On March 25, the European Commission (Commission) issued new Guidelines for screening foreign direct investment (FDI) in companies and critical assets located in the European Union (EU), including those operating in the fields of health, medical research, biotechnology and infrastructures deemed essential for security and public order. The Guidelines offer guidance to be applied within the context of the recently-adopted framework for EU screening and review of FDI (FDI Screening Regulations).

Essentially, the new Guidelines serve to: 

• Clarify that the Commission will have the power to conduct an ex post review of transactions that may occur now, given that the FDI Screening Regulations include a 15-month look-back mechanism covering transactions that have already been completed as of the October 11, 2020 date of full application. (Thus, for example, ex post review for transactions occurring in March 2020 will be possible until June 2021.) 
• Explain that health, medical research, biotechnology and related infrastructures may be essential for security and public order, particularly in the current COVID-19 environment, and encourage Member States to be vigilant with regard to any FDI in these sectors.
• Encourage the “use [of] all tools available at Union and national level to avoid that the current crisis leads to a loss of critical assets and technology,” thus clarifying that a broad view should be taken to safeguard against the potential negative impact of certain foreign investments on EU security interests and the public order. This includes both concerns about public health (e.g., the acquisition of EU medical technology companies by foreign governments or investors) and broader EU economic security at a time when the economy of many Member States is under serious duress. 
• Provide additional protective guidance to prevent predatory takeover practices by investors focused on weakened or distressed companies (which was seen as a significant threat during and following the 2008 financial crisis).

Both foreign investors and European companies should be mindful of the new Guidelines and determine whether and how they will apply and how they may affect investment opportunities, valuations and defensive strategies, as well as the overall investment process and timelines. 

Overall Scope and Implications of the New Guidelines

The new Guidelines are titled “Guidelines to 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).” As noted above, they clarify the FDI Screening Regulations, which provide for review of potential investment by non-EU entities (including states and governments, as well as private companies) in EU companies on the basis of public policy or security concerns (as discussed in previous alerts here and here).

The Guidelines provide direction regarding how Member States should conduct such reviews to ensure consistent application of FDI screening across the EU. They further encourage Member States to “take into account the impact of the European Union as a whole, in particular with a view to ensuring the continued critical capacity of EU industry, going well beyond the healthcare sector” when conducting FDI screenings. The Guidelines highlight the Commission’s focus on ensuring a bloc-wide approach to protecting critical assets during this time of significant uncertainty (for discussion of other EU-wide measures protecting production related to healthcare products, see previous alert here).

In particular, the Guidelines:

• Call on Member States to make full use of existing FDI screening mechanisms and “take fully into account the risks to critical health infrastructures, supply of critical inputs, and other critical sectors.”
• Call on those Member States without screening mechanisms to “set up a full-fledged screening mechanism and in the meantime to use 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.” Only 14 Member States currently have national FDI screening mechanisms in place.

While the FDI Screening Regulations take effect as of October 2020, the new Guidelines note that ex post review and regulatory action concerning “predatory investment” or other FDI occurring even as of now (i.e., March 2020) that implicates the EU public interest can take place from October 2020 (the date of full application of the FDI Screening Regulations) until June 2021. Thus, the Guidelines make it clear that effective implementation of the new FDI Screening Regulations will be possible even for FDI occurring prior to the date of full effectiveness. This ex post review mechanism is important in light of the political and economic concerns that are currently arising as a result of the novel coronavirus (COVID-19) pandemic, and the overall economic impact this crisis is having in Europe and around the world.

In particular, the Commission is concerned that European companies may be vulnerable to foreign takeover attempts or investment and that numerous Member States, especially considering the current economic crisis caused by the COVID-19 epidemic, and the European Union as a whole, do not currently have sufficient mechanisms in place to deal with such national security or public health-related threats. (In general, there is a consensus within Europe that countries in the European Union tend to have relatively few formal FDI restrictions or controls in place, especially compared with the United States and China.¹) In a press release announcing the new Guidelines, the Commission stated that the Guidelines will operate in the public interest, in accordance with the requirements of the FDI Screening Regulations, since “[p]rotection of public health is recognised as an overriding reason in the general interest” under EU law. Predatory investment—e.g., vulture purchases by investors from outside the European Union when stock markets have bottomed—is also viewed as contrary to public security, not just public health.  

The Guidelines direct Member States to enact or impose FDI screening mechanisms to protect against predatory buying in light of the financial uncertainty resulting from the economic effects of the COVID-19 pandemic. Specifically, the Commission strongly urges Member States that do not have FDI screening legislation in effect to date to enact and apply such rules. Although “predatory” buying is mentioned, the Guidelines are of general application to any purchases of companies by foreign investors—including startups and small and medium enterprises—that could pose a threat to European public security, public health and the public interest.

The Commission is also concerned about intra-EU investment restrictions, and the Guidelines serve in part as a “soft law” push to have Member States focus their investment screening on investment from non-EU third countries instead of other Member States. In particular, the Guidelines point out that screening mechanisms imposed by Member States for third-country investments can be stricter and based on broader precautionary concerns than Member State screening as applied to cross-border investments by investors based in other EU Member States. 

Pursuant to the FDI Screening Regulations, FDI screenings will take place at the Member State level. However, the Commission can issue opinions and recommendations even where Member States do not take action if a planned acquisition poses risks for the public interest in the EU. In addition, the Commission will address FDI regarding companies of public interest that benefit from EU funding programs, such as recipients of Horizon 2020 or linked research grants. This would apply to startups and biotech companies that obtain funding from EU programs and public private partnership initiatives.

Prior to the issuance of the Guidelines, nine European heads of state submitted a letter to the Commission urging measures to ensure that “essential value chains can fully function within the EU borders and that no strategic assets fall prey of hostile takeovers during this phase of economic difficulties.”² The Guidelines are also at least partially a response to alleged attempts by the Trump Administration to convince a German pharmaceutical company to move its production of a potential COVID-19 vaccine to the United States.³ The Committee on Foreign Investment in the United States (CFIUS), the entity in the United States authorized to review transactions involving foreign investment, already has broad power to conduct such screenings to determine the effect on national security.

Other FDI screening reforms in Europe

 In parallel to the EU-wide new Guidelines, we are seeing a number of developments at the Member State level as well. On March 17, for example, the Spanish government approved Royal Decree-Law 8/2020 (RDL 8/2020), which set up a new FDI regime applicable to acquisitions by companies from outside of the European Economic Area of entities involved in a range of fields, including technology and dual-use products; critical infrastructures such as energy, transportation, water and communications; aerospace and defense; media; and healthcare. This move appears to be precipitated by the increased potential of foreign takeovers of such Spanish companies, which are viewed as key for the national economy and which are currently facing significant financial stress. RDL 8/2020 requires authorization for the closing of acquisitions subject to the new regime. 

Germany has also adopted additional protections to shield struggling companies from foreign takeover. The German government has set up a €100 billion fund to provide cash injections to struggling German companies in exchange for equity in those companies. German economic minister Peter Altmaier issued a warning to foreign investors, stating, “I say to all those people in hedge funds and elsewhere who are looking forward to acquiring one or the other [German firms] on the cheap—make no mistake, we are determined to stand by our companies.”⁴  

WilmerHale continues to monitor these and other regulatory developments enacted by governing bodies worldwide in the face of the COVID-19 pandemic. WilmerHale has also assembled a task force of legal authorities across the wide array of disciplines implicated by the outbreak of COVID-19 that stands ready to assist clients as they develop legal and operational plans and protocols.