18 Aug 2020
Regulation (EU) 2019/452 (“Regulation”) establishes a framework for the screening by Member States of foreign direct investments (“FDIs”) into the Union on the grounds of security or public order and for a mechanism for cooperation between Member States, and between Member States and the Commission, with regard to FDIs likely to affect security or public order. By the term ‘screening’ one understands a procedure which is to be adopted by the Member States to allow it to assess, investigate, authorise, condition, prohibit or unwind FDIs.
The need for such screening at EU level was prompted by the fact that there was no comprehensive framework at Union level for the screening of FDIs on the grounds of security or public order, while the major trading partners of the EU have already developed such frameworks.
An FDI is understood to mean an investment of any kind by a foreign investor (i.e. from a third country) aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in a Member State. Investments include those which enable effective participation in the management or control of a company carrying out an economic activity.
The Regulation shall become applicable as from the 11th October 2020 and shall be binding in its entirety and directly applicable in all Member States. Currently, no national legislation is yet in place; however, one expects such to be available shortly.
Nevertheless, Malta has already set up a National Foreign Direct Investment Screening Office (“Office”), which office is already active, and has made itself available to answer enquiries, and even screen for FDIs using forms which have been created for this purpose.
The scope of the Office shall be that of screening FDIs, joint ventures with a foreign component, and the transfer of any shares and/or controlling interests in existing companies where the owner/titleholder/UBO originates from third countries, for the purpose of ensuring that Malta identifies any FDI which might affect its security or public order, and to protect the Union’s intelligence, knowledge, technology and security interests.
How are Member States to determine if an FDI is likely to affect security or public order?
They do this by considering the FDI’s effects on certain factors, which include, inter alia, the following: (i) critical infrastructure (physical or virtual) including energy, transport, water, health, communications, media, data processing/storage, aerospace, defence, electoral/financial infrastructure; (ii) critical technologies and dual use items (i.e. software and technology which can be used for both civil and military purposes) including, inter alia, artificial intelligence, robotics, cybersecurity and nuclear technology; (iii) supply of critical inputs, including energy or raw materials, as well as food security; (iv) access to sensitive data, including personal data, or the ability to control such information; or (v) the freedom and pluralism of the media.
Furthermore, the Regulation holds that when Member States are determining if an FDI is likely to affect security or public order, other considerations are to be made, such as if the foreign investor is controlled by the government of a third country, or if such investor has already been involved in activities which affect the security or public order of a Member State, or if there is a serious risk that the foreign investor engages in illegal or criminal activities. It is also possible to ask a Member State for information in regard to an FDI which is not being screened, but which the Commission or another Member State considers it likely that such FDI might affect its security or public order.
The Regulation imposes an obligation on Member States to submit an annual report to the Commission which shall include information on FDIs that took place in their territory, and on their screening mechanisms. Moreover, Member States are to notify the Commission and other Member States of any FDIs in their territory which are being screened, along with whose security or public order is deemed likely to be affected by such an FDI.
What will this mean for law firms and corporate services providers in Malta and the rest of the EU?
In essence, this new Regulation imposes the introduction of a new procedure intended to obtain FDI clearance from the Office, before registering new companies or share transfers. Law firms and corporate services providers in Malta should, therefore, prepare for this by updating their Policies and Procedures Manuals, training staff, and familiarising themselves with the procedures, while also making clients aware of this new requirement.