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New EU Proposal for Foreign Direct Investment Screening

February 2019 – On 20 November 2018, the European Parliament, European Council and European Commission (“EC”, the “Commission”) reached a political agreement on a new co-operation mechanism for the review of foreign direct investment (“FDI”) inflows to EU Member States. The agreement is based on the “Proposal for a Regulation Establishing a Framework for Screening Foreign Direct Investments into the European Union” (the “Proposed Regulation”)[1], adopted on 13 September 2017 by the EC. Under the Proposed Regulation, FDI screening would be undertaken by the Member States and, in certain cases, by the Commission on grounds of security or public order. The proposal is a reaction to the rapidly evolving and increasingly complex investment and geopolitical landscape and aims to maintain a balance between preserving the EU’s general openness to FDI inflows and ensuring that the EU’s essential interests are not undermined.

The Proposed Regulation’s objective is not to harmonise the formal FDI screening mechanisms currently used by one-half of the Member States, nor to replace them with a single EU mechanism. Rather, it strives to enhance cooperation on FDI screening between the Commission and the Member States and to ensure that any such screening procedure meets certain basic requirements, such as the possibility for the judicial redress of decisions, non-discrimination between different third countries and transparency. It is currently unclear how and to what extent the Proposed Regulation will affect the swift and timely implementation of transactions. While it imposes on the Member States the obligation to enact clear timeframes for the adoption of screening decisions, it nonetheless appears to dilute the screening procedure by allowing Member States and the EC to inform each other of planned or completed FDIs that may threaten security or public order and to exchange information in this regard.

1.  What is the current legal framework in the EU?

Pursuant to international commitments undertaken to date, the EU and the Members States may adopt restrictive measures relating to FDI on the grounds of security or public order, subject to certain requirements. However, there is currently no comprehensive framework at the EU level for the screening of FDIs on these grounds.

Currently, fourteen EU Member States[2] have put in place similar mechanisms for screening FDI. Though they share the same goal, these mechanisms differ significantly in their scope and procedure. Variations include: ex-ante/ex-post screenings; voluntary/mandatory notification; general/sectoral coverage’ company-based/asset-based screening; and screenings applicable to investments from other Member States and third countries, or to third countries only, etc.

2. What are the main factors for screening FDIs?

As guidance for the Members States and the EC, Article 4 of the Proposed Regulation contains a non-exhaustive list of factors that may be taken into consideration when screening FDI on the grounds of security or public order. These include whether or not the FDI may have an impact on strategic areas such as: (i) critical infrastructure, including energy, transport, communications, data storage, aerospace or financial infrastructure, as well as sensitive facilities; (ii) critical technologies, including artificial intelligence, robotics, semiconductors, technologies with potential dual-use applications, cybersecurity, aerospace or nuclear technology; (iii) the security of the supply of critical inputs; and (iv) access to sensitive information or the ability to control sensitive information. In determining whether an FDI is likely to affect security or public order, Member States and the Commission may take into account whether the foreign investor is controlled by the government of a third country, including through significant funding.

3. How does the EU FDI screening process look like?

The Proposed Regulation provides a mechanism for Member States to cooperate and assist each other when their security or public order is affected by an FDI inflow.

The Proposed Regulation requires each Member State to inform other Member States and the Commission of any FDI that it analyses under the framework of its national screening mechanism. Potentially affected Member States and/or the Commission should have the possibility to request additional information and/or to provide comments to the Member State(s) where such an investment is planned or completed, regardless of whether any of the Member States concerned maintains a screening mechanism or is conducting a screening of the investment itself. This cooperation should allow Member States and the EC to exchange information and to coordinate, where possible, their response, as the case may be, to the FDI. Member States retain the last word on whether a specific operation should be allowed or not in their territory.

The Commission has the possibility to screen FDIs that are likely to affect projects or programmes of EU interest on the grounds of security or public order. In these specific cases, the Commission may address an opinion to the Member State(s) where the investment is planned or completed if it considers that the investment is likely to threaten security or public order.

4. Particular examples of FDI screening in the CEE: Romania & Hungary

4.1 FDI screening in Romania

Romanian legislation provides for an FDI screening procedure in the form of a review mechanism from the national security perspective conducted by the Romanian Supreme Council of National Defence (“SCND”).

Any change of control over undertakings or assets[3] which is “susceptible to be analysed from the perspective of national security” must be notified to the SCND, irrespective of whether or not the EU or national merger control notification thresholds are met. A transaction will be “susceptible to be analysed from the perspective of national security” if it refers to areas such as, among others, the security of citizens or communities; border and/or energy security; information and communication systems; financial, fiscal, banking and insurance activities; the protection of agriculture and the environment; and protection of the privatisation of state-owned companies or their management; etc.[4]

As can be seen from the above, no clear criteria exist to determine when the SCND should be notified. The wording of the law is as broad as possible and makes reference only to some general sectors of the economy. There is also no de minimis threshold, i.e., in the case of FDI inflows falling below a certain value. Current Romanian legislation also does not provide clear statutory review deadlines and gives no guidance on what the foreign investor should do in case no response is given by the SCND within a reasonable time period. It is also unclear if a standstill period is applicable before the SCND issues its response.

If a transaction is found to place Romanian national security at risk, the transaction is prohibited through a decision taken by the government, based on the assessment and proposal issued by the SNCD.

4.2 FDI screening in Hungary

The Hungarian parliament adopted Act LVII of 2018 on Control over Foreign Investments Constituting Risk to the National Security (the “Foreign Investment Control Act”) applicable as of 1 January 2019. The new legislation requires ministerial approval for FDI in connection with specific activities. These include, among others: activities in connection with the supply of natural gas, electricity and water; electronic communications; financial services and the operation of payment systems; the manufacture of weapons and munitions; dual-use products; cryptography and wire-tapping products; etc.[5]

The acquisition of shares in companies registered in Hungary performing activities that may constitute a national security risk is subject to a preliminary notification obligation to the Interior Ministry only in cases where the foreign investor aims to (i) obtain a share, which directly or indirectly exceeds 25% of the Hungarian company’s registered capital or 10% of a Hungarian publicly listed company; (ii) obtain a share that provides him with dominant influence over the Hungarian company pursuant to the Hungarian Civil Code[6]; or (iii) register a branch office in Hungary. The foreign investor must also notify the Hungarian Interior Ministry (iv) in cases where its share in the Hungarian company combined with other foreign investor shares exceeds 25% (in the case of Hungarian publicly listed companies, the threshold is 10%). The notification obligation also applies if the Hungarian company or branch office over which the foreign investor already has influence as a result of a 25% ownership stake (10% in case of publicly listed companies) (v) intends to launch a new activity set out in the Foreign Investment Control Act or (vi) acquires a right to operate or use infrastructure or assets that are indispensable for carrying out such activities.

Under Hungarian law, in addition to citizens of or legal entities registered in a country outside the European Union, European Economic Area or Switzerland (together referred to as the “EEA”), a company registered in the EEA is also considered a foreign investor if the member of the company holding the majority of the voting rights or having dominant influence over the company pursuant to the Hungarian Civil Code is a citizen of or a legal entity registered in a country outside of the EEA.

The notification must be filed in the Hungarian language within 10 days following the conclusion of the agreement or pre-agreement on the transfer of shares or the registration of any of the activities listed above.

If a transaction constitutes a risk to national security, the Interior Ministry issues a prohibition decision.

Pursuant to the Foreign Investment Control Act, the Interior Ministry must adopt a decision no later than 60 days from the receipt of the notification from the foreign investor. The duration of the procedure before the Interior Ministry may be extended with up to 60 additional days.

Hungarian companies with foreign investors complying with the criteria established in the Foreign Investment Control Act may commence the above-mentioned activities following the notification and confirmation thereof, and therefore a standstill period is applicable.

For questions or more information, please contact Răzvan Popa, Partner, Co-head of Private Equity, at



[1] For additional information, please refer to


[3] Even a purely local transaction could be argued to qualify for the review, although the intention is to screen foreign investments.

[4] For all areas related to Romanian national security, please refer to the SCND Decision no. 73 of 27.09.2012 (

[5] For all areas related to activities subject to notification, please refer to Section 2 (4) of Act LVII of 2018 (×hift=fffffff4&txtreferer=00000001.TXT) and Annex 1 of Government Regulation No. 246/2018. (XII. 17.) (

[6] The holder of the participating interest is deemed to have dominant influence on the company, if:

a) a member of or shareholder in that company has the right to appoint and recall the majority of the executive officers or supervisory board members of the company; or

b) if other members of or shareholders in that legal person are committed under agreement with the holder of a participating interest to vote in concert with the holder of a participating interest, or if they exercise their voting rights through the holder of a participating interest, provided that together they control more than half of the votes.