The situation: The European Commission (“EC”) has issued its first decision (“Decision”) regarding the intersection of EU merger control rules and the recent growth of domestic foreign direct investment (“FDI”) regimes. The EC found that the Hungarian government’s decision to block a transaction under its domestic FDI rules violated the EC’s exclusive jurisdiction to review transactions with a “European dimension”, subject to certain exceptions.
The context: This decision contrasts with recent EC efforts to support the development of FDI screening regimes at national level.
Look forward: While the EC ruling may add another level of EU approval for certain transactions subject to EU merger control and national FDI reviews, it limits the circumstances in which a Member State may block a transaction under its national FDI rules. The decision also invites the merging parties to challenge Member States’ attempts to block a transaction under national FDI rules where the EC is empowered to conduct an EC-level competition review.
The EC recently found that Hungary’s veto of Vienna Insurance Group’s (“VIG”) acquisition of the Hungarian subsidiaries of the AEGON Group, an insurance, pension fund and asset management company, violated EU merger control rules, which give the EC exclusive authority to review transactions that meet EU jurisdictional thresholds.
VIG’s acquisition of AEGON’s Hungarian subsidiaries was part of a larger transaction, including the acquisition of several subsidiaries based in the EU and other states. Hungary rejected VIG’s acquisition of the Hungarian subsidiaries under its FDI rules. The EC then cleared the main transaction unconditionally under the EU Merger Regulation (“EUTMR”).
The VIG transaction highlights the potential limits of national FDI rules stemming from EU merger rules. Article 21 EUTMR recognizes that Member States may take appropriate measures to protect the following legitimate interests:
- Public security, media plurality and prudential rules; Where
- Another public interest, provided it has been communicated to and approved by the Commission (within 25 working days) after an assessment of its compatibility with the general principles of EU law.
When an FDI review of a Member State pursues an interest not specifically recognized in point 1, the Member State must therefore notify its intentions to the EC before implementing its decision. The EC decision found that the Hungarian authorities had not (i) notified their intention to veto to the EC before its implementation; and (ii) demonstrate that the veto was justified by legitimate interests. The EC ordered Hungary to withdraw its veto by March 18. If Hungary does not withdraw its veto by that date, the EC could launch an infringement action before the European Court of Justice to overturn Hungary’s decision.
The EU has encouraged the development of national FDI regimes, notably through the adoption of its March 2019 regulation on EU screening (to see our april 2019 white paper). Due to the EU Screening Regulation and a wider trend towards protectionism, there has been a significant increase in the number of Member States adopting FDI regimes, adding to the layers already (and increasingly more) complex antitrust and regulatory oversight in the EU (to see our April 2021 Remark regarding the EC’s expansive approach to non-reportable transactions). These FDI regimes empower national authorities to review, and possibly condition or prohibit, transactions that may threaten various national interests, including national security and public order. Although the EU Screening Regulation encourages Member States to adopt FDI rules, it does not promote a common set of rules or establish a one-stop shop for screening FDI in the EU. EU scale.
The EC decision recalls that even in the field of FDI, Member States cannot ignore the principles and rules of EU law. The decision is part of settled EU case law requiring Member States to justify and ensure the proportionality of measures which may restrict provisions of EU law, including limitations on the free movement of capital or the right of a company to carry out cross-border transactions within the EU Union. As a result, the EC decision may encourage member states to be more cautious or selective in applying FDI rules to matters involving both FDI and competition scrutiny at EU level. .
Finally, the EC decision draws attention to the obligation of Member States to inform the EC of certain measures likely to affect a concentration respecting the EU jurisdictional thresholds. Although the principle is clear, a Member State must communicate to the EC (and obtain its prior approval) any measure which does not genuinely aim to protect one of the interests recognized by the EUTMR (i.e. security media plurality and prudential rules) — the application of the rule in practice is less simple. EU and national authorities may have different views on what constitutes a recognized interest and what measures a Member State should notify. The absence of guidelines leaves room for different interpretations and, consequently, legal uncertainty and potential delays in the implementation of agreements that are subject to simultaneous examination at different levels.
Four takeaway meals
- Unlike the EU competition law regime, there is no review of FDI at the EU level. Although Member States or the EC have exclusive competence to carry out competition reviews, Member States carry out FDI screening exclusively at the national level. Therefore, a transaction requiring a competition case at the community level also frequently involves one or more FDI examinations at the national level.
- Although Member States generally have wide discretion in the field of FDI, a Member State must notify the EC of its intention to block a transaction subject to Community competition review if such a decision is not not based on the limited legitimate interests recognized by the EUMS (i.e. public security, media plurality and prudential rules). Any such notification will include a consideration of whether the measures are genuinely intended to protect a legitimate interest and may therefore lengthen FDI reviews.
- Given the limited number of recognized legitimate interests and the lack of guidance on what might be considered other public interests under which a Member State may reject a reviewable transaction at EC level, the EC and Member States are likely to have different interpretations of these interests and what measures would be justified, appropriate and proportionate to achieve this interest.
- In some transactions, merging parties may choose to file merger control notices with the EC or Member States. In these matters, parties should consider whether the possibility of EC oversight of a Member State’s FDI decision tips the balance in favor of filing with the EC, if they expect problems with a Member State’s FDI review.