Recent EU-level case law related to national-level foreign direct investment screening

Since the end of the 2010s foreign direct investment (“FDI”) considerations have been on the forefront of transaction planning and management. Although a unified EU-level screening mechanism is not in place, recently the European Commission (“EC”) closed a landmark case, while another one is currently ongoing before the European Court of Justice (“ECJ”) where the interplay of EU law and more specifically, EU merger law and national FDI rules were/are assessed. Dicta in these cases may have considerable implications in national FDI practice. This summary therefore provides a quick glance-through of the key notables taken from these cases.

1. The EC’s decision regarding the acquisition of the Hungarian leg of the AEGON transaction

Based on publicly available information, in April 2021 the Hungarian Minister of Interior denied to grant acknowledgment to the Hungarian leg of the acquisition by VIENNA INSURANCE GROUP AG Wiener Versicherung Gruppe from the Aegon Group of its Hungarian, Polish, Romanian and Turkish life and non-life insurance, pension fund, asset management and ancillary services businesses, referring to the legitimate interests of Hungary[1].

The EC investigated the case, and having taken into consideration the input of the Hungarian authorities, it found that the Hungarian veto decision violated the EU Merger Regulation. Therefore, the EC ordered Hungary to withdraw the decision, on the following grounds[2]:

i) Article 21 of the EU Merger Regulation sets out, as a general rule, the exclusive competence of the EC regarding concentrations with an EU dimension, ruling out the applicability of national laws to these transactions. The exemption from this general rule is the opportunity of the member states to take appropriate measures to protect public security, plurality of the media and prudential rules as legitimate interests. Any other public interest must be compatible with the general principles and other provisions of Community law and be communicated to and be recognized by the EC after a compatibility assessment with the foregoing, before a measure is taken.

ii) the EC had reasonable doubt as to whether the veto genuinely aimed to protect Hungary’s legitimate interests, in particular, whether it posed any threat to a fundamental interest in society (especially since both parties had already a well-established presence in Hungary).

iii) the Hungarian authority – in line with Article 21 of the EU Merger Regulation – should have communicated the intended veto but failed to do so, which constituted an infringement.

iv) the veto was incompatible with EU rules on the freedom of establishment as the Hungarian authority did not demonstrate that it was justified, suitable and proportionate, and restricted the right to engage in a cross-border transaction.

Based on the above, from an FDI and transaction planning perspective, while FDI screening remains on a national level, FDI screening and EU-level competition clearance may take place in parallel. Further, in community level concentrations, the EC as competition authority may ultimately overwrite a national-level FDI veto, on the basis of Article 21 of the EU Merger Regulation (provided that the referred provisions EU law is not complied with).

Consequently, prior to prohibiting a community-level transaction on the national level, based on national FDI laws, the FDI authorities of the Member States should also make sure whether the measure to be imposed is in line with Article 21 or the EU Merger Regulation, and whether in the case of EU investors, the fundamental freedoms under EU law are taken into consideration.

2. The preliminary ruling procedure currently ongoing before the ECJ regarding the acquisition of a Hungarian raw material extractor[3]

The Budapest Capital Regional Court requested the preliminary ruling of the ECJ in a case against  the Hungarian Minister of Innovation and Technology concerning an FDI veto. The acquirer  is a concrete products producer that intended to acquire a Hungarian strategic company engaged in raw material extracting. The acquirer notified the transaction to the Hungarian Minister of Innovation and Technology, who issued a prohibition[4].

By way of background, from public sources we understand that the reasons of the prohibition were the partial indirect Bermudan ownership in the acquirer that, according to the Minister, presented a risk regarding the security and supply of building materials, which could be especially harmful to national economy in the context of the COVID-19 pandemic. The acquirer turned to court locally arguing that the ministerial decision qualifies as arbitrary discrimination, and/or restriction on the free movement of capital, and referred to the fact that in 2017 the EC – in a previous transaction – already approved its ownership structure.

The local court hearing the case referred the following questions to the ECJ:

i) does Article 65(1)b of the TFEU[5] (considering recitals 4 and 6 of Regulation No. 2019/452 of the European Parliament and of the Council (“EU FDI Regulation”)[6], as well as Article 4(2) of the TFEU[7]) permit Hungarian law to set out rules such as those in the 2020 FDI Act, and more particularly:

a) the definition of “state interest” (Section 276(1) of the 2020 FDI Act). On a side note, the wording of the current definition[8] is quite wide and covers “such public interest that is related to the security and operability of networks and installations (berendezések), the continuity of supply, or public interest that, from the perspective of national economy, is related to fundamental economic strategy (nemzetgazdasági szempontból alapvető gazdaságstratégiai érdekkel összefüggő közérdek), provided that the foregoing is not regulated by sectorial European Union-level regulations or national regulations.

b) rendering an acquisition notifiable if the foreign investor executing it is a person with purely EU/EEA/Swiss control background (or a person who is a citizen of/established in the EU/EEA/Switzerland and is under the majority control of a person who is a citizen of/established in a country outside of the EU/EEA/Switzerland) and the aggregate value of the transaction reaches or exceeds HUF 350 million (Section 277(2)a) of the 2020 FDI Act).

c) defining as grounds for blocking a transaction the following: the impairment, endangerment (or the risk of these) of the state interest (államérdek), public security (közbiztonság), public order (közrend) of Hungary, taking into consideration especially the security of ensuring supply for fundamental needs of the society (alapvető társadalmi szükségletek ellátásának biztonsága) (Section 283(1)b) of the 2020 FDI Act).

ii) if the answer to the question above is in the affirmative, does the mere fact that the EC has conducted a merger control procedure, exercised its powers and authorised a concentration affecting the chain of ownership of a foreign indirect investor preclude the exercise of the decision-making power under the applicable law of the Member StateWe note that if the answer to this question will be yes, such could greatly reduce transaction risk and simplify transaction planning.

From the perspective of national-level FDI practice all of the above queries are of significant importance. We are monitoring the status of the ECJ procedure and once their conclusions are available, we will update this summary.


[1] Since public sources refer to the Minister of Interior as the authority issuing the veto, we understand that the ministerial decision was made in relation to the FDI regime enacted by Act 2018 of LVII in Hungary (“2018 FDI Regime”), which encompasses a national-security type screening in “classic” strategic sectors. On 12 August 2021 the EC unconditionally cleared the transaction under the European Council’s Regulation No. 139/2004 (“EU Merger Regulation”).

[2] https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1258.

[3]https://eulawlive.com/court-of-justice-to-rule-if-hungarys-opposition-to-foreign-investment-breaches-free-movement-of-capital-and-commissions-exclusive-merger-control-powers/ and https://curia.europa.eu/juris/document/document.jsf?text=&docid=259779&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=11883172

[4] We understand that that the ministerial decision was made in relation to the FDI regime enacted by Act LVIII of 2020 (“2020 FDI Act”) in Hungary, which encompasses a much wider array of sectors as compared to the 2018 FDI Regime.

[5] According to Article 63 of the TFEU: „Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and third countries shall be prohibited. Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited.”

Article  65.1. (b) of the TFEU provides that: „1. The provisions of Article 63 shall be without prejudice to the right of Member States: […] to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation and the prudential supervision of financial institutions, or to lay down procedures for the declaration of capital movements for purposes of administrative or statistical information, or to take measures which are justified on grounds of public policy or public security.”

[6] Article 4 of the EU FDI Regulation sets out factors that may be taken into consideration by Member States or the EC, in determining whether a foreign direct investment is likely to affect security or public order, while Article 6 provides for a cooperation mechanism in relation to foreign direct investments undergoing screening.

[7] Article 4(2) of the TFEU provides that: „Shared competence between the Union and the Member States applies in the following principal areas: (a) internal market; (b) social policy, for the aspects defined in this Treaty; (c) economic, social and territorial cohesion; (d) agriculture and fisheries, excluding the conservation of marine biological resources; (e) environment; (f) consumer protection; (g) transport; (h) trans-European networks; (i) energy; (j) area of freedom, security and justice; (k) common safety concerns in public health matters, for the aspects defined in this Treaty.”

[8] As at the date of this summary, Act XCIX of 2021 on intermediary regulations concerning the state of emergency is in effect and modifies the definition of „state interest” in the 2020 FDI Act – the quoted definition is from this act.

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