shareholders’ meetings, appointment of the majority of the board in previous in the last two terms, appointment of members of the board of directors by acquirer (serving for a certain period), and access to specific information or other rights, which materially differ from those of any other minority shareholder. 210 Explanatory Notes on direct investments, third subpara. 211 Above, the section “Participation in the Control”. 206

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means: any member of the administrative, management or supervisory bodies of a company’). Against this backdrop, it seems entirely defensible if an EU Member State should qualify such transactions as direct investments that enable effective participation in supervisory bodies: Management in the meaning of Art 2(1) of the Screening Regulation may include ‘supervisory bodies’. This result would be convergent with the EC Merger Regulation, by the way. The EC Merger Regulation acknowledges that control on the target can be constituted by the possibility of exercising decisive influence via rights or contracts that confer decisive influence on the composition, voting, or decisions of the organs of an undertaking.212 This inclusive approach (‘organs’ include supervisory bodies) is convincing in merger control law contexts, and the same goes with respect to the Screening Regulation. Quantitative and Qualitative Factors to Determine ‘Effective Participation’ The term ‘effective’ adds little other than the fact that the post-acquisition position would enable de facto participation rather than a mere potential participation.213 The interpretation, thus, should lean towards the context and the objective of the investor-management/control nexus. In the absence of an EU secondary law that would harmonise the elements of participation and influence (e.g. veto rights), this nexus should be designed by a quantitative-qualitative approach orienting itself towards a list of factors. Such factors could guide the Member States when determining their national rules of ‘effective participation in the management or control’.214 As for quantitative factors, the issue of thresholds arises. Thresholds can be attacked with several arguments: the percentage of shares or voting rights in the Member States comes with significant ranges from 5% to 50%,215 the European Parliament’s Committee on International Trade ‘support[ed] the Commission’s proposal that thresholds are ineffective here and can easily be circumvented’,216 and, of course, the same percentage does not necessarily come with the same legal rights under different national laws. Such thresholds, however, allow rather easy definitions. A number of Member States do apply thresholds as a means to qualify direct investments (e.g. Slovenia,217

212

Art 3(2)(b) of the EC Merger Regulation. OED Online (2020b) ‘effective, adj. and n.’, meaning 4, available at www.oed.com/view/Entry/ 59674. 214 This factor list approach, of course, would follow the same legal design as Art 4, i.e. be a list of factors that the Member States may consider in determining whether a foreign direct investment is likely to affect security or public order. 215 European Commission, Commission Staff Working Document, SWD(2017) 297 final, 13.9.2017, p. 8. 216 European Parliament, Committee on International Trade, Report on the proposal, A8-0198/2018 of 4.6.2018, p. 49. 217 Art 70 of the Slovenian Act Determining the Intervention Measures to Mitigate and Remedy the Consequences of the COVID-19 Epidemic (10% share in capital or in voting rights). 213

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Austria,218 or Germany219). Similarly, in order to qualify a transaction as FDI, the CJEU has dealt with thresholds to determine the existence of a definite influence.220 Subsequently, its judgments have been analysed with a focus on the correlation between qualification as direct investment and specific thresholds.221 Besides, implementing thresholds, in general, is a common legal practice. The Takeover Bid Directive, for example, requires the Member States to ensure that the acquirer must make a bid as a means of protecting the minority shareholders of the target if

218

Section 4 Austrian Investment Control Act 2020 (10%, 25%, and 50% of the voting rights of targets from listed sectors; 25% and 50% of the voting rights of all other targets). 219 Section 56 FTPO and section 60a of the German FTPO. 220 Cf. Judgment of the Court of 13 April 2000, C Baars v Inspecteur der Belastingdienst Particulieren/Ondernemingen Gorinchem, C-251/98, ECLI:EU:C:2000:205, para. 26 (a definite influence is ‘self-evidently always the case wherever there is a 100% holding’, not considering the Netherlands law any further); Judgment of the Court of 12 December 2006, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, C-446/04, ECLI:EU:C:2006:774, para. 37 (‘the nature of the interest [. . .] [in companies that are wholly owned by the investor] will confer on the holder[s] definite influence over the company’s decisions’); Judgment of the Court of 10 May 2007, Lasertec Gesellschaft für Stanzformen mbH v Finanzamt Emmendingen, C-492/04, ECLI: EU:C:2007:273, para. 21 (‘the national measure at issue applies to circumstances in which the non-resident lending company has a substantial holding in the nominal capital of the resident borrowing company, namely a holding of over 25%’); Judgment of the Court of 21 October 2010, Idrima Tipou AE v Ipourgos Tipou kai Meson Mazikis Enimerosis, C-81/09, ECLI:EU:C:2010:622, para. 51 (the CJEU stated abstract from the national law that ‘[d]epending on the manner in which the remainder of a company’s capital is distributed, in particular if it is spread among a large number of shareholders, a holding of 25% may be sufficient [. . .] at least to exert a definite influence’); Judgment of the Court of 19 July 2012, Marianne Scheunemann v Finanzamt Bremerhaven, C-31/11, ECLI:EU:C:2012:481, paras. 25 f., 29 (the CJEU accepted Germany’s qualification that 25% allow to exert a definite influence under German law); Judgment of the Court of 8 November 2012, European Commission v Hellenic Republic, C 244/11, ECLI:EU:C:2012:694, paras. 23 f. (the CJEU accepted when ‘the Commission maintained, without being contradicted by the Hellenic Republic’ that a 20% share under Greek law reaches the influence level); Judgment of the Court of 12 December 2006, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, C-446/04, ECLI:EU:C:2006:774, para. 58 (the Court considers the abstract case of ‘a company in which [the shareholders] hold 10% or more of the voting rights, without that holding conferring on them a definite influence’); Judgment of the Court of 11 September 2014, Kronos International Inc. v Finanzamt Leverkusen, C 47/12, ECLI:EU:C:2014:2200, paras. 33, 35 (a 10% share ‘does not necessarily mean that the holder exerts a definite influence’); Judgment of the Court of 10 June 2015, X AB v Skatteverket, C 686/13, ECLI:EU:C:2015:375, para. 21 (as a statement abstract from Swedish law, the CJEU stated that ‘a holding of at least 10% of the shares or voting rights does not necessarily imply that the owner of the holding exerts a definite influence’); Judgment of the Court of 26 March 2009, Commission of the European Communities v Italian Republic, C-326/07, ECLI:EU:C:2009:193, para. 38 (‘It is conceivable, in respect of companies having in general large numbers of smaller shareholdings, that the holders of shareholdings corresponding to those percentages [at least 5% of voting rights or, as the case may be, a lesser percentage fixed by the competent minister] might have the power to influence in a definite manner the management of such a company and to determine its activities, which is covered by [the freedom of establishment].’). 221 For example, Lutter et al. (2018), § 4, para. 7; Herrmann (2019), p. 440.

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the acquirer holds voting rights above a specified percentage;222 this percentage is specified by the Member States.223 That said, this contribution argues that thresholds are a well-established benchmark to qualify direct investments. The EU Member States should set a minimum of 10% of voting rights as a benchmark to define third country direct investment. Such a minimum benchmark would clearly delineate direct investments and portfolio investments and tackle the risk of blurring the differences between them.224 One specific argument for the 10% value is that the OECD Benchmark Definition of Foreign Direct Investment applies a strict 10% threshold criterion finding that a ‘direct investment is considered evident when the direct investor owns directly or indirectly at least 10% of the voting power’.225 While this OECD 10% threshold does not constitute normative obligations,226 it still seems remarkable that this has proven to be a sound approach despite the range of national differences with respect to what legal and/or factual power comes with a 10% share. In line with that benchmark, Member States such as Germany227 qualify (specific) direct investments referring to the 10% voting rights benchmark.228 Against that background, national thresholds below 10% voting rights should come with an explanation. To give an example, in the case Commission v Italy concerning Italian state powers to oppose the acquisition of shareholdings above 5% or a lower percentage fixed by a decree of the minister,229 the CJEU stated rather opaquely: It is conceivable, in respect of companies having in general large numbers of smaller shareholdings, that the holders of shareholdings corresponding to those percentages might have the power to influence in a definite manner the management of such a company and to determine its activities[.]230

Such a 5% threshold bears the serious risk of blurring the distinction between direct investments and portfolio investments. Therefore, one should closely monitor the Commission’s recent reference to a direct investment level of ‘(e.g. 5 %)’ in its

222

Art 5(1) sentence 1 of the Takeover Bid Directive. Art 5(3) of the Takeover Bid Directive. On different percentages in EU Member States, see Lutter et al. (2018), § 28, para. 35. 224 Cf. above Sect. 5.1.4.3. 225 OECD (2008) Benchmark Definition of Foreign Direct Investment (BMD4), p. 23, available at https://www.oecd.org/daf/inv/investmentstatisticsandanalysis/40193734.pdf. 226 Ibid., p. 20: the OECD benchmark is used to measure foreign direct investments globally to provide FDI statistics in order to assist users in their analysis of the global and/or regional nature of FDI activity and the industry sectors that FDI affects. 227 Section 56(1) no 1, (2) no 1(a), (2) no 2, (3) no 1 and section 60a(1), (2), (3) FTPO. 228 Cf. also the reference to a 10% threshold in EU financial law by Zwartkruis and de Jong (2020), p. 461. 229 Judgment of the Court of 26 March 2009, Commission of the European Communities v Italian Republic, C-326/07, ECLI:EU:C:2009:193, para. 4. 230 Ibid., para. 38. 223

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COVID-19 Guidance.231 The 5% threshold may turn out to be more than just a random example. This quantitative 10% voting rights approach should be complemented by a qualitative approach. Such complementary approaches are already established in some Member States, as the Austrian investment screening rules show: direct investments are defined as the acquisition of a percentage of voting rights232 or of a controlling influence on the target233 or of essential assets of the target.234 Qualitative criteria should be outlined to approach what kind of legal/factual position enables effective participation in the management or control. Such criteria should build a guideline for the Member States to determine what ‘participation in the management or control’ actually means and why certain positions (such as voting rights235 or veto rights regarding the appointment of directors236) come with legal rights or factual opportunities that likely affect security or public order. These qualitative factors should be abstractly defined to allow implementation by the Member States according to their respective company law. Examples of a Quantitative-Qualitative Approach A list of factors specifying the quantitative-qualitative approach should guide the Member States and increase the chances of more convergent developments. The Member States, of course, would keep their full competence in prescribing the national definition of the investor-management/control nexus. The list would (intentionally) come, however, at the price of a transnational politico-legal discussion. If a certain national approach was non-compliant with the list of factors, the respective Member State should explain its considerations. Two examples may be useful to concretise how a quantitative-qualitative approach could contribute to a more convergent common European understanding of FDI:

FDI Screening Regulation Guidance, C(2020) 1981 final, OJ C 99 I/4 of 26.3.2020. Section 1 no 3(b) of the Austrian Investment Control Act. 233 Section 1 no 3(c) of the Austrian Investment Control Act. 234 Section 1 no 3(d) of the Austrian Investment Control Act. 235 See Judgment of the Court of 11 November 2010, European Commission v Portuguese Republic, C-543/08, ECLI:EU:C:2010:669, para. 58: ‘the voting rights attaching to shares constitute one of the principal ways whereby the shareholder can actively participate in the management of an undertaking or in its control’. 236 See Judgment of the Court of 10 November 2011, European Commission v Portuguese Republic, C-212/09, ECLI:EU:C:2011:717, paras. 6, 56–61. 231 232

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(i) In the case Commission v Italian Republic, the CJEU has accepted that a 5% voting rights share (or even a lesser percentage fixed by the competent national minister) might bring a definite influence over the target.237 Given the 10% share benchmark discussed above,238 a quantitative-qualitative approach would require Italy to specify what kind of powers come with a 5% share and how that could affect its security or public order. Commonplaces without specific arguments (as the CJEU applied in its Judgment239) do not meet the argumentative thresholds set by a quantitative-qualitative approach. (ii) Also, a 10% threshold is not a self-justificatory argument. Instead, the Member States should give reasons as to how this figure relates to certain qualitative elements of management or control. The 2018 German FTPO reform fell short of such reasoning when it lowered the previous 25% shares benchmark down to 10% as the threshold for screening the acquisition of undertakings from listed sectors.240 Germany stated without further explanation that ‘[i]ndividual cases have [. . .] shown that there may be a need for screening even below this [previously applicable 25%] threshold. In many constellations, it is possible to exert influence even with smaller shareholdings.’241 This possibility may indeed exist, and lowering the threshold may be legitimate—but it is precisely this kind of short and obscure reasoning that is inconsistent with a common European approach. Other Member States can hardly imagine which ‘individual cases’ Germany had in mind and what features exactly characterised the ‘many constellations’ mentioned.242

5.2

Ex Post Screening

The Screening Regulation provides a framework for screenings after completion of the foreign direct investment (ex post screenings). This seems a logical consequence. Since direct investments are ‘lasting’ links between the investor and target, the effect of the investment does not cease to exist after closing the deal. Ex post screenings reflect this continuous effect that a transaction may have on the security or public order of a Member State. Correspondingly, an ex post screening decision can take

237

Judgment of the Court of 26 March 2009, Commission of the European Communities v Italian Republic, C-326/07, ECLI:EU:C:2009:193, para. 38. 238 Cf. above, the section “Quantitative and Qualitative Factors to Determine ‘Effective Participation’”. 239 See Judgment of the Court of 26 March 2009, Commission of the European Communities v Italian Republic, C-326/07, ECLI:EU:C:2009:193, para. 38. 240 Art 1 no 4(a), (b), (c) of the Twelfth Ordinance to Amend the German FTPO of 19.12.2018. 241 Circular Foreign Trade No 3/2020 of 19.12.2018, p. 1 (own translation). 242 These ‘individual cases’ may include the 50Hertz Transmission GmbH case (cf. above Sect. 4.2.2). Yet such educated guesses are of little help to a common European understanding.

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into consideration the experiences following the completion of an investment or an adjusted risk assessment.243 Ex post screenings may occur in different forms, including the following: (i) Within 15 months after completion of direct investments not undergoing screening, Member States may provide comments and the Commission may issue an opinion on direct investments (Art 7(8)).244 These comments/opinions may reflect the transaction’s effect both before and after the completion of the investment; the Regulation lacks any further qualification in that respect. Consequentially, Member States have to reserve legal means to give such post-completion opinions/comments due consideration (Art 7(7)).245 This incentivises the Member States to provide ex post screening mechanisms to accommodate such considerations.246 (ii) Significant changes to the ownership structure or key characteristics of a foreign investor are explicit factors that a Member State may consider for assessing risks to security or public order (Recital 11). Such changes, by their very nature, refer to developments after completion of the investment and may even occur after the 15-month period described (cf. above (i)). Other Member States cannot provide comments, and the Commission cannot issue an opinion on direct investments after the 15-month deadline has passed. But the Screening Regulation does not preclude a national screening mechanism that provides an ex post screening by an own autonomous national decision reacting to postcompletion changes to the ownership structure. And for the sake of completeness: the Screening Regulation does not prevent assessing further ex post developments other than the changes to the ownership structure or key characteristics of a foreign investor. (iii) An investor may acquire another share of a target of which the investor previously already has acquired a share. Just like the first acquisition, that second investment also would be subject to the Screening Regulation. Such a second direct investment screening does formally not qualify as ex post screening: subject to the screening is the second and not the first direct investment. Still, this situation comes comparably close to an ex post screening. The second investment screening provides the platform for comments and opinions that reflect past experiences with respect to the same investor and the same target.

CJEU case law set as temporal point of reference for the risk assessment ‘the time of issuing the authorisation’, Judgment of the Court of 8 November 2012, European Commission v Hellenic Republic, C 244/11, ECLI:EU:C:2012:694, para. 71, though apparently the Court has never dealt with ex post screenings. 244 Pursuant to Art 7(10), this shall not apply to foreign direct investments completed before 10 April 2019. 245 And take utmost account of the Commission’s opinion in the case of Art 8(2)(c). 246 This ex post situation was explicitly stressed by the Commission in its FDI Screening Regulation Guidance, C(2020) 1981 final, OJ C 99 I/4 of 26.3.2020. 243

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This may include perspectives that the screening Member State may now have on the first investment. Hence, closely monitoring how the regulatory framework for ex post screenings may develop would be prudent. Such developments are not merely hypothetical since ex post screenings are no stranger to European screening law. Some Member States already provide ex post screening provisions.247 Furthermore, the Commission just recently has taken an active approach in its ‘White Paper on levelling the playing field as regards foreign subsidies’248 to introduce a general instrument:249 an ex post review of foreign subsidies shall be introduced to capture foreign subsidies that may distort the internal market.250 Such subsidies may be countered by divestment orders.251 These instruments are designed to be complementary to the Screening Regulation.252 Obviously, any form of ex post screening causes frictions with the legitimate aim interests of the investor to have certainty on the acquisition. This certainty is explicitly recognised in Recital 21 sentence 1. Moreover, the protection of legitimate expectations is part of the legal order of the EU,253 so the Sword of Damocles situation of a possible ex post screening not only creates economic burdens but also raises legal concerns. Consequently, ex post screening must be balanced against the fundamental rights of both the foreign direct investor and the EU target.

5.3

Circumvention

The Screening Regulation prescribes that ‘Member States which have a screening mechanism in place shall maintain, amend or adopt measures necessary to identify

Cf. Art 72(2) first bullet point of the Slovenian Act Determining the Intervention Measures to Mitigate and Remedy the Consequences of the COVID-19 Epidemic: in cases of mandatory notification of the FDI, the ministry may screen FDI within five years at the latest; cf. also S 14a(3) sentence 2 of the German FTPA: the ministry’s screening competences are limited to a maximum of five years after the FDI contract has been concluded. 248 White Paper on levelling the playing field as regards foreign subsidies, COM(2020) 253 final, 17.6.2020. 249 Cf. also European Commission Press Release (2020a) Commission adopts White Paper on foreign subsidies in the Single Market, Press release. 250 White Paper on levelling the playing field as regards foreign subsidies, COM(2020) 253 final, 17.6.2020, pp. 17–20 (redressive measures must not be imposed later than ten years after a subsidy is granted; other than that, the temporal scope of the review is not qualified and, therefore, includes ex post reviews), and in general pp. 13–22 (general instrument to capture foreign subsidies [Module 1]). 251 Ibid., p. 19. 252 Ibid., p. 43. 253 See only Judgment of the Court of 20 September 1990, Commission of the European Communities v Federal Republic of Germany, C-5/89, ECLI:EU:C:1990:320, para. 13. 247

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and prevent circumvention of the screening mechanisms and screening decisions’ (Art 3(6)). This anti-circumvention clause covers investments from within the EU ‘by means of artificial arrangements that do not reflect economic reality and circumvent the screening mechanisms and screening decisions, where the investor is ultimately owned or controlled by a natural person or an undertaking of a third country’ (Recital 10 sentence 2). The anti-circumvention clause’s scope of application is broad by its very nature. This bears risks. To tackle them, the ratio of the anti-circumvention clause should be emphasised: the aim is subjecting to the Regulation’s scope such transactions that qualify as (illegitimate) constructions, which are meant to avoid FDI screening. Driven by this interpretation, this contribution argues that genuine and legitimate indirect investments do not qualify as such circumventions.254 Instead, an adequate interpretation of the anti-circumvention clause must focus on the recital’s element ‘artificial arrangements that do not reflect economic reality’.255 Screening Member States may feel inclined to qualify investor behaviours prematurely as ‘circumvention’. This risk is intensified by the hardly outlined anticircumvention clause256 and the current lack of a common European understanding of third country investments. Consequently, one Member State may easily interpret investor strategies as circumvention, while another Member State would assume a legitimate leeway. The anti-circumvention clause, hence, should form an integral part of a common European understanding of third country investments right from the beginning. For the purposes of this contribution, two short remarks on that matter shall suffice.

5.3.1

CJEU Case Law on ‘Wholly Artificial Arrangements’

Art 3(6) and Recital 10 sentence 2 reflect CJEU case law that deals with national anti-tax avoidance legislation concerning ‘wholly artificial arrangements which do not reflect economic reality’257 but rather aim ‘at circumventing the application of the legislation of the Member State’.258 To specify such wholly artificial arrangements, the Court has decided: If checking those factors leads to the finding that the [undertaking in question] is a fictitious establishment not carrying out any genuine economic activity in the territory of the host Member State, the creation of that [undertaking in question] must be regarded as having the

254

Cf. above Sect. 5.1.4.2. Recital 10 sentence 2. 256 Bayer and Schmidt (2019), p. 2187. 257 Judgment of the Court of 12 September 2006, Cadbury Schweppes plc, Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, C-196/04, ECLI:EU:C:2006:544, para. 55; Judgment of the Court of 17 September 2009, Glaxo Wellcome GmbH & Co. KG v Finanzamt München II, C-182/08, ECLI:EU:C:2009:559, paras. 89, 92. 258 Judgment of the Court of 12 September 2006, Cadbury Schweppes plc, Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, C-196/04, ECLI:EU:C:2006:544, para. 51. 255

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characteristics of a wholly artificial arrangement. That could be so in particular in the case of a ‘letterbox’ or ‘front’ subsidiary.259

The Screening Regulation codifies this case law. Yet the interpretation of Art 3(6) in conjunction with Recital 10 sentence 2 must accommodate a deviation from its origins: the Court uses in settled case law the term ‘wholly artificial arrangement’,260 while Recital 10 sentence 2 (only) calls for prevention against ‘artificial arrangements’. One may argue that omitting the word ‘wholly’ indicates that a lower level of artificialness would justify special FDI screening rules (compared to tax avoidance settings). Yet it seems hard to quantify artificialness (mere artificial arrangements versus wholly artificial arrangements?). Moreover, Art 3(6) must be interpreted in the light of the Regulation being a restriction to the fundamental freedom of capital movement.261 Consequently, the scope of the anti-circumvention clause must be construed narrowly since it extends the scope of the screening rules and, thus, further restricts direct investments. Therefore, Recital 10 sentence 2 should be interpreted along the same lines as the CJEU case law on ‘wholly artificial arrangements’. This avoids further uncertainties for foreign direct investors. Special national anti-avoidance measures shall be used only where the direct investment comes in the form of a ‘wholly artificial arrangement’, as outlined in the CJEU case law.

5.3.2

Accommodation with a ‘General Anti-Avoidance Rule’

National measures meant to prevent tax avoidance have been subject to EU law. CJEU case law262 established the basis for discussions on conceptualising a General Anti-Avoidance Rule (GAAR).

259

Judgment of the Court of 12 September 2006, Cadbury Schweppes plc, Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, C-196/04, ECLI:EU:C:2006:544, para. 68. 260 For example, Judgment of the Court of 13 December 2005, Marks & Spencer plc v David Halsey (Her Majesty’s Inspector of Taxes), C-446/03, ECLI:EU:C:2005:763, para. 57; Judgment of the Court of 12 September 2006, Cadbury Schweppes plc, Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, C-196/04, ECLI:EU:C:2006:544, paras. 51, 55, 57, 61, 63, 68 f., 72, 75; Judgment of the Court of 13 March 2007, Test Claimants in the Thin Cap Group Litigation v Commissioners of Inland Revenue, C-524/04, ECLI:EU:C:2007:161, paras. 72, 74, 79 (note that this Judgment also uses ‘purely’ artificial arrangements in paras. 81–83, 86–88, 92, obviously as synonym; Judgment of the Court of 26 February 2019, X GmbH v Finanzamt Stuttgart—Körperschaften, C-135/17, ECLI:EU:C:2019:136, para. 73. Emphasis added. 261 Cf. above Sect. 4.3.3. 262 For example, Judgment of the Court of 21 February 2006, Halifax plc, Leeds Permanent Development Services Ltd, County Wide Property Investments Ltd v Commissioners of Customs & Excise, C-255/02, ECLI:EU:C:2006:121, paras. 68 ff.; Judgment of the Court of 12 September 2006, Cadbury Schweppes plc, Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, C-196/04, ECLI:EU:C:2006:544, paras. 51 ff.; Judgment of the Court of 13 March 2007, Test Claimants in the Thin Cap Group Litigation v Commissioners of Inland Revenue, C-524/04, ECLI:EU:C:2007:161, paras. 72 ff.; Judgment of the Court of 17 September 2009,

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Though the GAAR is anything but sharply conceptualised and final,263 the specification of the Screening Regulation’s anti-circumvention clause should integrate the GAAR discussion as well as anti-avoidance EU secondary law.264 In the light of a missing common ground to define what measures are ‘necessary to identify and prevent circumvention of the screening mechanisms and screening decisions’ (Art 3(6)), the interpretation should make use of as many previous experiences as possible. One particular challenge, for example, will be to generalise the current case law that reviews each case under anti-circumvention clauses (in order to comply with the principle of proportionality) on a case-by-case examination.265 Another challenge will be not to turn a blind eye on potential differences between tax law and screening law.

5.4

Third Country Investor

So far, this contribution has analysed the ‘direct investment’ part of third country direct investments. Now, this section shall focus on the element of ‘third country’. The Screening Regulation is rather short on that topic. It just defines that the third country investor is ‘a natural person of a third country or an undertaking of a third country, intending to make or having made a foreign direct investment’ (Art 2(2)) and that a foreign corporate investor is an ‘undertaking constituted or otherwise organised under the laws of a third country’ (Art 2(7)). Many questions need further discussion. Hence, this section starts by arguing that the nationality of the owner of the corporate investor does not turn the corporate investor into a ‘third country’ investor (below Section 5.4.1). Next comes a tricky constellation: Are there factors that would allow qualifying an investor as a third country investor even if the investor comes in the form of an EU Member State corporation? Yes, there are, as this contribution will argue (below Section 5.4.2). And finally, this section deals with a number of countries that require some further thoughts on their third country status: OECD countries, OCTs, the European Economic Area states, Switzerland, and the post-Brexit UK (below Section 5.4.3).

Glaxo Wellcome GmbH & Co. KG v Finanzamt München II, C-182/08, ECLI:EU:C:2009:559, paras. 89 ff. 263 Cf. Kiekebeld (2009), pp. 144–145; Chen (2018), pp. 91–120. 264 For some examples, see ibid., pp. 96–105. 265 See Judgment of the Court of 17 September 2009, Glaxo Wellcome GmbH & Co. KG v Finanzamt München II, C-182/08, ECLI:EU:C:2009:559, paras. 99, 102.

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EU Corporations and Third State Owners

Do investor undertakings qualify as third country investors if they are constituted and/or organised under EU law effectively controlled or owned by nationals of a third country? This question does not seem absurd considering, for example, the approach of China’s Social Credit System (SCS). The SCS influences tax rates or market entry rights for goods and services, and the corporate SCS is linked to the individual SCS (so that the personal behaviour of managers influence the company’s score).266 Against that background, one might argue by the same principle that a Spanish sociedad de responsabilidad limitada owned by Chinese nationals should be deemed a third country investor. Such an argument must be rejected. It is a clear legislative intention not to consider the controller’s/owner’s nationality for the qualification of a third country investor. During the legislative procedure, an amendment was proposed according to which foreign investors would have been defined as ‘a natural person of a third country or an undertaking effectively controlled or owned by nationals of a third country, intending to make or having made a foreign direct investment’.267 This amendment was not endorsed,268 and so the definition of Art 2(2) leaves no room to include the third country nationality of owners. This also means that the anti-circumvention clause of Art 3(6) in conjunction with Recital 10 sentence 2 must not be interpreted to take the nationality of the investor’s shareholders as a sufficient factor to assume a circumvention. And for the full picture, attributing no relevance to the nationality of the investor’s owner is in line with the national screening law of at least some Member States269 or international investment case law.270 And, of course, it is in line with the same principles of EU law that exclude considering the shareholder’s nationality when categorising a company under Art 54 first subpara TFEU.271

266

Martinek (2020), p. 42. Opinion of the Committee on Industry, Research and Energy, 25.4.2018 (in European Parliament, Committee on International Trade, Report on the proposal, A8-0198/2018 of 4.6.2018, p. 63, Amendment 17; emphasis in original, clarifying the changes with respect to the Commission’s Proposal); see also Opinion of the Committee on Economic and Monetary Affairs, 3.4.2018 (in European Parliament, Committee on International Trade, Report on the proposal, A8-0198/2018, 4.6.2018, p. 124, Amendment 26). 268 Not even in the European Parliament itself; cf. European Parliament, Legislative resolution of 14 February 2019, P8_TA-PROV(2019)0121, p. 20. 269 For Germany, see Pottmeyer in Wolffgang/Simonsen/Rogmann/Pietsch (2019). 270 Dolzer and Schreuer (2012), p. 48. 271 Cf. Müller-Graff in Streinz R (2018), Art 54 AEUV, para. 10 (with further references). 267

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Qualifying as Third Country Investor Even if Constituted or Otherwise Organised Under the Laws of an EU Member State?

A foreign corporate investor is an ‘undertaking constituted or otherwise organised under the laws of a third country’ (Art 2(7)). The point of reference, thus, is the third country legal regime. But what about undertakings constituted or otherwise organised under the laws of an EU Member State: assuming such an undertaking could have at the same time legally significant connections to a third country, could it qualify as a third country investor? If the Bulgarian national legal order would allow, for example, for an undertaking to have its registered office in Bulgaria while having its central administration in Russia,272 would that be a third country investor in the meaning of the Screening Regulation? This contribution argues affirmatively. More convincing arguments support the interpretation that indeed certain qualified legal relationships with a third country do result in an undertaking being qualified as third country undertaking—even if (at the same time) this undertaking would also be constituted or otherwise organised under the laws of an EU Member State.273 Concededly, this topic of doubly organised undertakings certainly is a hard case. It shall be left open for further discussions whether such qualified legal relationships include the registered office, the central administration, the principal place of business (cf., for each criterion, Art 54 first subpara TFEU), and/or further criteria.274 Several arguments support the thesis presented in this contribution. First, Art 2(7) makes the third country’s (and not the EU Member State’s) legal order the point of reference for qualifying the status of an investor. A straightforward semantic interpretation, hence, suggests that it is only relevant whether an undertaking is organised under the laws of a third country. It is irrelevant whether the very same undertaking may also be considered to be constituted or otherwise organised under the laws of an EU Member State. Second, the freedom of establishment pursuant to Art 49 in conjunction with Art 54 first subpara TFEU does not require a different interpretation. A doubly organised undertaking may invoke the freedom of establishment to challenge the proposed interpretation of Art 2(7)—such an undertaking still is organised under the laws of an EU Member State. Under the freedom of establishment, a company formed in accordance with the laws of an EU Member State and having their

272

This example is a completely theoretical scenario. This contribution does not provide a legalempirical question whether and (if so) in what variations such doubly organised undertakings may occur. It suffices to say that prima facie it seems within the EU Member States legal competence to accept such double relationships. 273 This issue is not decisive in the case of indirect direct investments where the parent company undoubtedly is a third country investor (cf. on that topic above Sect. 5.1.4.2). Such a transaction would qualify as third country direct investment in any case. 274 For that discussion, it may be helpful to keep in mind that in international investment law, the main seat of the business is one of the most commonly used criteria to determine the corporate nationality pursuant to Dolzer and Schreuer (2012), p. 47.

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registered office, central administration, or principal place of business within the EU is entitled according to Art 49 in conjunction with Art 54 first subpara TFEU, which includes the intra-EU transfer of its place of effective management.275 But the freedom of establishment does not contain any provision that extends its application to situations concerning the establishment of a company of a Member State in a third country or the establishment of a third country company in a Member State.276 The freedom of establishment also does not cover situations concerning a shareholding in a company that has its registered office in a third country.277 Quite on the contrary, as the CJEU has decided, ‘it is important to ensure that the interpretation of Ar[t] 63 (1) TFEU as regards relations with third countries does not enable economic operators who do not fall within the limits of the territorial scope of freedom of establishment to profit from that freedom’.278 This supports the interpretation that significant corporate third country relations diminish the full protection that a ‘pure’ EU-related company would enjoy. Against that backdrop, the restrictions on Art 49 in conjunction with Art 54 first subpara TFEU for an undertaking that is (also) organised under the laws of an EU Member State seem justified, considering that these restrictions reflect the case that the company is also organised under the laws of a third country beyond the scope of protection of Art 49 in conjunction with Art 54 first subpara TFEU. Third, the ratio of the anti-circumvention clause of Art 3(6)279 argues for including doubly organised undertakings in the scope of Art 2(7). The circumvention clause is not applicable where a doubly organised undertaking carries out genuine economic activity. Still, qualified legal relationships of an investor with the legal order of a third country diminish the connection to the EU Member State’s legal order. If an investor has tied itself to a third country’s legal order with respect to crucial elements that characterise an establishment, this at least approximates to circumventing a screening.

275

See only Judgment of the Court of 29 November 2011, National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam, C-371/10, ECLI:EU:C:2011:785, para. 32. 276 Judgment of the Court of 13 November 2012, Test Claimants in the FII Group Litigation, C-35/11, ECLI:EU:C:2012:707, para. 97, and the case law cited. 277 Judgment of the Court of 19 July 2012, Marianne Scheunemann v Finanzamt Bremerhaven, C-31/11, ECLI:EU:C:2012:481, para. 33. 278 Judgment of the Court of 11 September 2014, Kronos International Inc. v Finanzamt Leverkusen, C 47/12, ECLI:EU:C:2014:2200, para. 53; Judgment of the Court of 13 November 2012, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, C-35/11, ECLI:EU: C:2012:707, para. 100; see also Judgment of the Court of 24 May 2007, Winfried L. Holböck v Finanzamt Salzburg-Land, C-157/05, ECLI:EU:C:2007:297, para. 28. 279 On the anti-circumvention clause in broader context, see above Sect. 5.3.

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Third Countries

What is a third country in the meaning of the Screening Regulation? This question seems trivial: any state that is not a Member State of the EU is a third country.280 Yet several categories of countries require some deeper discussions to answer the very first question any investor client would ask its legal counsel: Does my company fall within the scope of application of the Screening Regulation? It comes as a surprise that dealing with such not-that-self-evident country categories was not addressed during the legislative procedure. At least Germany could have known a legal dispute about the reach of the territorial scope of the screening rules: under previous German screening law, it was discussed whether ‘EU investor’ referred to the territory of the EU Member States or to the EU customs territory.281 This experience alone should have justified some remarks on third countries in the legislative procedure.

5.4.3.1

OECD Countries

Fifteen OECD Members are not part of the EU.282 These countries qualify as third countries in the meaning of the Screening Regulation. The Regulation itself does not offer any base for a different interpretation, nor can EU primary law serve to argue for a special treatment of these 15 countries: the EU itself is not a Contracting Party to the OECD Convention and not bound by the OECD Code of Liberalisation of Capital Movements.283 Besides, the legal effect of the OECD Code of Liberalisation of Capital Movements seems open: while Advocate General Geelhoed has acknowledged in the Ospelt case that the Code contains binding, non-discriminatory rules that should be taken into consideration when interpreting EU law,284 the Code’s provisions are elsewhere not considered to be self-executing and not having direct effects on market participants.285 The Code would, however, hardly justify a correction of the Screening Regulation by judicial review via an interpretation that would exclude the 15 non-EU OECD Members from being third countries. Yet this consequence leaves legal

280

See, e.g., Opinion of Advocate General Geelhoed delivered on 10 April 2003, Margarethe Ospelt and Schlössle Weissenberg Familienstiftung v Unabhängiger Verwaltungssenat des Landes Vorarlberg, C-452/01, ECLI:EU:C:2003:232, para. 51. 281 The dispute was settled when the German FTPA was reformed; see Pottmeyer in Wolffgang/ Simonsen/Rogmann/Pietsch (2019), para. 19. 282 For further details on the OECD, cf. Sect. 4.4. above. 283 Cf. Sect. 4.4. above. 284 Opinion of Advocate General Geelhoed delivered on 10 April 2003, Margarethe Ospelt and Schlössle Weissenberg Familienstiftung v Unabhängiger Verwaltungssenat des Landes Vorarlberg, C-452/01, ECLI:EU:C:2003:232, paras. 42 f. 285 Sedlaczek and Züger in Streinz (2018), para. 21.

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unease. Art 9 of the OECD Code of Liberalisation of Capital Movements states the principle of non-discrimination between OECD Members: A Member shall not discriminate as between other Members in authorising the conclusion and execution of transactions and transfers which are listed in Annex A [Annex A includes direct investments.] and which are subject to any degree of liberalisation.

Yet companies constituted or otherwise organised under the laws of non-EU Member States are treated differently compared to companies under the laws of EU Member States. This unequal treatment is not evidently justified.286 Art 10 of the OECD Code of Liberalisation of Capital as an exception to the equal treatment clause is not applicable. This provision allows exceptions to the principle of non-discrimination for Members forming part of a special customs or monetary system (such as the EU287). However, this ‘means that these countries may liberalise more rapidly or more widely among themselves; on the other hand, they may not raise new barriers to operations with third countries’.288 The Screening Regulation, however, is not an instrument of liberalisation but a new barrier.289 It must remain open whether Art 3 of the OECD Code of Liberalisation of Capital could justify the unequal treatment. This provision allows the OECD Members to take necessary actions to maintain public order and security, and Recital 3 sentence 1 of the Screening Regulation apparently refers to this OECD provision. Invoking this justification would require establishing the argument that direct investments from non-EU OECD undertakings require a special regime (compared to EU OECD undertakings) to maintain public order and security. So the EU would be prudent to assess this unequal treatment in the evaluation of the Screening Regulation (pursuant to Art 15(1)), at the latest.

5.4.3.2

Overseas Countries and Territories

In principle, OCTs in the meaning of Art 198 first subpara sentence 2 TFEU in conjunction with Annex II to the TFEU290 do not qualify as third countries in the

286 Bourgeois and Malathouni in Bourgeois (2020), pp. 185–187, assess the Regulation with respect to OECD guidelines, including the aspect of equal treatment (ibid., p. 185). They do not, however, address the problems discussed here. 287 OECD (2019) OECD Codes of Liberalisation—User’s Guide, Commentary on Art 10, p. 38, available at http://www.oecd.org/investment/investment-policy/38072327.pdf. 288 Ibid. Similar ibid., p. 15: ‘In particular, harmonisation and liberalisation within the EU may not raise new barriers to operations with third countries.’ 289 Cf. Sect. 4.3.3 above. 290 Greenland, New Caledonia and Dependencies, French Polynesia, French Southern and Antarctic Territories, Wallis and Futuna Islands, Mayotte, Saint Pierre and Miquelon, Aruba, Netherlands Antilles (Bonaire, Curaçao, Saba, Sint Eustatius, Sint Maarten), Anguilla, Cayman Islands, Falkland Islands, South Georgia and the South Sandwich Islands, Montserrat, Pitcairn, Saint Helena and Dependencies, British Antarctic Territory, British Indian Ocean Territory, Turks and Caicos Islands, British Virgin Islands, Bermuda. Note, however, that with the UK having withdrawn from

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meaning of the Screening Regulation. The EU Member States may deviate from this principle if this is justified on grounds of public policy or public security. OCTs are not sovereign countries.291 At the same time, they do not fall within the territorial scope of EU law but are subject to the special arrangements for association set out in Part 4 of the TFEU (Art 52(2) TEU, Art 355(2) first subpara TFEU). With respect to the EU, OCTs are therefore in the same situation as non-Member States.292 Hence, OCTs benefit from the provisions of EU law in a similar manner as the Member States only when EU law expressly provides that OCTs and the Member States are to be treated in such a manner.293 The Screening Regulation does not know any such express provision,294 but Art 59(2) of the Overseas Association Decision 2013/755/EU does: With regard to transactions on the capital account of balance of payments, the Member States and the OCTs authorities shall impose no restrictions on the free movement of capital for direct investments in companies formed in accordance with the laws of the host Member State, country or territory [. . .].

Consequently, OCTs must be treated in a manner similar to the Member States, even though Art 59(2) of the Overseas Association Decision 2013/755/EU only reflects what third countries could invoke under Art 63(1) TFEU. Any other interpretation would deprive Art 59(2) of the Overseas Association Decision

the EU, the Withdrawal Agreement (see Art 3(1)(e) of the WA) provides special rules for those OCTs special relations with the United Kingdom: Anguilla, Bermuda, British Antarctic Territory, British Indian Ocean Territory, British Virgin Islands, Cayman Islands, Falkland Islands, Montserrat, Pitcairn, Saint Helena, Ascension and Tristan da Cunha, South Georgia and the South Sandwich Islands, and Turks and Caicos Islands. This means for their qualification under the Screening Regulation: These OCTs are treated the same way as other OCTs, unless the Withdrawal Agreement states otherwise (cf. below Sect. 5.4.3.5). 291 European Commission (2020a) Overseas Countries and Territories, available at https://ec. europa.eu/international-partnerships/where-we-work/overseas-countries-and-territories_en. 292 Opinion of the Court of 4 October 1979, Opinion given pursuant to the second subparagraph of Art 228(1) of the EEC Treaty - International Agreement on Natural Rubber, Opinion 1/78, ECLI: EU:C:1979:224, para. 62; Opinion of the Court of 15 November 1994, Competence of the Community to conclude international agreements concerning services and the protection of intellectual property - Art 228 (6) of the EC Treaty, Opinion 1/94, ECLI:EU:C:1994:384, para. 17. 293 Judgment of the Court of 5 May 2011, Prunus SARL, Polonium SA v Directeur des services fiscaux, C-384/09, ECLI:EU:C:2011:276, para. 29. 294 The issue of the location of the targets was discussed in the legislative procedure; see European Parliament, Committee on International Trade, Report on the proposal, A8-0198/2018 of 4.6.2018, p. 9, Amendment 9: targets should be ‘undertakings carrying out an economic activity in the territory of a Member State, in its Economic Exclusive Zone declared pursuant to the United Nations Conventions on the Law of the Sea (UNCLOS), or continental shelf’ (emphasis in original, clarifying the changes with respect to the Commission’s Proposal). Correspondingly, an amendment of Art 2(1) was proposed (ibid., p. 20 f.). Yet neither did these proposed amendments make it into the Regulation, nor do they explicitly deal with the status of OCTs.

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2013/755/EU as special secondary law its legal significance. Therefore, OCTs qualify as non-third countries in the meaning of the Screening Regulation.295 Modifying this qualification is not beyond the reach of the Member States. The Member States are entitled to take measures that are justified on grounds of public policy or public security (Art 59(3) of the Overseas Association Decision 2013/755/EU in conjunction with Art 65(1)(b) TFEU). Such a justification requires explicit national legislation. Besides, a justification must specifically address the question why the same treatment of OCT direct investments and direct investments from any third country should be justified; the special status attributed to OCTs under Art 59(2) of the Overseas Association Decision 2013/755/EU must be respected. These caveats, however, do not pose a threshold that could hardly be passed. The CJEU has accepted that national legislation to prevent tax avoidance is compliant with the Overseas Association Decision since ‘numerous OCTs are considered to be tax havens’.296 Similar reasons may be applicable for OCT-based direct investments.297 Moreover, the Member States can invoke the so-called grandfathering or standstill clause of Art 59(3) of the Overseas Association Decision 2013/755/EU in conjunction with Art 64(1) TFEU. The Member States could include OCTs to the group of FDI-screened third countries if a corresponding national screening regime existed on 31 December 1993 under national law (and on 31 December 1999 regarding national law in Bulgaria, Estonia, and Hungary).298

295

This stands even though Art 59(2) of the Overseas Association Decision 2013/755/EU addresses the Member States (and not the EU itself). Since the Member States are bound to Art 59(2) of the Overseas Association Decision 2013/755/EU, the Screening Regulation must respect this obligation. Consequently, the Screening Regulation cannot be interpreted to qualify OCTs as third countries for its framework to national FDI screenings, while at the same time the Member States must treat OCTs as non-third countries in their national FDI screening. 296 Judgment of the Court of 5 June 2014, X BV, TBG Limited v Staatssecretaris van Financiën, C-24/12 and C-27/12, ECLI:EU:C:2014:1385, paras. 51–53. 297 From a dogmatic perspective, tax haven cases and direct investment cases differ slightly. Where the tax carve-out clause (Art 66(2) of the Overseas Association Decision 2013/755/EU) is the point of reference in tax haven cases, the scope of application Art 59(2) of the Overseas Association Decision 2013/755/EU is not opened (Judgment of the Court of 5 June 2014, X BV, TBG Limited v Staatssecretaris van Financiën, C-24/12 and C-27/12, ECLI:EU:C:2014:1385, para. 53). Direct investment cases, on the other hand, fall within its scope of application but are discussed on the level of justifying restrictions of capital movements (Art 59(3) of the Overseas Association Decision 2013/755/EU in conjunction with Art 65(1)(b) TFEU). 298 The standstill clause can be invoked if the national screening law does not introduce a new screening framework that would affect the inherent logic of a national legal restriction on direct investments from OCT undertakings that formed part of the respective national legal order continuously since the end of 1993/1999, cf. Judgment of the Court of 5 May 2011, Prunus SARL, Polonium SA v Directeur des services fiscaux, C-384/09, ECLI:EU:C:2011:276, paras. 34, 36. On Art 64(1) TFEU, see further Judgment of the Court of 12 December 2006, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, C-446/04, ECLI:EU:C:2006:774, paras. 187 ff.; Judgment of the Court of 24 May 2007, Winfried L. Holböck v Finanzamt Salzburg-Land, C-157/05, ECLI:EU:C:2007:297, para. 41; Judgment of the Court of 11 February 2010, Fokus

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European Economic Area States: Iceland, Liechtenstein, and Norway

The acquisition of a German Aktiengesellschaft by a Norwegian aksjeselskap would qualify as a third country direct investment—Iceland, the Principality of Liechtenstein, and the Kingdom of Norway are third countries in the meaning of the Screening Regulation. The EU Member States must treat these countries as any other third country since the Screening Regulation requires them to ‘not discriminate between third countries’ (Art 3(2) sentence 1). Privileging Icelandic, Liechtenstein, and Norwegian investors under national screening law by treating them like EU Member State based investors would qualify as such discrimination. This legal status may come as a surprise since Iceland, Liechtenstein, and Norway enjoy rights that tie them very close to the EU’s internal market. They are Contracting Parties to the Agreement on the European Economic Area (EEA Agreement).299 One of the principal aims of the EEA Agreement is to provide the fullest possible realisation of the free movement of goods, persons, services, and capital within the whole European Economic Area so that the EU internal market is extended to all EEA EFTA States.300 To this end, EEA EFTA States enjoy many rights, including the right of establishment301 and the freedom of capital movement.302 According to Art 6 of the EEA Agreement,303 these freedoms possess the same legal scope as Art 49 TFEU304 and Art 63 TFEU.305

Invest AG v Finanzierungsberatung-Immobilientreuhand und Anlageberatung GmbH (FIAG), C 541/08, ECLI:EU:C:2010:74, para. 42. 299 They are also Member States of the European Free Trade Association (EFTA) Convention. Iceland, Liechtenstein, and Norway are therefore referred to as ‘EEA EFTA States’ in this contribution (derogating from the terminology of Art 2(b) of the EEA Agreement). Their EFTA membership, however, is not relevant for the purposes of this sector. On Switzerland (EFTA Member State but not an EEA State), see Sect. 5.4.3.4 below. 300 Judgment of the Court of 23 September 2003, Margarethe Ospelt and Schlössle Weissenberg Familienstiftung, C-452/01, ECLI:EU:C:2003:493, para. 29; Judgment of the Court of 28 October 2010, Établissements Rimbaud SA v Directeur général des impôts, Directeur des services fiscaux d’Aix-en-Provence, C-72/09, ECLI:EU:C:2010:645, para. 20. 301 Art 31–35 in conjunction with Annexes VIII to XI of the EEA Agreement. 302 Art 40–45 in conjunction with Annex XII of the EEA Agreement. 303 On the interpretation of Art 6 of the EEA Agreement, see Fredriksen and Franklin (2015), p. 631 f. 304 Judgment of the Court of 23 February 2006, Finanzamt Offenbach am Main-Land v Keller Holding GmbH, C-471/04, ECLI:EU:C:2006:143, para. 49; Judgment of the Court of 23 October 2008, Finanzamt für Körperschaften III in Berlin v Krankenheim Ruhesitz am WannseeSeniorenheimstatt GmbH, C-157/07, ECLI:EU:C:2008:588, para. 24. 305 Judgment of the Court of 23 September 2003, Margarethe Ospelt and Schlössle Weissenberg Familienstiftung, C-452/01, ECLI:EU:C:2003:493, para. 32; Judgment of the Court of 28 October 2010, Établissements Rimbaud SA v Directeur général des impôts, Directeur des services fiscaux d’Aix-en-Provence, C-72/09, ECLI:EU:C:2010:645, para. 22; Judgment of the Court of 12 April 2018, European Commission v Kingdom of Belgium, C-110/17, ECLI:EU:C:2018:250, para. 63. Arguing for an amendment of the EEA Agreement that explicitly reflects the liberalisation of the

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Yet the EEA EFTA States are not Member States of the EU. Consequently, they are ‘third countries’ in the meaning of the Screening Regulation, even though a CJEU obiter dictum in the Ospelt case may indicate otherwise. With a doubting undertone, the CJEU stated that ‘it would appear that the [referring] national court implicitly regards the Principality of Liechtenstein [. . .] as a third country for the purposes of [Art 63 TFEU]’.306 Whatever the merits of this obiter dictum on EU primary law may be, it offers no sufficiently reliable basis to assume that the EEA EFTA States qualify as non-third countries in the meaning of the secondary law of the Screening Regulation. The Screening Regulation offers no provision to exclude the EEA EFTA States from their third country status, neither by explicit provision nor by interpretation. Also, the Screening Regulation has not been adopted under Art 102(1) sentence 1 of the EEA Agreement; such an adoption would allow a different interpretation. Also, the Screening Regulation cannot be ‘corrected’ via interpretation in the light of the EEA Agreement. An international agreement concluded by the EU prevails over EU secondary law.307 While the EEA Agreement, therefore, would prevail over the Screening Regulation, the EEA Agreement lacks a provision that would (beyond any reasonable doubt) exclude the EEA EFTA States from the group of third countries under the Screening Regulation. The EEA EFTA States could certainly challenge the Screening Regulation with respect to their non-exclusion from the group of third countries. They could, i.a., invoke the right of establishment308 the capital-movement-specific non-discrimination clauses,309 or the guarantees of the Capital Movements Directive.310 It seems hard to find a justification311 of the restrictions that come with being a third country direct investor under the Screening Regulation and harder yet when considering that the very same justifications would be applicable to national intra-EU screening rules—the respective freedoms under the TFEU and the EEA Agreement possess the same legal

freedom of capital movement in EC/EU law Stefánsson (2016), pp. 721–723; Fredriksen and Franklin (2015), p. 636, are more indulgent since a uniform interpretation of Art 40 of the EEA Agreement and Art 63 TFEU was possible. 306 Judgment of the Court of 23 September 2003, Margarethe Ospelt and Schlössle Weissenberg Familienstiftung, C-452/01, ECLI:EU:C:2003:493, para. 23. 307 Judgment of the Court of 16 July 2015, ClientEarth v European Commission, C-612/13, ECLI: EU:C:2015:486, para. 33, and the case law cited. 308 Art 31 of the EEA Agreement. The EEA EFTA States, contrary to other third countries (see above Sect. 3.2.2), can invoke the right of establishment according to the EEA Agreement. 309 Art 40 sentence 1 and Art 42(1) of the EEA Agreement. 310 The Capital Movements Directive is applicable (with qualifications) to the EEA EFTA States pursuant to Art 40 sentence 1, sentence 2, in conjunction with Annex XII (which lists the Capital Movements Directive) in conjunction with No 9 of the Protocol 1 on Horizontal Adaptations of the EEA Agreement (which extends the Directive’s guarantees from the EU Member States to the EEA EFTA States). 311 For example, see Art 33 of the EEA Agreement on restrictions to the right of establishment for foreign nationals on grounds of public policy, public security, or public health.

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scope.312 There are far better reasons to argue that subjecting EEA EFTA companies to national FDI screenings (as a consequence of the Screening Regulation’s equal treatment clause313) is non-compliant with the EEA Agreement. But still, this legal assessment is not so obvious as to leave no scope for any reasonable doubt. Therefore, answering that question must remain reserved for the CJEU. Omitting special rules in the Screening Regulation for Iceland, Liechtenstein, and Norway seems unintentional. Arguably, the EU legislator may just have forgotten about the EEA EFTA States, assuming the countries would not qualify as third countries in the meaning of the Regulation. This would reflect the current national situation: EU Member States’ screening rules do explicitly deal with the status of EFTA (including EEA) Member States. German screening law, for example, equals EU Member States and EFTA Member States and excludes EFTA Member States from third country direct investment screening.314 Yet the status of the EEA Member States has not been discussed during the legislative procedure (as far as the published materials tell)—although the Commission’s Proposal for the Regulation at least touched the EEA Agreement in a proposed recital that did not make it into the Screening Regulation.315 The best explanation for that omission316 seems this being the consequence of the competence setting of the Screening Regulation: the EU has designed the Regulation to be part of its Common Commercial Policy (Art 3(1)(e) in conjunction with Art 207(1) TFEU) rather than of the internal market (Art 64(2), (3) TFEU).317 The EEA Agreement, however, enables the three EEA EFTA States to participate fully in the internal market but does not cover the Common Commercial Policy. Consequently, the Screening Regulation apparently has not been considered to be ‘in a field which is governed by [the EEA Agreement]’.318 During the legislative procedure of the Screening Regulation, the EU Commission neither sought advice

312

However, increasing contextual differences between EU and EEA law may still justify different results; see in general Fredriksen and Franklin (2015), pp. 650–652. 313 Art 3(2) sentence 1. 314 Section 5(2) sentence 3 of the German FTPA, section 55(2) sentences 4 and 5 of the German FTPO. 315 Proposal for the Regulation, COM(2017) 487 final, 13.9.2017, p. 19 (proposal for Recital 22): ‘The implementation of this Regulation by the Union and the Member States should comply with the relevant requirements for the imposition of restrictive measures based on grounds of security or public order stipulated in EU law, in the Agreement on the European Economic Area (EEA Agreement) [. . .].’ 316 It does not seem a very bold claim to assume that most participants of the Regulation’s legislative procedure may hold the opinion that a special clause for the EEA EFTA States was not omitted but was not necessary due to the EEA Agreement. Such an opinion would not be convincing, as argued above. 317 Cf. above Sect. 3.2.4. 318 Art 99(1) of the EEA Agreement.

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from experts of the EFTA States319 nor transmitted the Regulation Proposal to the EFTA States,320 nor did the EEA EFTA States submit EEA EFTA Comments.321 Unsurprisingly, the Screening Regulation does not contain the official note ‘(Text with EEA relevance)’. The Screening Regulation is, apparently, not deemed to be an act with possible EEA relevance that should be adopted.322 This finding leads to a paradox under the current Screening Regulation. The EU Member States must treat the EEA EFTA States like any other third country since they must ‘not discriminate between third countries’ (Art 3(2) sentence 1 of the Screening Regulation). The German privileges, for example, that exclude EFTA State undertakings from third country screening are inconsistent with Art 3(2) sentence 1 of the Screening Regulation and cannot be applied under the principle of primacy of EU law. But again and paradoxically, if EU Member States qualify the EEA EFTA States as third countries, direct investors organised under EEA EFTA State laws could challenge such treatment by arguing that the Screening Regulation violates the EEA Agreement.323

5.4.3.4

Switzerland

Switzerland is a third country in the meaning of the Regulation. It is not part of the EU, nor is it a Contracting Party to the EEA Agreement (resulting from its 1992 referendum).324 Switzerland is an EFTA Member State,325 but the EFTA Convention (of which the EU is not a party) has no relevance for the interpretation of the Screening Regulation.

319

Cf. Art 99(1) of the EEA Agreement. Cf. Art 99(2) first subpara of the EEA Agreement. 321 Procedures in the EEA EFTA States, the EFTA Secretariat, and the EU for the incorporation of legislation into the EEA Agreement, Note 27 (‘The EEA EFTA States submit EEA EFTA Comments to the EU institutions on important policy issues.’). 322 Cf. Art 102(1) sentence 1 of the EEA Agreement. No results are shown for the Screening Directive in the EEA-Lex database. 323 The validity of an EU act may be affected by the incompatibility of that act with rules of international law, Judgment of the Court of 16 July 2015, ClientEarth v European Commission, C-612/13, ECLI:EU:C:2015:486, para. 34. While, again, a solution by the EU legislator is most preferable, one cannot exclude that the CJEU would also find an acceptable way of solving the issue. This solution must, however, take place at EU level and cannot be substituted by the interpretation of the EU Member States. 324 On Swiss membership and non-membership in international organisations, see Sprecher in Debus et al. (2011), pp. 256–258. 325 See for further details https://www.admin.ch/opc/de/classified-compilation/19600001/index. html. 320

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The legal relationship between Switzerland and the EU/the EU Member States is characterised by many bilateral international agreements326 and the ‘autonomous adaption’ of EU law by Switzerland.327 No bilateral agreement gives reason to argue to exclude Switzerland from the group of third countries in the meaning of the Screening Regulation. And just for the full picture on the status of Swiss companies under the Screening Regulation: while Switzerland can invoke Art 63(1) TFEU like any third country, it could not invoke a right to freedom of establishment that would resemble Art 49 in conjunction with Art 54 TFEU (and, of course, most investors are corporate investors). Part of the seven international agreements between the EU and Switzerland known as ‘Bilaterals I’ is the Agreement on the Free Movement of Persons (AFMP). This Agreement provides some form of freedom of establishment to natural persons,328 but it does not grant the right of establishment to legal persons.329 Besides, no other international agreement between the EU and Switzerland has been concluded that would require to exclude Switzerland from the category of third countries under the Screening Regulation. Since Switzerland, thus, is a third state in the meaning of the Screening Regulation, EU Member States that provide privileges for Swiss investors (via an EFTA State exemption to their national screening rules as in Germany330) do not comply with the non-discrimination clause of Art 3(2) sentence 1 and are called to adjust their screening law.

5.4.3.5

United Kingdom

The Brexit raises questions regarding the Screening Regulation since the UK has left the EU on 31 January 2020.331 The post-Brexit situation regarding the Screening Regulation has explicitly been dealt with neither in the Regulation itself nor in the Brexit agreement (the Agreement on the Withdrawal or WA). General provisions and interpretation, thus, must solve the issues raised.

326

A list of the agreements can be found at https://www.eda.admin.ch/dam/dea/de/documents/ publikationen_dea/accords-liste_de.pdf and a register (listing the agreements by sector) at https:// www.admin.ch/opc/de/european-union/international-agreements/index.html. 327 That is, the implementation of EU law into Swiss law by a sovereign decision of Switzerland without legal obligation to do so. On this autonomous adaption of EU law, see Sprecher in Debus et al. (2011), pp. 260–263, 273, 276. 328 For example, Art 4 of the AFMP in conjunction with Art 12 of Annex I to the AFMP. 329 Judgment of the Court of 12 November 2009, Christian Grimme v Deutsche AngestelltenKrankenkasse, C 351/08, ECLI:EU:C:2009:697, paras. 35, 39; Judgment of the Court of 11 February 2010, Fokus Invest AG v Finanzierungsberatung-Immobilientreuhand und Anlageberatung GmbH (FIAG), C 541/08, ECLI:EU:C:2010:74, para. 31. 330 Cf. above Sect. 5.4.3.3. 331 Notice concerning the entry into force of the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, OJ L 29, 31.1.2020, pp. 7–187.

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Legal Situation During the Transition Period During the transition period (i.e. at least until 31 December 2020332), the Screening Regulation is applicable with respect to and in the UK333 according to the general rule of Art 4(1) first subpara in conjunction with Art 127(1) first subpara of the WA.334 For example, when the Screening Regulation shall apply from 11 October 2020,335 the UK will be entitled to comment on a third country direct investment that is likely to affect the UK’s security or public order.336 During the transition period, a directly investing undertaking constituted or otherwise organised under the laws of the UK does not qualify as ‘foreign investors’ in the meaning of Art 2(2) of the Screening Regulation (see Art 127(6) of the WA). A British limited that directly invests in a German GmbH would not fall within the scope of application of the Screening Regulation. Legal Situation After the Transition Period When the transition period will expire and the effect of Art 127(1) first subpara (6) of the WA will cease, the Screening Regulation will not be applicable with respect to and in the UK anymore and the UK will be a third country in the meaning of the Screening Regulation. Without further ado, direct investments of undertakings constituted or otherwise organised under the laws of the UK launched after the expiration of the transition period, thus, will fall within the scope of application of the Screening Regulation. Things are a bit more intricate, however, with respect to direct investments into the UK or from the UK if they have been planned or have been completed at a time when the UK was an EU Member State or during the transition period.337 These are anything but ivory tower questions considering that M&A transaction may come with a significant mid-term timeline.

332

Art 2(e), Art 126 of the WA. Pursuant to Art 132(1) WA, the Joint Committee may, before 1 July 2020, adopt a single decision extending the transition period for up to 1 or 2 years. 333 ‘UK’ in this context refers to the territorial scope as defined in Art 3(1) of the WA. This includes the United Kingdom and (with qualifications) Gibraltar, the Channel Islands and the Isle of Man, the Sovereign Base Areas of Akrotiri and Dhekelia in Cyprus, and the OCTs that have special relations with the United Kingdom (Anguilla, Bermuda, British Antarctic Territory, British Indian Ocean Territory, British Virgin Islands, Cayman Islands, Falkland Islands, Montserrat, Pitcairn, Saint Helena, Ascension and Tristan da Cunha, South Georgia and the South Sandwich Islands, and Turks and Caicos Islands); on the situation of these OCTs, see above Sect. 5.4.3.2. 334 The general rule of Art 4(1) first subpara of the WA shall be omitted in further citations for reasons of simplicity. 335 Art 17 second subpara. 336 Cf. Art 6(2) first subpara sentence 1. 337 The following remarks are based on the law applicable at the time this contribution was finished. This law may be superseded by the agreement(s) on the future relationship between the European Union and the United Kingdom.

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Third Country Direct Investments into an EU Member State That Could Affect the Security or Public Order of the UK All of UK’s rights and obligations under the Screening Regulation cease the day after the transition period. To give the example of a Russian investor that intends to acquire a German undertaking: if Germany carries out an FDI screening, the UK may comment338 that the investment is likely to affect the UK’s security or public order. Germany must give due consideration to this comment339 from 11 October 2020 (when the Screening Regulation shall apply)340 to the expiration of the transition period. The day after the transition period has expired, Germany may ignore the comment—even if the German screening of the Russian investment continues.341 This legal design may not seem most compelling. Yet it is the consequence of the WA. The WA does not provide a clause that would guarantee UK’s continued rights and obligations in an administrative procedure beyond the transition period. Art 98–100 of the WA list specific administrative procedures involving the EU Member States and the UK where continuation applies, but none of these lists include investment screening procedures.342 Moreover, there is no general clause pursuant to which UK institutions should keep their rights and obligations in launched administrative procedures. This, obviously, is not an unintentional mistake, as proves the existence of such a clause for cases where EU institutions are competent.343 So the WA precludes an interpretation that would allow the UK to continue its position in an investment screening procedure after the transition period. Third Country Direct Investments to the UK That Could Affect the Security or Public Order of EU Member States The principles that pertain to third country direct investments that could affect the security or public order of the UK344 apply mutatis mutandis to third country investments to the UK that are likely to affect a Member State’s security or public order: while the UK must give due consideration to a Member State’s comment

Pursuant to Art 6(2) first subpara sentence 1. Pursuant to Art 6(9) sentence 1 of the Screening Regulation in conjunction with Art 127(1) first subpara, (6) of the WA. 340 Art 17 subpara 2. 341 While the EU Member State is not obliged to do so, EU law would not prevent such due considerations if the EU Member State should wish to do so by an autonomous decision. 342 Cf. Art 98 of the WA: Administrative cooperation for customs; Art 99 of the WA: Administrative cooperation for matters related to indirect tax; Art 100 of the WA: Mutual assistance for the recovery of claims relating to taxes, duties and other measure. 343 Art 92(1) of the WA. 344 Above, the section “Third Country Direct Investments into an EU Member State That Could Affect the Security or Public Order of the UK”. 338 339

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during the transition period, this obligation ceases in ongoing screenings once the transition period has expired. Direct Investments by UK Undertakings in an EU Target If the UK ‘turns’ into a third country after the transition period, this may affect direct investments by British investors into an EU Member State.345 Two examples may illuminate the situation: (i) A direct investment by a UK investor into an Italian target is initiated; before the transaction is completed, the UK turns into a third country, and (ii) A UK direct investment into a Polish target has been completed during the transition period. Within 15 months after completion, the Commission wishes to issue an opinion on that investment at a time when the transition period has passed. In both cases, the Screening Regulation applies without qualification: in scenario (i), Italy can carry out its screening mechanism and the Commission may exercise its rights to issue an opinion.346 Likewise, the Commission may issue an opinion in scenario (ii) where the now third country direct investment has not undergone screening.347 This result comes with legal reservations and economic concerns: legitimate expectations plea for a standstill clause that would freeze the legal qualification of the direct investment at the time of its initiation or (at least) of its completion. The legal metamorphosis of a transaction that once was an EU Member State direct investment and then turned into a third country direct investment touches the principle of legal certainty. The Screening Regulation aims at guaranteeing certainty for investors (see Recital 21 sentence 1348), and, of course, the protection of legitimate expectations is a general principle of EU law.349 Yet neither the Screening Regulation nor the WA provides any reliable basis for deducing a standstill clause. The WA is explicitly designed to allow the continuation of the UK as treated like an EU Member State for a limited time and limited areas.350 This limits any interpretation: the terms of the WA in their context and in the light of its object and purpose leave no room for a standstill clause for British direct investments. The changing legal situation certainly may be inconvenient for British investors. Yet the legal framework is quite clear to understand, and investors would be prudent to take the metamorphosis of their investment into consideration in their overall planning. 345

Obviously, the principles discussed here apply reciprocally in the case of EU investors acquiring a UK target. 346 Cf. Art 6(3) sentence 1. 347 Cf. Art 7(2) sentence 1. 348 See also Recital 7 sentence 1, which embraces the purpose of ‘legal certainty for Member States’ screening mechanisms’. This arguably includes the legal certainty for investors. 349 See only Judgment of the Court of 20 September 1990, Commission of the European Communities v Federal Republic of Germany, C-5/89, ECLI:EU:C:1990:320, para. 13. 350 Cf. The section “Third Country Direct Investments into an EU Member State That Could Affect the Security or Public Order of the UK” above.

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6 Concluding Remarks: Is Winter Coming? We certainly live in interesting times for screening law and politics. The Screening Regulation is just one building block to the architecture of a common European competition strategy. The Screening Regulation, indeed, is the first step of a ‘nascent EU investment screening mechanism’,351 and further steps will follow as day follows night. The EU and its Member States must tackle the legal, political, and economic challenges that are outlined above in Section 2. The fundamental question is how that struggle will turn out: Will strong common European voices ‘united in diversity’ prevail? The recent White Paper on levelling the playing field brings hope in that respect, and as a promising start this White Paper was corroborated by the German Monopolies Commission in July 2020,352 as well as by Germany’s programme for its 2020 Presidency of the Council of the EU.353 Or will national interests be the political force field that shapes the developments? Will Europe—despite the different national attitudes towards Chinese investments354—develop a coherent approach towards China, including fostering greater reciprocity in all policy areas and establishing a level playing field?355 Will the regulatory paradigm be decision-making by subsumption under abstract legal rules? Or will an approach that allows more political discretion gain support? It is, after all, notable to see the Franco-German initiative to enable political decisions in merger cases following the failed Siemens/Alstom merger356 or the German discussions on extending national merger authorisation by the federal minister.357 Will the catalytic impetus of the COVID-19 pandemic with its shift towards powerful government decision-making and exceptional stimulus packages to support the (national) economy open Pandora’s Box? Experts already expect more

351

Hindelang and Moberg (2020), p. 19 (forthcoming) (emphasis omitted). German Monopolies Commission (2020) Chinese state capitalism: A challenge for the European market economy, Excerpt from Chapter I of the Biennial Report XXIII of 29 July 2020, pp. 98 ff. 353 See the (somewhat camouflaged) reference in German Federal Foreign Office (2020) Together for Europe’s recovery—Programme for Germany’s Presidency of the Council of the EU from 1 July to 31 December 2020, p. 6. 354 Cf. above Sect. 4.1. 355 Cf. German Federal Foreign Office (2020) Together for Europe’s recovery—Programme for Germany’s Presidency of the Council of the EU from 1 July to 31 December 2020, pp. 21–23. 356 Cf. above Sect. 4.2.2. 357 Competent German minister Mr Altmaier authorised the Miba/Zollern merger in August 2019 (see German Federal Ministry for Economic Affairs and Energy (2019a) Altmaier: Minister’s Authorisation in the Miba/Zollern Procedure. Press release of 19.8.2019). This authorisation was heavily criticised; see German Monopolies Commission (2019) Planned Merger of Miba AG and Zollern GmbH & Co. KG – Special Opinion 81, pp. 42–44; Konrad (2020), pp. 244–247. 352

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cartels to emerge in the pandemic,358 and there is a striking increase of ‘our national economy first’ approaches.359 So European screening law and politics are at the crossroads of either convergent or divergent developments. For that reason alone, all stakeholders should make decisions wary that the new policy has features of a field of regulatory experimentation—a field that must be kept open for potential adaptations. This contribution argues for a common European approach: an approach that brings the national interests and perspectives together within a European framework. The Screening Regulation certainly builds the core for such an approach. Going beyond the Regulation, though, stakeholders like business organisations, law firms, and non-governmental organisations (NGOs) must have their say. Likewise, international experiences (as provided for by the OECD or the UNCTAD) must be integrated into the European developments more than has been the case to date. Screening parameters should be specified and fleshed out to the greatest extent possible—the open terms of security and public order bear a severe risk of decisions that camouflage a different agenda. It has recently been suggested by politicians that Europe should temporarily ban Chinese takeovers, arguing that China will be our biggest competitor in the future, in economic, social, and political terms.360 Such statements show how easily screening law could serve as a protectionist instrument instead of a regulatory means to prevent risks to security or public order. Two recent examples may illuminate that risk. The first is a COVID-19 motivated state acquisition of a minority share of Tübingen-headquartered CureVac, a clinical-stage biopharmaceutical company developing a COVID-19 vaccine. When the German Federal Republic acquired about 23% of CureVac’s shares for EUR 300 million despite critical voices,361 it officially argued with strikingly frank assertions of economic interests: ‘The measure of a participation is essentially

358 Global Competition Review News (21 April 2020) Coronavirus will likely lead to more cartels, ex-DOJ official warns, available at https://globalcompetitionreview.com/coronavirus-will-likelylead-more-cartels-ex-doj-official-warns. 359 The ‘our nation first’ approaches are a global phenomenon; cf. Japan’s subsidy to a Japanese company to shift production out of China as part of an effort to build more resilient supply chains (Nikkei Asian Review (21 April 2020) Japan preps first subsidy to company moving production out of China, available at https://asia.nikkei.com/Spotlight/Coronavirus/Japan-preps-first-subsidy-tocompany-moving-production-out-of-China); cf. also the linking of state support and required commitments to investments in France by French Minister Mr Le Maire, see Heise (22 May 2020) Frankreichs Wirtschaftsminister nennt Bedingungen für Renaults Rettung, available at https://www.heise.de/news/Frankreichs-Wirtschaftsminister-nennt-Bedingungen-fuer-RenaultsRettung-4726891.html. 360 EURACTIV/Reuters (18 May 2020) Europe should temporarily ban Chinese takeovers, Weber says, available at https://www.euractiv.com/section/economy-jobs/news/europe-should-temporar ily-ban-chinese-takeovers-weber-says/. 361 For example, Chairman of the German Monopolies Commission Wambach, see Mannheimer Morgen (16 Juni 2020) ‘Beteiligung birgt potenzielle Gefahr’, available at https://www. morgenweb.de/mannheimer-morgen_artikel,-wirtschaft-beteiligung-birgt-potenzielle-gefahr-_ arid,1650989.html.

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guided by the industrial policy objective of strengthening systemically important industries in Germany, such as in the field of medical biotechnology.’362 The second example is a national merger control decision. When the Chinese state-owned company CRRC Zhuzhou Locomotives Co., Ltd., filed for clearing the acquisition of Vosslo Locomotives GmbH (a German manufacturer specialising in shunters and the market leader in Europe), the competent German Federal Cartel Office indeed cleared the acquisition.363 It requires little fantasy to slightly adapt these cases. Imagine that a third country direct investor wishes to invest in a target, a portion of which is already held by the state—this certainly may influence the state’s screening decision. The critical phase for the future development of the ‘nascent’364 European screening law is now. This includes further fleshing out the concept of ‘third country direct investments’. To avoid a long night, only a common European approach with distinct mid- and long-terms perspective can provide the chances of developing a sustainable screening system.

References Legal Provisions and Legislative Material Convention establishing the European Free Trade Association, signed in Stockholm on 4 January 1960, revised by the Vaduz Convention signed on 21 June 2001. https://www.efta.int/sites/ default/files/documents/legal-texts/efta-convention/Vaduz%20Convention%20Agreement.pdf. Accessed 16 Sept 2020 Convention on the Organisation for Economic Co-operation and Development, done at Paris on 14 December 1960, entered into force 30 September 1961. 888 UNTS 179 Convention on the settlement of investment disputes between States and nationals of other States, opened for signature at Washington on 18 March 1965, entered into force 14 October 1966. 575 UNTS 159

362

German Bundestag Legislative Material 19/21251 of 24.7.2020, p. 2 (own translation); similar German Bundestag Legislative Material 19/21526 of 6.8.2020, p. 3. It must remain open whether or not the Trump administration intended to acquire CureVac; cf. German Bundestag Legislative Material 19/21251 of 24.7.2020, p. 2, and Bennhold K, Sanger DE (2020) U.S. Offered ‘Large Sum’ to German Company for Access to Coronavirus Vaccine Research, German Officials Say. The New York Times of 15 March 2020 (updated 2 April 2020). 363 German Federal Cartel Office, Decision of 27 April 2020, file no B4-115/19; see also German Federal Cartel Office (2020) Chinese company CRRC can acquire Vossloh’s shunter division. Press release of 27 April 2020. For an interpretation of this decision interplaying between merger control and FDI screening, see Covington Competition Post (28 April 2020) German Competition Authority Provides Guidance on the Interplay of Merger Control and FDI Screening, available at https:// www.covcompetition.com/2020/04/german-competition-authority-provides-guidance-on-the-inter play-of-merger-control-and-fdi-screening/. 364 Cf. Hindelang and Moberg (2020), p. 19 (forthcoming).

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European Commission, Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union, SWD(2017) 297 final, COM(2017) 487 final, 13.9.2017, 2017/0224 (COD) European Commission, Commission Staff Working Document Accompanying the document Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union, COM(2017) 487 final, SWD(2017) 297 final, 13.9.2017, available at https://eur-lex.europa.eu/legal-content/ EN/TXT/PDF/?uri¼CELEX:52017SC0297&from¼EN Bundestags-Drucksache 19/645 vom 06.02.2018 – Antwort der Bundesregierung: Know-howAbfluss aus Deutschland durch internationale Firmenübernahmen (Bundestag Legislative Material 19/645 of 6.2.2018 – Answer of the Federal Government: Know-how outflow from Germany through international company takeovers) European Committee of the Regions, Opinion on the Trade Package (2018/C 247/06) from the 128th CoR Plenary Session, 22.3.2018-23.3.2018, OJ C 247/28, 13.7.2018 European Economic and Social Committee, Opinion on the ‘Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union’ (COM(2017) 487 final — 2017/0224 (COD)) (2018/C 262/16) from the 534th EESC plenary session — renewal session, 18.4.2018-19.4.2018, OJ C 262/94, 25.7.2018 European Parliament, Committee on International Trade, Report on the proposal for a regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union (COM(2017)0487 – C8-0309/2017 – 2017/0224 (COD)), A8-0198/2018, 4.6.2018 Bundestags-Drucksache 19/4382 vom 18.09.2018 – Antwort der Bundesregierung: Übernahme von Anteilen des Übertragungsnetzbetreibers 50Hertz durch die KfW und Rolle der KfW bei der Finanzierung von fossilen Kraftwerksprojekten (Bundestag Legislative Material 19/4382 of 18.9.2018 – Answer of the Federal Government: Takeover of shares of the transmission system operator 50Hertz by KfW and role of KfW in financing fossil power plant projects) European Economic Area Standing Committee of the EFTA States, Procedures in the EEA EFTA States, the EFTA Secretariat and the EU for the incorporation of legislation into the EEA Agreement, Note by the Secretariat, 26 October 2018, Ref. 17-1402. Available at https://eealaw. efta.int/static/details. Accessed 15 Sept 2020 Zwölfte Verordnung zur Änderung der Außenwirtschaftsverordnung vom 19. Dezember 2018 (BAnz AT 28.12.2018 V1) (Twelfth Ordinance to Amend the German Foreign Trade and Payments Ordinance of 19.12.2018 (Federal Gazette AT 28.12.2018 V1)) Runderlass Außenwirtschaft Nr. 3/2018 – Zwölfte Verordnung zur Änderung der Außenwirtschaftsverordnung vom 19. Dezember 2018 (BAnz AT 28.12.2018 B1) (Circular Foreign Trade No 3/2018 – Twelfth Ordinance to Amend the German Foreign Trade and Payments Ordinance of 19.12.2018 (Federal Gazette AT 28.12.2018 B1)) European Parliament, Legislative resolution of 14 February 2019 on the proposal for a regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union (COM(2017)0487 – C8-0309/2017 – 2017/0224 (COD)), P8_TA-PROV(2019)0121 OECD (2019) OECD Codes of Liberalisation—User’s Guide. Available at http://www.oecd.org/ investment/investment-policy/38072327.pdf. Accessed 15 Sept 2020 Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, OJ L 29, 31.1.2020, pp 7–187 Notice concerning the entry into force of the Agreement on the Withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, OJ L 29, 31.1.2020, pp 189–189

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Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, An SME Strategy for a sustainable and digital Europe, COM(2020) 103 final, 10.3.2020 Communication from the Commission, Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak (2020/C 91 I/01), OJ C 91I, 20.3.2020, pp 1–9 Communication from the Commission, Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452 (FDI Screening Regulation), C(2020) 1981 final of 25.3.2020, OJ C 99I, 26.3.2020, pp 1–5 Communication from the Commission, Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak (2020/C 116 I/02), OJ C 116I, 8.4.2020, pp 7–10 Decreto-legge 8 aprile 2020, n. 23, convertito, con modificazioni, dalla legge 5 giugno 2020, n. 40 (Italian Decree-Law of 8 April 2020, no 23, implemented, with modifications by Law of 5 June 2020, no 40) Bundestags-Drucksache 19/18895 vom 04.05.2020 – Gesetzentwurf der Bundesregierung: Entwurf eines Ersten Gesetzes zur Änderung des Außenwirtschaftsgesetzes und anderer Gesetze (Bundestag Legislative Material 19/18895 of 4.5.2020 – Draft Act of the Federal Government: Draft of a First Act to Amend the German Foreign Trade and Payments Act and Other Acts) Fünfzehnte Verordnung zur Änderung der Außenwirtschaftsverordnung vom 25. Mai 2020 (BAnz AT 02.06.2020 V1) (Fifteenth Ordinance to Amend the German Foreign Trade and Payments Ordinance of 25.5.2020 (Federal Gazette AT 02.06.2020 V1)) Runderlass Außenwirtschaft Nr. 3/2020 – Fünfzehnte Verordnung zur Änderung der Außenwirtschaftsverordnung vom 25. Mai 2020 (BAnz AT 02.06.2020 B2) (Circular Foreign Trade No 3/2020 – Fifteenth Ordinance to Amend the German Foreign Trade and Payments Ordinance of 25.5.2020 (Federal Gazette AT 02.06.2020 B2)) Zakon o interventnih ukrepih za omilitev in odpravo posledic epidemije COVID-19 (ZIUOOPE), Datum začetka veljavnosti: 31.05.2020, Uradni list RS, št. 80/20 (Slovenian Act Determining the Intervention Measures to Mitigate and Remedy the Consequences of the COVID-19 Epidemic, Date of entry into force: 31 May 2020, Official Gazette of the Republic of Slovenia, No. 80/20). Available at http://pisrs.si/Pis.web/pregledPredpisa?id¼ZAKO8206 White Paper on levelling the playing field as regards foreign subsidies, COM(2020) 253 final, 17.6.2020 Erstes Gesetz zur Änderung des Außenwirtschaftsgesetzes und anderer Gesetze vom 10. Juli 2020 (BGBl. I S. 1637) (First Act to Amend the German Foreign Trade and Payments Act and other Acts of 10.7.2020 (Federal Law Gazette I p 1637)) Bundestags-Drucksache 19/21251 vom 24.07.2020 – Antwort der Bundesregierung: Beteiligung des Bundes an der Curevac AG (Bundestag Legislative Material 19/21251 of 24.7.2020 – Answer of the Federal Government: Participation of the Federal Republic in CureVac AG) Bundesgesetz über die Kontrolle von ausländischen Direktinvestitionen 2020 (Investitionskontrollgesetz - InvKG) BGBl I 87/2020 (Austrian Federal Act on the Control of Foreign Direct Investments 2020 (Investment Control Act - ICA) Federal Law Gazette I 87/2020). Available at https://www.ris.bka.gv.at/eli/bgbl/I/2020/87/20200724 Bundestags-Drucksache 19/21526 vom 06.08.2020 – Antwort der Bundesregierung: Beteiligung des Bundes/der KfW bei CureVac – Teil 2 (Bundestag Legislative Material 19/21526 of 6.8.2020 – Answer of the Federal Government: Participation of the Federal Republic/of the KfW in CureVac – Part 2) European Commission (2020a) MEMO - Frequently asked questions on Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the Union. Available at https://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157945.pdf. Accessed 16 Sept 2020 OECD (2020) OECD Code of Liberalisation of Capital Movements. Available at http://www.oecd.org/ investment/investment-policy/Code-capital-movements-EN.pdf. Accessed 15 Sept 2020

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OECD (2020) OECD Code of Liberalisation of Current Invisible Operations. Available at http:// www.oecd.org/investment/investment-policy/InvisibleOperations_WebEnglish.pdf. Accessed 15 Sept 2020 EFTA (2020) EEA-Lex. Available at https://www.efta.int/eea-lex. Accessed 15 Sept 2020 Der Bundesrat (2020a) Übereinkommen zur Errichtung der Europäischen Freihandelsassoziation (EFTA). Available at https://www.admin.ch/opc/de/classified-compilation/19600001/index. html. Accessed 11 Sept 2020 Eidgenössisches Departement für auswärtige Angelegenheiten EDA (2020) Liste der Abkommen Schweiz - Europäische Union, in Kraft am 1. Available at August 2020. https://www.eda.admin. ch/dam/dea/de/documents/publikationen_dea/accords-liste_de.pdf. Accessed 12 Sept 2020 Der Bundesrat (2020b) Register. Available at https://www.admin.ch/opc/de/european-union/ international-agreements/index.html. Accessed 11 Sept 2020

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Judgment of the Court of 12 September 2006, Cadbury Schweppes plc, Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, C-196/04, ECLI:EU:C:2006:544 Judgment of the Court of 12 December 2006, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, C-446/04, ECLI:EU:C:2006:774 Judgment of the Court of 13 March 2007, Test Claimants in the Thin Cap Group Litigation v Commissioners of Inland Revenue, C-524/04, ECLI:EU:C:2007:161 Judgment of the Court of 10 May 2007, Lasertec Gesellschaft für Stanzformen mbH v Finanzamt Emmendingen, C-492/04, ECLI:EU:C:2007:273 Judgment of the Court of 24 May 2007, Winfried L. Holböck v Finanzamt Salzburg-Land, C-157/05, ECLI:EU:C:2007:297 Judgment of the Court of 6 December 2007, Columbus Container Services BVBA & Co. v Finanzamt Bielefeld-Innenstadt, C-298/05, ECLI:EU:C:2007:754 Judgment of the Court of 23 October 2008, Finanzamt für Körperschaften III in Berlin v Krankenheim Ruhesitz am Wannsee-Seniorenheimstatt GmbH, C-157/07, ECLI:EU: C:2008:588 Judgment of the Court of 26 March 2009, Commission of the European Communities v Italian Republic, C-326/07, ECLI:EU:C:2009:193 Judgment of the Court of 17 September 2009, Glaxo Wellcome GmbH & Co. KG v Finanzamt München II, C-182/08, ECLI:EU:C:2009:559 Judgment of the Court of 12 November 2009, Christian Grimme v Deutsche AngestelltenKrankenkasse, C-351/08, ECLI:EU:C:2009:697 Judgment of the Court of 11 February 2010, Fokus Invest AG v FinanzierungsberatungImmobilientreuhand und Anlageberatung GmbH (FIAG), C-541/08, ECLI:EU:C:2010:74 Judgment of the Court of 21 October 2010, Idrima Tipou AE v Ipourgos Tipou kai Meson Mazikis Enimerosis, C-81/09, ECLI:EU:C:2010:622 Judgment of the Court of 28 October 2010, Établissements Rimbaud SA v Directeur général des impôts, Directeur des services fiscaux d’Aix-en-Provence, C-72/09, ECLI:EU:C:2010:645 Judgment of the Court of 11 November 2010, European Commission v Portuguese Republic, C-543/08, ECLI:EU:C:2010:669 Judgment of the Court of 10 February 2011, Haribo Lakritzen Hans Riegel BetriebsgmbH (C-436/08), Österreichische Salinen AG (C-437/08) v Finanzamt Linz, Joined Cases C-436/08 and C-437/08, ECLI:EU:C:2011:61 Judgment of the Court of 5 May 2011, Prunus SARL, Polonium SA v Directeur des services fiscaux, C-384/09, ECLI:EU:C:2011:276 Judgment of the Court of 29 November 2011, National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond / kantoor Rotterdam, C-371/10, ECLI:EU:C:2011:785 Judgment of the Court of 19 July 2012, Marianne Scheunemann v Finanzamt Bremerhaven, C-31/11, ECLI:EU:C:2012:481 Judgment of the Court of 6 September 2012, Deutsches Weintor eG v Land Rheinland-Pfalz, C-544/10, ECLI:EU:C:2012:526 Judgment of the Court of 8 November 2012, European Commission v Hellenic Republic, C-244/11, ECLI:EU:C:2012:694 Judgment of the Court of 13 November 2012, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, The Commissioners for Her Majesty’s Revenue & Customs, C-35/11, ECLI:EU:C:2012:707 Judgment of the Court of 22 January 2013, Sky Österreich GmbH v Österreichischer Rundfunk, C-283/11, ECLI:EU:C:2013:28 Judgment of the Court of 26 February 2013, Åklagaren v Hans Åkerberg Fransson, C-617/10, ECLI:EU:C:2013:105 Judgment of the Court of 26 September 2013, Texdata Software GmbH, C-418/11, ECLI:EU: C:2013:588 Judgment of the Court of 5 June 2014, X BV, TBG Limited v Staatssecretaris van Financiën, Joined Cases C-24/12 and C-27/12, ECLI:EU:C:2014:1385

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Judgment of the Court of 11 September 2014, Kronos International Inc. v Finanzamt Leverkusen, C-47/12, ECLI:EU:C:2014:2200 Judgment of the Court of 10 June 2015, X AB v Skatteverket, C-686/13, ECLI:EU:C:2015:375 Judgment of the Court of 16 July 2015, ClientEarth v European Commission, C-612/13 P, ECLI: EU:C:2015:486 Judgment of the Court of 26 May 2016, Envirotec Denmark ApS v Skatteministeren, C-550/14, ECLI:EU:C:2016:354 Judgment of the Court of 21 December 2016, Anonymi Geniki Etairia Tsimenton Iraklis (AGET Iraklis) v Ypourgos Ergasias, Koinonikis Asfalisis kai Koinonikis Allilengyis, C-201/15, ECLI: EU:C:2016:972 Judgment of the Court of 16 May 2017, Berlioz Investment Fund SA v Directeur de l’administration des contributions directes, C-682/15, ECLI:EU:C:2017:373 European Commission, Decision of 30 May 2017, Case M.8465 – Vivendi / Telecom Italia, C(2017) 3834 final, 30.5.2017 Commission Decision of 29 November 2017 setting up the group of experts on the screening of foreign direct investments into the European Union, C(2017) 7866 final, 29.11.2017 Opinion of Advocate General Wathelet delivered on 7 February 2018, EV v Finanzamt Lippstadt, C-685/16, ECLI:EU:C:2018:70 Judgment of the Court of 12 April 2018, European Commission v Kingdom of Belgium, C-110/17, ECLI:EU:C:2018:250 Judgment of the Court of 20 September 2018, EV v. Finanzamt Lippstadt, C-685/16, ECLI:EU: C:2018:743 Summary of Commission Decision of 6 February 2019 declaring a concentration to be incompatible with the internal market and the functioning of the EEA Agreement (Case M.8677 — Siemens/ Alstom), OJ C 300/14, 5.9.2019 Judgment of the Court of 26 February 2019, X GmbH v Finanzamt Stuttgart — Körperschaften, C-135/17, ECLI:EU:C:2019:136 Opinion of Advocate General Campos Sánchez-Bordona of 18 December 2019, Vivendi SA v Autorità per le Garanzie nelle Comunicazioni, C-719/18, ECLI:EU:C:2019:1101 Bundeskartellamt, Beschluss vom 27. April 2020, Az. B4-115/19 (German Federal Cartel Office, Decision of 27 April 2020, file no B4-115/19). English case summary available at https://www. bundeskartellamt.de/SharedDocs/Entscheidung/EN/Fallberichte/Fusionskontrolle/2020/B4115-19.pdf?__blob¼publicationFile&v¼5. Accessed 15 Sept 2020 Judgment of the Court of 3 September 2020, Vivendi SA v Autorità per le Garanzie nelle Comunicazioni, C-719/18, ECLI:EU:C:2020:627

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germany/germany-presses-for-changes-in-eu-competition-rules-after-siemens-alstom-dealblocked-idUSKCN1PV1BO. Accessed 15 Sept 2020 Rytter Sunesen E, Henriksen JJ (2020) The economics of FDI screening. In: Bourgeois JHJ (ed) EU framework for foreign direct investment control. Kluwer Law International, Alphen aan den Rijn, pp 3–21 Schill S (2020) Foreign direct investment control: rising protectionism or instrument for further investment liberalization? In: Bourgeois JHJ (ed) EU framework for foreign direct investment control. Kluwer Law International, Alphen aan den Rijn, pp 57–75 Schladebach M, Becker F (2019) Die Verschärfung der Investitionskontrolle im deutschen und europäischen Außenwirtschaftsrecht. Neue Zeitschrift für Verwaltnungsrecht 15:1076–1080 Schmidt J (2020) COVID-19: EU-Leitlinien zur Prüfung ausländischer Direktinvestitionen. Europäische Zeitschrift für Wirtschaftsrecht 8:301 Schmidt J, Meckl R (2020) COVID-19 und der Rechtsrahmen zur Überprüfung ausländischer Direktinvestitionen – ein wirksamer Schutz vor Übernahmen europäischer Unternehmen? Analyse und Überprüfung aus ökonomischer und juristischer Perspektive. Betriebsberater 22-23:1218–1226 Schulz O (2018) Alter Name – neue Wege. AWPrax 2018:57–59 Sedlaczek M, Züger M (2018) Art. 64 AEUV. In: Streinz R (ed) EUV/AEUV, 3rd edn. C. H. Beck, München Söhner M (2011) Sicherheitenstellungen und Außenwirtschaftsrecht – Prüfungskompetenz und Untersagungsrecht des BMWi nach § 7 Abs. 1 Nr. 4, 2 Nr. 6 AWG, § 53 Abs. 1 AWV. Recht der internationalen Wirtschaft 7:454–462 Stefánsson SM (2016) Die Kapitalverkehrsfreiheit in der Europäischen Union und im Europäischen Wirtschaftsraum. Europarecht 6:706–724 Stöbener de Mora PS (2020) EU-Wirtschaftspolitik: Neue KMU-Strategie der EU-Kommission. Europäische Zeitschrift für Wirtschaftsrecht 8:302–303 Sprecher F (2011) Die Schweiz im europäischen Verwaltungsrechtsraum: Mitten drin oder außen vor? In: Debus AG et al (eds) 51. Assistententagung Öffentliches Recht – Verwaltungsrechtsraum Europa. Nomos, Baden-Baden, p 253–284 The New York Times (15 March 2020, updated 2 April 2020) U.S. Offered ‘Large Sum’ to German Company for Access to Coronavirus Vaccine Research, German Officials Say. Available at https://www.nytimes.com/2020/03/15/world/europe/cornonavirus-vaccine-us-germany.html. Accessed 14 Sept 2020 UNCTAD (2000) World Investment Report 2000—Cross-border Mergers and Acquisitions and Development. Available at https://unctad.org/en/Docs/wir2000_en.pdf. Accessed 15 Sept 2020 UNCTAD (2019) National Security-related Screening Mechanisms For Foreign Investment—An Analysis Of Recent Policy Developments, Investment Policy Monitor, Special Issue December 2019. Available at https://unctad.org/en/PublicationsLibrary/diaepcbinf2019d7_en.pdf. Accessed 29 Aug 2020 UNCTAD (2020) About UNCTAD. Available at https://unctad.org/en/Pages/aboutus.aspx. Accessed 16 Sept 2020 Voland T (2009) Freitag, der Dreizehnte – Die Neuregelungen des Außenwirtschaftsrechts zur verschärften Kontrolle ausländischer Investitionen. Europäische Zeitschrift für Wirtschaftsrecht 15:519–523 Wikipedia: The Free Encyclopedia (2020) Tempora mutantur. Available at https://en.wikipedia. org/wiki/Tempora_mutantur. Accessed 12 Sept 2020 WilmerHale (24 July 2017) German Government Amends German Foreign Trade and Payments Ordinance to Widen Control of Foreign Takeovers of Critical German Companies. Available at https://www.wilmerhale.com/en/insights/client-alerts/2017-07-24-german-governmentamends-german-foreign-tradea-and-payments-ordinance-to-widen-control-of-foreign-take overs-of-critical-german-companies. Accessed 15 Sept 2020

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Lars S. Otto, LLM (LSE) works as Rechtsanwalt (lawyer) in Berlin, where he advises national and international clients in a wide range of public law and regulatory matters, including foreign direct investments. He also offers counsel in public policy and legislative affairs matters. Since 2017, he has been with Wilmer Cutler Pickering Hale and Dorr LLP. In addition to his professional work, he has been a regular visiting lecturer at Humboldt University of Berlin since 2017. Before joining WilmerHale, Lars worked for several years as a research assistant at the Walter Hallstein Institute for European Constitutional Law, Chair for Public Law, International Law and European Law (Prof. Dr. Dres. h.c. Ingolf Pernice) at the Faculty of Law, Humboldt University of Berlin (2008–2009? 2010–2016). During his legal clerkship (2015–2017), he gained working experience, i.a., at the German Federal Constitutional Court and at the directorate for constitutional law and policy of the German Federal Ministry of the Interior. Lars received his Master of Laws degree at the London School of Economics and Political Science (LSE) in 2010. His research, publications, and teaching focus on questions of constitutional, administrative, and European law.

Building Pipelines: Experiences with Formal and Informal Screening Mechanisms Barbara Kaech and Moritz Wüstenberg

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The Nord Stream 1 v. Nord Stream 2 Pipelines: Experiences in Regulatory Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Experiences from Formal and Informal Screening Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Domestic Measures: Competition and Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 EU Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 The Risk of Third Country Intervention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 European Investment Screening Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 The Impact on the Building of Pipelines: Positive Changes? . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract Following the example of a number of countries, the European Union recently introduced a regulation for a screening mechanism for foreign direct investments. Also preceding the formal EU-wide screening mechanism, major foreign investments, such as pipelines, could be screened by EU Member States, either formally or informally. The Nord Stream 2 (NSP2) pipeline project has been subject to a number of measures in the different phases of its investment that could be understood as informal screening processes. Such measures have been taken not only by the EU and its Member States but also by the United States in the form of extraterritorial sanction threats. In this chapter, experiences with these mechanisms are discussed with the aim of determining whether a common approach, as adopted in the EU, is necessary and desirable.

B. Kaech (*) Nord Stream 2 AG, Zug, Switzerland e-mail: [email protected] M. Wüstenberg University of Eastern Finland Law School, Joensuu, Finland © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 589–604, https://doi.org/10.1007/16495_2020_23, Published online: 31 July 2020

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1 Introduction The Nord Stream 2 (NSP2) pipeline project was launched on the basis of the good permitting,1 regulatory and execution experiences from the Nord Stream 1 (NSP) pipeline project. Planned to run along a similar route, with indistinguishable technical characteristics, the expectation was to rely on the solid legal framework that proved to be successful for the NSP. The anticipation was that the NSP2 pipeline project could be built in a similar regulatory and legal framework as its sister pipeline had been built. Only some two years after the project had been initiated in 2015, with significant funds committed, the expectations of regulatory and legal certainty were vanishing. Next to the retroactive introduction of national laws that placed unforeseen onus on the project, EU Member States and EU institutions took various measures aimed at complicating the NSP2 project.2 First, the Commission suggested that the existing directive (Gas Directive 2009/ 73)3 could be applied to import pipelines, but this was rejected by commentators and the EU’s legal services. Subsequently, the Commission requested to negotiate an intergovernmental agreement with Russia for the operation of the NSP2 pipeline. This was found to be unnecessary and only a matter of political choice by the EU’s own legal services.4 Finally, the Commission decided to simply amend the existing Directive so that it would apply to import pipelines.5 As will be discussed in this chapter, this amendment was not only directed at a single project, the NSP2 pipeline, but it was also implemented in a manner to avoid negative impact on all other pipelines. This approach was, as further elaborated below, not only discriminatory but also lacked transparency and violated expectations of legal certainty.6 Next to measures taken by the EU, some EU Member States as well as third countries have taken various legislative and administrative steps to influence the

1

See on this: Kaech in: Ehlers et al. (2010), p. 89 et seq. See on this: Talus (2017a), European Commission (2017) Nord Stream 2 - Divide et Impera Again? Avoiding a Zero-Sum Game. https://ec.europa.eu/epsc/publications/other-publications/ nord-stream-2-%E2%80%93-divide-et-impera-again_en. Accessed 06.1.2020. 3 Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC, OJ L 211, 14.8.2009, pp. 94–136. 4 Council of the European Union (27 September 2017), Opinion of the legal service, Recommendation for a Council decision authorizing the opening of negotiations on an agreement between the European Union and the Russian Federation on the operation of the Nord Stream 2 pipeline, Brussels, 12590/17, para. 25. 5 Directive (EU) 2019/692 of the European Parliament and of the Council of 17 April 2019 amending Directive 2009/73/EC concerning common rules for the internal market in natural gas, OJ L 117, 3.5.2019, pp. 1–7. 6 Euractiv (29 May 2019b) Exploring the limits of EU’s unbelievable behaviour on Nord Stream 2. Available at: https://www.euractiv.com/section/energy/opinion/exploring-the-limits-of-eus-unbe lievable-behaviour-on-nord-stream-2/. 2

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investment and building of the NSP2 pipeline. While Denmark took legislative steps to make the attainment of pipe laying permits more onerous, Polish competition authorities made objections to the ownership and financing structure behind the NSP2 project. In addition to these local measures, the United States have continued to use the threat of extraterritorial sanctions that could hamper the building of the pipeline. Before the introduction of the Foreign Direct Investment (FDI) Screening Regulation in March 2019 (which will enter into force in October 2020), the EU itself was the only major trading block that did not have a FDI screening mechanism. Nonetheless investments in certain economic sectors, such as the energy sector, are subject to various national permits and approvals in Member States, as well as continuous supervision. While these do not constitute formal screening,7 this type of informal screening may be very burdensome for investors.

2 The Nord Stream 1 v. Nord Stream 2 Pipelines: Experiences in Regulatory Treatment In their technical specifications and route, the NSP and NSP2 pipelines are nearly indistinguishable. Both are designed to transmit a maximum of 55 bcm/year of Russian natural gas from Russia to a landing point near Greifswald in Germany. While the originally planned route for the NSP2 pipeline would have run in parallel to the NSP apart from the Russian section, changes in Danish permitting laws, after the NSP2 permitting process had already started, required a rerouting from a course through the territorial sea, similar to the one suggested and approved by the Danish authorities for the NSP pipeline, to one in the exclusive economic zone (EEZ) only. On the EU level, the regulatory treatment accorded to the two pipeline projects has been very divergent. While the NSP pipeline was classified as a project of common interest (PCI),8 the EU and some of its Member States have taken a number of measures to frustrate the building of the NSP2 pipeline, the broadest measures being an amendment to the central regulatory framework.9 This shift in regulatory treatment is somewhat surprising and primarily politically driven as there seem to be no commercial, economic or environmental reasons or benefits for it. On the contrary, with domestic natural gas production in the EU declining, more natural gas will have to be imported. Additionally, the German decision to phase out energy production by coal will increase demand for natural gas.

7 See in this volume, Bent Ole Gram Mortensen, Existing EU Secondary Legislation on (Discriminatory) Treatment of Third Country Investments in the Energy Sector, section 3. 8 Decision No 1364/2006/EC of the European Parliament and of the Council of 6 September 2006 laying down guidelines for trans-European energy networks and repealing Decision 96/391/EC and Decision No 1229/2003/EC, OJ L 262, 22.9.2006, p. 1-23, Annex I, NG.1. 9 See on this: Yafimava (2019).

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At the EU level, the fact that natural gas is an important transition fuel is also acknowledged.10 While demand could also be met by increased LNG imports, from the environmental perspective, pipelines such as the NSP2 are often superior as they transport gas with lower greenhouse intensity (Fig. 1).11

3 Experiences from Formal and Informal Screening Mechanisms With the introduction of the FDI Screening Regulation12 in 2019, the EU followed the example of many other countries to screen foreign direct investment on security and public order grounds. Already prior to the introduction of the FDI Screening Regulation, different Member States implemented either formal or informal screening mechanisms on the domestic sphere. In the process of building the NSP2 pipeline, informal screening mechanisms, as applied by EU Member States and the EU’s institutions, have played a key role and have had an impact on ownership and financing structures, as well as the route along which the pipeline is laid. Moreover, even third countries have intervened in the building of the pipeline through the threat of direct or indirect sanctions. In this part, the key experiences that the NSP2 pipeline project has had with such primarily informal screening mechanisms are discussed.

3.1

Domestic Measures: Competition and Security

In the course of the project’s different investment phases, the NSP2 pipeline has been confronted with major domestic obstacles in Poland and Denmark. Although the pipeline does not cross Polish territory, domestic measures were taken under competition law. With the planned route of the NSP2 pipeline running through Danish territorial waters, Denmark had the ability to exert jurisdictional claims

Euractiv (18 September 2019a) ‘We need this dinosaur’: EU lifts veil on gas decarbonisation strategy. Available at: https://www.euractiv.com/section/climate-strategy-2050/news/new-gas-pos sibilities-in-focus-as-commission-prepares-decarbonisation-strategy/. 11 Nord Stream 2 (10 April 2017) Greenhouse Intensity of Natural Gas Transport – Comparing the Nord Stream 2 Pipeline to LNG Import Alternatives. Available at: https://www.nord-stream2.com/ media-info/commentary-analysis/greenhouse-intensity-of-natural-gas-transport-comparing-thenord-stream-2-pipeline-to-lng-import-alternatives-8/. 12 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 79I, 21.3.2019, pp. 1–14. 10

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Fig. 1 Nord Stream 2 Base case and alternate routes © Nord Stream 2 AG

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over the pipeline.13 Retroactive changes to regulations relevant to pipe laying eventually caused the NSP2 pipeline to be routed through the exclusive economic zone where international law guarantees the right to lay pipelines.14

3.1.1

Challenges Under Polish Competition Law

Initially the NSP2 pipeline project was intended to be owned by a joint venture of companies from the EU and Russia.15 This plan was, however, thwarted as the application to form this joint venture, as required by Polish competition law,16 was objected to by the Polish Office of Competition and Consumer Protection (Polish Competition Office) as it was considered to lead to anti-competitive market concentration.17 In contrast to this, a similar German requirement was treated as a mere formality.18 In consequence of these objections, the joint venture model was not pursued19 and the EU companies agreed to act as financial investors in the building of the pipeline, while Gazprom would be the sole owner of the company operating the NSP2 pipeline. This co-financing model was then also challenged by the Polish Competition Office as being an attempt to circumvent the previously proposed joint venture model.20 These proceedings are ongoing at the time of writing. This Polish experience shows how informal screening mechanisms can be used to pursue what may be seen as primarily political objectives. As the 2019 OPAL judgement shows, Poland has an interest in maintaining gas flows through the transmission pipelines spanning its territory.21 The NSP2 pipeline would enable greater quantities of gas to flow directly from Russia to Germany and could consequently reduce income from transit fees for Poland.

13 Under Article 2(1) of the United Nations Convention on the Law of the Seas (UNCLOS), the Sovereignty of a state extends beyond the land territory over what is defined as the Territorial Sea. 14 Article 58 of the UNCLOS includes the right to lay pipelines in the Exclusive Economic Zone. 15 Wintershall Nederland B.V., Shell Exploration and Production (LXXI) B.V., ENGIE SA, E.ON Global Commodities SE (now UNIPER SE), and PAO Gazprom. 16 Act of 16 February 2007 on Competition and Consumer Protection. Available at: https://www. uokik.gov.pl/competition_protection.php. 17 Office of Competition and Consumer Protection (2016) UOKiK issues objections to a concentration - Nord Stream 2. Available at: https://www.uokik.gov.pl/news.php?news_id¼12477. 18 Lang and Westphal (2016), p. 10. 19 Nord Stream 2 AG (2016) Joint Press Release of ENGIE, Gazprom, OMV, Shell, Uniper, Wintershall and Nord Stream 2 AG. Available at: https://www.nord-stream2.com/media-info/ news-events/joint-press-release-of-engie-gazprom-omv-shell-uniper-wintershall-and-nord-stream2-ag-22/. 20 Office of Competition and Consumer Protection (2018) UOKiK against Nord Stream 2. Available at: https://www.uokik.gov.pl/news.php?news_id¼14323. 21 Judgment of the General Court (First Chamber, Extended Composition) of 10 September 2019, Poland v Commission, Case T-883/16, ECLI:EU:T:2019:567, para. 62–64.

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‘Investment Screening’ Under the Danish Continental Shelf Act

In April 2017, an application for a permit for the construction of the NSP2 pipeline in Danish territorial waters was submitted to the Danish Energy Agency (DEA). The suggested route would have been the most obvious one, following a route similar to that of the NSP pipeline. Pursuant to the submission of the permit application, the Danish government moved to amend the Continental Shelf Act22 to allow for an evaluation of pipeline projects crossing through its territorial water for their effect on the nation’s foreign policy, security and defence interests.23 Consequently, the DEA could no longer make a decision on its own, but a binding recommendation from the Danish Foreign Minister was required. This was made applicable also to ongoing permitting procedures, the only one at that time being NSP2. In effect, this enabled the blocking of the building of new infrastructure in Danish territorial waters on political grounds, and NSP2 withdrew the permit application for this particular route in June 2019 after no recommendation had been made by the Minster of Foreign Affairs after nearly 18 months. From the investor’s perspective, the new law raises several legal and practical questions. For one, it is limited to pipeline projects and does not cover, for example, cables that arguably carry similar perceived risks. From the point of view of legal certainty, the circumstance that a recommendation from the Foreign Minister is required unduly politicizes an administrative process. As the Foreign Minister makes a recommendation and not a decision, the possibilities to formally appeal are very limited. Moreover, there is no time frame in which the recommendation has to be made, and the recommendation does not have to be justified. Finally, the new law was applied retroactively, applying to pending applications without a transitional period.

3.2

EU Measures

In 2009, the EU introduced the Third Energy Package with the objective of achieving a higher degree of liberalization on the EU’s energy markets through, inter alia, stronger unbundling rules. While commentators have questioned whether the Third Energy Package led to greater liberalization or in fact caused more intensive public sector involvement,24 the immediate effect on third countries was primarily limited

22 Bekendtgørelse af lov om kontinentalsoklen og visse rørledningsanlæg på søterritoriet (consolidated Act on the Continental Shelf and Certain Pipeline Installations). Available at: https://www. retsinformation.dk/Forms/R0710.aspx?id¼202937. 23 OSW (6 December 2017) Nord Stream 2: Denmark’s playing for time. Available at: https://www. osw.waw.pl/en/publikacje/analyses/2017-12-06/nord-stream-2-denmarks-playing-time. 24 Talus (2017b), pp. 380–381.

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to Article 11 of the Gas Directive, the so-called ‘third country clause’. Pursuant to the ‘third country clause’, natural gas operators that were owned by third country persons may not put at risk the security of the supply to the union if these want to operate in the EU. Beyond this, it was apparent that the application of Third Energy Package was limited to the domestic markets.25

3.2.1

The Amendment of the Directive:Changing the Rules Mid-Game

When initial assertions by the Commission that the Gas Directive would apply to import pipelines were generally found to be incorrect,26 the Commission called for a mandate to negotiate an intergovernmental agreement with Russia for the operation of the NSP2 pipeline in 2017. The Commission considered this necessary as the pipeline would otherwise operate in a ‘legal void’ and that there would be a risk of ‘conflict of laws’.27 Following an opinion of the legal services of the Council that the negotiations of such an intergovernmental agreement was not necessary and would only be a matter of political choice,28 the Commission changed tactic and decided to table a proposal to amend the Gas Directive in a manner that would make it applicable to import pipelines also.29 Finally, this was achieved by changing the definition of an interconnector,30 viz. a transmission line which crosses or spans a border between Member States for the sole purpose of connecting the national transmission systems of those Member States,31 to also include transmissions lines between a Member State and a third country up to the territory of the Member States or the territorial sea of that Member State.32 In order to enable major new infrastructure investments and avoid the retroactive application of the rules to existing pipelines, a derogation for existing pipelines was 25

Talus (2017c), pp. 30–42. See for example: Talus and Wüstenberg (2017), pp. 138–147; Goldthau (2016). 27 European Commission Press Release (9 June 2017), Commission seeks a mandate from Member States to negotiate with Russia an agreement on Nord Stream 2, IP/17/1571. 28 Council of the European Union (27 September 2017) Opinion of the legal service, Recommendation for a Council decision authorizing the opening of negotiations on an agreement between the European Union and the Russian Federation on the operation of the Nord Stream 2 pipeline, Brussels, 12590/17. 29 Council of the European Union (13 November 2017) Proposal for a Directive of the European Parliament and of the Council amending Directive 2009/73/EC concerning common rules for the internal market in natural gas, Brussels, 2017/0294 (COD). 30 An interconnector is a structure that enables energy flows between networks of different countries. 31 Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC, OJ L 211, 14.8.2009, pp. 94–136, article 2(17). 32 Directive (EU) 2019/692 of the European Parliament and of the Council of 17 April 2019 amending Directive 2009/73/EC concerning common rules for the internal market in natural gas, OJ L 117, 3.5.2019, pp. 1–7, article 2(17). 26

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introduced through new Article 49a, and the exemption regime for new infrastructure, enshrined in Article 36 of the Gas Directive, was extended to import pipelines. However, while the exemption regime is only available for investments that would not take place ‘unless an exemption was granted’,33 the newly introduced derogation is available only for transmission lines completed before 23 May 2019.34 Since the NSP2 pipeline project was being built at the time of the introduction of the amended Gas Directive, the amended Gas Directive suggests that it is eligible neither for an exemption nor a derogation. The temporal gap between these two options, taken together with the fact that the NSP2 pipeline is the only one falling into this gap, lays bare the discriminatory nature of the change in legal framework. Given the discriminatory nature and detrimental effect the amendment to the Gas Directive has on the NSP2 project, Nord Stream 2 AG filed an application for annulment of the amendment pursuant to Article 263 of the Treaty on the Functioning of the European Union (TFEU).35 The application sets out that the principles of equal treatment, proportionality and legal certainty were infringed and that the EU misused its powers and breached essential procedural requirements. Although a company has to date never successfully challenged an EU directive directly, given the controversial and discriminatory circumstances under which the Gas Directive amendment was made, this case may be groundbreaking in this regard.36 Substantively, the NSP2 pipeline is treated in a discriminatory manner as it is treated differently compared to other pipelines without an objective justification. This is due to the circumstance that unlike all other offshore import pipelines, the NSP2 pipeline appears not to be eligible for a derogation or an exemption under the amended Gas Directive. The amended Gas Directive therefore appears to infringe several key principles of EU law. Moreover, as the Directive will have to be adopted into German law, questions in relation to conformity with German constitutional law may arise. Despite of the general supremacy of EU law, in its implementation, certain principles of domestic constitutional law, such as the right to property and equal treatment, may be encroached on whenever a Directive leaves discretion to the Member States.37

33

Ibid., article 36(1)(b). Ibid., article 49(a). 35 Case T-526/19, Nord Stream 2 AG v Council and European Parliament. 36 For admissibility under TFEU Article 263, it will have to be shown that the amendment is of direct and individual concern to the applicant. A measure will be of direct concern where it directly affects the legal situation of the applicant and where there is no genuine discretion for the Member State implementing it (Judgment of the General Court (Fourth Chamber, Extended Composition) of 25 October 2011, Microban International and Microban (Europe) v Commission, Case T-262/10, EU:T:2011:623). Individual concern arises, where while a measure is not addressed to the applicant, that measures affects the applicant relative to others, as if it were the addressee of the act (Judgment of the Court of 15 July 1963, Plaumann v Commission, Case C-25/62, EU:C:1963:17). These admissibility criteria are arguably met in the circumstances surrounding the Gas Directive amendment and its effect on the NSP2 pipeline. 37 See for example: Ravluševičius (2011), pp. 1369–1388. 34

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Beyond violating EU law, the Gas Directive amendment also infringes the EU’s treaty commitments under the Energy Charter Treaty (ECT). As an investor of a contracting party, the Nord Stream 2 AG has consulted with the EU for clarification on its position in relation to the application of Article 49a of the Gas Directive to the NSP2 pipeline, as well as the potential breaches of the investment provisions of the ECT, if no derogation under this article is possible. To the date of writing, the EU has not taken a definitive position on this38 and Nord Stream 2 AG has consequently taken steps arbitrating the matter with the EU.39

3.3

The Risk of Third Country Intervention

Beyond measures taken by the EU and its Member States, the United States as a third country has also taken measures that may encroach on the building of the NSP2 pipeline. By means of the 2017 ‘Countering America’s Adversaries Through Sanctions Act’ (CAATSA), the US government can take measures against a number of entities and individuals that engage in the building of export pipelines from Russia.40 These sanctions could be used to penalize persons and entities that engage in the development of Russian export pipelines either through a single investment of at least USD 1 million or multiple investments totalling more than USD 5 million within 12 months. The imposition of these sanctions would be based on prior consultation with allies of the United States and would seek to avoid harming the energy security of the US’s partners. As theses sanction are focused on projects initiated after 2 August 2017, the NSP2 project may not be covered by this Act.41 At the time of writing, a bipartisan-backed bill titled the ‘Protecting Europe’s Energy Security Act of 2019’ (PEESA) is under the legislative process of the United States.42 This sanction bill is directed at the pipe-laying vessels needed for the building of the NSP2 and Turk Stream pipeline projects, authorizing the US President to take a range of punitive measures on entities involved in the selling, leasing or provision of such vessels. In effect, these are an attempt to change the rules by excluding the grandfathering principle introduced by the US Department of the

38 The Nord Stream 2 AG has addressed several letters to the European Commission to consult on this matter. See: European Commission, Documents archive. http://trade.ec.europa.eu/doclib/cfm/ doclib_section.cfm?sec¼802. 39 See: European Commission, Documents archive. https://trade.ec.europa.eu/doclib/html/158069. htm. 40 U.S. Department of the Treasury (2017) Countering America’s Adversaries Through Sanctions Act (sec. 232). Available at: https://www.treasury.gov/resource-center/sanctions/Programs/Pages/ caatsa.aspx. 41 U.S. Department of the Treasury (2019) CAATSA/CRIEEA Section 232 Public Guidance. Available at: https://www.state.gov/caatsa-crieea-section-232-public-guidance/. 42 U.S. Congress (2019) Protecting Europe’s Energy Security Act of 2019. Available at: https:// www.govtrack.us/congress/bills/116/hr3206.

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Treasury’s Office of Foreign Assets Control (OFAC) guidance for the CAATSA. Other sanction bills, such as the partisan Republican bill titled the ‘Energy Security Cooperation with Allied Partners in Europe Act of 2019’, are at different stages of the legislative process at the time of writing.43 Beyond cloaking ulterior political and economic ambitions under the guise of energy security, such as increasing sales of US LNG to the EU, it remains debatable why the United States take action for Europe’s energy security through sanctions on third country investments. However, due to the internal division over the NSP2 pipeline in the EU, with Germany and other central European countries backing it, while Poland and other Eastern European countries are opposed to it, finding a unified EU position on the US sanction has been difficult.44 Unlike investment screening measures taken by the EU or individual Member States over which some regional control can be exerted, the interference of third countries in investments in the EU remains beyond regional control. These cause economic harm not only to the investment that they target but also to other entities, such as contractors of the investor. The measures of the US affecting commercial investments in the EU can be seen as undue infringement of sovereignty. Moreover, it is difficult to see how these add to energy security, which the United Nations (UN) Commission for Europe defines as ‘the availability of usable energy supplies, at the point of final consumption, at economic price levels and in sufficient quantities and timeliness, so that, given due regard to encouraging energy efficiency, the economic and social development of a country is not materially constrained’.45 Objectively, the NSP2 pipeline would improve energy security by increasing the quantities of natural gas available in the EU. Lastly, while beyond the scope of this chapter, from the perspective of international law, the introduction of unilateral sanctions without a resolution from the UN Security Council may also be contrary to international trade obligations of the WTO.46

4 European Investment Screening Regulation The FDI Screening Regulation was introduced by the EU to establish a screening framework for foreign direct investment that may affect security or public order while at the same time enabling investment for the Union’s growth and

43

U.S. Congress (2019) Energy Security Cooperation with Allied Partners in Europe Act of 2019. Available at: https://www.govtrack.us/congress/bills/116/s1830. 44 Politico (2 August 2019) EU disunity on US’s anti-Nord Stream 2 push. Available at: https:// www.politico.eu/article/eu-disunity-hampers-efforts-to-block-us-pipeline-sanctions/. 45 UN Economic Commission for Europe (2007), pp. 8–9. 46 See on this: Mitchell (2017), pp. 283–303.

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competitiveness.47 According to the regulation, the EU has exclusive competence to regulate this area under Article 3(1)(e) of the TFEU as it falls into the field of common commercial policy.48 Importantly for pipeline investments, potential effects on infrastructure for energy and energy supply are factors that may be taken into consideration when determining whether an investment affects security or public order.49 In light of this, it is prudent to consider the effect that the FDI Screening Regulation may have on the building of pipelines.

4.1

The Impact on the Building of Pipelines: Positive Changes?

As the objective of the FDI Screening Regulation is to establish a framework for screening foreign direct investments that may affect the security or public order of the EU, it is unsurprising that energy and energy infrastructure are of specific interest and singled out in the FDI Screening Regulation.50 While beyond the scope of this chapter, this raises questions of competences in the area of investment and energy. Given that TFEU Article 194(2) gives Member States the right to choose ‘between different energy sources and the general structure of its energy supply’,51 the FDI Screening Regulation may be considered to encroach on this right.52 Member states have to take utmost consideration of other Member States’ and the Commission’s opinion when the screening of investment is likely to affect other Member States.53 Consequently, investment screening is not at the final discretion of the Member State in which the investment is made but could be affected by other Member States’ concerns. Given the interconnected nature of energy networks in the EU and the threshold for claiming to be affected by energy investments can be argued to be low. In relation to many of the shortcomings that the formal or informal screening mechanisms in the EU have, and the question whether investment screening is desirable from the investor’s point of view, the FDI Screening Regulation offers 47

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 79I, 21.3.2019, pp. 1–14, recital 1 and 5. 48 Ibid., recital 6. 49 Ibid., Art 4(1)(a) and (c). 50 See for example: Ibid., Art. 4(1)(a) and (c). 51 Consolidated Version of the Treaty on the Functioning of the European Union, OJ C 326, 26.10.2012, pp. 47–390, Art 194(2). 52 See on this: Reins (2019), pp. 665–672; More generally see: Hancher and Salerno in: Biondi et al. (2012), p. 397. 53 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 79I, 21.3.2019, pp. 1–14, Art 6(9).

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some solutions. The regulation sets out that screening mechanisms of Member States shall be transparent and non-discriminatory (Article 3(2)), the screening mechanisms shall have time frames (Article 3(3)) and there shall be the possibility of recourse against the decisions of national authorities (Article 3(5)). All of these considerations are desirable from an investor’s perspective. Given that the EU’s FDI Screening Regulation will apply from 11 October 2020, its relevance for the NSP2 pipeline is limited. For future pipeline projects, it may help in establishing more transparent criteria and processes for investment screening. These may alleviate the prima facie discriminatory and arbitrary treatment that the NSP2 pipeline experienced during its building process.

5 Conclusions The NSP2 pipeline project exemplifies the difficulties that major cross-border infrastructure investment can face. Given the nature of pipelines, there are usually a number of states parties involved between origin and destination. Due to the circumstance that the EU is a regional economic integration organization, regulatory requirements can arise from two levels. In the case of the NSP2, the involvement of third countries that have no direct relation to the investment is yet another layer of complexity. While the NSP2 pipeline is under construction at the time of writing, the involvement of these different parties has already had a negative impact on the investment. From the investor’s perspective, greater objectivity, predictability and legal certainty would be desirable. With the introduction of the EU FDI Screening Regulation, some of the above criteria may be met. However, this would also require political and legal stability within the EU. The politically motivated actions of the EU and its Member States are testing the relationship between politics and law and, ultimately, the rule of law in the EU. For long-term investments, legal certainty and the rule of law are of key importance. In light of the experiences of the NSP2 pipeline, outlined in this chapter, legal certainty in the EU remains wanting.

References Council of the European Union (27 September 2017) Opinion of the legal service, Recommendation for a Council decision authorizing the opening of negotiations on an agreement between the European Union and the Russian Federation on the operation of the Nord Stream 2 pipeline, Brussels, 12590/17 Euractiv (18 September 2019a) ‘We need this dinosaur’: EU lifts veil on gas decarbonisation strategy. Available at: https://www.euractiv.com/section/climate-strategy-2050/news/new-gaspossibilities-in-focus-as-commission-prepares-decarbonisation-strategy/. Accessed 6 Jan 2020

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Euractiv (29 May 2019b) Exploring the limits of EU’s unbelievable behaviour on Nord Stream 2. Available at: https://www.euractiv.com/section/energy/opinion/exploring-the-limits-of-eusunbelievable-behaviour-on-nord-stream-2/. Accessed 6 Jan 2020 European Commission, Documents archive. Available at: http://trade.ec.europa.eu/doclib/cfm/ doclib_section.cfm?sec¼802. Accessed 6 Jan 2020 European Commission Press Release (9 June 2017) Commission seeks a mandate from Member States to negotiate with Russia an agreement on Nord Stream 2, IP/17/1571 Goldthau A (2016) Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & UK. EUCERS Strategy Paper 10 Hancher L, Salerno F (2012) Energy policy after Lisbon. In: Biondi A, Eeckhout P, Ripley S (eds) EU law after Lisbon. Oxford University Press, Oxford, p 397 Kaech B (2010) Die Rechtsfragen der Ostsee-Pipeline. In: Ehlers D, Wolffgang H-M, Schröder U (eds) Energie und Klimawandel, Verlag Recht und Wirtschaft, C.H. BECK, p 89 et seq Lang K-O, Westphal K (2016) Nord Stream 2 – Versuch einer politischen und wirt-schaftlichen Einordnung. Stiftung Wissenschaft und Politik Deutsches Institut für Internationale Politik und Sicherheit Mitchell A (2017) Sanctions and the World Trade Organization. In: van den Herik L (ed) Research handbook on UN sanction and international law. Edward Elgar, Cheltenham, pp 283–303 Nord Stream 2 (2017) Greenhouse Intensity of Natural Gas Transport – Comparing the Nord Stream 2 Pipeline to LNG Import Alternatives. Available at: https://www.nord-stream2.com/mediainfo/commentary-analysis/greenhouse-intensity-of-natural-gas-transport-comparing-the-nordstream-2-pipeline-to-lng-import-alternatives-8/. Accessed 6 Jan 2020 Nord Stream 2 AG (2016) Joint Press Release of ENGIE, Gazprom, OMV, Shell, Uniper, Wintershall and Nord Stream 2 AG. Available at: https://www.nord-stream2.com/media-info/ news-events/joint-press-release-of-engie-gazprom-omv-shell-uniper-wintershall-and-nordstream-2-ag-22/. Accessed 6 Jan 2020 Office of Competition and Consumer Protection (2016) UOKiK issues objections to a concentration - Nord Stream 2. Available at: https://www.uokik.gov.pl/news.php?news_id¼12477. Accessed 6 Jan 2020 Office of Competition and Consumer Protection (2018) UOKiK against Nord Stream 2. Available at: https://www.uokik.gov.pl/news.php?news_id¼14323. Accessed 6 Jan 2020 OSW (6 December 2017) Nord Stream 2: Denmark’s playing for time. Available at: https://www. osw.waw.pl/en/publikacje/analyses/2017-12-06/nord-stream-2-denmarks-playing-time. Accessed 6 Jan 2020 Politico (2 August 2019) EU disunity on US’s anti-Nord Stream 2 push. Available at: https://www. politico.eu/article/eu-disunity-hampers-efforts-to-block-us-pipeline-sanctions/. Accessed 6 Jan 2020 Ravluševičius P (2011) The enforcement of the primacy of the European Union law: legal doctrine and practice. Jurisprudencija/Jurisprudence 18:1369–1388 Reins L (2019) The European Union’s framework for FDI screening: towards an ever more growing competence over energy policy? Energy Policy 128:665–672 Talus K (2017a) European Commission Crusade Against a Pipeline: act three - Lex Nord Stream 2. Oil Gas Energy Law Intell (OGEL) 2018(4) Talus K (2017b) Decades of EU energy policy: toward politically driven markets. J World Energy Law Bus 10:380–381 Talus K (2017c) Application of EU energy and certain national laws of Baltic Sea countries to the Nord Stream 2 pipeline project. J World Energy Law Bus 10:30–42 Talus K, Wüstenberg M (2017) Risks of expanding the geographical scope of EU energy law. Eur Energy Environ Law Rev, 138–147 UN Economic Commission for Europe (2007) Emerging global energy security risks. ECE Energy Ser 36:8–9 Yafimava K (2019) Gas Directive amendment: implications for Nord Stream 2. Oxford Institute for Energy Studies

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Barbara Kaech is the general counsel and corporate secretary at Nord Stream 2 AG. She is a Swiss lawyer (Rechtsanwältin lic. Iur., M.B.L.-HSG) with admission to the bar in Switzerland. From 1990 to 1997, she studied law at the universities of Berne, Lausanne and Nijmegen. In 2008, she completed the Executive Master of European and International Business Law at the University of St. Gallen. Between 1998 and 2004, she worked as a consultant and legal counsel at PwC in Berne, Zurich and London, handling litigation as well as various commercial and corporate legal issues. From 2005 to 2008, she was a senior manager at PwC for the People’s Republic of China and Hong Kong, based in Shanghai. She advised on Chinese and Hong Kong commercial law and trained staff in compliance and risk management. From 2009 to 2015, she was initially a deputy general counsel and later the general counsel at Nord Stream AG. Since 2015, she has been the general counsel and corporate secretary at the Nord Stream 2 AG, heading the Legal Department and managing all legal issues. Her main expertise is in cross-border legal matters, commercial and corporate law, investment law as well as public law in various jurisdictions. Moreover, she has expertise in setting up project finance as well as managing an international legal department. Moritz Wüstenberg works as a senior researcher at the University of Eastern Finland (UEF) Law School. Moritz has an educational background in biochemical engineering (University College London, 2008–2011 (BEng, hons)) and chemical engineering (Aalto University, 2011–2014 (MSc. Tech, with distinction)). From 2013 to 2014, Moritz completed the LL.M. Diploma Program in International and European Energy Law and Policy at the UEF Law School. In 2019, he defended his PhD thesis titled ‘EU-Russia Natural Gas Trade: An Investigation into the Need for Regulatory Reform Following Russia’s WTO Accession’. He has made extended research visits to the Oxford Institute for Energy Studies as well as the University of Geneva. Moritz has published in peerreviewed international journals on various aspects of energy trade regulation, focusing specifically on the role of the WTO. He has also worked on various consultancy projects related to energy efficiency (World Bank and the European Commission) and lobbying (Finnish government), as well as the Nord Stream 2 pipeline project. Currently he is working on several book projects related to energy security, energy democracy as well as investment protection in the energy sector.

Navigating Between Openness and Protectionism: EU Investment Screening in 25 Years’ Time Carolina Dackö

Contents 1 Predicting the Future of EU Foreign Direct Investment Screening . . . . . . . . . . . . . . . . . . . . . . . . 1.1 The Delicate Act of Legislating Member State Public Order and Security . . . . . . . . . 1.2 Is There a Basis for Transforming the Framework Into Something More? . . . . . . . . . 1.3 EU Alignment and Global Evolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Underlying Rationale of the Framework and Basis for Comparison with EU Export Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The EU Export Control Framework for Military Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 The Rationale of Defence Cooperation and Link to FDI Screening . . . . . . . . . . . . . . . . . 2.2 The Example of Sweden: FDI Screening as a Prerequisite for Defence Strategy . . . 2.3 History of the EU Export Control Rules on Military Goods: The Common Position 2.4 Features of the Current Common Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The EU Dual-Use Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Link to FDI Screening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 The Evolution of the Dual-Use Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Features of the Dual-Use Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 What Lies Ahead for the EU FDI Framework? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Legal Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Consultation Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Annual Reports and Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Possible Outcomes of FDI Consultation Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Perspective of Moving Decision-Making to the Union Level . . . . . . . . . . . . . . . . . . . . . . . 4.6 Long-Term Predictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract The purpose of this chapter is to assess the future development of the EU’s foreign direct investment (FDI) screening legislation. This chapter takes as a starting point the newly adopted EU framework for the screening of foreign direct This chapter was made in collaboration with Karin Matsson, associate at Mannheimer Swartling, and Robert Scherman, associate at Mannheimer Swartling. C. Dackö (*) Mannheimer Swartling, Göteborg, Sweden e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 605–636, https://doi.org/10.1007/16495_2020_2, Published online: 12 June 2020

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investments into the Union (hereinafter referred to as the “EU FDI framework”) and predicts the evolution of the rules in this legal regime by a comparison of how the EU export control regime has developed over the last 30 years. The two legal regimes share tensions between national security interests of the Member States and Union interests and exclusive competence. The regulatory separation of the export control of military equipment and that of so-called dual-use items allowed for more powers to be moved to the EU, which in turn resulted in more common EU provisions for Member States and private operators. The author concludes that something similar may happen with the FDI framework. As the export control rules still stand and continue to evolve, it is reasonable to expect that the EU FDI screening mechanisms will remain and continue to evolve for the next 25 years.

1 Predicting the Future of EU Foreign Direct Investment Screening Every day, the European Union institutions draft and adopt new legislation in different areas of law. The litmus test is to ensure that any proposed legislation falls within Union competence, i.e. that it does not infringe on areas of law in which the EU Members States retain their competence and legislative powers. The EU FDI framework is legislation adopted under the Union’s exclusive competence, and it imposes a formal obligation on Member States to cooperate by sharing information and to consider concerns of other Member States and the European Commission. At the same time, the regulation also refers to and acknowledges that the final decision regarding foreign direct investments lies with the Member States, a set-up that reflects the fact that the competence for Member States’ assessments regarding their public order and security remains with the Member State. For the EU FDI framework to function, it needs therefore to rely both on exclusive EU competence and national Member State competence. This combination of competences and the tension it causes is, arguably, also key for predicting the future of the EU FDI framework.

1.1

The Delicate Act of Legislating Member State Public Order and Security

At its core, the EU FDI framework relies on decisions relating to public order and the security of the individual Member States, but these are only loosely defined in the EU FDI framework.1 1

See especially recitals 3–7 and 18, and Article 1(1) of the EU FDI framework.

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According to the EU FDI framework, it is up to each Member State to assess and decide what constitutes public order and security in relation to investment screenings. These terms are, however, not undefined or unregulated under Union law. Case law of the European Court of Justice (CJEU) has throughout the years developed definitions of both public order and security. The CJEU has, for example, laid down a requirement that national measures based on public order or security have to be assessed in relation to the fundamental freedoms of the EU Charter of Fundamental Rights.2 The new framework therefore builds on a compromise between, on the one hand, allowing Member States to retain their national discretion and, on the other hand, constructing an EU law mechanism that serves a common EU purpose of protecting the EU internal market against sensitive foreign investments. It was maybe due to a political compromise driven by a sense of urgency that the new EU FDI framework only sets certain formal parameters for Member State cooperation and information sharing while refraining from imposing detailed screening regulations at Union level. The framework instead re-empowers the Member States’ decision-making by legitimising, under Union law, Member States’ existing national screening mechanisms provided the procedures respect minimum basic requirements set out in the EU FDI framework.3 The framework does not require Member States that do not have any mechanism to introduce one. Nor does it, at present, require those Member States that have a mechanism in place to perform investment screenings, ex officio, or at the request of other Member States or the European Commission. Nonetheless, the basic purpose of the framework is fulfilled, i.e. to allow Member States to request information from each other regarding foreign investments in each other’s respective territories. A Member State then needs, in order to comply with the framework, to provide information on investments on its territory when requested by other Member States or the European Commission and to take comments from other Member States and opinions from the European Commission “into consideration” in its screening mechanism or, if it does not have one, in its broader policy making. Although comments from other Member States have to be taken into consideration, the EU FDI framework does not require a Member State to block or condition investments made on its territory because of comments from another Member State or the Commission, at least as of yet. Member States could, in theory, therefore remain relatively passive in relation to foreign investment activity on their territory.

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See, for instance, Judgment of the Court (Grand Chamber) of 15 February 2016, J.N. v Staatssecretaris voor Veiligheid en Justitie, C-601-15 PPU, ECLI:EU:C:2016:84, paras. 65 and 66. 3 See Article 3 of the EU FDI framework, which stipulates certain requirements for Member State screening mechanisms. For example, the procedures have to be transparent and non-discriminatory, they have to be clear as to what circumstances trigger a screening, they have to protect confidential information and there shall be a possibility to “seek recourse” against a decision. Also, those Member States that have a screening mechanism in place shall have or shall introduce measures to identify and prevent circumvention of screening mechanisms and screening decisions.

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In its present form, the EU FDI framework is thus in fact primarily an obligation to exchange information; it will likely not require many substantive changes to Member States’ national laws or infringe on their discretion or decision-making. Material changes could, however, be required to ensure that existing screening mechanisms comply with the basic requirements, for example by introducing specific time limits and the possibility of “recourse” of decisions.4 While likely not many substantive changes would be needed, many Member States may need to adopt new administrative procedures. For the information sharing mechanism to function, those Member States that lack screening mechanisms will likely need to introduce national procedures, and in some cases maybe new national legislation, in order to be able to collect and share information on investments made in their territory. These Member States may also need their own procedures to analyse and comment on investments made in other Member States. How will this work in practice, and how will the framework evolve in the future? Is the framework just the starting point, with a potential for transitioning into substantive Union law provisions with more formal conditions and common criteria? Or is the framework doomed to stay as a framework for mere cooperation and information exchange precisely to avoid sensitive issues relating to Member States’ assessments of their public order and security or for fear of accusations of Brussels “power-gabbing”? The following subsections expands on these questions and explains why a comparison with Union export control rules is appropriate.

1.2

Is There a Basis for Transforming the Framework Into Something More?

Arguably, the EU FDI framework already now contains a seed of what could grow into a legal Union-wide security concept and from that could spring a rationale for introducing more substantive Union law provisions. Under the framework, although they are not required to decide in a certain manner, Member States are required to “take into account” concerns of other Member States5 and, more importantly, to “take utmost account” of the European Commission’s concerns related to a foreign investment in a Union project or programme.6 From a legal point of view, the wordings “take into account” and “take into utmost account” appear to be a strange choice of language for a Union regulation. Technically, the wording “take into account” imposes a procedural obligation on a Member States to consider the comments of other Member States

4

See Article 3(5) of the EU FDI framework. It should however be noted that the wording recourse does not necessarily imply that the Member States need to provide for a judicial recourse with an independent court. 5 Article 3(3), 6 and 7 of the EU FDI framework. 6 Article 8(2)(c) of the EU FDI framework.

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and the opinion of the European Commission, but it does not impose an actual legal obligation to decide in accordance with such comments of opinion. A Member State is required to explain if it does not follow the opinion of the European Commission, but as highlighted in the preamble to the regulation, “the final decision in relation to any foreign direct investment . . . remains the sole responsibility of the Member State where the foreign direct investment is planned or completed”.7 Moreover, there are no direct penalties or sanctions if a Member State disregards such comments or opinions, for example if a Member State decides to clear a foreign investment despite explicit concerns from another Member State or the European Commission. Although the EU FDI framework does impose an obligation to cooperate, it will be tested if and when a Member State is expected to put its economic interests aside, by, e.g., limiting a particular foreign direct investment due to other Member States’ security concerns. In other words, the Member States are faced with a moral obligation to follow the interest of other Member States and the European Commission. Time will tell what this moral obligation will amount to in terms of how Member States will come to act. The information exchange, consultation and reporting mechanisms set out in the framework, as further reviewed below, may in the long run simply turn into random rubber-stamping exercises, treated as typical bureaucratic Brussels administration without much political clout or legal effect. On the other hand, it is plausible that specific cases may arise that could lead to political debates between Member States, testing the strength of Union solidarity and cooperation, the internal market and the Union’s foreign policy. The annual reporting obligations may already in the medium term result in a critical mass of data to enable Member States and the Commission to make more profound and finetuned analysis and conclusions regarding foreign investment trends in the Union. This level of detail and transparency may allow for a clearer mapping of investment flows into the various Member States. This may in turn cause controversy by revealing foreign investments in specifically targeted sectors in some Member States that other Member States may disapprove of. If and when such controversy arises, the EU institutions and the Member States will unavoidably have to discuss the principle and value of a common Union approach to security or public order in the field of foreign investment. If one Member State disapproves of a specific foreign investor in a private company in another Member State, chances are that the private company will later face difficulties supplying or tendering in, for example, public projects in the Member State that disapproved of the foreign investment, as well as other like-minded countries. Such controversies may then spill over and turn into obstacles on the internal market. Faced with such threats to the functioning of the internal market, the EU institutions will likely want to propose more substantive obligations on Member States to block or condition investments or may even want to lift parts of the assessment or decision-making from the Member States to a common EU institution.

7

See recital 19 of the preamble of the EU FDI framework.

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EU Alignment and Global Evolution

One specific factor speaks in favour of a more elaborate EU system being adopted in the foreseeable future, that is the need to align to the interests of allies and to be able to act coherently in relation to powerful countries with potentially adverse interests. At the time of writing, the current EU FDI framework is very new. It was adopted in 2019, at a speed that has rarely been seen in the EU legislative system. It took 18 months only from the time the European Commission presented its proposal to the final adoption by the European Parliament and the European Council.8 It is rather uncommon that the three EU institutions are so harmoniously aligned, and some would claim that its rapid adoption was in fact due to a compromise; the framework does not touch Member States’ decision-making powers, and no decision-making powers were lifted from the Member States to a central authority (e.g. the European Commission). At the same time, it is no secret that the EU’s framework came about as a reaction to the increasing trend of targeted acquisitions from China. The legislative initiative from both the European Parliament and three prominent Member States (Germany, France and Italy), came about at a time of political debate regarding increasing Chinese FDI investments into the Union.9 Seeing beyond the EU and its Member States, it is apparent that the framework follows a global trend.10 Compared to other jurisdictions, the EU FDI framework is not a frontrunner. Some would even claim that the framework is a reaction to other countries increasing regulations. As noted by the European Parliament during the legislative procedure: All the G7 countries and EU partner countries already have an investment screening mechanism, which they have already reinforced several times. Thirteen out of twentyeight Member States have already introduced this mechanism into their system; in its text the Commission proposes filling this legislative void at European level to establish a foreign direct investment screening framework. Your rapporteur wishes to congratulate the Commission on the presentation of this legislative proposal and on its responsiveness.11

One of the most prominent examples of FDI screening rules being strengthened globally is the US CFIUS system, which has been updated and includes new rules on investments in, for example, emerging technologies and goods regulated by US export control laws.12

8

European Commission Press Release (10.4.2019), EU foreign investment screening regulation enters into force, IP/19/2088. 9 Grieger (2017), p. 2; Politico (10.4.2017). 10 Grieger (2017), p. 4. 11 European Parliament, (2018), Report on the proposal for a regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union, (COM(2017)0487 – C8-0309/2017 – 2017/0224(COD)), p. 49. 12 CFIUS stands for Committee on Foreign Investment Review, see further explanation in Grieger (2017), pp. 4–5.

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Thus, it is not unreasonable to assume that the momentum created by a common will among the Member States, as well as the sense of urgency to adopt the new framework, may live on and that the framework transcends into a more substantive Union legislation in its own right, already in the next 5–10 years. With the continuing rise of China, or other countries with an interest in becoming global players, the outside pressure may increase even further for Member States to agree on common minimum Union standards for security and public order and to codify such standards into Union law.

1.4

Underlying Rationale of the Framework and Basis for Comparison with EU Export Controls

Regardless of whether and how the framework evolves, it should, ideally, at least start by serving its core purpose, i.e. a common Union defence against investments that may affect security or public order and, in particular, investments that may give influence or control by foreign governments in sensitive sectors.13 One of the key (and rare) legal obligations in the framework is for Member States to provide other Member States and the European Commission with information of the foreign investor’s ties with a foreign government.14 By making such information exchange mandatory, Member States will eventually have access to more qualified information of what factors could constitute a risk of foreign state control. Such information could, for example, be related to specifically identified investors, state-backed financing systems in foreign countries, diverging legal requirements, political influence over state entities or maybe as simple as confidential intelligence information that has been collected by the Member States but that cannot be disseminated to the public or shared with the investment targets themselves. To help predict the future of the framework, this chapter compares EU foreign investment screening with how the EU’s export controls in trade with military equipment and dual-use items have evolved. Export controls is a specifically useful point of comparison. Both export controls and EU FDI screening try to converge the tension between, on the one hand, the Member States’ national security interests and,

13 14

Recital 13 of the EU FDI framework. Article 6 of the EU FDI framework.

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on the other, the common Union interest of strengthening the internal market and attracting foreign capital.15 As noted above, the EU FDI framework gives Member States the right to take decisions to review and possibly restrict investments by foreign investors in the EU based on grounds of public order and security. The right to determine what qualifies as security and public order rests with each Member State.16 At the same time, the common rules on foreign trade between the EU and third countries are one of the cornerstones of the EU common commercial policy. Union exclusive competence for the common commercial policy is clearly set out in the Treaty of the Functioning of the European Union (TFEU).17 In other words, through the TFEU, Member States have already handed over exclusive powers to the Union to set up a common external border for trade in goods, services and foreign direct investments.18 The defence sector is, however, one area in which Member States may decide to depart from the common commercial policy.19 The next two sections explore the features of the EU’s system of export controls on military equipment and dual-use items. The purpose is to illustrate how the Member States have been able to cooperate and agree in trade in defence items, which arguably fall outside the common commercial policy, as well as how they have regulated trade, which falls inside the common commercial policy, but still carries elements of national security or public order, as is the case with dual-use items. The example of export control shows the willingness of Member States to cooperate in the long term in the area of national security and that the EU is able to develop and adopt more detailed procedural rules in relation to Member States’ decision-making.

See also European Parliament (2018), (COM(2017)0487 – C8-0309/2017 – 2017/0224(COD)), p. 49, which also makes the direct link between the concept of security and public order in the framework, which the Member States retain competence, and the fact that the defence sector also remains excluded from union competence: 15

The concept of ‘security and public order’ is consistent with the terms used in the GATS/ WTO and allows a definition of the scope of the exceptions with regard to our international commitments and permits Member States to restrict investment in the event of a threat to security and public order. This must remain a concept and not be precisely defined so that it can remain dynamic according to the specific circumstances of the Member States. It should be noted that the defence sector remains excluded or is at least subject to exemptions linked to Article 346 TFEU. 16

Recital 8 and articles 3–4 of the EU FDI framework. Treaty of the Functioning of the European Union, OJ C 202, 7.6.2016, p. 1–388, article 207. 18 Article 3(1)(e) and article 207 of the TFEU. 19 Article 346(1)(b) of the TFEU. 17

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2 The EU Export Control Framework for Military Equipment Union export control rules provide interesting grounds for comparing what direction the EU FDI framework will take in the future. These rules provide a concrete example as export control combines, on the one hand, a very strong sovereign national interest (i.e. defence and defence-related goods and technology) and, on the other hand, the need for common external norms and rules, to not undermine the EU Member States’ own or their common Union security interest.20 While these rules demonstrate the Member States’ right to maintain substantive national rules that restrict trade in goods and technology for national security reasons, they also reveal the possibility of establishing a framework for common criteria and aligned administration among Member States. One may claim that EU export control rules, at least to some degree, successfully balance national security interest and common Union interest. An examination of how those rules have evolved over time may provide a model for predicting what direction the EU FDI framework could take going forward. The following two sub-chapters therefore examine the two main Union export control rules; the EU Common Position on military equipment and the Union dualuse regulation (as defined below) and compare these with the EU FDI Framework. While both sets of rules have at least a partial substantive origin in the international Wassenaar arrangement,21 they are quite different in substance at Union level. The EU’s export control rules on military equipment belong to the Common Foreign and Security Policy (CFSP), set out in Title V of the Treaty on the European Union (TEU).22 These provisions stipulate that the legislative procedure (i.e. the development of secondary Union law) and scrutiny by the CJEU are excluded (with certain limited exceptions).23 Member States therefore retain national legislative and decision-making powers. Nonetheless, Member States are bound to apply the criteria set out in the Common Position and to abide by arms embargoes issued by the Union.24 Thus, despite the lack of secondary Union legislation, there is indeed a moral obligation to follow the common norms at national level. The EU dual-use regulation, on the other hand, has seen more substantive development. It constitutes binding secondary Union law, applicable to both Member States and natural and legal persons, even if Member States still retain a large degree of discretion in relation to decisions taken under the regulation. 20

Davies (2002), p. 22. The Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies, 1995. 22 See articles 21–46 of the TEU. 23 Article 24 of the TEU and article 275 of the TFEU. The main exception from legal scrutiny is that the CJEU is allowed to review legality of decisions to impose sanctions (“restrictive measures”) against natural or legal persons. 24 See article 29 of the TEU, which is further explained under Sect. 2.4.2. 21

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The Rationale of Defence Cooperation and Link to FDI Screening

Most countries in the world with trade and production of equipment or technology used for military purposes will restrict the access or trade of such equipment or technology. Understandably, states will have to weigh different interests when deciding how strictly they should use export controls to regulate or limit trade. Pure economic reasons would speak in favour of allowing as much exports as possible, whereas national security reasons speak against an over-liberal export regime as it may undermine a country’s technological superiority.25 Other reasons for using export controls would also include moral and ethical grounds, such as preventing the use of military equipment to breach human rights.26 For the purpose of simplifying the comparison with the FDI screening framework, we leave such other reasons aside in the following. A country may have invested in advanced defence systems from domestic or regional defence producers, which many times are privately run companies. It is, however, impossible, in particular for smaller nations, to build a complete and sophisticated defence system based on domestic suppliers alone. Specialisation and cooperation between allied nations are therefore tantamount to developing and maintaining technological leadership. Countries will then use the mechanism of requiring export authorisations to regulate to what countries its defence producers may export their systems. Key to the assessment of whether to grant an authorisation is therefore what other countries participate in a specific project and the purchasing country and end destination. To maintain international standing, credibility and the possibility to participate in international defence cooperation, it is clear that, when assessing whether to grant an export control authorisation for an export to a particular end destination, the granting authority will need to consider how the country’s allies or partners view the destination country.27

25 A further elaboration on the rational of export controls, see Davies (2002), p. 22, which summarises the question in a concise way:

In short, in keeping with this neo-realist paradigm most, if not all, governments with major domestic defence industries are required to undertake two contradictory roles: the regulation and control of military exports, on the one hand, and the promotion of foreign sales, on the other. A further dichotomy is that supplier states normally want to export as many arms as possible in order to keep their defence industries vibrant and unit costs to a minimum, while at the same time seeking to retain the technological superiority they enjoy. 26

Davies (2002), p. 24. Davies (2002), p. 24, “Consideration of the potential effect of a proposed export on the defence and security interests of the exporting state (and those of its friends and allies) has been a longstanding criterion applied by most EU member states.” 27

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Understandably, granting an export authorisation for military equipment to a country that an ally disapproves of may undermine the country’s standing with its allies and, in the long run, the country’s competitive defence capabilities. Because of the often very large contractual value of defence projects, there is often a tension between the economic interest in authorising exports and the national security or defence interest in restricting exports. Private defence companies producing such equipment and technology for these defence projects operate to a large extent under market economy conditions of supply and demand. There is often an economic interest in selling and exporting their equipment or technology to large and likely profitable projects in foreign countries as such income will allow the company to further invest in R&D and the development of more advanced goods and technology. In the long run, such economic development will benefit the domestic country’s defence capabilities. Conversely, denying an export authorisation because of national security reasons may therefore also impede the defence company’s technological advancement. Thus, export control rules is a way for a country to ensure that trade by private defence companies is aligned and does not undermine a country’s long-term strategic defence policy and that it is aligned with its allies. As explained in the next subsection, apart from its export control rules, a country’s FDI screening rules are now seen as an important factor when countries assess what foreign defence contractors may participate in supplying for their defence programmes. If a private defence company is not protected in its home jurisdiction from unwanted foreign investors, there is a risk that other countries will perceive a long-term cooperation with that company as carrying a specific risk. The company may therefore be excluded from participating precisely because of the lack of sufficient regulatory protection from foreign investors.

2.2

The Example of Sweden: FDI Screening as a Prerequisite for Defence Strategy

This tension has become evident for a small country like Sweden with a relatively large high-tech defence sector and a dependency of cooperating with larger countries in order to defend its strategic interest. At the same time, Sweden at present has only limited legal powers to block a foreign acquisition. Some powers exist indirectly through the Swedish law on military equipment, under which export authorisations may be denied or recalled due to foreign ownership.28 In its annual report for 2018, the Swedish competent authority responsible for export control, the Inspectorate for Strategic Products (ISP), stressed the trend that export control rules have increased in importance because powerful countries increasingly use them in their strategic policies. 28

Sections 3–4 and 13 of Lag (1992:1300) om krigsmateriel (in Swedish).

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The ISP’s annual report noted that due to the general global trend of countries escalating military armament and the increased strategic tension between existing superpowers, the use of export control rules has increased in importance internationally.29 The annual report goes on to note that the superpowers (presumably, the United States, Russia and China) want to prevent each other or other countries from reaching the same level of technological advancement and that Sweden, in particular, is concerned with this tension because of its technological advancement.30 In particular, the ISP stressed the need for Sweden to take allied countries’ interest into consideration or face the risk of negative consequences (freely translated from Swedish): For the purpose of ensuring Sweden’s own supply of foreign technology, Sweden needs, from a national security interest perspective (Sw. säkerhetspolitiskt behov), to maintain the same level of control as that of the countries with which Sweden cooperates. Historical examples from the 1970s and 1980s show that insufficient Swedish export control over dual-use products has led to sanctions or the threat of sanctions against the Swedish defence industry’s access to critical parts or components.31

The ISP’s concerns mirror the recent public messages presented to Sweden by the United States. At an annual public defence conference in January 2019, Special Representative Scott Baum, of the United States Department of Defence, made a public statement stressing the need for Sweden to align its export control level with the United States defence strategy. Mr. Baum highlighted the importance of private defence companies’ role in defence strategies: Both the United States and Sweden share a common belief that their industrial base is core to their respective national defense strategies. The defense industrial base plays a critical role in the renewed great power competition and in support of all three of our National Defense Strategy lines of effort.32

In his statement, Mr. Baum then also made the link between the defence sector and investment screening rules. He stressed that the screening of foreign investments in the defence sectors is critical for the United States and implied that such rules should also be introduced in Sweden for Sweden to maintain its standing with the United States in terms of defence cooperation: China’s ability to exploit loopholes in existing trade and investment regulations in order to acquire advanced military technologies has driven the United States to implement trade actions and modernize our investment screening through our Committee on Foreign Investment in the U.S. to ensure we can deal more directly with their economic warfare. We have

29

Inspektionen för strategiska produkter (2018), Verksamhet 2018 (Swedish version of the ISP 2018 Annual Report), p. 12 available at https://isp.se/media/1311/isp_verksamhet2018_webb.pdf. 30 Inspektionen för strategiska produkter (2018), p. 12. 31 Free translation from the Swedish version of the ISP 2018 Annual Report, Inspektionen för strategiska produkter (2018), p. 12. 32 See statement by United States Department of Defense Special Representative for Industrial Policy, Baum (2019), Industrial Policy, People and Defense Annual Security Conference, Sälen, Sweden.

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taken note of Sweden’s efforts to modernize its own investment screening, both in the EU and domestically. We encourage those efforts as secure EU and Swedish investment environments benefit the West.33

Even the ISP, in its 2018 annual report, highlighted its support for the new screening framework and explained the need to protect the defence sector in Sweden by means of restrictions on foreign ownership. The ISP noted specifically that certain countries try to acquire private defence companies precisely to obtain the equipment or technology that it otherwise would not be able to obtain due to export control rules (freely translated from Swedish): An important trend in Swedish and international export control is that in the past years, more countries have launched an acquisition strategy by ownership in companies that produce or sell military equipment or strategically important dual-use products. The purpose is often to simplify the transfer to the home country of military goods or strategically important dualuse goods for military use. Many times, the home country is subject to a weapons embargo or other international sanctions and the countries therefore have difficulties in acquiring military goods or strategically important dual-use goods.34

The ISP furthermore explains the risk that a private foreign investor may be used as a front to disguise the military interest in the background: Through intricate ownership structures in the country in question, it is possible for a potential foreign buyer to present itself as a private venture capitalist without any connections to the state, whereas in reality, there is a disguised military interest in the background.35

It should be noted that at present, apart from the specific provisions in the Swedish law on military equipment, Sweden does not have any general rules for FDI screening.36 A parliamentary review has recently been launched in order to introduce Swedish legislation to complement the EU FDI framework, and which will also propose Swedish FDI screening rules. The review is ongoing, and the results are to be presented in May 2020 for the complementary rules and in November 2021 for Swedish screening rules.37 This chapter now turns to the actual EU export control rules relating to military equipment and technology.

33

Baum (2019). Inspektionen för strategiska produkter (2018), p. 15. 35 Inspektionen för strategiska produkter (2018), p. 15. 36 There are certain provisions at present which require the notification of change of ownership for sensitive sectors, however these are not qualified as related to foreign investment screening, see section 9 of the Swedish Security Protection Decree 2018:658 (Sw. säkerhetsskyddsförordningen) (in Swedish). These rules are however being subject to review and more substantive screening controls have been proposed. However, the proposed rules would only cover what is considered security sensitive under the security protection rules, see Kompletteringar till den nya säkerhetsskyddslagen (SOU 2018:82) (in Swedish). 37 See, Ett system for granskning av utländska investeringar inom skyddsvärda områden, Dir 2019:50 (in Swedish). 34

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History of the EU Export Control Rules on Military Goods: The Common Position

The EU Member States have agreed on a common set of “policy” criteria for assessing the export of military equipment (the “Common Position”), as well as a list of military equipment and technology that each Member State shall treat as military equipment (the “Common military list”). The current legal basis for the Common Position and the Common military list is the Council Common Position of 8 December 2008 (2008/944/CFSP).38 The Common Position is at present more than 10 years old. The Common Position, adopted in 2008, builds on the so-called Common Criteria, which were adopted in 1991 in Luxembourg and in 1992 in Lisbon, as well as the European Union Code of Conduct on Arms Exports, adopted by the Council in 1998 (the “Code”). These Common Criteria can in turn be traced back to Annex VII Luxembourg Council Resolution.39 This Annex VII provided the background and explains the European Council’s concern arising from the proliferation of weapons of mass destruction, the need to strengthen the regimes of nuclear non-proliferation, as well as chemical weapons. Furthermore, the Council Resolution also noted the alarming “stockpiling” of conventional weapons in certain regions of the world and that, therefore, “far-reaching international action is needed immediately to promote restraint and transparency in the transfers of conventional weapons and of technology of military use”.40 Thus, the origins of the current Common Position stem from the agreement in 1991, when Member States recognised the need to provide a more common approach by putting in place criteria elaborated based on “national policies on arms exports”. The Common Criteria consisted of seven assessment points, which the Member States agreed would be used when they determine whether or not to grant export licences to a particular country and end user. These seven criteria were later elaborated and explained in the Code, at which point also an eighth criterion had been added.41

38

Council Common Position 2008/944/CFSP of 8 December 2008 defining common rules governing control of exports of military technology and equipment, OJ L 335, 13.12.2008, pp. 99–103; Common Military List of the European Union adopted by the Council on 18 February 2019 (equipment covered by Council Common Position 2008/944/CFSP defining common rules governing the control of exports of military technology and equipment), OJ C 95, 12.3.2019, pp. 1–35. 39 European Council (1991), Luxembourg Presidency Conclusions, Annex VII “Declaration on non-proliferation and arms exports”. 40 European Council (1991), Annex VII. 41 The Council (1998), European Union Code of Conduct.

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Under these criteria and the Code, Member States agreed to deny export licences if the transfer would conflict with any of the first four criteria. These relate to international obligations (criterion one), respect for human rights and humanitarian law (criterion two), internal situation and armed conflicts in the destination country (criterion three) and preservation of regional peace, security and stability (criterion four). Further, as regards the fifth to eighth criteria, which relate to the national security of the Member States (criterion five) and the buyer country’s behaviour in relation to, e.g., terrorism (criterion six), risk of diversion (criterion seven) and compatibility between technological advancement and the destination country (criterion eight), Member States also agreed to take these into account when assessing whether or not to grant export licences. In addition, Member States agreed to share information and report on denied export licences for the purpose of ensuring a more consistent interpretation of the criteria. Member States also agreed on a consultation mechanism if the application for an export licence was “essentially identical” to an application that another Member State had denied in the last 3 years.

2.4

Features of the Current Common Position

Most of the language of the Common Criteria and the Code—which date back to the 1990s—were transposed and implemented into the 2008 Common Position. At present, in 2020, almost 30 years later, the current version of the Common Position still contains the same list of eight criteria. The following section describes some specific features of the Common Position that are relevant for a comparison with the EU FDI framework.

2.4.1

A Pragmatic Approach: The User’s Guide

Although the Common Criteria as such have not seen much evolution, the EU has agreed on a “User’s Guide”.42 It is intended to serve as an instrument for use primarily by export licensing officials and as a pragmatic way to converge Member State export control policies and procedures to also ensure a greater consistency between Member States. The User’s Guide was reviewed and updated in 2015, with input from various stakeholders, including civil society.

42 The Council (2015b), User’s Guide to Council Common Position 2008/944/CFSP defining common rules governing the control of exports of military technology and equipment.

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Legal Basis for the Common Position

The legal basis for the Common Position is Article 29 (former Article 15) of the TEU,43 which belongs to the chapter on the CFSP of the Union: Article 29 (ex Article 15) TEU The Council shall adopt decisions which shall define the approach of the Union to a particular matter of a geographical or thematic nature. Member States shall ensure that their national policies conform to the Union positions.

Although formulated as a “position”, the Common Position has the status of a legal act, a “decision” under Union law.44 It is binding on the Member States.45 However, no legislative (secondary law) acts may be adopted under the CFSP, and the CJEU does not have jurisdiction to review it (or any other provisions under the CFSP chapter of the TEU).46 Any decisions taken under the CFSP have to be adopted by consensus, i.e. all Member States have to agree.

2.4.3

Implementing the Common Criteria: The EU Military List

The Common Position has an important role of providing the basis for the Common EU military list. This is a list of military equipment that the EU Member States agree will be treated and assessed under the Common Criteria. At present, it consists of 22 items, ranging from smooth-bore weapons to specific military technology.47 The list is a common minimum list, and Member States are free to add and control also other items as military equipment or technology. The content of the military list, i.e. what items and technology shall be considered controlled under the Common Position, is usually updated on a yearly basis, and the latest version of this list was published on 12 March 2019.48

43

The Council (2008); article 29 of the TEU. Article 288 of the TFEU defines the legal acts of the Union as regulations, directives and decisions. The institutions may also adopted recommendations and opinions, but these are not legally binding. See also Article 24 of the TEU, which states that decisions under chapter 2, which includes policy decisions under the Common Foreign and Security Policy, shall exclude legislative procedures. 45 European Parliament (2019), Fact Sheets on the European Union: Defence Industry. 46 Article 24 of the TEU. 47 The Council (2019), Common Military List. 48 The Council (2019), Common Military List. The updates will usually stem from updates to the Wassenaar arrangement. 44

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Evolution and Tests of the Common Position

The Common Position was reviewed in the period 2011 to 2015, amounting to a Council Conclusion.49 That conclusion did, however, not result in any substantive changes to the Common Criteria but made some practical progress, such as updating the User’s Guide and the online information sharing system (see further below). The Council Conclusion also instructed the working group (COARM) to re-assess the Common Position in 2018.50 Although there is scarce information on whether the Common Position was in fact reviewed, a 2018 paper prepared by the Stockholm International Peace Research Institute (SIPRI), for the European Parliament’s Subcommittee on Security and Defence (SEDE), summarises recent issues related to Member State divergences in whether or not to issue export licences to certain destinations.51 The paper explains that in spite of the work done to converge Member States’ application of the Common Criteria, there have been cases of diverging policies, in particular in recent crisis situations, such as the Arab Spring, Syria and Yemen: Mounting allegations that the Saudi-led coalition might have violated international humanitarian law (IHL) in the conduct of hostilities in Yemen, raised doubts on the effectiveness of the EU Common Position and whether EU Member States’ arms exports to the most active members of this coalition, i.e. Saudi Arabia and United Arab Emirates (UAE), were conducted in coherence with its criteria. According to the SIPRI Arms Transfer Database, between 2013-2017 Saudi Arabia and UAE increased their arms imports by 225% and 51% respectively, and some EU Member States (France, Italy and United Kingdom) were among their major suppliers. At the same time, concern about the conduct of the war in Yemen has triggered a wider debate in EU member states about the legitimacy of these exports based on the Common Position. In some cases, these debates and the public pressures led some of them to suspend or to halt exports to these countries (as in the case of the Netherlands, the Walloon Region of Belgium and potentially Germany). The latest EU annual report – the 19th, covering 2016 – shows that there has been an increase in the number of denials towards Saudi Arabia and the UAE, mostly based on concerns that IHL might have been violated or risks of diversion (criteria 2 and 7). At the same time, resistance to public pressure in other countries, notably France, Italy and the UK, prompted a series of civil society initiatives aimed at challenging the governments in court to try and force a change in policy with regards to the conduct in arms exports.52

Thus, it would seem that whereas there is political will to maintain and apply the Common Criteria, it is first in real tangible cases or crisis situations that the strength of the system is tested and divergences become apparent. The cases explained above reveal the risk that diverging export control assessments among Member States will undermine Union cohesion. At the same time, it also shows that with transparency and debate, sometimes initiated by civil society, may also come a further

49 The Council (2015a), Council conclusions relating to the review of Common Position 2008/944/ CFSP on arms exports and the implementation of the Arms Trade treaty (ATT). 50 The Council (2015a), Council conclusions, p. 4. 51 Bauer et al. (2018). 52 Bauer et al. (2018), p. 9.

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convergence and common force of protecting common fundamental core values such as human rights or humanitarian law. In short, a controversial debate may actually lead to stronger Union cooperation and a more unified approach even in spite of the lack of Union competence or binding secondary Union law.

3 The EU Dual-Use Regulation By comparison, the EU dual-use regulation could be described as a spin-off hybrid legislation, which even more closely combines sovereign defence-related interest and a common Union approach to security. The EU dual-use regulation53 is a secondary Union law. In short, it defines dualuse goods as those that have both civil and potential military applications and obliges Member States to impose export controls in the form of export licences or authorisations, for certain products, software and technology listed in the annex to the regulation.54 These dual-use products are thus not military equipment but are considered as sufficiently sensitive to be subject to control when exported outside of the EU. The list of controlled items stems from the Wassenaar arrangement, as discussed above (see Sect. 2).55 The current version of the regulation was adopted by the European Union Council in 2009. As with export controls on military equipment, the history and evolution of the dual-use regulation provide valuable additional insights for predicting the evolution of the EU’s FDI screening framework.

3.1

Link to FDI Screening

As with the export rules on military equipment, there is also an important link with FDI screening rules in both the EU and other jurisdictions. The EU FDI framework itself specifically identifies companies and entities dealing with items controlled by the dual-use regulation as those that may be subject to the obligations for information exchange.56 For example, if a company dealing with dual-use items becomes the target of a foreign acquisition in one Member State, other Member States or the European Commission may trigger the information sharing mechanism. That would require the Member State in which the target dual-use producer is located to collect

53

Council Regulation (EC) No 428/2009 of 5 May 2009 setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items, OJ L 134, 29.5.2009, pp. 1–269. 54 The regulation also includes a definition of other goods which are not listed, but could become subject to control, so called “catch-all” items, see article 4 of the EU dual-use regulation. 55 Annex I of the EU dual-use regulation. 56 See article 4(1)(b) of the EU FDI framework.

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and share information with other Member States and the European Commission on the nature of the foreign investor, for example ownership and how the acquisition has been financed. Thus, companies producing and exporting dual-use goods in the Union are one of the sectors specifically targeted by the EU FDI framework as in need of screening rules. Including dual-use companies in the scope of screening rules is also part of a larger global trend. When the US recently reformed its screening rules, the CFIUS statute, as explained above,57 items subject to US export control rules, the Export Administration Regulations (EAR), were specifically linked into the screening system.58

3.2

The Evolution of the Dual-Use Regulation

The Common Position and the EU dual-use regulation share a common historical and political evolution. In the early 1990s, there was a momentum to establish a common arms export policy, which led to a proposal by the European Commission. However, at the same time, there was a need to establish a single market, including elimination of barriers in trade between Member States in dual-use goods (i.e. removing authorisation requirements) while respecting the Member States’ interest in deciding on whether or not to allow the export of dual-use goods to specific destinations. This was difficult to reconcile with a mere common policy of arms exports. Eventually, after various consultations and debates, the European Commission proposed treating dual-use goods differently from military goods and thereby proposed a new set of common rules for dual-use products.59 The EU’s first dual-use regime was set up in 1994.60 After some years, the first regulation was replaced with a second version of the regulation.61 The third and current regulation from 2009 strengthened the EU’s non-proliferation efforts even further. This was done by several means, including the provision of harmonised policies and tools for implementation and enforcement, as well as rules on administrative cooperation directly between Member States. The regulation was the result of wide consultations and a balancing of interest between national security and

57

Section 2.3. Congressional Research Service (2019), CFIUS Reform: Foreign Investment National Security Reviews. 59 The developments leading up the adoption of the EU dual-use regulation are described in great detail in Davies (2002), Part II, Chapter 3. 60 Council Regulation (EC) No 3381/94 of 19 December 1994 setting up a Community regime for the control of exports of dual-use goods, OJ L 367, 31.12.1994, pp. 1–7; and Council Decision of 19 December 1994 on the joint action adopted by the Council of the basis of Article J.3 of the Treaty on European Union concerning the control of exports of dual-use goods (94/942/CFSP). 61 Council Regulation (EC) No 1334/2000 of 22 June 2000 setting up a Community regime for the control of exports of dual-use items and technology, OJ L 159, 30.6.2000, pp. 1–215. 58

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Union interest and the interests of exporters and industry. The regulation from 2009 still stands, although it has amended several times, particularly as regards its Annex 1, which includes the list of controlled items. It is clear that since it was carved out and made independent from military equipment and arms, the dual-use regulation has seen substantial evolution compared to the Common Position. At present, the regulation is generally viewed as in need of adaptation to new and evolving security risks, as well as to rapid technological and scientific developments, especially within certain fields like cyber surveillance, quantum information technology, artificial intelligence and machine learning.62 In June 2011, the EU began considering more substantial reforms to the regulation. Various preparatory work resulted in a Commission proposal and suggested a recast regulation in September 2016.63 About a year later, the European Parliament adopted a report and negotiating position, and in June 2019, the Council issued its negotiating position and mandate for negotiations with the European Parliament.64 The outcome of these negotiations remains to be seen.

3.3

Features of the Dual-Use Regulation

Certain features of the EU dual-use regulation are valuable for a comparison with the EU FDI framework.

3.3.1

Legal Basis

The EU dual-use regulation was, at the time it was first adopted, based on Article 133 of the Treaty Establishing the European Community,65 which in current terms would be Article 207 of the TFEU. Notably, exports of dual-use items and “foreign direct investments” both fall into the scope of the common commercial policy, which falls under exclusive Union competence.66 The CJEU has, however, confirmed that Member States retain the right to restrict such trade flows for measures related to their national security, for dual-use items,67 and more recently in relation to foreign 62 European Commission (2016), Commission Staff Working Document Impact Assessment, Brussels, 28.9.2016, SWD(2016) 315 final p. 4. 63 European Parliament (2018), Briefing EU Legislation in Progress Review of dual-use export controls. 64 Council of the European Union (2019), Press release the 5 June 2019 Dual-use goods: Council agrees negotiating mandate. 65 Treaty establishing the European Community (Official Journal C 325, 24/12/2002 P. 0033 0184). 66 Article 3(1)(e) of the TFEU. 67 Judgment of the Court of 17 October 1995, Fritz Werner Industrie-Ausrüstungen GmbH v Federal Republic of Germany, C-70/94, ECLI:EU:C:1995:328, which in para. 29 explains that exports from

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direct investments provided that such restrictions do not render Union trade agreements with third countries redundant.68

3.3.2

Common EU Rules

The EU dual-use regulation lays down several common rules applicable directly to private operators. The EU dual-use regulation defines the term exporter,69 which should facilitate for private operators and competent authorities to identify, when operators in several Member States are concerned, which of those entities shall apply for export authorisation. For example, if a company in Sweden holds a contract with a customer in China but physical export is done from the company’s subsidiary in the Netherlands, the exporter and thus the entity that needs to apply for the authorisation is the parent company in Sweden. As noted, above, the EU dual-use regulation imposes a general EU-wide obligation on exporters to obtain export authorisations for all dual-use items, regardless of which Member State it is exporting from. At the same time, the EU dual-use regulation also establishes, for certain destinations, EU-wide general export authorisations. In principle, an exporter in any Member State may then rely on the EU-wide authorisation without having to apply for an individual authorisation with their national export control authority by simply making a note in the export declarations.70 Thus, whereas the EU sets common trade restrictions on all items listed in the regulation’s annex, it also provides common EU-wide relief from those restrictions through general authorisations. Arguably, these common provisions remove some decision-making power from the EU Member States by means of setting common systems for all operators in the EU. It should be noted that Member States are, according to Article 8 of the EU dualuse regulation, allowed to impose prohibitions or authorisation requirements on exports of items not listed in the annex “for reasons of public security or human

the EU fall within the common commercial policy, but that does not prevent Member States to take measures to protect their internal security. 68 Court of Justice of the European Union (2017), Opinion 2/15 of the Court (Full Court), para. 78–110, in which the CJEU explains the union competence to enter into international agreements with third countries in relation to direct foreign investments, while the Member States, at the same time, remain competent to take decisions related to public order, public security and other public interests. See in particular paras. 102 and 103 which explain that Union trade agreements with third countries, which contain investment protection provisions, may be subject to Member State derogations for reasons of public order, public security and other public interests, but only to the extent they do not render the agreements redundant. 69 Article 2(2) of the EU dual-use regulation. 70 Article 9 and Annex II of the EU dual-use regulation. The use of the general authorisations is also coupled with notification and reporting obligations.

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rights considerations”. The EU dual-use control system could therefore be described as a hybrid solution with common substantive Union rules, complemented by the possibility for Member States to impose national restrictions for public security reasons.

4 What Lies Ahead for the EU FDI Framework? The following section compares and analyses specific features of the Common Position and the EU dual-use regulation with that of the EU FDI framework, with the aim of providing a prediction of what the EU FDI framework will look like in the future.

4.1

Legal Basis

As noted above,71 the legal basis for the Common Position rests on the CFSP and the CJEU does not have jurisdiction to review the Common Position. One of the controversial debates surrounding the adoption of the EU FDI framework was whether the regulation would fall under exclusive Union competence or under shared competence. Shortly before the framework was drafted, the CJEU clarified that “direct” investments flowing into the Union from a third country fall under exclusive Union competence and may be subject to Union legislative acts.72 The CJEU at the same time confirmed that non-direct investment (also called portfolio investments) did not fall into exclusive Union, but rather belong to shared, competence.73 Even if parallels may be drawn to how the Common Position at present functions, the EU FDI framework has a different legal base and origin compared to the Common Position. Whereas the Common Position is based on the CSFP, which excludes a review by the CJEU, the EU FDI framework is based on the common commercial policy, with exclusive Union competence. The EU FDI framework, which regulates direct investments (and not portfolio investments), is thus a Union legislative act (a regulation) and has the same legal basis as the EU dual-use regulation (Article 207 TFEU). However, whereas the EU dual-use regulation has evolved and proscribes some rights and obligation directly to private operators (e.g. general EU export authorisation), the EU FDI framework is addressed to, and imposes obligations and rights on, the Member States. With the exception of the obligation to provide information in article 9.4, the regulation does

71

Section 3.3. Opinion 2/15 of the Court (Full Court) (2017), para. 78–110. 73 Opinion 2/15 of the Court (Full Court) (2017), para. 225–224. 72

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not, as such, proscribe any rights or obligations directly to private subjects (i.e. investors or target companies). Many Member States may need to complement the EU FDI framework with national procedural rules in order to be able to fulfil their obligation to cooperate under the regulation. For example, a Member State may need to introduce administrative rules in order to be able to collect information from private operators, to analyse information from other Member States and to share information with other Member States and the European Commission. If such national rules eventually prove insufficient for the cooperation mechanism to work efficiently, the Union institutions may propose new legislation to further enhance the framework, which may in turn lead to substantive rights and obligations addressed to private operators. The legal basis of the EU FDI framework is of course important to predict its future. Most importantly, because the EU FDI screening framework falls within the common commercial policy and thus exclusive Union competence, compared to the Common Position, there is more of an open door for the Union institutions to, in the future, push forward with more substantive legislation.

4.2

Consultation Procedure

The Common Position’s consultation requirement, under Article 4, requires a Member State to consult another Member State in situations where it is faced with a request for an export licence and the other Member State has denied an export licence in the past 3 years for an “essentially identical transaction”.74 The purpose of this rule is to require a Member State that wishes to grant an export licence to consult another Member State that has already denied such export licence, in order to not undermine that Member State’s decision. Ideally, this should work as a common lowest standard between Member States on how to interpret the Common Criteria. According to a recent report, in 2017, 137 such consultations took place in the Union, i.e. whereby a Member State considered that it was faced with a transaction that was essentially identical to a transaction that had already been denied by another Member State.75 This number should be compared to the total number of export licences issues in 2017, i.e. around 39,000.76 It would thus seem that only a very small portion of pending licence requests are actually brought through the consultation mechanism.

74

The Council (2008), Council Common Position, article 4.1. The Council (2018), Twentieth Annual Report According to Article 8(2) of Council Common Position 2008/944/CFSP According to Article 8(2) of Council Common Position 2008/944/CFSP Defining Common Rules Governing the Control of Exports of Military Technology and Equipment, OJ C 453, 14.12.2018, pp. 1–537. 76 The Council (2018), Twentieth Annual Report. 75

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The EU dual-use regulation also contains a number of consultation requirements. The regulation further establishes a Dual-Use Coordination Group, which shall facilitate consultation among the Member States. Under Article 13, when a Member State has decided to deny, revoke or restrict an export authorisation, it shall inform the other Member States and the European Commission. The Member States shall then, before granting an authorisation, review all denials of other Member States to identify if another Member State has denied an authorisation for an “essentially identical transaction” (meaning an item with essentially identical parameters or technical characteristics to the same end user or consignee). Whenever there is a match, the Member State shall consult the Member State that denied the authorisation. Importantly, the first Member State retains the right to take a final decision to grant the authorisation but shall, in such case, provide an explanation to the Member State that denied the authorisation.77 Furthermore, the EU dual-use regulation imposes another type of consultation mechanism under Article 11. If a Member State considers that an export might prejudice its “essential security interests”, it may request another Member State to not grant an export authorisation or, if such authorisation has been granted, request its annulment, suspension, modification or revocation. The Member State receiving such a request shall then immediately engage in consultations of a non-binding nature with the requesting Member State, to be terminated within ten working days.78 Turning to the consultation procedure under the EU FDI framework, while it is triggered in a slightly different manner, it does carry some similarities with the EU dual-use regulation. Under the framework, a Member States that has initiated a screening of a foreign investment is obliged to notify the other Member States and the Commission of such screening. A Member State that then considers that its security or public order could be at risk may trigger the consultation procedure. The same applies in case the investment is made in a Member State that does not have a screening procedure. In such a case, a Member State that considers its security or public order to be at risk because of the investment in the other Member State may trigger the consultation. Just as with the EU dual-use regulation, the outcome of the consultation mechanism is not technically legally binding. Compared to the Common Position and the EU dual-use regulation, the consultation mechanism presents a few features that speak in favour of more consultations taking place under the EU FDI framework and, in the long run, a potential ground for proposing more EU legislation to simplify or streamline the information sharing and consultation procedures:

77 Article 13(5) of the EU dual-use regulation, “If following such consultation the competent authorities of the Member State decide to grant an authorisation or allow the transit, they shall notify the competent authorities of the other Member States and the Commission, providing all relevant information to explain the decision.” 78 Article 11 of the EU dual-use regulation.

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• First, the framework sets more detailed deadlines for the consultation mechanism, which may enhance information exchange. • Second, the framework has an Union security dimension, as the European Commission may also issue opinions, which the Member States have to take “outmost” account of. The European Commission is given a formal voice and right to express an opinion. The key question is thus how the European Commission’s right to issue such opinions will evolve in the future. • Third, the potential scope of application of the framework’s consultation mechanism is much broader. Whereas the Common Position and the EU dual-use regulation speak of “essentially identical” transactions, the framework speaks of security and public order in several broadly defined sectors, including critical infrastructure, critical technology and supply of critical input.79 • Fourth, the regulation spells out clear information requirements that Member States must share with other Member States, including the ownership structure and financing of the foreign investor, which will likely increase transparency for all Member States.

4.3

Annual Reports and Statistics

The Common Position requires Member States to report the number of export licence issues per year, as well as the number and reasons for denying export licences. A consolidated EU-level report is then prepared and published in the EU’s official journal. The most recent annual report, which provides statistics for 2017, was published in December 2018.80 Interestingly, according to the report, in 2017, the 28 Member States in total issued 39,639 export licences and denied only 314 of such licences. Of these 314 denials, around half (163) were based on criterion 7, i.e. the risk of the exported equipment being diverted. A large portion (108) was based on criterion 2, i.e. respect for human rights or humanitarian law.81 The 2017 annual report also contains a descriptive section on the evolution of cooperation and consultation mechanism. In 2016, to improve and facilitate the consultation mechanism, a new functionality was added to the existing online information system COARM to provide quicker and more efficient information sharing. Reportedly, “the system has already demonstrated that it further supports transparency between Member States vis-à-vis specific countries of final destination and end users”.82

79

Article 4 of the EU dual-use regulation. The Council (2018), Twentieth Annual Report. 81 The Council (2018), Twentieth Annual Report, p. 489. 82 The Council (2018), Twentieth Annual Report, p. 2. 80

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The deemed risk of diversion, i.e. to undesired destination or re-export, is apparently one of the most frequent grounds for denying an export licence. Thus, such an increased transparency in relation to specific risk countries and end users appears to be a valuable tool for Member States to align and converge their policies. With regard to dual-use, according to the European Commission’s annual report on dual-use, only approximately 690 denials were issued in 2016, representing about 1.1% of the value of controlled dual-use exports in that year and 0.03% of total extraEU exports.83 The EU FDI framework also requires Member States to report annual figures to the European Commission on foreign direct investments made in their territory and, if applicable, how many of those investments have been subject to screening. Member States shall also provide data on how many requests for consultations have been received.84

4.4

Possible Outcomes of FDI Consultation Procedure

As discussed above, the EU FDI framework could lead to a large amount of consultations, which require Member States to collect substantive amounts of information to be shared with the other Member States. The information to be collected is likely not readily available for the Member States and would thus likely be difficult to obtain or at least require substantive efforts, especially, as the ISP noted, in view of the risk that an acquisition is intentionally done by a private front company to disguise foreign governmental interest or control. For example, it may be difficult for a Member State to verify the actual ownership of a Russian investor or the actual source of financing from China. In the EU dualuse regulation, the Member States arguably have a much easier task of identifying goods and technology that are essentially identical. All listed dual-use items have a specific code, which the operator that applies for an authorisation has to provide. Thus, when comparing applications for authorisations, the Member States have an easier time comparing what type of transaction could be considered “essentially identical” with other transactions. The same cannot be said for the information sharing for foreign direct investments. It is plausible, for example, that a Chinese foreign investor that has been blocked from investing in a company producing critical technology in France may try to make an acquisition of a competitor in another Member State but through another investment vehicle, e.g. an investment fund, front company or another financial sourcing structure. France would then certainly want to comment on that

83

The European Commission (2018), Report from the Commission to the European Parliament and the Council on the implementation of Regulation (EC) No 428/2009 setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items, p. 10. 84 Article 5 of the EU FDI framework.

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potential investment. However, neither the target names nor the investors’ names would be the same, and the immediate source of financing could be very different. In short, there are no binary factors such as export control codes, which facilitate detecting foreign investments that are of interest for other Member States. Rightly, the EU FDI framework contains a list of sectors, i.e. critical infrastructure, critical technology and supply of critical input material, but these are arguably too broad to provide detailed guidance on a transaction-by-transaction basis. As argued above, if the EU FDI framework indeed does lead to a large number of consultation cases and required information sharing, it is also likely that the quality and availability of the data will be different in the Member States. That in turn will likely delay or cause discussions during the course of the consultations, in particular if a Member State suspects that an investment in another Member State is in fact a potential circumvention of an already blocked transaction but the other Member State fails or is unable to provide sufficient and verifiably information to rebut such a suspicion. Faced with diverging quality of information and delayed consultations, a shortterm prediction would be that the EU institutions will propose legislation with more detailed obligations on private operators, the target and/or the investor, to collect and be obliged to provide the information required for the Member States’ information sharing, in short, for example, an obligation on foreign investors to provide full information on ownership structures and financing. This will of course be somewhat awkward to introduce in Member States that do not have any FDI screening mechanisms in place at present. However, a new EU provision could be introduced that would require any foreign investor to collect and provide the information to a Member State if the consultation mechanism has been triggered by another Member State.

4.5

Perspective of Moving Decision-Making to the Union Level

As noted above, a main difference between the Common Position and the EU dualuse regulation is the legal basis. In the EU dual-use regulation, part of the decisionmaking has already been removed from the Member States. For example, there is a common dual-use list and common general export authorisations. The current version of the EU FDI framework carries a potential for moving decision-making to the Union level. In part, the EU FDI framework already allows the European Commission to issue an opinion if a foreign investment is likely to affect “projects or programmes of Union interest” on grounds of security or public order (Article 8). Projects or programmes of Union interest shall include those projects and programmes that involve a substantial amount or a significant share of Union funding or that are covered by Union law regarding critical infrastructure, critical

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technologies or critical inputs, which are essential for security or public order. The European Commission has also been given delegated powers to amend the list of projects and programmes of Union interest. Arguably, this leaves the door open for the European Commission to take an active operational role in screening investments. The European Commission may both decide what constitutes projects and programmes of Union interest and carry out the screenings. It is, however, important to remember that, at present, the European Commission has no right to block such investment (only Member States have that power). Nonetheless, in the interest of predicting the form the FDI screening mechanism may have in the future, it is easy to imagine that the European Commission may be given formal rights or at least practical tools to block certain investments of Union interest. Clearly, if EU funding is used to build critical infrastructure, the Commission could potentially look into ways to reserve its rights to restrict foreign investments, if the Commission later screens and issues a negative opinion with regard to certain investors. Thus, in the medium term, say 5–10 years, the EU FDI framework may evolve to give a more substantive regulation granting the European Commission more practical tools to screen and block investments.

4.6

Long-Term Predictions

Predicting the EU FDI screening system in the long term, 25-year perspective, is a difficult task and requires some bravery. To predict the long-term future with some credibility, the author has chosen to compare this new EU FDI framework with a field of law (export control) that has been around for at least 30 years and that inherently presents similar tensions between national security interest and Union interests. As has been explained above, to facilitate common EU rules on export control, the EU decided to separately regulate export controls on military equipment and export controls on dual-use items. This allowed for more powers to be moved to an EU regulation for dual-use goods with more common EU provisions for Member States and private operators. It is not unforeseeable that some portions of the EU FDI framework could be lifted into a separate regulation, giving the European Commission exclusive powers to review investments in sectors covered by the Union projects and programmes, including the right to block or condition such investments. As the author has tried to describe above, the two systems, export control and FDI screening, have a common ground. They are both based on a common need to protect Member State and Union security, be it outbound, on exports of military or dual-use items not ending up in the wrong countries or regimes, or inbound, by protecting the internal market against strategic investments by foreign regimes. Thus, as the export control rules still stand and continue to evolve, it is reasonable

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to expect that the EU FDI screening mechanisms will remain and continue to evolve for the next 25 years. Furthermore, at the time of writing, there is a general narrative of increased protectionism in global trade. One important factor is that the use of national security has increased, which in principle started with the United States introduction of steel and aluminium tariffs in 2018. The increased use of FDI screening is by many seen as a signal of increased protectionism. However, there is arguably an important distinction between the proper and restricted use of national security grounds to protect a country’s defence capabilities or fundamental values or rights and when national security is used for economic reasons to protect domestic industries or players against fair, market-based, competition. The debate concerning national security and protectionism is expected to continue for some years, and hopefully more guidance at international level will evolve that may also lead to international agreement or at least provide a common understanding of how FDI screening shall be used. The Union, which wants to stand up for stable multilateral trading rules (such as the WTO and international trade agreements), will inevitably have to defend its own FDI screening system. Thus, the future of the EU’s system will depend also on this external and highly politicised, at times populistic, debate concerning protectionism. The correct use of the FDI screening framework, i.e. avoiding it to be used for economic protection, would likely be an important factor to strengthen its legitimacy, both between the Member States and in relation to the EU’s trading partners. Furthermore, as has been discussed in the introductory section, the EU FDI framework was adopted with unpresented speed. Media reports of questionable investments and a general sense of increased protectionism and lack of reciprocity with regard to other trading partners (in particular China) gave impetus to the legislative process. Such external factors put pressure on politicians and the EU institutions and therefore play an important role in predicting the future of the EU’s FDI screening system. It is uncertain how the global trade and investment trends will evolve in the next 20 to 25 years and what countries will next hold the title of economic and military superpowers. It is, however, commonly accepted that we have already seen, and continue to see, the economic rise of new emerging economies and countries with capital to invest in other countries. Thus, EU countries, which have historically been used to outbound investments from the EU, now also have to get used to inbound investments from new countries. Direct investments indeed give control over companies and allow the owners to steer the company’s strategy and policies. Direct foreign investments could thus allow a foreign government to steer companies according to the government’s objectives. With the rise of new and strong economies, some of which have governments and regimes built on diverging fundamental values or even adverse interests to the EU and its Member States, it would be very unsurprising if the EU does not have a strong and somewhat centralised EU FDI screening mechanism in 25 years.

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References Bauer S, Bromley M, Maletta, G (2018) The further development of the Common Position 944/2008/CFSP on arms exports control. http://www.europarl.europa.eu/RegData/etudes/ STUD/2018/603876/EXPO_STU(2018)603876_EN.pdf. Accessed 7 Aug 2019 Baum S (2019) Remarks as Prepared by Scott Baum, United States Department of Defense Special Representative for Industrial Policy, People and Defense Annual Security Conference, Sälen, Sweden, January 13, 2019. Sälen Congressional Research Service (2019, May 2) CFIUS Reform: Foreign Investment National Security Reviews. https://fas.org/sgp/crs/natsec/IF10952.pdf. Accessed 7 Aug 2019 Davies I (2002) The regulation of arms and dual-use exports Germany, Sweden and the UK. Stockholm International Peace Research Institute and Oxford University Press, Stockholm European Commission (2016) Commission Staff Working Document Impact Assessment Report on the EU Export Control Policy review, Brussels, 28.9.2016 SWD(2016) 315 final, https:// trade.ec.europa.eu/doclib/docs/2016/october/tradoc_155008.pdf European Commission (2019) European Commission Press Release Database, EU foreign investment screening regulation enters into force. https://europa.eu/rapid/press-release_IP-19-2088_ en.htm. Accessed 7 Aug 2019 European Council (1991) Luxembourg Presidency Conclusions. https://www.consilium.europa.eu/ media/20528/1991_june_-_luxembourg__eng_.pdf. Accessed 7 Aug 2019 European Parliament (2018) I Report on the proposal for a regulation of the European Parliament and of the Council. http://www.europarl.europa.eu/doceo/document/A-8-2018-0198_EN.pdf. Accessed 7 Aug 2019 European Parliament (2019) Fact Sheets on the European Union: Defence Industry. http://www. europarl.europa.eu/factsheets/en/sheet/65/defence-industry. Accessed 7 Aug 2019 Grieger (2017) Foreign direct investment screening: a debate in light of China-EU FDI flows. EPRS, European Parliamentary Research Service, Members’ Research Service Inspektionen för strategiska produkter (2018) Verksamhet 2018. https://isp.se/media/1311/isp_ verksamhet2018_webb.pdf. Accessed 7 Aug 2019 Judgment of the Court of 17 October 1995. Fritz Werner Industrie-Ausrüstungen GmbH v Federal Republic of Germany (ECLI:EU:C:1995:328), Case C-70/94 (Court of Justice of the European Union October 17, 1995) Kompletteringar till den nya säkerhetsskyddslagen (SOU 2018:82). (2018). Stockhom Lag (1992:1300) om krigsmateriel. (n.d.) Opinion 2/15 of the Court (Full Court), Opinion 2/15 (Court of Justice of the European Union May 16, 2017) Säkerhetsskyddsförordning (2018:658). (n.d.) The Council (1998) European Union Code of Conduct. https://www.sipri.org/sites/default/files/ research/disarmament/dualuse/pdf-archive-att/pdfs/eu-code-of-conduct-on-arms-exports.pdf. Accessed 7 Aug 2019 The Council (2008) Council Common Position 2008/944/CFSP of 8 December 2008 defining common rules governing control of exports of military technology and equipment (OJ L 335, 13.12.2008, p. 99–103). https://eur-lex.europa.eu/legal-content/EN/TXT/? qid¼1560835993597&uri¼CELEX:32008E0944. Accessed 7 Aug 2019 The Council (2009) Council Regulation (EC) No 428/2009 of 5 May 2009 setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items (OJ L 134, 29.5.2009, p. 1–269) The Council (2015a, July 20) Council conclusions relating to the review of Common Position 2008/ 944/CFSP on arms exports and the implementation of the Arms Trade treaty (ATT). http://data. consilium.europa.eu/doc/document/ST-10900-2015-INIT/en/pdf. Accessed 7 Aug 2019 The Council (2015b, July 20) User’s Guide to Council Common Position 2008/944/CFSP defining common rules governing the control of exports of military technology and equipment. http:// data.consilium.europa.eu/doc/document/ST-10858-2015-INIT/en/pdf. Accessed 7 Aug 2019

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The Council (2018) Twentieth Annual Report According to Article 8(2) of Council Common Position 2008/944/CFSP Defining Common Rules Governing the Control of Exports of Military Technology and Equipment (OJ C 453, 14.12.2018, p. 1–537). https://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri¼CELEX:52018XG1214(01)&from¼SV. Accessed 7 Aug 2019 The Council (2019) Common Military List of the European Union adopted by the Council on 18 February 2019 (equipment covered by Council Common Position 2008/944/CFSP defining common rules governing the control of exports of military technology and equipment) (OJ C 95, 12.3.2019, p. 1–35) The European Commission (2018) Report from the Commission to the European Parliament and the Council on the implementation of Regulation (EC) No 428/2009 setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items. http://trade. ec.europa.eu/doclib/docs/2018/december/tradoc_157592.pdf. Accessed 7 Aug 2019 The European Community (2002) Treaty establishing the European Community (Official Journal C 325, 24/12/2002 P. 0033 - 0184) The European Union (2012) Treaty on the Functioning of the European Union (OJ C 202, 7.6.2016, p. 1–388) The European Union (2016) Treaty on European Union (OJ C 202, 7.6.2016, p. 13–388) The Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies. (1995)

Carolina Dackö is a lawyer in private practice dedicated to international trade law. She is a partner at the Swedish law firm Mannheimer Swartling and heads up the international trade law practice under the firm’s practice group, Corporate Sustainability & Risk Management. She has ten years of experience in private practice working in Brussels and a further eight years in Sweden. Her practice focuses on international trade law matters, mainly national security, foreign direct investment screening, import and export law, export control and sanctions law, customs law, trade defence measures, WTO law and free trade agreements. Carolina has substantial experience assisting clients with export control classification and assessments regarding trade bans in risk markets, as well as internal and external investigations, often involving multi-jurisdictional aspects. Carolina has substantial experience in customs audits, anti-dumping and anti-subsidy investigations and represents clients in investigations before the European Commission, as well as in court proceedings in both national and EU courts. Carolina holds an LLM from the University of Gothenburg and a Maîtise in European and International Law from the University of Toulouse.

The One Belt and One Road (OBOR) Initiative: Reconceptualisation of State Capitalism Vis-à-Vis Remapping of Global Governance? Qingxiu Bu

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 State Capitalism Vis-à-Vis the Washington Consensus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 The Rise of a Distinct Form of State Capitalism in China . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 One Belt One Road (OBOR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Overcapacity and Energy Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 OBOR Vis-à-Vis the “Marshall Plan” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Reshaping the Global Governance Landscape? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Existing Global Governance Regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Global Governance Characterised with Chinese Elements . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Compatibility Vis-à-Vis Transplantation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 The Chinese OBOR Initiative: An Alternative Concept of International Order? . . . 5 Going Beyond Geopolitical Power Play . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Strategic Focus: Geopolitical Manoeuvrings Vis-à-Vis Economic Enhancement . . . 5.2 Promote More Transparent and Inclusive Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Legal and Regulatory Framework in Response to Other Concerns . . . . . . . . . . . . . . . . . 5.4 Who Will Write the New Global Order? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract China is emerging as an economic powerhouse with the globalisation of the world economy. The country takes proactive steps to deepen its global engagement through new initiatives, such as One Belt, One Road (OBOR). It offers good evidence of China’s mercantilist efforts to derive political and geostrategic leverage from the OBOR-related projects. The initiative serves as a key indicator of whether China is primarily to satisfy its national interests or whether it seeks to create a win-win Eurasia. No ready formula can suffice to explain the cross-cutting economic and political factors at play. Arguably, the OBOR initiative appears to be a combination of geopolitical and economic strategies to achieve China’s multiple strategies.

Q. Bu (*) Sussex Law School, University of Sussex, Falmer, UK e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 637–676, https://doi.org/10.1007/16495_2020_12, Published online: 2 September 2020

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It all comes down to whether China could be able to write global governance rules via the OBOR initiatives.

1 Introduction Major powers influence the design and implementation of global rules to their own advantage.1 Globalisation has led to asymmetric engagement and opportunities, although standard theory would lead one to expect that all countries will benefit evenly. The resulting unequal opportunities under the existing institutions trigger increased nationalist pushback, while a new power is seeking to integrate its own institutional approaches into the global policy architecture. During the geopolitical transformation, the contestations are even sharper in the context of globalising economic orders and legal norms. With its enormous financial capacity, China has been building up its soft power through a “One Belt, One Road” (OBOR) Initiative,2 which differs from existing treaty-based integration concepts. It is worth examining whether it signifies a “global public good” concept and further achieves win-win objectives. At a macro-level, this chapter addresses whether the OBOR initiative strikes a balance between China’s national ambitious goals and its international obligations. Given that the UN Sustainable Development Goals (SDGs) encapsulate, in principle, an integrated vision for sustainable development, at a micro-level, the chapter explores rigorously how China deals with cross-border disputes in accordance with international law. The study proceeds in four steps. In the context of reshaping global governance, section I conceptualises a state capitalism model vis-à-vis the Washington Consensus. This section seeks to address whether they could complement each other since they may become rival models of influence. The chapter then continues with an application of the power transition theory to analyse how China is engaged in a global institution building of its own through creating a new formula of global governance. Section II refers to China’s grand strategy of the OBOR initiative. Apart from the exploration of its rationales, it is also argued that the OBOR initiative differs substantially from that of “Marshall Plan”. Section III ascertains whether the establishment of a hybrid global governance regime is dependent on China’s unique characteristics and also whether it is compatible with international law. It remains unclear as to whether an ideologically perceived line is becoming increasingly blurred in terms of the market-driven OBOR

1

Haas and Hird (2012), p. 67. The two terms are interchangeably used between ‘One Belt and One Road (OBOR)’ and ‘Bridge and Road Initiative (BRI)’ in this chapter.

2

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initiative. It is equally essential to look at the EU Screening Regulation as well as the response from the Organisation for Economic Co-operation and Development (OECD). Their interaction with OBOR provide more insights in terms of the viability of the initiative. Section IV examines barriers in China’s implementation of its long-standing principles of equality and cooperation for mutual benefits. The emerging multilateral system embedded in the OBOR initiative has been challenged by rising popular nationalist sentiments. This section seeks to mitigate inevitable conflicts from multipronged perspectives. The concluding section affirms that the OBOR initiative must be based on universally recognised international norms; otherwise, it would be difficult for China to project the strategic narratives at an international stage. At stake is whether China can overcome the governance challenge while enhancing its own global influence.

2 State Capitalism Vis-à-Vis the Washington Consensus China’s stunning growth rates have corresponded with the rise of state capitalism.3 It captures China’s unique blend of market, finance, government-owned corporations and central control.4 The re-emergence of capitalism in China after the 2008 financial crisis is fuelling competition between China and other states around the globe for soft power and global influence.5 Since the mid-2000s, China’s political economy has stabilised around a model where most sectors are marketised and increasingly integrated with the global economy.6 However, strategic industries remain firmly in the control of an elite empire of state-owned enterprises (SOEs).7 It poses a direct challenge to the Western concept of the free market and neoliberal capitalism.8 A variety of inquiries are explored regarding the implications of state capitalism on geopolitical competitiveness and global governance. It is not yet entirely clear to what extent OBOR offers a different version of capitalism.9 Any approaches via either purely economic or geopolitical and security affairs would be too simplified and incomplete. It is crucial to conceptualise China’s OBOR initiative in an interdisciplinary context.

3

Naughton and Tsai in Naughton and Tsai (2015), pp. 1–24. Ibid. 5 McNally (2012). 6 Boltho and Weber in Naughton and Tsai (2015), pp. 240–265. 7 Pearson in Naughton and Tsai (2015), pp. 27–45. 8 Breslin (2011). 9 Nordin and Weissmann (2018). 4

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The Rise of a Distinct Form of State Capitalism in China

As the primary driver, the rise of state capitalism in China poses a challenge to the free market economies of the developed world, particularly in the aftermath of the 2008 financial crisis.10 It is a market-driven economic system where the state allows for more direct control of the economy.11 The sustainability of Chinese capitalism depends upon the extent to which China can address development challenges with adequate resilience and efficient adaptability.12

2.1.1

Legitimacy

China needs to maintain domestic economic growth, which is the foundation for political stability in the Chinese Communist Party (CCP) regime. This helps to strengthen the role of the CCP as a tool of governance in an authoritarian but market-dominated system.13 The Chinese state capitalism, along with its institutional adaption, has led to the Chinese miracle.14 In view of a long-term global strategy of poverty eradication, China’s double-digit growth has moved over 400 million people out of poverty,15 associated with structural and systemic measures. China holds that its development paradigm would contribute to global economic prosperity as well as security and stability.16 Given the essential role of the poverty eradication narrative, it remains to be seen to which extent other OBOR member states will benefit from the OBOR initiative.

2.1.2

Geo-Economics and Geopolitical Perspectives

Steadily advancing China’s strategic objective of fashioning a Sino-centric order characterises geo-economics.17 Conceptually, the term geo-economics refers to China’s long-standing predilection for a realist or mercantilist style of state-economy relations and foreign economic policy.18 It means the use of economic instruments to

10

Calhoun in Wallerstein and Calhoun et al. (2013), pp. 131–161. Bremmer (2009). 12 United States-China Economic and Security Review Commission (7 February 2019), Hearing on What Keeps Xi Up at Night: Beijing’s Internal and External Challenges, Washington, 116th Congress, 1st Session. Available at https://www.uscc.gov/sites/default/files/transcripts/February% 207%2C%202019%20Hearing%20Transcript.pdf. 13 The Diplomat (30 September 2015a), The Chinese Communist Party and Legitimacy. 14 Frazier in Naughton and Tsai (2015), pp. 223–239. 15 Fan and Kanbur, et al. in Fan and Kabur et al. (2014), pp. 1–28. 16 Ferchen (2016), p. 1. 17 Ibid., p. 6. 18 Harding (2015). 11

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promote national interests, and to produce beneficial geopolitical results,19 and further to achieve broader foreign policy or geostrategic aims.20 Ikenberry and Lim provided insights of China’s incentives via a theory of external innovation, that is: (i) Offering a new institutional mode of international cooperation within the existing system (ii) Creating a new tool of statecraft to enhance bilateral or multilateral influence; and (iii) Challenging and replacing the prevailing substantive rules and norms within the relevant policy domain.21 China may use OBOR to promote its economic system to other countries. Given the long-term geopolitical implications, China’s economic might could translate into global political influence.22 Positively, OBOR plays into the narrative laid out by China that its rise will be peaceful and marked by economic relationships.23 It is worth examining the extent to which these logics and pathways of influence align with China’s practical objectives.24

3 One Belt One Road (OBOR) China’s OBOR was launched in 2013 to boost economic integration with its neighbours and various trading partners.25 Morgan Stanley has predicted that China’s investment in OBOR member states will increase by 14% annually, and the total investment amount could double to $1.2–1.3 trillion by 2027.26 The strategy is designed largely to fund projects from China’s west through Central Asia to the Middle East and Europe.27 As the vanguard for Beijing’s reach for global power,28

19

Blackwill and Harris (2016), p. 20. Grieger (2016). 21 Ikenberry and Lim (2017), p. 8. 22 Global Agenda Council on Geo-Economics (2016), Geo-Economics with Chinese Characteristics: How China’s Economic Might Is Reshaping World Politics, available at http://www3. weforum.org/docs/WEF_Geoeconomics_with_Chinese_Characteristics.pdf. 23 Sidaway and Woon (2017). 24 Ikenberry and Lim (2017). 25 Chatham House, China’s Belt and Road Initiative (BRI), London, The Royal Institute of International Affairs, available at https://www.chathamhouse.org/research/topics/china-belt-androad-initiative-bri. 26 Stanley (14 March 2018), Inside China’s Plan to Create a Modern Silk Road, available at https:// www.morganstanley.com/ideas/china-belt-and-road. 27 Oxford University Faculty of Law, One Belt One Road, Oxford, available at https://www.law.ox. ac.uk/one-belt-one-road. 28 Hawkins (2017). 20

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OBOR has the potential to be perhaps the world’s largest institutional platform for regional collaboration. The implementation of OBOR involves the complex interaction among the economic, geopolitical and security dimensions of China’s relations with the rest of the world.29 Economically and strategically expanding its global influence, the OBOR initiative marks a new stage in the growing salience of geopolitical considerations in Chinese foreign policy.30 It is intended to promote infrastructure, enhance complementarity of development strategies and boost interconnected development to achieve common prosperity.31

3.1

Overcapacity and Energy Security

China’s domestic economy is at a critical juncture of its development trajectory, facing a challenging transition from an investment-led to consumption-led model of growth.32 Overcapacity is one of China’s comprehensive economic and geopolitical motives. There is great potential for China to use the OBOR initiative to absorb some of its surplus.33 The OBOR-orientated infrastructure projects offer outlets to relieve overcapacity in major industrial sectors, where domestic returns have been declining.34 Given that trade and infrastructure are inextricably linked, the goal of the OBOR initiative is to provide energy security and access to global markets for Chinese products. Such strategic moves could shape a more pliable regional security and political environment for the country.35 There is overcapacity in many sectors, which squeezes corporate profits, increases debt levels and makes China’s financial system more vulnerable.36 Dealing with China’s excess capacity has become one of the top economic priorities, which is considered as the sword of Damocles hanging over its head.37 Cutting down overcapacity would involve slashing jobs, shutting down plants and closing factories.38 OBOR serves as an initiative to drain some of China’s excess production.39

29

Blanchard and Flint (2017). Hughes (2011). 31 XinhuaNet (11 November 2017), Chinese President Xi’s Address at APEC CEO Summit, available at http://www.xinhuanet.com/english/2017-11/11/c_136743492.htm. 32 Zilibotti (2017). 33 Brookings (Summer 2015), The AIIB and the ‘One Belt, One Road, available at https://www. brookings.edu/opinions/the-aiib-and-the-one-belt-one-road/. 34 Ikenberry and Lim (April 2017), p. 10. 35 The Diplomat (26 June 2015b), The Trouble with China’s ‘One Belt One Road’ Strategy. 36 Cai (March 2017). 37 Ibid. 38 The Diplomat (26 June 2015), The Trouble with China’s ‘One Belt One Road’ Strategy). 39 Council on Foreign Relations (21 May 2019), China’s Massive Belt and Road Initiative, available at https://www.cfr.org/backgrounder/chinas-massive-belt-and-road-initiative. 30

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More specifically, investment in infrastructure and poverty eradication are two of the most pressing public policy issues.40 The world faces a global infrastructure deficit of USD 2 trillion per year over the next 20 years.41 The absence of adequate infrastructure represents a key structural factor that holds back local economic development. China has relatively advanced technologies as well as abundant capital. Its global extraction of oil and other resources has created a formidable capability in construction and engineering. During the last four decades, infrastructure development abroad represents the cornerstone of China’s rise. The lure has been almost irresistible to those countries that do not have the resources.42 Another projected benefit is the energy security that will come through the construction of OBOR-funded transport routes.43 For instance, China’s energy security can be enhanced by creating alternative trade routes across land bridges in economic corridors linking China’s south-western provinces directly to the Indian Ocean.44 A flagship project of the China-Pakistan Economic Corridor (CPEC) provides China with energy resources as well as growing consumer markets.45 The OBOR features prominently, alongside China’s reliance on SOEs for the country’s efforts to guarantee access to energy and other global commodities.46 It can be reconceptualised as the cornerstone of China’s future global vision. Thus, China may gain a more viable return on its foreign exchange reserves, create new overseas business opportunities for Chinese firms, create new markets for industries currently experiencing overcapacity and stimulate economic development in poorer regions of China.47 As such, seen as a quick solution to the problem of overcapacity, Chinese companies are incentivised to go abroad by expanding their access to overseas markets.

3.2

OBOR Vis-à-Vis the “Marshall Plan”

Compared with the US Marshall Plan for Europe,48 OBOR could serve as a twentyfirst-century version of the “Marshall Plan”, with huge infrastructure projects and 40

Dunford and Liu (2019). World Economic Forum (2015a), The Global Competitiveness Report 2015–2016, pp. 46–47, available at www3.weforum.org/docs/gcr/2015-2016/Global_Competitiveness_Report_20152016.pdf. 42 Hawkins (2017). 43 Foreign Policy (6 December 2018a), One Belt, One Road, One Big Mistake, available at https:// foreignpolicy.com/2018/12/06/bri-china-belt-road-initiative-blunder/. 44 Grieger (2016). 45 Foreign Affairs (24 October 2017), China’s $62 Billion Bet on Pakistan, available at https://www. foreignaffairs.com/articles/china/2017-10-24/chinas-62-billion-bet-pakistan. 46 Ferchen (2016), p. 6. 47 Haenle et al. (2019). 48 The Diplomat (6 November 2014), The New Silk Road: China’s Marshall Plan? 41

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enhanced trade and investment schemes underpinning new forms of Chinese leverage.49 The “Chinese Marshall Plan” risks, however, to prolong China’s state capitalism, with its SOEs and state-owned policy banks playing a major role in OBOR’s implementation, even though China pledged to allow the market to play a decisive role in resource allocation.50 It will present China with strategic opportunities in expanding its global influence, given that state capitalism may cross national boundaries through OBOR.51 It is significant to explore how each national context affects operations of those SOEs and thus shapes idiosyncratic models of state capitalism being developed in those OBOR member states.52 Similarly, the two grand schemes share a common context of market failure or global power vacuum. China does not share the US’s belief in limited state intervention, which plays an important role via markets.53 As the OBOR projects boost local economic growth, Chinese investors will be in a position to take advantage of new opportunities and further expand their foreign direct investment (FDI) holdings. The initiative seems to put common development over power politics,54 but the strategic purpose of OBOR goes beyond merely economic gain.55 Rolland provides testimony: . . .BRI’s different components serve Beijing’s vision for regional integration under its helm. It is a top-level design for which the central government has mobilised the country’s political, diplomatic, intellectual, economic and financial resources . . . it is a grand strategy.56

Vines points to potential risks: “The Belt and Road initiative might conceivably become no more than a gigantic instrument of supply-chain management for China, creating the kind of jobs that drive an enormous Chinese production machine.”57

49 Shen (6 February 2016), How China’s ‘Belt and Road’ Compares to the Marshall Plan, available at https://thediplomat.com/2016/02/how-chinas-belt-and-road-compares-to-the-marshall-plan/. 50 Grieger (2016). 51 Le Corre (2018). 52 The Economist (21 January 2012a), The Rise of State Capitalism, available at https://www. economist.com/leaders/2012/01/21/the-rise-of-state-capitalism; The Economist (21 January 2012b) Theme and Variations, available at https://www.economist.com/special-report/2012/01/21/themeand-variations. 53 World Economic Forum (27 February 2015b), Who are the winners and losers of geo-economic competition?, available at https://www.weforum.org/agenda/2015/02/who-are-the-winners-andlosers-of-geo-economic-competition/. 54 Piccone (2018). 55 Scobell et al. (2018). 56 Rolland (25 January 2018); The terms of Belt Road Initiative (BRI) and One Belt One Road (OBOR) are interchangeably hereinafter used in this chapter. 57 Daily Mirror (15 May 2017), Can Belt and Road Initiative resurrect a liberal international order?, available at www.dailymirror.lk/businessopinion/Can-Belt-and-Road-Initiative-resurrect-a-liberalinternational-order-/306-128896.

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Echoed by Dunford and Liu, it is just the old “division of labour” common to imperialism, despite that it was claimed as a win-win situation.58

4 Reshaping the Global Governance Landscape? Power transition theory deals with the emergence of global power transformations and their effects on the structure of the global governance.59 The rise of China to the status of a global power is one of the seminal developments of the current era.60 The emerging power dynamics highlights a competition of ideologies about the future constitution of the global governance.61 China inevitably finds itself with growing stakes in how the world is organised and seeks to reshape the current governance regime.62 Based primarily upon an ideological perspective, China’s economic miracle is often attributed to its unique political and economic policies, which is referred to as the China Model/Beijing Consensus. It is worth examining whether the China Model can be replicated by OBOR member states and how China is moving to realign the global economy with its interests.63

4.1

Existing Global Governance Regime

American hegemony, liberal internationalism and the deeper systemic foundations of sovereignty and state primacy are three layers of the existing system.64 Many of the existing global rules and institutions were established prior to China’s ascent and entry into the global system.65 Reform of the institution entails the redistribution of decision-making authority, facilitating greater influence over operations and potentially a larger share of the gains generated by the reshaping of institutions.66 Influence may extend to leverage in the pursuit of greater formal authority within existing institutions in the relevant policy domain, thus overlapping with the authority-seeking stakeholder strategy.67 As Kaya illustrated: a “status-quo

58

Dunford and Liu (2019). Layne (2018). 60 Larson (2015). 61 Ferdinand (2016). 62 Foreign Affairs (January/February 2019), The Age of Uneasy Peace - Chinese Power in a Divided World, available at https://www.foreignaffairs.com/articles/china/2018-12-11/age-uneasy-peace. 63 Lake (2018). 64 Ikenberry and Lim (April 2017). 65 Feng and He (2017). 66 Ikenberry and Lim (April 2017), p. 4. 67 Ikenberry and Lim (April 2017), pp. 7–8. 59

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stakeholder” state accepts the existing rules and norms of the institution or regime, while an “authority-seeking stakeholder” seeks to gain greater voice and influence in the formal processes of the institution, defined as “distributive change” via enhanced voting rights and/or greater national representation in the constituent organs based on underlying member characteristics.68 OBOR challenges the still dominating Western vision of the international system and could effectively transform the existing structure of the current international order.69 Development has always entailed social and political change and challenges.70 It remains a challenge to enhance policy coordination necessary for the implementation of such cross-border infrastructure projects.71 In this vein, China is not seeking to reform the substantive rules and norms of an institution.

4.2

Global Governance Characterised with Chinese Elements

The geo-economic paradigm characterises China as a mercantilist power whose state-led economy and increasingly assertive foreign economic initiatives will enhance the country’s global power and leverage.72 Despite China’s four-decade economic reforms, it is still labelled as a socialist-market economy. The transformation from state socialism to state capitalism helps to legitimise the marketisation of the economy.73 The China Model attempts to play a levelling role in markets, to ensure that booms and busts are limited and that unbridled capitalism is tempered by the interests of the state and other stakeholders.74 This appears to indicate that the government uses free market forces to promote the economy, but it still plays a major role in the country’s economic development.75 In the scenario of OBOR, democracy and individual rights are largely subservient to economic growth and social

68

Kaya (2015), p. 9. Esteban and Zhou (2018). 70 Horsley (December 2018). 71 Caixin (19 June 2019), World Bank: Managing the Risks of the Belt and Road, available at https://www.caixinglobal.com/2019-06-19/world-bank-managing-the-risks-of-the-belt-and-road101438368.html. 72 Ferchen (2016), p. 1. 73 Bremmer (2009). 74 World Economic Forum (January 2015c), Geo-economics Seven Challenges to Globalization, p. 7, available at http://www3.weforum.org/docs/WEF_Geo-economics_7_Challenges_Globaliza tion_2015_report.pdf. 75 Morrison (25 June 2019). 69

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stability.76 As such, OBOR is characterised by an economically liberal and politically illiberal order, which mirrors China’s domestic governance architecture.77

4.2.1

China as an Ideological Rival: Paving the Way to a New Global Order?

Globalisation has helped fuel China’s rise as a strategic rival.78 It is emerging as a near-peer competitor and began to project geo-economic influence beyond its vicinity.79 The advance of the OBOR project could trigger a transition of the international system that moves the current US-dominant order to a multipolar, or even a China-centric, one.80 As a new player in global governance, China is committed to be a frontrunner in developing a new kind of multilateralism and in reshaping the global governance system.81 Critical inquiries arise as to what alternative concepts of order exist and how these concepts may challenge the existing order.82 Some commentators have respectively labelled China as a “fragile” or “partial” power.83 However, British polemicist Martin Jacques speculates about when China will “rule the world”.84 Theoretically, China could create a parallel global order with a new model of development, given China’s ascendant role in the global economy.85 It depends largely upon whether China can create new, potential rival institutions within the wider context of its engagement with global institutions and the broader system of existing multilateral rules and institutions.86 The country is attempting to reshape the geo-economic landscape through the OBOR initiative.87

76

Voice of Djibouti (9 November 2018), China’s Belt and Road Initiative: Reshaping the Global and Regional Orders, available at voiceofdjibouti.com/chinas-belt-and-road-initiative-reshapingthe-global-and-regional-orders/. 77 Ibid. 78 The New York Times (7 February 2018), The Rise of China and the Fall of the Free Trade Myth, available at https://www.nytimes.com/2018/02/07/magazine/the-rise-of-china-and-the-fall-of-thefree-trade-myth.html. 79 The Diplomat (5 June 2018a), What Does China’s Belt and Road Initiative Mean for US Grand Strategy?, available at https://thediplomat.com/2018/06/what-does-chinas-belt-and-road-initiativemean-for-us-grand-strategy/. 80 YaleGlobal Online (25 July 2017), Is a China-Centric World Inevitable?, available at https:// yaleglobal.yale.edu/content/china-centric-world-inevitable. 81 Chatham House (12 June 2019), Engage China to Uphold Multilateralism-But Not at Any Cost, The Royal Institute of International Affairs, available at https://www.chathamhouse.org/expert/ comment/engage-china-uphold-multilateralism-not-any-cost#. 82 Godehardt (January 2016). 83 Shirk (2007), p. 107. 84 Jacques (2009), pp. 364–414. 85 Ikenberry (2008). 86 Ikenberry and Lim (April 2017), p. 2. 87 Ferdinand (2016).

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The ambitious initiative is to be achieved through nurturing China’s multinational champions, building infrastructure across continents and creating new markets.

4.2.2

A Hybrid Model: State’s Dominance Vis-à-Vis Private Actors’ Emerging Role

China’s OBOR may give rise to a hybrid model of transnational governance.88 Its state-driven aspects contribute to OBOR’s ambition. The government uses its ownership of companies and financial institutions to further its strategic goals.89 The state still dominantly shapes rule-making, and state-owned enterprises (SOEs) advancing state policy play a key role in the implementation of OBOR projects. States often create national investment portfolios via sovereign wealth funds (SWFs), which are used to help finance state capitalism.90 Large SOEs and government policy banks provide more than 95% of OBOR funding.91 The privileged relationship between the state and Chinese SOEs allows the former to secure control over key strategic sectors and resources, thereby ensuring stable energy supplies and providing national stability.92 The highly centralised model seems to make a lot of these projects viable. However, there is substantial challenge to deal with the issues in the state-driven side of the hybrid governance model. Entering a phase of relatively slower growth, China need to adapt to new challenges and party-state priorities.93 To build an effective and sustainable hybrid model of transnational governance, a number of strategies can be pursued. It is essential to develop a diversified financing system and facilitate greater cooperation between government and private capital.94 State-affiliated MNCs serve to promote national developmental agendas. Some powerful non-state actors, such as multinational corporations (MNCs), play increasingly significant roles in the OBOR framework. In response, they are expected to increase their level of engagement with non-state entities on OBOR-related issues. It is notable that the interface between state and market may be complex and multifaceted.95 It remains uncertain whether this hybrid model could be effective and 88

Feldman (28 January 2019). The Interpreter (Published by the Lowy Institute, Sydney) (2 July 2019), China’s Belt and Road Initiative, From the Inside Looking Out, available at https://www.lowyinstitute.org/the-interpreter/ china-s-belt-and-road-initiative-inside-looking-out>. 90 Bremmer (2009). 91 Foreign Policy (6 December 2018a), One Belt, One Road, One Big Mistake, available at https:// foreignpolicy.com/2018/12/06/bri-china-belt-road-initiative-blunder/. 92 University of Alberta - China Institute (2018), State-Owned Enterprises in the Chinese Economy Today: Role, Reform, and Evolution, available at https://cloudfront.ualberta.ca/-/media/china/ media-gallery/research/policy-papers/soepaper1-2018.pdf. 93 Naughton and Tsai in Naughton and Tsai (2015) pp. 1–24. 94 Feldman (28 January 2019). 95 Petersmann (2018). 89

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sustainable in dealing with unprecedentedly complicated legal issues. High standard of labour and environmental protection, among other things, need to be highly prioritised.96 It is argued that both public and private actors adhere to principles of transparency and social standards for OBOR projects.

4.3

Compatibility Vis-à-Vis Transplantation

China is trying to not just export higher-end goods through OBOR but also encourage the acceptance of Chinese standards.97 More precisely, China is exporting the idea of “market authoritarianism”, whose appeal rests largely in its challenge to the basic tenets of the Washington Consensus.98 One is through ideology; another is through institutional methods, despite the vague overlap between each other. Authoritarian states seek to emulate China’s growth model, given that the Chinese Communist Party (CCP) has managed to retain its power not only politically but also economically.99 It remains uncertain as to whether the state-directed development in other emerging market economies will be compatible with China’s model of state capitalism.100 Viability is of utmost importance while translated into local institutions in foreign societies. Strong governance can promote OBOR projects, especially in the absence of appropriate local standards. OBOR serves as a vehicle to use the Chinese model of state capitalism to develop the world’s poorer regions. Those OBOR member states may benefit from some potentially positive spillover effects to advance their economic development. An inclusive approach to governance has won support due to its voluntary nature and its embrace of the principle of “common but differentiated responsibilities”.101 However, there is heterogeneity across countries in terms of institutions, and thus experience from China cannot be directly transferred elsewhere.102 As Ikenberry argued, “the liberal international characteristics of order, openness, rules, multilateral cooperation, are deeply rooted and likely to persist”.103 OBOR involves diverse political, economic and social factors and regulatory regimes that impact implementation. The involvement of foreign financing, foreign 96

Caixin (17 May 2017), One Belt, One Road: China’s 21st Century Marshall Plan?, available at https://www.caixinglobal.com/2017-05-17/opinion-one-belt-one-road-chinas-21st-century-mar shall-plan-101091483.html. 97 Nordin and Weissmann (2018). 98 Reardon-Anderson (2018), p. 79. 99 Brookings (22 January 2019), Protect the Party: China’s Growing Influence in the Developing World, available at https://www.brookings.edu/articles/protect-the-party-chinas-growing-influ ence-in-the-developing-world/. 100 Harris (2018). 101 Ollapally (2018). 102 Hoskisson et al. (2013). 103 Ikenberry (2018).

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companies and foreign investment makes the typical infrastructure governance challenges more complicated.104 The scenarios become even more complicated with such factors considered as environmental and social impact and the interests of the local populations.105

4.4

The Chinese OBOR Initiative: An Alternative Concept of International Order?

The narrative of China’s rise questions the hegemony of Western powers in the global governance. Influence comes via wielding substantial authority over the operations of the new institution and the status conferred by institutional leadership. It remains a significant inquiry as to whether the growing global interdependence of China’s economy is translating into greater Chinese geopolitical influence. OBOR helps to increase the leverage of China to push forward alternative ideas of global governance.106 China’s influence on the global economy and the creation of new relations with other developing economies presents a growing challenge to US hegemony.107 Mouffe argued that the world is a pluri-verse and to accept a diversity of political forms of organisation will be more conducive to peace and stability than the enforcement of a universal model.108 The complexity is expressed in a competition of ideologies about international order and a multifaceted understanding of power.109

4.4.1

Is Thucydides’ Trap Inevitably Unavoidable?

China is adjusting to an international system that was developed in its absence.110 The current global governance system has generally been slow to adjust and slow to grant China a voice commensurate with its growing stature.111 China’s approach will not involve a singular decision either to “engage and integrate into” existing regional

104

Horsley (December 2018). Hoare et al. (May 2018). 106 Beeson and Li (2016). 107 Foreign Policy (6 December 2018a), One Belt, One Road, One Big Mistake, available at https:// foreignpolicy.com/2018/12/06/bri-china-belt-road-initiative-blunder/. 108 Mouffe (2009). 109 Godehardt (January 2016). 110 Blackwill and Tellis (1 April 2015), p. 16. 111 South China Morning Post (17 January 2018), Not a Zero-Sum Game: Global Governance Must Adapt to the New US-China Equation, available at https://www.scmp.com/comment/insight-opin ion/article/2128429/not-zero-sum-game-global-governance-must-adapt-new-us-china. 105

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and global institutions or to “oppose and undermine” these institutions.112 On the one hand, Chinese state capitalism integrates selectively aspects of the Washington Consensus while maintaining strong political control over key strategic sectors. On the other hand, China attempts to build a network of “counter-hegemonic” institutions that seeks to challenge, oppose and undermine the US-led global and regional institutions and the order they help sustain.113 As an innovative institution, the OBOR initiative serves as a great example for “counter-hegemonic” purposes. Trump’s national populism and protectionist trade policies have effectively undermined the very liberal order that once justified US leadership.114 It appears that OBOR is a radical departure from the crude mercantilism of ‘my country first’ trade governance.115 As Russel observed: It’s the risk that the US might curtail its global leadership and participation in international institutions, while China approaches global engagement and international institutions largely as a means to satisfy so-called core interests and national goals.116

China’s OBOR is even viewed by some as a major challenge to US global economic interests.117 Through fostering a strategic dialogue, international institutions should seek to mitigate and circumvent historical patterns, such as the Thucydides Trap.

4.4.2

Is the Creation of a Rival International Order Viable Under the OBOR Initiative?

Institutions should work to facilitate better resolution of cross-border disputes and develop the capacity to set forward-looking agendas to deal with future challenges. Chinese policy makers are actively trying to develop a new international order through the creation of new institutions, such as the OBOR blueprint for international trade and investment centred on China.118 The weakening of the West’s global domination and the growing unwillingness on the part of the US to defend the liberal order have increased the importance of regional-level international politics.119 China increasingly presents itself as an alternative to the Western democratic model,120

112

Ikenberry and Lim (April 2017), p. 3. Ibid. 114 Forbes (14 January 2019), China’s Grand Strategy, available at https://www.forbes.com/sites/ danielaraya/2019/01/14/chinas-grand-strategy/#6a4e4031f180. 115 Drache (2017). 116 South China Morning Post (17 January 2018), Not a Zero-Sum Game: Global Governance Must Adapt to the New US-China Equation, available at https://www.scmp.com/comment/insight-opin ion/article/2128429/not-zero-sum-game-global-governance-must-adapt-new-us-china. 117 Morrison (25 June 2019), p. 37. 118 Beeson and Li (2016). 119 Kaczmarski (2017). 120 New York Times (20 November 2011), How China Can Defeat America. 113

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conceived as a “revisionist” power.121 OBOR will create a new impetus in world economic growth and lay the foundations of regional peace and stability.122 Its focus on infrastructure-led development domestically became the pivot in its rapid industrialisation and ascendant rise as a regional hegemon in the last 40 years.123 China has been attempting to create some institutions to propagate rules, principles and norms that could form the basis of a rival international order.124 It remains unclear as to whether China’s strategy is one of portfolio diversification or replacement of institutions and systems.125 A further inquiry needs to be ascertained whether China could remain a unique epicentre with a growing sphere of influence and core interests to counterbalance the US sole super power.126 OBOR serves as a test stone to demonstrate whether China can use it to advance the strategy. The above approaches could present various sorts of challenges to the existing system of rules and institutions. In the global governance arena, arguably, there is a long way to go for China to become the global leader and hegemonic power of the Asian Century.127 After all, China’s ability to wield new institutions as “instruments” of its geopolitical goals has limits.128 While using the counter-hegemonic institutional strategies, China faces substantial challenges, like ideological and normative competition, to achieve them in the short term.

4.4.3

Too Early to Conclude!

In terms of the policy implications of OBOR, it is essential to examine how other states and stakeholders align their interests in response to the challenges. The Organisation for Economic Co-operation and Development (OECD) has set ground rules designed to preserve capitalist rule, in response to which China supported calls for a New World Economic Order.129 With the European Union sensitive about big powers trying to play divide-and-rule within its sphere, China’s dealings have caused concern in Brussels.130 Upon China’s rising global prominence, the EU has initiated the Euro-Asian Connectivity Strategy in September 2018 in a move to increase investments in Asia. The EU plans to address sustainability issues and has

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Le Corre (2018). Godement et al. (April 2018). 123 Wu (2016). 124 Ikenberry and Lim (April 2017). 125 Le Corre (2018). 126 Zimmerman (2015). 127 Blanchard and Flint (2017). 128 Ikenberry and Lim (April 2017). 129 Bader (2016). 130 Financial Times (27 November 2017a), Brussels Rattled as China Reaches out to Eastern Europe, available at https://www.ft.com/content/16abbf2a-cf9b-11e7-9dbb-291a884dd8c6; de Jonquières (April 2015). 122

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expressed that it will adopt a comprehensive, rule-based and transparent approach.131 The European Parliament approved on 14 February 2019 the EU Screening Regulation.132 It is aimed at harmonising and coordinating the various national foreign investment screening mechanisms. The EU Screening Regulation sets out to strengthen the EU’s tools for dealing with the challenges while reaping the opportunities stemming from the OBOR initiative. With the EU Screening Regulation entering into force in April 2019, it may catalyse OBOR to become a truly two-way street initiative for China and the EU. Such institutions should draw states to greater convergence around shared interests.133 It is up to those states that value the current liberal, rule-based international order to “ensure that the illiberal values China is exporting under the guise of the OBOR initiative do not take root across the globe”.134 This will require constructive global leadership and engagement from states that have benefited most from the current global and regional governance architectures.135 As Ikenberry observed, the success of a Chinese-centred order would depend on its ability to outcompete liberal internationalism over the long term.136 Democratic constitutionalism is conducive to limiting abuse of power and enhancing legitimacy of law and governance.137 The lack of rule of law creates injustice at every level of society.138 During its incomplete transition to a market economy, China uses access to its own market as a point of leverage in negotiations with the West, while the latter seeks to use laws, standards and trade agreements to set the rules of the game by which China and its firms must play.139 Efficient global governance cannot occur without greater government transparency, a system of checks and balances and an independent judiciary.140 Despite the challenges, it is worth exploring how China seeks to address the above-mentioned barriers to pursue multi-win ends in the following section. To address potential disputes, it is inadequate to rely purely on legal and regulatory mechanisms. An approach that embodies transparency and inclusiveness will efficiently mitigate potential conflicts as well. A key issue is who will be reshaping the

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D’Ambrogio (October 2018). Regulation (EU) 2019/452 establishes a framework for screening of foreign direct investments into the European Union, OJ L 79I, 21.3.2019, pp. 1–14. 133 Keith and Xiaotong (2017). 134 Foreign Policy (16 May 2018b), On China’s New Silk Road, Democracy Pays a Toll, available at https://foreignpolicy.com/2018/05/16/on-chinas-new-silk-road-democracy-pays-a-toll/. 135 Voice of Djibouti (9 November 2018), China’s Belt and Road Initiative: Reshaping the Global and Regional Orders, available at voiceofdjibouti.com/chinas-belt-and-road-initiative-reshapingthe-global-and-regional-orders/. 136 Ikenberry (2018). 137 Rosenfeld (2001). 138 Time (2 November 2017), How China’s Economy Is Poised to Win the Future, available at https://time.com/5006971/how-chinas-economy-is-poised-to-win-the-future/. 139 Ferchen (2016), p. 12. 140 Hale (2008). 132

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global governance rules in the long-standing competition between China and the West.

5 Going Beyond Geopolitical Power Play China could use OBOR as part of a strategy to increase its influence and authority within the existing system of institutions and liberal international order.141 Nevertheless, the OBOR-oriented investment brings not only golden opportunities but also a series of risks and challenges that may lead to low returns on investment and weak profitability.142 OBOR is in need of better governance mechanisms, including social standards, greater transparency and local engagement.143 These include establishing responsible financial, environmental and labour standards for projects under the initiative and ensuring that projects are transparent and inclusive with open and competitive bidding.144

5.1

Strategic Focus: Geopolitical Manoeuvrings Vis-à-Vis Economic Enhancement

OBOR is truly transformative in its strategic vision.145 The initiative could provide a big boost to China’s economy and soft power image.146 In principle, the OBOR member states’ economic interdependence with China is leading to new patterns of the latter’s economic and political influence. As a form of economic imperialism, OBOR gives China enormous leverage over other OBOR member states.147 China may use its growing leverage to push forward an alternative model of global governance.148 OBOR can be regarded as a proactive Chinese response to the growing complexity in the world that has the potential to turn into an alternative concept of how international politics could be organised in the future.149 It remains

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Ikenberry and Lim (April 2017). Horsley (December 2018). 143 Foreign Policy (22 April 2019), Can China Deliver a Better Belt and Road?, available at https:// foreignpolicy.com/2019/04/22/965685-china-beltandroad-governance/. 144 Lagarde (April 2019). 145 Hawkins (2017). 146 Morrison (25 June 2019). 147 The Guardian (30 July 2018a), What is China’s Belt and Road Initiative?, available at https:// www.theguardian.com/cities/ng-interactive/2018/jul/30/what-china-belt-road-initiative-silk-roadexplainer. 148 Beeson and Zeng (2018). 149 Godehardt (January 2016). 142

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unclear how China’s international economic links interact with the geopolitical ambitions.

5.1.1

Geopolitical Influence and Perceptions

The mark of a global superpower is the ability to shape geopolitics through longterm strategies.150 Under the OBOR framework, China endeavours to move to be a superpower that is trying to shape the global governance regime. As a domestic economic strategy but with geopolitical effects, OBOR is also a massive exercise in soft power projection.151 A rising China would integrate into, and share responsibility for leading, the world’s governance institutions.152 It remains uncertain as to whether OBOR could lay the groundwork for a Sino-centric global order or for the emerging multipolar world order.153 The ultimate success of OBOR will depend largely upon whether issues of debt sustainability and terms of financing and competition for projects are properly addressed.154 In this vein, whether the impetus behind OBOR is more economic or political is less significant, given that both are inseparable.155 While using OBOR in favour of China’s own firms, the initiative could saddle some member states with large debts. Friedman associates the phenomenon golden straitjacket to a situation where individual countries must sacrifice some degree of economic sovereignty to global institutions, such as OBOR.156 Using its leverage to extract concessions, China takes a strategic approach for pragmatic solutions.157 Dependencies may develop, with political leverage applied to poorer nations.158 The initiative could pose financial risks if borrowers cannot repay loans.159 China could

150 American Security Project (25 May 2017), China’s One Belt, One Road: An Ambitious Strategy Challenging the U.S., available at https://www.americansecurityproject.org/chinas-one-belt-oneroad-an-ambitious-strategy-challenging-the-u-s/. 151 Council on Foreign Relations (9 February 2018), China’s Big Bet on Soft Power, available at https://www.cfr.org/backgrounder/chinas-big-bet-soft-power. 152 Ikenberry (2008). 153 Nordin and Weissmann (2018). 154 Financial Times (7 August 2018), China’s Belt and Road Projects Drive Overseas Debt Fears, available at https://www.ft.com/content/e7a08b54-9554-11e8-b747-fb1e803ee64e. 155 Brookings (17 May 2017), What’s driving China’s New Silk Road, and How should the West Respond?, available at https://www.brookings.edu/blog/order-from-chaos/2017/05/17/whats-driv ing-chinas-new-silk-road-and-how-should-the-west-respond/. 156 Friedman (2000), pp. 101–111. 157 Breslin (2013). 158 The Diplomat (6 March 2019a), Demystifying Debt Along China’s New Silk Road, available at https://thediplomat.com/2019/03/demystifying-debt-along-chinas-new-silk-road/. 159 Morrison (25 June 2019).

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use debt-trap diplomacy to gain a foothold in some of the world’s most strategic places.160 Tillerson criticised certain aspects of OBOR in his remarks: Financing is structured in a way that makes it very difficult for them [the recipient countries] to obtain future financing, and oftentimes has very subtle triggers in the financing that results in financing default and the conversion of debt to equity.161

In the long run, China hopes to channel capital into areas where it will have the largest long-term benefit and will make cumulative infrastructure improvements possible. For instance, a US$1-billion transaction in Sri Lanka in 2017 illustrates how the state-driven aspects of the OBOR initiative can result in controversy. China signed a 99-year lease to control a port in Sri Lanka after the government was unable to maintain it.162 After struggling to make repayments, Sri Lanka agreed to transfer control over and leased the strategic port to a Chinese company in exchange for a reduced debt burden. In this regard, the deal should be scrutinised in terms of debt sustainability, terms of financing and local employment. Arguably, OBOR projects are shaped first and foremost by political incentives. The CCP even enshrined OBOR in the party constitution when it was revised in October 2017, reinforcing the political importance of OBOR.163 Infrastructure projects that were driven more by political considerations than commercial needs bring added risk to the banks funding them.164 If an investment improperly failed, the SOE director could face disciplinary action or the courts, even after retirement.165 Nevertheless, many investment decisions often seem to be driven by geopolitical needs instead of a sound financial sense.166 Most of them have been likely prioritised from a geopolitical perspective. Thirty-two percent of the total value of the whole OBOR projects in South and Southeast Asia have been put on hold because of problems 160

Voice of Djibouti (9 November 2018), China’s Belt and Road Initiative: Reshaping the Global and Regional Orders, available at voiceofdjibouti.com/chinas-belt-and-road-initiative-reshapingthe-global-and-regional-orders/; The Guardian (15 May 2018b), Warning Sounded over China’s ‘Debtbook Diplomacy’, available at https://www.theguardian.com/world/2018/may/15/warningsounded-over-chinas-debtbook-diplomacy. 161 U.S. Department of State (18 October 2017), Remarks on ‘Defining Our Relationship with India for the Next Century, available at https://www.state.gov/remarks-on-defining-our-relationshipwith-india-for-the-next-century/. 162 The Economist (25 April 2019), China Tries to Calm Jitters about the “Belt and Road” Initiative, available at https://www.economist.com/china/2019/04/25/china-tries-to-calm-jitters-about-thebelt-and-road-initiative. 163 Reuters (27 October 2017), Pressure on as Xi’s ‘Belt and Road’ Enshrined in Chinese Party Charter, available at https://www.reuters.com/article/us-china-congress-silkroad/pressure-on-asxis-belt-and-road-enshrined-in-chinese-party-charter-idUSKBN1CT1IW. 164 Financial Times (26 January 2017b), China Warned of Risk to Banks from One Belt, One Road Initiative, available at https://www.ft.com/content/6076cf9a-e38e-11e6-8405-9e5580d6e5fb. 165 Reuters (27 September 2016), When Deals Go Bad: China State Firm Managers Spooked by New Liability Rules, available at https://www.reuters.com/article/us-china-soe-m-a/when-deals-gobad-china-state-firm-managers-spooked-by-new-liability-rules-idUSKCN11W2LW. 166 Council on Foreign Relations (21 May 2019), China’s Massive Belt and Road Initiative, available at https://www.cfr.org/backgrounder/chinas-massive-belt-and-road-initiative.

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with financial viability.167 OBOR has the potential to stimulate global growth, which should not involve geopolitical manoeuvrings.168 A testing stone is whether all the OBOR member states benefit from the initiative as an essential part of the global poverty eradication narrative.169 It would be more sustainable if China intends not to exert undue political influence but to enhance economic understanding between those OBOR member states.170

5.2

Promote More Transparent and Inclusive Procedures

The world would benefit if OBOR could pursue high standards for projects and governance and avoid non-transparent competition and inequality.171 At a microlevel, the OBOR projects have a substantial impact on local communities. Both public and private actors are expected to strive to ensure that high standards for engaging affected local communities. A challenge is to address how national and regional markets can use locational theory to create new opportunities.172

5.2.1

Theory of Localisation

The OBOR initiative must align closely with localised needs and conditions in order to create a sustainable strategy.173 The importance of local engagement cannot be overstated to implement the ambitious development programme.174 This could help China ensure more successful projects to benefit the people in other member states while realising China’s economic and other strategic goals.175 Cross-border

167

Foreign Policy (6 December 2018a), One Belt, One Road, One Big Mistake, available at https:// foreignpolicy.com/2018/12/06/bri-china-belt-road-initiative-blunder/. 168 World Economic Forum (16 January 2019), How Asia Could be the Winner in the US and China’s Belt and Road Race, available at https://www.weforum.org/agenda/2019/01/china-the-usand-the-great-asean-infrastructure-race/. 169 Foreign Policy (10 May 2018c), China Enlists U.N. to Promote Its Belt and Road Project, available at https://foreignpolicy.com/2018/05/10/china-enlists-u-n-to-promote-its-belt-and-roadproject/. 170 Bloomberg (16 April 2019a), China’s New Silk Road, available at https://www.bloomberg.com/ quicktake/china-s-silk-road. 171 Caixin (17 May 2017), One Belt, One Road: China’s 21st Century Marshall Plan?, available at https://www.caixinglobal.com/2017-05-17/opinion-one-belt-one-road-chinas-21st-century-mar shall-plan-101091483.html. 172 Krugman (1993), p. 22. 173 The Diplomat (8 September 2018b), China Debates the Belt and Road, available at https:// thediplomat.com/2018/09/china-debates-the-belt-and-road/. 174 Lu et al. (2018). 175 Horsley (December 2018), p. 3.

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infrastructure projects under the OBOR framework are more challenging than those based in one jurisdiction. Enthusiasm among development partners could wane if projects are organised in a circular way with all spokes directed toward China.176 This is reflected in concerns regarding the environmental and social sustainability of OBOR projects, which directly implicates local populations.177 An established governance regime must involve collaboration with not only public and private actors but also those that have been negatively affected. Many projects are not deemed viable in regard to problems about local employment, environment protection and so on.178 Local opposition can stall or derail the best intended of projects.179 Strong public opposition has led to the suspension and even cancellation of many major OBOR infrastructure projects.180 This has put China’s huge investment at risk. As some commentators noted: The embryonic China-led international order has not yet shown any signs of credible constraint on China’s power, and this lack of check on the arbitrary use of its predominant strength undermines not only China’s relations with its periphery but also the broader international community’s acceptance of a China-centric system.181

Geopolitical and financial risk considerations mean that China will need to ensure more widespread participation in projects.182 On the other hand, well-executed consultation processes can enhance the legitimacy of the project within the community and foster a sense of shared ownership.183 Furthermore, effective transparency and local public consultation mechanisms must be incorporated as a requirement for

176

Caixin (17 May 2017), One Belt, One Road: China’s 21st Century Marshall Plan?, available at https://www.caixinglobal.com/2017-05-17/opinion-one-belt-one-road-chinas-21st-century-mar shall-plan-101091483.html. 177 The Diplomat (3 May 2019b), Making the Belt and Road Environmentally Sustainable, available at https://thediplomat.com/2019/05/making-the-belt-and-road-environmentally-sustainable/. 178 Bloomberg (29 January 2019b), Souring Deals Put China’s Belt and Road Dreams under Pressure, available at https://www.bloomberg.com/news/articles/2019-01-29/souring-deals-putchina-s-belt-and-road-dreams-under-pressure. 179 South China Morning Post (8 August 2017), The ‘Belt and Road’ Projects China Doesn’t Want Anyone Talking About, available at https://www.scmp.com/news/china/economy/article/2099973/ belt-and-road-projects-china-doesnt-want-anyone-talking-about. 180 Foreign Affairs (24 October 2018), Why Democracies Are Turning Against Belt and Road, available at https://www.foreignaffairs.com/articles/china/2018-10-24/why-democracies-are-turn ing-against-belt-and-road. 181 Columbia-Harvard China and the World Programme (13 April 2016), The One Belt One Road Project and China’s Foreign Relations, available at https://cwp.sipa.columbia.edu/news/one-beltone-road-project-and-chinas-foreign-relations-cwp-alumni-dalton-lin. 182 Deloitte (2018), Embracing the BRI Ecosystem in 2018: Navigating Pitfalls and Seizing Opportunities, available at https://www2.deloitte.com/content/dam/insights/us/articles/4406_Beltand-road-initiative/4406_Embracing-the-BRI-ecosystem.pdf. 183 OECD (2016), Getting Infrastructure Right: The Ten Key Governance Challenges and Policy Options, available at https://www.oecd.org/gov/getting-infrastructure-right.pdf.

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the financing, development and implementation of all OBOR projects.184 Such approaches can ensure that local concerns are to be dealt with properly.

5.2.2

Transparency Facilitation

The process of implementation of projects should be transparent,185 given that high standards of governance are crucial for success. There should be transparency throughout the project life, including information disclosure, procurement processes and project implementation.186 It is required to make government procurement for OBOR projects transparent and open to qualified companies from around the world. However, in many OBOR member states, the public tendering is opaque and unestablished. In theory, all eligible enterprises can be involved in building OBOR, regardless of their background.187 In reality, roughly 60–80% of overseas projects funded by Chinese state banks have been awarded to Chinese companies.188 Nearly 89% of contracts for China-funded transport infrastructure projects in 34 Asian and European countries were awarded to Chinese contractors.189 This partly attributes to a fact that the foreign loans will have strings attached mandating the hiring of Chinese firms to design, build and even operate the new infrastructure.190 Nevertheless, the downside is that the Chinese model of development creates ill feelings locally and nurtures the rise of anti-Chinese sentiment.191 To address this asymmetry, a variety of initiatives are examined below. China’s highly advocated “Open Government” emphasises a transparent, participatory, service-oriented and accountable government.192 Relevant information must be disclosed by different levels of government, including environmental assessment, licensing, budget, government procurement and contracts. The government could be sued for failing to disclose information.193 In addition, the Chinese scheme of Provisional Major Administrative Decision-Making requires transparency and

184

Foreign Policy (22 April 2019), Can China Deliver a Better Belt and Road?, available at https:// foreignpolicy.com/2019/04/22/965685-china-beltandroad-governance/. 185 Morrison (25 June 2019). 186 Horsley (December 2018), p. 4. 187 China Daily (4 July 2018), China will work to ensure Belt, Road transparent, available at http:// www.chinadaily.com.cn/a/201807/04/WS5b3c2f47a3103349141e0943.html. 188 Silk Road Briefing (25 April 2018), EU Ambassadors, China Policy Advisors’ Myopia Misses the Point of Belt and Road, available at https://www.silkroadbriefing.com/news/2018/04/25/euambassadors-china-policy-advisors-myopia-misses-point-belt-road/. 189 Financial Times (24 January 2018), Chinese contractors grab lion’s share of Silk Road projects, available at https://www.ft.com/content/76b1be0c-0113-11e8-9650-9c0ad2d7c5b5. 190 Council on Foreign Relations (21 May 2019), China’s Massive Belt and Road Initiative, available at https://www.cfr.org/backgrounder/chinas-massive-belt-and-road-initiative. 191 Ferchen (2016). 192 Horsley (22 February 2016a). 193 Horsley (28 April 2016b).

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public participation in major project decisions.194 Furthermore, it must be open to participation by both local and Chinese companies in project procurement and development. To make OBOR projects more truly transparent and inclusive, The National Development and Reform Commission (NDRC) Regulations on Approving and Recording Overseas Investment requires overseas Chinese investors to do business in good faith and avoid any act of unfair competition.195 This is in line with the World Trade Organization (WTO) Agreement on Government Procurement (GPA), which establishes rules for open, competitive and transparent international competition. This helps to minimise the opportunity for corruption and ensure better, more cost-effective projects.196 The Foreign Investment Law 2019197 would guarantee fair participation and equal treatment in government procurement activities with respect to non-Chinese enterprises.198 As such, foreign companies can compete on a level playing field for OBOR-related government procurement contracts funded by the Chinese government and its policy banks.199 In order to secure more OBOR projects, Chinese companies must increase their global competitiveness, and its manufacturing sector must move up the value chain to keep up with increased labour costs and foreign competition.200 However, a fundamental issue is still in the way because China still provides heavy subsidies to its own companies, which constitutes an advantage over foreign competitors.201

5.3

Legal and Regulatory Framework in Response to Other Concerns

Legal regulation and institutions are indispensable instruments for effective global governance. There have been concerns that OBOR does not guarantee international standards of transparency and equal opportunities for all investors. This, to some

194

Provisional Regulations on Major Administrative Decision Procedures was issued by the State Council for Public Comment on 9 June 2017. 195 NDRC Regulations on Approving and Recording Overseas Investment took effect on 1 March 2018. 196 Horsley (December 2018), p. 13. 197 See in this volume Qingjiang Kong and Kaiyuan Chen, Country Report for China. 198 Foreign Investment Law of the People’s Republic of China 2019 (中华人民共和国外商投资 法) Chapter II Investment Promotion Article 16. 199 Silk Road Briefing (25 June 2019), China’s New Foreign Investment Law and The Impact on The Belt & Road Initiative, available at https://www.silkroadbriefing.com/news/2019/06/25/ chinas-new-foreign-investment-law-impact-belt-road-initiative/. 200 World Tribune (17 May 2017), As U.S. Balks at Rebuilding Infrastructure, China Advances ‘Silk Road Economic Belt’ Strategy to Dominate Eurasia Africa, available at https://www. worldtribune.com/as-u-s-balks-at-rebuilding-infrastructure-china-advances-silk-road-economicbelt-strategy-to-dominate-eurasia-africa/. 201 Hillman (25 January 2018).

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extent, inevitably results in undermining China’s diplomatic and strategic goals for OBOR initiatives. On the other hand, the judicial interpretations issued by the Supreme People’s Court (SPC) illustrate how China is bound by its international obligations. It must treat foreign parties on an equal basis. The SPC Opinions202 to be analysed below represent China’s progress in the international rule-making during its integration into the global market.

5.3.1

Provisions and Guidelines

As early as 2008, the Chinese State Council adopted National Regulations on Contracting Foreign Projects, which requires Chinese contractors to protect the local environment and promote local economic and social development.203 The Ministry of Commerce (MOFCOM) Rules on Overseas Investment issued in 2014 requires both state-owned and private enterprises to respect and to honour social responsibilities.204 Another legally binding multi-agency government Guideline calls for the fostering of a culture of compliance with Chinese and local law, relevant international treaties, internal rules and self-disciplinary regulations and codes of professional ethics.205 In 2012, the China Banking Regulatory Commission (CBRC), China’s bank regulator, issued a legally binding Guideline that focuses on “Green Credit” in dealing with environment and social concerns.206 As such, banks are required to strengthen environmental and social risk management for overseas projects, which ensure that they abide by laws and regulations on environmental protection.207 Finally, a catch-all regulation provides that an investor may be ordered to suspend or cease the relevant project, and the project may be terminated if the project is deemed to injure China’s national interests or security.208 In practice,

Supreme People’s Court, ‘Several Opinions on the Provision by the People’s Courts of Judicial Services and Safeguards for the Construction of the “One Belt One Road’ promulgated on and effective since 16 June 2015. 203 State Council Regulations on Administering Foreign Contracting Projects (对外承包工程管理 条例, 21 July 2008) Article 4, available at http://www.mofcom.gov.cn/article/swfg/swfgbi/201101/ 20110107352097.shtml. 204 Ministry of Commerce (MOFCOM), Measures for the Administration of Overseas Investment (境外投资管理办法, 6 September 2014) Article 20, available at http://www.mofcom.gov.cn/ article/b/c/201409/20140900723361.shtml. 205 National Development and Reform Commission (NDRC), Ministry of Foreign Affairs (MFA), Ministry of Commerce (MOFCOM), People’s Bank of China (PBoC), State-owned Assets Supervision and Administration Commission (SASAC), State Administration of Foreign Exchange (SAFE), and All-China Federation of Industry and Commerce (ACFIC) jointly issued Guidelines for Enterprise Compliance Management of Overseas Operations (企业海外经营合规管理指引) on 26 December 2018, available at http://www.ndrc.gov.cn/gzdt/201812/t20181229_924456.html. 206 China Banking Regulatory Commission, Green Credit Guidelines (12 February 2012). 207 Horsley (December 2018), p. 8. 208 NDRC Regulations on Approving and Recording Overseas Investment took effect on 1 March 2018. Articles 55, 56. 202

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OBOR projects should be mandated to release regular reports on their corporate social responsibility (CSR) and sustainable development performance.

5.3.2

Supreme People’s Court (SPC)’s Judicial Interpretations

The question of a legal response to OBOR was addressed by the Supreme People’s Court (SPC) in the 2015 Several Opinions on the Provision by the People’s Courts of Judicial Services and Safeguards for the Construction of the “One Belt One Road” (SPC Opinions).209 In the legally binding SPC Opinions, the Supreme People’s Court sets out the need for increased capability in the courts in relation to the creation of a fair and impartial judicial environment for business investment210 and an increase in judicial assistance and cooperation.211 In addition, the SPC adjusts judicial policies, strictly limits the jurisdictional scope for finding contracts invalid and promotes transparency in case of foreign matters. The measures embodied in the SPC Opinions help to promote the use of Chinese dispute resolution centres apart from applying Chinese law. This holds particularly true when Chinese investors are involved in forum shopping in countries with relatively weak legal systems.212 The SPC urges Chinese courts’ application of international treaties to which China and other OBOR member states are parties pursuant to the principles of international law.213 Judicial support should be provided for the performance of obligations under investment treaties and free trade agreements (FTAs).214 The SPC Opinions also include exhortations for the courts to emphasise equality before the law and equal treatment of Chinese and foreign parties and to strengthen criminal trials with an international element.215 Institutionally, the SPC has established specialised divisions, i.e. international commercial courts (ICCs), to handle major cross-border litigation over the increasing OBOR-related international disputes.216 In order to facilitate the application of the ICCs, the SPC also issued Rules of Procedure for the China International Commercial Courts. Given that disputes are arising in multijurisdictional projects, a new Committee of International Business Experts (CIBEs)

Supreme People’s Court, ‘Several Opinions on the Provision by the People’s Courts of Judicial Services and Safeguards for the Construction of the “One Belt One Road” promulgated on and effective since 16 June 2015. 210 Ibid., Article 4. 211 Ibid., Articles 5 & 6. 212 Wang (2019). 213 Supreme People’s Court, ‘Several Opinions on the Provision by the People’s Courts of Judicial Services and Safeguards for the Construction of the “One Belt One Road” promulgated on and effective since 16 June 2015, Article 7. 214 Ibid., Article 8. 215 Ibid., Articles 2 & 3. 216 Supreme People’s Court, ‘Provisions of the Supreme People’s Court on Several Issues Concerning the Establishment of the International Commercial Courts’ became effective on 1 July 2018; Erie (31 August 2018). 209

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will aid judges in ascertaining applicable foreign law.217 It is worthy to note that China has established Internet courts, making the services more accessible to far-flung litigants.218

5.3.3

(In)adequate?

It is essential to ensure that Chinese MNCs comply with local, Chinese national as well as international laws.219 In the absence of local legal requirements, they are to observe standards of international organisations and multilateral institutions instead.220 It is in China’s interests for Chinese MNCs to adhere, at a minimum, to those basic domestic standards in their overseas business as well.221 It is essential to improve higher standards in the conduct of Chinese public and private actors in overseas financing, project contracting and investment.222 The above practices are conducive to gradually changing the behaviour of Chinese SOEs, as well as public expectations.223 It would not only make OBOR projects sustainable but also help promote China’s soft power. Given its non-treaty-based initiative, OBOR allows considerable flexibility in its implementation.224 At a macro-level, global constitutionalism helps to limit abuses of power and justify third-party adjudication by following due process of law. China, as a founding member state, lacks an overarching law governing OBOR-related cross-border transactions, most of which are still regulated through the interplay of policy and legally enforceable regulations.225 At the current stage, the legitimacy of the OBOR-related governance is still dependent upon multilevel respect for the legal settings of all the OBOR member states.226 China may set contractual terms and conditions for each OBOR project; meanwhile, it uses the law of contracts as a powerful lever. Concession bargaining serves to build friendly guanxi (interrelationships) for political and solidaristic purposes by offering large-scale financing of infrastructural deals at discount rates.227 Each bilateral agreement is negotiated

217 Supreme People’s Court, Working Rules of the International Commercial Expert Committee of the Supreme People’s Court (For Trial Implementation) was adopted on 21 November 2018. 218 China Daily (18 August 2017a), World’s First Internet Court Goes Online in Hangzhou, available at https://www.chinadaily.com.cn/china/2017-08/18/content_30770108.htm. 219 Horsley (December 2018), p. 7. 220 China Daily (29 December 2017b), SOE Foreign Investment Risk Curbed, available at http:// www.chinadaily.com.cn/a/201712/19/WS5a383e86a3108bc8c67357f8.html. 221 Horsley (December 2018), p. 18. 222 Ibid., p. 6. 223 Ibid., p. 5. 224 Wang (2019). 225 Horsley (December 2018), p. 6. 226 Petersmann (2018). 227 Drache et al. (2019), pp. 37–75.

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without a one-size-fits-all template. The flexibility differs from that of the WTO with its precise rules and rigid legal codes. It does result in substantial space of soft power. Notably, enormous legal and regulatory risks arise, despite the fact that such kinds of deals are easily being translated into a new form of soft power.228 It is essential to work out more innovative solutions to reinforce more constructive interaction between China and all the OBOR member states. The realisation of the ambitious OBOR will depend, inter alia, on multilevel legal regulation. It is critical for the OBOR member states to acquire shared institutions and values. Furthermore, many of the official documents regulating Chinese overseas investment do not impose legally enforceable obligations.229 Legally binding laws and regulations on overseas activities are increasingly important not only to address environmental and social risk considerations but also to project decision-making within China.230 In terms of transnational corporate crime, the corrosive effects of OBOR project-related corruption might be reduced through strengthening and enforcing China’s criminalisation of overseas bribery.231 The move is in line with the US Foreign Corrupt Practices Act (FCPA)232 or adherence to the OECD AntiBribery Convention,233 to bolster the general commitments that China has already undertaken pursuant to the United Nations Convention Against Corruption.234 However, the People’s Court may not be able to decide disputes independently.235 Another concern is that China may pressure recipient countries to agree to submit to the jurisdiction of the international commercial courts (ICCs) and to the application of Chinese law.236

228

Council on Foreign Relations (9 February 2018), China’s Big Bet on Soft Power, available at https://www.cfr.org/backgrounder/chinas-big-bet-soft-power. 229 Horsley (December 2018), p. 9. 230 Ibid., p. 7. 231 China’s amended Article 164 of the Criminal Law in 2011 includes providing money or property to foreign officials or officers of public international organisations in order to derive improper commercial benefits. 232 The Foreign Corrupt Practices Act of 1977, as amended, 15 U.S.C. §§ 78dd-1, et seq. 233 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. 234 China ratified the United National Convention against Corruption in 2006. 235 CNBC (1 February 2018), China’s Plans for Creating New International Courts Are Raising Fears of Bias, available at https://www.cnbc.com/2018/02/01/china-to-create-international-courtsfor-belt-and-road-disputes.html. 236 Horsley (December 2018), p. 12.

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665

Who Will Write the New Global Order?

China, with substantial investments in infrastructure, could emerge as a leader in setting rules and standards for global governance.237 OBOR may propagate new norms that could form the basis of a rival international order.238 They are well embodied in such innovations as “Global Community of Common Destiny” and the China-led Asian Infrastructure Investment Bank (AIIB). The approaches could serve as a vehicle for China to write new rules, establish institutions that reflect Chinese interests, and reshape soft infrastructure.239

5.4.1

The UN’s Endorsement of Global Community of Common Destiny

The commitment of OBOR is highly compatible with the goal of the G20 and should be seen as part of a new and inclusive globalisation.240 Since the initiative represents an alternative mode of interstate cooperation in the creation of mutual gains, it may ultimately stunt future global economic growth.241 The OBOR initiative helps to relieve the infrastructural deficit impeding many countries’ pathway for development.242 Two priorities enshrined in OBOR’s focus on developing infrastructure and global partnerships are also included in the Sustainable Development Goas (SDGs, 2030).243 There has been so far no solid evidence to ascertain whether the SDGs can help to reshape the OBOR initiative. After all, a rule-orientated international order based on respect for international law is a fundamental prerequisite for securing sustainable development. China has been promoting an idealistic vision of a “Global Community of Common Destiny” driven in large part by economic interdependence.244 Unprecedentedly, a resolution was initiated in June 2017 by China, which represents a milestone on this path in the development of the United Nations Human Rights Council (UNHRC).245 The UNHRC Resolution of “Contribution of Development to the Enjoyment of All Human Rights” reflects China’s 237

Dollar (May 2016). Ikenberry and Lim (April 2017), p. 2. 239 Ikenberry and Lim (April 2017). 240 Hawkins (2017). 241 Shaw and Li (2013). 242 Foreign Policy (6 December 2018a), One Belt, One Road, One Big Mistake, available at https:// foreignpolicy.com/2018/12/06/bri-china-belt-road-initiative-blunder/. 243 ‘United Nations Poised to Support Alignment of China’s Belt and Road Initiative with Sustainable Development Goals’ (SG/SM/19556, 26 APRIL 2019), available at https://www.un.org/press/ en/2019/sgsm19556.doc.htm. 244 Wharton University of Pennsylvania- Knowledge@Wharton (10 March 2016), Three Misunderstandings of China-ASEAN Economic Relations, available at https://knowledge.wharton.upenn. edu/article/three-misunderstandings-of-china-asean-economic-relations/. 245 UNHRC Resolution 35/21 ‘Contribution of Development to the Enjoyment of All Human Rights’. 238

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policy of “Global Community of Common Destiny”. This contributes to the reform of the global governance regime with China’s vision included in the UN document. In addition, it was also added to the Chinese Constitution in March 2018.246 Despite existing political and ideological differences, the UNHRC’s adoption of this Resolution seems to break the Western monopoly of discourse in human rights development.247 China may need to be more deeply involved in some multilateral organisations and regimes of such sorts.248

5.4.2

Asian Infrastructure Investment Bank (AIIB) in the OBOR Initiative

There is state financing for Chinese firms seeking to expand their operations overseas.249 China’s financial support of infrastructure projects in many countries could produce positive economic results.250 The Asian Infrastructure Investment Bank (AIIB) boasts of its core principles as “openness, transparency, independence and accountability”.251 As a multilateral development bank, its mission is to improve social and economic outcomes in Asia and beyond. The establishment of the AIIB constitutes a new mode of interstate cooperation.252 The AIIB attempts to address the concerns and makes fiscal sustainability as a condition of financing as well as transparent procurement processes.253 In the process, the AIIB has changed the rules of development aid.254 As Weinland said, “the China-led bank is prepared to change the basis on which these types of projects have been traditionally financed”.255 To some extent, it implies that China may have intended to develop its own parallel institutions to the World Bank and the International Monetary Fund (IMF). After all, China’s policy banks have $1 trillion or four times the assets of the World Bank, IMF, European Bank of Reconstruction combined.256 One central institution could

The Constitution law of People’s Republic of China, Preamble §12. Godement et al. (April 2018). 248 Ikenberry and Lim (April 2017), p. 2. 249 Forbes (25 September 2012), China’s Financial Institutions Expand Overseas, available at https://www.forbes.com/sites/jackperkowski/2012/09/25/chinas-financial-institutions-expand-over seas/. 250 Brookings (11 September 2018), Will Chinese Development Projects Pave the Way to Inclusive Growth?, available at https://www.brookings.edu/blog/future-development/2018/09/11/will-chi nese-development-projects-pave-the-way-to-inclusive-growth/. 251 Bin Gu, ‘Chinese Multilateralism in the AIIB’ (2017) 20 (1) Journal of International Economic Law 137, 158. 252 Ikenberry and Lim (April 2017). 253 Park (2017). 254 Renard (2015). 255 Financial Times (3 May 2017c), Asia’s Regional Banks Lend Where Their Western Rivals Dare Not, available at https://www.ft.com/content/15c1b070-1884-11e7-9c35-0dd2cb31823a. 256 Ferchen (2016). 246 247

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advance transparency by coordinating China’s OBOR-oriented decision-making.257 China’s recently created International Development Cooperation Agency (IDCA) will oversee China’s foreign aid, which could play such a role.258 Ambitious as it is, the OBOR initiative should not be overread. The OBOR stimulus is not sufficiently large enough to reshape the global economic development as well as its growth rates. Indeed, China has certain leverage to devote its large amount of foreign reserves to invest in infrastructural development. Given its dual economic and geopolitical elements, it remains unclear as to whether China’s growing international engagement is primarily about satisfying its national interests or whether China seeks to create a more prosperous, interconnected and win-win Eurasia through multilateral cooperation.259 The mercantilist geo-economic framework is backed by remarkably little evidence drawing a direct or even indirect link between China’s global economic ties and its geopolitical influence.260

6 Conclusion Infrastructure investment is part of China’s extraordinary ascendancy in the global economy. OBOR is driven by infrastructure overcapacity and the need to deploy China’s huge foreign savings and construction capacity. With significant geopolitical and geo-economic implications, the OBOR initiative has the potential to redefine the world economy and global governance. This chapter not only identifies challenges posed by OBOR to global governance but also sorts out the pathways and identify their implications in the context of development lending and the broader liberal international order. Some strategic measures are highlighted to build mutual trust along with infrastructure and help result in sustainability. These include, among other things, establishing efficient, open and competitive procurement system; improving transparency throughout the project life; and effective local engagement policies. More adequate transnational governance improvements would help ensure that OBOR will genuinely contribute to, rather than complicate, China’s drive to achieve common development and prosperity. Apart from a potential “win-win” solution for all, it will also advance China’s soft power building. To achieve this ambition, China should operate OBOR on terms consistent with international standards. However, it remains unclear as to whether OBOR could trigger a transition of the international system to a China-centric or multipolar one. It is still too early to

257

Ikenberry and Lim (April 2017). The Diplomat (7 August 2018), Foreign Aid with Chinese Characteristics, available at https:// thediplomat.com/2018/08/foreign-aid-with-chinese-characteristics/. 259 South China Morning Post (17 January 2018), Not a Zero-Sum Game: Global Governance Must Adapt to the New US-China Equation, available at https://www.scmp.com/comment/insight-opin ion/article/2128429/not-zero-sum-game-global-governance-must-adapt-new-us-china. 260 Ferchen (2016). 258

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judge whether OBOR initiates a new chapter of poverty eradication, backed by China’s deep financial pockets, soft power diplomacy and bilateral cooperation.

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The Economist (21 January 2012b) Theme and Variations. Available at https://www.economist. com/special-report/2012/01/21/theme-and-variations. Accessed 22 Nov 2019 The Economist (25 April 2019) China Tries to Calm Jitters about the “Belt and Road” Initiative. Available at https://www.economist.com/china/2019/04/25/china-tries-to-calm-jitters-aboutthe-belt-and-road-initiative-. Accessed 22 Nov 2019 The Guardian (30 July 2018a) What is China’s Belt and Road Initiative? Available at https://www. theguardian.com/cities/ng-interactive/2018/jul/30/what-china-belt-road-initiative-silk-roadexplainer. Accessed 22 Nov 2019 The Guardian (15 May 2018b) Warning Sounded over China’s ‘Debtbook Diplomacy’. Available at https://www.theguardian.com/world/2018/may/15/warning-sounded-over-chinas-debtbookdiplomacy. Accessed 22 Nov 2019 The New York Times (7 February 2018) The Rise of China and the Fall of the Free Trade Myth. Available at https://www.nytimes.com/2018/02/07/magazine/the-rise-of-china-and-the-fall-ofthe-free-trade-myth.html. Accessed 22 Nov 2019 Time (2 November 2017) How China’s Economy Is Poised to Win the Future. Available at https:// time.com/5006971/how-chinas-economy-is-poised-to-win-the-future/. Accessed 22 Nov 2019 University of Alberta - China Institute (2018) State-Owned Enterprises in the Chinese Economy Today: Role, Reform, and Evolution. Available at https://cloudfront.ualberta.ca/-/media/china/ media-gallery/research/policy-papers/soepaper1-2018.pdf. Accessed 22 Nov 2019 Voice of Djibouti (9 November 2018) China’s Belt and Road initiative: reshaping the global and regional orders. Available at voiceofdjibouti.com/chinas-belt-and-road-initiative-reshaping-theglobal-and-regional-orders/. Accessed 22 Nov 2019 Wang H (2019) China’s approach to the Belt and Road initiative: scope, character and sustainability. J Int Econ Law 22(1):29–55 Wharton University of Pennsylvania - Knowledge@Wharton (10 March 2016) Three Misunderstandings of China-ASEAN Economic Relations. Available at https://knowledge.wharton. upenn.edu/article/three-misunderstandings-of-china-asean-economic-relations/. Accessed 22 Nov 2019 World Economic Forum (2015a) The Global Competitiveness Report 2015–2016. Available at www3.weforum.org/docs/gcr/2015-2016/Global_Competitiveness_Report_2015-2016.pdf. Accessed 22 Nov 2019 World Economic Forum (27 February 2015b) Who are the winners and losers of geo-economic competition? Available at https://www.weforum.org/agenda/2015/02/who-are-the-winnersand-losers-of-geo-economic-competition/. Accessed 22 Nov 2019 World Economic Forum (January 2015c) Geo-economics Seven Challenges to Globalization. Available at http://www3.weforum.org/docs/WEF_Geo-economics_7_Challenges_Globaliza tion_2015_report.pdf. Accessed 22 Nov 2019 World Economic Forum (16 January 2019) How Asia Could be the Winner in the US and China’s Belt and Road Race. Available at https://www.weforum.org/agenda/2019/01/china-the-us-andthe-great-asean-infrastructure-race/. Accessed 22 Nov 2019 World Tribune (17 May 2017) As U.S. Balks at Rebuilding Infrastructure, China Advances ‘Silk Road Economic Belt’ Strategy to Dominate Eurasia Africa. Available at https://www. worldtribune.com/as-u-s-balks-at-rebuilding-infrastructure-china-advances-silk-road-eco nomic-belt-strategy-to-dominate-eurasia-africa/. Accessed 22 Nov 2019 Wu M (2016) The “China, Inc.” challenge to global trade governance. Harv Int Law J 57 (2):261–324 XinhuaNet (11 November 2017) Chinese President Xi’s Address at APEC CEO Summit. Available at http://www.xinhuanet.com/english/2017-11/11/c_136743492.htm. Accessed 22 Nov 2019 YaleGlobal Online (25 July 2017) Is a China-Centric World Inevitable? Available at https:// yaleglobal.yale.edu/content/china-centric-world-inevitable. Accessed 22 Nov 2019 Zilibotti F (2017) Growing and slowing down like China. J Eur Econ 15(5):943–988

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Zimmerman T (October 2015) The New Silk Roads: China, the U.S., and the future of Central Asia. University of New York. Available at https://cic.nyu.edu/sites/default/files/zimmerman_new_ silk_road_final_2.pdf. Accessed 22 Nov 2019

Qingxiu Bu LLM (Soochow) LLM (Groningen) PhD (Birmingham) PGCHET (Queen’s): Qingxiu has published widely in a variety of areas of law, many of which are themed around law and global governance, with a particular focus on the development of legal infrastructure in China. He joined Sussex Law School in 2013 as associate professor, having previously been a lecturer in law at Cardiff Law School, Cardiff University (2007–2008) and School of Law, Queen’s University Belfast (2008–2013), during which he taught transnational business law at the Centre of Transactional Legal Studies (CTLS), Georgetown University, as adjunct professor. Qingxiu was appointed as Li Ka Shing Professor of Practice at Faculty of Law, McGill University, in 2019. He has held visiting posts at various institutions, including Lund University, Sweden; University College Dublin, Ireland; Tel Aviv University, Israel; and the Max Planck Institute for Comparative and International Private Law in Germany. He worked also as a docent at the Institute of Global Law and Policy (IGLP), Harvard Law School, in January 2013 and 2014. Qingxiu has completed four projects funded respectively by the British Academy, Department for Business, Energy & Industrial Strategy (BEIS), Newton Fund and British Council (PMI) during the past years.

Screening of Foreign Direct Investments Through European Company Law Thomas Papadopoulos

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Freedom of Establishment of Companies, CJEU’s Case Law on Corporate Mobility and Screening of Foreign Direct Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Privatizations of State-Owned Companies, Golden Shares and Screening of Foreign Direct Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Golden Shares as an Effective Tool to Screen Foreign Directive Investments . . . . . . 3.2 Privatizations of State-Owned Companies and Conflicts of Interests . . . . . . . . . . . . . . . 4 Harmonization of European Company Law and Screening of Foreign Direct Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 The Relationship Between the Goals of the Harmonization of European Company Law and the Screening of Foreign Direct Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Takeover Bids Directive and Screening of Foreign Direct Investments . . . . . . . . . . . . . 4.3 Disclosure of Information in Takeover Bids and Screening of Foreign Direct Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Political Considerations and Protectionism in Takeover Bids and Their Impact on the Screening of Foreign Direct Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Shareholders Rights Directive II and Screening of Foreign Direct Investments . . . . 4.6 Transparency in Listed Companies and Screening of Foreign Direct Investments: The Role of EU Capital Markets Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 Corporate Restructuring Harmonizing Instruments and Screening of Foreign Direct Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract This chapter examines how screening of foreign direct investments could take place through European company law. It scrutinizes the contribution of both CJEU’s case law and the harmonization of European company law to an effective screening of foreign direct investments. On the basis of this approach, this chapter is divided into two parts. The first part focuses on CJEU’s case law, and the second part examines harmonization. An examination of the freedom of establishment of T. Papadopoulos (*) University of Cyprus, Department of Law, Nicosia, Cyprus e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 677–724, https://doi.org/10.1007/16495_2020_9, Published online: 28 May 2020

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companies in the light of CJEU’s case law on corporate mobility sheds light on the screening of foreign direct investments. The impact of the privatizations of Stateowned companies and of CJEU’s golden share case law on the screening of foreign direct investments is discussed. This chapter analyzes how certain harmonizing instruments of European company law could contribute to the screening of foreign direct investments. The relationship between the goals of the harmonization of European company law and the screening of foreign direct investments is also scrutinized. The Takeover Bids Directive with its optionality and reciprocity regime and with its requirements for disclosure of information could contribute to an effective screening of a foreign direct investment behind a takeover bid. Additionally, this chapter examines how the Shareholders Rights Directive II, the Transparency Directive, the Cross-Border Mergers Directive (repealed and consolidated into Directive 2017/1132) and the European Company Statute (Societas Europaea – SE) could contribute to investment screening. Some concluding remarks are deduced on the importance and effectiveness of European company law for the screening of foreign direct investments.

1 Introduction Screening of foreign direct investments could take place through European company law. The harmonization of company law in the European Union, as well as CJEU’s case law, offers mechanisms in this regard. EU company law includes certain instruments that could constitute effective screening mechanisms: derogations to EU fundamental freedoms as interpreted by CJEU’s case law, corporate control mechanisms, requirements for transparency and disclosure of information and veto powers in corporate restructuring harmonizing instruments. These company law instruments could be used indirectly for this screening as their primary aim is the harmonization of company law and the promotion of EU fundamental freedom of establishment (Arts. 49–54 TFEU). Although their primary objective is “the protection of the interests of members [i.e. shareholders] and others”,1 they could also contribute significantly to an effective screening of foreign direct investments. The scope and the limits of European company law in the area of screening of foreign direct investments are revealed from CJEU’s case law on corporate mobility scrutinizing the freedom of establishment of companies. It is accepted that a foreign investor from a third country must establish first a company in one of the Member States in order to benefit from EU fundamental freedom of establishment. Only EU companies fall within the scope of EU freedom of establishment (Arts. 49–54 TFEU)

1

Art. 50(2)(g) TFEU.

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and of harmonized rules. The focus of this chapter is on EU companies2 controlled by a foreign (non-EU/third-country) investor and benefiting from freedom of establishment and on which tools of European company law could be used for the screening of the foreign (non-EU/third-country) investor controlling these EU companies. This chapter examines how the screening of foreign direct investments could take place through European company law. It scrutinizes the contribution of both CJEU’s case law and the harmonization of European company law to an effective screening of foreign direct investments. On the basis of this approach, this chapter is divided into two parts. The first part focuses on CJEU’s case law, and the second part examines harmonization. An examination of the freedom of establishment of companies in the light of CJEU’s case law on corporate mobility sheds light on the screening of foreign direct investments. The impact of the privatizations of Stateowned companies and of CJEU’s golden share case law on the screening of foreign direct investments is discussed. This chapter argues that lawful golden shares in privatized companies also play an important role in the screening of foreign direct investments. The golden share case law elaborated the conditions under which a Member State could exercise control over a privatized company. In Commission v Belgium,3 the CJEU stipulated the conditions under which golden shares could be justified and, as a result, could be lawful. These conditions for lawful golden shares could be used by Member States in order to structure an effective screening mechanism for foreign direct investments. Lawful golden shares could either block a foreign investor from investing in the capital of a privatized company or control and restrict its actions when the foreign investor is already a (controlling) shareholder of the privatized company. Conflicts of interests in privatizations of Stateowned companies are also taken into account. This chapter analyzes how certain harmonizing instruments of European company law could contribute to the screening of foreign direct investments. The relationship between the goals of the harmonization of European company law and the screening of foreign direct investments is also scrutinized. The Takeover Bids Directive with its optionality and reciprocity regime and with its requirements for disclosure of information could contribute to an effective screening of a foreign direct investment behind a takeover bid. This chapter refers also to political considerations and protectionism in takeover bids and to their impact on the screening of foreign direct investments. Additionally, this chapter examines how the Shareholders Rights Directive II, the Transparency Directive, the Cross-Border Mergers Directive (repealed and consolidated into Directive 2017/ 1132) and the European Company Statute (Societas Europaea—SE) could

With the term “EU company”, this paper refers to a national company established in a Member State under its domestic law. An “EU company” falls within the scope of Art. 54 TFEU and could benefit from freedom of establishment. The term “EU company” was chosen in order to distinguish such companies from “non-EU companies”, which are companies established in non-EU States. 3 Judgment of the Court of 4 June 2002, Commission v Belgium, C-503/99, ECLI:EU:C:2002:328. 2

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contribute to investment screening.4 Some concluding remarks on whether European company law could constitute an effective mechanism for the screening of foreign direct investments are deduced. It is necessary to explain in advance what the term investment screening means in the context of European company law. The term investment screening has a twofold meaning in European company because it serves two objectives: the public interest and the interest of shareholders and other stakeholders. This distinction derives from the fact that European company law has the promotion of EU fundamental freedom of establishment of companies as its primary objective and investment screening as its secondary objective. On the one hand, investment screening in the context of the exercise of EU fundamental freedom of establishment of companies and of CJEU’s case law on corporate mobility is related to the assessment of foreign direct investments on grounds of public interest. CJEU’s case law interprets the available justifications of restrictions on the freedom of establishment of companies, which contribute to investment screening. Moreover, investment screening in the light of privatizations and the golden share case law takes place on the basis of public interest considerations. The CJEU explained under which conditions golden shares could constitute justified restrictions on EU fundamental freedoms and, as a result, could be lawful and could also serve as a screening mechanism. On the other hand, investment screening in the context of harmonization of company law entails an assessment of foreign direct investments on the basis of both the protection of the interests of shareholders and other stakeholders and the protection of public interest. An investment screening during a takeover bid assesses the bidder controlled by a foreign investor. In the context of the Shareholders Rights Directive II, investment screening is related to the promotion of the interests of the company through encouragement of long-term shareholder engagement by identification of shareholders, transmission of information, facilitation of the exercise of shareholder rights, disclosure of engagement policy and transparency and approval of related party transactions. Investment screening in the framework of Transparency Directive encompasses an assessment of foreign direct investments on the basis of investor protection and market efficiency, which include the protection of the interests of shareholders. In specific corporate restructuring harmonizing instruments, such as the Cross-Border Mergers Directive (repealed and consolidated into Directive 2017/ 1132) and the European Company Statute (Societas Europaea—SE), investment screening comprises an assessment of foreign direct investment on the basis of public interest. Hence, it could be deduced that investment screening in the context of European company law takes place on two bases: public interest and the interest of shareholders and other stakeholders. Their common denominator is that the interest of shareholders and other stakeholders is not always confined to the narrow limits of the company. Sometimes the interest of shareholders and other stakeholders touches

4 Reference is also made to Shareholders Rights Directive I and to Statute for a European Cooperative Society (SCE).

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public interest. Quite often, a company is crucial for the interests and the welfare of the general public. This is quite common in the case of “strategic companies” and of “national champions”, where the interest of shareholders and other stakeholders is intertwined with the public interest. “Strategic companies” and “national champions” play a major economic, political and social role in many Member States, which affect significantly the public interest. The importance of such companies for the various national interests of Member States gives sometimes the impression that public interest is hiding behind the interest of shareholders and other stakeholders. In addition to their own interests, shareholders and other stakeholders of “strategic companies” and “national champions” sometimes should take into account public interest in their decisions. Screening is required for “unwanted” foreign investments, which might be detrimental both to shareholders and other stakeholders’ interests and to public interest. In the case of “strategic companies” and “national champions”, an investment screening taking place through European company law might reveal and sometimes frustrate “unwanted” foreign direct investments.

2 Freedom of Establishment of Companies, CJEU’s Case Law on Corporate Mobility and Screening of Foreign Direct Investments EU fundamental freedom of establishment is conferred on both natural persons and companies (legal persons) by Arts. 49–54 TFEU. Article 49 TFEU (ex Art. 43 TEC) proclaims the freedom of establishment, while Art. 54 TFEU (ex Art. 48 TEC) specifies the meaning of companies or firms, which can benefit from the freedom of establishment.5 The effect of Arts. 49 and 54 TFEU was illustrated by the prominent Centros case: “The immediate consequence of this is that those companies are entitled to carry on their business in another Member State through an agency, branch or subsidiary. The location of their registered office, central administration or principal place of business serves as the connecting factor with the legal system of a particular State in the same way as does nationality in the case of a natural person.”6

According to the definition of “companies” of Art. 54 TFEU, the freedom of establishment of companies could not be enjoyed by companies having been formed abroad and subsequently having been reincorporated into an EU company. A company shall be “formed in accordance with the law of a Member State” in order to fall within the scope of freedom of establishment. Hence, a non-EU company of a foreign investor could not enjoy the benefits of freedom of establishment by reincorporating into an EU Member State. The foreign investor shall form a new EU company capable of benefiting from freedom of establishment. 6 Judgment of the Court of 9 March 1999, Centros Ltd v Erhvervs- og Selskabsstyrelsen, C-212/97, ECLI:EU:C:1999:126 para. 20 citing: Judgment of the Court (Second Chamber) of 10 July 1986, D. H. M. Segers v Bestuur van de Bedrijfsvereniging voor Bank- en Verzekeringswezen, Groothandel en Vrije Beroepen, 79/85, ECLI:EU:C:1986:308 para. 13; Judgment of the Court of 5

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Moreover, the CJEU elucidated how freedom of establishment could be exercised by companies: “In the case of a company, the right of establishment is generally exercised by the setting-up of agencies, branches or subsidiaries, as is expressly provided for in the second sentence of the first paragraph of Article 52. [. . .] A company may also exercise its right of establishment by taking part in the incorporation of a company in another Member State, and in that regard Article 221 of the Treaty ensures that it will receive the same treatment as nationals of that Member State as regards participation in the capital of the new company.”7 Freedom of establishment of companies does not allow discriminatory treatment of a company with a registered office in another Member State: “[. . .] As the Court has already stated, in [. . .]Case 270/83 Commission v France [. . .] acceptance of the proposition that the member state in which a company seeks to establish itself may freely apply to it a different treatment solely by reason of the fact that its registered office is situated in another member state would deprive article 58 of all meaning.”8 An EU company set up in an EU Member State by a foreign investor could benefit from EU fundamental freedom of establishment (Arts. 49–54 TFEU). A foreign investor could accrue all the benefits of the internal market by setting up a company in a Member State, which could then exercise its right of establishment. On the one hand, EU companies set up by a foreign investor could exercise their right of primary establishment, where the EU company could move its seat/registered office to another Member State through conversion/reincorporation in compliance with the conditions and restrictions of the national laws applicable to companies, which were interpreted by the CJEU in a series of cases. On the other hand, EU companies set up by a foreign investor could exercise their right of secondary establishment by setting up agencies, branches or subsidiaries in other Member States, which was interpreted in liberal way by the CJEU.9 With regard to secondary establishment, EU companies 28 January 1986, Commission v France, 270/83, ECLI:EU:C:1986:37 para. 18; Judgment of the Court of 13 July 1993, The Queen v Inland Revenue Commissioners, ex parte Commerzbank AG, C-330/91, ECLI:EU:C:1993:303 para. 13; and Judgment of the Court of 16 July 1998, Imperial Chemical Industries plc v Kenneth Hall Colmer, C-264/96, ECLI:EU:C:1998:370 para. 20, Dashwood et al. (2011), p. 648. 7 Judgment of the Court of 27 September 1988, The Queen v H. M. Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General Trust plc, 81/87, ECLI:EU:C:1988:456 para. 17; Dashwood et al. (2011), p. 648. 8 Judgment of the Court (Second Chamber) of 10 Jul 7 1986, D. H. M. Segers v Bestuur van de Bedrijfsvereniging voor Bank- en Verzekeringswezen, Groothandel en Vrije Beroepen, 79/85, ECLI:EU:C:1986:308, paras 13–14; Dashwood et al. (2011), p. 648. 9 Judgment of the Court of 9 March 1999, Centros Ltd v Erhvervs- og Selskabsstyrelsen, C-212/97, ECLI:EU:C:1999:126; Judgment of the Court of 30 September 2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd., C-167/01 ECLI:EU:C:2003:512; Judgment of the Court of 5 November 2002, Überseering BV v Nordic Construction Company Baumanagement GmbH, C-208/00, ECLI:EU:C:2002:632; Judgment of the Court (Grand Chamber) of 13 December 2005, SEVIC Systems AG, C-411/03, ECLI:EU:C:2005:762; Judgment of the Court (Grand Chamber) of 13 December 2005, Marks & Spencer plc v David Halsey, C-446/03, ECLI:EU: C:2005:763; Judgment of the Court of 6 June 1996, Commission v Italy, C-101/94 ECLI:EU: C:1996:221; Judgment of the Court of 28 January 1986, Commission v France, C-270/83, ECLI:

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(including letterbox companies) setting up a secondary establishment in another Member State and the resulting regulatory competition were favoured by the CJEU in Centros and subsequent cases, which struck down many restrictions. With regard to primary establishment, the possibility of seat transfers at EU level was not harmonized for a long time, and some Member States put restrictions on inbound and/or outbound seat transfers and reincorporations. While the CJEU accepted the possibility of Member States to retain specific restrictions on seat transfers,10 it put certain limits to these powers of Member States by allowing seat transfers of companies wishing to change also their applicable law and, as a matter of fact, by providing the possibility of cross-border conversions.11 Finally, cross-border conversions at EU level were harmonized by Directive 2019/2121,12 which is going to change completely the landscape of seat transfers at EU level. In CJEU’s case law on the freedom of establishment of companies, Member States put an effort in justifying on the basis of the available justifying grounds of TFEU (Art. 52 TFEU) or on the basis of the mandatory requirements of the general interest formulated by CJEU’s case law the various restrictions imposed by them on the freedom of establishment of companies. The CJEU applied also the well-known Gebhard test13 to these corporate mobility cases. These justifications invoked by Member States could contribute to an effective screening against a foreign investor benefiting from the freedom of establishment through an EU company. Some examples of these justifications are the following: (1) (a) that capital requirements reinforced financial soundness and protected public creditors (as, unlike other creditors, they could not secure their debts through guarantees); (b) that all creditors were protected from the risk of a fraudulent bankruptcy related to the insolvency of a company following an inadequate initial capitalization (Centros); (2) protection of

EU:C:1986:37; Judgment of the Court (Second Chamber) of 10 Jul 7 1986, D. H. M. Segers v Bestuur van de Bedrijfsvereniging voor Bank- en Verzekeringswezen, Groothandel en Vrije Beroepen, 79/85. For a discussion of primary and secondary establishment of companies, see: De Luca (2017), pp. 85–111; Myszke-Nowakowska (2014), pp. 25–31. 10 Judgment of the Court of 27 September 1988, The Queen v H. M. Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General Trust plc, C-81/87, ECLI:EU:C:1988:456. 11 Judgment of the Court (Grand Chamber) of 16 December 2008, CARTESIO Oktató és Szolgáltató bt, C-210/06, ECLI:EU:C:2008:723; Judgment of the Court (Third Chamber), 12 July 2012, VALE Építési kft, C-378/10, ECLI:EU:C:2012:440; Judgment of the Court (Grand Chamber) of 25 October 2017, Polbud, C-106/16, ECLI:EU:C:2017:804. 12 Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions, OJ L 321, 12.12.2019, pp. 1–44. 13 “However, national measures liable to hinder or make less attractive the exercise of fundamental freedoms guaranteed by the Treaty must fulfil four conditions: they must be applied in a non-discriminatory manner; they must be justified by imperative requirements in the general interest; they must be suitable for securing the attainment of the objective which they pursue; and they must not go beyond what is necessary in order to attain it” Judgment of the Court of 30 November 1995, Reinhard Gebhard v Consiglio dell'Ordine degli Avvocati e Procuratori di Milano, C-55/94, ECLI:EU:C:1995:411.

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creditors, protection of minority shareholders, protection of employees and requirements of taxation authorities (Uberseering); (3) prevention of fraud, protection of creditors, effectiveness of tax inspections and the need to ensure fairness in business dealings (Inspire Art); (4) protection of the interests of creditors, minority shareholders and employees, preservation of the effectiveness of fiscal supervision and fairness of commercial transactions (SEVIC); and (5) tax avoidance (Marks & Spencer).14 While the CJEU accepted these justifications as valid justifying grounds, in the individual cases, the Member States’ measures did not comply with the principle of proportionality and, as a matter of fact, could not be accepted. All these categories of justifications of restrictions constitute public policy grounds under which an effective screening could take place. It should be noted that this is wide reading of screening, which aims at screening for sufficient capitalization, non-fraudulent behaviour, etc. Nevertheless, even in the context of such a wide reading of screening, certain corporate activities or decisions of an EU company controlled by a foreign investor could be restricted lawfully. This screening on the basis of justified restrictions could stop an EU company controlled by a foreign investor to expand its activities at cross-border level via the establishment of agencies, branches or subsidiaries in other Member States. Nevertheless, Member States should make sure that the invoked justifications used as a screening mechanism must comply with the principle of proportionality. Member States should not neglect that non-compliance with the principle of proportionality is the most common ground for rejection of the justifying grounds invoked by them. Moreover, it should be stressed that purely economic considerations (e.g. budgetary grounds or grounds related to the national economy or financial interests of domestic companies, etc.) can never serve as justifications for restrictions. Hence, purely economic considerations of Member States cannot hinder a foreign investor’s EU company from exercising freedom of establishment.

3 Privatizations of State-Owned Companies, Golden Shares and Screening of Foreign Direct Investments 3.1

Golden Shares as an Effective Tool to Screen Foreign Directive Investments

“Golden Shares” or “Special Shares” (hereinafter “golden shares”) are defined as “any legal structure applicable to individual companies which preserves or helps to perpetuate the influence of the State on such companies”.15 This definition encompasses special rights and privileges that Member States retain in certain privatized 14

Papadopoulos and Moloney (2012), paras [2254]–[2260]. Judgment of the Court (Grand Chamber) of 23 October 2007, Commission v. Germany, C-112/05 ECLI:EU:C:2007:623; Van Bekkum et al. (2008), p. 8; Van Bekkum (2010), p. 13. 15

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companies. These special rights and privileges do not correspond usually to the State’s percentage of shareholding in the privatized company, meaning that there is no proportionality between capital and control in the State’s shareholding. The motive behind the introduction of these golden shares in privatized companies was the protection of public interest.16 This pursue of public interest took more specific shapes. The main reasons put forward by Member States for keeping ownership control rights over a company after its privatization include the following: (1) to ensure that ownership and control of the company do not fall into hostile or undesirable hands (i.e. takeover protection); (2) to ensure that the company retains its corporate purpose and jurisdiction of incorporation; (3) to prevent the sale of strategic and key company assets while retaining the current corporate structure, purpose and form of the undertaking; (4) to ensure that the new owners of privatized enterprises comply with certain commitments included in the sales agreement; (5) to guarantee the provision of services of general interest in sensitive sectors of the economy; (6) to safeguard public security, public health and national defence.17 The prerogatives that golden shares grant could be broadly categorized into three large categories: (1) guarantee of certain voting rights or blocking power, such as the right to outvote other shareholders at general meetings or to veto certain decisions of the company, such as the sale of core assets; (2) provisions in the company’s articles of association or shareholders’ agreements intended to ensure that no shareholder is beneficially entitled to an interest in more than a fixed proportion of voting shares; and (3) power of Member States to nominate some of the directors and to influence the management of the company.18 Some Member States adopted golden shares on the basis of existing company law, while other Member States adopted new legislation introducing State privileges in privatized companies.19 The European Commission (hereinafter referred to as “Commission”) argued that golden shares were infringing EU fundamental freedoms, more specifically free movement of capital and freedom of establishment. In its 1997 Communication, the Commission stated that several of these golden shares are accompanied by public interest considerations as a basic justification for their use. It is useful to mention at this point the argumentation of the Commission. Despite the fact that public interest considerations are often connected to theoretically non-discriminatory measures

16

The State as a shareholder wished to continue to strive for public interest after the privatization by exercising a certain degree of control over privatized companies, which now had private investors as their major shareholders. 17 European Commission Staff Working Document (22 July 2005), Special rights in privatised companies in the enlarged Union–a decade full of developments, p. 6. For an analysis of protectionism and golden shares, see: Rickford (2010), pp. 54–94. Biondi (2010), pp. 95–102. 18 For a discussion of the composition of board of directors as a vehicle for State intervention in corporate governance, see: Licht (2012), pp. 597–622. For challenges to State’s defensive measures, see: Strauss (2019), p. 119. 19 Andenas and Wooldridge (2009), pp. 14–15. See, also an interesting study on the change in government control of privatized firms in OECD countries: Bortolotti and Faccio (2009), pp. 2907–2939.

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(e.g. prior authorization), this condition does not seem to be sufficiently transparent and could, as a matter of fact, result in a situation of discrimination against foreign investors as well as legal uncertainty.20 Moreover, this concept could include both economic and non-economic conditions exceeding the judicially accepted justifications to the free movement of capital and freedom of establishment. On the basis of these arguments, the Commission did not accept that public interest considerations could be used as a justifying ground for these golden shares.21 The CJEU decided many cases22 in which the free movement of capital and the freedom of establishment were directly or indirectly restricted through golden shares held by Member States in privatized companies. In these golden share cases, the CJEU examined these national privatization schemes in the light of free movement of capital and freedom of establishment. State-owned companies in various Member States could also attract the interest of foreign investors. Many of these State-owned companies belong to strategic areas of the economy. In privatizations of State-owned companies, where foreign investors are seeking to acquire their corporate control, golden shares compatible with internal market rules could constitute an effective screening mechanism. As mentioned above, the CJEU had the chance to examine many national golden share schemes in privatizations of State-owned companies. These golden shares were considered to infringe free movement of capital (Art. 63 TFEU) and freedom of establishment (Arts. 49, 54 TFEU). In its golden share case law, the CJEU structured the criteria under which a golden share scheme could be compatible with internal market

20 Communication of the Commission on certain legal aspects concerning intra-EU investment, OJ C 220. 19.7.1997, pp. 15–18, para. 8. 21 Ibid. 22 Judgment of the Court of 23 May 2000, Commission v Italy, C-58/99, ECLI:EU:C:2000:280; Judgment of the Court of 4 June 2002, Commission v Portugal, C-367/98, ECLI:EU:C:2002:326; Judgment of the Court of 4 June 2002, Commission v France, C-483/99, ECLI:EU:C:2002:327; Judgment of the Court of 4 June 2002, Commission v Belgium, C-503/99, ECLI:EU:C:2002:328. Judgment of the Court of 13 May 2003, Commission v Spain, C-463/00, ECLI:EU:C:2003:272; Judgment of the Court of 13 May 2003, Commission v UK, Case 98/01, ECLI:EU:C:2003:273; Judgment of the Court (First Chamber) of 2 June 2005, Commission v Italy, C-174/04, ECLI:EU: C:2005:350; Judgment of the Court (First Chamber) of 28 September 2006, Commission v Netherlands, Joined Cases C-282 and C-283/04, ECLI:EU:C:2006:608; Judgment of the Court (Grand Chamber) of 23 October 2007, Commission v Germany, C-112/05, ECLI:EU:C:2007:623; Judgment of the Court (Third Chamber) of 14 February 2008, Commission v Spain, C-274/06, ECLI:EU:C:2008:86; Judgment of the Court (Third Chamber) of 17 July 2008, Commission v Spain, C-207/07, ECLI:EU:C:2008:428; Judgment of the Court (First Chamber) of 6 December 2007, Federconsumatori v Comune di Milano, Joined Cases C-463/04 and C-464/04, ECLI:EU: C:2007:752; Judgment of the Court (First Chamber) of 8 July 2010, Commission v Portugal, C-171/ 08, ECLI:EU:C:2010:412; Judgment of the Court (First Chamber) of 11 November 2010, Commission v Portugal, C-543/08, ECLI:EU:C:2010:669; Judgment of the Court (First Chamber) of 10 November 2011, Commission v Portugal, C-212/09, ECLI:EU:C:2011:717; Judgment of the Court (Fourth Chamber) of 8 November 2012, Commission v Greece, C-244/11, ECLI:EU: C:2012:694. O’Grady-Putek (2004), pp. 2219–2285; Artes (2009), pp. 457–482.

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rules.23 In all these cases, apart from one, Member States failed to convince the CJEU on the justifications to these infringements, which they invoked.24 Only one golden share case, Commission v Belgium,25 passed the test of the CJEU; the Belgian golden share scheme was found to be justified and, as a result, to be lawful. Belgian golden shares had certain characteristics that distinguished them from the golden shares of other Member States. The Belgian golden share scheme prescribed a right to oppose, ex post facto, some corporate decisions in privatized companies. The Belgian golden shares entailed a right to oppose only certain decisions concerning specific assets, did not allow any arbitrary exercise of the rights deriving from these prerogatives, required full justification of these decisions and opened the door to the possibility of judicial review by Belgian courts.26 Hence, in Commission v Belgium, the CJEU stipulated the conditions under which golden shares could be justified and, as a result, could be lawful. These conditions for lawful golden shares could be used by Member States in order to structure an effective screening mechanism for foreign direct investments. Lawful golden shares could either block a foreign investor from investing in the capital of a privatized company or control and restrict its actions when the foreign investor is already a (controlling) shareholder of the privatized company. These privileges of Member States to continue to exercise control over the privatized company, even when they do not possess a sufficient percentage of capital and there is no proportionality between capital and control, deviate from investor ownership, which constitutes one of the foundations of company law.27 Company law is structured primarily in a default way to contribute to the establishment and operation of investor-owned firms, i.e. firms in which the rights to control the firm and the right to receive the firm’s net profits are closely linked to investment of equity capital in the firm. In an investor-owned firm, the right to participate in corporate control (involving voting for the election of directors and for the approval of major transactions) and the right to participate in the profits are proportional to the amount of capital contributed to the firm by the shareholder.28 The proportionality between capital and participation in control and profits constitute the basis of corporate legislation. By retaining special powers in the company after its privatization, Member States derogate from this default principle of proportionality between capital and control in the context of investor ownership. These special rights of the State to continue to intervene in the control of a privatized company

23

For a critical overview of golden share case law, see: Andenas and Wooldridge (2009), pp. 14–20. The CJEU found that the national provisions were not precise, clear and proportionate. Benyon (2010), p. 38. 25 Judgment of the Court of 4 June 2002, Commission v Belgium, C-503/99, ECLI:EU:C:2002:328. 26 Szabados (2015), p. 1127. 27 Kraakman et al. (2017), p. 14. For an analysis in the context of protectionism and the market for corporate control, see: Bernitz (2010), pp. 191–206. Ringe (2010), pp. 209–240. Reisberg (2010), pp. 241–249. 28 Kraakman et al. (2017), p. 13. 24

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deviate from this element of investor ownership and could violate EU fundamental freedoms. However, this deviation from investor ownership could be justified according to the criteria of CJEU’s golden share case law and, as a matter of fact, could be lawful. This lawful deviation from the default investor ownership rule serves the screening of foreign direct investments. State as a shareholder in a privatized company, which deviates from the investor ownership rule, invokes public interest considerations in the exercise of its control over the privatized company, which aims at screening the profile of the potential foreign investor. Moreover, golden shares are also quite useful in case of onward transfers of privatized activities. The Member State could continue to screen and to exercise control through golden shares over the privatized company when there is an onward transfer of ownership over the initial privatized shareholding from the initial investor to another investor.29

3.2

Privatizations of State-Owned Companies and Conflicts of Interests

In privatizations of State-owned companies at EU level, conflicts of interests might arise. The typical conflict of interest arises between the State continuing to hold shares in a privatized company and a private investor having acquired shares in this privatized company. This conflict entails the interests of private investor seeking to maximize the profits from such acquisition of shares and the interests of the State pursuing political and social goals with a positive (serving the public interest) or negative dimension (the product of rent seeking).30 The State is very rarely a typical financial investor. As a result, State ownership is characterized by diversity in the shareholder base, which goes beyond that of a regular investor-owned company and from which peculiar conflicts of interest might emerge.31 A new kind of conflict of interests in State-owned companies might arise when the private investor is another State-owned company. In this case, there is going to be a foreign State-owned company participating in the privatization of another Stateowned company. This is the case of “imperfect privatizations”: when a State decides to privatize its activities, instead of transferring them to the private sector, it privatizes them to another State’s public sector (e.g. a multinational State-owned company or a sovereign wealth fund).32 The investor State-owned company might seek to achieve political objectives33 and not simply to get some short-term or long-

29

Strauss (2019), pp. 65–66. Pargendler et al. (2013), p. 571. 31 Kraakman et al. (2017), p. 14. 32 Strauss (2019), p. 121. 33 For a perspective on political influence over the governance of Chinese State-owned companies, see: Wang (2014), pp. 631–669. Fu (2017), pp. 145–162, Wang (2017), pp. 183–211. 30

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term profits. Although the business incentives could be dominant in the participation of a foreign State-owned company in the privatization of a State-owned company, political or strategic incentives should not be excluded.34 This scenario results in a different conflict of interests: both the investor State-owned company and the investee State-owned company under privatization could seek to achieve political goals, which could be proved to be conflicting. Their shareholdings in such a case could be guided by conflicting political objectives. Hence, a State would prefer to avoid attracting a foreign State-owned company as a shareholder in its State-owned company under privatization or would like to know in advance the political goals that the foreign investor State-owned company might pursue. Moreover, “disguised State enterprises”, which are private-sector businesses but with its State’s ownership and control determining the interests they pursue, are an additional source of uncertainty regarding foreign direct investments in privatized companies.35 According to the CJEU’s case law, lawful golden shares might help a Member State to screen the political intentions of a foreign State-owned company planning to invest in one of its privatized companies. Lawful golden shares might facilitate a Member State to control such foreign direct investments at the pre and postinvestment stage.36 Before the investment, lawful golden shares could dissuade an unwanted foreign State-owned company to participate in the capital of a privatized company. After the investment, lawful golden shares could grant the essential powers to the State to exercise an effective control over the privatized company in order to inhibit the foreign State-owned company to realize its political plans through its shareholding in the privatized company. Lawful golden shares provide the necessary means, such as veto rights, etc., to block certain decisions of the privatized company serving the political interests of a foreign State-owned company holding shares in this privatized company. Hence, lawful golden shares constitute an effective means of restricting the political influence that a foreign investor State-owned company might seek to exercise on this investee privatized company.

34

Strauss (2019), p. 119. Strauss (2019), p. 125. 36 For an analysis of pre-establishment and post-establishment restrictions to investments of Chinese State-owned companies in the context of international investment law, see: Wang (2019), pp. 83–84, Yin (2018), pp. 284–314. 35

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4 Harmonization of European Company Law and Screening of Foreign Direct Investments 4.1

The Relationship Between the Goals of the Harmonization of European Company Law and the Screening of Foreign Direct Investments

According to Art. 50(2)(g) TFEU, harmonization of European company law seeks to coordinate “to the necessary extent the safeguards which, for the protection of the interests of members and others, are required by Member States of companies or firms within the meaning of the second paragraph of Article 54 with a view to making such safeguards equivalent throughout the Union”. The aim of this harmonization is the attainment of freedom of establishment, as proclaimed by Art. 50 (1) TFEU.37 When the harmonizing instruments of company law were adopted, their primary goal was not the screening of foreign direct investments. Their primary goal was the facilitation of the freedom of establishment of companies, according to their legal basis (Art. 50 (2)(g) TFEU). The same consideration applies to the relevant corporate mobility cases decided by the CJEU on the basis of the freedom of establishment of companies (Art. 49 TFEU), which were discussed above. However, the screening of foreign direct investments could take place to a certain extent through European company law.38 Harmonization of company law in the EU offers mechanisms that could be used for the screening of foreign direct investments. These harmonized company law instruments could be used indirectly for this screening as their primary aim is the harmonization of company law. Although their primary objective is “the protection of the interests of members [i.e. shareholders] and others”, they could also contribute significantly to an effective screening of foreign direct investments, in parallel with this primary objective. Without prejudice to its aim (i.e. the attainment of EU freedom of establishment), certain provisions of the harmonization of company law could achieve an effective level of screening of foreign direct investments. While a link is required between harmonization of company law on the basis of Art. 50(2)(g) TFEU and facilitation of the freedom of establishment of companies, a generous construction of this link allows pursuing other secondary goals, such as screening of foreign direct investments.39

37

Dashwood et al. (2011), p. 677. For a critique of protectionism in the context of company law, see: Waymouth (2010), pp. 32–53. Hansen (2010), pp. 176–190. 39 Edwards (1999), p. 7. Dashwood et al. (2011), p. 678. The CJEU did not have the chance to examine the legal basis of Art. 50(2)(g) TFEU. However, in European Parliament v Council, the CJEU had the opportunity to discuss the appropriateness of Art. 352 TFEU (ex Art. 308 EC Treaty) instead of Art. 114 TFEU (ex Art. 95 EC Treaty) as a legal basis for a supranational corporate entity such as the European Cooperative Society. Judgment of the Court (Grand Chamber) of 2 May 2006, European Parliament v Council of the European Union, C-436/03 ECLI:EU:C:2006:277. 38

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As it was mentioned in the introduction, investment screening in the context of harmonization of company law entails an assessment of foreign direct investments on the basis of both the protection of the interests of shareholders and other stakeholders and the protection of public interest. On the one hand, these harmonized provisions focusing on the protection of the interest of shareholders and other stakeholders could also be used indirectly for the protection of public interest. The protection of the interest of shareholders and other stakeholders sometimes includes elements of public interest. This happens quite often in the case of “strategic companies” or “national champions”. These latter companies play a major role in the national economy and in some other fundamental interests of Member States. Hence, in “strategic companies” or “national champions”, the protection of the interest of shareholders and other stakeholders is quite often underpinned by the protection of public interest. On the other hand, some of these harmonized rules focus directly on the protection of public interest by providing veto rights to relevant national supervisory authorities. These harmonized company law provisions aiming directly at the protection of public interest are related to the supervisory role of Member States in the area of cross-border corporate restructuring. The limits of harmonization of company law with regard to the screening of foreign direct investments are founded on the attainment of freedom of establishment. A harmonizing company law instrument could contribute to the screening of foreign direct investments through the realization of the objective of the freedom of establishment of companies stated in Art. 50 (1) TFEU. As long as a harmonizing instrument contributes primarily to the freedom of establishment of companies, it could also be used for the screening of foreign direct investments. Otherwise, there might be a constitutional law problem regarding the legal basis of this harmonizing instrument; a harmonizing company law instrument contributing primarily to another objective, such as the screening of foreign direct investments, and not to the freedom of establishment might violate the legal basis invoked for its adoption (Art. 50 (2) (g) TFEU).40 The harmonization of European company law could play an effective but complementary role in the screening of foreign direct investments, especially in the capital of “strategic companies” and “national champions. The identity and intentions of a foreign investor acquiring corporate control or even a portfolio investment might have important repercussions on corporate relationships and management within and outside the company. These harmonized company law instruments could identify and evaluate such identity and intentions. On the one hand, in Member States without a special and sophisticated system of screening of foreign direct investments, these harmonized company law instruments, which must be implemented on a mandatory basis by Member States, provide the possibility of screening foreign direct investments in the capital of EU companies. On the other

See, the “Tobacco Advertising” case and the subsequent case law discussing the Union competence to regulate the internal market: Judgment of the Court of 5 October 2000, Germany v Council and Parliament, C-376/98, ECLI:EU:C:2000:544; Dashwood et al. (2011), p. 678.

40

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hand, in Member States with a special and sophisticated system of screening of foreign direct investments, these harmonized company law instruments operate complementarily with the screening system and enhance it by providing additional information. Although these harmonized company law instruments capable of screening foreign direct investments are addressed to EU companies and their stakeholders (directors, shareholders, creditors, employees), sometimes they give powers to national supervisory authorities, which could block certain corporate procedures and actions.

4.2 4.2.1

Takeover Bids Directive and Screening of Foreign Direct Investments Basic Concepts and Key Provisions

A takeover bid is a corporate control transaction between a third party (the acquirer) and the company’s shareholders.41 A “takeover bid” is a method often used to carry out a takeover or merger and takes the form of an offer to buy all the shares of the company.42 What happens is that one company, the offeror or bidder or acquiring company, buys either all or at least a voting majority of the shares in another, the offeree or target company.43 After the takeover, the two companies remain in being, and the offeree company becomes a subsidiary (perhaps a wholly owned subsidiary) of the other, and it is thereafter controlled by the acquiring company through its majority shareholding and its ability to remove the existing directors and appoint its own nominees in their place.44 A takeover bid is a quite common method of acquiring control of an EU company: the third-country investor sets up an EU company (offeror company/bidder), which launches a takeover bid towards another EU company (offeree company/target company) in order to acquire its corporate control. Since 2004, takeover bids at EU level have been harmonized by the Takeover Bids Directive (Directive 2004/25/EC).45 It is interesting to examine, in the context of the Takeover Bids Directive, how a target company could screen a foreign direct investment occurring through a takeover bid and how it could reject a bid and, simultaneously, a foreign direct investment, which is hostile and unwelcome.

41

Kraakman et al. (2017), p. 205. Weinberg et al. (1979), p. 3. 43 Sealy (1993), p. 135. 44 Ibid. 45 Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids, OJ L 142, 30.4.2004, p. 12–23. For an analysis of the Takeover Bids Directive, see: Papadopoulos (2010), Papadopoulos (2008) pp. 13–103. 42

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Investment screening in the context of takeover bids constitutes an assessment of the potential bidder controlled by a foreign investor and the possibility of frustrating its bid and ultimately the acquisition of control of the target company. This investment screening is very important when the target company is a “strategic company” or a “national champion” of a Member State. This assessment takes place primarily on the basis of the protection of the interests of the target company’s shareholders. First, the Takeover Bids Directive contains certain provisions capable of screening the identity of the bidder, the conditions of the bid and the plans and intentions of the bidder towards the target company after a successful takeover bid. Secondly, the Takeover Bids Directive allows under certain conditions the adoption of defensive measures by the target company’s board capable of frustrating a hostile bid behind which a foreign investor is found. The interests of the target company’s shareholders could be affected adversely by the acquisition of the target company’s control by a hostile bidder, especially when its plans are detrimental to the value of the company. However, sometimes, in case of takeover bids towards “strategic companies” or “national champions”, public interest could be also affected indirectly by the negative and harmful plans of the bidder towards the target company. “Strategic companies” and “national champions” very often serve public interest considerations in addition to the protection of the interests of their shareholders and other stakeholders. When a “strategic company” or a “national champion” is the target of a bid launched by a hostile bidder, which is controlled by a foreign investor, the protection of public interest is concealed behind the protection of the interest of the target company’s shareholders. The acquisition of corporate control of a “strategic company” or of a “national champion” by a hostile or at least dubious bidder, which is controlled by a foreign investor, might endanger certain vital national interests served by it (e.g. national defence, national security, energy security, telecommunications, transports, various utilities and networks, etc.). Some examples of these dangers for “strategic companies” and “national champions” are the following: seat transfer out of a particular Member State, divestment of activities and assets, collective redundancies, technology transfer, loss of tax revenues, control of networks, control of natural resources, winding up or liquidation, bankruptcy fraud, strategic bankruptcy, etc.). The Takeover Bids Directive contains certain provisions capable of investment screening, which include both disclosure of certain information about the bid and the bidder and the possibility of frustrating the bid. This investment screening could protect the interests of the target company’s shareholders, but it could also protect indirectly public interest, in case of “strategic companies” or “national champions”. First, this investment screening might identify and reveal the profile of an unwelcome bidder with hostile plans towards a target company, which is also a “strategic company” or a “national champion”. Secondly, it allows under specific conditions the frustration of such bid. This investment screening would protect primarily the interests of target companies’ shareholders, but it would also ensure that the national interests served by such companies would not be jeopardized. In the context of listed companies, the Takeover Bids Directive could be used for the screening of foreign direct investments. The two main provisions of the Takeover

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Bids Directive are (1) the board neutrality rule, which does not allow the board of the target company to adopt defensive measures during the period allowed for the acceptance of the bid (Art. 9),46 and (2) the breakthrough rule, under which any restrictions on the transfer of securities or on voting rights shall not apply vis-à-vis the offeror during the time allowed for the acceptance of the bid or shall not have effect at the general meeting of shareholders, which decides on any defensive measures (Art. 11). However, these two main provisions of the Takeover Bids Directive are optional. Article 12 of the Takeover Bids Directive introduces a complicated multi-level optionality and reciprocity system. According to the optionality system, Member States may reserve the right not to require companies to apply the board neutrality rule and/or the breakthrough rule. Moreover, where a Member State makes use of optionality and opt-outs, it shall nevertheless grant its companies the option, which shall be reversible, of applying the board neutrality rule and/or the breakthrough rule. According to the reciprocity system, Member States may, under the conditions determined by national law, exempt companies that apply the board neutrality rule and/or the breakthrough rule if they become the subject of an offer launched by a company that does not apply the same articles as they do or by a company controlled, directly or indirectly, by the latter.47 The adoption of both optionality and reciprocity systems by Member States gives their listed companies the possibility to frustrate hostile takeovers by bidders controlled by unwanted foreign investors. On the one hand, in a Member State applying the optionality regime, a target company could allow its board of directors to adopt various defensive measures48 capable of frustrating a bid launched by a hostile company controlled by a foreign investor. Optionality could also permit the introduction of restrictions on the transfer of securities or on voting rights capable of inhibiting permanently the takeover by a hostile bidder controlled by a foreign investor.49 On the other hand, in a Member State applying the reciprocity regime, a target company could retaliate and could allow defensive measures and restrictions

46

For a critique to the board neutrality rule, see: Davies et al. (2010), pp. 107–125. For an analysis of the choices made by Member States and by companies in the implementation of board neutrality rule, see: Davies et al. (2010), pp. 125–152. 48 The board of the target company can choose from a great variety of defensive measures. The “poison pill” is a mechanism implemented by a company that could become the target of an unwelcome takeover bid. This mechanism makes sure that a successful takeover bid will trigger some frustrating event that substantially reduces the value of the company. Pallister and Isaacs (2002), p. 392. Other defensive measures adopted by the board of the target company, which could frustrate a hostile takeover bid, are: “the sale of crown jewels” or “spin-offs” (selling valuable assets of the company), “lock-up options” (granting preferential options over shares or assets to white knights or other persons), “green mail” (which involves paying the hostile bidder to withdraw its bid), the “Pac Man” defence (which involves launching a bid for the bidder itself) and “golden parachutes” (which involves contractually binding the target company to make large severance payments to incumbent managers in the event of a change of control). Dashwood et al. (2011), p. 881; Kirchner and Painter (2002), p. 452; Pallister and Isaacs (2002), p. 393. 49 This is the distinction between ex ante and ex post defensive measures. Ex ante defensive measures exist in the target company’s articles of association or in agreements between 47

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on the transfer of securities or on voting rights against a company, which is not open itself to takeovers by adopting defensive measures.

4.2.2

Optionality and Screening of Foreign Direct Investments Made Through a Takeover Bid

Optionality results in differences with regard to who decides on the bid and who screens the foreign investor behind the bidder. This issue presents a great interest for investment screening taking place during takeovers of “strategic companies” or “national champions”, where various public interests served by them might be jeopardized after a transfer of corporate control. In case of an opt-out from the board neutrality rule, the board of the target company could screen and reject an unwelcome foreign direct investment made through a takeover bid. As mentioned above, it should be stressed that such investment screening is very important for takeovers of “strategic companies” or “national champions”, where certain public interests promoted by such companies might be threatened by a hostile bidder controlled by a foreign investor. In case of an opt-out from the board neutrality rule, the screening and the decision whether to reject a foreign direct investment made through a takeover bid is vested in the target company’s board and not in the target company’s shareholders. The target company’s shareholders are alienated from the process to screen and reject a foreign direct investment made through a takeover bid as this power was granted to the target company’s board.50 It is easily understood that this opt-out influences the possibility to screen a foreign direct investment through a takeover bid; the board and not the shareholders are responsible for examining a foreign direct investment made through a takeover bid and for deciding on the adoption of defensive measures against this bid. It should be mentioned that EU Member States consider opt-out from the board neutrality rule as an effective protectionist measure. After the implementation of the Takeover Bids Directive, it was found that more Member States decided to opt-out from the board neutrality rule, while before the adoption of the Takeover Bids Directive, they had already in place the board neutrality rule.51

shareholders before the launch of the takeover bid, while ex post defensive measures are adopted by the board after the launch of the takeover bid. De Luca (2017), p. 415. 50 Nevertheless, there is a requirement for transparency of the defensive measures, which were adopted. Shareholders should be aware of the existing defensive mechanisms put already in place. Recital 18 of the Takeover Bids Directive’s Preamble states: “In order to reinforce the effectiveness of existing provisions concerning the freedom to deal in the securities of companies covered by this Directive and the freedom to exercise voting rights, it is essential that the defensive structures and mechanisms envisaged by such companies be transparent and that they be regularly presented in reports to general meetings of shareholders.” 51 Davies et al. (2010), p. 138. Optionality constitutes an important danger of protectionism for the implementation of the Takeover Bids Directive: Johnston (2010), pp. 170–172.

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In case of an opt-in for the board neutrality rule, the decision on the bid and, as a matter of fact, the screening of the foreign direct investment taking place through the takeover bid belong to shareholders. Again, this issue is very important for investment screening at takeovers of “strategic companies” or “national champions”. Such an opt-in grants the decision on the bid only to shareholders by excluding the board from the corporate control transaction between the bidder and the target company’s shareholders. In this opt-in case, the shareholders, who have the power to examine and decide whether to accept the bid, could also perform a screening on the foreign investor behind this takeover bid. The shareholders and not the board screen the foreign direct investment taking place through the takeover bid and decide on whether to accept it. Nevertheless, opting in the board neutrality rule provides the possibility for shareholders to authorize the board of the target company to adopt defensive measures: defensive actions by the board of the target company, which might frustrate a takeover bid, are lawful only if the shareholders have approved them.52 In this case, shareholders grant to the board the power to screen the foreign investor behind a takeover bid and to decide whether to adopt defensive measures capable of frustrating the bid. According to Art. 9 of the Takeover Bids Directive, this authorization to the board of the target company to adopt defensive measures is specific to a certain bid and not a general one given prior to any bid submitted against the target company. This implies that when the shareholders of the target company would decide to grant such an authorization to the board in order to adopt defensive measures, they would have already screened at least preliminarily the foreign investor, who is launching through his EU offeror company the specific bid. In the context of this preliminary screening, the shareholders would have probably examined the status and intentions of the foreign investor behind the takeover, as well as the terms of its offer, before authorizing the board to proceed to any defensive actions.

4.2.3

Screening of Foreign Direct Investments and the Powers of the Target Company’s Board to Look for Competing Bids and to Publish Its Opinion on the Bid

Although the board neutrality rule does not allow the board to adopt independently defensive measures, it does not require the board to remain completely inactive during the period allowed for the acceptance of the bid.53 According to Art. 9(2) of the Takeover Bids Directive, the board complying with the board neutrality rule could seek for alternative/competing bids without the prior authorization of shareholders.54 The board could try to enlarge the available offers to shareholders by

52

Kraakman et al. (2017), p. 211. Kraakman et al. (2017), p. 213. 54 For a critical approach to the benefits of competing bids, see: Mucciarelli (2006), pp. 408–425. 53

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seeking for a “white knight”.55 A “white knight” is a welcome and friendly competing bidder compared to a first unwelcome and hostile bidder. It is quite obvious that the board performs a screening of the first bidder before deciding to look for a competing bidder. After a careful screening of the first bidder, the board could decide that this bidder is an unwelcome one and could start looking for friendlier bidders. If the results of the screening of the first bidder reveal that this bidder has plans against the interests of the target company, the target company’s board could contact a potential friendly bidder (i.e. white knight) in order to invite it to submit a competing bid. This search for a friendly competing bidder also entails a careful screening of this potential competing bidder in order to identify its friendly stance towards the target company. This search for a friendly competing bidder could be very useful for “strategic companies” or “national champions”, which are the target of a hostile bidder jeopardizing certain public interests served by such target companies. While the board cannot adopt defensive measures due to the board neutrality rule, it could seek to influence the view of shareholders and to persuade them to take a specific decision. Recital 17 of the Takeover Bids Directive’s Preamble states: “The board of an offeree company should be required to make public a document setting out its opinion of the bid and the reasons on which that opinion is based, including its views on the effects of implementation on all the company’s interests, and specifically on employment.” Article 3(1)(b) of the Takeover Bids Directive introduces a general principle on the expression of the board’s opinion on the takeover bid, which assists shareholders in deciding on the bid: “the holders of the securities of an offeree company must have sufficient time and information to enable them to reach a properly informed decision on the bid; where it advises the holders of securities, the board of the offeree company must give its views on the effects of implementation of the bid on employment, conditions of employment and the locations of the company’s places of business”. According to Art. 9(5) of the Takeover Bids Directive, the board expresses its non-binding, consultative opinion on the bid and circulates it among shareholders with the aim of affecting their views and choices in a particular way.56 Similarly, with the efforts to find competing bids, the board is not characterized by complete passivity as it could issue its opinion on the advantages and disadvantages of the bid, which proposes to shareholders the route they should follow. This possibility of the board to express its opinion on the bid deals with the information asymmetry problems of the target company’s shareholders.57 This opinion of the board might be exposed to conflicts of interests in case this board would be replaced after a successful bid. Such conflicts of interest could be mitigated if independent experts participate in the preparation of the document expressing the board’s opinion on the bid.58 This opinion of the board includes also

55 The alternative/competing bids are considered to have a wealth-enhancing impact on target company’s shareholders. Kraakman et al. (2017), p. 214. 56 Kraakman et al. (2017), p. 213. 57 Kraakman et al. (2017), p. 213. 58 Sergakis (2018), p. 138.

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elements of screening of foreign direct investment launched through a takeover bid. Screening of a foreign direct investment behind a bid is an indispensable part of the preparation of this document. The board evaluates the foreign investor behind the bid and states its findings from this screening process in its opinion. Actually, some of the shareholders would prefer their board to perform a screening of the foreign direct investment behind the bid in order to help them get a better understanding of the offer. The requirements of the public document expressing the board’s opinion on the bid are described by Art. 9(5) of the Takeover Bids Directive.59 According to this latter provision, during the drafting of this public document, the board should proceed to a very careful, diligent and fully justified screening of the foreign investor behind the bid in order to comment on “the effects of implementation of the bid on all the company’s interests and specifically employment, and on the offeror’s strategic plans for the offeree company and their likely repercussions on employment and the locations of the company’s places of business”. Moreover, this non-binding, consultative opinion on the bid expressed by the board of the target company could be very useful for “strategic companies” or “national champions”, which are the target of a hostile bidder jeopardizing certain public interests served by such target companies. A “strategic company” or a “national champion” might serve additional public interests and not only the interests of their shareholders and other stakeholders. Taking into account the requirements of this document as prescribed by Art. 9(5), a “strategic company” or a “national champion” might play a crucial role in the labour market of a Member State by offering a high number of jobs, which might be threatened by a hostile bidder having declared collective redundancies. Moreover, the “location” of the places of business of a “strategic company” or of a “national champion” within a specific Member State might serve specific public interest considerations (e.g. defence industry or high-technology company). The plans of a hostile bidder to transfer the seat or the business of such “strategic companies” or “national champions” abroad might endanger such public interest. A hostile bidder might also have various other “strategic plans” that are detrimental to the public interest served by such “strategic companies” or “national champions”. The view of the target company’s board on such plans of a hostile bidder could facilitate shareholders to assess the bid and to decide whether to accept it, which constitutes an effective screening mechanism.

59 Art. 9 (5) states: “The board of the offeree company shall draw up and make public a document setting out its opinion of the bid and the reasons on which it is based, including its views on the effects of implementation of the bid on all the company’s interests and specifically employment, and on the offeror’s strategic plans for the offeree company and their likely repercussions on employment and the locations of the company’s places of business as set out in the offer document in accordance with Article 6(3)(i). The board of the offeree company shall at the same time communicate that opinion to the representatives of its employees or, where there are no such representatives, to the employees themselves. Where the board of the offeree company receives in good time a separate opinion from the representatives of its employees on the effects of the bid on employment, that opinion shall be appended to the document.”

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Disclosure of Information in Takeover Bids and Screening of Foreign Direct Investments

Disclosure of information in the context of a takeover bid is essential for the screening of a foreign investor launching a takeover bid through an EU company. An offer document should provide detailed information on the bidder, the conditions of its offer, and its strategic plans and intentions for the target company. Recital 13 of the Takeover Bid Directive’s Preamble states: “The holders of securities should be properly informed of the terms of a bid by means of an offer document [. . .].” Article 3(1)(b) of the Takeover Bids Directive introduces a general principle on the conditions under which shareholders decide on the bid: “the holders of the securities of an offeree company must have sufficient time and information to enable them to reach a properly informed decision on the bid;”. Hence, the provision of sufficient information is a prerequisite for a properly informed decision on the bid and contributes to the screening of a foreign direct investment constituting the basis of a takeover bid. This requirement for sufficient information permits shareholders to screen the status of the foreign investor, the conditions of its offer and its strategic plans on the target company before reaching their decision on whether to accept the bid. The Takeover Bids Directive has certain provisions obliging the bidder to disclose its plans and intentions regarding the target company. Article 6 of the Takeover Bids Directive is dedicated to important information concerning bids. This is a disclosure obligation for the pre-offer announcement, as well as during and after the offer announcement.60 More specifically, Art. 6(2) of the Takeover Bids Directive requires the bidder to disclose certain information concerning its bid through the publication of a detailed offer document: Member States shall ensure that an offeror is required to draw up and make public in good time an offer document containing the information necessary to enable the holders of the offeree company’s securities to reach a properly informed decision on the bid. Before the offer document is made public, the offeror shall communicate it to the supervisory authority. When it is made public, the boards of the offeree company and of the offeror shall communicate it to the representatives of their respective employees or, where there are no such representatives, to the employees themselves. Where the offer document referred to in the first subparagraph is subject to the prior approval of the supervisory authority and has been approved, it shall be recognised, subject to any translation required, in any other Member State on the market of which the offeree company’s securities are admitted to trading, without its being necessary to obtain the approval of the supervisory authorities of that Member State. Those authorities may require the inclusion of additional information in the offer document only if such information is specific to the market of a Member State or Member States on which the offeree company’s securities are admitted to trading and relates to the formalities to be complied with to accept the bid and to receive the consideration due at the close of the bid as well as to the tax

60

Sergakis (2018), pp. 132–139.

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arrangements to which the consideration offered to the holders of the securities will be subject.

Article 6(3) of the Takeover Bids Directive prescribes the minimum content of the offer document: “[t]he offer document referred to in paragraph 2 shall state at least: (a) the terms of the bid; (b) the identity of the offeror and, where the offeror is a company, the type, name and registered office of that company; . . . (f) the maximum and minimum percentages or quantities of securities which the offeror undertakes to acquire; (g) details of any existing holdings of the offeror, and of persons acting in concert with him/her, in the offeree company;. . . (h) all the conditions to which the bid is subject; (i) the offeror’s intentions with regard to the future business of the offeree company and, in so far as it is affected by the bid, the offeror company and with regard to the safeguarding of the jobs of their employees and management, including any material change in the conditions of employment, and in particular the offeror’s strategic plans for the two companies and the likely repercussions on employment and the locations of the companies’ places of business; . . . (k) where the consideration offered by the offeror includes securities of any kind, information concerning those securities; (l) information concerning the financing for the bid; (m) the identity of persons acting in concert with the offeror or with the offeree company and, in the case of companies, their types, names, registered offices and relationships with the offeror and, where possible, with the offeree company; (n) the national law which will govern contracts concluded between the offeror and the holders of the offeree company’s securities as a result of the bid and the competent courts”. The offer document delves into the identity and the background of the bidder and could disclose also certain information of a foreign investor, who is controlling the bidder. The offer document does not require information only on the bidder, but it also asks the disclosure of information on the characteristics and the conditions of the bid, which could reveal the stance of the bidder towards the target company. This required information could be used as a screening mechanism for foreign investors by the target company, the relevant national supervisory authority for takeovers and the relevant national supervisory authority for the screening of foreign direct investments. Apart from the identity of the bidder, the offer document should disclose the existing holdings of the bidder and of persons acting in concert with him, the identity of persons acting in concert with him, the conditions applying to a bid, the bidder’s intentions and strategic plans for the future business of the target company, the impact on employment conditions, information about securities offered as consideration and information concerning the financing of the bid.61 This latter issue on the financing of the bid is quite important because quite often the necessary capital for the takeover bid would be injected under the free movement of capital provisions from the foreign investor into its EU subsidiary company launching the bid. The financial position of the bidder should be disclosed as the bid would not be selffunded but would be based on external funding deriving from a foreign investor. 61

Sergakis (2018), p. 136.

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Nevertheless, many bidders do not go into much detail and depth, when they provide information concerning bids, because they want to be adjusted to the new realities and conditions following a bid and to avoid being firmly bound about future actions, which might not be realizable or which might be negative for the bidder.62 This lack of in-depth information might diminish the possibility of screening a foreign direct investment behind a takeover bid. The required information of the offer document listed above assists the board and the shareholders in evaluating not only the conditions of the takeover bid but also the status and the intentions of the bidder and simultaneously of the foreign investor. Thus, the board and the shareholders of the target company could screen the foreign direct investment behind the bid through the information disclosed by the offer document. This disclosure of information alleviates the coordination problems of the target company’s shareholders when there is an opt-in for the board neutrality and the breakthrough rules. When a bid is addressed to the shareholders of the target company, they confront important coordination problems because the decision whether to accept the bid is taken individually by the shareholders and is not a collective one binding all shareholders.63 This mitigation of coordination problems of the target company’s shareholders through the disclosure of information allows them to screen without pressure the foreign direct investment behind the takeover bid and facilitates their decision-making power. The time allowed for the acceptance of the bid also provides the possibility for the target company’s shareholders to screen diligently and without pressure the foreign direct investment behind the bid and to reach a careful decision. Article 7(1) of the Takeover Bids Directive states: “Member States shall provide that the time allowed for the acceptance of a bid may not be less than two weeks nor more than 10 weeks from the date of publication of the offer document.” This period allows the shareholders to absorb the information64 and, as matter of fact, the outcome of the screening of the foreign direct investment behind the bid. Moreover, additional information could be provided. First, company law has general rules on the disclosure of information, which apply in addition to the Takeover Bid Directive’s disclosure rules.65 Nevertheless, general company law rules on the disclosure of information present serious disadvantages. The annual financial statements are quite often obsolete, in spite of the continuing reporting obligations imposed on listed companies.66 Thus, the special provisions of the Takeover Bids Directive requiring the disclosure of information regarding the takeover bid and the bidder are essential for an effective screening of the foreign direct investment as general company law provisions on the disclosure of

62

Sergakis (2018), p. 136. Kersaw (2016), p. 278. Kraakman et al. (2017), p. 224. 64 Kraakman et al. (2017), p. 225. 65 Kraakman et al. (2017), p. 225. 66 Kraakman et al. (2017), p. 225. 63

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information are not really effective.67 Secondly, in addition to the information disclosed by the offer document, any other important information about the bid must be provided on an ad hoc basis by the companies participating in a bid to the relevant national supervisory authority on its request, depending on the relevant powers granted to the supervisory authority by national capital market law. National supervisory authorities must have a decisive presence with regard to the disclosure of information during the pre-offer and the post-offer announcement until the completion of the bid. Moreover, national supervisory authorities, which constitute an expression of State interventionism in the area of disclosure of information in takeover bids, should seek to achieve the best level of transparency in takeover bids.68 This certainly enhances the possibility of screening a foreign direct investment behind the bid. Article 6(2) of the Takeover Bids Directive gives Member States the power to require prior approval of the offer document by national supervisory authorities. National supervisory authorities of other Member States must recognize this offer document (translated, if required), and there is no need to approve it again, but they could require the inclusion of additional information under certain conditions described in Art. 6(2) of the Takeover Bids Directive. This latter provision is important for the screening of a foreign investor behind a takeover in situations with a cross-border element, when the target company’s securities are admitted to trading in the markets of more than one Member States.

4.4

Political Considerations and Protectionism in Takeover Bids and Their Impact on the Screening of Foreign Direct Investments

Apart from the legal provisions regulating takeover bids, political considerations play a very important role. Many Member States reject the idea of an acquisition of control of their “strategic companies” or “national champions” by foreign

67

Special disclosure and scrutiny obligations are also prescribed for cross-border mergers of companies, which could be used as a screening mechanism for a foreign investor wishing to merge its EU subsidiary with a company from another Member State. See the following articles of Directive 2017/1132 codifying the provisions of the Cross-Border Mergers Directive (Directive 2005/56/EC): Art. 122 on common draft terms of cross-border mergers, Art. 123 on publication, Art. 124 on report of the management or administrative organ, Art. 125 on independent expert report, Art. 127 on pre-merger certificate, Art. 128 on scrutiny of the legality of the cross-border merger, Art. 130 on registration. Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law, OJ L 169, 30.6.2017, pp. 46–127. Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies, OJ L 310, 25.11.2005, pp. 1–9. 68 Sergakis (2018), p. 147.

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investors.69 The political cost is quite high for governments of Member States, where successful takeovers resulted in a control shift of “strategic companies” or “national champions” to foreign investors. The public worries about the repercussions of takeover bids on the national economy and is afraid of collective redundancies following the completion of a takeover bid.70 The Takeover Bids Directive provides the ground for protectionism under which the screening of an unwelcome foreign investor behind a takeover bid could lead to the rejection of its bid. Hence, political considerations appear in the EU market for corporate control and could affect the implementation of the Takeover Bids Directive. Member States implemented the Takeover Bids Directive in a protectionist way.71 There are examples of takeovers of “national champions” attracting political controversy and reactions from the public, such as the Cadbury/Kraft takeover and the Alstom/General Electric acquisition.72 Additionally, national supervisory authorities could waive national takeover rules in accordance with derogations prescribed by their national law and taking into account circumstances determined at national level (Art. 4(5)(i)–(ii) of the Takeover Bids Directive). Member States enjoy discretion with regard to the derogations to takeover rules adopted in their national laws. This power of the supervisory authority to waive takeover rules according to specific national derogations permits it to consider protectionist political views, as long as the relevant EU and national rules are not infringed. The decision of the supervisory authority on whether it should grant a waiver could also be based on a prior screening of the foreign direct 69

Kraakman et al. (2017), p. 239. Kraakman et al. (2017), p. 240. 71 Hopt (2009), p. 375; Kraakman et al. (2017), p. 239. With regard to the transposition of the optional provisions of the Takeover Bids Directive, 19 Member States implemented the board neutrality rule, 3 Member States implemented the breakthrough rule and 13 Member States permit their companies, which apply the board neutrality rule and/or breakthrough rule (by legislation or based on the company’s articles of association), not to apply the rule when they are the target of a takeover bid by a bidder which does not apply the same rule (reciprocity). European Commission (28 June 2012), Report from the Commission on Application of Directive 2004/25/EC on takeover bids, COM (2012) 347 final, p. 3. Commission Staff Working Document, Report on the Implementation of the Directive on Takeover Bids, SEC(2007) 268. The 2007 Report on the implementation of the Takeover Bids Directive comments on the protectionist approach of Member States: “However, there is a risk that the board neutrality rule, as implemented in Member States will hold back the emergence of a European market for corporate control, rather than facilitate it. It is unlikely that the breakthrough rule, as implemented in Member States would bring any significant benefits in the short term. A large number of Member States have shown strong reluctance to lift takeover barriers. The new board neutrality regime may even result in the emergence of new obstacles on the market of corporate control. The number of Member States implementing the Directive in a seemingly protectionist way is unexpectedly large.” Commission Staff Working Document, Report on the Implementation of the Directive on Takeover Bids, SEC(2007) 268, p. 3. Benyon (2010), p. 69. It is extremely difficult for the Commission to challenge such protectionist choices in the implementation of the Takeover Bids Directive, which were provided by the Takeover Bids Directive itself. Davies et al. (2010), p. 143. For a different approach against the view that the implementation of Takeover Bids Directive followed a protectionist approach, see: Hansen (2010), pp. 1186–1190. 72 Kraakman et al. (2017), p. 240. 70

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investment behind this takeover. This prior screening before the waiver is vulnerable to political and protectionist influences. When Member States are structuring the derogations to the takeover bid rules allowed under Art. 4(5) of the Takeover Bids Directive, they should insulate the decision-making process of their supervisory authority from political and protectionist influences. Some Member States have already adopted special national legislation for the screening of foreign direct investments,73 which could interact with the national takeover rules implementing the Takeover Bids Directive. Certain decisions on a takeover bid deriving from a foreign direct investment are taken on the basis of the findings of a screening process conducted in the context of the special national legislation for the screening of foreign direct investments. The Takeover Bids Directive has its own rules allowing the screening of a foreign investor behind a takeover bid. In addition to these takeover rules allowing the screening, this special screening process of national law brings additional information to the board and the shareholders, which could be used for their decisions on the bid. These special national regimes for the screening of foreign direct investments should comply with the newly adopted Regulation 2019/452 establishing a framework for the screening of foreign direct investments into the EU.74

4.5 4.5.1

Shareholders Rights Directive II and Screening of Foreign Direct Investments Introduction

The newly adopted Shareholders Rights Directive II (Directive 2017/828)75 could also play a major role in this field. Some of the goals that this Directive seeks to achieve are the following: (1) to develop significantly the engagement of asset owners and asset managers with their investee companies; (2) to make much easier the transmission of cross-border information (including voting) across the investment chain, in particular through shareholder identification; (3) to ameliorate the advice of proxy advisors; (4) to strengthen the transparency and shareholder

73

For a discussion of the German approach towards popular fears of globalization and trends towards political protectionism regarding takeovers and foreign direct investments with emphasis on German foreign direct investment law, see: Hopt (2009), pp. 381–391. 74 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 79I, 21.3.2019, pp. 1–14. 75 Directive (EU) 2017/828 amending Directive 2007/36/EC of the European Parliament and of the Council of 17 May 2017 as regards the encouragement of long-term shareholder engagement, OJ L 132, 20.5.2017, pp. 1–25. Dijkhuizen (2015), pp. 45–50.

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supervision of related party transactions.76 These goals, which this Directive is pursuing, also have important repercussions on the screening of a foreign investor, who holds shares in EU companies sometimes through complex ownership structures involving intermediaries.

4.5.2

Identification of Shareholders, Transmission of Information and Facilitation of the Exercise of Shareholder Rights in the Context of Screening of Foreign Direct Investments

In this Directive, there is a new provision for the identification of shareholders (Art. 3a of the Shareholders Rights Directive II), which could assist in the screening of foreign investors participating in the capital of EU companies. More specifically, companies have the right to identify their shareholders.77 There are also provisions obliging intermediaries holding shares to transmit specific information from the company to the shareholder (Art. 3b of the Shareholders Rights Directive II).78 The exercise of shareholder rights is also facilitated: “Member States shall ensure that the intermediaries facilitate the exercise of the rights by the shareholder, including the right to participate and vote in general meetings” (Art. 3c of the Shareholders Rights Directive II). Hence, foreign investors, who are shareholders in EU companies, cannot hide behind intermediaries as easily as in the past.79 Indirect 76 European Commission (9 April 2014), Proposal for a Directive amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement and Directive 2013/34/EU as regards certain elements of the corporate governance statement, COM/2014/0213 final, 2014/0121 (COD), p. 2. For an analysis of the transparency issues of sovereign wealth funds in the context of the Shareholders Rights Directive II, see: Ginevra and Presciani (2017), pp. 826–828 and 832–834. 77 Art. 3a states that: “1. Member States shall ensure that companies have the right to identify their shareholders. Member States may provide for companies having a registered office on their territory to be only allowed to request the identification of shareholders holding more than a certain percentage of shares or voting rights. Such a percentage shall not exceed 0,5 %. 2.Member States shall ensure that, on the request of the company or of a third party nominated by the company, the intermediaries communicate without delay to the company the information regarding shareholder identity[. . .].” Böckli et al. (2015), pp. 6–9; Gargantini (2019), pp. 214–235: Ahern (2018), pp. 94–96; Malberti (2017), pp. 77–78; Andrew/Morrow (2014), p. 5. For a discussion of the risks of intermediation, see: Gullifer (2010), pp. 4–12. 78 Art. 3b states that: “1. Member States shall ensure that the intermediaries are required to transmit the following information, without delay, from the company to the shareholder or to a third party nominated by the shareholder: (a) the information which the company is required to provide to the shareholder, to enable the shareholder to exercise rights flowing from its shares, and which is directed to all shareholders in shares of that class; or (b) where the information referred to in point (a) is available to shareholders on the website of the company, a notice indicating where on the website that information can be found.” 79 Article 3e is addressed to third-country intermediaries and states that: “This Chapter also applies to intermediaries which have neither their registered office nor their head office in the Union when they provide services referred to in Article 1(5).” This provision is very important for foreign investors cooperating with third-country intermediaries in the context of their shareholding in EU companies. Moreover, a company has five core structural characteristics: (1) legal personality,

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sources of control over a company and the way that this control is exercised, as well as the motives behind such control, could be identified and screened.80 Some foreign investors, who are considered to be unwelcome in specific Member States, hold shares in EU companies of such Member States through complex chains of intermediaries, resulting in difficulties in identifying them as shareholders of these EU companies. Disclosure of plans, intentions and shareholder engagement demand this identification of shareholders. Intermediaries cannot be used any more as a cover for an unwelcome foreign investor holding shares in an EU company and are obliged to provide all information with regard to the identification of this foreign investor as a shareholder.81

4.5.3

Engagement Policy and Screening of Foreign Direct Investments

Additionally, Art. 3g of the Shareholders Rights Directive II introduces an engagement policy82: “institutional investors and asset managers shall develop and publicly disclose an engagement policy that describes how they integrate shareholder engagement in their investment strategy and institutional investors and asset managers shall, on an annual basis, publicly disclose how their engagement policy has been implemented, including a general description of voting behaviour, an explanation of the most significant votes[. . .]”. This engagement policy could contribute to the screening of foreign investors holding shares in EU companies. These foreign investors must disclose specific aspects of their plans for the investee company. There are also provisions for the disclosure of investment strategy of institutional investors and of arrangements with asset managers (Art. 3h of the Shareholders Rights Directive II)83 and for the transparency of asset managers (Art. 3i of the

(2) limited liability, (3) transferable shares, (4) centralized management with a board structure and (5) investor ownership. These characteristics sometimes make it difficult to discern the owners of company and their interests. Kraakman et al. (2017), p. 5. 80 Strauss (2019), p. 59. 81 Recital 4 of the Preamble of Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of longterm shareholder engagement, OJ L 132, 20.5.2017, pp. 1–25. 82 Malberti (2017), p. 76; Böckli et al. (2015), pp. 1–5. Johnston and Morrow (2014), pp. 6–7; Johnston and Morrow (2015), pp. 22–26; Birkmose (2018), pp. 613–642. Birkmose (2014), pp. 214–257. Chiu (2015), pp. 25–36. Chiu (2016), pp. 31–44. 83 Art. 3h states that: “1. Member States shall ensure that institutional investors publicly disclose how the main elements of their equity investment strategy are consistent with the profile and duration of their liabilities, in particular long-term liabilities, and how they contribute to the medium to long-term performance of their assets. 2. Member States shall ensure that where an asset manager invests on behalf of an institutional investor, whether on a discretionary client-byclient basis or through a collective investment undertaking, the institutional investor publicly discloses the following information regarding its arrangement with the asset manager: [. . .].”

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Shareholders Rights Directive II).84 These provisions could also constitute an effective method of screening foreign investors. A foreign investor having set up an EU company and conducting business at EU level through this EU company must comply with these disclosure requirements of Shareholders Rights Directive II. The various plans and incentives of the foreign investor must be disclosed in the context of this harmonized framework. One of the main goals of this Directive is the enhancement of the rules on the “monitoring” of investee companies and on engagement by institutional investors and asset managers, which were often inadequate and focused excessively on short-term returns.85 It is obvious that this goal also contributes significantly to the screening of foreign investors in EU companies.

4.5.4

Related Party Transactions and Screening of Foreign Direct Investments

The Shareholders Rights Directive II has also some new provisions on the transparency and approval of related party transactions. Related party transactions are defined as “transactions between a company and its management, directors, controlling entities or shareholders, [which] create the opportunity to obtain value belonging to the company to the detriment of shareholders, and in particular minority shareholders”.86 The harmonized rules on related party transactions seek to address transactions among affiliated companies, which quite often belong to the same group of companies, where a company could be unfairly advantaged to the detriment of another company and of its shareholders raising issues with fiduciary duties of directors.87 The problem with related party transactions is that shareholders are lacking adequate information in advance of this planned transaction and quite often do not have any mechanisms allowing them to object to abusive related party transactions. The problem could be solved by enhancing the control rights over related party

Art. 3i states that: “1. Member States shall ensure that asset managers disclose, on an annual basis, to the institutional investor with which they have entered into the arrangements referred to in Article 3h how their investment strategy and implementation thereof complies with that arrangement and contributes to the medium to long-term performance of the assets of the institutional investor or of the fund.[. . .].” 85 Recital 2 of the Preamble of Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of longterm shareholder engagement, OJ L 132, 20.5.2017, pp. 1–25. 86 European Commission (9 April 2014), Proposal for a Directive amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement and Directive 2013/34/EU as regards certain elements of the corporate governance statement COM/2014/0213 final, 2014/0121 (COD), p. 5. For an analysis of related party transactions in State-owned companies, see: Milhaupt and Pargendler (2019), pp. 245–259. 87 Ventoruzzo et al. (2015), p. 343. 84

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transactions, which would provide additional protection to minority shareholders.88 Transparency and approval of related party transactions are crucial for screening certain transactions between the investee company and other subsidiaries of the foreign investor. These provisions could restrict transactions planned by the foreign investor and aiming at technology transfer or asset stripping of the investee company.89 Article 9c of the Shareholders Rights Directive II is dedicated to transparency and approval of related party transactions.90 The definition of related party transactions by Member States should consider “(a) the influence that the information about the transaction may have on the economic decisions of shareholders of the company; (b) the risk that the transaction creates for the company and its shareholders who are not a related party, including minority shareholders” (Art. 9c(1) of the Shareholders Rights Directive II). The public announcement of related party transactions include “at least information on the nature of the related party relationship, the name of the related party, the date and the value of the transaction and other information necessary to assess whether or not the transaction is fair and reasonable from the perspective of the company and of the shareholders who are not a related party, including minority shareholders” (Art. 9c(2) of the Shareholders Rights Directive II). With regard to the approval of related party transactions, Art. 9c(4) of the Shareholders Rights Directive II requires related party transactions to be “approved by the general meeting or by the administrative or supervisory body of the company according to procedures which prevent the related party from taking advantage of its position and provide adequate protection for the interests of the company and of the shareholders who are not a related party, including minority shareholders”. Additionally, Art. 9c(7) of the Shareholders Rights Directive II regulates related party transactions between the related party of the company and that company’s subsidiary examining “whether or not the transaction is fair and reasonable from the perspective of the company and of the shareholders who are not a related party, including minority shareholders”. From the provisions cited above, it is obvious that transparency and approval mechanisms of related party transactions are strengthened significantly. These provisions could also be used for screening related party transactions involving EU company/ies of foreign investors. The new harmonized framework on transparency and approval of related party transactions does not allow a foreign investor to plan and to materialize abusive related party transactions (i.e. technology transfer or asset stripping). Moreover, Member States always enjoy the discretion to introduce special rules for related party transactions addressed to certain categories of their

88 European Commission (9 April 2014), Proposal for a Directive amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement and Directive 2013/34/EU as regards certain elements of the corporate governance statement COM/2014/0213 final, 2014/0121 (COD), p. 5. 89 Prud'homme et al. (2018), pp. 150–168. Prud'homme and Von Zedtwitz (2019). 90 Malberti (2017), pp. 80–81. Groenland (2019), pp. 44–49. Reynisson (2016), pp. 175–182.

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strategic companies by tightening the related party transaction rules for such strategic companies in comparison with regular companies. For example, strategic innovative companies in the area of technology could be protected from technology transfers abroad through more specialized stringent rules on related party transactions. It could be deduced that Art. 9c of the Shareholders Rights Directive II is definitely an important development in European company law enriching the available tools for the screening of foreign direct investments. Foreign investors controlling EU companies would be discouraged from looting their assets and transferring them to third countries.

4.5.5

Shareholder Rights Directive I and Screening of Foreign Direct Investments

Apart from the Shareholders Rights Directive II, Shareholder Rights Directive I91 contains certain provisions facilitating the exercise of shareholders’ rights, which could assist minority shareholders in screening indirectly the proposals, plans and intentions of a majority shareholder (foreign investor) controlling the company. The following articles of the Shareholders Rights Directive I could contribute to this screening: Art. 4 on equal treatment of shareholders, Art. 5 on information prior to the general meeting, Art. 6 on right to put items on the agenda of the general meeting and to table draft resolutions, Art. 7 on requirements for participation and voting in the general meeting, Art. 8 on participation in the general meeting by electronic means and Art. 9 on right to ask questions.

4.6

Transparency in Listed Companies and Screening of Foreign Direct Investments: The Role of EU Capital Markets Law

In addition to the Shareholders Rights Directive II, the foreign investor should be obliged to provide certain information (e.g. information about major holdings) in accordance with the Transparency Directive (Directive 2004/109/EC92). The aims of the Transparency Directive are prescribed by Recitals 1 and 2 of its Preamble: “[t]he disclosure of accurate, comprehensive and timely information about security issuers builds sustained investor confidence and allows an informed assessment of their

91

Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain rights of shareholders in listed companies, OJ L 184, 14.7.2007, pp. 17–24. 92 Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, OJ L 390, 31.12.2004, p. 38–57.

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business performance and assets. This enhances both investor protection and market efficiency”93 and “[t]o that end, security issuers should ensure appropriate transparency for investors through a regular flow of information”.94 The Transparency Directive sets specific thresholds95 and demands the Member States to impose on natural persons or legal entities the requirement to notify, in case of acquisition or disposal of a shareholding in a company, the proportion of voting rights held by them reaching, exceeding or falling below these specific thresholds.96 The criteria of shareholder composition and changes with regard to major shareholdings play a very important role for investors’ decisions affecting particularly institutional investors and influencing the price of shares.97 Knowledge of the identity of major shareholders provides investors with important information, for example permitting them to evaluate the possibility of conflicts of interest.98 The Transparency Directive contributes to the further integration of EU capital markets through the reduction or elimination of information asymmetries and through the strengthening of investor confidence in the financial position of issuers.99 These harmonized disclosure obligations seek to secure market efficiency and to assist issuers and shareholders to be informed as to who exerts influence or is about to exert even more influence over issuers.100 This provision of information combats the

93 Recital 1 of the Preamble of Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, OJ L 390, 31.12.2004, pp. 38–57. 94 Recital 2 of the Preamble of Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, OJ L 390, 31.12.2004, pp. 38–57. 95 Art. 9 of the Transparency Directive sets the following thresholds of 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%. Sergakis (2018), pp. 121–122. Strauss (2019), p. 61. 96 It should be mentioned that the Commission enacted an implementing Directive and a delegated Regulation as Level 2 acts of the Lamfalussy process: Commission Directive 2007/14/EC of 8 March 2007 laying down detailed rules for the implementation of certain provisions of Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, OJ L 69, 9.3.2007, pp. 27–36, and Commission Delegated Regulation (EU) 2015/761 of 17 December 2014 supplementing Directive 2004/109/EC with regard to certain regulatory technical standards on major holdings, OJ L 120, 13.5.2015, pp. 2–5. These acts are very important for the screening process taking place under the Transparency Directive. Veil (2017), p. 396, 399. Kraakman et al. (2017), p. 222. For a comparative analysis, see: Schouten and Siems (2010), pp. 451–483. Clausen and Sørensen (2002), pp. 201–247. 97 Veil (2017), p. 396. For an analysis of the transparency issues of sovereign wealth funds in the context of the Transparency Directive, see: Ginevra and Presciani (2017), pp. 825–826, 829–832. 98 Veil (2017), p. 396. 99 European commission (26 March 2003), Proposal for a Directive on the harmonization of transparency requirements with regard to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, COM(2003)138, p. 2. 100 Sergakis (2018), p. 120.

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abuse of inside information. After the adoption of the Transparency Directive, new types of financial instruments (e.g. derivatives) not covered by its disclosure rules were started being used by investors aiming at circumventing the Directive. The danger with these new types of financial instruments was that investors could acquire stocks in companies, resulting in market abuse, and that they could display a false and misleading situation of economic ownership and corporate control of listed companies. In 2013, the Transparency Directive was amended (Art. 13 of the Transparency Directive) in order to cover all instruments with similar economic effect to holding shares and entitlements to acquire shares, which ensure that issuers and investors have full knowledge of the structure of corporate ownership.101 These harmonized rules on the disclosure of major shareholdings play a very important role in the screening of foreign direct investments. The disclosure of any changes with regard to major shareholdings contributes to a careful screening of the structure of corporate ownership. Knowledge of shareholder composition allows both investors and (EU and national) supervisory authorities to evaluate carefully foreign direct investments financing the acquisition of shares in the capital of listed EU companies. An effective disclosure of major shareholdings could be proved useful for national governments interested in screening any changes at the corporate ownership and control of their “strategic companies” or “national champions”, behind which an unwelcome foreign investor is found.102 In case of privatizations of State-owned companies, these disclosure obligations reveal the relationships of control appearing below the surface of legal ownership, which assist in an assessment of a company’s underlying interests and which secures that privatized activities are performed in line with the State’s interests.103 Disclosure of major shareholdings revealing beneficial holders of shares plays also a very important role in the context of takeover bids. More specifically, this disclosure of major shareholdings assists the target company’s incumbent management in getting extra time, allowing it to design its defensive strategy, which would be developed after the launch of the bid in board neutrality jurisdictions (with the

101

Recital 9 of the Preamble of Directive 2013/50/EU of the European Parliament and of the Council of 22 October 2013 amending Directive 2004/109/EC on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading and Commission Directive 2007/14/EC laying down detailed rules for the implementation of certain provisions of Directive 2004/109/EC, OJ L 294, 6.11.2013, pp. 13–27; Veil (2017), p. 397. See, also: Conac (2012), pp. 49–68; Zetzsche (2010), pp. 231–252; Strauss (2019), pp. 62–63. 102 The disclosure rules of the Transparency Directive are aiming at making more difficult and costly creeping acquisitions. Creeping acquisitions constitute acquisition of a company’s de facto control without the submission of a formal takeover bid. Nevertheless, these disclosure rules are insufficient to inhibit creeping acquisitions: Enriques and Gatti (2015), pp. 73–75. Control of a company could also be acquired by a creditor through pledged shares as collateral in a loan agreement, when the company does not comply with its obligations under the loan agreement and subsequently the creditor gets control of the collateral. Strauss (2019), pp. 54–55, 64–65. 103 Strauss (2019), p. 64.

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permission of the general meeting of shareholders), or to start adopting pre-bid defensive measures in jurisdictions without the board neutrality rule.104 This obligation to disclose major shareholdings facilitates the screening of a foreign investor during the pre-bid period by the board of the target company. Nevertheless, an important disadvantage of the Transparency Directive is that it does not oblige the shareholder to disclose its plan to acquire control and/or its aim to launch a takeover bid. Only a few Member States, like France and Germany, have rules imposing a duty to disclose the goal of an acquisition of a big amount of shares.105 It is obvious that this disadvantage diminishes the efficiency of the Transparency Directive with regard to the screening of the intentions of a foreign investor having acquired a large number of shares. There are some aspects of the Transparency Directive that enhance the screening of foreign direct investments financing the acquisition of a shareholding. The Transparency Directive requires disclosure from persons with the possibility of influencing voting rights.106 This latter comprehensive approach covering additional instruments leads to a closer screening of foreign direct investment. As far as notification with regard to attribution of voting rights attached to third-party shares is concerned, disclosure requirements are imposed on persons acting in concert.107 Art. 10(a) states: “The notification requirements defined in paragraphs 1 and 2 of Article 9 shall also apply to a natural person or legal entity to the extent it is entitled to acquire, to dispose of, or to exercise voting rights in any of the following cases or a combination of them: (a) voting rights held by a third party with whom that person or entity has concluded an agreement, which obliges them to adopt, by concerted exercise of the voting rights they hold, a lasting common policy towards the management of the issuer in question;” [emphasis added]. This requirement contributes to an effective screening of foreign direct investment because a foreign investor might have a specific agreement with another local or foreign person to exercise their voting rights in accordance with specific commitments. The disclosure requirements imposed on a foreign investor acting in concert with another local or foreign investor could reveal their “lasting common policy towards the management of the issuer in question”, which could screen effectively their plans for the

104

Kraakman et al. (2017), p. 222. Schouten (2009), p. 136. Ginevra and Presciani (2017), p. 826. For an analysis of motivations for acquiring control, see: Strauss (2019), pp. 55–58. 106 Art. 13(1) of the Transparency Directive states: “1.The notification requirements laid down in Article 9 shall also apply to a natural person or legal entity who holds, directly or indirectly: (a) financial instruments that, on maturity, give the holder, under a formal agreement, either the unconditional right to acquire or the discretion as to his right to acquire, shares to which voting rights are attached, already issued, of an issuer whose shares are admitted to trading on a regulated market; (b) financial instruments which are not included in point (a) but which are referenced to shares referred to in that point and with economic effect similar to that of the financial instruments referred to in that point, whether or not they confer a right to a physical settlement.” Veil (2017), p. 401. 107 Veil (2017), p. 409. 105

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company. Article 10 of the Transparency Directive also includes some more circumstances requiring notification with regard to the attribution of voting rights attached to third-party shares: temporary transfer of voting rights (Art. 10(b)), notification obligations of the secured party (Art. 10(c)), life interest (Art. 10(d)), voting rights held or exercised by a controlled undertaking (Art. 10(e)), deposited shares (Art. 10(f)), shares held on behalf of another person (Art. 10(g)) and voting rights exercised by proxy (Art. 10(h)).108 In these cases, the voting rights of specific shares are attributed to persons other than the shareholders. The disclosure imposed on such situations by the Transparency Directive results in an effective screening of a foreign direct investment. First, the voting rights of an unwelcome foreign investor’s shares might be attributed to another person with the aim of concealing the unwelcome foreign direct investment and of giving the impression of a friendly or at least neutral stance. Secondly, another scenario is a friendly or at least neutral foreign investor to attribute the voting rights of his shares to a person with hostile intentions. These latter problematic situations are addressed by Art. 10 of the Transparency Directive. The disclosure requirements in cases of attribution of voting rights adopted by the Transparency Directive could constitute a method of screening such foreign direct investments with elements of hostility. Some Member States moved beyond the disclosure obligations harmonized by the Transparency Directive. France and Germany, inspired by similar US rules, adopted additional disclosure obligations requiring an investor to disclose its intentions and its plans underpinning the acquisition of voting rights in a specific company.109 These intentions, which must be published by the issuer, include the plans to acquire control or at least additional shares or whether it wishes to affect the appointment or removal of board members.110 Hence, this obligation of investors to notify intent requires a person to disclose his purposes with regard to future developments, corporate structure, business activities and other corporate and financial aspects of the issuer.111 The Transparency Directive does not have provisions requiring such notification of intent. This lack of harmonized rules constitutes an important deficit of the process of screening a foreign investor at EU level. Undoubtedly, such notification of an investor’s intent constitutes an effective tool for monitoring the investor’s plan and strategy towards a company. A foreign investor, who is obliged to notify his intentions on the company, could be assessed more comprehensively and with greater clarity. Empirical research reveals that reactions of market participants in capital markets are affected not only by the disclosure of 108 Veil (2017), pp. 408–420. For Art. 10g of the Transparency Directive, see: Zetzsche (2009), pp. 132–134. 109 In US law, these disclosure obligations are described by Art. 13(d) of the Securities and Exchange Act, which were introduced by the 1968 Williams Act. These disclosure obligations on investors’ notifications of intent are prescribed by Art. L.233-7 VII Code de Commerce and Art. 223-14 RG AMF in France and Art. 27a Wertpapierhandelsgesetz (WpHG) in Germany. Veil (2017), pp. 402, 424–425. Kraakman et al. (2017), p. 222; Sergakis (2018), pp. 126–127. 110 Veil (2017), p. 402. 111 Veil (2017), p. 424.

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acquisition of major shareholdings but also by the goals that the relevant investor wishes to achieve through this acquisition.112 Member States wishing to screen the goals of a foreign investor could adopt such additional rules on the notification of intent, like France and Germany. These additional rules would assist them in identifying the intentions behind the acquisition of shares by a foreign investor, which allows a screening of this foreign direct investment. In a future amendment of the Transparency Directive, notification of intent might be added to the disclosure obligations in order to have a more transparent EU capital market.

4.7

Corporate Restructuring Harmonizing Instruments and Screening of Foreign Direct Investments

Screening of foreign direct investments could also take place through some corporate restructuring harmonizing instruments. These instruments could be used in the context of cross-border corporate restructuring in order to assist a foreign investor to acquire control of a company. Public interest considerations could inhibit the completion of cross-border corporate restructuring. Member States enjoy the discretion under the Cross-Border Mergers Directive (repealed and consolidated into Directive 2017/1132) and the European Company Statute (Societas Europaea— SE) to block the process of cross-border merger or of establishment of a European company (SE) or of transfer of the registered office of a European company (SE) when such processes are against public interest.113 A cross-border merger could be inhibited on the basis of public interest considerations. Article 121 of Directive 2017/1132114 (ex Art. 4(1)(b) of the Cross-Border Mergers Directive115) regulating conditions relating to cross-border mergers states: “The laws of a Member State enabling its national authorities to oppose a given internal merger on grounds of public interest shall also be applicable to a crossborder merger where at least one of the merging companies is subject to the law of that Member State. This provision shall not apply to the extent that Article 21 of Regulation (EC) No 139/2004 is applicable.” Hence, a foreign investor seeking to merge his EU company with a company from another Member State could be blocked by the relevant national authority on the basis of public interest considerations. This provision is addressed mostly to the “strategic companies” or “national champions” of Member States. This opposition right must also comply with EU

112

Scherr et al. (1993), pp. 66-78; Veil (2017), p. 424. For a discussion of the notion of public interest in the context of company law, see: Lee (2012), pp. 106–129. 114 Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law, OJ L 169, 30.6.2017, pp. 46–127. 115 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies, OJ L 310, 25.11.2005, pp. 1–9. 113

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fundamental freedoms. Moreover, this provision clearly excludes from its scope merger concentration from a competition law point of view (Art. 21 of Merger Regulation).116 A procedure for the verification of this opposition right and an explicit requirement for its compliance with proportionality, like in Merger Regulation, are missing.117 Additionally, from an empirical point of view, the majority of Member States granted this right of opposition to sectorial authorities (for mergers in the financial sector, mass media, etc.).118 The harmonized provisions of cross-border mergers mentioned above, through which screening of foreign direct investments could take place, get additional significance in the light of the geographical expansion of their scope. While the harmonization of cross-border mergers applies to “mergers of limited liability companies formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union” (Art. 118 of Directive 2017/1132 (ex Art. 1 of the Cross-Border Mergers Directive)), eight Member States are thought to have gold plated this provision and to have extended the geographical scope of their cross-border merger legislation implementing this provision, which now covers also cross-border mergers between EU and non-EU companies.119 Nevertheless, this argument about the geographical expansion of the scope of the harmonized rules on cross-border mergers to non-EU countries must be treated cautiously because it derives from the fact that these eight Member States do not explicitly prohibit cross-border mergers with companies from non-EU countries and not from explicit national provisions allowing universally cross-border mergers between EU and non-EU companies on a worldwide basis.120 It is obvious that this alleged geographical expansion is very important for foreign investors. Under this interpretation, the company of a foreign investor registered in a non-EU country could merge directly with an EU company. According to this approach, it would not be necessary for the foreign investor to set up an EU company in order to proceed to a cross-border merger with another EU company from another Member State, but it could merge directly its foreign company registered to a non-EU country with an EU company. In the context of this approach, the possibility of screening through the opposition right of Art. 121 of Directive 2017/1132 a crossborder merger encompassing a foreign direct investment is now expanded to non-EU companies. This alleged geographical expansion to non-EU companies strengthens the power of the national authorities to screen a foreign direct investment through the 116

Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation), OJ L 24, 29.1.2004, pp. 1–22. Bech-Bruun and Lexidale (2013), p. 101. For an excellent comparison between the protection offered under Art. 4(1) (b) of the Cross-border Mergers Directive and the protection offered under the Merger Regulation, see: Corradi and Nowag (2019), pp. 159–174. For the competition law aspects of direct cross-border investment, see: Benyon (2010), pp. 41–49. 117 Benyon (2010), p. 64. 118 Bech-Bruun and Lexidale (2013), pp. 101–103. 119 Bech-Bruun and Lexidale (2013), p. 84. 120 Bech-Bruun and Lexidale (2013), pp. 84–85.

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opposition right of Art. 121 of Directive 2017/1132, which could cover not only cross-border mergers between EU companies but also cross-border mergers between EU and non-EU companies. It remains to see the evolution of this provision and whether any Member State would gold plate clearly this provision by adopting in the future explicit national rules expanding the geographical scope of the harmonized rules on cross-border mergers to non-EU companies. A foreign investor might be interested in acquiring the control of a company through the formation of a European company (SE), an EU supranational corporate type introduced by the European Company Statute.121 The formation of an SE by merger could be prohibited by Member States’ competent authorities on grounds of public interest, which are subject to judicial review (Art. 19 of Regulation on the Statute for a European Company (SE)). The opposition on public interest must be expressed before the issue of the certificate referred to in Art. 25(2) of Regulation on the Statute for a European Company (SE), and its judicial review is exercised by a national judicial authority in accordance with national law. These public interest considerations are defined by national law in accordance with CJEU’s case law.122 This provision could be quite useful for the protection of the financial sector; national competent authorities could block the participation of their financial entities, such as banks or insurance companies, in the formation of an SE by merger in case there is a serious threat to their financial stability and to the interests of their stakeholders.123 Nevertheless, opposition on public interest to the formation of an SE by merger might be circumvented if the participating companies decide not to merge but that one of them should acquire all the shares of the other.124 Moreover, the transfer of the registered office of an SE is also subject to public interest considerations (Art. 8(14) of Regulation on the Statute for a European Company (SE)).125 More specifically, Art. 8(14) of Regulation on the Statute for a

121

Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE), OJ L 294, 10.11.2001, p. 1–21. For an empirical analysis, see: Eidenmüller et al. (2010), pp. 334-348; Kirshner (2010), pp. 349–353. 122 Hodt Dickens (2007), p. 1437; Van Gerven (2006), p. 38. 123 Hodt Dickens (2007), p. 1437, Van Gerven (2006), p. 38. 124 Storm (2006), p. 10. 125 In case the foreign investor plans to materialize his investment through a European Cooperative Society (SCE), the same blocking power of Member States appears also in the Statute for a SCE (Regulation 1435/2003 on the Statute for a European Cooperative Society (SCE) [2003] OJ L 207/1–24). This blocking power constitutes an effective screening mechanism under which the Member State could intervene under public interest considerations into important decisions. Art. 21 of the Statute for a SCE specifies the grounds for opposition to a merger and gives the possibility to a Member State to adopt national rules inhibiting one of its national cooperatives to participate in the formation of SCE through a merger only on grounds of public interest amenable to judicial review. Moreover, Art. 7(14) of the Statute for a SCE allows Member States’ competent authorities to oppose the transfer of a registered office of an SCE registered in that Member State. The same provision refers also to cooperative financial institutions and states that: “Where an SCE is supervised by a national financial supervisory authority according to Community directives, the right to oppose the change of registered office applies to this authority as well”.

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European Company (SE) grants the right to competent authorities of Member States to stop on grounds of public interest the transfer of the registered office of an SE registered in that Member State resulting in a change of applicable law. These public interest considerations must be based on grounds specified by national law, and no other grounds could be invoked to block such transfer.126 When an SE is a financial institution and is supervised by a national financial supervisory authority in accordance with EU banking and financial law, this national financial supervisory authority has also the right to restrict the change of registered office.127 The exercise of these rights to inhibit the change of registered office of an SE is susceptible to judicial review by national courts.128 With regard to the transfer of the registered office of an SE, the Member State of departure enjoys the possibility of stopping the transfer of the registered office of one of its SEs quite often constituting a “strategic company” or a “national champion”. In a possible future amendment of the European Company Statute, this right of opposition to the transfer of registered office could also be expanded and granted to the Member State of destination. This expansion of the right of opposition to the Member State of destination is deemed to be essential for addressing the following problematic situation: a foreign investor cannot set up an SE in a specific Member State because it is considered to be unwelcome there, and its initiative to set up an SE could also be blocked under Art. 19 of Regulation on the Statute for a European Company (SE); instead of this, the foreign investor could set up the SE in a friendly jurisdiction and then transfer its registered office to the desired hostile jurisdiction. Hence, the right to oppose transfers of the registered office of SEs should also be extended to the relevant competent authorities of the Member State of destination. Although this extension might be included in a possible future amendment of the European Company Statute, Member States could possibly gold plate this provision and extend also this right of opposition to the Member State of destination. It is interesting to mention some empirical data in order to see the trends among Member States: thirteen Member States implemented the opposition right of Art. 8 (14) of Regulation on the Statute for a European Company (SE), and also thirteen Member States implemented the opposition right of Art. 19 of Regulation

126

Van Gerven (2006), p. 72. The relationship between the first and the second part of Art. 8(14) is quite obscure. The difference between these two parts is questioned. A textual interpretation leads to the following questionable conclusion: the opposition by a competent authority under the first part of Art. 8 (14) must be explicitly authorized by national law, while the opposition by a financial supervisory authority under the second part of Art. 8(14) could be based directly on the SE Regulation without the need to grant this power by national law. Werlauff (2003), p. 129. 128 The exhaustion of an administrative appeal procedure as a prerequisite for judicial review is allowed as long as the possibility of judicial review is not affected adversely. The preliminary reference procedure to the CJEU under Art. 267 TFEU is also available, which might be proved particularly useful in the future for the interpretation of the notion of public interest. Werlauff (2003), pp. 129–130. 127

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on the Statute for a European Company (SE).129 With regard to Art.19 of Regulation on the Statute for a European Company (SE), Member States confer the power of opposition either on judicial authorities or on economic authorities. Moreover, with regard to Art. 19 of Regulation on the Statute for a European Company (SE), eight out of thirteen Member States, taking into account the cross-border characteristics of the merger, adopted stricter opposition rights than in similar domestic situations, while five out of thirteen Member States implemented similar opposition rights as in domestic situations.130 Around half of Member States provided their national competent authorities the right to oppose the transfer of the registered office of an SE, according to Art. 8(14) of Regulation on the Statute for a European Company (SE).131 Furthermore, all Member States granted their national financial supervisory authorities the right to restrict the establishment of an SE by merger when one of their domestic financial institutions (bank, investment fund, mutual fund, insurance company, pension fund, brokerage house) is participating.132 It is obvious that cross-border mergers of companies, the establishment of an SE through merger and the transfer of the registered office of an SE could be hindered by the relevant authorities on the basis of public interest considerations. These public interest considerations capable of restraining a foreign investor to participate in the capital of a company (domestic public or private limited company or SE) could constitute an effective screening mechanism against undesirable foreign investors. These opposition rights of Member States to block a cross-border merger or the establishment of an SE through merger or the transfer of the registered office of an SE constitute a deviation from investor ownership, for which rules of company law are designed.133 Company law is structured primarily to contribute to the establishment and operation of investor-owned firms, i.e. firms in which the right to control the firm and the right to receive the firm’s net profits are closely linked to investment of equity capital in the firm.134 This State intervention blocking these corporate restructuring transactions constitutes a deviation from investor ownership. Nevertheless, this deviation could be justified on the basis of public interest considerations served by it.

129

Ernst & Young (2009), p. 35. Ernst & Young (2009), pp. 59, 77. 131 Ernst & Young (2009), p. 75. 132 Ernst & Young (2009), pp. 60, 78. 133 Kraakman et al. (2017), p. 14. 134 Kraakman et al. (2017), p. 13. 130

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5 Conclusion It is obvious that European company law could play an important role in investment screening. Both positive and negative integration in the area of European company law could provide the tools for screening a foreign direct investment.135 Both case law and harmonization in the context of European company law pave the way for an effective screening of foreign direct investments. Freedom of establishment of companies as interpreted by CJEU’s case law on corporate mobility could contribute to the screening of foreign direct investments. Lawful golden shares in privatized companies could also constitute effective tools in screening foreign investors interested in acquiring shares in privatized companies. Harmonization of company law at EU level could play a very important role in the screening of foreign direct investments. Various harmonizing instruments contain provisions capable of screening a foreign direct investment. The Takeover Bids Directive with its optionality and reciprocity regime and with its requirements for disclosure of information could contribute to an effective screening of a foreign direct investment behind a bid. Moreover, the Shareholders Rights Directive II (Directive 2017/828) could contribute to investment screening. Transparency requirements imposed on listed companies by EU capital markets law (Transparency Directive) could also constitute an effective screening mechanism for foreign direct investments. Additionally, screening of foreign direct investments could take place through some corporate restructuring harmonizing instruments. The opposition rights of the Cross-Border Mergers Directive (repealed and consolidated into Directive 2017/1132) and of the European Company Statute (Societas Europaea—SE) could block the process of cross-border merger or of establishment of an SE by merger or of transfer of the registered office of an SE, which are threatening public interest. Although European company law contributes effectively to the screening of foreign direct investments, a special legal framework for investment screening continues to be necessary for Member States prioritizing the assessment and control of foreign direct investments. European company law is not primarily designed for screening foreign direct investments, but it could play a major role in this area. It could be deduced that European company law, without downgrading and diverting from its own objectives, could also simultaneously achieve the goal of screening foreign direct investments, a goal serving the greater purpose of internal market. European company law cannot play alone the role of a consolidated institutional framework for screening foreign direct investments, but it can contribute effectively to this goal.

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For an analysis of positive and negative integration in the development of European company law after the 2007/08 financial crisis, see: Hopt (2010), pp. 13–31.

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Thomas Papadopoulos is an assistant professor of Business Law at the Department of Law of the University of Cyprus. He received his DPhil in Law from the Faculty of Law, University of Oxford, UK (2010). He received a degree of Magister Juris-MJur (2006) and a degree of MPhil in Law (2007) from the Faculty of Law, University of Oxford, UK. He also received his LLB with Distinction (ranked first) from the Department of Law, Aristotle University of Thessaloniki, Greece (2005). Previously, he was a visiting researcher at Harvard Law School (2009–2010). He is also a visiting professor at International Hellenic University and an attorney at law (Greece). Moreover, he is an editorial secretary of European Company Law (ECL) Journal published by Kluwer. He was awarded the “Cyprus Research Award-Young Researcher (2014)” of the Research Promotion Foundation of the Republic of Cyprus (category of “Social Sciences & Humanities”). This distinction was awarded on the basis of his research on takeovers and mergers and was accompanied by a research grant. His main research areas are business law, company law, financial law, capital market law, competition law, insolvency law, European economic law and internal market law. His articles were published in many top international law journals. He is also the author of the following monograph published by Kluwer: EU Law and the Harmonization of Takeovers in the Internal Market, 2010, Kluwer. Moreover, he is the editor of the following book published by Springer: Cross-Border Mergers – EU Perspectives and National Experiences, 2019, Springer.

The Impact of Investment Treaty Commitments on the Design and Operation of EU Investment Screening Mechanisms Jens Hillebrand Pohl

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Application of Investment Treaty Obligations to Investment Screening . . . . . . . . . . . . . . . . . . . 2.1 Scope of Application of Investment Treaty Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Manner of Application of Investment Treaty Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Implications of Investment Treaty Obligations on the Functioning of Investment Screening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Manner of Resolving Norm Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Implications on the Design and Operation of Screening Mechanisms . . . . . . . . . . . . . . 4 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

726 728 728 742 757 758 762 764 766

Abstract This chapter asks how and why investment treaty obligations of the EU or its Member States may affect the design and operation of EU and Member State investment screening mechanisms. It examines the scope of application of such investment treaty obligations in the area of investment screening on grounds of security or public order. It then assesses the potential for norm conflicts between such treaty obligations and legal acts of the EU or its Member States relating to investment screening by considering the manner in which such obligations are to be applied, taking stock of both the material content of the main applicable protection standards and available general and security exceptions. Finally, the chapter explores the available legal remedies by means of which such potential norm conflicts may be

This chapter draws on the author’s doctoral dissertation ‘Arbitration of Investor-State Disputes Relating to Foreign Investment Control’. The author thanks Steffen Hindelang, Andreas Moberg, Teoman Hagemeyer, Denise Prévost, Rodrigo Polanco and two anonymous reviewers for their constructive comments on previous drafts. Any remaining errors are solely attributable to the author. J. H. Pohl (*) Maastricht University, Faculty of Law, Maastricht, The Netherlands e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 725–768, https://doi.org/10.1007/16495_2020_5, Published online: 1 August 2020

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resolved and considers the effects of such remedies on the functioning of investment screening mechanisms.

1 Introduction As the new EU regulation on foreign investment screening1 (EU Screening Regulation) entered into force on 10 April 2019, national screening and control mechanisms for foreign investments were already in place in 14 of the Member States.2 As of the same date, these Member States and the EU itself were parties to a total of 865 investment treaties with third countries.3 Put into perspective, this number corresponded to almost two thirds of all investment treaties to which the EU or its Member States were parties and a third of all investment treaties in force globally.4 Few investment treaties or other international investment agreements5 address investment screening directly,6 but most include provisions on the treatment of foreign investors and foreign investments that may be applicable to the process or effects of screening. The EU Screening Regulation defines ‘screening’ as ‘a procedure allowing to assess, investigate, authorise, condition, prohibit or unwind foreign

1 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. 2 These Member States were Denmark, Germany, Spain, France, Italy, Latvia, Lithuania, Hungary, Netherlands, Austria, Poland, Portugal, Romania and Finland. As of 10 April 2019, the United Kingdom also had a screening mechanism in force. However, since the United Kingdom has since withdrawn from the Union, it is not included among the Member States for purposes of this chapter. 3 Investment Policy Hub (2019). 4 Ibid. As of 20 May 2019, there were 1136 international investment agreements (for this term, see below fn 5) in force between the EU or its Member States (excluding the United Kingdom), on the one hand, and third countries, on the other hand, and a further 179 such agreements between Member States. There were an additional 1315 international investment agreements in force between third countries inter se. 5 The term ‘international investment agreements’ refers to investment treaties, i.e. international agreements the principal object of which is to promote or protect investments, as well as other international agreements containing investment treaty obligations, such as free trade agreements and the like. For purposes of this chapter, the Treaty on the Functioning of the European Union (TFEU), despite its inclusion of treaty obligations relating to investments, is not treated as an international investment agreement. 6 For example, Canadian investment treaties often address screening by way of excluding investment authorisation decisions under the Canadian screening legislation (Investment Canada Act, R.S.C. 1985, c. 28 (1st Supp.)) from the scope of the dispute settlement provisions of the relevant treaty. See, e.g., Article 8.45 and Annex 8-C of the Comprehensive Economic and Trade Agreement (CETA) between Canada, of the one part, and the European Union and its Member States, on the other part, 30 October 2016 (not published in UNTS) available at https://investmentpolicy.unctad. org/international-investment-agreements/treaty-files/3593/download. Accessed 06.1.2020.

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direct investments’.7 As such, investment screening is an administrative procedure and an exercise of public authority liable to produce legal effects or factual consequences for the foreign investors and the undertakings concerned. As will be further elaborated below, both investments that have not yet been made and those that have already been made may be subject to screening. As of the date of publication, screening decisions have not been the subject matter of investment treaty arbitration. This chapter examines how and why investment treaty obligations of the EU or its Member States may affect the design and operation of EU and Member State investment screening mechanisms. It asks how investment screening mechanisms or screening decisions may conflict with investment treaty obligations and what standards of protection may be invoked against such mechanisms or decisions (Sect. 2). The hundreds of affected international investment agreements contain a wide variety of protective provisions and exceptions that may be applied to the varied situations, procedures and outcomes that may come into play in investment screening. At this stage of the analysis, focus lies on the existence and scope of binding treaty obligations and not on the manner in which they may be enforced. As a matter of international law, a treaty provision that is subject to investor–State arbitration is just as binding as one that is only subject to interstate arbitration. The chapter then considers why investment treaty obligations might restrict the EU and its Member States in designing or operating investment screening mechanisms (Sect. 3). How is the existence of conflicts between investment screening mechanisms or screening decisions of the EU or its Member States,8 on the one hand, and the investment treaty obligations of the EU or its Member States, on the other hand, to be determined and, if necessary, resolved? How does the manner of determination or resolution of such norm conflicts—investor–State or interstate arbitration—impact the design and operation of investment screening mechanisms? This section will explore how legal restrictions emanating from investment treaty obligations serve as de facto restrictions at the EU and national levels resulting from the enforceability of these obligations. The chapter concludes with a summary of its findings and a reflection on their policy implications (Sect. 4).

7

Article 2(3) of the EU Screening Regulation. Note that while the EU itself does not operate an investment screening mechanism under the EU Screening Regulation, it may issue opinions where it considers that a foreign direct investment undergoing screening is likely to affect security or public order in Member States (cf. Article 6 (3) and (4)). Such opinions may also be issued under Article 7 and 8 under the circumstances set forth in those articles. As such, it may participate in the adoption of measures in the application of a screening mechanism, i.e. a ‘screening decision’ (cf. Article 2(6)). 8

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2 Application of Investment Treaty Obligations to Investment Screening The point of departure of this enquiry is the default proposition that investment treaties apply to investments once they are made and that investment screening takes place before they are made. From this it seems intuitive that screening is inherently beyond the scope of application of investment treaty obligations. However, as will be elaborated more closely later on, in practice, investment treaties sometimes apply to investments before they are made, while screening often concern investments that have already been made and that are increased above a certain predetermined level that triggers the screening. Before approaching the question whether investment treaty obligations apply to investment screening in more detail, it is necessary to understand what screening entails. The precise scope of the powers that may be exercised under the investment screening mechanisms of the Member States varies. However, it is clear from the definition of ‘screening’ in the EU Screening Regulation that these powers may be vast and potentially very invasive. These include the power to authorise or deny authorisation of a contemplated investment, the power to impose potentially burdensome conditions for such investment, the power to prohibit an investment altogether and even the power to order the unwinding of an investment that has already been made.9 The exercise of these powers would normally constitute a serious interference with the kind of interests that investment treaty obligations are meant to safeguard, viz. the ability of foreign investors to make and operate investments. To assess whether and to what extent investment screening could result in a norm conflict with investment treaty obligations, it is necessary to first understand whether and, if so, how far such obligations extend to screening (Sect. 2.1). Where the obligations are applicable, the existence and extent of norm conflicts depend on how the obligations are to be applied (Sect. 2.2).

2.1

Scope of Application of Investment Treaty Obligations

Before assessing the extent, if any, to which investment treaty obligations may apply to investment screening, it is convenient to ascertain the fact patterns that may trigger the application of investment treaty obligations in the first place or, more precisely, (1) the factual situations that may give rise to screening and (2) the factual consequences that may result from screening. The criteria for carrying out screening are given by the national investment screening mechanisms of the Member States and by Article 4 of the EU Screening

9

See above fn7.

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Regulation. The elements of the screening process, from which legal consequences may ensue, are also provided in national legislation and in the EU Screening Regulation, specifically Articles 2(3), 6 and 8. For present purposes, it is assumed that the national screening mechanisms conform to the requirements of the EU Screening Regulation. Factual Preconditions to Screening Article 1(1) of the EU Screening Regulation delimits its scope of application to ‘foreign direct investments’, which is defined in Article 2(1) as follows: an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in a Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity.

It follows from this definition that the existence of an actual or prospective investment is a threshold requirement for the application of the EU Screening Regulation, which is indeed generally true also for investment treaty obligations.10 This fact therefore does not appear to give rise to any difficulties that are unique to investment screening. A ‘foreign investor’ is defined in Article 2(2) as ‘a natural person of a third country or an undertaking of a third country, intending to make or having made a foreign direct investment’, where ‘undertaking of a third country’ means ‘an undertaking constituted or otherwise organised under the laws of a third country’ (cf. Article 2(7)). From this it is apparent that an undertaking organised under the laws of a Member State falls outside the definition of a ‘foreign investor’. Neither the definition of ‘foreign direct investment’ nor that of ‘foreign investor’ extends the scope of application to investments by EU undertakings that are controlled by non-EU investors.11 It is also clear that the definition covers both prospective and actual investors.12 The key element of a ‘foreign direct investment’ as defined in Article 2(1) is the existence of an aim ‘to establish or to maintain lasting and direct links’ between, on the one hand, the foreign investor and, on the other hand, ‘the entrepreneur to whom

10

See Bischoff and Happ (2015), Salacuse (2015), pp. 176–206; Dolzer and Schreuer (2012), pp. 60–78. 11 Nevertheless, the EU Screening Regulation also provides that Member States are obliged to ensure that their screening mechanisms and screening decisions are not circumvented (cf. Article 3 (6)). According to Recital 10, ‘[t]his should cover investments from within the Union by means of artificial arrangements that do not reflect economic reality and circumvent the screening mechanisms and screening decisions, where the investor is ultimately owned or controlled by a natural person or an undertaking of a third country’. An investment of an EU undertaking controlled by non-EU investors could in these situations be covered by national screening mechanisms, even though it would not be a ‘foreign direct investment’ under the EU Screening Regulation. 12 Note specifically the words ‘intending to make or having made’ an investment.

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or the undertaking to which the capital is made available in order to carry on an economic activity in a Member State’.13 It is this aim—and not the effect per se—of establishing or maintaining lasting and direct links between the relevant parties that is the essence of this definition. At its core, the definition is therefore of a teleological character. Yet another such element is embedded in the definition, viz. with respect to the purpose of the transfer of invested capital to its recipient, to whom the capital is to be made available ‘in order to carry on an economic activity’. In other words, the purpose for which the investor makes the capital available must be for the recipient to carry on such an activity. It is noteworthy that these teleological elements must be attributable to the investor.14 Finally, it should be noted that the definition of a ‘foreign direct investment’, and thus the scope of the EU Screening Regulation, includes ‘investments which enable effective participation or control of a company carrying out an economic activity’. Since the definition does not exclude investments that do not enable such participation or control, it appears that the existence of ‘lasting and direct links’ does not presuppose effective participation or control.15 In any event, no de minimis threshold for what counts as a ‘foreign direct investment’ can be inferred on the basis of the level of influence at which the investment enables the investor to exercise control over a company carrying on a relevant economic activity.16 Indeed, the quantitative criteria for screening under the national screening mechanisms of the Member States in terms of percentage of shares or voting rights (screening thresholds) are often well below the level required to exercise control of a company.17 In other words, ‘foreign direct investments’ include, but are not necessarily limited to, investments that enable a foreign investor to exercise effective participation or control over a company. 13 Cf. Judgment of the Court of 12 December 2006, Test Claimants in the FII Group Litigation, C-446/04, EU:C:2006:774, paras. 180, 185. 14 For further discussion on the definition of ‘foreign direct investment’ for purposes of the EU Screening Regulation, see in this volume Lars Otto. An important question in this context is how these teleological elements may be determined; subjectively or by resort to objective determinants (such as structure, effect and operation). 15 This question, whether ‘lasting and direct links’ for purposes of the definition of ‘foreign direct investment’ in the EU Screening Regulation presupposes or merely includes investments that enables the investor to ‘participate effectively in the management of the company or in its control’, falls outside the scope of this chapter. It is sufficient to note that the Judgment of the Court of 20 May 2008, Orange European Smallcap Fund, C-194/06, EU:C:2008:289, paras. 98–102, on which the definition of ‘foreign direct investment’ seems to have drawn inspiration (see also Judgment of the Court of 15 February 2017, X, C-317/15, EU:C:2017:119, paras. 21, 22 and 25), addressed the question insofar as it held that direct investments are ‘investments of any kind undertaken by natural or legal persons and which serve to establish or maintain lasting and direct links between the persons providing the capital and the undertakings to which that capital is made available in order to carry out an economic activity’ (para. 102), regardless of the question whether an investor, who is a shareholder of a company, is ‘in a position to exercise decisive influence over the management or control of that company’ (para. 98). For a comprehensive analysis, see Hindelang (2009), pp. 70–74. 16 See generally Hindelang (2009), pp. 81–114. 17 European Commission (2017), p. 8.

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Security or Public Order Article 1(1) of the EU Screening Regulation further delimits the scope of application to screening on the grounds of ‘security or public order’.18 The latter phrase is not defined in the EU Screening Regulation, but Article 4(1) provides an open-ended list of factors that may affect security or public order, which gives an indication of the nature of the investments that may give rise to screening and the sectors of the economy that may be concerned. It includes infrastructure and facilities (including land and real estate), technologies, critical inputs and food security, sensitive information and the media. Moreover, Article 4 (2) indicates that security or public order may be affected if the investment is controlled by a third country, if the investor is already involved in activities affecting a Member State’s security or public order or if there is a ‘serious risk’ that the investor engages in illegal or criminal activities. It is clear from these provisions that, even if ‘security or public order’ is restrictively interpreted, the potential range of factual situations that may give rise to screening is considerable. Factual Situations Emanating from Screening Screening can give rise to numerous factual consequences. Analysed as ‘factual’ from the perspective of international investment agreements, these include the legal process and legal consequences (under EU law or national law) of screening inherent in the definition of ‘screening’ in Article 2(3) of the EU Screening Regulation: assessment, investigation, authorisation, conditioning, prohibition and unwinding of foreign direct investments. These activities may give rise to consequences in the form of decisions factually affecting an investor or an investment, and also to other adverse effects, whether resulting from actions or omissions and whether deliberate or not, which may injure the investor or the investment. For purposes of assessing the applicability of investment treaty obligations to the factual situations that may result from investment screening, it is useful to distinguish between screening that takes place in the period preceding the making of an investment (pre-investment phase), i.e. screening of a future or prospective investment (Sect. 2.1.1), and screening that takes place in the period after an investment has been made (the post-investment phase), i.e. screening of an already existing investment (Sect. 2.1.2).

2.1.1

Screening in the Pre-investment Phase

Most national screening mechanisms of the Member States oblige prospective investors to notify the competent authority that undertakes the screening regarding certain types of contemplated investments and to obtain an authorisation before

18 This terminology is in contrast to that in Article 65(1)(b) TFEU, which refers to ‘public policy or public security’. See also recital (4) of the EU Screening Regulation.

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making such certain types of investments.19 Whether investment treaty obligations apply to such ex ante screening mechanisms depends, in part, on whether the scope of application of the relevant international investment agreement extends to future investments and, in part, on what counts as a future investment under the relevant agreement. Future Investments Excluded Most investment treaty obligations, including the core investment protection standards, do not apply to investments that have not yet been made. The obligations to provide national treatment, most-favoured-nation (MFN) treatment, fair and equitable treatment, and full protection and security normally become applicable only once an eligible investor has invested, i.e. when the investor has established a new investment or acquired an existing investment from someone else.20 When a treaty is silent on the matter, a host State cannot be considered obligated to extend protection to prospective investments or investors.21 Conversely, foreign individuals cannot be presumed to have a right to invest since States are inherently free as of sovereign right to deny the entry or admission of foreign investors and their investments and thus also to prohibit the establishment of foreign-controlled investments in their territories.22 In treaty practice, however, the exclusion of prospective investments and of the making of investments from the scope of application of investment treaty obligations is often expressly reflected in a number of different ways. Definitional Exclusion of Future Investments First, international investment agreements may exclude prospective investments from the scope of application by excluding them from the definition of the term ‘investment’ or ‘covered investment’ to which the investment treaty obligations relate. By way of example, Article 8.2 (1) CETA provides: This Chapter applies to a measure adopted or maintained by a Party in its territory relating to: (a) an investor of the other Party; (b) a covered investment; and (c) with respect to Article 8.5, any investments in its territory.

Here, the term ‘investor’ is defined in Article 8.1 to mean ‘a Party, a natural person or an enterprise of a Party, other than a branch or a representative office, that seeks to make, is making or has made an investment in the territory of the other Party’ [emphasis added]. Prospective investors are thus within the definition of ‘investor’ and hence within the scope of the investment treaty obligations of

19 Such ex ante screening e.g. exists in Denmark, Germany, Spain, France, Italy, Latvia, Lithuania, Hungary, Netherlands, Austria and Finland. 20 See above fn 10. 21 See Barcelona Traction [1970] ICJ Rep 4, para. 33 and Mihaly v. Sri Lanka, Award, 15 March 2002, para. 60. For further references, see Newcombe and Paradell (2009), pp. 121–122 (and further references cited in footnote 2); Salacuse (2013), p. 76. 22 Ibid.

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CETA.23 By contrast, the term ‘covered investment’ is limited to an investment that has already been made (‘made in accordance with the applicable law at the time the investment is made’ and ‘existing on the date of entry into force of this Agreement, or made or acquired thereafter’). It is thus clear from Article 8.2(1) that the scope of CETA’s investment treaty obligations covers measures relating to investors both in the pre- and postinvestment phase, as well as measures relating to actually existing investments.24 With respect to the prohibition against performance requirements in Article 8.5, the scope covers measures relating to both existing and future investments.25 Once excluded from the definition of ‘covered investment’, prospective investments fall outside substantive investment protections that incorporate the term, such as the absolute standard of protection referred to in Article 8.10(1): Each Party shall accord in its territory to covered investments of the other Party and to investors with respect to their covered investments fair and equitable treatment and full protection and security in accordance with paragraphs 2 through 6.

Investment protection in the form of fair and equitable treatment and full protection and security in the pre-investment phase is thus excluded in CETA through the limitation of the scope of Article 8.10(1) to ‘covered investments’ and ‘investors with respect to their covered investments’.26 Similar exclusions are found in Article 2.4 of the EU–Singapore Investment Protection Agreement (IPA),27 which in addition limits the application of its investment protections to ‘covered investors’, i.e. investors that have made an investment, and Article 2.5 of the EU–Vietnam IPA.28

23

See, for a similar reasoning, Nordzucker v. Poland, para. 171. Note, e.g., that the national treatment obligation in Article 8.6(1) CETA thus applies to the preand post-investment phase insofar as adverse discrimination of investors is concerned (as per the definition of ‘investors’), but only to the post-investment phase when it comes to adverse discrimination of investments (as per the definition of ‘covered investments’). 25 Similar provisions are contained in Article 2.1 of the investment chapter of the draft EU–Australia Free Trade Agreement, published on 22 October 2018, available at http://trade.ec.europa.eu/doclib/ docs/2018/december/tradoc_157572.pdf (accessed 06.1.2020); and Article 2.1 of the investment chapter of the draft EU–New Zealand Free Trade Agreement, published on 25 September 2018, available at http://trade.ec.europa.eu/doclib/docs/2018/december/tradoc_157580.pdf (accessed 06.1.2020). 26 Note that with respect to the scope of application of Article 8.10(1), Article 8.2(1) does not add any further limitations. 27 Investment Protection Agreement between the European Union and its Member States, of the one part, and the Republic of Singapore, of the other part, 15 October 2018 (pending ratification) available at https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/ 5714/download. Accessed 06.1.2020. 28 Investment Protection Agreement between the European Union and its Member States, of the one part, and the Socialist Republic of Viet Nam, of the other part, 30 June 2019 (pending ratification) available at https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/ 5868/download. Accessed 06.1.2020. 24

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Other examples of definitions of ‘investment’ that clarify that the act of investing must have taken place can be found in many treaties.29 Many treaties provide that investments must be ‘invested’,30 as illustrated by Article 1(1) of the China–Germany bilateral investment treaty (BIT)31: the term ‘investment’ means every kind of asset invested directly or indirectly by investors of one Contracting Party in the territory of the other Contracting Party, and in particular, though not exclusively, includes: [. . .].

Another common formulation is that the investment must be ‘established or acquired’, as exemplified by Article 1(1) of the Finland–Kazakhstan BIT32: The term ‘investment’ means every kind of asset established or acquired in connection with business and entrepreneurial activity by an investor of one Party in the territory of the other Party in accordance with the national legislation of the State of the latter Party, including in particular, though not exclusively: [. . .].

The difference between ‘establishment’ and ‘acquisition’ of an investment is usually that the former refers to investments in the form of a business being set up, whereas the latter refers to investment in an already set-up business.33 However, the terminology is not uniform. Some treaties, such as the EU–Japan Economic Partnership Agreement (EPA)34 and the EU–Korea Free Trade Agreement (FTA),35 define ‘establishment’ so as to include acquisition.36 In arbitral practice, the issue of pre-investment obligations has surfaced in some cases in the context of the treaty definition of investment, although none has been a ‘clean’ case of a prospective investment, in the sense of a denied opportunity to invest or a dispute as to the right to invest.37 The emphasis of these cases has not

29

Investment Policy Hub (2019). See, e.g., Nordzucker v. Poland, para. 184. 31 Agreement between the People’s Republic of China and the Federal Republic of Germany on the Encouragement and Reciprocal Protection of Investments, 1 December 2003, 2362 UNTS 253. 32 Agreement between the Government of the Republic of Finland and the Government of the Republic of Kazakhstan on the Promotion and Mutual Protection of Investments, 9 January 2007, 2558 UNTS 585. 33 See Juillard (2000), pp. 332–333. Note that another frequent distinction is between, on the one hand ‘establishment’ and ‘acquisition’ and, on the other hand, ‘admission’ (or, synonymously, ‘entry’), the latter terms being understood as occurring prior to the establishment, cf. Newcombe and Paradell (2009), p. 132; Gómez-Palacio and Muchlinski (2008), pp. 229–232. References to ‘admission’ or ‘entry’ therefore signify a somewhat less far-reaching application of the relevant protection standard. 34 Agreement between the European Union and Japan for an Economic Partnership, 17 July 2018 (not published in UNTS) OJ L330 of 27 December 2018, p. 3. 35 Free Trade Agreement between the European Union and its Member States, of the one part, and the Republic of Korea, of the other part, 6 October 2010 (not published in UNTS) OJ L 127 of 14 May 2011, p. 6. 36 EU–Japan EPA Article 8.2(i) and EU–Korea FTA Article 7.9(a). 37 Mihaly v. Sri Lanka, Award dated 15 March 2002; Nagel v Czech Republic, Final Award, 9 September 2003; Zhinvali v. Georgia, unpublished award, 24 January 2003; Petrobart 30

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centred on whether an investment was ‘made’ but has turned on the question of whether certain pre-investment phase steps—communications or acts by the prospective investor—had progressed to the extent sufficient to constitute an ‘investment’. In other words, the issue in principle of pre-investment application of investment treaty obligations has in practice often veered into the more factual question of whether the substantive criteria for an investment have been satisfied. Specific Exclusion of Future Investments Second, the substantive provisions of the international investment agreements may be expressly limited to investments that have been made by investors, i.e. to the exclusion of investments yet to be made. An example is contained in the Denmark–North Macedonia BIT,38 which defines ‘investor’ and ‘investment’ in a manner that does not exclude prospective investors or investment, respectively, but provides under Article 3(1) on ‘Treatment of Investments’: Each Contracting Party shall in its territory accord to investments made by investors of the other Contracting Party fair and equitable treatment which in no case shall be less favorable than that accorded to its own investors or to investors of any third State, whichever is the more favorable from the point of view of the investor.

Here it is clear that the treatment of investments excludes prospective investments by limiting the application of the provision to ‘investments made by investors’ [emphasis added]. An example of another type of formulation is Article 4(1) of the France–Ethiopia BIT,39 which limits the application of the national treatment and MFN treatment to investments ‘once admitted in accordance with the legislation’ of the host State. Yet another example is found in Article III(1) of the Slovakia–Turkey BIT40: Each Party shall in its territory accord investments of investors of the other Party, once established, and returns of investors of the other Party treatment which is fair and equitable and not less favourable than that which it accords to investments and returns of its own investors or to investments and returns of investors of any third State whichever is more favourable.

v. Kyrgyz Republic, Award, 29 March 2005; Nordzucker v. Poland, Partial Award (Jurisdiction), 10 December 2008; White Industries v. India, Final Award, 30 November 2011; Bosca v. Lithuania, Award, 17 May 2013; Deutsche Telekom v. India, Interim Award, 13 December 2017. 38 Agreement between the Macedonian Government and the Government of the Kingdom of Denmark for the Promotion and Reciprocal Protection of Investments, 8 May 2015 (not published in UNTS) UN reg. no. 54486. 39 Accord entre le gouvernement de la République française et le gouvernement de la République démocratique fédérale d’Ethiopie sur l’encouragement et la protection réciproques des investissements, 25 June 2003 (not registered in UNTS) available at https://investmentpolicy. unctad.org/international-investment-agreements/treaty-files/3550/download. Accessed 06.1.2020. 40 Agreement between the Slovak Republic and the Republic of Turkey Concerning the Reciprocal Promotion and Protection of Investments, 13 October 2013 (not published in UNTS) available at https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/2266/down load. Accessed 06.1.2020.

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Most international investment agreements concluded by Member States neither have restrictive definitions that exclude prospective investments nor exclude such investments expressly in the substantive provisions.41 Yet, as mentioned above, this absence of an exclusion is an insufficient basis for interpreting the scope of application of these agreements so as to extend protection to the pre-investment phase. Exclusion of Specific Activities Involved in Making Investments Third, the substantive provisions of the international investment agreement may be expressly limited to certain activities of an investor, which exclude references to the making of the investment, such as the entry, admission, establishment or acquisition of the investment. This usually applies to the national treatment and MFN treatment clauses insofar as they relate to the treatment of investors rather than investments, but it also sometimes applies to the fair and equitable treatment standard.42 Article 3 (2) of the Denmark–North Macedonia BIT is again illustrative: Each Contracting Party shall in its territory accord investors of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their investment, fair and equitable treatment which in no case shall be less favorable than that accorded to its own investors or to investors of any third State, whichever of these standards is the more favorable from the point of view of the investor.

The standard of protection is here extended to investors, not in relation to investments made but with respect to the ‘management, maintenance, use, enjoyment or disposal of their investment’. What is excluded here is any mention of the making of investments, such as admission, establishment, acquisition or expansion.43 An example of a treaty that does include such references is the aforementioned Finland–Kazakhstan BIT, which in Article 3(2) provides: Each Contracting Party shall accord to investors of the other Contracting Party and to their investments, a treatment no less favourable than the treatment it accords to investors of the most favoured nation and to their investments with respect to the establishment, acquisition, expansion, operation, management, maintenance, use, enjoyment, and sale or other disposal of investments.

This provision extends MFN treatment to the pre-investment phase through the references to ‘establishment’ and ‘acquisition’. As in most investment treaties, ‘investor’ here includes prospective investors.44 Pursuant to Article 1(3), the term ‘investor’ is defined as ‘subjects who invest in the territory of the State of the other Party in accordance with the national legislation of the State of the latter Party and the provisions of this Agreement’ [emphasis added]. While only a minority of the international investment agreements of the 14 Member States, which have screening

41

Investment Policy Hub (2019). Ibid. 43 This point was highlighted by the arbitral tribunal in Nordzucker v. Poland, para. 177. For further analysis of the pre-investment stage application of national treatment and MFN treatment, see Bonnitcha et al. (2017), pp. 103–104; Gómez-Palacio and Muchlinski (2008), pp. 242–245. 44 Investment Policy Hub (2019). 42

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mechanisms, extend national treatment and MFN treatment to the pre-investment phase, most of those that do are of this type.45 In contrast with the pre-Lisbon treaty practice of the Member States,46 the national treatment and MFN treatment clauses in the EU’s post-Lisbon international investment agreements normally do cover the making of investments. An example is Article 7.12 of the EU–Korea FTA47: In the sectors inscribed in Annex 7-A, and subject to any conditions and qualifications set out therein, with respect to all measures affecting establishment, each Party shall accord to establishments and investors of the other Party treatment no less favourable than that it accords to its own like establishments and investors.

Here, the term ‘establishment’ is defined to comprise ‘the constitution, acquisition or maintenance of a juridical person [. . .] within the territory of a Party for the purpose of performing an economic activity’, including ‘capital participation in a juridical person with a view to establishing or maintaining lasting economic links’. When considering that ‘investor’ is defined as ‘any person that seeks to perform or performs an economic activity through setting up an establishment’ [emphasis added], it becomes clear that the application of the provision extends to the pre-investment phase. A somewhat similar formulation is contained in Article 8.8 (1) of the EU–Japan EPA48: Each Party shall accord to entrepreneurs of the other Party and to covered enterprises treatment no less favourable than that it accords, in like situations, to its own entrepreneurs and to their enterprises, with respect to establishment in its territory.

The definition of ‘establishment’ in this treaty means ‘the setting up or the acquisition of a juridical person, including through capital participation, or the

45 Ibid. Of the international investment agreements concluded externally by the EU and those of its Member States that have screening mechanisms in force, 31 apply national treatment to the pre-investment phase, whereas 38 apply MFN treatment to the pre-investment phase. In particular, agreements concluded by Finland and Italy are of these types. 46 On 1 December 2009, the Lisbon Treaty entered into force, bringing about the latest major amendment and re-codification of the founding treaties of the European Union. These amendments included the extension of Union competences to the area of foreign direct investment as part of the common commercial policy of the EU, cf. Article 206 TFEU. This became the departure point for the EU’s investment treaty programme. It is therefore convenient to distinguish between treaty practice before and after the Lisbon Treaty. 47 A similar provision is contained in Article 4 of the investment chapter of the draft EU–Mercosur Association Agreement, published 12 July 2019, available at http://trade.ec.europa.eu/doclib/cfm/ doclib_section.cfm?sec¼151. Accessed 06.1.2020. 48 Similar provisions are contained in Articles 7(1) and 8(1) of the investment chapter of the draft modernised EU–Mexico Global Agreement, published 25 April 2018, available at http://trade.ec. europa.eu/doclib/cfm/doclib_section.cfm?sec¼132 (Accessed 06.1.2020); Article 2.3(1) of the investment chapter of the draft EU–Australia Free Trade Agreement, published on 22 October 2018, available at http://trade.ec.europa.eu/doclib/docs/2018/december/tradoc_157572.pdf (Accessed 06.1.2020), and Article 2.3(1) of the investment chapter of the draft EU–New Zealand Free Trade Agreement, published on 25 September 2018, available at http://trade.ec.europa.eu/ doclib/docs/2018/december/tradoc_157580.pdf (Accessed 06.1.2020).

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creation of a branch or representative office, in the European Union or in Japan respectively, with a view to establishing or maintaining lasting economic links’. Again, considering that ‘entrepreneur’ refers to ‘a natural or juridical person of a Party that seeks to establish, is establishing or has established an enterprise in accordance with subparagraph (i), in the territory of the other Party’ [emphasis added], the application is also in this case extended to cover national treatment of investors (entrepreneurs) in making (establishing) future investments.49 A similar kind of formulation appears in Article 8.6(1) CETA on national treatment: Each Party shall accord to an investor of the other Party and to a covered investment, treatment no less favourable than the treatment it accords, in like situations to its own investors and to their investments with respect to the establishment, acquisition, expansion, conduct, operation, management, maintenance, use, enjoyment and sale or disposal of their investments in its territory.

Pursuant to this provision, both investors and their investments are to be accorded national treatment. It is important to note, however, that with respect to national treatment of investors, there is no distinction between pre- and post-investment phase. Investors are protected with respect to the establishment and acquisition of their investments, as well as the expansion, conduct, operation, management, maintenance, use, enjoyment and sale or disposal of their investments.50 By contrast, national treatment of investments only covers investments that have already been made and are existing.51 As such, treatment of investments (as opposed to investors) with respect to the establishment or acquisition of such investments would cover matters pertaining retrospectively to the making of the investment but not a denied opportunity to make the investment in the first place. On the other hand, such denial would be covered as a treatment of the investor. By contrast to Article 8.8(1) of the EU–Japan EPA and Article 8.6(1) CETA discussed above, the provisions in Article 2.3 of the EU–Singapore IPA and Article 2.3 of the EU–Vietnam IPA exclude references to the making of investments and restrict the application of the national treatment standard to ‘covered investments’ and ‘covered investors’, both of which are defined to apply exclusively to the postinvestment phase.

49

For another example, see Article 88 of the EU–Ukraine Association Agreement, see further Investment Policy Hub (2019). 50 Note that Section B of Chapter 8 CETA contains provisions that apply specifically to establishment, although the application of other provisions of the chapter also extend to establishment, notably Section C (which can also be gleaned from Article 8.2(2) and from the text of Articles 8.6 and 8.7). Note also that Section B is excluded from the investor–State arbitration provisions (cf. Article 8.18(1)). See further below Sect. 3.1.2. 51 Cf. the formulation of Article 8.10(1) CETA, discussed above, which applies to ‘covered investments of the other Party and to investors with respect to their covered investments’ [emphasis added]. Here it is clear that both the treatment of investments and that of investors are limited to investments already in existence.

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Exceptions There are certain investment treaty obligations that frequently do apply to investments that have yet to be made. Notably, it is not uncommon that obligations may apply with respect to the transfer of investment capital prior to the making of an investment. Some treaties also contain specific obligations to provide market access or not to impose performance requirements, both of which affect prospective investments. None of these types of provisions, however, entail a significant potential for norm conflicts with investment screening mechanisms, as further explained below. First, transfer-of-funds provisions often cover the free transfer of capital to establish the investment but primarily address the repatriation of funds.52 The post-Lisbon EU international investment agreements either limit the transfer clause to existing investments53 or provide for a general free movement of capital clause, common to transfers related to both trade and investment.54 However, even where transfer-of-funds provisions obligate the host State to not restrict the funds required to make the investment, it does not follow that the investment as such is admitted and subject to investment protection. Second, ‘market access’ provisions are included in most post-Lisbon EU investment agreements but are virtually non-existent in Member State agreements.55 This type of treaty provision, which is based on Article XVI of the General Agreement on Trade in Services (GATS), prohibits the imposition of quantitative restrictions on the establishment of investments and restrictions on the types of legal entities through which economic activity may be carried out.56 The subject matter of these clauses is thus different from the essentially qualitative restrictions on investment that may result from investment screening, which aims to control investments on the basis of their implications on matters of security and public order.57 Market access clauses are found, e.g., in Article 8.4 CETA, Article 8.7 of the EU–Japan EPA and Article 7.11 of the EU–Korea FTA. Third, provisions prohibiting performance requirements are found in some postLisbon treaties, including Article 8.5 of CETA and Article 8.11 of the EU–Japan EPA, and in some Member State treaties.58 This type of clause, which originates from the illustrative list of inconsistent measures set forth in the annex to the Agreement on Trade-Related Investment Measures (TRIMs), applies specifically 52 See, e.g., Article 7.1(g) of the Slovakia–Iran BIT and Article 8.1(a) of the BLEU–Panama BIT, see further Investment Policy Hub (2019). 53 See, e.g., Article 8.13(1) CETA and Article 2.7(1) of the EU–Singapore IPA. 54 See, e.g., Article 9.2(1) of the EU–Japan EPA and Article 8.2(1) of the EU–Korea FTA. 55 Investment Policy Hub (2019). 56 Hahn (2015), pp. 659–666; Van den Bossche and Zdouc (2017), pp. 516–521. 57 This does not exclude the possibility of an application of market access provisions to investment screening mechanisms in particular situations, such as if the mechanism were to be designed to impose a maximum limit to foreign capital participation or a restriction in the type of legal entity or joint venture that may engage in particular investments, e.g. sovereign wealth funds or other stateowned enterprises. 58 Investment Policy Hub (2019).

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to future investments.59 The clause prohibits making investments conditional on certain trade practices, often including subsidies, that typically have discriminatory effects, such as mandated levels of exports or domestic contents or mandated technology transfers.60 In the context of investment screening, it is possible that an investment authorisation could be made conditional on such performance requirements. However, it is questionable how likely that would be in practice since the policy interests at stake in investment screening are fundamentally different from those underpinning prohibitions against performance requirements. The former concern, at least nominally, security and public order, whereas the latter concern purely economic interests. Thus, while performance requirements clauses are applicable to future investments and could be engaged in ex ante investment screening, it is fair to assume that the potential for norm conflicts is limited. Conclusions In summary, a potential for norm conflicts between ex ante investment screening and investment treaty obligations exists with respect to provisions in international investment agreements that are expressly applicable to future investments. The most prevalent types of such clauses are the national treatment and MFN treatment provisions in several post-Lisbon EU investment agreements, the scope of application of which explicitly extends to investors in the pre-investment phase. However, most pre-Lisbon Member State investment agreements and some postLisbon EU investment agreements are not applicable to future investments. Future Investments or Expansion of Existing Investments? Investment treaty obligations may also apply to screening mechanisms to the extent that screening concerns an expansion of an existing investment, rather than a separate, future investment. From the moment an investment has been established or acquired, the provisions of international investment agreements normally apply, in principle encompassing both increases and decreases in the economic value of the investment. In the case of expansion, an investment has already been admitted and established (or acquired). Further increases of an investment, such as subsequent capital contributions or reinvestments of business profits, fall within the scope of investment treaty obligations to the same extent as decreases of the investment, such as divestment of capital or distribution of dividends. When screening concerns a future expansion of an investment—because an investment already exists for purposes of investment treaties—investment treaty obligations therefore apply. From the perspective of investment treaties, such screening consequently occurs in the postinvestment phase. In treaty practice, the distinction between the initial making of an investment, i.e. establishment or acquisition, and the expansion of an investment is often made clear in the treaty provision that provides for pre-investment treatment, such as Article 8.6 (1) CETA quoted above. As per a footnote to Article 8.8(1) of the EU–Japan EPA,

59 60

See, e.g., Article 8.1(1)(c) CETA and Article 8.6(1)(c) of the EU–Japan EPA. Hahn (2015), pp. 657–659; Van den Bossche and Zdouc (2017), p. 381.

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also quoted above, the definition of ‘establishment’ also covers expansion. However, the distinction between expansion of investments and new investments is equally relevant in the context of treaties that do not explicitly cover expansion.61 Often such treaties include provisions that investments are admitted in accordance with the domestic law of the host State, e.g. as part of the definition of ‘investment’.62 Normally, screening laws apply not to all investments but only to investments that satisfy certain quantitative or qualitative criteria, such as a minimum percentage of the shares or voting rights of a company (screening threshold). An investment that was not notified for screening when it was originally made, because it was below the screening threshold stipulated by the applicable screening law, would thus have been admitted in accordance with the law. This means that an ‘investment’ already exists and that investment treaty obligations already apply to the screening of an expansion of such a previously admitted investment. Moreover, an investment originally not subject to screening would not necessarily lose its investment treaty protection, just because the expansion of such an investment were subject to screening and eventually prohibited. Even if a national screening authority requires the unwinding of an entire investment, i.e. not only the acquisition that brought the investment over the screening threshold, it does not follow from this that, for purposes of international investment law, the investment must be deemed never to have existed or otherwise must be deprived of protection. In the context of ex ante investment screening, there are significant practical implications of distinguishing expansion from the establishment or acquisition of an investment. The fact that most mechanisms provide for (often high) quantitative or qualitative screening criteria means that investors may be able to already make investments and derive rights under investment treaty obligations—such as under the national treatment or MFN standards—prior to reaching the screening threshold.63 If an investor already has made an investment that is not subject to screening, the ex ante screening of a contemplated expansion of that investment over and above the screening threshold would result in the screening being deemed to have occurred in the post-investment phase for purposes of the applicable international investment agreement.

2.1.2

Screening in the Post-Investment Phase

A minority of the national screening mechanisms of the Member States, notably including that of Germany, provides for the screening of certain types of investments

61

See, e.g., Nordzucker v. Poland, paras. 143–162. The post-Lisbon EU treaties, and the vast majority of pre-Lisbon treaties between Member States with screening mechanisms and third countries, are of this type. Investment Policy Hub (2019). 63 Firm or indicative screening thresholds are e.g. applied by Germany, Spain, France, Italy, Latvia, Lithuania, Hungary, Austria, Portugal, Romania and Finland. 62

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after the investment has been made.64 In these systems, the competent authority undertaking the screening can, normally within a certain time period, decide to prohibit the investment after it has been established or acquired; to impose conditions for the investor’s continued conduct, operation, management, use or enjoyment of the investment; or to order its unwinding, i.e. its sale or disposal.65 In such an ex post screening mechanism, an investment is deemed to already exist for purposes of international investment law and therefore benefits from protection pursuant to the relevant international investment agreement.66 In addition, as just mentioned, because of the use of quantitative or qualitative screening criteria, ex ante screening is also often deemed to take place in the postinvestment phase for purposes of investment treaty obligations, even though the additional investment that triggers the screening has not yet been made. This occurs when such investment is deemed to be an expansion of an already established or acquired investment that has previously not met any screening criteria. Investment treaty obligations therefore apply to both ex post and ex ante screening to the extent that the screening takes place in the post-investment phase. In addition, as analysed under Sect. 2.1.1, in some cases investment treaty obligations also apply to (ex ante) screening in the pre-investment phase. To assess whether and to what extent such screening could result in a norm conflict with investment treaty obligations, it should next be examined how the obligations are to be applied.

2.2

Manner of Application of Investment Treaty Obligations

The potential for norm conflicts between applicable investment treaty obligations, on the one hand, and investment screening mechanisms, on the other, depends on how investment treaty obligations are applied to particular factual situations involving investment screening. Widely varying factual situations may give rise to investment screening, out of which may, in turn, arise a broad range of administrative actions, omissions and other effects on the investment that may be imputable to the Member State, through its screening authority, in carrying out screening, or even to the European Commission.67 Given this factual variety, only a cursory outline of the

64

Such ex post screening exists inter alia in Germany, Hungary, Netherlands, Poland, Portugal and Finland. Note that the German law only allows for such ex post review if the deal has been carried out without being notified in the first place (cf. § 55(3) of the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung). 65 See in this volume Philipp Stompfe, Investment Screening in Germany and France; in this volume Szilárd Gáspár-Szilágy, Country Report on Hungary and Romania. 66 The existence of an investment is a general prerequisite under international investment agreements. See above fn 10. 67 See in this volume Teoman Hagemeyer, Access to Legal Redress in an EU Investment Screening Mechanism.

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application of investment treaty obligations can be provided here. The aim is limited to demonstrating that significant room for norm conflicts exists. In examining the possibility of such norm conflicts, it is convenient to first look closer at the standards of protection that may be applied to investment screening and the factors that may give rise to their application (Sect. 2.2.1) before turning attention to factors that limit the effect of such application (Sect. 2.2.2).

2.2.1

Applicable Treaty Standards

The factual situations associated with investment screening may engage both the main relative standards of protection (national treatment and MFN treatment) and the most important absolute standard of protection (fair and equitable treatment). Although other standards could conceivably also be applied with respect to screening, such as the general prohibition against arbitrary, unreasonable or discriminatory measures or treaty rules governing expropriation, the analysis below is, in keeping with the aim of Sect. 2.2, limited to the aforementioned principal standards. Non-discrimination The most common relative standards of protection in international investment agreements provide that a host State must treat investors of a certain home State and their investments no less favourable than it treats its own investors and their investments (national treatment) or foreign investors of a third country and their investments (MFN treatment).68 All international investment agreements of the EU and the 14 Member States that have screening mechanisms include one or both of these non-discrimination standards.69 Formulations of these standards vary somewhat across treaties, but in arbitral practice their application has evolved into a comparison of treatments structured around a threefold enquiry: (A) identifying the basis of comparison, (B) assessing the existence of adverse difference in treatment and (C) evaluating whether any such discrimination is justified.70 Basis of Comparison As for the first element, the EU Screening Regulation applies only to third-country investors having made, making or seeking to make direct investments likely to affect security or public order.71 Similar direct investments that are made, have been made or are sought to be made by Member State investors are not subject to the EU Screening Regulation. To assess whether a relevant

68

See Bonnitcha et al. (2017), p. 93; see also above fn 45. See above fn 45. 70 UPS v. Canada, Award, 27 August 2009, para. 388; Saluka v. Czech Republic, Partial Award, 17 March 2006, para. 313; Marfin v. Cyprus, Award, 26 July 2018, para. 1237. See further Nadakavukaren Schefer (2016), pp. 338–353; Reinisch (2015), pp. 852–864; Dolzer and Schreuer (2012), pp. 199–206; Newcombe and Paradell (2009), pp. 158–188. 71 See above fn 12. 69

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differential treatment exists, the basis of comparison must be apposite.72 The situation or circumstances pertaining to the foreign investor and its investment must be ‘like’ (or similar to but not necessarily identical with) the situation or circumstances pertaining to Member State investors or investors of other third countries with which the treatment is compared. This means that the investments by foreign investors and those by Member State investors must at least relate to the same economic sector or economic activity.73 The list of factors in Article 4(1) of the EU Screening Regulation indicates such sectors or activities, on the basis of which the treatment of foreign and Member State investments can be compared. It is important to note that investment treaties provide differently formulated bases of comparison. Some treaties, including the majority of the EU’s post-Lisbon international investment agreements, specify that the treatment in question must be that which is accorded in ‘like situations’.74 Some Member State treaties also include wording to that effect.75 Nevertheless, even if such qualifiers are meant to narrow the basis of comparison, perhaps to investors or investments in the same line of business, such as competitor or near-competitor industries, arbitral practice does not provide much support for the legal significance of such express comparator wording.76 In any event, it is plain from the design of the EU Screening Regulation that, as a matter of fact, similarly situated foreign and Member State investors and investments are inherently treated differently since the EU Screening Regulation exclusively applies to the former and not the latter. Moreover, it cannot be excluded that not all similarly situated foreign investors might be treated equally but that the identity of the investors’ home State may be a factor taken into consideration in the screening process, as will be further discussed below. Adverse Difference in Treatment As for the second element, the EU Screening Regulation and the screening mechanisms of the Member States impose on foreign investors the obligation to undergo screening of their investments on grounds of security or public order. Such investors may be prohibited from establishing, acquiring or expanding investments and subjected to conditions or enforcement measures, including the unwinding of already made investments. This treatment is on its face less favourable than the treatment accorded to similarly situated Member State investors that are not subject to screening in accordance with the EU Screening Regulation.77 In other words, investment screening inherently involves the adverse

72 Bonnitcha et al. (2017), pp. 101–102; Nadakavukaren Schefer (2016), pp. 338–350; Newcombe and Paradell (2009), pp. 163–169. 73 Ibid. 74 Investment Policy Hub (2019). 75 Ibid. 76 Newcombe and Paradell (2009), pp. 159–161. 77 It should be noted, however, that most national screening laws apply to Member State investors as well, although somewhat different rules apply to third-country investments under the screening laws of some Member States. European Commission (2017), p. 7.

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treatment of third-country investors or investments compared to similarly situated EU investors or investments. It is also conceivable that this treatment of foreign investors depends on the investor’s third country of origin. It could readily be imagined that, in practice, the treatment of foreign investors of a certain third country with which the EU does not maintain close security links is found to be less favourable than, for example, the treatment accorded to similarly situated investors of third countries with which the EU cooperates closely on security matters.78 The former may be subject to more rigorous screening and more restrictive screening decisions than the latter, which could be seen as an adverse difference in treatment that would be at odds with the MFN treatment obligation. For purposes of the application of MFN provisions, it is sufficient that the treatment of investors or investments of a particular third country is de facto less favourable compared to the treatment of investors or investments of another third country; de jure discrimination is not required. Justification It is possible that a discriminatory treatment would not constitute a breach of the non-discrimination standards if such treatment can be appropriately justified. This additional requirement has emerged as a defence or implied exception in arbitral practice in the interpretation of the national treatment standard in international investment agreements,79 although similar qualifications or implied exceptions have also emerged in the application of non-discrimination standards in other contexts.80 It is fair to presume that the issue of justification would be central to the application of non-discrimination standards to disputes involving alleged national treatment violations or even MFN treatment violations related to investment screening. Whether screening direct investments made by foreign investors, while not screening investments of Member State investors in like situations, could be justified is an issue that cannot be determined in abstract. Surely the differentiation of treatment could in principle be readily justified on rational grounds, citing the fundamental societal interest of safeguarding security and public order. Yet, with respect to the manner of application of investment screening, it could be questioned whether the differential treatment of the relevant foreign investor or its investment can be reconciled with, or is rationally related to, the policy objective with which the screening has been justified. In this respect, there is no shortage of inspiration for 78 Other possible bases for differential treatment might be the maintenance of economic sanctions against a third country or a third country’s human rights record. 79 Saluka v. Czech Republic, Partial Award, 17 March 2006, para. 313; Marfin v. Cyprus, Award, 26 July 2018, para. 1237; SD Myers v. Canada, First Partial Award, 13 November 2000, para. 250. See Dolzer and Schreuer (2012), pp. 202–204; Nadakavukaren Schefer (2016), pp. 351–353; Bjorklund (2010), pp. 419, 433–434; Salacuse (2015), pp. 279–280. 80 An example from the context to WTO law is the implied exception to the non-discrimination obligation in Article 2.1 of the Agreement on Technical Barriers to Trade (1994) with respect to de facto discrimination stemming exclusively from ‘legitimate regulatory distinctions’. See US–Clove Cigarettes (2012) paras. 182, 215. See further Van den Bossche and Zdouc (2017), pp. 904–912.

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persuasive arguments that can be gleaned from other instances where non-discrimination standards have been applied.81 For example, it could be argued that there is unjustified discrimination if it is shown that the screening is applied arbitrarily, in the sense of random or capricious application or by being applied rigidly without allowing for an inquiry into its appropriateness for the situation of the relevant investor or its investment.82 Likewise, a lack of justification may also be argued where the differential treatment could be avoided83; where a less intrusive alternative exists to imposing a condition for or denying investment authorisation following a screening investigation84; and where the screening measure at hand is unbalanced, disproportionate, or otherwise lacking a sufficient degree of means–end relationship with the pursued policy objective.85 Fair and Equitable Treatment Most of the international investment agreements in effect between the EU, or the Member States that have screening mechanisms, and third countries include a fair and equitable treatment clause.86 These provide for a standard of protection that is not related to how the host State treats its own or other third-country investors. While there are different formulations of the standard, attempts at elaborating the contours of its contents can be found in arbitral practice.87 For present purposes, it is sufficient to note that reference is commonly made to other legal concepts that are treated as a manifestation of the standard. These include denial of justice, due process, transparency, non-arbitrariness, non-discrimination, legitimate expectations, legal certainty, good faith, proportionality and reasonableness.88 As such, the standard is susceptible to a wide range of argumentative structures and models of legal discourse. This wide scope is somewhat balanced by certain tendencies in treaty and arbitral practice towards a restrictive application, which leaves a margin of discretion on the part of the host State, rendering non-actionable potential errors within that margin.89 The fair and equitable treatment clause in Article 8.10(2) and (4) CETA is reflective of this practice: 2. A Party breaches the obligation of fair and equitable treatment referenced in paragraph 1 if a measure or series of measures constitutes:

81

See e.g. Olin v. Libya, paras. 200–203; Pope & Talbott, para. 78. See also above fn 80. With respect to the interpretation of general exceptions, the interpretive guidance provided by WTO jurisprudence may be particularly influential. See Newcombe and Paradell (2009), pp. 503–505. 82 Ibid. See also Van den Bossche and Zdouc (2017), pp. 595–597, 600–601. 83 See above fn 82; see also Van den Bossche and Zdouc (2017), pp. 597–598. 84 Ibid. 85 See further Newcombe and Paradell (2009), pp. 503–505. For the relationship between proportionality and the rule of law, see generally Jacob and Schill (2015), pp. 713–717 (in particular para. 36). 86 Investment Policy Hub (2019). 87 For a comprehensive review, see Jacob and Schill (2015). 88 Ibid. pp. 717–743 and the case law cited. See also Bonnitcha et al. (2017), pp. 108–112. 89 For a comprehensive overview, see Nadakavukaren Schefer (2016), pp. 381–426.

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(a) denial of justice in criminal, civil or administrative proceedings; (b) fundamental breach of due process, including a fundamental breach of transparency, in judicial and administrative proceedings; (c) manifest arbitrariness; (d) targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief; (e) abusive treatment of investors, such as coercion, duress and harassment; or (f) a breach of any further elements of the fair and equitable treatment obligation adopted by the Parties in accordance with paragraph 3 of this Article. [. . .] 4. When applying the above fair and equitable treatment obligation, a Tribunal may take into account whether a Party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated.

The first two items on the list relate mainly to procedural justice, whereas the following three are also relevant for the protection of property. Interestingly enough, paragraph 4 makes clear that a breach of legitimate expectations may also constitute a violation of the standard, even though it is not specifically mentioned in the closed list of paragraph 2. Perhaps a breach of legitimate expectations involving property rights would most appropriately have to be construed as a case of manifest arbitrariness. This illustrates that the items of that list are themselves legal concepts of wide scope, the further elaboration of which is still expected from arbitral practice. Procedural Justice Investment screening is an administrative procedure liable to result in legally binding acts. As such, screening mechanisms are subject to the customary principle prohibiting the denial of justice as well as principles of administrative due process that apply by virtue of treaty obligations, including judicial and administrative transparency.90 More specifically, an administrative decision to prohibit an investment, to impose conditions, to deny an application for authorisation or to require an investment to be unwound would involve the application of the due process obligation to hear the investor concerned (the principle of audi alteram partem).91 This in turn involves administrative transparency, including providing reasonable notice to the investor when the screening proceeding is initiated,92 which should comprise the legal basis and a description of the nature of the proceedings and of the facts and issues in question.93 A failure to provide the investor concerned with 90

See generally Kläger (2011), pp. 213–234; della Cananea (2010), pp. 56–74; Palombino (2018), pp. 57–82; Paparinskis (2013), pp. 181–216; Yannaca-Small (2010), pp. 394–398. 91 See further Kläger (2011), p. 214; della Cananea (2010), pp. 60–64; Palombino (2018), p. 61; Paparinskis (2013), pp. 194, 213. 92 See further Kläger (2011), pp. 227–234, della Cananea (2010), pp. 65–67; Paparinskis (2013), pp. 247–250; Yannaca-Small (2010), pp. 388, 396–397. 93 See e.g. Article 27.3(a) CETA; Article 17.5(2)(a) of the EU–Japan EPA; Article 12.5(a) of the Article EU–Korea FTA.

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an effective opportunity to present its views on the truthfulness or relevance of any fact relied upon in an adverse screening decision might result in a violation of the right to be heard.94 In addition to responding to facts and arguments alleged against it, the investor can expect a reasonable opportunity to present facts and arguments of its own in support of its position.95 Administrative justice also requires the possibility for aggrieved investors to seek review and correction of administrative actions before impartial and independent tribunals and to support and defend their positions before such tribunals.96 The principle of nemo iudex in sua causa also requires that the tribunal does not have a substantial interest in the outcome of the proceedings.97 Moreover, administrative and judicial decisions must be properly motivated and be based on evidence and on facts and arguments submitted in record.98 The elaboration of these and other fundamental principles of procedural law may be gleaned from a wide range of sources, including the case law of human rights tribunals and of municipal legal systems. Protection of Property The fair and equitable treatment standard also provides protection against the taking of property rights, in particular by incorporating the concept of legitimate expectations.99 In this respect, the standard significantly overlaps with the protection of investor interests in connection with direct and indirect expropriation but is broader in scope and also covers situations that involve less invasive interference with property rights than in the case of expropriation.100 The protection of legitimate expectations requires that the host State’s conduct creates ‘reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct, such that a failure by the [host State] to honour those

94

A related question concerns the determination of the scope of the right to be heard required under investment treaty obligations. If, on the basis of the national treatment standard, the scope is determined by EU law, the Hoffmann-La Roche formula would be applicable [‘le respect des droits de la défense exige que l'entreprise intéressée ait été mise en mesure, au cours de la procédure administrative, de faire connaître utilement son point de vue sur la réalité et la pertinence des faits et circonstances alléguées et sur les documents retenus par la Commission’, Judgment of the Court of 13 February 1979, Hoffmann-La Roche v. Commission, C-85/76, EU:C:1979:36, para. 11], which also extends to matters of external economic matters, see Judgment of the Court of 27 June 1991, Al-Jubail Fertilizer v. Council, C-49/88, EU:C:1991:276, para. 17. For the relationship between the right to be heard in EU law and the international minimum standard, see also Pohl (2018). 95 See e.g. Article 27.3(b) CETA; Article 17.5(2)(b) of the EU–Japan EPA; Article 12.5(b) of the Article EU–Korea FTA. See also above fn 94. 96 See e.g. Article 27.4 CETA; Article 17.6 of the EU–Japan EPA; Article 12.6 of the Article EU– Korea FTA. See also above fn 94. 97 Ibid. 98 Ibid. 99 See generally Jacob and Schill (2015), pp. 723–728; Kläger (2011), pp. 164–186; Paparinskis (2013), pp. 217–259; Yannaca-Small (2010), pp. 396–407. 100 See further Jacob and Schill (2015), pp. 758–760; Kläger (2011), pp. 281–302.

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expectations could cause the investor (or investment) to suffer damages’.101 In the post-Lisbon treaties that include this standard, it is further qualified by wording such as that contained in Article 8.10(4) CETA quoted above. Investment screening can result in significant interference with the property rights of investors, particularly in the post-investment phase. The prohibition of an investment, the imposition of conditions for authorising an investment and, in particular, the unwinding of already consummated investments are prone to severely disturb the affected investor’s property rights. Nevertheless, absent special circumstances, protection from such disturbances would normally fall short of qualifying as a legitimate expectation created by the host State’s conduct. In the post-Lisbon treaties, the argument that the introduction of the screening mechanism would per se frustrate the investor’s expectations is neutralised by provisions such as Article 8.9(2) CETA: For greater certainty, the mere fact that a Party regulates, including through a modification to its laws, in a manner which negatively affects an investment or interferes with an investor’s expectations, including its expectations of profits, does not amount to a breach of an obligation under this Section.

Although rare in pre-Lisbon treaties, this type of provision would exclude from the protection of legitimate expectations the mere fact that the host State introduced screening legislation or that the EU adopted the EU Screening Regulation. As for the application of screening legislation in a particular case, an investor alleging legitimate expectations would have to elicit evidence of conduct attributable to the host State that created the expectation, such as explicit representations that were reasonably relied upon by the investor.102 It is also possible that consistent host State conduct could amount to implicit representations in the context of investment screening, depending on how the screening mechanism is administered in practice.103 The range of claims that could be raised on the basis of legitimate expectations cannot be easily generalised. While expectations relating to an investor’s favourable special treatment in the application of screening may seem far-fetched to entertain, a more common type of expectation relates to the manner in which the screening is conducted. Expectations as to the non-discriminatory, non-arbitrary, proportional and good faith application of screening appears more reasonable and justifiable. It may also be reasonably expected that the screening is applied in conformity with its policy objective and not, for example, as a disguised restriction on competition.

101

Thunderbird v. Mexico, Arbitral Award, 26 January 2006, para. 154. See further Jacob and Schill (2015), p. 725. 102 See generally Dolzer and Schreuer (2012), pp. 145–149; Newcombe and Paradell (2009), pp. 279–289; Salacuse (2013), pp. 253–260. 103 See further Jacob and Schill (2015), pp. 725–727; Yannaca-Small (2010), pp. 400–402; Salacuse (2013), pp. 260–261.

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Applicable Treaty Exceptions

The room for tension between investment treaty obligations and national autonomy is reduced by means of numerous legal techniques or devices that operate to achieve deference to State policy choices. One type of device is exclusions, which delimit ex ante the scope of application of treaty obligations (see Sect. 2.1 above). Another type of device is exceptions, which limit ex post the effects of applying treaty obligations, thus affecting the manner in which those obligations are applied.104 The most important exceptions in the context of investment screening are general exceptions and security exceptions. General Exceptions The post-Lisbon treaties and a minority of Member State treaties include general exception clauses inspired, to a greater or lesser extent, by Article XIV of GATS and Article XX of the General Agreement on Tariffs and Trade (GATT). The structure of this type of clause is often that a treatment that is inconsistent with the host State’s treaty obligations may nevertheless be provisionally justified on the basis of enumerated policy objectives but that the exception is only effective if the provisionally justified treatment is consistent with the ‘chapeau’ of the clause. While the provisional justifications are geared towards the character of the measure at issue, the chapeau addresses the manner in which the measure is applied. Article 28.3(2) CETA is illustrative: For the purposes of [. . .] Sections B (Establishment of investments) and C (Non-discriminatory treatment) of Chapter Eight (Investment), subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between the Parties where like conditions prevail, or a disguised restriction on trade in services, nothing in this Agreement shall be construed to prevent the adoption or enforcement by a Party of measures necessary: (a) to protect public security or public morals or to maintain public order; (b) to protect human, animal or plant life or health; or (c) to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement including those relating to: (i) the prevention of deceptive and fraudulent practices or to deal with the effects of a default on contracts; (ii) the protection of the privacy of individuals in relation to the processing and dissemination of personal data and the protection of confidentiality of individual records and accounts; or (iii) safety [footnotes excluded].

Given the policy objective of investment screening, it is clear that the excepted situation in clause (a) of the provision above would be relevant. A footnote to the clause provides that ‘[t]he public security and public order exceptions may be 104

For a comprehensive review of devices to achieve deference, of which exceptions are only a notable example, see Viñuales (2018). Other devices range from those that operate at the application stage, including rules on burden of proof, choice of applicable law, and exhaustion of domestic remedies, to those that operate at the post-application stage, such as excuses or preclusions of responsibility, and circumstances precluding wrongfulness.

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invoked only where a genuine and sufficiently serious threat is posed to one of the fundamental interests of society’. This requirement reflects the interpretation in case law of Article 65(1)(b) TFEU, which derogates from the free movement of capital with respect to Member State measures justified on grounds of ‘public policy or public security’. In EU case law, this requirement means that a measure so justified must not serve purely economic ends105 and must be designed to give effect to such justification.106 In view of Article 4(1)(d) of the EU Screening Regulation, the excepted situation described in clause (c)(ii) of Article 28.3(2) CETA (and similar provisions in other treaties), relating to personal data, may also be of relevance, as well as, generally, the situation described in clause (c)(iii) of that article, relating to safety. An initial step in assessing the applicability of the exception is therefore to determine whether the measure at issue falls within the range of policy objectives permitted by the excepted situation described in these clauses. Importantly, in the next step, the measures at issue must be necessary for the achievement of the relevant policy objective, which generally implies that they must contribute in a particular manner and to a sufficient degree to achieving that objective. In determining whether the necessity requirement is met, interpretive guidance is provided by a rich body of WTO case law,107 which indicates a ‘weighing and balancing’ of (A) the degree to which the measure contributes to achieving the policy objective in question, relative to ‘reasonably available’ alternative measures, against other factors, including (B) the relative importance of the values or interests that the measure aims to safeguard and (C) the degree to which the measure restricts international commerce.108 As stated by the Appellate Body in US– Gambling (2005): The requirement, under Article XIV(a), that a measure be ‘necessary’ – that is, that there be no ‘reasonably available’, WTO – consistent alternative – reflects the shared understanding of Members that substantive GATS obligations should not be deviated from lightly. An alternative measure may be found not to be ‘reasonably available’, however, where it is merely theoretical in nature, for instance, where the responding Member is not capable of taking it, or where the measure imposes an undue burden on that Member, such as prohibitive costs or substantial technical difficulties. Moreover, a ‘reasonably available’ alternative measure must be a measure that would preserve for the responding Member its

105

See Judgment of the Court of 7 June 2012, VBV-Vorsorgekasse, Case C-39/11, EU:C:2012:327, para. 29 and the case law cited. 106 Ibid., para. 30 and the case law cited. 107 For a comprehensive analysis of GATT-style general exception clauses in investment treaties, see Mitchell et al. (2019). 108 See Mitchell et al. (2019), pp. 225–231; Newcombe and Paradell (2009), pp. 503–506; Van den Bossche and Zdouc (2017), pp. 609–611. The ‘weighing and balancing’ is not necessarily limited to these three factors, see Van den Bossche and Zdouc (2017), p. 614, citing US–Gambling (2005) paras. 306–307.

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right to achieve its desired level of protection with respect to the objective pursued under paragraph (a) of Article XIV.109

As interpreted by the Appellate Body, the determination of ‘necessity’ is the entry point to a multifaceted scrutiny of the measure at issue, involving both a relative assessment of international and domestic policy interests (trade restrictiveness versus the importance policy objective of the domestic measure at issue) and a relative assessment of the measure’s policy effectiveness (contribution to the objective).110 In the context of investment screening, it is sufficient to observe that the policy interests of security and public order, interpreted in light of the list of factors in Article 4(1) of the EU Screening Regulation, would have to be scrutinised with respect to their relative importance. Given the diverse nature of these policy interests, one could expect them to be assigned different levels of importance. It is conceivable that essential security interests may, for example, have to be considered more important than the supply of certain raw materials or that food security and critical financial infrastructure may not be deemed to be at the same level of importance. Moreover, it is possible that the trade-restrictive impact of the screening measure at issue would be limited, in which case the necessity test would focus more on the contribution of the screening measure at issue to the policy objectives and the ‘reasonable availability’ of alternative measures. For example, a screening decision consisting of the imposition of a condition (cf. Article 2(3) of the EU Screening Regulation) may be a ‘reasonably available’ alternative to prohibiting the investment (ibid.) and may contribute to an equivalent (or even greater) degree to the realisation of the policy interests at stake. Pursuant to the chapeau, the exceptions must be applied in good faith and not discriminate arbitrarily or unjustifiably between ‘the Parties where like conditions prevail’.111 The chapeau serves to prevent abuse by providing that provisionally justified measures may not be used as disguised restrictions on trade in services.112 As mentioned in Sect. 2.2.1 above, an implied exception with respect to the national treatment standard has been recognised in arbitral practice. To some extent, there is an overlap between this implied exception and the general exception that is based on the GATS/GATT standard.113 Stated differently, if a measure violates the

109

US–Gambling (2005) para. 308. Cf. Mitchell et al. (2019), pp. 329–330 argues that the necessity test is principally characterised by a substantial deference to the level of protection chosen by a host State in order to achieve the policy objective in question. 111 Brazil–Retreaded Tyres (2007) paras. 215 and 224. See Van den Bossche and Zdouc (2017), pp. 594–595; Newcombe and Paradell (2009), pp. 504–505. 112 See generally Mitchell et al. (2019), pp. 331, 347–348; Van den Bossche and Zdouc (2017), pp. 594–595; Newcombe and Paradell (2009), pp. 502–503. Note that, in addition to general exceptions modelled on Article XIV GATS relating to trade in services, Article 28.3(1) CETA, Article 2.22 of the EU–Japan EPA and Article 2.15 of the EU–Korea FTA incorporate by reference Article XX GATT, addressing trade in goods, as applicable also to the investment chapters of each treaty. 113 See further Newcombe and Paradell (2009), pp. 505–506. 110

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national treatment standard, and thus cannot be justified by the implied exception that forms part of that standard, then it is difficult to imagine that the measure could be justified by the general exception, which if anything is narrower, or at least more structured, than the implied exceptions developed in practice. In any event, the added value of the general exception clause is that it applies uniformly across all standards of protection. It reduces the scope for norm conflicts to those between, on the one hand, investment treaty obligations and, on the other hand, EU or Member State measures, which either cannot be justified as necessary to achieve certain recognised policy objectives or are not applied in a good faith and non-abusive manner. Security Exceptions Rarely included in pre-Lisbon treaties, security exceptions are now a standard feature of the EU’s international investment agreements. Security exceptions included in the latter agreements are modelled on Article XXI(b) of GATT and Article XIVbis (1)(b) of GATS and generally except actions related to the protection of the host State’s essential security interests. The structure is exemplified by Article 28.6(b) CETA: Nothing in this Agreement shall be construed: [. . .] (b) to prevent a Party from taking an action that it considers necessary to protect its essential security interests: (i) connected to the production of or traffic in arms, ammunition and implements of war and to such traffic and transactions in other goods and materials, services and technology undertaken, and to economic activities, carried out directly or indirectly for the purpose of supplying a military or other security establishment; (ii) taken in time of war or other emergency in international relations; or (iii) relating to fissionable and fusionable materials or the materials from which they are derived[.]

The exception in clause (b) above covers certain enumerated types of ‘actions’, i.e. not just legal acts or ‘measures’ but potentially any type of treatment.114 The enumerated kinds of actions are excepted subject to the chapeau of the clause, which provides that the host State considers the action in question necessary for the protection of the host State’s essential security interests. This necessity requirement is thus subjective or ‘self-judging’.115 The material scope of the exception is, for that reason, difficult to delimit ex ante. It is, however, not unlimited in scope. This is, in part, because the ‘actions’ to which it applies must be of the kinds enumerated in

On the meaning of ‘treatment’, see Salacuse (2013), p. 228; Newcombe and Paradell (2009), pp. 182, 203, 261. 115 Note that some pre-Lisbon treaties have non-self-judging essential security exceptions. 114

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subclauses (i), (ii) and (iii)116 and, in part, because the host State’s discretion is subject to the general obligation of good faith.117 Covered Actions The actions in respect of which the security exception may be invoked are normally of three kinds. They need to be ‘relating to’, ‘connected with’ or ‘taken in time of’ certain other objectively ascertainable material or temporal facts or circumstances. Actions ‘relating to fissionable or fusionable materials or the materials from which they are derived’ in clause (b)(iii) of Article 28.6 CETA pose scant interpretive difficulty. Actions ‘taken in time of war or other emergency in international relations’ in clause (b)(ii) offer some more space for disagreement, particularly with respect to what counts as an ‘emergency’.118 Rather, it is the first prong of the clause that is the widest in scope. A footnote to clause (b)(i) clarifies that ‘[t]he expression “traffic in arms, ammunition and implements of war” in this Article is equivalent to the expression “trade in arms, munitions and war materials”’. Less clear is the scope of ‘such other traffic and transactions in other goods and materials, services and technology undertaken, and to economic activities, carried out directly or indirectly for the purpose of supplying a military or other security establishment’.

116 Muchlinski (2009), pp. 59–60. This conclusion was endorsed in Russia – Traffic in Transit (2019), para. 7.101. 117 Newcombe and Paradell (2009), pp. 484, 492, 494–495; Muchlinski (2009), pp. 57, 74; Salacuse (2013), p. 381; Van den Bossche and Zdouc (2017), p. 620. By way of reaching the same conclusion, note also that actions of the enumerated kinds are not excepted without qualification under Article 28.6(2) CETA—in which case the necessity requirement would have been superfluous; e.g. the clause could have stated that all actions related to fissionable and fusionable materials were excepted. Nor are all actions of the enumerated kinds that are objectively necessary for the purpose of protecting its essential security interests excepted. For these reasons, the clause is not a pre-application exemption, i.e. a (preliminary) exclusion from (or delimitation of) the treaty’s scope of application, the applicability of which would have been the claimant’s burden of proof. See Viñuales (2018), section 1.2. Cf. Article XI of the Argentine–US BIT (not published in UNTS, UN reg. no. 54935), which was at issue in a number of cases arising out of Argentina’s economic crisis of 2001–2002, including CMS v. Argentina. The security exception of that treaty has an objective necessity requirement and is thus a pre-application exemption, operating as a ‘threshold requirement’, see CMS v. Argentina, Decision on the Application for Annulment, 25 September 2007, para. 129. By contrast, Article 28.6(2) CETA only excepts such actions of the enumerated kinds that the host State determines to be necessary for the purpose of protecting its essential security interests; i.e. the necessity requirement is subjective. Absent such a determination—and invocation of the exception by the host State—, full effect will be given to the application of the substantive treaty obligations. This security exception is therefore a post-application exemption, i.e. an exception stricto sensu, which precludes a finding of breach. See Viñuales (2018), section 1.6. This is to be distinguished from an excuse, which operates to preclude liability, ibid. section 1.7. Muchlinski (2009), p. 67 rightly points out that the security exception at issue in the Argentina cases is not an exemption that operates to preclude liability. However, nor are all security exceptions exclusions (i.e. scope-of-application clauses). The self-judging ones apply only at the option of the host State and are thus to be invoked and proven (to the extent required) by that State. 118 It is evident from the negotiating record of the GATT that the potential for abuse in this respect was acknowledged. See United Nations Conference on Trade and Employment (1947), pp. 19–21. Cf. Russia – Traffic in Transit (2019), section 7.5.5.

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The potential for abusive application of the clause is significantly greater with respect to the wide category of actions covered by this wording. Particularly, the ‘indirect’ purpose of supply may cause interpretive difficulties. In the context of investment screening, the screening of investments of the kind referred to in Article 4(1)(b) of the EU Screening Regulation could be covered by Article 28.6(b)(i) CETA, i.e. ‘critical technologies and dual use items as defined in point 1 of Article 2 of Council Regulation (EC) No 428/2009, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies’. With respect to the other factors listed in Article 4(1) of the EU Screening Regulation, the screening of investments affecting critical infrastructure and the supply of critical inputs could also be covered to the extent that there is a direct or indirect purpose of supplying a military or other security establishment. By contrast, the screening of investments affecting other critical infrastructure, the supply of other critical inputs, food security in general, access to sensitive information, or the freedom and pluralism of the media would appear to fall outside the scope of the exception. However, the screening of such investments might fall within the ambit of exceptions such as in Article 24(3)(c) of the Energy Charter Treaty, which applies to ‘any measure which [a Contracting Party] considers necessary [. . .] for the maintenance of public order’. Good Faith Article 26 of the Vienna Convention on the Law of Treaties (VCLT) enshrines the customary principle of pacta sunt servanda—that ‘[e]very treaty in force is binding upon the parties to it and must be performed in good faith’. As the International Court of Justice explained in the Gabčikovo-Nagymaros case, ‘[t]he principle of good faith obliges the [parties to a treaty] to apply it in a reasonable way and in such a manner that its purpose can be realised’.119 Interpreting the security exception in good faith thus implies that, although the necessity requirement is selfjudging and the discretion of the host State invoking the exception is very extensive, the discretion must nevertheless be exercised reasonably and not in a manner that defeats the purpose of the exception.120 In Russia – Traffic in Transit (2019), the panel held that the discretion of a WTO Member to take ‘any action which it considers necessary for the protection of its essential security interests’ pursuant to the chapeau of Article XXI(b) GATT— which is nearly identical to Article 28.6(2) CETA—–extends both to the determination of the invoking Member’s essential security interests and the necessity of the actions of the enumerated kinds taken for the protection of those interests.121 The panel observed that ‘essential security interests’ is a narrower concept than ‘security interests’ and that it generally referred to ‘those interests relating to the quintessential

119

Gabčikovo-Nagymaros Project [1997] ICJ Rep 7, para. 142. Ziegler and Baumgartner (2015), pp. 18–19; De Brabandere and Van Damme (2015), pp. 52–55. 121 Russia – Traffic in Transit (2019), paras. 7.131, 7.146 and 7.147. 120

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functions of the state, namely, the protection of its territory and its population from external threats, and the maintenance of law and public order internally’.122 What constitutes essential security interests in a specific case depends on the particular situation and perceptions of the State in question and can be expected to vary with changing circumstances.123 The panel observed that the obligation to act in good faith requires WTO Members not to invoke the security exception as a means to circumvent their GATT obligations. From that obligation, the panel derived (A) a duty of transparency—a duty to ‘articulate the essential security interests said to arise from the [alleged situation in the relevant enumerated sub-clause (i), (ii) or (iii) of the clause] sufficiently enough to demonstrate their veracity’124—and (B) a requirement that the actions at issue are ‘not implausible as measures protective of these interests’.125 As for the level of transparency required, the panel held that the essential security interests would have to be articulated with greater specificity the further the situation at issue is removed from external or internal threats and the less obvious the ‘defence and military interests, or maintenance of law and public order interests, that can generally be expected to arise’.126 The right of a party not to disclose information contrary to its essential security interests pursuant to Article XXI(a) GATT (cf. Article 28.6(1) CETA) could not be invoked to evade this duty of transparency.127 As for the implausibility requirement, the panel considered whether the measures at issue was so remote from, or unrelated to, the essential security interests in question that it was implausible that the measures protected these interests.128 If this interpretation of Article XXI(b) GATT were to be transferred to Article 28.6(b)(i) CETA to except the screening of an investment, e.g. relating to a critical technology, the duty of transparency would mean that the host State carrying out the screening would have to articulate what essential security interest it considered to be threatened by the contemplated investment in the relevant technology. The exception would then be available unless the screening was so remote from, or unrelated to, these articulated interests that it would be implausible that the interests were being protected by the screening.

122

Ibid. para. 7.130. Ibid. para. 7.131. 124 Ibid. para. 7.134. 125 Ibid. para. 7.138. 126 Ibid. para. 7.135. 127 Ibid. para. 7.129 in light of para. 7.134. 128 Ibid. para. 7.139. 123

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3 Implications of Investment Treaty Obligations on the Functioning of Investment Screening From the analysis above, it is evident that investment treaty obligations apply, to a greater or lesser extent, at both the pre- and post-investment phases. Post-Lisbon treaties generally apply at the pre-investment phase, while most pre-Lisbon treaties do not. However, even with respect to the latter, by the time screening actually occurs, investors may have already reached the post-investment phase because of the possibility that they may already have acquired pre-existing investments below the relevant screening threshold, which they could then expand. The analysis has also revealed that there is significant potential for norm conflicts between, on the one hand, the main applicable standards of protection in international investment agreements—national treatment, MFN treatment, and fair and equitable treatment—and, on the other hand, the design or operation of screening mechanisms. The potential for conflicts is reduced, but not eliminated, by general and security exceptions. The former are broad in scope but subject to rigorous conditions, while the latter are narrow in scope but self-judging (within limits). In light of these findings, the next question to be addressed is why the identified potential for norm conflicts might restrict the EU and its Member States in designing or operating screening mechanisms. At this stage, it should be noted that a potential norm conflict may, on closer scrutiny, not be a conflict of norms in a narrow sense.129 For example, it may be that a particular screening mechanism does not require anything that cannot be reconciled with investment treaty obligations. Moreover, in a situation where national screening laws, regulations or other measures are interpreted so as to avoid a conflict stricto sensu with investment treaty obligations, the latter will inevitably have an influence on the operation (and the future design) of the screening laws or measures. It is thus in the latter, wider sense that norm conflicts are discussed below.130 In the event of such conflicts, EU secondary law and national law should be interpreted so as to comply with international commitments.131 This is emphasised in recital 35 of the EU Screening Regulation:

129

In the strict sense, a conflict between two norms arises only where both norms cannot be complied with simultaneously. See Vranes (2006), p. 400. 130 In such a broad sense, ‘[t]here is a conflict between norms, one of which may be permissive, if in obeying or applying one norm, the other norm is necessarily or potentially violated’, Vranes (2006), p. 418. 131 See e.g. Judgment of the Court of 3 September 2008, Kadi and Al Barakaat v. Council and Commission, C-402/05 P, EU:C:2008:461, para. 291 and the case law cited. According to the settled EU case law ‘the primacy of international agreements concluded by the EU over secondary legislation requires that the latter be interpreted, in so far as is possible, in conformity with those agreements’, see General Court Judgment of 21 November 2018, Stichting Greenpeace Nederland and PAN Europe v. Commission, T-545/11 RENV, EU:T:2018:817, para. 106 and the case law cited. As a matter of international law, States have a general duty to bring their domestic law into

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The implementation of this Regulation by the Union and the Member States should comply with the relevant requirements for the imposition of restrictive measures on grounds of security and public order in the WTO agreements, including, in particular, Article XIV (a) and Article XIV bis of the General Agreement on Trade in Services (GATS). It should also comply with Union law and be consistent with commitments made under other trade and investment agreements to which the Union or Member States are parties and trade and investment arrangements to which the Union or Member States are adherents [emphasis added].

To assess the possibility that investment treaty obligations may influence the interpretation of the EU Screening Regulation or national screening laws or measures or require them to be changed or designed in a particular way, it is necessary to first ascertain how a norm conflict lato sensu would be determined and resolved (Sect. 3.1). It will then be analysed how the different approaches to dispute resolution and enforcement might impact the functioning of investment screening mechanisms (Sect. 3.2).

3.1 3.1.1

Manner of Resolving Norm Conflicts General

Conflicts between, on the one hand, investment treaty obligations and, on the other hand, EU secondary legislation or national legislation may, in principle, be determined either at the international level or at the EU or national level. With respect to international adjudication, such norm conflicts may be determined by investor–State arbitration or interstate arbitration. With respect to EU or national adjudication, several types of actions are possible.132 As regards the national level, domestic courts can (A) review the constitutionality of investment treaties, (B) intervene to directly redress breaches of investment treaties and (C) exercise supervisory jurisdiction over investment arbitration proceedings through (i) actions for the disqualification of arbitrators, (ii) actions for provisional measures, (iii) actions to set aside an arbitral award and (iv) actions for the recognition or enforcement of arbitral awards.133 Each of these actions at national level may be the subject matter of references for preliminary rulings on the interpretation of EU law by the Court of Justice of the European Union (CJEU) pursuant to Article 267(1)(a) TFEU. As regards proceedings directed against the EU, the CJEU could hear (A) an action for

conformity with their obligations under international law. Exchange of Greek and Turkish Populations (1925) PCIJ Ser B No 10, p. 20. See further Crawford (2012), p. 52. 132 See in this volume Teoman Hagemeyer, Access to Legal Redress in an EU Investment Screening Mechanism. 133 On the litigation of investment treaty breaches before domestic courts, see generally Ben Hamida (2009), pp. 72–75. Note that the ICSID Convention restricts domestic courts from setting aside or denying the recognition or enforcement of an arbitral award rendered under the auspices of that convention.

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annulment of a binding EU legal act (such as the EU Screening Regulation) pursuant to Article 263 TFEU; (B) an action for damages resulting from, e.g., a non-binding act (such as an opinion by the Commission pursuant to Articles 6, 7 and 8 of the EU Screening Regulation) pursuant to Article 268 TFEU; (C) references for preliminary rulings on the validity of secondary legislation pursuant to Article 267(1)(b) TFEU (including review of the validity of international agreements concluded by the EU134); and (D) requests for interim measures pursuant to Article 278 TFEU. As outlined in Sect. 1 above, the following analysis is limited to comparing the impact of investor–State arbitration and interstate arbitration on the design and operation of investment screening mechanisms. While a comprehensive review of the impact of the different remedies under EU law and national law would go beyond the aim of this chapter, such review could only provide additional support for the proposition of this chapter; viz., the availability at the EU or national level of additional means of resolving norm conflicts or of enforcing international norms, as a complement to international adjudication, could only further restrict the EU and its Member States in designing or operating screening mechanisms. However, international remedies and remedies under national or EU law are not necessarily complementary. Resort to remedies at the EU or national level may exclude the availability of international remedies as a consequence of so-called forkin-the-road clauses in investment treaties, by which the investor must choose between pursuing remedies at the international or domestic (including EU) level. Nevertheless, this choice remains with the investor, which can normally be expected to prefer investor–State arbitration.135 It should also be noted that adjudication at the national (and EU) level requires that the relevant treaty obligations have direct effect in the national legal order or have been implemented in national law. For present purposes, it is sufficient to observe that there are investment treaties that expressly limit their own direct effect. Notably, the EU’s post-Lisbon international investment agreements exclude the possibility of recourse at the national level. For example, Article 30.6 CETA provides: 1. Nothing in this Agreement shall be construed as conferring rights or imposing obligations on persons other than those created between the Parties under public international law, nor as permitting this Agreement to be directly invoked in the domestic legal systems of the Parties. 2. A Party shall not provide for a right of action under its domestic law against the other Party on the ground that a measure of the other Party is inconsistent with this Agreement.

Similarly, Article 23.5 of the EU–Japan EPA provides: ‘Nothing in this Agreement shall be construed as conferring rights or imposing obligations on persons, without prejudice to the rights and obligations of persons under other public

134

Judgment of the Court of 27 February 2018, Western Sahara, C-266/16, EU:C:2018:118, paras. 43–45, 48–50. 135 Cf. Ben Hamida (2009), p. 69.

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international law.’ Another similar provision is found in Article 4.11 of the EU– Singapore IPA.136 By contrast, a majority of pre-Lisbon Member State treaties contemplate the possibility that they may be relied upon before host State domestic courts, occasionally combined with a ‘fork-in-the-road’ clause.137 With respect to disputes brought before domestic courts on the basis of such treaties, provided that the relevant treaty is directly effective or has been transposed into national law, the EU judiciary may also get involved. Matters relating to conflicts between treaty obligations and national law that concern the interpretation and application of the EU Screening Regulation may end up before the CJEU by means of a reference for preliminary ruling pursuant to Article 267 TFEU. Turning to international adjudication, with respect to post-Lisbon treaties concluded by the EU, norm conflicts may be determined and resolved by means of interstate arbitration or investor–State arbitration. Some treaties, such as the EU– Japan EPA and the EU–Korea FTA, provide only for the former.138 Others, including CETA and the EU–Singapore IPA, provide for both.139 A third possibility, which has not been utilised with respect to investment treaty obligations, would be that the treaty does not provide for any consent to arbitration, in which case disputes would have to be resolved through bilateral negotiation with the possibility to submit disputes to arbitration by mutual consent on an ad hoc basis. It should be noted that whenever an international tribunal reviews an EU or national measure for consistency with an international standard, the meaning of that measure will necessarily have to be interpreted, but merely as a fact, not as a matter of national law as such.140 An explicit provision to such effect has been included in the post-Lisbon treaties that provide for investor–State arbitration.141

3.1.2

Scope of Arbitral Jurisdiction

General Except for disputes that are objectively non-arbitrable and thus concern a subject matter that is incapable of settlement by arbitration, States generally enjoy the freedom to agree to settle any dispute by recourse to arbitration. However, in

136

Domestic recourse is also excluded in relation to the EU–Korea FTA by virtue of Article 8 of the Council Decision (2011/265/EU) of 16 September 2010. 137 Investment Policy Hub (2019). 138 Article 21.2 of the EU–Japan EPA and Article 14.2 of the EU–Korea FTA. 139 Articles 8.18(1) and 29.2 CETA, and Articles 3.1(1) and 3.25 of the EU–Singapore IPA. 140 Certain German Interests in Polish Upper Silesia (Germany v Poland) [1926] PCIJ Rep Series A No 7, p. 19, para. 52. 141 Article 8.31(2) CETA and Article 3.13(2), footnote 7, of the EU–Singapore IPA. The inclusion of such provision in CETA was instrumental in assuaging the European Court of Justice that the investor–State dispute settlement provisions of that treaty do not call into question the autonomy of the EU legal order. See CJEU Opinion 1/17, CETA, EU:C:2019:341, 30 April 2019, paras. 76–77, 122, 130–131.

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practice, disputes rarely confine themselves to non-arbitrable subject matters and will, at least partially, concern matters that States may agree to arbitrate. More commonly, there may be disagreement as to the scope of the consent to arbitration. With respect to interstate arbitration, the post-Lisbon treaties contain explicit consent provisions that cover all types of disputes arising under the relevant treaty, which have not been explicitly excluded.142 In relation to investment treaty obligations contained in those treaties, no specific exclusions normally apply; this is typically the case also for interstate arbitration clauses of Member State treaties. However, CETA contains an exclusion from both interstate and investor–State arbitration,143 viz. disputes relating to investment screening under the Investment Canada Act. Specifically, the exclusion covers ‘[a] decision by Canada following [investment screening under the Investment Canada Act] regarding whether or not to permit an investment that is subject to [screening]’.144 It is noteworthy that CETA does not contain any similar exclusion applicable to investment screening by the EU or its Member States. Treaties that provide for investor–State arbitration often limit the application of such arbitration to certain types of disputes and explicitly exclude other types. With respect to investment screening, it is important to note Article 8.18(1)(a) CETA, which limits the scope of investor–State arbitration to allegations of breach of the non-discrimination standards ‘with respect to the expansion, conduct, operation, management, maintenance, use, enjoyment and sale or disposal of its covered investment’.145 By not mentioning ‘establishment’ and ‘acquisition’, the scope of arbitral jurisdiction is limited to the post-investment phase. However, the arbitral jurisdiction does cover ‘expansion’ of investments, which seems to imply that a dispute arising out of ex ante screening that relates to a prospective expansion of an existing investment can be arbitrated. This is not called into question by Article 8.18 (2) CETA, which provides that ‘[c]laims under [Article 8.18(1)(a)] with respect to the expansion of a covered investment may be submitted only to the extent the measure relates to the existing business operations of a covered investment and the investor has, as a result, incurred loss or damage with respect to the covered investment’ [emphasis added]. Rather, it appears that Article 8.18(2) CETA serves to exclude expansions of investments into future business operations, presumably to avoid circumvention of the exclusion of establishment or acquisition of new investments. Pursuant to Article 8.18(1)(b) CETA, the scope of arbitral jurisdiction also covers alleged breaches of the fair and equitable treatment standard without limitation.

142

See above fn 138 and 139. Article 8.45 CETA. 144 Annex 8-C CETA. Another example is Annex 9-H of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (2018), which however remains affected by the suspension of Article 9.19 (on the submission of a claim to arbitration) pursuant to Article 2. 145 Similarly, see Article 2(1) of the chapter on the resolution of investment disputes of the draft modernised EU–Mexico Global Agreement, published 25 April 2018, available at http://trade.ec. europa.eu/doclib/cfm/doclib_section.cfm?sec¼132. Accessed 06.1.2020. 143

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Exceptions Limitations to the material scope of investment treaty obligations pursuant to general and security exceptions, discussed in Sect. 2.2.2 above, also limit the scope of arbitral jurisdiction.146 In particular with respect to the self-judging necessity requirement of GATT/GATS-style security exceptions, the question of material scope and scope of jurisdiction can easily be conflated.147 However, such conflation should be approached with caution because while the former limits the latter, it is possible that the latter is further limited by the consent to arbitration. Nevertheless, none of the post-Lisbon treaties provide for additional limitations to the arbitral jurisdiction with respect to the matters covered by the general and security exceptions.

3.2

Implications on the Design and Operation of Screening Mechanisms

Three types of dispute resolution and enforcement systems in respect of screening decisions were identified in the previous section: (A) EU and national adjudication, (B) interstate arbitration and (C) investor–State arbitration. While a combination of all three of these systems are available for most pre-Lisbon Member State treaties, only the latter two can be resorted to for purposes of post-Lisbon EU treaties.148 These types of dispute resolution and enforcement systems differ in important respects. First, there are important differences in terms of standards of review. With respect to national and EU adjudication, post-Lisbon treaties and some pre-Lisbon treaties cannot form part of the standard of review due to their lack of direct effect. Other pre-Lisbon treaties could have direct effect and, if so, form part of the standard of review. Of course, the precise standards of review also differ depending on the type of action or procedure in the various national legal orders—a review of these differences are beyond the scope of this chapter. As between investor–State arbitration and interstate arbitration, there are no differences in the standards of review, insofar as the dispute falls within the scope of arbitral jurisdiction, which may differ (cf. Sect. 3.1.1). Second, there are also significant differences in terms of legal procedure. The EU and national adjudication systems are not only very different from arbitration but also differ among themselves—again, a review of these procedural differences is beyond the scope of this chapter. There are also important differences between

146

With respect to the general exceptions in Article 28.3(2) CETA, this point was highlighted in CJEU Opinion 1/17, CETA, EU:C:2019:341, 30 April 2019, paras. 152–153. 147 Ibid. 148 The question of whether national (and EU) courts may exercise supervisory jurisdiction over the arbitral process in the context of (non-ICSID) post-Lisbon treaties is for present purposes ignored.

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interstate and investor–State arbitration. The overall effects of these differences on the functioning of screening mechanisms are not obvious, however. Third, the different systems do not provide access to a legal remedy on the same premises. National and EU adjudication is widely accessible to aggrieved investors concerned by screening decisions. Article 3(5) of the EU Screening Regulation provides that ‘[f]oreign investors and the undertakings concerned shall have the possibility to seek recourse against screening decisions of the national authorities’. To the extent that an applicable international investment agreement were to be invoked by an investor before national or EU courts—which has not occurred so far—this would mean that legal recourse under the EU Screening Regulation would comprise disputes relating to conflicts between screening measures and investment treaty obligations. As mentioned above, such disputes would be resolved differently as a result of differing standards of review depending on the type of action or procedure and whether the relevant investment treaty is a post-Lisbon EU treaty or a pre-Lisbon Member State—only treaty. By contrast, there is a considerable hurdle in accessing interstate and investor– State arbitration. Investors have no right to initiate interstate arbitration but have to petition their home State to do so. Home States have very wide, if not unfettered, discretion to decide whether or not to act upon any such petition. Given the multifaceted nature of interstate relationships, a single investment dispute—even one involving considerable economic value—will rarely be sufficiently important to warrant intervention by the home State. Such intervention comes with the risk of adverse effects on the relationship between the States concerned. Access to this remedy is therefore highly uneven. It will be beyond reach for all but the most economically or politically influential investors. Investor–State arbitration is more readily available than interstate arbitration, but significantly more costly than adjudication before national or EU courts, and often also very time-consuming. While the investor is, in principle, often entitled to initiate arbitral proceedings without the need to exhaust domestic remedies, it is nevertheless a remedy that requires significant resources. Only disputes of sufficiently high economic value or fundamental significance will justify the commencement of investor–State arbitral proceedings. Fourth, as between interstate arbitration, on the one hand, and national and EU adjudication and investor–State arbitration, on the other hand, there are material differences in enforcement incentives. Because aggrieved investors have no formal role in interstate arbitration, there is a palpable likelihood of conflicting incentives in pursuing legal recourse between the investor concerned and the home State. As a consequence, even if a home State initiates arbitral proceedings, there are no safeguards that could mitigate the risk that the home State would be guided by ulterior motives or interests that are unrelated to, or even at odds with, those of the investor concerned. This is in stark contrast to national and EU adjudication and investor–State arbitration, where the investor has control over its own procedural conduct as litigant or claimant. The cumulative effect of a lower level of access and a greater potential for conflicting incentives is to render interstate arbitration a less effective mechanism

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than national and EU adjudication and investor–State arbitration for resolving norm conflicts between screening measures and investment treaty obligations.149 In contrast to investor–State arbitration, access to national and EU adjudication is guaranteed in the EU Screening Regulation and is more cost efficient and expeditious. The differences between the three dispute settlement systems in terms of accessibility and enforcement incentives are liable to affect the likelihood that investment treaty obligations will be enforced and the intensity of such enforcement. With respect to the application of national treatment and MFN treatment obligations to investment screening in the pre-investment phase (Sect. 2.1.1 above), the fact that national and EU courts lack jurisdiction over treaty disputes under post-Lisbon agreements (Sect. 3.1.1 above) and that investor–State arbitral jurisdiction, where it exists (such as in CETA), does not normally cover national treatment and MFN treatment disputes in the pre-investment phase (Sect. 3.1.2 above) means that only interstate arbitration is available to enforce such obligations. As a result, although the EU Screening Regulation is meant to be interpreted in conformity with investment treaty obligations (pursuant to recital 35), the limited access and non-straightforward procedural incentives involved in interstate arbitration is liable to affect the likelihood that such obligations will be enforced. By contrast, with respect to the application of investment treaty obligations to investment screening in the postinvestment phase (Sect. 2.1.2 above), the availability of investor–State arbitration, which is normal under both pre- and post-Lisbon agreements (Sect. 3.1.2 above), as well as national and EU adjudication under many pre-Lisbon agreements, means that the likelihood and intensity of enforcement are comparatively higher.

4 Conclusions Investment treaty obligations apply to investment screening at least to the extent that the screening takes place after an investment has been made. In practice, most investment screening is of this type, either because the investment that is screened has already been made or because the screening concerns a prospective expansion of an existing investment that would bring the total investment above the applicable screening threshold. As a result, screening laws and other measures relating to screening may potentially conflict with investment treaty obligations not to unjustifiably discriminate between comparable investors or investments and to accord fair and equitable treatment. In particular, foreign investors and their investments must not be denied justice or due process, and their legitimate expectations must be protected.

149

This is not meant to suggest necessarily that interstate arbitration is a less effective means of dispute resolution.

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Host States will generally not breach their investment treaty obligations by applying screening measures that are necessary to maintain public order in a manner that does not arbitrarily or unjustifiably discriminate against investors of comparable third countries. Nor will investment treaty obligations be breached where a host State deems, in good faith, screening measures of certain limited types to be necessary to protect its essential security interests. While the host State’s determination of the necessity of such measures and, in particular, of its essential security interests, is, in principle, shielded from adjudicatory scrutiny, the principle of good faith requires a minimum level of transparency and plausible relationship between the measure and the security interest at issue. The application of investment treaty obligations and treaty exceptions leaves a significant room for potential conflicts between treaty norms, on the one hand, and investment screening laws and other screening measures, on the other. Such conflicts may be resolved by national or EU adjudication, by interstate arbitration or by investor–State arbitration. Post-Lisbon treaties exclude the possibility of national and related EU adjudication of investment treaty provisions, whereas this remains a viable avenue according to most pre-Lisbon treaties concluded by the Member States in question. While some post-Lisbon treaties exclude pre-investment disputes from the scope of investor–State arbitration, expansion of investments relating to existing business operations are not excluded. This means that a dispute concerning an existing investment that is increased above the screening threshold can be arbitrated, whereas a dispute concerning an initial investment above the threshold cannot. The availability of different international dispute settlement systems influences the design and operation of investment screening mechanisms primarily as a consequence of differences in accessibility and enforcement incentives. Treaty obligations that may be adjudicated before national or EU courts have a greater potential to impact the functioning of screening since access to such adjudication is explicitly guaranteed in the EU Screening Regulation. Where investor–State arbitration is available, it offers better access to a legal remedy and less risk for conflicting incentives than interstate arbitration. The policy implications of these findings operate at different levels. Principally, investment treaty obligations can be expected to shape the manner in which investment screening is conducted. It may even be possible that screening laws would need to be redesigned to conform to treaty obligations. Working out ex ante the possible interactions between investment treaty obligations and screening legislation is a very difficult task, requiring significant further research, but it is a task worth undertaking. The alternative would be to reactively modify the way that screening is carried out over time in view of arbitral awards, which could be financially very burdensome, operationally disruptive and inefficient. A proactive approach to ensure harmony at the international, European and national levels is therefore recommended.

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References Ben Hamida W (2009) Investment treaties and domestic courts: a transnational mosaic reviving Thomas Wälde’s Legacy. In: Werner J, Ali AH (eds) A Liber Amicorum: Thomas Wälde – law beyond conventional thought. Cameron May, London, pp 69–85 Bischoff JA, Happ R (2015) The notion of investment. In: Bungenberg M, Griebel J, Hobe S et al (eds) International investment law. Nomos, Baden-Baden, pp 495–544 Bjorklund A (2010) The national treatment obligation. In: Yannaca-Small K (ed) Arbitration under international investment agreements: a guide to key issues. Oxford University Press, Oxford, pp 411–444 Bonnitcha J, Skovgaard Poulsen LN, Waibel M (2017) The political economy of the investment treaty regime. Oxford University Press, Oxford Crawford J (2012) Brownlie’s principles of public international law, 8th edn. Oxford University Press, Oxford Della Cananea G (2010) Minimum standards of procedural justice in administrative adjudication. In: Schill S (ed) International investment law and comparative public law. Oxford University Press, Oxford, pp 39–74 De Brabandere E, Van Damme I (2015) Good faith in treaty interpretation. In: Mitchell AD, Sornarajah M, Voon T (eds) Good faith and international economic law. Oxford University Press, Oxford, pp 37–59 Dolzer R, Schreuer C (2012) Principles of international investment law, 2nd edn. Oxford University Press, Oxford European Commission (2017) Commission staff working document accompanying the document proposal for a regulation of the European Parliament and of the council establishing a framework for screening of foreign direct investments into the European Union (COM/2017/0487 final – SWD(2017) 297 final). https://publications.europa.eu/en/publication-detail/-/publication/ cf655d2a-9858-11e7-b92d-01aa75ed71a1. Accessed 6 May 2019 Gómez-Palacio I, Muchlinski P (2008) Admission and establishment. In: Muchlinski P, Ortino F, Schreuer C (eds) The Oxford handbook of international investment law. Oxford University Press, Oxford, pp 229–256 Hahn M (2015) WTO rules and obligations related to investments. In: Bungenberg M, Griebel J, Hobe S et al (eds) International investment law. Nomos, Baden-Baden, pp 653–670 Hindelang S (2009) The free movement of capital and foreign direct investment: the scope of protection in EU law. Oxford University Press, Oxford, New York Investment Policy Hub (2019) United Nations Conference on Trade and Development (UNCTAD). https://investmentpolicy.unctad.org. Accessed 6 Jan 2020 Jacob M, Schill SW (2015) Fair and equitable treatment: content, practice, method. In: Bungenberg M, Griebel J, Hobe S et al (eds) International investment law. Nomos, BadenBaden, pp 700–763 Juillard P (2000) Freedom of establishment, freedom of capital movements, and freedom of investment. ICSID Rev Foreign Invest Law J 15(2):322–339. https://doi.org/10.1093/ icsidreview/15.2.322 Kläger R (2011) ‘Fair and equitable treatment’ in international investment law. Cambridge University Press, Cambridge Mitchell A, Munro J, Voon T (2019) Importing WTO general exceptions into international investment agreements: proportionality, myths, and risks. In: Sachs L, Johnson L, Coleman J (eds) Yearbook on international investment law and policy 2017. Oxford University, Oxford Muchlinski PT (2009) Trends in international investment agreements: balancing investor rights and the right to regulate. The issue of national security. In: Sauvant KP (ed) Yearbook on international investment law and policy 2008–2009. Oxford University, Oxford, pp 35–78 Nadakavukaren Schefer K (2016) International investment law. Text, cases and materials, 2nd edn. Edward Elgar, Cheltenham

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Newcombe A, Paradell L (2009) Law and practice of investment treaties: standards of treatment. Kluwer Law International, Alphen aan den Rijn Palombino FM (2018) Fair and equitable treatment and the fabric of general principles. T.M.C. Asser Press, The Hague and Springer, Berlin Paparinskis M (2013) The international minimum standard and fair and equitable treatment. Oxford University Press, Oxford Pohl JH (2018) The Right to be Heard in European Union Law and the International Minimum Standard: Due Process, Transparency and the Rule of Law, CERiM Online Paper 6/2018. Available via SSRN: https://doi.org/10.2139/ssrn.3192858. Accessed 6 Jan 2020 Reinisch A (2015) National treatment. In: Bungenberg M, Griebel J, Hobe S et al (eds) International investment law. Nomos, Baden-Baden, pp 846–869 Salacuse JW (2013) The three laws of international investment: national, contractual, and international frameworks for foreign capital. Oxford University Press, Oxford Salacuse JW (2015) The law of investment treaties, 2nd edn. The Oxford International Law Library, Oxford University Press, Oxford United Nations Conference on Trade and Employment (1947) Second Session of the Preparatory Committee, Verbatim Report of the Thirty-Third Meeting of Commission A, 24 July 1947, Document No. E/PC/T/A/PV/33 Van den Bossche PLH, Zdouc W (2017) The law and policy of the World Trade Organization: text, cases and materials. Oxford University Press, Oxford Viñuales JE (2018) Seven ways of escaping a rule: of exceptions and their avatars in international law. In: Bartels L, Paddeu F (eds) Exceptions and defences in international law. Oxford University Press, Oxford Vranes E (2006) The definition of ‘norm conflicts; in international law and legal theory. Eur J Int Law 17(2):395–418. https://doi.org/10.1093/ejil/chl002 Yannaca-Small K (2010) Fair and equitable treatment standard. In: Yannaca-Small K (ed) Arbitration under international investment agreements: a guide to key issues. Oxford University Press, Oxford, pp 385–410 Ziegler AR, Baumgartner J (2015) Good faith as a general principle of (international) law. In: Mitchell AD, Sornarajah M, Voon T (eds) Good faith and international economic law. Oxford University Press, Oxford, pp 9–36

Cases Al-Jubail Fertilizer Company (SAMAD) and Saudi Arabian Fertilizer Company (SAFCO) v. Council of the European Communities, C-49/88, ECJ Judgment of 27 June 1991, EU: C:1991:276 Barcelona Traction, Light and Power Company Limited (Belgium v. Spain) Judgment [1970] ICJ Rep 4 Brazil – Measures Affecting Imports of Retreaded Tyres, WT/DS332 (2007) Certain German Interests in Polish Upper Silesia (Germany v Poland) [1926] PCIJ Rep Series A No 7 CMS Gas Transmission Company v. Argentine Republic (ICSID Case No ARB/01/8) Decision on the application for annulment, 25 September 2007 Deutsche Telekom AG v. The Republic of India (PCA Case No. 2014-10) Interim Award, 13 December 2017 Exchange of Greek and Turkish Populations (1925) PCIJ Ser B No 10 Gabčikovo-Nagymaros Project (Hungary v. Slovakia) Judgment [1997] ICJ Rep 7 Hoffmann-La Roche v. Commission, C-85/76, ECJ Judgment of 13 February 1979, EU:C:1979:36

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International Thunderbird Gaming Corporation v. The United Mexican States, Arbitral Award, 26 January 2006 Kadi and Al Barakaat International Foundation v. Council and Commission, C-402/05 P, EJC Judgment of 3 September 2008, EU:C:2008:461. Luigiterzo Bosca v. Republic of Lithuania (PCA Case No. 2011-05) Award, 17 May 2013 Marfin Investment Group Holdings S.A., Alexandros Bakatselos and others v. Republic of Cyprus (ICSID Case No. ARB/13/27) Award, 26 July 2018 Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka (ICSID Case No. ARB/00/2) Award, 15 March 2002 Nordzucker AG v. The Republic of Poland, Partial Award (Jurisdiction), 10 December 2008 CETA, Opinion 1/17 of the Court, EU:C:2019:341, 30 April 2019 Olin Holdings Limited v. State of Libya (ICC Case No. 20355/MCP) Final Award, 25 May 2018 Orange European Smallcap Fund, C-194/06, ECJ judgment of 20 May 2008, EU:C:2008:289 Petrobart Ltd. v. The Kyrgyz Republic (SCC Case No. 126/2003) Award, 29 March 2005 Pope & Talbot Inc v. Government of Canada, Award on the Merits of Phase 2, 10 April 2001 Russia – Measures Concerning Traffic in Transit, WT/DS512 (2019) Saluka Investments BV v. The Czech Republic, Partial Award, 17 March 2006 S.D. Myers, Inc. v. Government of Canada, First Partial Award, 13 November 2000 Stichting Greenpeace Nederland and PAN Europe v. Commission, T-545/11 RENV, General Court Judgment of 21 November 2018, EU:T:2018:817 Test Claimants in the FII Group Litigation, C-446/04, ECJ judgment of 12 December 2006, EU: C:2006:774 United Parcel Service of America, Inc. (UPS) v. Government of Canada (ICSID Case No. UNCT/ 02/1), Award, 27 August 2009 United States – Measures Affecting the Production and Sale of Clove Cigarettes, WT/DS406 (2012) United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285 (2005) VBV- Vorsorgekasse AG, C-39/11, ECJ judgment of 7 June 2012, EU:C:2012:327 Western Sahara Campaign UK, C-266/16, ECJ judgment of 27 February 2018, EU:C:2018:118 William Nagel v. The Czech Republic (SCC Case No. 049/2002), Final Award, 9 September 2003 White Industries Australia Limited v. The Republic of India, Final Award, 30 November 2011 X, C-317/15, ECJ judgment of 15 February 2017, EU:C:2017:119 Zhinvali Development Ltd. v. Republic of Georgia (ICSID Case No. ARB/00/1) unpublished award, 24 January 2003 [described in Ben Hamida W (2005) The Mihaly v. Sri Lanka case: Some Thoughts Relating to the Status of Pre-Investment Expenditures. In: Weiler T (ed) International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law. Cameron May, London, pp 47–76]

Jens Hillebrand Pohl is a research fellow at the Institute of Globalization and International Regulation (IGIR) and an adjunct lecturer in International Economic Law at Maastricht University, the Netherlands, and course director at the Academy of European Law, Trier, Germany. His research focuses on the law and practice of foreign investment control. He holds an LL.M. from Harvard Law School and is a PhD candidate at Maastricht University. He is a member of the New York Bar.

State Aid and Investment Screening: A Multifaceted Relationship Grith Skovgaard Ølykke and Louise Tandrup Christensen

Contents 1 Introduction: The Relationship Between State Aid Rules and FDI Screening . . . . . . . . . . . . 2 When Does FDI Screening Lead to the Granting of State Aid? . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Privatisation of a State-Owned Undertaking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Sale of a Private Undertaking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Does EU Law Regulate Distortion of Competition Caused by Subsidies from Third Countries to Buyers of European Assets? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 The EU Screening Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Trade Defence Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Conclusions and Possible Ways Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract This chapter examines the relationship between State aid rules and the EU Screening Regulation, which may be characterised as multifaceted. Whereas State aid law in its nature limits Member States’ room for manoeuvre in the sphere of industrial policy, the new EU Screening Regulation provides an arguably broad room for manoeuvre for Member States to intervene in markets to protect public security and public order. However, it may be argued that this broader manoeuvring room could lead to a clash between the two sets of rules. The first facet of the relationship between the rules that are examined is where FDI screening leads to the granting of State aid. This could occur in connection with privatisation of Stateowned undertakings; FDI screening may lead to the undertaking being sold to the second-best bidder following a disqualification of the best bidder. Such a situation would prior to the entry into force of the EU Screening Regulation lead to State aid to the buyer. Another facet is third country subsidised FDI. Although this topic has not been addressed explicitly during the legislative process leading to the adoption of the The opinions expressed are the authors’ own. G. S. Ølykke (*) and L. T. Christensen Kammeradvokaten/Lawfirm Poul Schmidt, Copenhagen, Denmark e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 769–794, https://doi.org/10.1007/16495_2020_24, Published online: 19 June 2020

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EU Screening Regulation, there are traces of subsidised FDI being an issue of concern, and the EU Screening Regulation in certain ways facilitates that subsidisation of the FDI could be taken into account by the screening Member State. It is concluded that many stones in the relationship between State aid law/third country subsidies and FDI screening are left unturned by the EU Screening Regulation.

1 Introduction: The Relationship Between State Aid Rules and FDI Screening The challenge posed in the other chapters in this section of the edited volume on policy coherence is to examine whether the relevant area of EU law contains rules that pursue similar goals as the EU Screening Regulation.1 EU State aid law, i.e. Articles 107 and 108 of the Treaty on the Functioning of the European Union (hereafter TFEU), does not pursue the same goals as the EU Screening Regulation. Stated briefly, these provisions of the Treaty have as their function to ensure that no individual undertaking is benefitted by State resources without authorisation from the European Commission (hereafter the “Commission”). The reason why it is still interesting to examine FDI screening from the perspective of State aid law is that both sets of rules are concerned with the protection of national industries, albeit from different angles and with opposite points of departure, as will be explained below. Member States may wish to grant State aid to undertakings for two main reasons: to boost their ability to compete nationally and internationally (i.e. through lowering their cost of capital, investment, operation or expansion) or for social reasons to shield them from bankruptcy (e.g. to further local employment policy).2 Article 107(1) TFEU contains a prohibition against State aid. Thus, the main rule is that the use of State aid to protect national industries is not allowed. The purposes thereof at EU level are to ensure a level playing field for European undertakings on the internal market,3 to prevent a subsidy race between Member States4 and to limit State aid as a policy tool to correcting market failures and obtaining European policy

1

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 79/1 21.3.2019, p. I/1 (hereafter: the “EU Screening Regulation”). 2 The phenomenon of granting subsidies to attract FDI is not considered in this Chapter. 3 Commission’s State aid action plan—Less and better targeted state aid: a roadmap for state aid reform 2005–2009, 7 June 2005, COM (2005) 107 final, para. 7 (hereafter: “State aid action plan”) and EU State Aid Modernisation, 8 May 2012, COM (2012) 209 final, para. 2 (hereafter: “SAM”). 4 State aid action plan, para. 8–9, and e.g. Nicolaides (2012).

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goals such as social and regional cohesion, sustainable and technological development and cultural diversity.5 The avoidance of subsidy races are arguably a purpose at national level too, from a budgetary perspective. However, mostly, the EU-level State aid control is a “nuisance” for Member States. Member States screen investments for two main reasons: to avoid foreign ownership of critical assets and to maintain State control with the ownership of such assets. The EU Screening Regulation is only concerned with and thus only legitimises screening of investments from third countries.6 FDI screening and the conditions or prohibitions resulting from such screening has two main effects: that investors are deterred from investing in a Member State (or with the EU Screening Regulation, which also provides certain competences to the Commission, in the EU) and that the investment object remains in national ownership. The purposes of FDI screening at EU level are harmonisation, (international) security policy and reciprocity7—i.e. access for EU undertakings to invest in countries where foreign investors that invest into the EU originate from—whereas the purposes at national level in addition could be, e.g., national security, public order and the retaining of State control over important assets, such as infrastructure for essential services, e.g. electricity, gas water, transport, digital infrastructures etc. The EU Screening Regulation as a main rule allows for State protection against third country ownership of and control over of critical assets.8 Thus, whereas State aid law limits Member States’ room for manoeuvre in the sphere of industrial policy, the new EU Screening Regulation provides an arguably broad room for manoeuvre for Member States to intervene in markets to protect public security and public order. Another interesting difference between the rules on State aid and the EU Screening Regulation is that in the former, the Commission has exclusive competence to declare State aid compatible with the internal market,9 whereas the EU Screening

5

Europe 2020—a strategy for smart, sustainable and inclusive growth, 3 March 2010, COM (2010) 2020 final, p. 20; State aid action plan, para. 10. 6 Article 2(1) of the EU Screening Regulation. Due to the Union’s sole competence with regard to the common commercial policy, cf. Article 3(1) (e) TEUF and Article 207(1) and (2) TEUF, it was considered necessary to create a legal basis for Member States’ already existing screening mechanisms; see Recitals 6 and 7 of the EU Screening Regulation. 7 Recital 5 of the EU Screening Regulation; European Commission (10 May 2017), Reflection paper on harnessing globalization, COM (2017) 240 final, p. 9 and 14; European Commission (13 September 2017), Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union, COM (2017) 487, p. 2. 8 Member States may also screen investments from other EU Member States subject to compliance with the rules on free movement, which only leaves a relatively narrow scope for such screening, cf. e.g. Judgment of the Court of 4 June 2002, Commission v Belgium, C-503/99, EU:C:2002:328. 9 Article 108(3) TFEU.

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Regulation is leaving the competence to decide whether to intervene in FDI to the individual Member States.10 Admittedly, the above comparison of the two areas of law is only at a very general level, but it is sufficient for our purpose, which among others is to suggest that a clash may occur where FDI screening leads to the granting of State aid. This clash has ample grounds, as illustrated above, as the objectives behind the rules and the division of competences between the EU and the Member State differ; however, in practice the clash will most likely create economic risks, which must be handled in the specific transactions, and therefore it is necessary to put it on the agenda. In this context, it is notable that the relationship between the EU Screening Regulation and the provisions on State aid in the Treaty has not been examined in the legislative process leading to the adoption of the EU Screening Regulation, where consistency with other Union policies – such as free movement law,11 the Merger Regulation12 and sector regulation—was explicitly considered.13 On this background, it is useful to consider the relationship between FDI screening and State aid rules. The relationship may be characterised as multifaceted, first, because the State’s intervention in the sale of undertakings, shares or other assets may in some circumstances create an advantage through the transfer of State resources either for the buyer, for the seller, for the assets sold or for several of these at the same time. Thereby, the State’s intervention in the sale of private assets or political influence on the sale of public assets could—aside from restricting the free movement of capital—give rise to State aid in the sense of Article 107(1) TFEU. This provision stipulates that: Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.

The cumulative conditions in Article 107(1) TFEU are usually summarised to require that State aid is granted when a transaction involves (1) a transfer from a State or through State resources, which (2) is imputable to the State, and provides (3) an economic advantage to (4) an undertaking (economic activity), which may cause (5) a distortion of competition when (6) trade between Member States is affected. For the purpose of the analyses in this chapter, it will be assumed that 10 Recital 8 of the EU Screening Regulation. This might, as indicated in this volume by Korte, In search for an EU Competence to Establish an Investment Screening Mechanism and Restricting Effects Flowing from Fundamental Freedoms, Fundamental Rights, and other EU Primary Law, contradict Article 207(1) TFEU which requires that “[t]he common commercial policy shall be based on uniform principles. . .”. 11 Articles 49 TFEU on establishment and Article 63 TFEU on free movement of capital. 12 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings, OJ L 24, 29.1.2004, p. 1 (hereafter: the “Merger Regulation”). 13 European Commission (13 September 2017), Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union, COM (2017) 487, pp. 4–8.

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conditions 4–6 are fulfilled. In Sect. 2, it will be discussed how and when the remaining conditions 1–3 may be fulfilled in situations where an FDI screening mechanism exists. Second, the buyer of an asset in the EU may be privileged by subsidies received in its country of establishment (inside or outside the EU), which enables it to outbid other potential buyers (from the EU). This situation is only within the scope of EU State aid law if the buyer receives State aid from an EU Member State. This problem is not further addressed in this chapter because it falls outside the FDI theme. The Commission would have competence to investigate such aid, declare it unlawful14 and incompatible with the internal market and ultimately order its repayment from the beneficiary.15 Thus, in this part of the analysis, focus will be on whether EU law regulates buyers receiving subsidies from third countries to fund the purchase. In such situations, EU State aid law does not apply; according to its wording, Article 107 TFEU only applies to aid granted by “Member States”.16 In Sect. 3, it will be examined whether the EU Screening Regulation or other EU law may be applied to prevent distortion of competition in the EU from subsidies granted to buyers of European assets from third countries. It is concluded in Sect. 4 that the risk of granting State aid is pertinent when FDI screening is conducted in the context of privatisation of State-owned undertakings and that even though third country subsidisation of an FDI is not explicitly regulated by the EU Screening Regulation, some of the provisions in the EU Screening Regulation seem to support concerns about threats to competition in the national or the internal market; it is submitted that it will be difficult to discern such threats from the threat to security and public policy inherent in control by certain foreign governments.

State aid is “unlawful” if it has not been notified to the Commission in accordance with Article 108(3) TFEU, or if it has been paid to the beneficiary prior to the Commission’s decision to find it compatible or incompatible with the internal market. 15 The procedural rules governing the Commission’s investigatory powers are codified in Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union, OJ L 248, 24.9.2015, p. 9. 16 In this sense, Article 107 TFEU has a narrower scope of application than EU competition law (Articles 101 and 102 TFEU), which broadly stated apply whenever behavior of undertakings distorts competition and affects trade between Member States, irrespective of the undertakings’ place of establishment. This was much discussed in academic literature in the 1990s. More recent contributions include e.g. Danov (2014), pp. 430–436 and Scott (2014), pp. 1343–1380. 14

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2 When Does FDI Screening Lead to the Granting of State Aid? Although the EU Screening Regulation rightfully enables Member States (and the Commission) to take into account the context and circumstances of a foreign direct investment, in particular whether a foreign investor is controlled directly or indirectly, for example through significant funding, including subsidies, by the government of a third country or is pursuing state-led outward projects or programmes, the FDI regulation may also create situations that prior to the entry into force of the regulation would have been contrary to the State aid rules.17 In this section, the multifaceted relationship between the EU Screening Regulation and the State aid rules will be carefully examined. Of particular interest is a potential clash between the two sets of rules, which may appear. It has been decided to delineate the analyses to focus on the effect of the rules following a Member State’s privatisation of a state-owned undertaking (Sect. 2.1) and a Member State’s intervention in a sale of privately owned undertakings (Sect. 2.2) as these situations are most illustrative of the potential clash between the two sets of rules.

2.1

Privatisation of a State-Owned Undertaking

Privatisations of state-owned undertakings have in recent years presented new and challenging State aid questions, which are likely to become even more complex with the introduction of the EU Screening Regulation. When carrying out a privatisation, Member States must ensure that privatisation procedures are State aid compliant to avoid creating an economic advantage (third condition of Article 107 (1)) through the transfer of state resources (first condition of Article 107) either for the buyer, for the seller, for the assets sold or for several of these at the same time. In order to provide guidance for Member States on how to carry out a privatisation process in accordance with the State aid rules, the Commission has laid down a number of conditions that should be complied with during a privatisation process.18 In 2012, the Commission issued a working document on State-aid-compliant financing, restructuring and privatisation of State-owned enterprises to provide guidance within this area. The document is the successor of the 1993 Competition report, which lays down certain principles that should be complied with during a

17 Article 4 (2) (a) of the EU Screening Regulation. See also the Regulation’s preamble recital 13 and 23. 18 The Commission’s, XXIIIrd Report on Competition Policy 1993, pp. 255–256 and Commission Staff Working Document: Guidance on state-aid compliant financing, restructuring and privatisation of State-owned enterprises, 10 February 2012, SWD (2012) 14 final, p. 11.

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privatisation process. Despite being soft law, the working document codified several relevant principles developed by the Union courts and the Commission, respectively. The key principle to comply with in order to secure a State-aid-free privatisation process is the Market Economy Investor Principle (MEIP), which in a privatisation context translates into the Market Economy Vendor Principle (MEVP). According to this principle, a Member State avoids granting an economic advantage where the Member State ensures that all its actions are carried out in accordance with the conduct of a comparable private vendor.19 The general assumption put forward by the Commission is that a private vendor intending to sell his undertaking would do so for the highest possible price— “highest-bid criterion”.20 Case law and the Commission’s “guidelines” show that the Commission operates with three categories of privatisation procedures: 1. Initial public offering (IPO) or sale of securities on the stock exchange 2. Trade sale by published competitive tender outside the stock exchange 3. Sale by use of any other procedure than 1 and 221 The highest bid criterion applies irrespective of the choice of privatisation process. The principle implies that a Member State must accept the highest bid and not act to protect national assets/undertakings based on non-economic grounds, which would be irrelevant to a diligent private vendor, such as retaining critical infrastructure on national hands.22 This all-economic focus of the State aid rules 19 Landmark cases include; judgment of the Court of First Instance (Third Chamber) 12 December 2000, Alitalia v. Commission, T-296/97, EU:T:2000:289; judgment of the Court of First Instance (Second Chamber) of 6 March 2003, Westdeutsche Landesbank v. Commission, joined cases T-228/99 and T-233/99 EU:T:2003:57; judgment of the Court of 10 July 1986, Belgium v. Commission, C-234/84, EU:C:1986:302; judgment of the Court of 14 September 1994, Spain v. Commission, C-278/92, EU:C:1994:325 and judgment of the Court (Grand Chamber) of 19 March 2013, Bouygues and Bouygues Télecom v. Commission and Others, joined cases C-399/10 and 401/10 P, EU:C:2013:175. 20 Even when an undertaking is sold to the highest bidder, the sale may still involve State aid, where the highest bid does not reflect market price, see Commission Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union (2016/C 262/01), (hereafter “Notion of aid”), para 93. For the sake of simplicity this issue will not be further dealt with in this Chapter. 21 According to Article 108(3) TFEU only measures involving aid must be notified to the Commission. In its guidance paper the Commission believes all measures, which do not follow the two safeharbour procedures must be notified for the sake of legal certainty. However, it must be noted that the requirement only relates to state aid; therefore, a Member State is under no obligation to notify if it has created a state aid free privatisation process. 22 The Commission’s previous case law includes other examples of the distinction between Member States acting in their capacity as a public authority and Member States acting in their capacity as private shareholders. In Commission Decision of 27 February 2008 on State aid C 46/07 (ex NN 59/07) Automobile Craiova, 2008/717/EC, (OJ L 239, 6.9.2008, pp. 12–25) the Commission determined that conditions attached to the privatisation of an automobile manufacturer by the Romanian government had lowered the sales price and deterred other potential bidders from submitting a bid, thereby not meeting the MEVP, as a private vendor would never impose conditions, which could lower the sales price. The case concerned Automobile Craiova, an

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leaves no room for political influence or considerations as it requires Member States to refrain from pursuing objectives in their capacity as a public authority.23 The implications of the application of the principle are most clearly illustrated by the Bank Burgenland case. The case concerned the privatisation of Bank Burgenland,24 which was owned by an Austrian province.25 The privatisation process was carried out as a tender with certain criteria to be met, including (1) the possibility of obtaining an authorisation from the Austrian Financial Market Authority, (2) reliability of the purchase price payment, (3) avoidance of the use of a state guarantee (for failing banks) provided by Austria and (4) transaction security. Two bidders, one being GRAWE (an Austrian undertaking) and the other being an Austro-Ukrainian Consortium, made binding offers. GRAWE offered a purchase price of EUR 100.3 million, which was significantly lower than the offer received from the Consortium with a purchase price of EUR 155 million. The highest bid was rejected by the Austrian province, referring to insecurity as to the reliability of the purchase price offered by the Consortium, the risk of the Consortium not being able to obtain the necessary permits and the continued operation of Bank Burgenland while avoiding risks stemming from a guarantee provided to the bank by the province during the financial crisis. Following a complaint from the Consortium, the Commission opened a formal investigation procedure of the sale.26 The Commission found it clear that there was no reason to doubt that the Consortium could pay the purchase price or any indications that the necessary permits could not be obtained. According to the

automobile undertaking, in which the Romanian government held a stake of 72,4% of the shares. When the government in 2007 decided to privatise the undertaking, and sell its remaining shares, several award criteria were set. The criteria consisted of requirements to ensure a certain minimum production and investment level. The Commission noted that “the highest possible price can normally only be achieved if no conditions are attached which would potentially reduce the sales price and which would not be acceptable for a market economy operator”. Furthermore, the Commission believed the requirements concerning the number of employees were also made part of the sale. These criteria were found by the Commission to be liable to have a negative impact on the sales price and therefore not meeting the MEVP principle. The Commission’s point of view is also reflected in judgment of the Court of 14 September 1994, Spain v. Commission, joined Cases C-278/92 to C-280/92, EU:C:1994:325, para. 22 and judgment of the Court 28 January 2003, Germany v Commission, Case C-334/99, EU:C:2003:55, para. 134. This has also been carefully assessed in Jaeger (2008) p. 631. 23 Competing bids must be comparable, see judgment of the General Court of 13 December 2011, Konsum Nord v Commission, T-244/08, EU:T:2011:732, paras. 67–75 24 Judgment of the Court (Second Chamber), 24 October 2013, Land Burgenland and Others v Commission, joined cases C-214/12P, C-215/12 P and C-223/12 P, EU:C:2013:682. 25 State resources include all resources of the public sector including resources of intra-State entities (decentralised, federated, regional or other). It is irrelevant whether or not an institution within the public sector is autonomous, see Notion of aid para 48. 26 State aid for the privatisation of HYPO Bank Burgenland AG (C 56/2006 (ex NN 77/06)), Commission decision to open the formal investigation procedure, (OJ C 28, 8.2.2007, p. 8). See also Commission Decision of 30 April 2008 on State aid C 56/06 (ex NN 77/06) implemented by Austria for the privatisation of Bank Burgenland, 2008/719/EC, (OJ L 239, 6.9.2008, p. 32).

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Commission, by selling Bank Burgenland to the lower bid offered by GRAWE, Austria had unlawfully granted State aid to GRAWE (the buyer), the amount of which corresponded to the difference between the two offers submitted by GRAWE and the Consortium, respectively. Accordingly, the Commission required Austria to recover EUR 55 million from GRAWE.27 The Commission’s decision was upheld by the General Court and the Court respectively. The Court noted that in respect of State aid rules:28 where a public authority proceeds to sell an undertaking belonging to it by way of an open, transparent and unconditional tender procedure, it can be presumed that the market price corresponds to the highest offer provided that it is established first that the offer is binding and credible, and, secondly, that the considerations of economic factors other than the price is not justified.

The Bank Burgenland judgment illustrates how Member States when acting within the sphere of the State aid rules may only take other factors than the price into consideration where these factors would also have been considered by a private vendor. However, following the introduction of the EU Screening Regulation and the introduction of the possibility of screening potential investors, cases like the privatisation of Bank Burgenland could turn out differently. One could imagine a situation where the EU Screening Regulation had entered into force prior to the sale of Bank Burgenland. Austria would have found itself in a situation where it could have chosen to conduct a screening procedure of the Ukrainian undertakings taking part in the Consortium to establish whether these undertakings were under the influence of the Ukrainian Government and presenting a threat to public security and public order. Admittedly, the mere State funding of a foreign undertaking does not provide a solid legal basis for a Member State to reject an investment and/or investor. The Member State would also have to substantiate that the foreign direct investment is likely to affect security or public order.29 If Austria had been able to establish that public order or security was affected—for instance where it could be argued that Bank Burgenland had access to sensitive information, including personal data, or the ability to control such information30—Austria would within the EU Screening Regulation have had the right to reject the Consortium’s offer and sell the bank to GRAWE, irrespective of the fact that GRAWE had presented an offer approximately EUR 55 million below the offer presented by the Consortium. This would inevitably lead to GRAWE receiving an economic advantage, which under normal circumstances would be caught by the prohibition in Article 107 (1) TFEU as established by the Bank Burgenland judgment.

27

Commission decision 2008/719/EC, Article 2 (1), cf. Article 1. Judgment of the Court (Second Chamber) of 24 October 2013, Land Burgenland and Others v Commission, joined cases C-214/12P, C-215/12 P and C-223/12 P, EU:C:2013:682, para 94. 29 Article 4 (1) and (2) of the EU Screening Regulation. 30 Article 4 (1) (d) of the EU Screening Regulation. 28

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As mentioned in the introduction, the potential clash between Article 107 (1) TFEU and the EU Screening Regulation has not been examined in the legislative process leading to the adoption of the EU Screening Regulation. No guidance has therefore been provided by the Commission on how to address and carry out a privatisation case, like that of the Bank Burgenland, following the entry in force of the EU Screening Regulation. Going forward, it will be interesting to see how the Commission will choose to address this potential clash. One way of securing a peaceful coexistence between the two sets of rules could be to consider the FDI screening a pre-qualification of potential bidders. By using FDI screening as a pre-qualification, Member States could develop a list of qualified bidders, which would then receive an invitation to bid. By carrying out the screening and disqualifying bidders prior to the actual bidding, Member States would be able to ensure that the highest bid can—and will—be chosen. However, this method does not ensure that the MEVP is observed as disqualified bidders may have offered a higher price, which would indicate that the sales price does not amount to the market price (the State-aid-compliant price). Member States could therefore be forced to verify through additional means, e.g. by a valuation or fairness opinion that the outcome (the final bid) corresponds to the market price. Another way of aligning these two sets of rules would be to consider any bid offered by a bidder, which could not pass a later FDI screening, as a nullity. However, this method would also not be sufficient to ensure that the MEVP is observed. Furthermore, by allowing bidders to place their bids prior to the FDI screening, it will become apparent—in a situation like the Burgenland case—the difference between the highest bid and the actual purchase price. The Commission has yet to determine how the alignment of the rules should play out. In a recent German case, the Commission had to consider whether Kreditanstalt für Wiederaufbau (hereafter KfW), a State-owned German bank, had observed the MEIP when buying a 20% share of the power-distributing undertaking Eurogrid International (hereafter “Eurogrid”). Eurogrid is the holding undertaking of the German transmission system operator 50Hertz Transmission GmbH (hereafter “50Hertz”). Prior to KfW’s purchase, an Australian infrastructure fund (IFM), which held a 40% stake of Eurogrid, had announced that it wanted to sell a 20% share. However, the majority shareholder of the Eurogrid, Belgian State-owned undertaking Elia, had a “right of first refusal”, which granted them priority in such deals. The Belgian group decided to use this right of refusal to increase its share from 60 to 80%.31 The 20% share was sold at a price of EUR 989 million in March 2018. In May 2018, the IFM announced that it intended to divest the remaining 20% of its shareholding in Eurogrid to the State Grid Corporation of China (SGCC), which is a Beijing-backed undertaking. With IFM now selling the remaining one fifth of the shares, Elia once again invoked its priority to buy it; however, this time Elia immediately resold the share to the State-owned German bank KfW for a price of

31 The Elia Group operates under the legal entity Elia System Operator, a listed undertaking whose core shareholder is the municipal holding company PubliT.

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EUR 991 million, which was equivalent to the price offered by the SGCC.32 Prior to the purchase of the remaining 20% shareholding, the German ministries of economy and finance had announced that the purchase was motivated by “considerations of security policy”.33 The acquisition did not give rise to a formal notification from Germany. This stand appears not to have been contested by the Commission.34 Although the German purchase of the remaining 20% share in Eurogrid seems to be borne by the same reasoning as reflected in the EU Screening Regulation, the case can hardly be considered a precedent for the Commission’s future stand in cases where the EU Screening Regulation might collide with the State aid rules. First, in the German case, the bids offered by KfW and the SGCC were identical. Unlike the Burgenland case, there were no grounds for claiming that the KfW received an economic advantage. Second, one might keep in mind that the State aid rules, in contrast to the Treaty’s rules on free movement, do not require that Member States adhere to the principle of non-discrimination. Once it has been determined that no economic advantage is present, the Commission cannot—within the sphere of the State aid rules—require that a Member State choose a specific buyer. As pointed out in the beginning of this chapter, Articles 107 and 108 of the Treaty have as their sole function to ensure that no individual undertaking is benefitted by State resources without authorisation from the Commission. Where a Member State chooses to match a bid for a share of an undertaking rather than letting a foreign undertaking acquire said share, this situation may only be caught by the State aid rules, where it can be established that the price paid by the Member State does not correspond to “market price”. Member States may therefore still find themselves in a no man’s land with no proper guidance from the EU institutions when privatising State-owned undertakings while also carrying out FDI screenings. Furthermore, the lack of guidance can enable Member States to use FDI screenings to circumvent State aid rules, where bids are placed by certain third country undertakings.

2.2

Sale of a Private Undertaking

Although private undertakings and assets etc. are not typically under the control of a Member State and any economic advantage granted in the process of a sale as a rule will not be granted by the use of State resources or actions that are imputable to the

32 Rumour has it that the German Government put pressure on Elia to invoke its right of refusal. See to the extend Deutsche Welle (27.07.2018), Berlin beats Chinese firm to buy stake in 50Hertz power company and Montel News (23.3.2018), Elia increases stake in German TSO 50Hertz for EUR 980m. 33 Deutsche Welle (27.07.2018), Berlin beats Chinese firm to buy stake in 50Hertz power company. 34 Ibid.

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Member State (conditions 1 and 2 of Article 107), a sale of a private undertaking and/or assets could, following the entry into force of the EU Screening Regulation, potentially experience the same clashes as described in Sect. 2.1 above. The last 20 years have shown an increased privatisation of State-owned undertakings within the energy, postal and telecommunication sector. Despite this, still Member States have sought to maintain some sort of control over these vital infrastructure elements. In this context, the concept of “golden shares” started to emerge.35 The concept dates all the way back to the 1980s and served the purpose of maintaining control of newly privatised undertakings during the process of adjusting these undertakings to the free market environment, and of even more importance, golden shares have been used by Member States to prevent takeovers by foreign shareholders of previously public-owned undertakings operating in strategically important fields of national interest. In the beginning of the millennium, the Court handed down several judgments significantly limiting the possibility for Member States to use golden shares as a mean of protection of foreign investors.36 The less involvement and influence a Member State holds over an undertaking, the less the possibility is of invoking the State aid rules. However, the entry into force of the EU Screening Regulation has, as described above, sparked a potential clash between the State aid rules and the EU Screening Regulation. It must therefore be considered how this clash will affect a sale of a private undertaking. The EU Screening Regulation may also be applied to screening of investors seeking to acquire a private undertaking. This could be the case where a Member State has privatised, e.g., a power grid, which is later resold to a bidder, which is subject to an FDI screening. Where such a screening results in a situation where a Member State insists on disqualifying a buyer, it should be assessed whether the (cumulative) conditions of Article 107 (1) are met. It seems apparent that an economic advantage could be granted to a second-best (and qualified) bidder (and final buyer) of a power grid, where the highest bidder has been disqualified following an FDI screening. However, it is not apparent that this advantage comes from State resources (condition 1 of Article 107). This may lead to a situation where an undertaking (second-best bidder) obtains an economic advantage—due to the actions of a Member State, although a sale of a private undertaking typically does not fall within the scope of the rules. As described in Sect. 2.1 above, there appears to be two ways of securing that the State aid rules do not affect the sale of a private undertaking (or a state-owned

35

See also in this volume Papadopoulos, What Role for EU Company Law in Screening Foreign Investment? 36 Judgment of the Court of 4 June 2002, Commission v Portugal, C-367/98, EU:C:2002:326; judgment of the Court of 4 June 2002, Commission v France, C-483/99, EU:C:2002:327; judgment of the Court of 4 June 2002, Commission v Belgium, C-503/99, EU:C:2002:328; judgment of the Court (First Chamber) of 28 September 2006, Commission v Netherlands, C-282/04, EU: C:2006:608, and judgment of the Court (First Chamber) of 11 November 2010, Commission v Portugal, C-543/08, EU:C:2010:669.

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undertaking) following an FDI screening. One way of securing a peaceful coexistence between the two sets of rules could be to consider the FDI screening a pre-qualification criterion for potential bidders. Another way of aligning these two sets of rules would be to consider any bid offered by a bidder, which could not pass a later FDI screening, as a nullity. However, as carefully described under Sect. 2.1, the former appears to be the most appropriate solution.

2.3

Comments

Although the relationship between the EU Screening Regulation and the provisions on State aid in the Treaty has not been examined in the legislative process leading to the adoption of the EU Screening Regulation, it seems likely that a potential clash of the rules may occur, most likely in a situation where a Member State seeks to privatise a State-owned undertaking and receives the highest bid from third country undertakings, which is subject to FDI screenings. How this clash should be addressed has yet to be determined; however, it seems apparent that it must be addressed going forward.

3 Does EU Law Regulate Distortion of Competition Caused by Subsidies from Third Countries to Buyers of European Assets? From the perspective of the national or European industry, competition may be distorted in at least two ways if a foreign direct investor is subsidised by the government in its country of establishment: first, because the foreign direct investor will be able to offer an artificially high price for the relevant asset and, second, because the activity may be subsidised indirectly as the full cost of buying the asset will not be reflected in the price of goods or services sold on the market, which may provide a competitive advantage in competition with other undertakings on the internal market. From the perspective of Member States, subsidies to buyers from third countries may raise concerns of potential control of the asset by a foreign State; i.e., the buyer is an intermediary for a foreign State. Furthermore, Member States may, in the same way as potential EU buyers, fear that the national (or EU-level) industry will be outcompeted.

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An additional concern that is perhaps more topical in the context of social and labour law—an issue that has high priority in, e.g., procurement law37—is the future supply chains of undertakings bought by third country buyers. In this section, it will be examined to what extent this kind of distortion of competition may be prevented by existing EU rules and whether it may be necessary to consider adopting additional measures. The matter is complex, and the scope of the examination will most likely not capture all possible perspectives. It has been decided to delineate the analysis to focus on the EU Screening Regulation, as it is the subject matter of this book (Sect. 3.1), and on EU trade defence measures that implement, among others, the WTO regulation of subsidies (Sect. 3.2), as these rules are the most obvious basis for regulating the matter of government subsidies to foreign direct investors.38

3.1

The EU Screening Regulation

The EU Screening Regulation provides legal basis for Member States to maintain or establish FDI screening mechanisms.39 It does not regulate which FDI Member States can screen,40 and it does not regulate whether the screening is conducted ex ante or ex post. Furthermore, it does not regulate the consequences of a negative screening. These decisions are left to the Member States, which in their decisionmaking must comply with the treaties. The EU Screening Regulation also does not explicitly regulate foreign-government-subsidised FDI. Due to the Commission’s

37 Cf. Articles 18(2), 56(1), 57(4) (a), 69(2) (d) and (3), and 71(1) and (6) in Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC, (OJ L 94, 28.3.2014, p. 65). 38 The financing of the investment—i.e. whether it is subsidies by the country of origin—is not addressed directly in other international treaties, e.g. Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID), available at: https://icsid.worldbank. org/en/Documents/icsiddocs/ICSID%20Convention%20English.pdf (last accessed 6 January 2020), which establishes a dispute settlement body to handle disputes between foreign direct investors and the host States, or the Convention Establishing the Multilateral Investment Guarantee Agency (MIGA Convention), available at: https://www.miga.org/sites/default/files/archive/Docu ments/MIGA%20Convention%20(April%202018).pdf (last accessed 6 January 2020), which establishes an institution providing access to insurance against e.g. political risk for foreign direct investors. Furthermore, typically the financing of the transaction would not be addressed in Bilateral Investment Treaties (BIT) are inter-governmental agreements governing disputes between foreign direct investors and host States—rather BIT typically protects the (physical) security of the FDI and the foreign direct investor against expropriation. ICSID has jurisdiction in BIT disputes. Regulation (EU) 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries, (OJ L 351, 20.12.2012, p. 40), regulates the entry into BIT by EU Member States and third countries. 39 Article 3(1) of the EU Screening Regulation. 40 Article 1(3) of the EU Screening Regulation.

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sole competence in the common commercial policy, cf. Article 2(1) TEU, Member States may be prevented from pursuing other objectives in their FDI screening than those of protecting security and public policy.41 The concepts of security and public order are not defined in the EU Screening Regulation, and even though ample case law exists as to the (narrow) content of the concepts in free movement law, it is not evident that the concepts have the same meaning in the regulation of FDI. Protection of competition on the internal market is clearly not within the scope of the legitimate aim of protecting “security”, but in this section it is examined whether it may be within the scope of protecting “public policy” contained in the EU Screening Regulation.42 To examine whether the EU Screening Regulation leaves room for manoeuvre for Member States to prevent foreign-State-subsidised FDI with the aim of protecting competition in the internal market, the provisions of the EU Screening Regulation that concern the funding of FDI will be analysed. The EU Screening Regulation provides the available legitimate objectives that may justify rejecting FDI—i.e. public security and public policy—and in Article 4, it lists factors, albeit not exhaustively, that may be considered by Member States in the assessment of whether attaining the legitimate objectives is jeopardised. In Sect. 3.1.1, it is examined whether Article 4 may be applied by Member States to prevent foreign-State-subsidised FDI. Furthermore, the EU Screening Regulation regulates the cooperation between Member States and the Commission in relation to FDI screening. In Sect. 3.1.2, it is examined whether Article 9 on information obligations may be used by a Member State to prevent foreign-State-subsidised FDI. In Sect. 3.1.3, findings are summarised and comments are made.

41

Including national security and other essential security interest, as mentioned in Article 1(2) of the EU Screening Regulation. It is outside the scope of this contribution to consider the possible consequences for Member State of stepping outside the specific boundaries of the EU Screening Regulation in terms of pursuing other goals than preservation of security and public order. 42 In this volume Martin Nettesheim, argues that distortion of competition is regulated by competition law. This is entirely true with regard to the behaviour of acquired undertakings on the internal market, subsequent to the FDI. However: (1) foreign State subsidy of the investment in or acquisition of European assets is as mentioned above in Sect. 1 not “State aid” in the sense of Article 107(1) TFEU, and (2) assessments under competition law, i.e. Article 101 and 102 TFEU and national equivalents, are made on the basis of the cost undertakings incur; foreign State subsidies lower costs in a way which is not addressed by competition law. The question addressed in this section is whether this void is filled by the EU Screening Regulation.

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Article 4 of the EU Screening Regulation

The factors that may be taken into account by Member States in the assessment of whether an FDI is likely to affect security or public policy are provided in Article 4 of the EU Screening Regulation, which has two sections: Article 4(1) describes factors relating to the critical asset, and Article 4(2) describes factors related to the characteristics of the investor. Only the latter contains a factor of interest for the present analysis as Article 4(2) (a) states that: 2. In determining whether a foreign direct investment is likely to affect security or public order, Member States and the Commission may also take into account, in particular: (a) whether the foreign investor is directly or indirectly controlled by the government, including state bodies or armed forces, of a third country, including through ownership structure or significant funding;[. . .].43

From a literal interpretation, this provision addresses the concern of influence on critical assets from foreign governments—the kind of influence that could follow from ownership or funding of an undertaking. However, it is not as such concerned with the funding of the specific FDI and any distortion of competition such funding might entail. Teleological interpretation would not provide a broadening of the scope of the provision to our avail as the stated purpose of the EU Screening Regulation is to enable Member States to protect security and public order and not to protect a level playing field and competition on the internal market. Retreat is made to subjective interpretation where the preparatory works of the EU Screening Regulation however provide some insights. One of the policy recommendations in the opinion of the European Committee of the Regions is interesting as it touches directly on question of financing of the FDI transaction:44 THE EUROPEAN COMMITTEE OF THE REGIONS ... 39. stresses that justifying a restriction on FDI for national security and public order reasons is different from restricting it for fears of market distortion and calls on the Commission to ensure that the mechanism is not used as a disguised protectionist measure; notes in this respect that an FDI screening mechanism that restricts investments simply because the FDI is subsidised cannot be sufficient grounds for blocking an investment and that it has to prove that the FDI at hand is part of strategic or national industrial goals of a foreign state;[. . .].45

43

Our emphasis. Opinion of the European Committee of the Regions of 23 March 2018 on Trade Package, OJ C 247, 13.07.2018, p. 28. The date of the opinion is not mentioned in the document, but is available from letter of 22 February 2019 from the Council to the permanent representatives committee of the Council, available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri¼CONSIL:ST_ 6551_2019_INIT&from¼EN (last accessed 6 January 2020). 45 Our emphasis. 44

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It may be noted that subsidisation of the FDI transaction is mentioned in the context of (national?) protectionism and not in the context of the impact of third country subsidies on competition in the internal market. This policy recommendation from the Committee of the Regions is not explained further. A guess could be that it may be related to the objective of the EU Screening Regulation and to the distinction between commercial policy and industrial policy. The policy recommendation is directed at the Commission’s supervision or enforcement of the EU Screening Regulation and is—maybe also for that reason—not directly reflected in the EU Screening Regulation. The practical importance of the policy recommendation is difficult to predict, but if nothing else it shows that the Committee of the Regions is of the opinion that subsidisation of FDI transactions is not endangering security or public policy and therefore should not be a ground for rejecting or restricting FDI. Subsequent to the opinion of the Committee of the Regions, the European Parliament’s Committee on Economic and Monetary Affairs for the Committee on International Trade suggested that the following wording was inserted to the recital of the preamble of the EU Screening Regulation relating to Article 4:46 Member States and the Commission should also take into account whether a foreign investor is controlled directly or indirectly (e.g. through significant funding, including subsidies, preferential tax treatment, guarantees or investments by State funds etc.) by the government of a third country or whether that foreign investor is beneficially owned by such a government.47

The Parliament’s Committee on Industry, Research and Energy for the Committee on International Trade suggested that the preamble and Article 4(2) of the EU Screening Regulation should contain the following wording:48 Member States and the Commission shall take account of whether the foreign investor is. . .corroborated through significant funding and subsidies, extended credit and lending by the government of a third country or a state-owned financial institution.49

46

OPINION of the Committee on Economic and Monetary Affairs for the Committee on International Trade on the proposal for a regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union (COM(2017)0487 – C8-0309/2017 – 2017/0224(COD)), 5. April 2018, Amendment 9, available at: http://www.europarl.europa.eu/RegData/commissions/econ/avis/2018/615441/ECON_AD(2018) 615441_EN.pdf (last accessed 6 January 2020). 47 Emphasis in the original. Emphasis indicated the amendments suggested. 48 Opinion of the Committee on Industry, Research and Energy for the Committee on International Trade on the proposal for a regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union (COM(2017)0487 – C8-0309/2017 – 2017/0224(COD)), 25 April 2018, Amendments 7 and 29, available at: http:// www.europarl.europa.eu/RegData/commissions/itre/avis/2018/615451/ITRE_AD(2018)615451_ EN.pdf (last accessed 6 January 2020). 49 Emphasis in the original. Emphasis indicates the amendments suggested. Wording for the preamble was “should” rather than “shall”. Otherwise the suggested wording was identical for the preamble and Article 4(2).

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Both committees thus seem to emphasise the possible influence by third country governments through financial support to the buyer. It is not possible to discern whether the concern relates to the financing of transaction or the financing of future operation, and the perspective might depend on the specific FDI. Nevertheless, on this background and considering the specific committees suggesting the mentioned amendments, it seems some concerns that might be interpreted as relating to distortion of competition in the internal market were voiced in the legislative process. However, none of the suggested amendments were included in the final amendments adopted by the Parliament.50

3.1.2

Article 9 of the EU Screening Regulation

Article 9 of the EU Screening Regulation regulates which information Member States should include in their notification of any FDI screening to other Member States and to the Commission and which information Member States or the Commission may request concerning any FDI, if it is not screened by the relevant Member State. Article 9(1) and (2) (e) of the EU Screening Regulation states: 1. Member States shall ensure that the information notified pursuant to Article 6(1) or requested by the Commission and other Member States pursuant to Articles 6(6) and 7 (5) is made available to the Commission and the requesting Member States without undue delay. 2. The information referred to in paragraph 1 shall include: (a) the ownership structure of the foreign investor and of the undertaking in which the foreign direct investment is planned or has been completed, including information on the ultimate investor and participation in the capital; ... (e) the funding of the investment and its source, on the basis of the best information available to the Member State;[. . .].51

50 European Parliament legislative resolution of 14 February 2019 on the proposal for a regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union (COM(2017)0487 – C8-0309/2017 – 2017/0224(COD)), First Reading, available at: http://www.europarl.europa.eu/RegData/seance_pleniere/textes_ adoptes/provisoire/2019/02-14/0121/P8_TA-PROV(2019)0121_EN.pdf (last accessed 6 January 2020). 51 Our emphasis.

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This information relates to ownership structure and the funding of the FDI transaction itself. The provision was included in the Commission’s proposal for the EU Screening Regulation.52 In the proposal, it is explained that:53 Such minimum level of information on a foreign direct investment should be made available by a Member State upon request of another Member State, or the Commission. Relevant information includes aspects such as the ownership structure of the foreign investor, and the financing of the planned or completed investment, including, when available, information about subsides granted by third countries.

It is not explained why there is a difference between the factors that may be taken into account according to Article 4 of the EU Screening Regulation, cf. above Sect. 3.1.1, and the information that may be requested about FDI in other Member States. Article 4 of the EU Screening Regulation is focused on the ownership and financial structure of the buyer—i.e. on present and future government control/influence— whereas the information that Member States may request from other Member States regarding FDIs on their territory according to Article 9 focuses on ownership and the financing of the FDI transaction itself. Other information that must be supplied to other Member States and the Commission includes information about the products, services and business operations of the foreign investor and of the undertaking in which the FDI is made, as well as the geographical markets that the investment object operates on.54 On the basis of the information that must be made available, it is difficult to imagine how threats from control by foreign governments may be convincingly discerned from threats to competition in the national or the internal market. The Committee on Industry, Research and Energy for the Committee on International Trade suggested to specify that the information should relate to the lawfulness of the financing of the FDI transaction, but these suggestions did not result in amendments to the text originally proposed by the Commission.55 The suggestion is not further elaborated but was included in the Parliament’s common proposal for amendments.56 However, it was not included in the EU Screening Regulation as

52

European Commission (13 September 2017), Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union, COM (2017) 487, Article 10. 53 Ibid p.14. 54 Article 9(2) (c) and (d) of the EU Screening Regulation. 55 Opinion of the Committee on Industry, Research and Energy for the Committee on International Trade on the proposal for a regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union (COM(2017)0487 – C8-0309/2017 – 2017/0224(COD)), 25 April 2018, Amendment 59, available at: http://www. europarl.europa.eu/RegData/commissions/itre/avis/2018/615451/ITRE_AD(2018)615451_EN.pdf (last accessed 6 January 2020). 56 Report on the proposal for a regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union, Amendment 76, available at: http://www.europarl.europa.eu/RegData/seance_pleniere/textes_deposes/rapports/ 2018/0198/P8_A(2018)0198_EN.pdf (last accessed 6 January 2020).

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adopted. Thus, nothing may be inferred from the suggestion to focus on the lawfulness of the financing of the FDI.

3.1.3

Comments

Nothing in the text of Article 4 or 9 of the EU Screening Regulation or in the preparatory works speaks very clearly about whether distortion of competition by third country government subsidisation of an FDI may be interpreted as “likely to affect security or public order”, thus rendering it a valid ground for Member States to reject an FDI. However, the impression from the analysis above is slightly schizophrenic as the information Member States are required to share about FDI in their territory provides ample scope for the Commission and other Member States to at least take into account a possible distortion of competition on the internal market emanating from the financing of the FDI transaction in their assessment. Needless to say, the information will also be available for the Member State in which the FDI is made. How this information will be used and where boundaries will be set for concerns regarding distortion of competition on the internal market stemming from third country government subsidies remains to be seen. Based on the analysis, what can be said is that the issue of distortion of competition seems to have been considered at some level, but it is likely that a (potential) distortion of competition in the internal market on its own will not be a legitimate ground for rejection of an FDI.

3.2

Trade Defence Measures

Trade defence measures are measures enacted to ensure a level playing field for imported products and national products. Article XVI of GATT 1994 specifically addresses subsidies granted to provide advantages for producers of goods, which translates into promotion of export and/or protection of national markets against imports.57 It is accompanied by the Agreement on Subsidies and Countervailing Measures,58 which puts flesh to its bones.

57 Article XVI of GATT 1994 (text of the provision and interpretative text is available at: https:// www.wto.org/english/res_e/publications_e/ai17_e/gatt1994_art16_gatt47.pdf) (last accessed 6 January 2020), see also Lowenfeld (2003), p. 202. Article XV of the General Agreement on Tariffs and Services (GATS) also concerns subsidies but is much less developed and will not be considered further. 58 Agreement on Subsidies and Countervailing Measures (available at: https://www.wto.org/ english/docs_e/legal_e/24-scm_01_e.htm) (last accessed 6 January 2020).

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The EU Anti-subsidy Regulation59 provides legal basis for trade defence measures but derives from and must be in line with WTO rules.60 The Anti-subsidy Regulation provides for investigative and decision-making powers to the Commission and practical implementation of countervailing duties by Member States.61 Anti-subsidy measures consist of charging of duties on subsidised products when they are imported into the EU,62 or of accepting voluntary undertakings offered by the relevant country of origin or importing companies,63 in order to countervail the advantage and restore the level playing field for producers competing on the internal market. Government-subsidised FDI somehow compares to a situation where a producer of products “released for circulation in the EU”64—i.e. imported to the EU— receives subsidies in the country of production.65 Under the WTO anti-subsidy rules, it is assumed that any subsidy received that is “specific”, in the sense that it is available for specific undertakings, industries or regions or is contingent on products being exported or on the use of national inputs for the production (i.e. similar to being “selective” in the sense of EU State aid law),66 will (proportionally) be used to lower price on products exported to other countries.67 The question to be analysed is whether subsidies from a third country financing an FDI comes within the scope of application of the trade defence anti-subsidy rules as implemented in the EU.

59 Regulation (EU) 2016/1037 of The European Parliament and of the Council of 8 June 2016 on protection against subsidised imports from countries not members of the European Union, OJ L176, 30.6.2016, p. 55 (hereafter: the “Anti-subsidy Regulation”). 60 General Agreement on Tariffs and Trade from 1994 (GATT 1994). Generally, on anti-subsidy rules, see e.g. Lowenfeld (2003) or Van Bael and Bellis (2019). 61 On division of competences between the EU and its Member States in this context see e.g. Devuyst (2013), pp. 259–316. 62 In accordance with the method stipulated by Articles 5–7 and the framework provided in Article 12 of the Anti-subsidy Regulation. 63 Article 13 of the Anti-subsidy Regulation. 64 Article 1(1) of the Anti-subsidy Regulation. 65 GATT 1994 applies to subsidies that increase exports or reduce imports, cf. Article XVI, section A. 66 Article 2 and 3 of the Agreement on Subsidies and Countervailing Measures, and Article 4 of the Anti-subsidy Regulation. 67 I.e. the effect of the subsidy will be distributed on the entire production of the relevant product in the period, cf. Recital 5 and Article 7(2) of the Anti-subsidy Regulation, and e.g. McGovern (2008), § 312.

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Do Anti-subsidy Rules Apply to FDI Subsidised by a Third Country Government?

Neither Article XVI of GATT 1994, the Agreement on Subsidies and Countervailing Measures nor the Anti-subsidy Regulation mentions general investment subsidies or subsidies for specific investments.68 This is not surprising as the scope of application for the GATT 1994 is international trade in goods and not FDI. However, there has been some discussion about the issue of investment subsidies over time. In the interpretative notes to Article XVI GATT 1994,69 cases from the 1970s concerning the limiting of taxation to revenues generated in the (European) country of origin, i.e. not taxing income from revenues generated abroad, are described. In those cases, the respective panels deciding on the subsidy disputes recognised that the taxation practices might provide an incentive for investment in other countries but did not consider this effect relevant for the assessment. In a Regulation on countervailing duties from 1999, the Council held that tax subsidies available to companies investing abroad (FDI) is a subsidy in the sense of the Anti-subsidy Regulation70 because the criterion of foreign investment narrows the group of companies to which the subsidy is available, making the subsidy “specific”. In effect, this interpretation brings certain forms of investment subsidies within the scope of trade defence measures. These cases show that different aspects of investment (inducing) subsidies have been considered in the context of trade defence measures.

3.2.2

Comments

Apparently, subsidies are a contentious matter in international trade law.71 Whereas practice and literature on trade subsidies are relatively well developed,72 the issue of third country government subsidising of specific FDI transactions seems to be outside the scope of the WTO and EU anti-subsidy rules and therefore not a topic 68

The Agreement on Subsidies and Countervailing Measures mentions equity infusion as a form of subsidy in Article 1(1) (a) (1) (i). Equity capital might conceivably be used for FDI, but this situation is not discussed in the guidelines which, as the other anti-subsidy rules, is concerned with subsidisation of the production of goods (for export). 69 P. 459 of the interpretative notes (available at: https://www.wto.org/english/res_e/publications_e/ ai17_e/gatt1994_art16_gatt47.pdf.) (last accessed 6 January 2020). 70 Council Regulation (EC) No 1601/1999 of 12 July 1999 imposing a definitive countervailing duty and collecting definitively the provisional duty imposed on stainless steel wires with a diameter of less than 1 mm originating in India and terminating the proceeding concerning imports of stainless steel wires with a diameter of less than 1 mm originating in the Republic of Korea, OJ L 189, 22.7.1999, p. 26 e.g. recital 81. Prior to the current Anti-subsidy Regulation, Regulations imposing definitive countervailing duties had to be adopted by the Council, but this competence is now with the Commission. 71 Lowenfeld (2003), p. 200 and Beckington and Amon (2011), pp. 209–268, at. p. 227. 72 E.g. references in fn. 70.

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that is discussed or even mentioned. It seems unlikely that suddenly international agreement on the abandonment of subsidisation of FDI would occur, but the practical issues do not disappear even if they are ignored.

4 Conclusions and Possible Ways Forward Given that FDI screening as demonstrated may lead to State aid in the sense of Article 107(1) TFEU,73 and given the discussion of many other areas of law in the process leading to the adoption of the EU Screening Regulation, the lack of any specific regulation of how to address the relationship between State aid and FDI screening appears strange. As argued, there seems to be at least two possible approaches to ensure coherence between the EU Screening Regulation and State aid law. The first is to make FDI screening a precondition for participating in the bidding for the relevant asset, which is probably the preferable approach, as relevant pre-qualification criteria are compliant with State aid law. The second is to consider a nullity bids from foreign direct investors that are rejected based on FDI screening during the sales process because the bids could be argued not to be “actual” bids. This latter approach does, however, as explained, not automatically remove any advantage to the (European) buyer. This implies that further measures might have to be applied to ensure the market price in, e.g., sales processes related to privatisation; such measures might be valuation or fairness opinion from an independent expert.74 Another topic that is not overtly addressed in the text of the EU Screening Regulation or in the legislative process is third-country-subsidised FDI. Nevertheless, the analysis of the EU Screening Regulation and the preparatory works unveils the fact that third-country-subsidised FDI seems to have been on the agenda with some stakeholders, and possibly also with the Commission, considering the list of information that Member States are required to provide to the Commission and other Member States.75 Once the information on the financing of the FDI has been obtained by a screening Member State, it is difficult to imagine how threats from control by foreign governments may be convincingly discerned from threats to competition in the national or the internal market. From the perspective of international law, the matter of third-country-subsidised FDI also appears to be unsolved, which might explain why the Union legislator has not ventured into discussing and articulating or even regulating EU policy on this issue. That third-country-subsidised FDI has not been addressed does, however, not mean that it will not give rise to problems or disputes. There are several possible

73

Cf. Above Sect. 2. Notion of aid, para 103. 75 Article 9 of the EU Screening Regulation, cf. above Sect. 3.1.2. 74

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solutions or interpretative techniques at hand to attempt to handle State aid issues that arise in the context of FDI and FDI screening. However, none of them are perfect. The WTO trade defence rules seem to be the most appropriate framework for addressing the distortion of competition that may be caused by third-countrysubsidised FDI. However, the current system is not appropriate as it is designed to handle production subsidies, not investment subsidies. It is difficult to envisage what a countervailing duty for government-subsidised investments would look like and how it would impact bidding strategies and competition for European assets. As there are no ready solutions to the issue of subsidised FDI, it is not unimaginable that EU Member States—which themselves are prevented from granting subsidies— would use the means provided by the EU Screening Regulation to intervene in cases where a third country government subsidises an FDI, albeit covertly. The overall conclusion from the analyses in this chapter is that many stones are unturned in the relationship between State aid law/third country subsidies and FDI screening—the EU Screening Regulation was an obvious opportunity to turn some stones, but this opportunity has been missed.

References Journals Beckington JS, Amon MR (2011) Competitive currency depreciation: the need for a more effective international legal regime. J Int Bus Law 10(2):209–268 Danov M (2014) Awarding exemplary (or punitive) antitrust damages in EC competition cases with an international element - the Rome II Regulation and the Commission’s white paper on damages. Eur Compet Law Rev 29(7):430–436 Devuyst Y (2013) European Union law and practice in the negotiation and conclusion of international trade agreements. J Int Bus Law 12(1):259–316 Jaeger T (2008) Privatising Austrian airlines: another Groundhog Day. Eur State Aid Law Q 7 (4):631 Scott J (2014) The new EU ‘extraterritoriality’. Common Mark Law Rev 51(5):1343–1380

Books Lowenfeld AF (2003) International economic law. Oxford University Press, London McGovern E (2008) European community anti-dumping and trade defence law and practice. Globefield Press, § 312 Nicolaides P (2012) The economics of state aid and the balancing test. In: Hancher L, Ottervanger T, Slot PJ (eds) EU state aids, 3rd edn. Sweet & Maxwell, London, Chapter 2 Van Bael I, Bellis JF (2019) EU anti-dumping and other trade defence instruments, 6th edn. Wolters Kluwer, Netherlands

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Supplementary Material/Private Homepage Deutche Welle, 27 July 2018, Berlin beats Chinese firm to buy stake in 50Hertz power company. https://www.dw.com/en/berlin-beats-chinese-firm-to-buy-stake-in-50hertz-power-company/a44848676. Accessed 6 Jan 2020 industriAll, European Trade Union, Policy Brief 2018-1, on Screening Foreign Direct Investment – Another step towards a fairer global level playing field. https://news.industriall-europe.eu/ content/documents/upload/2018/2/636552427060145606_PB2018-01-ScreeningFDIs-EN.pdf. Accessed 6 Jan 2020 Montel, 23 March 2018, Elia increases stake in German TSO 50Hertz for EUR 980m. https://www. montelnews.com/en/story/elia-increases-stake-in-german-tso-50hertz-for-eur-980m/883672. Accessed 6 Jan 2020

Grith Skovgaard Ølykke is a commercial law consultant at Kammeradvokaten/Law Firm Poul Schmidt, where she works in the EU and International Law team. She advises mainly public clients on State aid law, procurement law and general EU law. Grith has a background in academia. She was employed at Copenhagen Business School from 2007 to 2017, obtained her PhD in 2010 and was in 2017 promoted to professor with special responsibilities in commercial law and EU market law. She has published extensively in recognised journals on, among others, State aid law and public procurement law. She has co-authored textbooks in public procurement law and competition law. Furthermore, Grith has been a member of the Swedish Competition Authority’s Research Council and of the Danish Public Procurement Complaints Board. Louise Tandrup Christensen is an attorney-at-law at Kammeradvokaten/Law Firm Poul Schmidt, where she works in the EU and International Law Department. Louise advises public authorities about legal issues pertaining to competition law and state aid law. She is especially experienced in the handling of public and semi-public organisations’ and institutions’ state aid issues. She holds an LL.M., specialising in competition law, from King’s College London. Louise is admitted to appear in front of the Danish High Court and has litigated a number of cases involving EU law matters.

Access to Legal Redress in an EU Investment Screening Mechanism Teoman M. Hagemeyer

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 What the EU Screening Regulation Has to Say . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Some Factual Issues to Be Considered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Legal Redress: Goals, Bases and Fora . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Primary Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Secondary Claims, Especially Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Fora for Legal Redress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Material Criteria and Obstacles for Legal Redress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 The Court of Justice of the EU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 National Courts (Here: Germany) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Investor-State Dispute Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract This chapter reviews the options of legal redress offered to non-EU investors seeking to place controlling investments in EU member states vis-à-vis measures taken by member states, their investment screening and control mechanisms (ISCMs) and the European Commission under Regulation (EU) 2019/452 (EU Screening Regulation). It matches investors’ goals with legal bases and fora for legal redress to outline procedural options of legal redress. Thereafter, the chapter focusses on the material criteria of review and finds that judicial review is significantly limited regarding the factors that allow ISCMs to screen, prohibit, condition or unwind investments. This finding is valid for the legal bases taken into account, i.e. national law, exemplified by German law, EU law and international investment All views expressed in this chapter are the author’s personal opinion only. The author is indebted to Jens Hillebrand Pohl, who kindly provided invaluable input to an early draft of this chapter. That said, all errors are the sole responsibility of the author. T. M. Hagemeyer (*) Berlin Administrative Court, Berlin, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 795–834, https://doi.org/10.1007/16495_2020_4, Published online: 12 June 2020

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law, although the legalistic realization of limited revisability varies. Litigation seeking to annul screening decisions of ISCMs or to recover damages in consequence of screening decisions or other actions taken by ISCMs thus faces somber prospects. Fully reviewable procedural rights of investors and the protection by international investment agreements in the post-entry stages of investment provide the most reliable grounds for litigation. The EU Screening Regulation’s pertinent provisions are analyzed and found not to change the legal status quo of third state investors seeking controlling investments in EU member states.

1 Introduction In 2019, the European Union (EU) decided to step up its efforts to shield the common market from venomous third state investments. This decision is the result of a hurried process: the European Commission’s 2017 Proposal for a regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union1 (Draft Proposal) quickly became 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 Union2 (EU Screening Regulation), avoiding any ruffle by the European parliamentary elections set for May 2019. With the EU Screening Regulation, the EU takes a first step to close the ranks with states such as Australia, Canada, China and the United States of America (US), which – like many other major economies, including numerous EU member states (member states) – all entertain some sort of investment screening and control mechanism (ISCM), many of which have been updated recently.3 Increased proliferation and use of ISCMs, i.e. the practice of screening and blocking certain investments, will inevitably leave some investors feeling wronged. And wronged investors are not unlikely to seek legal redress if no amicable solution can be found.4 This chapter explores the alleys that investors might turn onto in their striving for legal redress, as well as the pitfalls associated therewith. It does so by formulating possible goals of legal redress and matching these with the available fora and bases for legal redress (below Sect. 2). The chapter then looks at limited judicial revisability of the crucial material criteria of investment screening (below Sect. 3). 1

Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union, COM(2017) 487, 13 September 2017. 2 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, 21 March 2019, pp. 1–14. 3 See, for instance, Grieger (2017), pp. 7, 9; Dammann de Chapto and Brüggemann (2019), p. 95. 4 Some investors might also be legally obligated to sue for damages by corporate law.

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Results are summarized at the end (below Sect. 4). It is important to note that the chapter focusses exclusively on legal redress of third states, i.e. non-EU, investors seeking to place investments that allow them to exert control over the target (foreign direct investment – FDI).5 Formal and procedural rights (cf. Art. 41 Charter of Fundamental Rights of the European Union (CFREU)) are neglected in this chapter; they are judicially revisable, however, and, given limited revisability of material criteria, the most promising basis for successful legal redress. Beforehand, this section looks at the scarce pertinent wording of the EU Screening Regulation itself (below Sect. 1.1) and points to some noteworthy factual issues to be taken into consideration regarding legal redress (below Sect. 1.2). In doing so, this contribution sets foot on what appears to be a largely unexplored legal terrain: although virtually every international law firm issued some kind of statement on the Draft Proposal and the EU Screening Regulation, judicial review has been but a peripheral matter in the various memoranda.6 Academia and institutional research have thus far not scrutinized the issue.7 The following cannot claim to fill the gap, but it is written in the hope to inspire future research that might do so. One conclusion of this chapter may be anticipated: investors suing against decisions of an ISCM are the absolute exception,8 and this is likely to remain unchanged under the EU Screening Regulation vis-à-vis the obstacles to legal redress illustrated in the following.

5

Hence, especially portfolio investments and legal redress for EU investors and target companies are exempt from this analysis. It is assumed that FDI is controlling and portfolio investment is non-controlling investment. 6 Mannheimer Swartling (2017), Freshfields (2017), Akin Gump Strauss Hauer & Feld LLP (2017), Allen & Overy (2017), Arnold Porter Kaye Scholer (2017), Baker McKenzie (2017), Clifford Chance (2017), DLA Piper (2018), EUbusiness (undated), European Council on Foreign Relations (2017), Herbert Smith Freehills (2017), Jones Day (2017), Kromann Reumert (2017), Mayer Brown (2017), Norton Rose Fulbright (2017a, b), Pinsent Mansons (2017), Squire Patton Boggs (2017), Steptoe & Johnson LLP (2017), Sullivan & Cromwell LLP (2017), Wilmer Hale (2017) and EUobserver (2017). See, by contrast, BDI, Freshfields (2008) on German legislation in the field of investment protection. 7 Cf. Moran (2017), Bismuth (2018), Wei and Anran (2017) and Grieger (2018); however, Grieger (2017), p. 10 looked at some national ISCMs and found judicial review to be something of an exception. 8 Thus, the Judgments of the Warsaw Administrative Court of 17 October 2017, cases VI SA/Wa 727/17, VI SA/Wa 728/17 an VI SA/Wa 776/17, as well as the Judgment of the US Court of Appeals for the District of Columbia Circuit of 5 May 2014, case 13-5315, are something of a rarity. Taking note of the scarcity of litigation in German foreign trade law is Hindelang (2013a), p. 9.

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What the EU Screening Regulation Has to Say

Before looking into the ends and means of legal redress for investors, the EU Screening Regulation’s bearing on the subject is worth noting. Article 3 (5) of the EU Screening Regulation offers the following verbalization of legal redress: Foreign investors and the undertakings concerned shall have the possibility to seek recourse against screening decisions of the national authorities.

The EU Screening Regulation offers definitions for all but one of the key elements of this provision.9 With “foreign investor”, the EU Screening Regulation means a natural person of a third country or an undertaking of a third country, intending to make or having made a foreign direct investment.10

An “undertaking of a third country” means an undertaking constituted or otherwise organised under the laws of a third country.11

A “screening decision” is defined in the regulation as a measure adopted in application of a screening mechanism;12 [i.e. of] an instrument of general application, such as a law or regulation, and accompanying administrative requirements, implementing rules or guidelines, setting out the terms, conditions and procedures to assess, investigate, authorise, condition, prohibit or unwind foreign direct investments on grounds of security or public order;13 [whereby “screening” refers to] a procedure allowing to assess, investigate, authorise, condition, prohibit or unwind foreign direct investments[.]14

In conclusion, the EU Screening Regulation says who (third country investors and undertakings concerned) shall have “recourse” against what (screening decisions), but only if and when FDI is in question.15 The pivotal term “recourse” is thus not defined by the EU Screening Regulation. One indication of its intended meaning can be derived from the fact that the EU Screening Regulation’s use of “recourse” replaced the Draft Proposal’s wording

It should be added that apart from “recourse”, the EU Screening Regulation does not contain a definition of “undertakings concerned”. These are the targets of investment, whose legal remedies are not addressed in this chapter. 10 Art. 2 (2) EU Screening Regulation. 11 Art. 2 (7) EU Screening Regulation. 12 Art. 2 (6) EU Screening Regulation. 13 Art. 2 (4) EU Screening Regulation (here and in the following square brackets added). 14 Art. 2 (3) EU Screening Regulation. 15 FDI is defined as “an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in a Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity” (Art. 2 (1) EU Screening Regulation). This contribution employs the term FDI in this sense. 9

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“judicial redress”.16 It is not far-fetched to assume that this change in language was made in deference to those member states that have lain legal redress into the hands of administrative bodies. Those states that have specifically not vested the review process in judicial bodies separated from the executive branch of state are thus given a way to maintain the status quo.17 Vis-à-vis recent case law, it is not entirely clear that this constriction of legal redress is per se permissible under EU law, especially under Art. 47 of the CFREU, which guarantees the right to an effective remedy before a tribunal.18 Given the fact that effective protection of fundamental freedoms by judicial remedy against (national or EU) authority refusing benefits conferred under the fundamental freedoms is not only a general principle of EU law, but also a common principle of the member states’ constitutional traditions, one could be inclined to find “recourse” merely in the form of administrative review to be a violation of EU law.19 Eventually, however, the nominal designation of the body competent for review cannot determine whether they provide effective remedy since this is a factor resulting from the member states’ legal traditions, but determinative has to be its actual powers, independence and scope of review. A second indication of the meaning of “recourse” can be derived from the legislative history of Art. 3 (5) EU Screening Regulation, which reveals that the provision originally intended to guide existing member state ISCMs to meet some “basic requirements, such as the possibility of a judicial redress of decisions”.20 “Judicial redress” was seen as one of the “essential elements of the procedural framework”21 of ISCMs (see also recital (13) Draft Proposal). Further guidance is offered by the decision of the Court of Justice (Court) in re Association Église de Scientologie de Paris, which is fundamental with regard to the requirement of legal redress for foreign investors. It stipulates:

Art. 6 (4) Draft Proposal read: “Foreign investors and undertakings concerned shall have the possibility to seek judicial redress against screening decisions of the national authorities.” See also in this volume Joanna Warchol, A look behind the doors of the RU Institutions: Inter-institutional Agreement on the Framework for the Screening of Foreign Direct Investments. 17 The change is justified as follows (European Parliament 2018, p. 51): “The possibility of initiating proceedings before the national authorities or courts against the screening decisions must be ensured, while safeguarding the legal system of the Member State in question.” For example, France, and, inspired by its model, also Belgium, Italy, the Netherlands, Greece and Romania maintain administrative bodies with judicial functions (see Săraru 2017, pp. 228–230). 18 See Judgment of the Court (First Chamber) of 13 December 2017, Soufiane El Hassani v Minister Spraw Zagranicznych, C-403/16, ECLI:EU:C:2017:960, paras 38-42, on the one hand, and Judgement of the European Court of Human Rights, Chevrol v. France, no. 49636/99, paras 76 et seq., on the other hand. 19 Cf. Judgment of the Court of 15 October 1987, Unectef v Heylens, C-222/86, ECLI:EU: C:1987:442, paras 14-15. 20 European Commission (2017) Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union (COM/2017/0487 final – 2017/0224 (COD)), p. 3. 21 Ibid. pp. 12–13. 16

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Further, any person affected by a restrictive measure based on such a derogation must have access to legal redress [. . .].22

Tracing back the EU Screening Regulation’s obligation to provide “recourse” to this origin, it becomes clear why originally the European Commission (Commission) thought that “[p]otential investors must be able [. . .] to seek judicial review”.23 In conclusion, this interpretation of the term “recourse” would be in line with traditional views on legal redress. It does not answer the question what criteria member states’ “recourse” must fulfil in order to hold up before the Court. These criteria have to be derived from EU law, which is currently still in the process of carving out the golden ratio of equivalence and effectiveness of legal redress.24 However, there is a second, wider interpretation of Art. 3 (5) EU Screening Regulation and the “recourse” provided therein – one with potentially far-reaching consequences: the provision of “recourse” rather than “legal redress” or “judicial review” could change the legal status quo of third state FDI investors in EU law.25 As will be expanded upon in greater detail in the course of this chapter, the majority opinion argues that third state investors cannot rely on any fundamental freedom when placing controlling investments or, in the terminology of this contribution, FDI in companies based in the EU (below Sect. 3.1). Because it is arguably so that no fundamental freedom protects third state investors placing FDI, the EU Screening Regulation’s offer of “recourse” to this group of investors could be read to extend the material scope of protection of EU law (namely, the scope of the fundamental freedoms) to them – and not merely a formal right to recourse. This argument could be made on the basis that the Court’s reference to “a derogation” in Association Église de Scientologie de Paris is to a derogation from fundamental freedoms (in that case, the free movement of capital). Thus, the Court presupposes that a fundamental freedom applies and that only derogation from an applicable fundamental freedom triggers the obligation to provide legal redress. Inversely, the lacking applicability of fundamental freedoms to third state FDI investors precludes a derogation and could thus not trigger an obligation to provide legal redress (at least with regard to the fundamental freedoms). Consequently, since Art. 3 (5) EU 22 Judgment of the Court of 14 March 2000, Association Eglise de scientologie de Paris and Scientology International Reserves Trust v The Prime Minister, C-54/99, ECLI:EU:C:2000:124, para 17. Reiterated in the Court’s “Golden Shares” decisions, see Judgment of the Court of 4 June 2002, Commission v Portugal, C-387/98, ECLI:EU:C:2002:326, para 50; Judgment of the Court of 4 June 2002, Commission v France, C-483/99 ECLI:EU:C:2002:327, para 46; Judgment of the Court of 13 May 2003, Commission v Spain, Case C-463/00, ECLI:EU:C:2003:272, para 69. The material criteria for restrictions must be objective, sufficiently precise and reviewable (Judgment of the Court of 4 June 2002, Commission v Belgium, C-503/99, ECLI:EU:C:2002:328, para 52 and Judgement of the Court of 13 May 2003, Commission v Spain, C-463/00, ECLI:EU:C:2003:272, para 79). 23 European Commission (2017), COM/2017/0487 final, p. 4 (here and in the following emphasis added). 24 See Soufiane El Hassani v Minister Spraw Zagranicznych, C-403/16, para 26 with further references. 25 Cf. Snell (2019).

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Screening Regulation grants “recourse” nonetheless, it could be read to extend the fundamental freedoms to said investors. This reading would imply a step out of the void of material protection third state FDI investors found themselves in prior to the EU Screening Regulation (at least according to those views denying them protection by any fundamental freedom). While prior to the EU Screening Regulation, the fundamental freedoms being inapplicable, material protection had to be sought in national law, with entry into force of the EU Screening Regulation, the fundamental freedoms could be found applicable and restrictable, especially by the reasons provided for in Art. 4 EU Screening Regulation. Despite its compatibility with the majority view on the legal status of third state FDI investors under EU law, ultimately this understanding of “recourse” has to be rejected. One basis for scepticism is provided by the fact that nothing in the legislative history points at this somersault regarding material protection of third state investors. Also, one would have to assume gross negligence on the part of the legislator for hiding a provision on such a controversial issue in the less-thanindicative wording of what some would consider a technical provision. Finally, vesting an investor with material rights by detour of stipulating formal rights to legal redress would put the cart before the horse: procedural rights serve to realize material rights; they do not create them, so that investors are usually vested with material rights and their procedural enforcement is a separate question that follows. In conclusion, it is more convincing to assume that third state FDI investors are granted a formal right to “recourse”. If one takes the view that third state FDI investors were not without protection by the fundamental freedoms to begin with,26 the EU Screening Regulation’s Art. 3 (5) contains nothing but a confirmation of something self-evident. From this point of view, “recourse” can only refer to legal redress meeting the principles of equivalence and effectiveness established by the Court. The standard of review would be defined by the applicable fundamental freedoms and the EU Screening Regulation. A final detail in the wording of Art. 3 (5) EU Screening Regulation that is worth noting lies in its limitation of recourse to one type of action (namely screening decisions) taken by certain actors (namely national authorities). On the one hand, this might seem aligned with the regulation’s assumption that screening decisions will only come from member states entertaining ISCMs.27 On the other hand, however, this limitation is also puzzling because it omits actions other than screening decisions provided for in the EU Screening Regulation (namely opinions,

26

See, for instance, Hindelang (2010), p. 447; Hindelang (2013b), p. 80. The EU Screening Regulation tolerates that member states do not entertain ISCM (cf. Art. 1 (3), 3 (1) EU Screening Regulation [“may”] as well as recitals (4) and (10)). The explanatory memorandum to the Draft Proposal reads as follows (European Commission 2017, COM/2017/0487 final, p. 3): “The proposed Regulation does not require Member States to adopt or maintain a screening mechanism for foreign direct investment.” However, Bismuth (2018), pp. 52–53, detects an implied obligation to install an ISCM inter alia by the notification and reporting obligations of all member states under the Draft Proposal (cf. Art. 6 (1) EU Screening Regulation). 27

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information requests and comments28) and because it omits other actors in the investment screening process (namely the Commission and other member states than the one targeted by the investment). Turning to the latter point, it should be noted that the Commission is granted some authoritative powers: under the EU Screening Regulation, the Commission has the power to screen certain investments (cf. recitals (8) EU Screening Regulation)29; the Commission may issue opinions in the sense of Art. 288 (5) Treaty on the Functioning of the European Union (TFEU) on certain investments into member states (cf. recital (16) and (19), Arts. 1 (1), 6 (3) and (4), 7 (2) and (3), 8 (1) EU Screening Regulation). In addition, member states may issue comments on investments in other member states (cf., for instance, Arts. 6 (2) and 7 (1) EU Screening Regulation) and make information requests (cf., for instance, Arts. 6 (6), 7 (5) and 9 EU Screening Regulation). “Recourse” against the Commission’s opinions and the member states’ comments and information requests seems to be omitted by the wording of Art. 3 (5) EU Screening Regulation,30 indicating that it is either taken for granted or excluded by the EU Screening Regulation. That actions other than screening decisions can have crippling effects on investments will be discussed next.

1.2

Some Factual Issues to Be Considered

It is assumed in this chapter that not only screening decisions have the potential to quell investments but that also opinions, comments and information requests can have a similar impact. Further on, a temporal constraint with regard to legal redress has to be considered. How ISCMs’ screening decisions impact investments is captured by the EU Screening Regulation, which assumes that at the end of a screening

28

The view is taken here that it is not possible to subsume opinions, information requests and comments under the EU Screening Regulation’s definition of screening decision because neither stem from a screening mechanism, but rather from the Commission (which entertains no ISCM of its own) or a member state (which need not entertain ISCM and if it does, the ISCM need not be the body competent for issuing comments or making information requests). 29 Clearer was Art. 3 (2) Draft Proposal, which read: “The Commission may screen foreign direct investments that are likely to affect projects or programs of Union interest on the grounds of security or public order.” Although this clause was removed from the EU Screening Regulation, it is clear that the Commission has to remain competent to screen investments pertaining to “Union interest” in order to issue an opinion on how an investment affects security or public order. 30 A different view could be based on the notion of a (legally binding) “final screening decision” (Art. 6 (9) EU Screening Regulation) as opposed to (an all-encompassing) “screening decision”, which could include comments, information requests and opinions. But as noted in fn. 28 above, it seems difficult to subsume these measures under the term screening decision. Art. 6 (8) EU Screening Regulation shows that with screening decision reference is made to a legally binding act and that the word “final” in Art. 6 (9) EU Screening Regulation is but legalistic prose for the avoidance of doubt.

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(i.e. assessment and investigation) of FDI on grounds of security or public order stands an authorization (where such is needed, otherwise non-objection), condition, prohibition or unwinding of the FDI.31 It is clear how screening decisions affect an investment in a jurisdiction governed by the rule of law: once prohibited, it will not take place. Conditions can make investments commercially unviable. Approval is reassurance for investors. But the EU Screening Regulation ignores that ISCMs have abilities going beyond the issuance of screening decisions, for instance by initiating or by publicly announcing a(n) (imminent) screening procedure.32 The EU Screening Regulation does not take into account the Commission’s opinions and member states’ comments and information requests, respectively.33 To be sure, it is empirically less clear how these actions (or rather knowledge of them among investors or even the public) affect investments as compared to screening decisions. Nonetheless, it will be assumed in this chapter that opinions, comments, information requests and other statements short of a screening decision (such as the announcement of an ISCM that it considers entering into formal review or that it has entered into formal review of a particular investment) carry what will be referred to as the “power of fact”.34 The power of fact is no scientific truth. It is, for lack of resilient empirical verification, a hypothesis derived from random observation: it can be observed that investment deals fall apart only on a whiff of regulatory encroachment. Experience with the Committee on Foreign Investments in the US (CFIUS) and the German ISCM in the Aixtron takeover is only one illustration for the power of fact: public announcement of the German authorities to review the takeover (regarding Germany-based Aixtron SE), together with its partial prohibition by the US President (regarding the US-based subsidiary Aixtron Inc.), sealed the deal’s fate and ultimately led to its failure.35 Based on such observations, two effects of actions other than screening decisions assumed in this chapter are thus the following: firstly, that a pending review of a particular investment can suffice to alarm investors to a degree that they withdraw altogether and, secondly, that the target company also faces significant devaluation in consequence of a (pending) review or a withheld approval.36 Another factual issue not taken into consideration by the EU Screening Regulation but assumed in this contribution is temporal in nature. “The court is the

31

Art. 2 (3) to (6) EU Screening Regulation. Art. 10 EU Screening Regulation only protects the confidentiality of information transmitted, but it does not bar the public announcement that a screening procedure is considered or has been initiated. 33 If the term screening decision is understood in a wide sense, i.e. including measures other than legally binding acts, Art. 3 (5) EU Screening Regulation would also provide recourse against these measures. The view is taken here that this is not the understanding of screening decision purported by the EU Screening Regulation (cf. above fn. 28, 30). 34 See especially Lecheler and Germelmann (2010), p. 171 et seq. 35 Flaßhoff and Glasmacher (2017), p. 489; Seibt and Kulenkamp (2017), p. 1347. 36 Cf. Lecheler and Germelmann (2010), p. 171. 32

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bureaucracy of the law”,37 and bureaucracy is commonly associated with lengthy procedures. In other words, court cases take time, and even the time necessary for preliminary injunctions will often overstrain the patience of investors.38 This time factor is significant at least for pending investments: the longer the duration of a court case is, the higher the probability for the power of fact to take effect. Once an investment has been made, however, tables (and incentives39) turn and court cases’ duration can even work to the benefit of investors fighting divestment decisions. Time is also no longer as pressing an issue for investors claiming damages after a prohibition of an investment (and exhaustion of legal recourse against the screening decision) or after withdrawal from the investment. Neither are the actions conveying the power of fact expressly subject to “recourse” according to the EU Screening Regulation, nor are the temporal restraints expressly addressed. Nonetheless, these factors do play a decisive role in what goals investors can realistically and legally pursue with legal redress, as will be seen in the following section.

2 Legal Redress: Goals, Bases and Fora This section goes about to analyze the goals of legal redress realistically pursued by investors. It starts with primary claims, namely annulment and injunction (below Sect. 2.1), and then considers secondary claims, namely compensation (below Sect. 2.2). Fora for legal redress are briefly presented afterwards (below Sect. 2.3). The results are summarized at the end of this section (below Sect. 2.4). It should be noted that pursuing primary claims can be a prerequisite for securing the availability of secondary (damage) claims under the aspect of exhaustion of legal remedies.40 Legal

37

Foucault and Gordon (1980), p. 27. Cf. Flaßhoff and Glasmacher (2017), p. 491. Duration of court cases is a topic escaping generalization not only due to few studies in the field (Voigt 2016, p. 200 et seq.), but also because of vast differences among jurisdictions and, within jurisdictions, among different judicial branches (see only Djankov et al. 2003; Spurr 1997; Grajzl et al. 2018; Di Vita 2018). For instance, the Court required 16.4 months for main and 2.9 months for interim proceedings on average in 2017 (see Court of Justice of the European Union (2018) Annual Report 2017: The Year in Review, p. 37. By comparison, the Verwaltungsgericht Berlin in 2017 on average required 8.6 months for main proceedings and 2 months for interim proceedings (see Präsidentin des Verwaltungsgerichts Berlin 2018, p. 1). 39 Cf. Posner and Sykes (2013), p. 288 et seq. 40 See Judgment of the Court of First Instance (Third Chamber) of 21 June 2006, Danzer v Council, T-47/02, ECLI:EU:T:2006:167, para 28 citing Judgment of the Court of 15 January 1987, Krohn & Co. Import-Export GmbH & Co. KG v Commission, C-175/84, ECLI:EU:C:1987:8 and below Sect. 2.2.1. 38

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redress against screening laws is not considered a realistic option for most investors, which is why it is omitted here.41

2.1

Primary Claims

Primary claims are those that serve the purpose of saving a pending or a settled investment, which has run into (the prospect of) review by an ISCM and either faces prohibition or conditions or has already been subjected to such, by litigating the pertinent measure. This can be achieved, vis-à-vis an existing negatory or conditional screening decision, by suing for the (partial) annulment of that screening decision. Where no screening decision or only a negatory one exists (and a positive one is a prerequisite to the investment), investors might sue for the issuance of a(n) (unconditional) screening decision.42 These options are considered in the next subsection (below Sect. 2.1.1). Prior to a screening decision, i.e. in pre-screening stages43 or during ongoing screening, other goals perceivable for investors are either to annul opinions, comments and information requests whose publicity can inflict damage on the investment pending or to prevent any such opinions, comments and information requests from being made or being made public. Essentially the same goal would be to prevent the initiation of the screening procedure as a whole. All of these options will be considered in the subsection after the next (below Sect. 2.1.2).

41 Which is not to say that legal action against screening laws is per se unrealistic (at least in those member states which offer this kind of review procedure, see e.g. Art. 93 (1) No. 2, No. 4a juncto Art. 101 (1) Basic Law for the Federal Republic of Germany). It can also play a role, for instance, in the course of an infringement procedure (Art. 258 TFEU), action for annulment (Art. 263 TFEU) or preliminary ruling (Art. 267 TFEU), the former and latter of which was the case in Judgment of the Court of 23 October 2007, Commission v Germany, C-112/05, ECLI:EU:C:2007:623 and Église de scientology, C-54/99. In this context, it is worthwhile to take note of a GATT panel decision on the 1973 Canadian Foreign Investment Review Act (Canada’s ISCM): Not only did the GATT parties doubt the panel’s competence for the dispute since it involved investment legislation, but also did the panel declare to refrain from passing judgement on the ISCM itself. Operating on a thin line, the GATT panel managed to avoid passing judgement on the ISCM itself or the right of states to establish one (Report of the Panel of 25 July 1983, adopted on 7 February 1984, L/5504 – 30S/140, Canada – Administration of the Foreign Investment Review Act, para 5.1)): “In view of the fact that the General Agreement does not prevent Canada from exercising its sovereign right to regulate foreign direct investments, the Panel examined the purchase and export undertakings by investors subject to the Foreign Investment Review Act of Canada solely in the light of Canada’s trade obligations under the General Agreement.” 42 In this regard, see Flaßhoff and Glasmacher (2017), pp. 491 et seq. 43 Even before (host) member state A’s ISCM even considers screening an investment can member state B or the Commission request information in accordance with Art. 7 (5) EU Screening Regulation, so that even prior to the actual initiation of screening procedures, measures affecting an investment can be taken.

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Annulment of Screening Decisions

Screening decisions can take many forms, depending on the applicable law. Usually, screening decisions will be binding acts, i.e. administrative decisions. Member state jurisdictions commonly provide some sort of remedy against these decisions.44 In Germany, for instance, investors could initiate a rescissory action (Anfechtungsklage) against the screening decision of the German ISCM.45 If investors seek the issuance of a(n) (affirmative) screening decision, this goal would – where an affirmative screening decision is necessary46 – have to be pursued procedurally by enforcement action (Verpflichtungsklage), which requires that the screening decision was negatory or has been omitted.47 Conditional screening decisions could either be partially (with a view to the unwanted condition) annulled or require enforcement action aiming at the issuance of an unconditional screening decision, depending on whether the condition can be logically and lawfully separated from the rest of the screening decision.48 On the EU level, the action for annulment provides for a similar remedy against measures adopted by the institutions enumerated in Art. 263 (1) TFEU if those measures are intended to produce legal effects.49 But since the Commission is not vested with the right to issue screening decisions under the EU Screening Regulation, actions for annulment are not available to investors. The Commission can only issue opinions on investments likely to affect security or public order in more than

44 Cf. https://e-justice.europa.eu/content_judicial_systems_in_member_states-16-en.do (accessed 6 January 2020) for information on the member states’ court systems. 45 Sec. 42 (1) Code of Administrative Court Procedure, English translation of the promulgation of 19 March 1991 (Federal Law Gazette Part I (FLG I), p. 686), most recently amended by Art. 5 of the Act of 10 October 2013 (FLG I, p. 3786) available at http://www.gesetze-im-internet.de/englisch_ vwgo/englisch_vwgo.html#p0166 (accessed 03 May 2019). 46 The case will often only be theoretical due to a technical peculiarity of the German ISCM regarding all cross-sectoral screening: the so-called certificate of non-objection (Unbedenklichkeitsbescheinigung). Investors can apply for a certificate of non-objection and if no screening procedure is initiated within 2 months of the application, the certificate of non-objection is deemed to have been issued (Sec. 58 Foreign Trade and Payments Ordinance, English translation of the promulgation of 2 August 2013 (FLG I, p. 2865), as last amended by Art. 1 of the Ordinance of 19 December 2018 (Federal Gazette Official Part of 28 December 2018, p. V1) available at https:// www.gesetze-im-internet.de/englisch_awv/englisch_awv.html (accessed 6 January 2020). It should be noted that the procedure is different (and said case not theoretical at all) for investments in the specific sectors mentioned in Sec. 60 (1) Foreign Trade and Payments Ordinance, where investments undergo sector-specific screening and require clearance (Sec. 61 Foreign Trade and Payments Ordinance). For details on the different procedures, i.e. cross-sectoral screening on the one hand and sector-specific screening on the other, see, for instance, Theiselmann (2009) (in English) and Hindelang and Hagemeyer (2017a) (in German; also on the recent extension of sector-specific screening). 47 See Sec. 42 (1), 75 Code of Administrative Court Procedure. 48 Cf. Judgment of the Bundesverwaltungsgericht of 22 November 2000, case 11 C 2/00. 49 Judgment of the Court of 31 March 1971, Commission v Council, C-22/70, ECLI:EU:C:1971:32, para 42.

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one member state or likely to affect projects or programmes of Union interest (cf. Arts. 6 (3) and 8 EU Screening Regulation), but it cannot issue screening decisions (in the narrow sense advocated in this chapter). Opinions lack binding force (Art. 288 (5) TFEU) and are exempt from Art. 263 (1) TFEU by virtue of its unambiguous wording. The measure’s face value “opinion” is not decisive in this regard50 but the fact that the opinions lack any legally binding effect; the mere power of fact does not create legal effect.51 Even if an opinion issued by the Commission under the EU Screening Regulation would (for the sake of argument) qualify under Art. 263 (1) TFEU, the opinion would be addressed and be of direct concern only to the member state and not the investor. Thereby, an investor would in any case fail to meet the requirements under Art. 263 (4) TFEU, which provides that any natural or legal person may, under the conditions laid down in Art. 262 (1) and (2) TFEU, institute proceedings against an act addressed to that person or that is of direct and individual concern to them and against a regulatory act that is of direct concern to them and does not entail implementing measures. Since the Commission’s opinions do not affect an investor’s legal position in a definite and immediate manner and neither imposes obligations on her or him nor restricts her or his rights,52 these conditions are not met and an action for annulment is not available.53 This applies analogously to the process of screening by the Commission, which logically precedes the issuance of an opinion. Finally, since the Commission cannot issue screening decisions, no remedy to the end of issuing such a decision is available to investors.

50 Judgment of the Court of 11 November 1981, IBM v Commission, C-60/81, ECLI:EU: C:1981:264, paras 8-9. 51 Cf. Judgment of the Court (First Chamber) of 12 November 1981, Birke v Commission, C-543/ 79, ECLI:EU:C:1981:265, para 27. 52 Judgment of the Court of First Instance of 3 May 2002, Jégo-Quéré & Cie SA v Commission, T-177/01, ECLI:EU:T:2002:112, para 51. One might challenge this position on the grounds of the Court’s Plaumann formula (Judgment of the Court of 15 July 1963, Plaumann v Commission of the EEC, C-25/62, ECLI:EU:C:1963:17) since the concerned investor could be distinguished individually just as is the member state addressee of the opinion. Yet, the opinion remains non-actionable under Art. 263 (1) TFEU in lack of legal effect. 53 The Court’s practice, probably inspired by French law, to allow actions for annulment against materially incorrect internal instructions (as ultra vires act or misuse of powers, cf. Art. 263 (2) TFEU) is of no avail to investors as the Court has only applied this intriguing finesse to allow member state suits under Art. 263 TFEU (see Judgment of the Court of 9 October 1990, France v Commission, C-366/88, ECLI:EU:C:1990:348 and Grundel (2016), p. 610 (concluding, for individual actions of annulment against the Commission’s guidelines on state aid, continuously negligible prospects of success)).

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Annulment of and Injunctions Against Opinions, Comments and Information Requests

If investors aim to prevent the screening procedure altogether or to hinder opinions, information requests or recommendations, as provided under the EU Screening Regulation, finding suitable administrative litigation remedies is difficult. Under German law, one option to prevent screening would be to file an action for a declaratory judgment (Feststellungsklage) that the investment in question is not subject to review under the Foreign Trade and Payments Ordinance, i.e. that it is not a covered transaction.54 Well-advised and cautious investors would, in the alternative, sue for the issuance of a certificate of non-objection or clearance in case the court sees the necessity for either.55 Preventing the administration from issuing a screening decision is theoretically possible, but something of a rarity in German administrative litigation, which is based on the principle of post hoc legal protection against binding legal acts.56 The Federal Administrative Court (Bundesverwaltungsgericht) and other administrative courts have allowed preventive actions for injunction in a number of cases, which elude systematic generalization.57 On the ground that the violation of a negatory or conditional, enforceable screening decision is an administrative offence for the investor,58 such screening decisions could be argued to qualify for preventive actions for injunction according to some attempts to generalize this casuistry.59 However, the view is taken here that it is unlikely that a court would extend preventive actions for injunctions in this case since post hoc legal protection is available to investors (see above Sect. 2.1.1).60 As regards other actions by member states under the EU Screening Regulation (information requests, comments), investors do not seem to be exposed to negative effects and preventive injunctions thus appear moot. Since the legally binding screening decision is always one made by the member state host to the investment target, the power of fact emanating from information requests and comments by other member states will generally not suffice to constitute sufficient locus standi. Rescissory

54 Cf. Sec. 43 (1) Code of Administrative Court Procedure (for the action for a declaratory judgement) and Sec. 55, 60 Foreign Trade and Payments Ordinance (for covered transactions). 55 Cf. Sec. 58, 61 Foreign Trade and Payments Ordinance. 56 Schmidt-Aßmann (2018), para 279. 57 See, for instance, Judgments of the Bundesverwaltungsgericht of 8 September 1971, case IV C 17/71, of 16 April 1971, case IV C 66/67, of 12 January 1967, case III C 58/65 and of 11 October 1963, case I A 10.60. 58 Sec. 81 (1) No. 6 Foreign Trade and Payments Ordinance. 59 See especially Schenke (1970), pp. 250 et seq. The possibility of preventive preliminary injunctions against national authorities applying EU regulations is expressly considered by Baumeister (2005), p. 16. 60 See Pietzcker (2018), para 167.

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actions against information requests and comments are not available to investors because they are not administrative acts.61 On EU level, actions for annulment in accordance with Art. 263 TFEU are barred. The Commission is not allowed to issue acts with legal effect under the EU Screening Regulation. Thus, injunctions are also hardly conceivable.

2.2

Secondary Claims, Especially Compensation

If the primary goal to save an investment by litigating the screening decision (or other pertinent action) fails, investors will often revert to secondary claims, namely compensation. This is an option not only in cases where the ISCM ordered divestment of an investment made but also in cases where the screening procedure, be it by virtue of a negatory or conditional screening decision or by the power of fact, led to a withdrawal from the investment. As regards compensation, three legal bases come to mind: national state liability law (below Sect. 2.2.1), EU law (below Sect. 2.2.2) and international investment law (below Sect. 2.2.3).62 The latter does not play a role for primary claims because investor-state dispute settlement (ISDS) arbitral tribunals do not have a competence of cassation.63 Against the background of “treatification”,64 this contribution will only consider the situation where the host state has entered into international investment agreements (IIAs) with investors’ home states.65

61 Cf. Sec. 35 sentence 1 Administrative Procedure Act, English translation of the promulgation of 25 May 1976 in the wording last promulgated on 23 January 2003 (FLG I, p. 102), amended by Art. 4 (8) of the Act to Modernise the Law on Costs of 5 May 2004 (FLG I, p. 718) available at https:// www.bmi.bund.de/SharedDocs/downloads/EN/gesetztestexte/VwVfg_en.html?cms_ dlConfirm¼true (accessed 6 January 2020): “An administrative act shall be any order, decision or other sovereign measure taken by an authority to regulate an individual case in the sphere of public law and intended to have a direct, external legal effect.” 62 International investment law refers to the international law part of investment protection law. The term investment protection law is used here to refer to the vast body of rules protecting foreign property abroad. Not all investment protection law is international law. Domestic law can also protect foreign investors as can (so-called state) contracts between foreign investors and host states. See Salacuse (2013), p. 35. 63 Cf. Krajewski (2014), p. 398. The other remedies in international investment law, restitution and satisfaction, will not be considered here due to their limited significance in practice, see Hindelang and Sassenrath (2015), p. 92; Dolzer and Schreuer (2012), pp. 293 et seq. 64 Salacuse (2015), p. 4 (fn. 19); Salacuse (2013), p. 331 (fn. 4). 65 Cf. Subedi (2012), pp. 81 et seqq. For the other situations and governing regimes of investment protection see Griebel (2008), p. 6.

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National Law

Where it was a member state ISCM that caused the failure of the investment, national state liability law is the obvious candidate for potential compensation claims. As before, Germany will serve as an example: its state liability law is couched in no lesser place than the first sentence of Art. 34 Basic Law for the Federal Republic of Germany (Basic Law), which sets forth the fundamental rule: If any person, in the exercise of a public office entrusted to him, violates his official duty to a third party, liability shall rest principally with the state or public body that employs him.66

The provision is followed up by Sec. 839 of the Civil Code, which states in greater detail: (1) If an official intentionally or negligently breaches the official duty incumbent upon him in relation to a third party, then he must compensate the third party for damage arising from this. If the official is only responsible because of negligence, then he may only be held liable if the injured person is not able to obtain compensation in another way. [. . .] (3) Liability for damage does not arise if the injured person has intentionally or negligently failed to avert the damage by having recourse to appeal.67

In sum, Art. 34 Basic Law and Sec. 839 Civil Code result in liability of the state or public body to which the official’s actions are imputable. Although German state liability law thus provides for a right to compensation, it is also clear from the wording of the above-cited provisions that investors’ claims are contingent on requirements not readily satisfied. Most problematic are the requirements of a violation of an official duty relating to a third party and the official’s intent or negligence. An official duty relates to a third party if the violation of the duty at the same time constitutes a violation of a subjective right of the third party vis-à-vis the public authorities. In other words, the official duty must not only be in the public but also in the individual interest.68 It should be noted that official duties can be derived not only from German but also from (primary and secondary) EU law.69 Whether the revocation of an affirmative screening decision or the issuance of a negatory or conditional screening decision is an official duty in this sense is unclear. On the one hand, the material70 basis for the decision, which is public order and

66

English translation available at https://www.gesetze-im-internet.de/englisch_gg/englisch_gg. html#p0176 (accessed 6 January 2020). 67 Civil Code, English translation of the version promulgated on 2 January 2002 (FLG I, pp. 42, 2909; 2003, p. 738), last amended by Art. 4 (5) of the Act of 1 October 2013 (FLG I, p. 3719) available at https://www.gesetze-im-internet.de/englisch_bgb/englisch_bgb.html#p3529 (accessed 6 January 2020). 68 Cf. Judgments of the German Federal Court of Justice (Bundesgerichtshof) of 10 January 1955, case III ZR 153/53; of 23 February 1959, case III ZR 208/57. 69 Judgment of the Bundesgerichtshof of 27 January 1994, case III ZR 42/92. 70 Formal errors relating to due process are official duties (cf. Judgement of the Bundesgerichtshof of 1 October 1956, case III ZR 53/55). However, they play a negligible role because many formal

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security or essential security interests (cf. Sec. 59 (1)), 62 (1) Foreign Trade and Payments Ordinance), points at an official duty in the public interest. On the other hand, denying third state FDI investors market access could violate these investors’ subjective rights vis-à-vis the public administration (at least where such rights are granted, see below Sect. 2.2.3).71 Also, finding negligence of the official and – such is the investor’s burden72 – proving it if necessary is an onerous and in many cases futile task.73 However, as Flaßhoff and Glasmacher note, (at least) negligent conduct of an official is likely given where officials revoke screening decisions only for political reasons.74 A second alley for compensation is provided in German law by Secs. 48 (3) and 49 (6) Administrative Procedure Act. These establish strict liability, thereby avoiding the issues associated with fault-based liability. In case of withdrawal of an unlawful administrative act (Sec. 48) and the revocation of a lawful administrative act (Sec. 49), the provisions establish that “the authority shall upon application make good the disadvantage to the person affected” under the condition that the person relied on the existence of the administrative act and to the extent that her or his reliance merits protection. Compensation is, however, limited to damages suffered as a consequence of reliance on the continued existence of the administrative act, thereby especially excluding lost profits.75 (Only) withdrawal or revocations of (affirmative) screening decisions can, under the above-mentioned conditions, incur this strict (if capped) liability.76 The scope is thus narrower in comparison to Art. 34 Basic Law and Sec. 839 Civil Code. In cases of withdrawal or revocation, it will thus be decisive whether investors relied on the existence of the screening decision and – crucially – whether this reliance merits protection vis-à-vis public interest, the latter of which carries the weight of public order and security or essential security interests (cf. Secs. 59 (1) and 62 (1) Foreign Trade and Payments Ordinance).

errors can be rectified during (first and second instance) court proceedings (cf. § 45 (2) Administrative Procedure Act). 71 In addition, a provision expressly stating that the Federal Ministry for Economic Affairs and Energy, which is competent for screening decisions, only acts in public interest (such as, for instance, Sec. 4 (4) Act Establishing the Federal Financial Supervisory Authority, English translation of the promulgation as published in the announcement of 22 April 2002 (FLG I, p. 1310) available at https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Aufsichtsrecht/Gesetz/ findag_aktuell_en.html (accessed 6 January 2020) does for the Federal Financial Supervisory Authority), does not exist. 72 Judgment of the Bundesgerichtshof of 15 February 1990, case III ZR 293/88. Despite alleviations such as the requirement to show which individual was negligent, cf. Judgment of the Bundesgerichtshof of 26 September 1960, case III ZR 125/59. 73 Flaßhoff and Glasmacher (2017), pp. 492 et seq. (also for other bases for claims in German state liability law). 74 Flaßhoff and Glasmacher (2017), p. 493. 75 Order of the Bundesverwaltungsgericht of 1 February 2007, case 4 B 1/07. 76 In detail and also from the perspective of the seller Flaßhoff and Glasmacher (2017), p. 494.

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EU Law

Another potential legal basis for investors’ claims could be grounded in the Court’s case law on the principle of state liability for loss and damage caused to individuals as a result of breaches of EU law, which are independent of the requirements of national state liability law.77 The liability concept developed thereby is, naturally, not limited to the German jurisdiction. It is two-pronged in the sense that claims against members states as well as against the EU can be based upon it (in the latter case, under Art. 340 (2) TFEU).78 The three requirements for claims according to this body of case law are the following: “[1] the rule of law infringed must be intended to confer rights on individuals; [2] the breach must be sufficiently serious; and [3] there must be a direct causal link between the breach of the obligation resting on the State and the damage sustained by the injured parties”.79 Since public liability in this sense is also applicable to administrative wrongs80 and due to the fact that investment screening involves the application of EU law, inter alia in the form of the EU Screening Regulation by national authorities, it forms a potential legal basis for secondary claims arising from damage caused by screening decisions of member state ISCMs or any other actions under the EU Screening Regulation. In addition, even though the Commission cannot issue screening decisions, any of its actions under the EU Screening Regulation other than screening decisions could incur liability. Where it was the Commission that allegedly caused the failure of the investment and the damage suffered thereby, Art. 340 (2) TFEU and Art. 41 (3) CFREU form the statutory basis of non-contractual liability. The provisions’ broad reference to the (very diverse) “general principles common to the laws of the Member States” enabled the Court to establish its own body of jurisprudence on the prerequisites for EU public liability. Under the previously quoted conditions established by this casuistry, the EU could be held liable for the damage caused by one of its institutions (cf. Art. 13 (1) Treaty on European Union) – the Commission – in the performance of its duties under the EU Screening Regulation. No apparent obstacle to liability is erected by the non-binding character of opinions, comments and information requests under the EU Screening Regulation.81

77 Judgment of the Court of 19 November 1991, Francovich and others v Italy, joined cases C-6/90 and C-9/90, ECLI:EU:C:1991:428, paras 38-46; Judgment of the Court of 5 March 1996, Brasserie du pêcheur v Bundesrepublik Deutschland and The Queen / Secretary of State for Transport, ex parte Factortame and Others, C-46/93, ECLI:EU:C:1996:79, para 51; Judgment of the Court of 23 March 2004, Mediator v Lamberts, C-234/02, ECLI:EU:C:2004:174, para 49. 78 Cf. Bülow (2013), p. 610. 79 C-46/93, para 51. 80 Cf. Judgment of the Court of 23 May 1996, The Queen v Ministry of Agriculture, Fisheries and Food, C-5/94, ECLI:EU:C:1996:205, para 26. 81 Cf. Judgment of the Court of 28 May 1970, Denise Richez-Parise and others v Commission, Joined cases 19, 20, 25 and 30-69, ECLI:EU:C:1970:47, para 20; Judgment of the Court of First Instance of 14 September 1995, Lefebvre frères et soeurs, GIE Fructifruit, Association des

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Leaking information covered by the obligation of professional secrecy (Art. 339 TFEU) can entail liability.82 Since the information sent back and forth between the Commission, member states and investors in accordance with the provisions of the EU Screening Regulation is protected by Art. 10 thereof, leakage of such information could also give rise to damage claims of investors. However, a significant restriction on liability impedes aggrieved investors’ potential claims. For the Commission and the member states, the Court formulated the following standard regarding the most contentious of the requirements of public liability – namely when a breach of EU law is “sufficiently serious”: [A]s regards [. . .] both Community liability [. . .] and Member State liability for breaches of Community law, the decisive test for finding that a breach of Community law is sufficiently serious is whether the Member State or the Community institution concerned manifestly and gravely disregarded the limits on its discretion [. . .]. Where the Member State or the institution in question has only considerably reduced, or even no, discretion, the mere infringement of Community law may be sufficient to establish the existence of a sufficiently serious breach [. . .].83

This – by virtue of the “manifestly-and-gravely”-requirement – already lenient standard was subjected to further caveats by the Court in cases involving the discretion of the Commission or the member states.84 These caveats are summarized with clarity by the General Court: It follows that only the finding of an irregularity that an administrative authority, exercising ordinary care and diligence, would not have committed in similar circumstances, can render the Community liable [. . .]. It is, consequently, for the Union judicature, once it has first determined whether the institution concerned enjoyed any discretion, next to take into consideration the complexity of the situations to be regulated, any difficulties in applying or interpreting the legislation, the clarity and precision of the rule infringed, and whether the error made was inexcusable or intentional [. . .]. On any view, an infringement of Community law is sufficiently serious if it has persisted despite a judgment finding the infringement in question to be established, or a preliminary ruling or settled case-law of the Court on the matter from which it is clear that the conduct in question constituted an infringement [. . .].85

Mûrisseurs Indépendants and Star fruits Cie v Commission, T-571/93, ECLI:EU:T:1995:163, paras 73–74. 82 Cf. Judgment of the Court of 7 November 1985, Adams v Commission, C-145/83, ECLI:EU: C:1985:448. 83 Judgment of the Court of 4 July 2000, Laboratoires pharmaceutiques Bergaderm SA and JeanJacques Goupil v Commission, C-352/98, ECLI:EU:C:2000:361, paras 43–44. 84 Judgment of the Court of 10 July 2003, Commission v Fresh Marine, C-472/00 P, ECLI:EU: C:2003:399, paras 61 et seq.; see also Bülow (2013), p. 618. 85 Judgment of the General Court of 23 November 2011, Sison v Council, T-341/07, ECLI:EU: T:2011:687, paras 39-40.

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Indeed it seems that both the Commission86 as well as the member states87 enjoy broad discretion88 under the EU Screening Regulation, not least with regard to the factors that may be taken into consideration to determine whether an investment is likely to affect public order and security (Art. 4 EU Screening Regulation). Given the realities of takeovers in sensitive industries, the consideration of both “complexity” and “difficulties” in interpreting the not-too-clear and not–too-precise guidelines established by the EU Screening Regulation casts its shadow on the probability of a “sufficiently serious” breach of EU law in investment screening scenarios.89

2.2.3

International Investment Law

At the time of writing, the EU is party to more than 60 IIAs, its member states to more than 2,000.90 Even after the deduction of signed but unratified and terminated IIAs as well intra-EU IIAs, i.e. such between member states, the numbers lose nothing of their impressiveness.91 Where ISCMs block access of certain third state FDI investors to member states, a violation of protection standards under the applicable IIA, for instance of national treatment or most-favoured-nation obligations,92 seems possible. For instance, the exclusion of certain foreigners forms a blatant discrimination on grounds of nationality. It would be unlawful under IIAs granting market access and extending national treatment to investors in the pre-entry phase.93 Investors will rarely be able to invoke these standards, however. This is because very few IIAs provide what is called “market access” here,94 i.e. the situation where 86 Cf., for instance, Art. 8 (1) EU Screening Regulation: “Where the Commission considers [. . .] it may [. . .]”. 87 Cf., for instance, Art. 6 (2) EU Screening Regulation: “Where a Member State considers [. . .] it may [. . .]”. 88 That is, discretion in the sense of EU law, which does not follow the German dogmatic dichotomy of discretion regarding legal consequences (Ermessen) and discretion regarding factual requirements (Beurteilungsspielraum), see Hatje and Mankowski (2014), pp. 164 et seq. 89 Where no discretion is available (for instance, regarding formal rights such as due process), sufficiently serious breaches of (procedural) law are a possibility. 90 Numbers accumulated from https://investmentpolicy.unctad.org/international-investment-agree ments (accessed on 6 May). Not all of the IIAs are in force. 91 On the compatibility of investor-state dispute settlement in intra-EU IIAs with EU law see especially Hindelang (2019) and Pohl (2018). 92 On the often similar standards of protection in IIAs see, for instance, Audit (2009) pp. 624–625. 93 Without any IIA or at least one of said configuration, however, such discrimination would likely not constitute an international wrong, cf. Sornarajah (2017), pp. 130 et seq., who even doubts that open discrimination against an ethnic group may be unlawful under general international law in an economic context. 94 On the meaning of “market access” extensively Wallace and Bailey (1998), pp. 227 et seq. On the difference between market access and admission see Gómez-Palacio and Muchlinski (2008), pp. 229 et seq.; Juillard (2000).

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a state allots foreign investors the right to enter their capital market by effecting portfolio or controlling investments in whichever sector they please.95 States that grant market access surrender their right under customary international law to refuse the entry of foreign capital to their territory.96 Academics assume “an absolute right of control over the entry and establishment and the whole of the process of foreign investment”.97 This right emanates from state sovereignty.98 More specifically, it “is based on the state’s control of its territory, which carries the attendant right to exclude aliens from that territory”.99 It is today not only universally recognized by the international legal community but also reflected in numerous international instruments.100 Viewed from the standpoint of the foreign investor, customary international law does not grant a right to admission or market access.101 Of course, states’ principle right to inhibit or prohibit flows of capital into their territory can be surrendered in a treaty such as an IIA, thus conferring on a foreign investor the right to make an international investment.102 Provisions granting foreign capital access to a state’s economy are commonly found under the headings “market access” or “right of entry and establishment” or “admission”. Occasionally, national treatment and most-favoured-nation provisions also apply at the pre-entry stage.103 All these provisions convey some form of pre-entry rights to the beneficiary.

95

Market access need not be unrestricted, particular sectors of the economy may be singled out and protected from foreign ownership. Neither is market access necessarily restricted to the capital market and investments but can also exist regarding goods, services, or persons. 96 Sornarajah (2017), pp. 110, 128–129. 97 Sornarajah (2010), p. 88 (for reasons unknown, the formulation (but not its content) was dropped in the next edition, see Sornarajah (2017), pp. 110 et seq.) and the references in fn. 100. 98 Salacuse (2013), p. 309; Neff (1990b), p. 152; cf. García-Amador et al. (1974), pp. 46 et seq. 99 Gómez-Palacio and Muchlinski (2008), p. 228. 100 UNCTAD (2002), p. 7; Mann (1949), pp. 268 et seq; Dimopoulos (2011), p. 50; cf. Jennings et al. (1992), pp. 382–385 (paras 117–118); UNCTAD (2003), p. 102; Shihata (1994), p. 47; Salacuse (2015), p. 213; Gómez-Palacio and Muchlinski (2008), pp. 228, 239; Juillard (2000), p. 336; de Mestral (2015), para 1; Sacerdoti (2000), p. 105; Griebel (2008), p. 67; Schrijver (1997), pp. 281 et seq.; Shan (2005), p. 115; Salacuse (2013), pp. 76, 309; Heinemann (2011), p. 39; Muchlinski (2007), pp. 177 et seq.; Wallace (2002), p. 288; see Neff (1990b), pp. 125, 149 (regarding trade and export controls) and historically Neff (1990a), pp. 70 et seq.; Ralston (1926), p. 270 (para 476) (with regard to the comprehensive exclusion of access of foreigners); even Sandrock (2010), pp. 268–269, 301–302 seems so admit this at the basis of his argument, arguing however that (enforceable) market access rights have been granted in the majority of German (and, arguably, even European) post-1968 IIAs; implicitly Carlevaris (2008), p. 44; Carreau and Juillard (2013), pp. 441 et seq.; Shihata (1993), Art. II (3) World Bank Guidelines; UN General Assembly Resolution 3281 [XXIX] of 12 December 1974; Charter of Economic Rights and Duties of States: 1974 Charter Art. 2 (2) (a); Commission on Transnational Corporations (1983), Art. 47; Report of the Panel of 25 July 1983, adopted on 7 February 1984, L/5504 – 30S/140, Canada – Administration of the Foreign Investment Review Act, para 5.1. 101 Heinemann (2012), p. 852. 102 Gómez-Palacio and Muchlinski (2008), pp. 228, 239–240; UNCTAD (2002), p. 12; for examples see Wallace (2002), pp. 290 et seq. 103 Salacuse (2015), p. 222.

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However, these rights differ considerably in scope: for instance, it is not uncommon to secure the right of states to refuse the entry of foreign capital either by exempting certain sectors of their economy104 or by pulling market access provisions from the ambit of the applicable (investor-state) dispute resolution mechanism.105 Subjecting certain foreign investors (for instance, third state FDI investors) to a different treatment than enjoyed by domestic or yet other foreign investors (for instance, EU investors) is another way of relativizing market access.106 Only where market access provisions are reinforced by (pre-entry) national treatment obligations does the host state entirely cede its right to control the entry of foreign capital on the basis of the nationality of the investor.107 Although there is evidence pointing at an increased willingness of states to grant some form of market access in recent years,108 the majority of jurisdictions (at least partially) exempt (at least certain sectors of) their economies from investments by foreigners. Strong or “absolute” market access provisions, totally free from at least one of the above-mentioned constrictions, remain few in number.109 This is hardly surprising: in their national laws, states reserve (certain sectors of) their economy for ownership and control by their own citizens and juristic persons, inter alia for reasons of national security and public order.110 These national-level reservations are usually mirrored by corresponding clauses in IIAs, in which states tread carefully not to provide market access rights for foreign investors exceeding these reservations.111 Such grandfathering on the international level is necessary to prevent domestic reservations from constituting a treaty breach. Hardly any multilateral agreement contains market access provisions.112 A general tendency of regional economic associations seems to be to extend market access to other member states’ investors but not to third country investors (the EU’s Art. 63 (1) TFEU is an exception to this rule, subject to the limitation explained below Sect. 3.1).113 More commonly, market access provisions are found in bilateral IIAs

Either by taking a “positive list” approach, committing expressly to the sectors which are opened for foreign investors or by taking a “negative list” approach, principally opening up to foreign investments but exempting specified sectors from such commitment (de Mestral 2015, para 9). 105 For instance, Art. 8.18 Comprehensive Economic and Trade Agreement between Canada and the European Union and its Member States (CETA), OJ L 11, 14 January 2017, pp. 23–1080. Statestate enforcement remains an option in this case, see Hindelang and Sassenrath (2015), p. 118. 106 Salacuse (2015), pp. 218 et seq. 107 Sornarajah (2017), p. 110; Salacuse (2015), pp. 225 et seq. 108 UNCTAD (2015), pp. 110 et seq.; Dimopoulos (2011), pp. 50 et seqq. 109 See Salacuse (2015), pp. 218, 225; Sornarajah (2017), p. 130 for these and other reasons. 110 Salacuse (2015), p. 214; on defence and national security, see Trebilcock et al. (2013), pp. 575 et seq. 111 Sornarajah (2017), p. 128 (fn. 86); Salacuse (2015), p. 214. 112 On the General Agreement on Trade in Services cf. Trebilcock et al. (2013), pp. 480, 485–486; Sornarajah (2017), pp. 130 et seq.; Gómez-Palacio and Muchlinski (2008), pp. 245 et seq. The TFEU is considered a treaty of a regional economic association here. 113 Sacerdoti (2000), p. 112. 104

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(or bilateral investment treaties (BITs)).114 Traditionally, only the US and Canada model investment treaties contained market access provisions, whereas the majority of states refrained from (enforceable) provisions of the sort.115 Even the US and Canadian BITs contained sectoral exclusions, however. Both the EU as well as other states have started following the US and Canada’s lead in recently concluded IIAs.116 Older treaties not involving the US or Canada – at least according to majority opinion – does not contain a right to market access for foreign investors.117 However, even recently negotiated EU agreements exclude market access provisions from investor-state dispute settlement and thus leave investors with a non-enforceable right.118 By contrast, in post-entry situations, investors enjoy full protection by the applicable IIA. The EU’s hospitality for and legal protection (at least) of portfolio investment from third states would seem to invite circumvention or even abuse by (first) placing non-controlling investments protected by Art. 63 (1) TFEU and (then) incrementally extending these to controlling investments benefiting from post-entry protection standards in IIAs. However, cases of circumvention or abuse are addressed not only in national law and the EU Screening Regulation.119 They can also be dealt with under IIAs, many of which require that investments be made in accordance with the host state’s law, which would likely not be the case if the investor circumvents the rules on admission in bad faith.120

2.3

Fora for Legal Redress

Parties to a case bring it to an institution whose decision they desire. Within this institution, judges, competent by law, or arbitrators, competent by party consensus, preside over the case – in the best-case scenario neutrally, independently and

114

Cf. de Mestral (2015), paras 5–11; Salacuse (2015), pp. 217 et seq. Alvarez (1990), pp. 120 et seq. (also on treaties of friendship, commerce, and navigation); Annacker (2011), pp. 546 et seq; Gómez-Palacio and Muchlinski (2008), pp. 240 et seq. call this the “‘controlled entry’ approach”; Sacerdoti (2000), p. 108; Sandrock (2010), pp. 275, 280; Sornarajah (2011), pp. 274, 281 also lists Japan and South Korea as employing effective market access provisions. 116 For the EU see Reinisch (2015), paras 20–22; for some non-EU examples Gómez-Palacio and Muchlinski (2008), p. 255 (fn. 65). 117 Sornarajah (2011), pp. 281 et seq. According to Sandrock (2010), pp. 286–288, 310 however, the German model BIT contains a right to market access for foreign investors that is enforceable by way of investor-state dispute arbitration. See also Carlevaris (2008). 118 Cf. Art. 8.18 CETA; Hindelang and Hagemeyer (2017b), p. 54. 119 Cf. Sec. 55 (2), 60 (1) Foreign Trade and Payments Ordinance for Germany as well as recital (10) and Art. 3 (6) EU Screening Regulation. 120 Cf. Dolzer and Schreuer (2012), pp. 92 et seq.; Borris and Hennecke (2008), pp. 53 et seq. 115

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impartially.121 Together, judges and arbitrators are referred to as adjudicators here. Depending on the chosen basis of legal redress, investors will find themselves in a court or an arbitral institution. If investors sue member states on the basis of national state liability law or EU public liability law, national courts are competent. In Germany, in the first instance, primary claims are handled by the administrative court (Verwaltungsgericht) in Berlin, where the Federal Ministry for Economic Affairs and Energy (responsible for the issuance of screening decisions) is located.122 This court would also be competent for secondary claims on the basis of Sec. 48 (3) Administrative Procedure Act. Civil district courts (Landgerichte) are competent in the first instance for other secondary claims, regardless of whether these are based on Art. 34 Basic Law in conjunction with Sec. 839 Civil Code, EU state liability law or Sec. 49 (6) Administrative Procedure Act.123 If it is the Federal Ministry for Economic Affairs and Energy that allegedly caused the damage, the Berlin civil district court would be competent.124 As regards primary claims against the Commission, investors are, in the first instance, directed to the General Court (Arts. 256 (1) and 281 (1) TFEU and Art. 51 Protocol No. 3 on the Statute of the Court of Justice of the EU). This is also true for secondary claims in first instance (Arts. 268 and 256 (1) TFEU). Competence for claims under IIAs is subject to the provisions therein, which usually assign competence to some type of ISDS mechanism, often arbitral institutions.125

2.4

Summary

While primary claims are, in effect, limited to the annulment or issuance of a screening decision and thus in many cases unsatisfactory for impatient investors, secondary claims are hardly able to gain a foothold either in national or in EU or in international investment law. Regarding material protection by IIAs, this is at least the case for pre-entry stages. In post-entry scenarios, material protection by IIAs is more extensive, time not as pressing an issue and legal redress more of an option. A

121

Cf. Hindelang and Hagemeyer (2017b), pp. 105 et seq. See Sec. 52 No. 2 and 5 Code of Administrative Court Procedure. 123 See Art. 34 third sentence Basic Law, Sec. 49 (6) third sentence Administrative Procedure Act, Sec. 40 (2) Code of Administrative Court Procedure; Sec. 71 (2) No. 2 Courts Constitution Act, English translation of the version published on 9 May 1975 (FLG I, p. 1077), last amended by Art. 10 paragraph 6 of the Act of 30 October 2017 (FLG I, p. 3618) available at www.gesetze-iminternet.de/englisch_gvg/englisch_gvg.html (accessed 6 January 2020). 124 Cf. Sec. 18, 32 Code of Civil Procedure, English translation of the promulgation of 5 December 2005 (FLW I, p. 3202; 2006, p. 431; 2007 p. 1781), last amended by Art. 1 of the Act dated 10 October 2013 (FLG I, p. 3786) available at https://www.gesetze-im-internet.de/englisch_zpo/ englisch_zpo.html (accessed 6 January 2020). 125 Cf. Hindelang and Sassenrath (2015), p. 32 et seq.; Hindelang and Hagemeyer (2017b), pp. 12–13, 51–53; see generally Waibel (2015). 122

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quick glimpse on the potential addressees of legal redress has shown who bears the sensitive task of exploring the extent and limits of judicial review. These somber prospects for investors are not brightened by the blinders placed on judicial review regarding the crucial material criteria for investment screening discussed in the next section.

3 Material Criteria and Obstacles for Legal Redress Irrespective of whether third state FDI investors pursue primary or secondary claims or whether they base these on national law, EU law or international investment law, the decisive material criteria are not or not fully reviewable by adjudicators.126 The mechanisms and legal technicalities to limit judicial review vary, but the result is uniform: a black box from the perspective of adjudicators, a Pandora’s Box from the perspective of states. What are the decisive material criteria? In essence, ISCMs’ screening decisions are restrictions on an investment on grounds of national security or public order or security (cf. Arts. 1 (1) and 3 (1) EU Screening Regulation). Although “national security” and “public order or security” are nominally different legal concepts in many jurisdictions (cf. also Art. 4 (2) TEU, Art. 36 TFEU), a de facto convergence of the two is becoming apparent by simultaneous extension of what constitutes national security and by extension of the limitations to judicial review of what constitutes public order and security.127 This convergence relates directly to one of the sanctuaries of interstate dealings: sovereignty.128 Ever protective of their sovereignty, states have found ways to bar national security from judicial review and successfully protected administrative discretion in the interpretation of what falls under national security or public order or security.129 Unsurprisingly, thus, national security is an elusive concept.130 With regard to public order or security, a similar traction towards self-justiciability is discernable, at least with regard to third state FDI investors. The lack of full judicial revisability is the main reason why legal redress against screening decisions and other actions by member state ISCMs, the Commission or member states is without sound prospects of success for third state FDI investors. The

126

Regarding procedural rights (cf. Art. 41 CFREU), review remains possible and could indeed be viewed crucial given the limited review of material criteria. 127 Cf. Cable (1995), p. 305 for a similar convergence of international economic and security concerns. 128 See generally Jackson (2003). 129 Cf. Clodfelter and Guerrero (2012), p. 186; Knoll (1984), pp. 622 et seq.; see also Art. 4 (2) TEU. On the scope of judicial review of Art. XXI GATT see, on the one hand, Bhala (1998), pp. 268 et seq.; Bhala (1997), pp. 8 et seq. and, on the other hand, Schill and Briese (2009), pp. 107–110, 120–138; Chen (2017), pp. 321 et seq.; Hestermeyer (2010), para 21. 130 Alvarez (1990), p. 101; Feng (2010), p. 264.

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following sections show how review is limited in EU law (below Sect. 3.1), in national law (below Sect. 3.2) and in international investment law (below Sect. 3.3).

3.1

The Court of Justice of the EU

On the EU level, limited contestability of screening decisions in cases involving third state FDI investors is a consequence of the denial of protection of these investors by the fundamental freedoms. In essence, adjudicators cannot review the material criteria for screening decisions because screening decisions do not interfere with the fundamental freedoms applicable to third state FDI investors. The situation is somewhat different for investments by EU natural or legal persons. On principle, member states have to navigate the waters of national security (in the diction of 346 (1) TFEU: essential interests of member state security) and public order or security (on terminology, cf. Arts. 36, 52 (1) and 65 (1) (a) TFEU) in order to legally place restrictions on investments. Article 346 (1) TFEU is by no means a general abdication from member state obligations under the TFEU.131 Neither is public order or security non-reviewable. On the contrary, [. . .] public policy and public security may be relied on only if there is a genuine and sufficiently serious threat to a fundamental interest of society.132

Avoiding a clear differentiation between public order and public security, the Court has created a body of case law delineating permissible and impermissible grounds for restricting the pertinent fundamental freedom: for example, the Court has decided that public order and security are affected when the continuity of supply of telecommunication, energy and services of strategic import (and also the respective infrastructure for their conveyance) are endangered.133 By contrast, economic and protectionist motives are not acceptable to the Court.134 The enhancement or protection of competitiveness of sectors, the reduction of state debt and the modernization of production facilities have been rejected as grounds for intervention.135

131

See especially, Eisenhut (2010), p. 122; see also Judgment of the Court of 20 March 2018, Commission v Austria, C-187/16, ECLI:EU:C:2018:194, paras 72 et seq.; Bratanova (2004); Mausch-Liotta (2017c), para 3. 132 Église de scientology, C-54/99, para 17 (references omitted); see also Commission v Belgium, C-503/99, para 47. 133 See, for example, Commission v Belgium, C-503/99, para 23; Judgment of the Court of 14 February 2008, Commission v Spain, C-274/06, ECLI:EU:C:2008:86, para 72; for more references see Hindelang and Hagemeyer (2017a), pp. 887 et seq.; Rickford (2010), pp. 74 et seq.; Mausch-Liotta (2017a), para 27. 134 Église de scientology, C-54/99, para 17; Rickford (2010), p. 74. 135 Pottmeyer (2013), para 44.

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Whether “key industries” and “critical infrastructure” lie within the fundamental interest of society has not been ruled upon by the Court yet.136 In case of a controlling investment by third state investors, however, neither questions of the extent and legal effect of Art. 346 (1) TFEU nor those of the existence of a genuine and sufficiently serious threat to a fundamental interest of society play a role. This is because neither Art. 49 (1) (in conjunction with Art. 54 (1)) TFEU nor Art. 63 (1) TFEU137 protects third state FDI investors. According to the Court, it is the purpose of the member state legislation in question that determines the applicable fundamental freedom: if it only applies to shareholdings enabling the holder to exert a definitive influence, Art. 49 TFEU is pertinent; if it also applies to portfolio investments, Art. 63 TFEU is pertinent.138 The “in-betweens”, i.e. member state legislation applicable to both types of investment, are measured against the predominantly affected fundamental freedom. Since ISCMs primarily target the former type of investment (mostly by the definition of what a covered transaction is, i.e. one conveying definite influence over the target), it will in most cases be Art. 49 (1) TFEU that is exclusively applicable. The EU Screening Regulation is no exception to this rule, although it arguably allows a different interpretation as it is not strictly limited to controlling investments (see also recital (10) EU Screening Regulation).139 Since third state investors are not included in the personal scope of Art. 49 (1) TFEU (applicable only to nationals of a member state) and Art. 63 (1) TFEU is superseded by Art. 49 (1) TFEU when it comes to the type of FDI targeted by ISCMs, a justification is not required for negatory or conditional screening decisions against such investors.140 This reasoning has been scolded as a paradox by many, not least due to the counter-intuitive, inversely proportional decline of legal protection with rising participation in target companies and the 136 See Friedrich (2009), para 32; Müller and Hempel (2009), p. 1640; Seibt and Wollenschläger (2009), p. 839; sceptical Schweitzer (2010), pp. 278 et seq. 137 On the applicable fundamental freedoms cf. Martini (2008), p. 317; Hindelang and Hagemeyer (2017a), pp. 885 et seq. 138 Judgment of the Court of 13 November 2012, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue and others, C-35/11, ECLI:EU:C:2012:707, paras 89 et seq.; this line of jurisprudence has been maintained in the Judgment of the Court of 10 June 2015, X AB v Skatteverket, C-868/13, ECLI:EU:C:2015:375, para 17 and Judgment of the Court of 5 February 2014, Hervis Sport- és Divatkereskedelmi Kft. v Nemzeti Adó, C-385/12, ECLI:EU:C:2014:47, para 21. 139 The ISCM of member states are envisioned (only) “to screen foreign direct investments” (Art. 3 (1) EU Screening Regulation), which is defined to include “investments which enable effective participation in the management or control of a company”, but, more generally, also “means an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in a Member State” (Art. 2 (1) EU Screening Regulation). 140 See Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue and others, C-35/11, para 97-99; X AB v Skatteverket, C-868/13, para 18; Hervis Sport- és Divatkereskedelmi Kft. v Nemzeti Adó, C-385/12, para 22; in outlines already Judgment of the Court of 19 July 2012, Scheunemann v Finanzamt Bremerhaven, C-31/11, ECLI:EU:C:2012:481, para 35.

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derogation of Art. 63 TFEU by an inapplicable provision (Art. 49 TFEU).141 Whether Art. 4 EU Screening Regulation can be understood as a renunciation of this doctrine is unclear but seems unlikely (see above Sect. 1.1).

3.2

National Courts (Here: Germany)

On national level, limited contestability is, first and foremost, a consequence of the above-mentioned reasoning of the Court. Under the assumption that the EU is exclusively competent for FDI (Arts. 3 (1) (e) and 207 (1) TFEU), member states’ ISCMs only have to stand up to the Court’s above-mentioned casuistry,142 unless national legislation extends a higher degree of protection to investors. For example, the German ISCM permits the prohibition of investments by the Federal Ministry for Economic Affairs and Energy (with the approval of the federal government) in order to ensure public order or the security of the Federal Republic of Germany.143 If certain military industries are targeted, prohibition has to ensure the essential security interests of the Federal Republic of Germany.144 Both legal concepts – public order or security and essential security interests – require interpretation.145 In general, the interpretation of such legal concepts by the administration is subject to full review by the courts in order to provide effective legal protection.146 Exceptionally, however, courts’ prerogative to review is limited either to ensure a proper functioning of the executive branch or because courts are inapt to review the decision made.147 In practice, this means that the executive branch has the final say in determining the content of the legal concept; essentially, the concept in question becomes self-judging. Review by the courts is largely limited to errors touching upon not the content of the legal concepts but the process of arriving at the 141

See Hindelang (2013b), p. 80 with further references. For a convincing discussion of why the Court’s reasoning should be limited to the field of direct taxes see Hindelang (2010), p. 447; see also Hindelang (2009), pp. 112 et seq. 142 On issues of competence see in this volume Korte, In Search of a Role for the Member States and the EU to Establish an Investment Screening Mechanism. See also recital (6) EU Screening Regulation. 143 Sec. 55 (1), 59 (1) Foreign Trade and Payments Ordinance; Sec. 4 (1) No. 4, 5 (2) Foreign Trade and Payments Act, English translation of the promulgation of 6 June 2013 (FLG I, p. 1482), as last amended by Art. 4 of the Act of 20 July 2017 (FLG I, p. 2789) available at www.gesetze-iminternet.de/englisch_awg/englisch_awg.html (accessed 6 January 2020). 144 Sec. 60 (1) 62 (1) Foreign Trade and Payments Ordinance; Sec. 4 (1) No. 1, 5 (3) Foreign Trade and Payments Act. 145 Hindelang (2013a), p. 15 (in German legal parlance: unbestimmte Rechtsbegriffe). 146 Cf. Art. 19 (4) Basic Law and Order of the German Federal Constitutional Court (Bundesverfassungsgericht) of 17 April 1991, case 1 BvR 419/81, para 47. 147 Cf. Order of the Bundesverfassungsgericht of 8 July 1982, case 2 BvR 1187/80, para 79; Order of the Bundesverwaltungsgericht of 16 January 2018, ECLI:DE: BVerwG:2018:160118B1VR12.17.0, para 27; Hindelang (2013a), p. 16 with further references.

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decision on whether the facts at hand meet the self-set requirements of the legal concept (or not). In other words, judicial review is limited to methodological errors, for instance whether the facts of the case were correctly and exhaustively established, whether they were taken into consideration correctly or whether the determination was based only on factors that fall under the (administrative understanding of the) legal concept.148 The intriguing question is thus: Are the legal concepts of public order or security and essential security interests fully reviewable? Since prohibitions or conditions on acquisitions are restrictions on fundamental freedom(s) under the TFEU and require justification (at least vis-à-vis EU investors),149 public order and security have to be interpreted in accordance with Arts. 36, 52 (1) and 65 (1) TFEU (Sec. 4 (1) Nos. 4 and 5 (2) Foreign Trade and Payments Act).150 Essential security interests are a legal concept deduced from Arts. 65 and 346 (1) (b) TFEU and also Art. XXI General Agreement on Tariffs and Trade (GATT).151 It applies in particular if security policy interests or military readiness is endangered as a consequence of the acquisition (Sec. 4 (1) Nos. 1 and 5 (3) Foreign Trade and Payments Act).152 Any construction of the two concepts beyond this European understanding would (again vis-à-vis EU investors) be potentially actionable, although the member states supposedly enjoy a certain discretion in determining public order and security, as well as essential security interests.153 However, in relation to third state FDI investors, this interpretation is irrelevant because the Court’s logic (see above Sect. 3.1) is mirrored at national level, so that absent protection by Art. 49 (1) or Art. 63 (1) TFEU, justification of a deviation from these fundamental freedoms is not required. Judicial review is limited accordingly. If said provisions of the TFEU do not apply, foreign investors could only rely on national (fundamental) rights to market entry (if any). Assuming, for the sake of argument, that such rights exist, the interpretation of public order and security would consequently also be derived from national law, not the TFEU.154 Against this 148

See Order of the Higher Administrative Court of Hesse of 10 April 2014, ECLI:DE: VGHHE:2014:0410.6A2077.13.Z.0A, para 12; Mausch-Liotta (2017b), para 26; Mausch-Liotta (2017c), para 3; see also Tietje (2015), para 175. 149 European Commission (2017), p. 4. 150 They are not to be equated or confused with the concept of public order or security under German police and general public order law Müller and Hempel (2009), p. 1640; Pottmeyer (2013), para 43. 151 Order of the Bundesverfassungsgericht of 25 October 1991, case 2 BvR 374/90, para 10. 152 Widder and Ziervogel (2005), para 262. 153 Cf. European Commission (2017), p. 5; Order of the Higher Administrative Court of Hesse of 10 April 2014, ECLI:DE:VGHHE:2014:0410.6A2077.13.Z.0A, para 11 (on Sec. 4 (1) No. 3 Foreign Trade and Payments Act; it is disputed whether and to which extent this applies to the other items in Sec. 4 (1) Foreign Trade and Payments Act); Judgment of the Court of 20 March 2018, Commission v Austria, C-187/16, ECLI:EU:C:2018:194, paras 72 et seq. 154 Before the EU Screening Regulation, it was unclear whether recurrence to the German concept of public order and security (see Voland 2009, p. 522) were possible, given the competence issues between member states and the EU (see in this Volume Korte, In Search of a Role for the Member States and the EU to Establish an Investment Screening Mechanism. After the entry into force of the

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background, it is remarkable that Art. 4 EU Screening Regulation provides guidance as to the interpretation of public order and security also for scenarios involving third state FDI investors. It remains unclear why the EU Screening Regulation deems necessary this list of factors if no fundamental freedom applies (see above Sect. 1.1). In any case, since some of the items in this provision are ambiguous and the list is not exhaustive, non-reviewable discretion on the part of the administration is not far to seek. Ultimately, legal certainty as to the extent and standard of judicial review of the interpretation of public order and security in cases involving third state FDI investor will only exist after the Court clarifies its position on the applicability of the fundamental freedoms. As regards essential security interests, the EU Screening Regulation refrains from modifying the status quo (cf. recital (7) and Art. 1 (2) EU Screening Regulation).

3.3

Investor-State Dispute Settlement

On the international level, the material criteria are not comparably shielded from judicial review. To be sure, IIAs also show a tendency for securing national security interests: such tendency is evidenced by typical IIA clauses regarding essential security interests and public order (or so-called non-precluded measure provisions),155 which can be wide in scope, ambiguously worded and self-judging in nature – similar to Art. XXI GATT, the historical prototype of these clauses.156 However, vis-à-vis the vast number of different IIAs and the fragmented and occasionally inconsistent arbitral opinions on these issues,157 it is difficult to concede that international investment law principally (and successfully) keeps open a backdoor to fend off foreign investment through ISCMs.158 Far greater limitations are placed on investors’ access to legal redress by the widespread exclusion of pre-entry rights (above Sect. 2.2.3).

EU Screening Regulation, it seems that member states’ understanding of public order and security in the field of FDI has become entirely irrelevant. In any case, (court-enforceable) market entry rights, rarely ever granted in IIAs, cannot silently be read into the Foreign Trade and Payments Act. 155 The Court even demands the inclusion of such exceptions to ensure that Art. 64, 66, and 75 TFEU can take effect, see, for instance, Judgment of the Court of 3 March 2009, Commission v Sweden, C-249/06, ECLI:EU:C:2009:119, paras 37–38; Viterbo (2012), p. 195 (fn. 133) with further references. 156 See especially OECD (2007), p. 105; Sabanogullari (2018), pp. 42–44, 271–272; Moon (2012), p. 483; by contrast, Alvarez (2012), p. 275 (fn. 83) quotes a study indicating that 90% of the 2,000 reviewed IIAs did not contain security exceptions. 157 Cf. Burgstaller (2011), pp. 181 et seq., who points out the extension of the essential security doctrine to non-military reasons; Dolzer and Schreuer (2012), pp. 188 et seq.; Salacuse (2015), pp. 378 et seq.; Sornarajah (2017), pp. 544 et seq. is more critical. 158 Skovgaard Poulsen (2016), p. 21 finds that “[w]ith respect to security concerns, the US is arguably the country most insulated from sensitive claims due to its self-judging security carveouts in recent BITs.” Alvarez (2012), p. 273 draws a rather pessimistic picture, too.

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4 Conclusions Legal redress against the actions of ISCMs in the pre-entry stages of investment is something of a rarity. This is likely to remain unchanged even after the entry into force of the EU Screening Regulation. The decisive obstacles to legal redress have been left untouched by the EU Screening Regulation. On a factual level, the EU Screening Regulation does not take into account the fact that it does not take a formal screening decision to shatter investment undertakings, but it considers the fact that (public) knowledge of a(n) (imminent) screening procedure and lapse of time – the power of fact – can impact investments just as devastatingly as formal screening decisions can. Legally, most of the primary claims are also impeded by the time factor or by lack of apt administrative litigation remedies. Actions other than screening decisions (opinions, comments and information requests), as well as the initiation of a screening procedure, are in effect not actionable in the jurisdictions considered here. Primary claims thus focus on the (partial) annulment or issuance of a screening decision and thus only address member states, not the Commission. Secondary claims against the EU or member states, be it under EU law or national law, will often be fault based, only award capped damages and, especially due to restrictive material conditions to liability, be of little avail to investors. International investment law regularly offers no mitigation because enforceable market access rights are a rarity while at the same time crucial to investors’ claims. For investors that have overcome these hurdles, the most significant obstacle lies yet ahead: limited review of the decisive material criteria allowing restrictions on foreign investment, i.e. national security and public order or security, both under EU law and – mirroring it – under national law. This limited review becomes possible as a consequence of the denial of protection by any fundamental freedom of third state FDI investors vis-à-vis ISCMs. The situation under IIAs is less clear but also less relevant, given the vast absence of enforceable market access rights. Given the limited review of material criteria, the review of formal investor rights such as to due process gains significance, and successful legal redress will thus often depend on formal or procedural errors. The EU Screening Regulation has not changed these impediments on legal redress. It does provide third state FDI investors with a right to “recourse” at least against screening decisions, which – even in lack of applicability of any fundamental freedom – was also guaranteed before Art. 3 (5) EU Screening Regulation. Neither has the EU Screening Regulation lessened investor rights by providing “recourse” rather than “judicial redress”, nor has it expanded them by unlocking hitherto inapplicable fundamental freedoms. Recent upgrading and anticipated enhanced use of ISCM is thus not very likely to bring a flood of lawsuits to the doorsteps of courts and arbitral institutions. Normatively, judicial review would contribute to the EU Screening Regulation’s goals of a transparent investment climate and further the rule of law. It could also better the soiled reputation of ISCMs, which are criticized as protectionist instruments

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susceptible to politicization or even populist abuse.159 However, this would require to provide adjudicators, most of which have a healthy tendency not to judge or make (foreign) policy, a set of more concrete rules to base their decisions on – otherwise, one unpredictable decision-making process would only be replaced by another.160

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Part VIII

Conclusions and Perspectives

A Complex Setting of Cooperation and (Potential) Conflict: Regulation (EU) 2019/452 in a Doctrinal Perspective Steffen Hindelang and Andreas Moberg

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The EU Screening Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 The Loose EU Framework for the Screening of FDIs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 The Cooperation Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract This chapter provides a doctrinal perspective on the EU Screening Regulation. It seeks to present, clarify, and assess the very rules contained therein. Following a sketch of the way in which the rules are organised in the Regulation, the chapter discusses in more detail the rules that are directed at the establishment of “a framework for the screening by Member States of foreign direct investments into the Union on the grounds of security or public order”. It continues by critically assessing the rules that create the “mechanism for cooperation between Member States, and between Member States and the Commission, with regard to foreign direct investments likely to affect security or public order”. The chapter closes with a brief summary and outlook.

S. Hindelang (*) University of Southern Denmark, Department of Law, Odense, Denmark Humboldt University, Faculty of Law, Berlin, Germany e-mail: [email protected] A. Moberg University of Gothenburg, Department of Law, Gothenburg, Sweden e-mail: [email protected] © Springer Nature Switzerland AG 2020 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: 837–852, https://doi.org/10.1007/16495_2020_27, Published online: 9 August 2020

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1 Introduction The rules governing the screening of foreign investments by public authority was an area of law that had largely led a shadowy existence in most of the Member States of the European Union (EU), if it existed at all. Almost any foreign investment into the EU was welcomed, essentially perceived as proof of the competitiveness of the market.1 This picture, however, has changed rapidly since around 2016, when companies such as Kuka, a manufacturer of industrial robots, and Aixtron, manufacturing metalorganic chemical vapour deposition equipment, where eyed by foreign investors.2 Investment screening laws – or their insufficient scope – have made it to the front page of major media outlets,3 and foreign investors, once wooed and wheedled by European governments, are suddenly met with scepticism.4 Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the Union (EU Screening Regulation)5 is one of the clearest signs – and possibly also a catalyst – of this tectonic shift in the EU’s crust. The Commission’s latest call on the EU Member States during the COVID-19 crisis to use their investment screening regimes to the fullest, or to introduce such if still lacking,6 should have been enough to convince the last doubter that we are living in different times. The preceding contributions to this volume cover a wide range of issues tackling this tectonic shift from different perspectives. They address the economic7 and political8 contexts of investment screening; they retrace the political debates that

1 See in this volume Age Bakker, The Political Economy of Capital Controls and Liberalization in the European Union. 2 Cf., e.g. The Wall Street Journal (24 October 2016), https://www.wsj.com/articles/german-with draws-approval-of-chinese-takeover-of-aixtron-1477297215. 3 Federal Ministry for Economic Affairs and Energy (BMWi) (2019), https://www.bmwi.de/ Redaktion/EN/Publikationen/Industry/industrial-strategy-2030.pdf?__blob¼publicationFile&v¼7; European Commission (13 September 2017), https://ec.europa.eu/commission/presscorner/detail/ en/SPEECH_17_3165. 4 Reuters (17 May 2020), https://www.reuters.com/article/us-eu-china-investment/europe-shouldtemporarily-ban-chinese-takeovers-germanys-weber-idUSKBN22S0WR. 5 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 investment into the Union, OJ L 79/1, 21/03/2019, p. 1–14. 6 Communication from the Commission, Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452 (FDI Screening Regulation), Brussels, 25.3.2020, C(2020) 1981 final, Annex, p. 2. 7 See in this volume Age Bakker, The Political Economy of Capital Controls and Liberalization in the European Union. 8 See in this volume: Stephan Wernicke, Investment Screening: The Return of Protectionism? A Business Perspective; Sven Simon, Investment Screening – The Return of Protectionism? A Political Account.

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led to the adoption of the EU Screening Regulation.9 They shed light on the Regulation’s constitutional foundations10 and its two key concepts of “public order and security”11 and “third country” investment.12 They, further, present various investment screening regimes existing in the EU Member States13 and other major jurisdictions outside the EU,14 and they seek to unveil legal mechanisms already contained in EU law that share similar functions as investment screening, namely sectoral rules and regulations that constrain the free movement of capital.15 The concluding chapter of this volume seeks to add yet another facet to the picture by engaging into a doctrinal exercise. It seeks to present, clarify, and assess the very rules contained in the EU Screening Regulation, which ultimately emerged from a complex mix of interests at play when this piece of legislation was drafted.16 After a brief outline of the way in which the rules are organised in the EU Screening Regulation (below, Sect. 2.1), the rules that are directed at the establishment of “a framework for the screening by Member States of foreign direct investments into the Union on the grounds of security or public order” are discussed (below, Sect. 2.2). Further, the rules that create the “mechanism for cooperation between Member States, and between Member States and the Commission, with regard to foreign direct investments likely to affect security or public order” are explained and critically assessed (below, Sect. 2.3). This chapter closes with a brief summary and outlook (below, Sect. 3).

9

See in this volume Joanna Warchol, The Birth of the EU Screening Regulation. See in this volume: Stefan Korte, In search for an EU Competence to Establish an Investment Screening Mechanism and Restricting Effects Flowing from Fundamental Freedoms, Fundamental Rights, and other EU Primary Law; Bugge Daniel, Comment on Stefan Korte’s chapter In search for an EU Competence to Establish an Investment Screening Mechanism and Restricting Effects Flowing from Fundamental Freedoms, Fundamental Rights, and other EU Primary Law. 11 See in this volume Martin Nettesheim, EU Investment Screening: The Concept of “Security und Order”. 12 See in this volume: Lars S. Otto, What Is a Foreign Direct Investment? Understanding Third Country Direct Investments Conceptually and in Practise. 13 See in this volume: Philipp Stompfe, Foreign Investment Screening in Germany and France; Paolo Vargiu, Foreign Investment Screening in Italy, Spain, Portugal and Greece; Szymon Pawłowski/Marek Jaśkowski, Foreign Investment Screening in Poland, Lithuania and Latvia; Szilárd Gáspár-Szilágyi, Foreign Investment Screening in Hungary and Romania; Jonas Hallberg, Foreign Investment Screening in Finland, Norway, Sweden and Denmark. 14 See in this volume: Vladimir Talanov, Foreign Investment Screening in on Russia; Greta Lichtenbaum/David J. Ribner, Foreign Investment Screening in USA; Kojiro Fujii/Noriko Yodogawa/Marie Wako, Foreign Investment Screening in Japan; Qingjiang Kong/Kaiyuan Chen, Foreign Investment Screening in China. 15 See in this volume: Henning Berger, The Banking and Insurance Sector; Dominik Eisenhut, The Defence, Military and Dual-Use Sector; Henning Jessen, The Transport Sector; Bent Ole Gram Mortensen, The Energy Sector; Michael Fehling, The Telecommunications and IT Infrastructure Sector. 16 This topic is further elaborated in Hindelang and Moberg (2020). 10

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2 The EU Screening Regulation 2.1

Overview

According to its Article 1(1), the EU Screening Regulation’s aim is twofold: first, to establish “a framework for the screening by Member States of foreign direct investments into the Union on the grounds of security or public order” and, second, to bring about a “mechanism for cooperation between Member States, and between Member States and the Commission, with regard to foreign direct investments likely to affect security or public order”.17 Article 2 contains essential definitions, such as “foreign direct investment” (FDI), “foreign investor”, or “screening mechanism”. Article 3 is addressed to the Member States’ screening mechanisms, i.e. instruments of general application to screen FDIs on grounds of public order and security, setting certain procedural standards. In Article 4, the Regulation refers to a number of factors – neither compelling nor forming a closed list – that may be taken into account when determining whether an FDI is likely to affect “security or public order”.18 Article 5 establishes, inter alia, an annual reporting duty of the Member States to the Commission on activities relating to FDIs in general and the operation of domestic investment screening mechanisms. Articles 6 and 7 respectively set up the cooperation mechanism “in relation to foreign direct investment undergoing screening” as well as to FDI not undergoing screening in a Member State. Articles 9, 10, and 14 provide detailed rules on the handling of information to be shared among the Member States themselves, as well as between the Commission and the Member States. Article 8 lays down special rules for cooperation when an FDI is likely to affect projects or programmes of Union interest. Projects and programmes subject to these rules are listed in the Annex to the Regulation.19 Articles 11, 12, and 13 relate to a “minimalist infrastructure” in support of the cooperation mechanism, including an international component.

2.2

The Loose EU Framework for the Screening of FDIs

According to its Article 1(1), the EU Screening Regulation aims at establishing an EU framework for the screening of FDIs by Member States into the EU on grounds of security or public order. Contrary to what one may typically expect to find when a

17

Cf. Article 1 (1). “Security or public order” is the locution chosen by the EU legislator to define the grounds which legitimate restrictive measures relating to foreign direct investment, cf. para. 3 of the preamble of the Regulation and Article 1.1. The exact relation, and potential overlap, of the term “security and public order”, in relation to e.g. “national security” in Article 4(2) TEU and “public policy” or “public security” in Article 65(1) TFEU will be covered more in depth below. 19 The Annex is amendable in accordance with Articles 8(4), 16. 18

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legislative act in an area of exclusive Union competence claims to establish an EU framework, the Regulation actually grants the Member States very wide discretion to decide on how to regulate the screening of FDIs, cf. Article 3(1) (in accordance with Article 2(1) TFEU). Significantly, the EU Screening Regulation in fact leaves it up to the individual Member States to decide on whether or not to entertain a screening mechanism. In essence, the EU framework does two things. First, it initiates a light-touch harmonisation by introducing a number of procedural standards governing the screening of FDIs. Second, by suggesting a number of factors that the Member States “may consider” when determining whether or not an FDI is likely to affect security or public order, it initiates a collective process aiming at a converging interpretation and application of those legal terms across the EU Member States, in other words a “rough consensus”. As a “harmonizing” measure, this rough consensus approach must yet prove, in practice, whether it can bring together the diverging interests and needs of the Member States when it comes to “security” and “public order”.20

2.2.1

“Light-Touch” Harmonisation of the Procedural Rules of the Member States’ Screening Mechanisms

What the EU Screening Regulation refers to as “framework” is essentially a “lighttouch” harmonisation of the procedural rules in a given Member State’s screening mechanism (if it chooses to entertain such a mechanism). In such case, in Article 3 (2)–(6), the Regulation requires a Member State: • to enact transparent21 rules and procedures which include relevant timeframes, the circumstances triggering the screening, the grounds for screening and the applicable detailed procedural rules, • to apply such rules in a non-discriminatory fashion between third countries, 20

The empowerment of the EU Member States by the EU in the area of the Common Commercial Policy can also be found – taking various forms and different scopes – in other regulatory areas, cf. e.g. Article 10 of the Regulation (EU) 2015/479 of the European Parliament and of the Council of 11 March 2015 on common rules for exports, OJ L 83, 27.3.2015, p. 34 (“Without prejudice to other Union provisions, this Regulation shall not preclude the adoption or application by a Member State of quantitative restrictions on exports on grounds of [. . .] public policy or public security [. . .].” [Emphasis added]); similar also in Article 24(2)(a) of the Regulation (EU) 2015/478 of the European Parliament and of the Council of 11 March 2015 on common rules for imports (codification), OJ L 83, 27.3.2015, p. 16; Article 8(1) of Council Regulation (EC) No 428/2009 of 5 May 2009 setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items (Recast), OJ L 134 29.5.2009, p. 1, (“A Member State may prohibit or impose an authorisation requirement on the export of dual-use items not listed in Annex I for reasons of public security or human rights considerations.” [Emphasis added]). 21 To further transparency, according to Article 3(7), (8) of the Regulation, Member States shall notify the Commission of their existing, newly adopted, or altered screening mechanisms, which the Commission will make publicly available.

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• to set timeframes under their screening mechanisms which allow for sufficient time to take into consideration comments provided by other Member States and the opinions of the Commission, within the context of the cooperation mechanism (cf. Articles 6–7 of the EU Screening Regulation), • to protect confidential information, including such information that is commercially sensitive, • to provide foreign investors and the undertakings concerned with the possibility to seek recourse against screening decisions of the national authorities, and, • to maintain, amend or adopt measures necessary to identify and prevent circumvention of the screening mechanisms and screening decisions. Requirements of administrative procedural law, such as these, may be described as largely declaratory and “a matter of course” in a Union governed by the rule of law, and their inclusion in the Regulation will most likely not come as a surprise to anyone.22 Nonetheless, they are binding, and their express reference and specification may make it easier for the Commission to monitor, on a daily basis, Member States’ domestic legislation for compliance with such basic rule of law standards. In addition to procedural requirements, the EU Screening Regulation also stipulates, discussed in more detail further below,23 a duty to provide information24 and to take into account the view of other Member States, and the Commission, on the likely effects of a certain FDI on public order and security.25 Such a duty applies irrespective of whether a Member State entertains a screening mechanism or not. However, no duty exists to publish (in any form) the outcome of the screening process or the principles guiding any particular decision, even though such a duty would have provided much-wanted forward guidance for other market participants and increased legal certainty in a field characterised by a significant degree of opacity.

2.2.2

The Rough Consensus Approach: Factors That Member States and the Commission “May Consider” in Determining Whether a Foreign Direct Investment “Is Likely to Affect Security or Public Order”

Article 4 constitutes a non-exhaustive list26 of factors that Member States and the Commission “may consider” in determining whether a foreign direct investment “is likely to affect security or public order”. In doing so, the Member States as well as 22

Evaluating the degree to which existing Member State screening mechanisms require adaption is beyond the scope of this chapter, cf. on this the country reports referenced above in footnotes 14. 23 Cf. below Sect. 2.3. 24 Cf. Articles 6(1), 7(5), 8(2). 25 Cf. Articles 6(9), 7(7), 8(2) lit. c. 26 Cf. Article 4(1): “inter alia”, and Article 4(2): “in particular”. See also Recital 12 of the Regulation.

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the Commission may consider factors that are attached to the foreign investment itself (Article 4(1)) as well as such factors vested within the investor (Article 4(2)).27 According to Article 4(1), the Member States and the Commission may take into consideration, inter alia, an FDI’s “potential effect” on critical infrastructure and related real estate, critical technology and dual-use items, the supply of critical inputs, food security, access to and control of sensitive information, as well as freedom and pluralism of the media. Regarding the foreign investor, Member States and the Commission may also “take into account” control or funding by non-EU countries, previous involvement in activities affecting security and public order, as well as the serious risk of engagement in illegal or criminal activities (Article 4(2)). What is clear already from the language is that Article 4 does not harmonise the material scope of the Member States’ screening mechanisms. As it merely enumerates factors perceived as potentially relevant for the determination of whether or not an FDI “is likely to affect security or public order”, the Regulation leaves the decision on what the relevant factors actually are to the Member States’ discretion.28 Nonetheless, as explained before, a rough consensus on the interpretation and application of the concepts of security and public order may emerge over time. Such convergence may foster consensus among the Member States on a possible “real” harmonisation and may render the adoption of binding rules in the future more likely. Aside from informing, without prejudicing, about the Commission’s and the Member States’ assessments of the likely effects of a particular FDI on security and public order within the cooperation mechanism,29 Article 4’s further effects are contentious. In particular, the question arises whether Article 4 increases the Member States’ leeway to interfere with third-country direct investments beyond the limits stipulated essentially by Article 63(1) in connection with Article 65(1) 27

See also Recital 13 of the Regulation. The Member States “may consider” “inter alia” the factors relating to the particular FDI mentioned in Sect. 1, and “may also take into” consideration “in particular” the factors listed in Sect. 2 in respect of the investor. The European Parliament proposed that some of the said factors should in fact be made compulsory, by switching “may” to “shall”. However, this was not accepted into the final version of the regulation. See in this volume Joanna Warchol, The Birth of the EU Screening Regulation; see also Neergaard in: Bourgeois (2019), p. 155. 29 Cf., e.g., Article 6(1): “The notification may include a list of Member States whose security or public order is deemed likely to be affected.”; Article 6(2): “Where a Member State considers that a foreign direct investment undergoing screening in another Member State is likely to affect its security or public order...”; Article 6(3): “Where the Commission considers that a foreign direct investment undergoing screening is likely to affect security or public order in more than one Member State...”; Article 7(1): “Where a Member State considers that a foreign direct investment planned or completed in another Member State which is not undergoing screening in that Member State is likely to affect its security or public order...”; Article 7(2): “Where the Commission considers that a foreign direct investment... is likely to affect security or public order in more than one Member State...”; Article 8(1): “Where the Commission considers that a foreign direct investment is likely to affect projects or programmes of Union interest on grounds of security or public order...” [Emphases added.]. 28

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(b) TFEU on the free movement of capital. Said freedom applies also in a thirdcountry context. Absent EU harmonisation proper, the regulation of third-country investments by a Member State is controlled by the aforementioned freedom. Thus, save when addressing “a genuine and sufficient serious threat to the fundamental interest of society”,30 Member States may not hinder the capital flow between its own territory and a third country on grounds of security and public order.31 With a view to diminishing the protective scope of Article 63(1) TFEU and to broaden Member States’ powers to interfere with FDIs, some authors point to the fact that EU secondary law can have a concretising effect on primary law. By enacting secondary law, the EU may deviate from the requirements set by case law, for example relating to the protective scope of fundamental freedoms. The harmonisation competences of the EU also regularly allow the EU to enact secondary law restricting the fundamental freedoms to a degree which the Member States could not justify by reference to the exceptions to the fundamental freedoms should they seek to enact restrictive legislation themselves.32 However, while the description of possible concretising effects of harmonising EU secondary law on EU primary law as such is correct, the Regulation does not have such effects. By its clear and unmistakable wording, Article 4 with its illustrative, non-exhaustive list of factors potentially affecting security and public order – while it may foster rough consensus on the interpretation and application of these concepts by the Member States in the long term – simply does not harmonise. Since the Regulation does not harmonise and therefore does not further define the level of protection of security and public order, the Member States are “still, in principle, free to determine the requirements of public order and public security in

30 Judgment of the Court of 14 March 2000, Association Eglise de scientologie de Paris and Scientology International Reserves Trust v The Prime Minister, C-54/99, ECLI:EU:C:2000:124, para. 17; cf. also Hindelang (2009), p. 226. 31 The free movement of capital in Article 63(1) TFEU is the only freedom which extends, by its clear and unmistakable wording, its scope of application to the third country context and it covers, as such also direct investments. However, its applicability (and consequently the Member States’ leeway in restricting third country capital movements) in this context is determined by the freedom’s relationship to the freedom of establishment, which the CJEU perceives as competing and largely prevailing, also in a third country context. Cf., inter alia, Judgment of the Court (First Chamber) of 11 September 2014,, Kronos International Inc. v. Finanzamt Leverkusen, Case C-47/ 12, ECLI:EU:C:2014:2200, paras. 30–43, which sets out the complicated relationship of the freedoms as perceived by the Court in a textbook like fashion. For a critical appraisal of the CJEU’s jurisprudence see Hindelang (2009), p. 81 et seqq, see also Hindelang (2013). To what degree the freedom of establishment can displace free movement of capital, if one is prepared to follow the CJEU’s view on its interrelation, depends also on the degree of substantive overlap. Cf. for the question of whether the notion of “(foreign) direct investment” within the context of free movement of capital is largely identical with the one of “establishment” within the freedom of establishment or whether a certain investment could qualify as (foreign) direct investment within the meaning of free movement of capital without reaching the threshold of qualifying, at the same time, as an establishment: Hindelang (2009), p. 85 et seqq. For a different view cf. Herrmann (2019), p. 464. 32 Herrmann (2019), pp. 429, 465.

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the light of their national needs”.33 They must therefore justify any restrictions of the fundamental freedoms with reference to the ordre public clause, i.e. first and foremost Article 65(1) TFEU.34 Thus, a (permissible) restriction would require “a genuine and sufficient serious threat to the fundamental interest of society”.35 Even if the CJEU were to seek inspiration in Article 4 in the context of assessing a Member State’s screening mechanism in light of Article 65(1) TFEU with a view to identifying and specifying legitimate public interests capable of justifying a restriction on the free movement of capital, this does not mean that the Member States have received a carte blanche.36 Rather, the CJEU in Commission v. Portugal made clear that in the absence of common rules and despite the “importance attached by [. . .] the European Union to the protection of a secure energy supply [reflected in some EU secondary legislation . . .] it is undisputed that requirements of public security must, in particular as a derogation from the fundamental principle of the free movement of capital, be interpreted strictly, so that their scope cannot be determined unilaterally by each Member State without any control by the institutions of the European Union.37 Thus, public security may be relied on only if there is a genuine and sufficiently serious threat to a fundamental interest of society.”38 Thus, Article 4 seems not to broaden Member State powers to interfere with FDIs. This, however, does not rule out that the CJEU may further develop the notion of “genuine and sufficiently serious threat to a fundamental interest of society” in light of technological advancements and changing political landscapes.

33 Judgment of the Court of 14 March 2000, Association Eglise de scientologie de Paris and Scientology International Reserves Trust v The Prime Minister, C-54/99, ECLI:EU:C:2000:124, para. 17. 34 Cf. Recital 4 of the Regulation which reads “This Regulation is without prejudice to the right of Member States to derogate from the free movement of capital as provided for in point (b) of Article 65(1) TFEU.” 35 Judgment of the Court of 14 March 2000, Association Eglise de scientologie de Paris and Scientology International Reserves Trust v The Prime Minister, C-54/99, ECLI:EU:C:2000:124, para. 17; Hindelang (2009), p. 226. 36 Possibly of a different view is Herrmann (2019), pp. 465–466, which seems, however, not find strong support in the judgment cited in support of his opinion. 37 The approach in WTO law seems to be different. Here, the prevalent view has been that the “national security” exception has been a so called self-judging clause, meaning that the state invoking it practically enjoys complete discretion as regards the determination of whether or not the exception is applicable. Cf. Alford (2011). This approach turns focus to the obligation of good faith when invoking the clause, meaning that it is a breach of good faith to invoke it to lightly. Recent panel decisions may however indicate that self-judging clauses will be more severely scrutinized in the future, Sanklecha (2019). 38 [Emphasis added] Judgment of the Court (First Chamber) of 11 November 2010, Commission v. Portugal, Case C-543/08, ECLI:EU:C:2010:669, paras. 84–85. In para. 89, the Court also stated that “[e]ven were it accepted that, pursuant to provisions of European Union secondary legislation, a Member State has an obligation to guarantee the supply of energy within its territory, as is claimed by the Portuguese Republic, compliance with such an obligation cannot be relied on to justify any measure which is contrary in principle to a fundamental freedom.”.

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Furthermore, and needless to say, a Member State measure restricting FDIs needs to be proportionate. Thus, when a Member State finds, inspired by or even exclusively using the factors mentioned in Article 4, that “a foreign direct investment is likely to affect security or public order”, this does not automatically mean that the said Member State is authorised to restrict fundamental freedoms by way of “conditioning, prohibiting, or unwinding foreign direct investment” as Article 4 does not set the threshold (or “risk level”) for permissible government intervention of such severity. Rather, what the Regulation requires is that, in the event of a likely effect on security and public order, the Member State takes recourse to the Regulation’s cooperation mechanism. More severe interference with an FDI, therefore, (still) requires a more specific and more concrete risk to security and public order.39

2.3

The Cooperation Mechanism

The establishment of a cooperation mechanism among the Member States, and between the Commission and the Member States, is an essential part of the EU Screening Regulation. In that regard, the Regulation contains rules affecting all Member States, irrespective of whether these currently entertain a screening mechanism or not.40 The EU Screening Regulation distinguishes in Articles 6 and 7 between FDI “undergoing screening” and FDI “not undergoing screening”.

2.3.1

Cooperation When a Member State Screens

Whenever a Member State screens an FDI, i.e. subjects it to “a procedure allowing to assess, investigate, authorise, condition, prohibit or unwind foreign direct investments”,41 the Member State must notify the Commission and the other Member States according to Article 6(1) of the EU Screening Regulation and provide the information referred to in Article 9(2). Notably, the EU Screening Regulation ties the duty of notification to FDIs undergoing screening. It does, however, not relate to FDIs subject to a “screening mechanism”. While the Regulation’s definition of “screening” covers any procedure 39

Currently proposed amendments to the German Foreign Trade and Payments Act (Außenwirtschaftsgesetz – AWG, BGBl. I (Federal Law Gazette), 1,482; last amended 12. December 2019, BGBl. (Federal Law Gazette) I, 2602.) seek a reduction of the said threshold, cf. (proposed) Section 5(2) of the AWG (Deutscher Bundestag, Entwurf eines Ersten Gesetzes zur Änderung des Außenwirtschaftsgesetzes und anderer Gesetze, 21.04.2020, Drucksache 19/18700.). In light of the above, one may wonder whether the proposed legislative changes are not overshooting the mark. 40 Cf. Articles 6, 7. 41 Cf. Article 2 No. 3.

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“allowing to assess, investigate, authorise, condition, prohibit or unwind foreign direct investments”, a “screening mechanism” is “an instrument of general application [. . .], setting out the terms, conditions and procedures to assess, investigate, authorise, condition, prohibit or unwind foreign direct investments on grounds of security or public order”.42 The Member State must therefore actively provide information about the screening of FDIs irrespective of how the reviewing procedure is set up, and not only on procedures that are covered by the definition of a screening mechanism. This duty is limited, though, by the Member States’ empowerment in Article 3(1) to screen only on the grounds of security or public order. Linking the duty to “screening” instead of “screening mechanism” obliges the Member States to report FDI screening also outside a formal “instrument of general application” which specifically sets out the terms for screening FDIs. The reporting duty thus includes all kinds of ad hoc screening on a legal basis not specifically tailored towards FDI screening but nevertheless used to assess, investigate, authorise, condition, prohibit, or unwind foreign direct investments. Once the information provided by a Member State has been received, other Member States and the Commission may provide a comment or opinion respectively if they consider an investment “likely to affect” their own security or public order, the factors in Article 4 of the EU Screening Regulation serving as a source of inspiration. A Member State screening a certain FDI may also request comments from other Member States and/or an opinion from the Commission according to Article 6(4). Following the receipt of such comments or opinions through contact points to be established in each Member State,43 a screening Member State “shall give due consideration” to them, although the final decision shall remain with the screening Member State.44 It seems that the screening Member State is under no express obligation to provide reasons for disregarding comments or opinions.45 However, giving “due consideration” amounts to a duty of care as an expression of the general principle of sincere cooperation according to Article 4(3) TEU,46 which goes beyond the mere acknowledgement of the existence of the interests formulated in the comments and opinions. The other Member States’, or the Union’s, interests47 are

42

Emphasis added. Cf. Article 2 No. 4. Cf. Articles 6(10), 11. 44 Cf. Article 6(9). 45 Interestingly, this is not the case with regard to FDI likely to affect projects or programmes of Union interest, where the Member State “shall . . . provide an explanation to the Commission if its opinion is not followed.” Cf. Article 8(2) lit. c. 46 Cf. Ohler in: Terhechte (2011), margin number 36. 47 An example may be provided by the 2020 COVID-19 public health crisis. Supply commitments with critical health infrastructure and critical inputs may extend beyond the individual Member State. Cf. Communication from the Commission, Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452 (FDI Screening Regulation), 25.3.2020, C(2020) 1981 final, Annex, at 2. 43

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thus capable of influencing the screening Member State’s decision48 whereby – due to a lack of a common definition of public order and security – considerable deference can be exercised. Having said that, the Regulation does not provide for any duty to inform the other Member States of the final decision taken with regard to the FDI undergoing screening, which may render it somewhat challenging to determine whether “due consideration” to the comments was actually given. The same holds true for the opinion rendered by the Commission within the context of Article 7 of the EU Screening Regulation. Only when it comes to FDIs likely to affect projects or programmes of Union interest according to Article 8 of the EU Screening Regulation must the Member State “provide an explanation to the Commission if its opinion is not followed”.49

2.3.2

Cooperation When a Member State Does Not Screen

As already mentioned above, a cooperation mechanism also exists with regard to an FDI not undergoing screening. In accordance with Article 7(1), (2), of the EU Screening Regulation, other Member States and the Commission may provide comments, or in the case of the Commission, an opinion, on an FDI likely to affect their security and public order to a Member State in which the said FDI is planned or completed but not screened. Furthermore, the latter Member State is under a duty “to give due consideration” to the comments and opinions of the other Member States and the Commission respectively.50 The question arises what this duty entails with regard to a Member State not maintaining a screening mechanism or, while maintaining such a mechanism, having explicitly excluded a certain FDI (which other Member States or the Commission perceives as a threat to security or public order) from screening. On the one hand, there is “[n]othing in this Regulation [that] shall limit the right of each Member State to decide whether or not to screen a particular foreign direct investment within the framework of this Regulation”.51 On the other, not having a residual legal instrument in place allowing for consideration of whether to interfere with the contentious FDI in that Member State where it takes or took place would surely render the obligation to give due consideration to the security and public order concerns of other Member

48 Cf. Judgment of the Court of 10 May 1995, Alpine Investments BV v Minister van Financiën, Case C-384/93 ECLI:EU:C:1995:126, para. 43; Judgment of the Court (First Chamber) of 10 July 2008, Ministerul Administraţiei şi Internelor - Direcţia Generală de Paşapoarte Bucureşti v Gheorghe Jipa, Case C-33/07, ECLI:EU:C:2008:39, para. 25; cf. also Janssens (2013), p. 292. 49 Article 8(2) lit. c. Considering the breath and reach of the Union’s projects and programmes mentioned in the Annex to the Regulation, the Commission potentially gained a quite far-reaching voice in FDI screening. As an undertaking accepting funding out of the Union’s projects and programmes essentially opens up the possibility of the Commission to render an opinion according to Article 8. 50 Article 7(7). 51 Cf. Article 1(3).

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States and the Commission very difficult to fulfil, which risks making the obligation meaningless. The same, by the way, holds true for opinions of the Commission on a likely effect on projects or programmes of Union interest where a Member State in which the contentious FDI takes place “shall [even] take utmost account of the Commission’s opinion and provide an explanation to the Commission if its opinion is not followed”.52 Furthermore, although a Member State is, in principle, not obliged to establish an FDI screening mechanism, according to Articles 7(5), 9(1), (2), of the EU Screening Regulation, it must have in place what this chapter calls a comprehensive FDI monitoring mechanism.53 Upon request, Member States are under the duty to provide other Member States and the Commission with information on the ownership structure of the foreign investor and of the undertaking in which the FDI is placed, including information on the ultimate investor and participation in the capital; the approximate value of the FDI; the products, services, and business operations of the foreign investor and of the undertaking in which the FDI is placed; the Member States in which the foreign investor and the undertaking in which the FDI is placed conduct relevant business operations; the funding of the investment and its source, on the basis of the best information available to the Member State; as well as the date when the FDI is planned to be completed or has been completed. By virtue of Articles 7(5), 9(1), (2), of the EU Screening Regulation, FDI screening as a regulatory field joins the ranks of institutionalised information exchange found already in many other fields in the context of European administrative cooperation.54 This comprehensive obligation to provide information in combination with the duty to “give due consideration” to comments of other Member States according to Article 7(7) of the EU Screening Regulation, as well as to “take utmost account” of opinions of the Commission according to Article 8(2) lit. c, gives the EU Screening Regulation – while containing no formal obligation – a certain pull towards at least a nascent screening mechanism in those Member States that do not already have one. The intertwining of different administrative processes, both on Member State level and between the EU and the Member States, also triggers complicated questions of accountability and clarity concerning responsibility (also for damages suffered) and of sufficient guarantees of both procedural rights and other fundamental rights. While these problems are well known in the context of European administrative cooperation,55 here they arise once again against the backdrop of a regulatory area that is in terms of the rule of law particularly challenged due to a high degree of opacity, non-transparent decision making, and secrecy interests.

52

Cf. Article 8(2) lit. c. Cf. Bismuth in: Bourgeois (2019), p. 108, where he speaks about an “implied obligation for Member States to establish FDI screening mechanisms”. 54 On institutionalised information exchange in general cf. Nowak in: Leible/Terhechte (2014), margin numbers 26–27. 55 Ibid., margin numbers 50-55 with further references. 53

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3 Concluding Remarks The analysis of the legal rules relating to the EU “framework” for Member State screening mechanisms and the respective factors that may be taken into consideration when assessing a likely effect on public order and security (the “Article 4-factors”) revealed that although they aim at creating a “rough consensus” among the Member States concerning legitimate restrictions of FDIs, they do not – save for the rules relating to procedural questions in Article 3(2)–(6) of the EU Screening Regulation – constitute a harmonisation measure stricto sensu. However, the “Article 4-factors”, de facto, may – as a source of inspiration – inform future CJEU case law on permitted derogations to the free movement of capital. In this way, the Member States may gain some additional leeway when screening foreign investments in the future. However, so far, more severe interferences with FDIs, such as a decision not to authorise a transaction, still requires “a genuine and sufficient serious threat to the fundamental interest of society”.56 Despite that, the EU Screening Regulation contains a nascent EU investment screening mechanism, albeit somewhat camouflaged, through the comprehensive cooperation mechanism established in order to secure an adequate exchange of information on FDI screening among the Member States and between the Member States and the Commission. The introduction of an administrative cooperation structure, resting on the obligation to provide information through contact points, and the duty to give due consideration to comments of other Member States and opinions of the Commission may well turn out to be a “non-harmonizing measure” having significant “harmonizing effects”. All in all, it seems reasonably clear that – with the enactment of the EU Screening Regulation – we have just witnessed the birth of a new EU regulatory field. While still it its infancy, it will possibly not take long to unfold. The latest Communication of the Commission, issued at a moment of the growing Corona crisis, leaves hardly any room for doubt. In this sense, it holds true that all crises provide opportunities. In its Communication, the Commission called upon the Member States not only to make full use of its existing FDI screening mechanisms with a view “to take fully into account the risks to critical health infrastructures, supply of critical inputs, and other critical sectors as envisaged in the EU legal framework” but also “to set up a fully-fledged screening mechanism” if they did not have one in place already. Although the Member States may still diverge in terms of political views on the function and scope of screening of foreign investments, there has been an increasing general trend towards tightening the control of FDIs, motivated by both a push by the EU – see the Communication just mentioned above – and a pull by Member State

56

Judgment of the Court of 14 March 2000, Association Eglise de scientologie de Paris and Scientology International Reserves Trust v The Prime Minister, C-54/99, ECLI:EU:C:2000:124, para. 17; cf. also Hindelang (2009), p. 226.

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self-interest, as evidenced by the most recent bill tabled in Germany57 and legislative consultations in Sweden,58 reacting to attacks on multilateralism and globalisation advanced by some states outside the EU. The dividing line between protecting public order and security and protectionist industrial policy may indeed become increasingly blurry as FDI is quickly turning into a function of geopolitical strategy rather than one based on the logics of market economy.59

References Alford RP (2011) The self-judging WTO security exception. Utah Law Rev 3:697–759 Bismuth R (2019) Reading between the lines of the EU regulation establishing a framework for screening FDI into the union. In: Bourgeois J (ed) EU framework for foreign direct investment control. Kluwer Law International, Alphen aan den Rijn European Commission (13 September 2017) President Jean-Claude Juncker’s State of the Union Address 2017, Available at https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_ 17_3165 Federal Ministry for Economic Affairs and Energy (BMWi) (2019) Industrial Strategy 2030. Guidelines for a German and European industrial policy, Available at https://www.bmwi.de/ Redaktion/EN/Publikationen/Industry/industrial-strategy-2030.pdf?__blob¼publicationFile& v¼7 Herrmann C (2019) Europarechtliche Fragen der deutschen Investitionskontrolle. Zeitschrift für Europarechtliche Studien 3:429–475 Hindelang S (2009) The free movement of capital and foreign direct investment: the scope of protection in EU law. Oxford University Press, Oxford Hindelang S (2013) Die steuerliche Behandlung drittstaatlicher Dividenden und die europäischen Grundfreiheiten – Die teilweise (Wieder-)Eröffnung des Schutzbereiches der Kapitalverkehrsfreiheit für Dividenden aus drittstaatlichen Direktinvestitionen – zugleich eine Besprechung des Urteils in der Rechtssache Test Claimants in the FII Group Litigation II. Internationales Steuerrecht 3:77–81 Hindelang S, Moberg A (2020) The Art of casting political dissent in law: the EU’s framework for FDI screening. Common Mark Law Rev (in press) Janssens C (2013) The principle of mutual recognition in EU law. Oxford University Press, Oxford Meunier S, Nicolaïdis K (2019) The Geopoliticization of European trade and investment policy. J Common Mark Stud 57:103–113 Meunier S, Roederer-Rynning C (2020) Missing in action? France and the politicization of trade and investment agreements. Polit Gov 8(1):312–332 Neergaard A (2019) The adoption of the regulation establishing a framework for screening of foreign direct investment into the European Union. In: Bourgeois J (ed) EU framework for foreign direct investment control. Kluwer Law International, Alphen aan den Rijn Nowak C (2014) § 34 Europäisches Kooperationsverwaltungsrecht. In: Leible S, Terhechte JP (eds) Europäisches Rechtsschutz- und Verfahrensrecht (EnzEuR vol. 3). Nomos, Baden-Baden

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Ohler C (2011) § 9 Horizontaler Verwaltungsverbund zwischen den Mitgliedstaaten. In: Terhechte J (ed) Verwaltungsrecht der Europäischen Union. Nomos, Baden-Baden Reuters (17 May 2020) Europe should temporarily ban Chinese takeovers: Germany’s Weber, Available at https://www.reuters.com/article/us-eu-china-investment/europe-should-temporar ily-ban-chinese-takeovers-germanys-weber-idUSKBN22S0WR Sanklecha JM (2019) The limitations on the invocation of self-judging clauses in the context of WTO dispute settlement. Indian J Int Law. https://doi.org/10.1007/s40901-019-00108-6 The Wall Street Journal (24 October 2016) Germany withdraws approval of Chinese Takeover of Aixtron, Available at https://www.wsj.com/articles/german-withdraws-approval-of-chinesetakeover-of-aixtron-1477297215

Steffen Hindelang is a professor (wsr) at the Department of Law of the University of Southern Denmark in Odense. He teaches and researches in the areas of international economic law, esp. international investment law, EU law and German public law. Previously he was a professor at Freie Universität Berlin (2011–2017), senior research associate and senior lecturer at HumboldtUniversität zu Berlin (2010–2011) and research associate and lecturer at the University of Tübingen (2004–2009). He is also a senior fellow at the Walter Hallstein Institute of European Constitutional Law at Humboldt-Universität zu Berlin and an academic advisor to the International Investment Law Centre Cologne (IILCC). He was a guest professor, among others, at the Faculty of Law of the University of Uppsala as a Riksbankens Jubileumsfond – Alexander von Humboldt Stiftung Swedish Prize Laureate, at Nagoya University, Bocconi University Milan, the University of Lausanne, the Charles University Prague, the International Law School of the Moscow State Institute of International Relations (MGIMO) and the Turkish-German University Istanbul. Andreas Moberg is a senior lecturer and an associate professor at the Department of Law of the University of Gothenburg. He is also the assistant director of CERGU (Center for European Research at the University of Gothenburg). He teaches and researches both EU law and public international law but specializes in EU constitutional law. He has lectured in EU law as a visiting professor at Bond University (Australia), San Pablo CEU Madrid and Háskóla Islands Reykjavík.

Correction to: YSEC Yearbook of Socio-Economic Constitutions 2020 Steffen Hindelang and Andreas Moberg

Correction to: S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions 2020, https://doi.org/10.1007/978-3-030-43757-2 The book was inadvertently published with an incorrect title for chapter 25 ‘Country Report on Hungary and Romania’ whereas it should be ‘Foreign Investment Screening in Hungary and Romania’. In addition to this, the title of chapter 28, ‘Comment on “In Search for an EU Competence to Establish an Investment Screening Mechanism and Restricting Effects Flowing from Fundamental Freedoms, Fundamental Rights, and Other EU Primary Law” should have read ‘Comment on “Exploring the Possibilities and Limits of the EU and Member States to Set Up an Investment Screening Mechanism in the Light of Union Law”’.

The updated online versions of the chapters can be found at https://doi.org/10.1007/16495_2020_25 https://doi.org/10.1007/16495_2020_28 © Springer Nature Switzerland AG 2021 S. Hindelang, A. Moberg (eds.), YSEC Yearbook of Socio-Economic Constitutions 2020, YSEC Yearbook of Socio-Economic Constitutions (2021) 2020: C1, https://doi.org/10.1007/978-3-030-43757-2_32

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