The COVID-19 pandemic has shocked the economy of the European Union thereby exposing many businesses and other strategic industries to adverse risks.
In a communication issued on the 25th March 2020, the European Commission (the "Commission") highlighted the importance of ensuring that those European businesses involved in strategic industries, particularly the healthcare industry, remain resilient during the COVID-19 pandemic and have sufficient resources to be able to respond to the needs of all EU Citizens during such a delicate period. The Commission further noted that such an unprecedented pandemic might expose businesses involved in the healthcare industry (such as those producing medical or protective equipment or those involved in medical research) to potential takeover attempts via foreign direct investment ("FDI"), which would negatively impact the EU's capacity to cater for the health needs of its citizens.
Accordingly, in order to strike a balance between the importance of FDI in the EU and the interest of all EU citizens, the Commission has deemed it fit to issue guidelines to Member States concerning foreign direct investment and free movement of capital from third countries and the protection of Europe's strategic assets (the "Guidelines") in light of the FDI Screening Regulation which came into force on the 10th April 2019 (the "FDI Screening Regulation").
Briefly, the FDI Screening Regulation applies to those 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." The FDI Screening Regulation empowers Member States to review foreign investments within its jurisdiction on grounds of national security or public order and to take any measures it deems fit to address the risks posed by the investment. This applies to all sectors of the economy and is not subject to any value thresholds.
In terms of the Guidelines, those Member States who already have fully fledge FDI screening mechanisms are to take into account all risks applicable to businesses providing critical healthcare infrastructure or supplies. Those Member States who as of yet do not have a fully fledged screening mechanism (which includes Malta) are obliged to use all other tools available to them to screen and address cases where the acquisition of a particular business or technology would create a risk to critical healthcare infrastructure or supplies.
The FDI Screening Regulation specifically refers to potential risks posed to critical health infrastructures and supply of critical health inputs as one of the principal factors to be considered when screening a foreign investment. The Guidelines further provide that such screening does not necessarily prohibit the investment from going through. Member States may adopt mitigating measures to further reduce potential risks such as conditions, which would guarantee the supply of a number of medical products or equipment. In this regard the Guidelines also provide that any supply commitment may extend beyond the needs of the Member State imposing such a condition where the interest of the European community so dictates.
In addition, the Guidelines further stipulate that those projects funded by the EU Research and Innovation Programme, Horizon 2020, relating to the health sector, including those projects launched (or to be launched) in response to the COVID-19 pandemic which are likely to be affected by an FDI, will be subject to heightened scrutiny by the Commission itself.
In the case of foreign investments, which do not constitute an FDI, such as portfolio investments, Member States may impose restrictions, which are suitable, necessary and proportionate to achieve legitimate public policy objectives in accordance with Article 63 of the Treaty on the Functioning of the European Union. Such objectives are defined in the Treaty itself and through case law of the European Court of Justice as 'overriding reasons in the general interest'. Such objectives should not be purely economical and include national security and public policy. More importantly and, within the context of the COVID-19 pandemic, the ECJ has recognised public health as an overriding reason in the general interest.
It will be interesting to understand how this approach will effect transactions relating to mergers and acquisitions within the EU generally. One may argue that this is a unique opportunity for Member States to make use of the tools made available by the EU to nurture and promote businesses operating in their territory, thus ensuring that once the worst of this pandemic is over, these businesses have the necessary tools to grow and expand even further.
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