Europe: Foreign direct investments and intragroup transactions

Foreign direct investments are a hot topic in many jurisdictions, not least the European Union. While the FDI regime may have a justified purpose in certain areas, it is valid to ask if these regulations do indeed apply to pure intragroup transactions.

In the wake of a 2017 proposal of the European Commission to establish a cooperation mechanism among the EU member states on foreign direct investments, the European Parliament and the Council of the European Union issued Regulation (EU) 2019/452, the EU-FDI Screening Regulation, in 2019. Subsequently, several EU member states adopted FDI regulations into national law. In this article, we report on our analysis of   FDI regimes around the world – in particular, the different regulations in the EU member states. The regime is similar in some aspects in many EU member states; others, however, have not yet implemented FDI regulations based on the FDI-Screening Regulation.

"Across the EU, the scope, interpretation of sectors and the standard as to when national security or public order and safety appear to be at risk all vary."

FDI regimes apply to both direct and indirect measures. The scope, interpretation of sectors and the standard as to when national security or public order and safety appear to be at risk all vary. This un-harmonized landscape can easily lead to a situation in which a global transaction is subject to pre-closing approval in one EU member state while another EU member state only requests post-closing notification and yet another EU member state may not require any such measures.

Unfortunately, there is no indication that a less strict or more harmonized regulation will be put in place in the European Union in the near future. The FDI Screening Regulation provides for an evaluation of the functionality and effectiveness of this Regulation by October 12, 2023 and every five years thereafter, so there is hope that some general exceptions will be implemented for intragroup transactions, in particular when it comes to share transfers.

For the time being and after roughly two years of various FDI regimes, the most relevant challenges when advising on the structuring and implementation of global reorganizations we see are: 

• considerable delays in the implementation of a reorganization
• administrative procedure with extensive disclosure towards the authority of company data and strategic considerations
• significant consequences in case of non-compliance – from missing deal security to personal criminal liability issues for all involved including local management and advisors 
• last but not least, explaining the logic on the variety of the regimes.

Given the risk of a transaction being declared null and void, many companies, especially listed companies, may decide to notify a transaction or obtain approval for transactions (as a precautionary measure), even though in many transactions it is questionable how a local European authority would be able to declare a foreign transaction null and void and to enforce such local decision.

Certain arguments hold that FDI regulations should not apply to intragroup (share) transfers; however, notably, the various national laws do not per se exempt such transactions. To support a successful outcome for your intragroup reorganization, a sensible approach is to ensure that your legal, tax and commercial teams remain closely aligned throughout the process.

Our global team is well placed to help you navigate through the FDI jungle, supporting your transaction security and implementation around the globe at every step.

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Crossroads – ICR Insights is our series of short-read articles designed to assist organizations considering an international corporate reorganization (ICR). Each country-specific, solutions-based brief will answer a key consideration during a global transaction such as carveouts, spinoffs, acquisitions and dispositions, pre- and post-acquisition integration, or legal entity rationalization. Visit Crossroads – ICR Insights to view the entire collection or sign up to be notified of new postings. Have an idea of a topic or interested in discussing further? Email ICRCrossroads@dlapiper.com.