Introduction

Over the past couple of years as the global economic outlook has become more unsettled, European Union (EU) national member states have been either tightening existing, or introducing new, foreign direct investment (FDI) legislation designed to scrutinize FDI more closely in critical infrastructure, military technologies and other key sectors of the economy that could endanger national security.

The EU has also introduced legislation to provide for a more coordinated community-wide approach to these types of investment laws.

Inside the EU, Ireland is the latest country to announce plans to introduce a new FDI law.

Post-Brexit, the U.K. has just introduced its own FDI legislation in the form of the National Security & Investment Act 2021 (the NSI Act) which came into force in January this year

With the EU and the U.K. ramping up their FDI regimes, companies and international investors involved in global transactions cannot afford to ignore their application and will need to successfully navigate these overlapping regimes to deliver on their inward investment plans.

The EU legislation and provisions of the new Irish FDI law are likely to impact both U.S. and U.K. investors.

We recently covered the provisions and impact of the U.K.’s NSI Act on our website.

European Union

In Council Regulation 2019/452 (EU Regulation) the EU sets out a framework for coordinating FDI screening in the EU. The EU Regulation was adopted in March 2019 and has been in force since October 2020.

The legislation does not create an EU-level FDI screening mechanism, and individual EU member states still maintain their own sovereignty in taking final decisions on inward investments in their countries. However, the EU Regulation sets out minimum requirements for EU national member states’ FDI screening legislation. In addition, it also creates a mechanism for coordinating FDI reviews between EU member states and the European Commission (Commission). All EU member states are being strongly encouraged to implement their own FDI screening mechanisms in line with the provisions of the EU Regulation. As of June 2021, it is estimated that about 24 member states have or are in the process of passing such legislation. This is a considerable increase from the 11 member states which had relevant legislation prior to the passing of the EU Regulation.

Under the EU Regulation, EU member states and the Commission are permitted to make comments on transactions involving another member state’s territory (Host State). The Host State has an obligation to give those comments “due consideration.” In cases which involve investments of a wider “Union interest” (these are defined in the Annex to the EU Regulation), the Host State must take “utmost account” of the Commission’s comments. Ultimately, the Host State does have the final say on any inward investment in its territory. However, if it does not follow the Commission’s opinions, it must give reasons for any divergence.

Scope of EU FDI Legislation

The EU Regulation (Article 3) sets out the areas which EU members states may like to cover in their domestic FDI legislation. This is an attempt to harmonise sectors which will trigger investigation under EU member states’ domestic legislation. The specified areas are:

• critical infrastructure (including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, as well as sensitive facilities and investments in land and real estate crucial for the use of such infrastructures);
• critical technologies and dual use items (including artificial intelligence, robotics, semiconductors, cybersecurity, quantum, aerospace, defence, energy storage, nuclear technologies, nanotechnologies and biotechnologies);
• supply of critical inputs (including energy or raw materials, as well as food security);
• access to or the ability to control sensitive information (including personal data);
• freedom and pluralism of the media; and
• health care. This has been added in response to the COVID-19 crisis.

Member State Coordination

The EU Regulation requires member states to notify the Commission of any new or existing screening mechanism, as well as any changes. They must each submit annual reports to the Commission detailing the FDI screening decisions taken. Based on this information, the Commission will publish annual reports on the implementation of the EU Regulation.

The legislation also sets out certain minimum criteria that member states' screening mechanisms must meet. Relevant mechanisms must be transparent and not discriminate between third countries. Member states must set out the circumstances triggering screening, their criteria for evaluation, and detailed procedural rules including time frames for investigating cases and issuing decisions.

There are detailed timeframes which EU member states must obey to allow other member states to comment on cases undergoing investigation in the Host State’s territory. Upon receipt of an initial notification that a case is subject to FDI screening in a Host State, the Commission and other member states have 15 calendar days to notify the Host State that they intend to provide comments and to request additional information. Comments should be delivered within 35 calendar days of the original notice, or 20 calendar days from receipt of any additional information requested. In addition, the Commission may issue an opinion following comments from other member states no later than 40 calendar days from the original notification.

Effect of the Regulation

The cooperation process under the EU Regulation is likely to lengthen consideration periods for mergers subject to FDI scrutiny and will need to be factored into national member states’ FDI legislation as well as companies’ own deal timetables. However, whilst keeping the ultimate decision-making authority with the Host State, the EU Regulation does help reduce the risk of uncoordinated screening processes with potentially inconsistent approaches and outcomes.

Ireland

The Screening of Third Country Transactions Bill (Screening Bill) will give full effect to the provisions of the EU Regulation. Ireland is the latest EU country to announce plans to introduce FDI legislation. The Screening Bill will establish for the first time in Ireland a regime for assessing investments from non-EU countries where those investments could pose a risk to security or public order.

The Screening Bill has not yet been published, so little is known about its detailed provisions. It is anticipated that it will be published in the coming months and could reach the statute book by the end of the year.

However, it is believed that the scope of the notification regime will be based on certain ownership and transaction value criteria. An Irish Government Press release dated 26 June 2022 indicated that the current transaction value threshold under the legislation being contemplated was likely to be set at €2 million. However, this could be reviewed and can be revised by the Minister if required.

The new regime will cover third-country investments in sensitive technology or critical infrastructure in the areas of health, energy, military and transport such as ports and airports following the sectors highlighted in the EU Regulation. Of particular note is that the Screening Bill will apply to investors from third countries (non-EU). This would include U.S. and U.K. investors who are the biggest source of foreign investments into Ireland.

It is likely that the Screening Bill will follow the form of similar legislation in other EU countries requiring mandatory pre-notification for transactions in the key sectors of the economy identified. Failure to obtain the required clearances will expose companies to fines of up to €4 million or imprisonment. It is not known whether the Irish legislation will follow the approach taken by the NSI Act, which dictates that transactions completed without clearance will also be void and unenforceable. There are also likely to be widespread investigative and information request powers included in the Screening Bill to assist in the investigation of relevant transactions. Failure to comply with these procedural obligations will also likely incur fines. Noncompliance with information requests could also stop the clock on any investigation consideration periods.

We will have to wait to see the duration of the consideration period the Government will set for the new regime. However, it should be noted that the effect of the information sharing and cooperation obligations with other EU member states and/or the Commission under the EU Regulation is likely to extend those consideration periods considerably. They could, in the worst-case scenario, add up to 30-40 days to the consideration timeline. The Government also states that it intends to include in the Screening Bill an appeals mechanism to ensure transparency and certainty for investors, while safeguarding security and public order.

We will set out more details about the detailed provisions in the legislation when the Screening Bill is published in the next couple of months.

Conclusion

The Irish FDI legislation will directly impact investors from non-EU countries, particularly investors from the U.S. and the U.K. These two groups make up the biggest sources of inward investment for the country.

When the Screening Bill is published, non-EU investors and their legal advisors need to carefully consider whether their proposed inward investment plans will be caught by the legislation and whether there will be a need for a pre-closing filing. If there is, this will adversely impact the deal timetable and will need to be worked into the deal schedule.