FDI Screening: When Does National Interest Override Investment? - McDermott Will & Emery

FDI Screening: When Does National Interest Override Investment?


A recent decision from the European Court of Justice (ruling C-106/22) has significant impact on EU foreign investment screening mechanisms.

In Depth

The Court begins with two useful reminders: i) that the regulation establishing a framework for the screening of foreign direct investment in the European Union does not apply to an investment made by a company established in the European Union, even if it is directly or indirectly controlled by a company established in a non-member country; and ii) any company established in the European Union may avail itself of the freedom of establishment guaranteed by Article 54 TFEU, irrespective of the nationality or origin of its shareholders.

On the merits, the Court firmly reiterates that, insofar as they constitute a restriction on the fundamental freedoms guaranteed by the Treaty, the grounds of public policy or public security likely to justify an investment screening mechanism “must be understood strictly, so that their scope cannot be determined unilaterally by each of the Member States without control by the institutions of the European Union”. According to the Court, public policy and public security, or the objective of security of supply, can only be invoked where there is a genuine and sufficiently serious threat affecting a fundamental interest of society.

The case in question concerned the decision to prohibit the acquisition of a Hungarian company deemed “strategic” by a company established in the European Union, forming part of a group of companies established in several Member States, in which a company from a third country has a decisive influence, on the grounds that this acquisition would pose a risk to the security of supply of basic raw materials for the benefit of the local construction sector. In this context, the Court held that freedom of establishment precludes a mechanism for filtering foreign investment, which makes it possible to prohibit, on such grounds, the acquisition of a company deemed “strategic”.

This decision could mark a halt to the trend towards the extension of foreign investment screening mechanisms by various Member States, by requiring them to exercise closer control over the grounds of public policy and public security that may be invoked, which cannot be purely hypothetical, but must be based on a real and sufficiently serious threat that has been duly established.