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FDI Screening Regulation and ‘Indirect’ Foreign Direct Investments

Mateusz Milek , 4 septembre 2023

In its judgment of 13 July 2023 in Xella Magyarország, the Court of Justice of the European Union ruled for the first time on the scope of application of Regulation 2019/452 establishing a framework for the screening of foreign direct investments (‘FDI Screening Regulation’).

The case concerned the acquisition by Xella Magyarország – a Hungarian company which is part of a group of companies whose ultimate parent company is established in Bermuda and ultimately belongs to an Irish national – of a 100% holding in Janes és Társa. The latter is a Hungarian company whose main activity concerns the extraction of certain basic raw materials, in particular gravel, sand and clay, and which is considered under national, on account of that extractive activity, to be a ‘strategic’ company. That acquisition was notified to the competent Hungarian Minister, who blocked it on the ground that it would risk undermining the national interest in ensuring the continuity of supply of basic raw materials to the construction sector. Xella Magyarország challenged the Minister’s decision before the Fővárosi Törvényszék (Budapest High Court), which decided to refer a question to the Court of Justice of the European Union for a preliminary ruling to ascertain whether EU law, in particular, the Treaty provisions on the free movement of capital and the FDI Screening Regulation precludes the national contested decision.

Firstly, the Court of Justice reflected on the applicable EU law in this case. Contrary to the Opinion of Advocate General T. Ćapeta, it ruled that the acquisition at issue did not fall within the scope of the FDI Screening Regulation. It reasoned that the scope of this regulation is limited to investments in the European Union made by undertakings constituted under the laws of a third country. By contrast, the acquisition at issue in the main proceeding concerned the situation where an investment was made by undertakings registered in Hungary which was only controlled by an undertaking registered in a third country (the so-called ‘indirect’ foreign direct investment).

Secondly, having ruled out the applicability of the FDI Regulation, the Court of Justice went on to identifying the applicable fundamental freedom of the EU internal market. It held that in accordance with its settled case-law, national legislation intended to apply only to those shareholdings which enable the holder to exert a definite influence on a company’s decisions and to determine its activities fall within the scope of the rules on the freedom of establishment and not the rules on the free movement of capital. Although the acquisition at issue concerned two Hungarian undertakings, the freedom of establishment was still applicable given Xella’s cross-border ownership structure.

The Court of Justice subsequently recalled its settled case-law according to which all measures which prohibit, impede or render less attractive the exercise of the freedom of establishment must be considered to be restrictions on that freedom within the meaning of Article 49 TFEU. A foreign investment screening mechanism clearly constitutes a particularly serious restriction on that freedom. As regards the existence of an overriding reason relating to the public interest capable of justifying the restriction on the freedom of establishment, the Court of Justice held that purely economic grounds, such as, in particular promotion of the national economy cannot serve as justification for an obstacle to one of the fundamental freedoms enshrined in the Treaties. As regards an objective linked to the security of supply, the Court of Justice has held that such an objective may be relied on only if there is a genuine and sufficiently serious threat to a fundamental interest of society. Contrary to the Opinion of Advocate General T. Ćapeta, the Court of Justice has indicated that ensuring the security of supply to the construction sector of certain basic raw materials cannot be held to concern a ’fundamental interest of society’ within the meaning of the Court’s settled case-law, as is the case with the security of supply to the petroleum, telecommunications and energy sectors. By consequence, the freedom of establishment precludes such a foreign investment screening mechanism laid down by national law.

In its judgment, the Court of Justice has made clear that the FDI Screening Regulation does not apply to intra-EU investments made by EU investors which form part of companies whose ultimate parent company is established in a third country. Member States may keep screening such investments on condition that they comply with the internal market fundamental freedoms. At the same time, by giving a strict interpretation of what constitutes a genuine threat to a fundamental interest of society, the Court of Justice has signaled that national authorities are allowed to block such ‘indirect’ foreign direct investments only in very limited circumstances. 


Reproduction autorisée avec la référence suivante : Mateusz Miłek, FDI Screening Regulation and ‘Indirect’ Foreign Direct Investments, actualité du CEJE n° 28/2023, 4 septembre 2023, disponible sur www.ceje.ch