FDI in Europe: New report reveals increasing number of notifications and sectors screened but the unconditional approval rate remains high

The EU does not operate its own FDI screening mechanism but has a coordinating and advisory role for its Member States: twenty-four of the twenty-seven Member States now have a screening mechanism in place, with the remaining three (Croatia, Cyprus and Greece) expected to introduce a new FDI regime within the coming year. During the course of 2023, eight Member States adopted a new FDI regime being Belgium, Bulgaria, Estonia, Ireland, Luxembourg, Romania, Slovakia and Sweden.

The EU report’s key takeaways, which we discuss in more detail below, are that: (1) the vast majority of investments were unconditionally cleared and without the European Commission issuing a formal opinion to the screening Member State(s); (2) the main sector where investments triggered a detailed security review by the European Commission continued to be  manufacturing, and within this, mainly critical technologies and defence; and (3) a growing number of deals are notified by several Member States to the European Commission for comment.

Vast majority of transactions cleared unconditionally in Phase 1 but uncertainty about scope of FDI screening regimes remains

While there were more notifications to Member States’ FDI screening authorities in 2023 – 1,808 compared to 1,444 in 2022 – the percentage of cases which Member States formally screened remained almost static: 56% in 2023 compared to 55% in 2022. So a significant percentage of transactions still seem to be notified while not requiring an FDI review.

Of the cases in which Member States adopted a decision, 85% were authorised without conditions. Of the other transactions, 10% were approved with conditions, 1% of transactions were blocked and 4% were withdrawn before a formal decision was taken.

These statistics are unsurprising. As shown in the Eversheds Sutherland’s 2024 M&A report, while the regulatory burden and uncertainty for M&A transactions has increased in recent years, the vast majority of transactions undergoing FDI screening continue to be cleared unconditionally. The same applies to transactions subject to merger control review.

The European Commission was only notified in half of the cases undergoing a review at a Member State level and rarely issued a formal opinion

Member States must notify the European Commission when transactions are undergoing formal screening. This occurred in approximately 50% of cases in which Member States adopted a decision, i.e. 488 notifications. This reflects that what constitutes a formal FDI screening is not yet harmonised across Member States. Seven Member States were responsible for over 85% of notifications. These were: Austria, Denmark, France, Germany, Italy, Romania and Spain; reflecting the Member States with the most established, and often broadest, regimes with Romania being a notable new addition to this cohort.

In the vast majority of cases, 92%, the European Commission concluded its review within the prescribed 15 days following a notification from a Member State. In only 8% of cases, did the European Commission undertake a more detailed security risk assessment and only issued an opinion in less than 2% of cases notified, which is less than 1% of all cases being screened at Member State level. The report mentions that the European Commission may issue an opinion in cases when the FDI is likely to negatively affect security or public order in more than one Member State or impact a project or programme of Union interest.

Investments in a broader range of sectors were subject to in-depth review but manufacturing, and in particular critical technologies, continued to most often trigger a detailed security assessment

Whilst manufacturing remained the sector most subject to a European Commission detailed security risk assessment, a Phase 2 review, the sector accounted for a significantly lower proportion than in 2022 (39% compared with 59% in 2022). The other top sectors were Information and Communication (ICT) (24%), professional activities tied with wholesale and retail (10%), and financial activities (8%). Within manufacturing, 51% of Phase 2 notifications related to investments in critical technologies and those specifically related to defence, aerospace and semiconductors making up 65% of the further reviews.

From a notification perspective to the European Commission, most FDI notifications continued to be in the manufacturing (23%) and ICT (21%) sectors. However, there was an increase in the proportion of cases in wholesale and retail (14% compared with 9% in 2022) and financial (11% compared with 8% in 2022), as well as energy (6% compared with below 4% in 2022).[1]

A growing number of investments are being reviewed by multiple Member States

It is notable that a growing number of notifications relate to multi-jurisdictional deals, i.e. investments for which the European Commission received notifications from several Member States. These accounted for 36% of notifications compared to 20% in 2022. Most of these relate to ICT (23%), closely followed by manufacturing comprising 21% of them. This underlines the importance of a coordinated strategy across Member States.

Investor origin or deal size do not determine whether an investment is subject to an FDI review

Of investments notified to the European Commission, the six main jurisdictions of origin were the US, the UK, the UAE, China (including Hong Kong), Canada and Japan. Whilst this broadly aligns with the investor origin for overall investment, China (including Hong Kong) did not feature in the top five for total number of acquisitions (although it did invest more heavily in greenfield projects). This indicates investments originating from China are more likely than average to raise concerns and be subject to further review, whilst investments from countries such as Switzerland are less likely to be reviewed.

Noticeably in the reporting period the share of the number of notifiable transactions by origin for the UAE more than doubled (albeit from a low percentage) from 3% in 2022 to 7% in 2023. Also worth noting is the large number of reviews of investments originating from the UK.

Many national screening regimes have no value threshold for a deal to fall within scope. When categorised by value, the single largest group of investments notified to the FDI Mechanism were over €500 million (29%). However, deals of all values have been reviewed, including less than €10 million (18%). Investors should not assume that small deals are less likely to be reviewed.

On the horizon: changes to the EU FDI Screening Regulation

In its report the European Commission reflects on the proposals to revise the EU FDI Regulation, as discussed in our briefing European Commission reinforces FDI screening regulation. The proposed changes are to address identified “blind-spots” where concerning investment might not be reviewed. Of the changes proposed, the most notable include:

• Extending the scope of screening to cover transactions in the EU where the direct investor is owned from a non-EU country;
• Ensuring Member States cover certain sectors at a minimum in their screening processes; and
• A new step in the process where, after an investment subject to the process takes place, the relevant Member State shares information on that investment with other Member States and the Commission regarding the final decision on the investment.

These proposed changes remain under discussion.

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[1] Note that comparisons year to year are not directly comparable because of changes in methodology.