Legal Analysis Of EU Security-Related Screening Mechanism For Foreign Direct Investment

On 10 April 2019,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(hereinafter referred to as “Regulation”)entered into force.The Regulation establishes a framework for screening foreign direct investment inflows into the EU on grounds of security or public order.According to Article 2 of the Regulation,case law of CJEU,and relevant OECD and IMF documents,FDI is characterized by the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the enterprise.The Regulation is a response to a rapidly evolving and complex investment landscape.State-Owned enterprises have played a prominent role in Chinese outward FDI.Chinese FDI focuses on EU strategic sectors such as critical infrastructure and key technology.In addition,EU has alleged that Chinese FDI into the EU may receive subsidy,thus creating an uneven playing field.While EU remains a liberal market access for FDI,Chinese regulatory framework on inward FDI is very restrictive.These challenges have aroused concerns by EU countries about their national and economic security and have raised the question of whether Member States' diverging FDI screening mechanisms on national security grounds should be upgraded or better coordinated by a new EU framework.The rapid rise of Chinese outbound investment in the past decade has triggered an overhaul of investment screening regimes in many advanced economies including Australia,Canada,Japan,and recently the US and Europe long lagged behind.That' why the EU FDI Screening Regulation is adopted.In the Second chapter,the highlight of the Regulation is analyzed.The Regulation provides that national screening mechanisms shall comply with certain minimum requirements.For example,screening mechanism shall not discriminate between third countries and foreign investors shall have the possibility to seek recourse against screening decisions.The European Commission is empowered to issue non-binding opinions on foreign direct investments which are likely to affect projects and programmes of Union interest on security or public order grounds.The soft law dimension implies that the Commission's opinions do not have legal effects vis-à-vis third parties and thus cannot be challenged before the CJEU according to Article 263 TFEU.In addition,the Regulation provides a non-exhaustive list of factors that can be taken into account in determining whether a foreign direct investment is likely to affect security or public order.In essence,the Regulation establishes a coordination and cooperation framework which neither establishes a centralized EU screening mechanism nor harmonizes existing national screening mechanisms.The Regulation imposes information sharing and notification requirements between Member States and the European Commission.Regarding the legal basis of the Regulation,Article 207 TFEU does not effectively grant the Union an exclusive competence over matters concerning Member States' public policy or public security.Rather,it confirms that,in conjunction with Article 65 TFEU,the possibility for Member States to insert a public order and public security carve-out.And the Regulation missed an opportunity to address the issue of competitive neutrality.As discussed above,the decision on whether to set up a screening mechanism and the final decision in relation to any foreign direct investment undergoing screening remain the sole responsibility of the Member State concerned.Since Germany,France and UK has always been important destinations for Chinese investors,this thesis does not take Brexit into account and conducts a thorough analysis on the latest screening mechanism reform in these three countries.On 19 December 2018,the German government further tightened the rules of the Foreign Trade and Payments Ordinance(AWV).The amendment broadens the scope of foreign investment control by the German Ministry for Economic Affairs and Energy by lowering the threshold for reviews from 25 percent to 10 percent of the voting rights for direct or indirect acquisitions of German companies.The amendment applies to sector-specific reviews by foreign investors as well as cross-sector reviews by investors from outside the EU or EFTA.On May 2019,Pacte Law was published in France aiming to modernize French control over foreign investment by strengthening the sanction mechanism in case of infringement by investors.This new regime of sanctions comes after an extension of the foreign investment regulation's scope to the “sectors of the future” by Decree No.2018-1057 dated 29 November 2018 on foreign investments subject to prior approval from the French Minister for the Economy.On 17 October 2017,the UK Government published “National Security and Infrastructure Investment Review”(Green Paper)to indicate how the government proposes to address the perceived gaps in its current intervention powers.The Green Paper was followed by amendments to the Enterprise Act 2002,lowering the thresholds for when mergers or acquisitions require government review.On 24 July 2018,the UK Government published “National Security and Investment: A Consultation on Proposed Legislative Reforms”(White Paper).The White Paper invites public comments on its proposals for a significantly revised regime of foreign investment into the UK,which would introduce a new national security review process for mergers and acquisitions.Many sectors for scrutiny under the Regulation and national screening mechanisms are preferred sectors for Chinese investors in the EU.Besides,the Regulation calls for heightened scrutiny of investments by state-controlled entities including through significant state-backed funding.So,a large share of Chinese FDI will be covered.In the last chapter,legal measures that Chinese investors can take to protect legitimate interests are analyzed.CJEU acknowledged Member States' margin of discretion in determining public order and security requirements.However,it does not mean that the undefined notions of public policy and security are totally self-judging concepts.Instead,the case law of CJEU has established that Member States cannot unilaterally determine the scope of public security without any control by the EU institutions.Member Sates' invocation of public security exception should be interpreted strictly and be subject to certain conditions.For example,there must be a genuine and sufficiently serious threat to a fundamental interest of society;these exceptions cannot be applied to fulfil purely economic initiatives;and restrictions must be proportionate,which means that these measures must be necessary to achieve the objectives and there must be no less restrictive measure that is equally effective.In addition to the principle of free movement of capital,Chinese investor can use the principle of freedom of establishment to ensure the smooth progress of transaction and insert bearing of risk clause in contract so as to prevent or mitigate losses.