Investment screening may be in breach of the freedom of establishment
The Court of Justice of the European Union (CJEU) has issued a judgement stating that the FDI Regulation covers foreign direct investments only. The CJEU also states that national screening mechanisms must comply with the Treaty rules on the freedom of establishment. For this reason, such rules and decisions must be proportionate and justified by overriding reasons relating to the public interest.
Judgment of the CJEU of 13 July 2023 in case C-106/22 Xella Magyarország
Background
The case concerns a Hungarian company extracting gravel, sand and clay in a quarry. Another Hungarian company entered into a sale agreement for the purpose of acquiring 100% of the shares in the former company. The latter company is directly owned by a German company, but indirectly owned by a Bermuda company ultimately belonging to an Irish national.
The Hungarian Minister for Innovation and Technology blocked the acquisition on the ground that it would be contrary to national interest to allow a company – indirectly owned from Bermuda – to take control of a company that under Hungarian law is characterised as strategic – being active in the extraction of materials for the construction sector. Another ground was that acquisition of the company would pose a risk to the security of supply of raw materials to the construction sector.
The acquiring company disagreed with the decision, arguing that blocking the acquisition would violate the rules on free movement. Furthermore, failure to authorise the acquisition would constitute arbitrary discrimination.
The case was referred to the CJEU at the request of the court of first instance in Budapest. The Hungarian court asked the CJEU to rule on whether EU law should be interpreted as precluding Hungary from introducing a national screening mechanism that also covers indirect ownership by non-EU companies, as it results in restrictions on foreign investments.
The CJEU initially found that the case does not fall within the scope of Regulation 2019/452 of the European Parliament and of the Council of 19 March 2019 on screening of foreign direct investments into the Union (the "FDI Regulation"). The reason is that the company in question is not directly established or resident in a third country, but is instead owned only indirectly by a company from a third country. The CJEU further states that the case does not involve circumvention of the screening mechanism, which could otherwise have led to the application of the FDI Regulation.
In addition, the CJEU maintains that the question in the case must be decided solely on the basis of the right of establishment.
The CJEU subsequently states that the rules set out in the Hungarian legislation constitute a restriction on the right of establishment. The CJEU then examines whether the restriction on the right of establishment is justified, as such restrictions are only permitted if they are justified by an overriding reason relating to the public interest. In this case, the decision was based on the view that the acquisition would pose a risk to the security of supply. According to the CJEU, this consideration may be relied on only if there is a genuine and sufficiently serious threat to a fundamental interest of society. The CJEU concludes that the objective of the decision does not fall within this category.
Our comments
Interestingly, the CJEU arrives at another conclusion than the one reached by the Advocate General in the opinion of 30 March 2023. Contrary to the Advocate General, the CJEU finds that the FDI Regulation only covers foreign direct investments made by investors outside the EU. Where this is not the case, a national investment screening – if there is a cross-border element within the EU – must comply with the right of establishment directly under the Treaty.
Like the Hungarian rules, the Danish rules embodied in the Investment Screening Act cover investments that both directly and indirectly create influence on Danish companies. Thus, it has now been established that such rules constitute restrictions on the freedom of establishment and that such rules and decisions under the rules must be justified by overriding reasons relating to public interest which are suitable for achieving the objective, proportionate and sufficiently detailed to allow an assessment of whether these requirements are met.
As we have previously written in connection with the Advocate General's opinion (see here in Danish), the Danish authorities, including the Danish Business Authority, will often be very reluctant to share the details justifying specific decisions, as the authorities will claim that the very considerations for national security and public order mean that only very little information about the background for the specific decisions can be shared. For this reason, it may often be difficult for a company to assess whether a decision – which, for example, includes commitments – can be justified by overriding reasons relating to public interest.
Read the CJEU's decision of 13 July 2023
Read our previous news article on the Advocate General’s opinion (in Danish)
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