ECJ provides guidelines regarding blocking of Foreign Direct Investments

Background

On 13 July 2023 the European Court of Justice (“ECJ”) issued a judgement (Case C-106/22 – Xella)[1] in which it clarified the conditions under which EU Member States may screen and block foreign direct investments (“FDI”).

The aforementioned decision is a response to a reference from the Budapest High Court for the preliminary ruling regarding the compliance of the Hungarian law, allowing the Minister of Innovation and Technology to prevent foreign investors, including EU-based companies under “majority control” by third-country investors, from acquiring “strategic” Hungarian companies with the Regulation (EU) 2019/452 (“FDI Screening Regulation”) and with EU law in general.

In this case, a Hungarian company, Xella Magyarország, that is ultimately owned by an Irish national and also part of a group of companies based in Bermuda, anticipated the acquisition of 100% of shares of a Hungarian company involved in mining raw materials like gravel, sand, and clay, Janes és Társa. The transaction was blocked by the Hungarian Ministry due to the consideration regarding the security of raw material supply to the construction sector and its impact on the national interest.[2]

ECJ Decision

The ECJ held that the FDI Screening Regulation is “limited to investments in the European Union made by undertakings constituted or otherwise organised under the laws of a third country”[3] and hence does not apply to investments performed by an EU-based company even if it is (directly or indirectly) controlled by non-EU shareholders. Therefore, the Hungarian regulation of the FDI screening mechanism, which also includes investments that “are made by undertakings registered in Hungary or in another Member State over which an undertaking registered in a third country has “majority control”,[4] falls beyond the scope of the FDI Screening Regulation.

According to ECJ, “freedom of establishment granted in the Treaty on the Functioning of the European Union (“TFEU”) is enjoyed, inter alia, by companies or firms constituted under civil or commercial law, provided that they are formed in accordance with the law of a Member State and have their registered office, central administration or principal place of business within the EU, that is to say, companies or firms which have the nationality of a Member State”.[5] Therefore, the freedom of establishment protects an EU-based company that wishes to acquire another EU-based company even if such EU acquirer has non-EU shareholders. The fact that an EU entity has non-EU shareholders is insufficient to consider such EU entity a non-EU investor, therefore, such entity is protected by the freedom of establishment.[6]

ECJ further clarified that any restriction of the freedom of establishment needs to be justified by legitimate reasons of public policy, public security or public health,[7] and must be appropriate and necessary for the protection of such interest. As per the ECJ case law, purely economic grounds, such as, in particular, promotion of the national economy or its proper functioning, cannot serve as justification for an obstacle to one of the fundamental freedoms,[8] however, the ECJ has acknowledged that “reasons of an economic nature in the pursuit of an objective in the public interest or the guarantee of a service of general interest may constitute an overriding reason in the public interest capable of justifying an obstacle to one of the fundamental freedoms enshrined”.[9]

ECJ did confirm that Member States remain free to determine the requirements of public policy and public security, yet these requirements need to be interpreted strictly and their application by EU Member States is subject to the control by the EU’s institutions. As far as the case in question is concerned, ECJ asserted that the objective of ensuring supplies of construction materials does not represent a “fundamental interest of society”.

The Slovenian FDI screening regime and the outlook

Initially the Republic of Slovenia (“Slovenia”) regulated its mechanisms for monitoring and control over FDI with the adoption of the Act Determining the Intervention Measures to Mitigate and Remedy the Consequences of the COVID-19 Epidemic (“COVID-19 Act”), [10] which had been in effect since 31 May 2020 and regulated FDI screening mechanism until 30 June 2023. From 1 July 2023 onward, the Slovenian FDI screening mechanism is governed by the new Investment Promotion Act (“Current FDI Law”).[11]

Per the Current FDI Law, the subject of the notification obligation is an FDI that meets the following criteria, namely:

  • It is performed by a foreign investor;
  • It relates to certain risk factors, such as: performance of critical economic activities and critical infrastructure, supply of critical resources, access to sensitive information, freedom and plurality of the media, and projects or programs in the interest of the EU as defined in Annex I of the FDI Screening Regulation and
  • It represents the gaining of participation or permanent influence through voting rights in a commercial legal entity, whereby a 10% participation in capital or a share of voting rights is considered a permanent influence.

The COVID-19 Act considered a foreign investor any national of any other country other than Slovenia. The current FDI Law took a different approach as it defines a foreign investor as a citizen of a third country or a legal entity based in a third country, that intends to make a direct foreign investment in Slovenia or has already done so. The Current FDI Law also provides for an additional safeguard and stipulates that a foreign investor is also a citizen of a third country or a legal entity based in a third country, which directly or indirectly holds at least 10% of the capital or voting rights in a legal entity based in an EU member state and intends to make a direct foreign investment in the Republic of Slovenia or has already made such investment.

As ECJ clarified in the Case C-106/22 – Xella, since blocking acquisitions of EU companies by EU-based companies solely because these EU-based acquirers have non-EU shareholders by national FDI screening mechanisms is permitted only if there is a genuine and sufficiently serious threat affecting a fundamental interest of society, the definition of the foreign investor as stipulated in the Current FDI Law might be deemed problematic and non-compliant with guidelines provided by the ECJ. Therefore, each eventual blocking of an FDI by an EU-based company with non-EU shareholders will have to be justified by genuine and sufficiently serious threat to a fundamental interest of society, whereas as per guidelines provided by ECJ “purely economic ends” alone cannot provide a sufficient justification.

 

Eva Hafnar, Associate
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[1] Case C‑106/22, Xella Magyarország Építőanyagipari Kft. v Innovációs és Technológiai Miniszter EU:C:2023:568.
[2] Ibid, para. 24.
[3] Ibid, para. 32.
[4] Ibid, para. 33.
[5] Ibid, para. 44.
[6] Jones Day, ECJ Clarifies Conditions Under Which Member States Can Block Foreign Direct Investments, July 2023.
[7] Case C‑106/22, Xella Magyarország Építőanyagipari Kft. v Innovációs és Technológiai Miniszter EU:C:2023:568, para. 63.
[8] Ibid, para. 64.
[9] Ibid, para. 65.
[10] Zakon o interventnih ukrepih za omilitev in odpravo posledic epidemije COVID-19, Official Gazette of the Republic of Slovenia (OG) 88/20 et. seq.
[11] Zakon o spodbujanju investicij, Official Gazette of the Republic of Slovenia no. 13/18, 204/21, 29/22 and 65/23.