EUPLANT

The European Union’s regulation screening foreign direct investment: What implications for Chinese investors?

The enactment of the ‘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’ puts the EU to the list of economies that adopt a mechanism to review foreign direct investment (FDI) on grounds of national security or other relevant public interests.

20 December 2019

Cheng Bian
Academic Researcher, Erasmus School of Law, Erasmus University Rotterdam

The enactment of the ‘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’ puts the EU to the list of economies that adopt a mechanism to review foreign direct investment (FDI) on grounds of national security or other relevant public interests.[1]

Regulation 2019/452 aims to attain three main regulatory objectives, namely:

(1) the establishment of ‘a mechanism for cooperation between Member States, and between Member States and the Commission’ regarding FDI screening on grounds of national security,[2]

(2) the harmonization of Member States FDI screening on grounds of national security, which still permits Member States to ‘maintain, amend or adopt’ investment review mechanisms in their national law, as 13 Member States have already done so at the moment,[3] but only subject to a set of predetermined substantive and procedural requirements pursuant to Regulation 2019/452;[4] and

(3) the EU’s competence to issue non-binding opinions regarding takeovers made by third-country investors that are likely to affect projects of the Union’s interest on grounds of security or public order.[5]

Regulation 2019/452 was incentivized by the EU’s rationale to prevent the sellout of strategic EU assets and advanced technology to third-country investors through the means of cross-border mergers and acquisitions (M&As), and to put an end to the lack of reciprocity on the takeover markets between the EU and some third countries, where EU investors face more restrictions in the takeover market abroad than non-EU investors in the EU market, which creates asymmetry and competitive disadvantages to EU investors. Arguably, Regulation 2019/452 was believed to a large extend to address the perils derived from Chinese takeover activities in the EU in particular, because of the unique features of Chinese investments in the EU. From 2000 to 2016, Chinese investors have invested the most in EU companies in sectors of information and communication technology; utilities, transport and infrastructure; industrial machinery and equipment; energy; real estate and hospitality; and automotive, suggesting that Chinese investors are driven by a zest to purchase critical EU infrastructure and technological advancements.[6] Furthermore, Chinese investors faced only a few regulatory restrictions when acquiring EU companies but EU investors, despite China’s continuous commitments and substantial efforts in recent years in liberalizing its domestic FDI regulatory regime, are imposed a case-by-case approval procedure that is still in effect today when acquiring Chinese companies, in addition to a national security review regime applicable in certain strategic sectors.[7] Hence a lack of a levelling playing field in the takeover market between China and the EU.

Another compelling argument that Chinese investment might be the subject of extra scrutiny in the context of Regulation 2019/452 is some of the wording adopted in the Regulation. Regulation 2019/452 points out that Member States and the Commission should take into account ‘…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 programs’.[8] This could be understood as an emphasis on investments made by Chinese SOEs in the EU, which, according to Merics, accounted for 41% of total Chinese outbound FDI into the EU in 2018, 71% in 2017, 36% in 2016 and 68% in 2015.[9] In addition, it fits the narrative of investments made under China’s national strategies such as the Belt and Road Initiative and the Made in China 2025, the latter of which is seen by some as an important industrial policy to quest for China’s global technological leadership.

Nonetheless, the negative impacts of Regulation 2019/452 on Chinese investors should be deemed insignificant. This is, first of all, because it does not by any means establish a pan-European FDI screening mechanism and the role of the European Commission is rather limited. The Commission’s ability to intervene third-country FDI into the Union stops at issuing non-binding opinions, which a Member State receiving the investment may decide whether or not to abide by. The Commission therefore has no power to veto a takeover project.

Second of all, and more importantly, non-EU investors can maneuver a corporate structure to circumvent Regulation 2019/452. In the Regulation, an non-EU investor is defined 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’ and ‘undertaking of a third country’ means ‘an undertaking constituted or otherwise organized under the laws of a third country’.[10] A Chinese investor, or for that matter any third-country investor, can therefore first establish its presence in the EU using greenfield investment, that is to establish a new company in a Member State A under the laws of that Member State, which according to the afore definition, constitutes an EU undertaking, but not an undertaking of a third country, and then use that corporate vehicle established in Member State A to acquire a company in a Member State B, which would be the ultimate target company that the Chinese investor aims to take control of. In this scenario, the Commission would not be able to intervene and issue opinions because a transaction discussed above would not constitute a takeover by an extra-EU investment but an intra-EU one in the context of Regulation 2019/452. It is therefore reasonable to expect that Regulation 2019/452 itself would not have a significant negative impact on Chinese investors.

 

[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, OJEU, L 79 I, 21.3.2019.

[2] Ibid, art. 1.1.

[3] These 13 Member States are Austria, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, Poland, Portugal, Romania, Spain, and the UK.

[4] Regulation 2019/452, arts. 3 and 4.

[5] Regulation 2019/452, art. 8.

[6] Thilo Hanemann | Mikko Huotari, ‘Record Flows and Growing Imbalances: Chinese Investment in Europe in 2016’, Merics Paper on China, No 3, January 2017, <https://www.merics.org/sites/default/files/2018-07/MPOC_3_COFDI_2017_web.pdf>, last accessed on 18 November 2019, p. 7.

[7] 关于外国投资者并购境内企业的规定(2009) (Provisions on the Takeover of Domestic Enterprises by Foreign Investors) (Promulgated by Ministry of Commerce on 22 June 2009, effective on promulgation), art. 6;国务院办公厅关于建立外国投资者并购境内企业安全审查制度的通知 (Notice of the General Office of the State Council on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors) (Promulgated by the General Office of the State Council on February 3, 2011, effective on promulgation), art. 1(1).

[8] Regulation 2019/452, para. 13.

[9] Thilo Hanemann, Mikko Huotari, and Agatha Kratz, ‘Chinese FDI in Europe: 2018 Trends and Impact of New Screening Policies’, Merics Papers on China, March 2019, <https://www.merics.org/sites/default/files/2019-03/190306_MERICS-Rhodium%20Group_COFDI-Update_2019.pdf>, last accessed on 18 November 2019, p. 14.

[10] Regulation 2019/452, arts. 2(2) and 2(7).