{"id":4439,"date":"2023-09-20T17:19:46","date_gmt":"2023-09-20T15:19:46","guid":{"rendered":"https:\/\/blogs.dlapiper.com\/advocatus\/?p=4439"},"modified":"2023-10-19T16:43:15","modified_gmt":"2023-10-19T14:43:15","slug":"the-ecj-rendered-its-judgment-in-the-xella-case-key-takeaways","status":"publish","type":"post","link":"https:\/\/blogs.dlapiper.com\/advocatus\/2023\/09\/the-ecj-rendered-its-judgment-in-the-xella-case-key-takeaways\/","title":{"rendered":"The ECJ rendered its judgment in the Xella case: key takeaways"},"content":{"rendered":"\t\t
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In July 2023 the European Court of Justice (ECJ<\/strong>) rendered its judgment in case no. C-106-22 (Xella Judgment<\/strong>), referred by the F\u0151v\u00e1rosi T\u00f6rv\u00e9nysz\u00e9k (Budapest High Court, Hungary) for preliminary ruling on the interpretation of Article 65(1)(b) TFEU in conjunction with recitals 4 and 6 of Regulation (EU) 2019\/452 (EU FDI Regulation<\/strong>) and Article 4(2) TEU.\u00a0We published a summary<\/a>\u00a0of the legal questions submitted for the interpretation of the ECJ.<\/p>

1.\u00a0<\/span>Facts<\/strong><\/p>

The catalyst of the review was the blocking decision of the Hungarian Minister for Innovation and Technology that relied on the ground of \u201cnational interest\u201d referred in the Hungarian FDI screening legislation (Act LVIII of 2020) in connection with the acquisition by Xella Magyarorsz\u00e1g Kft. (a Hungarian company, the parent company of which is established in Germany, and the indirect shareholders of which are established in Luxembourg and Bermuda, respectively) of the shares in Janes \u00e9s T\u00e1rsa Kft. (Target<\/strong>). The Target is a Hungarian strategic company engaged in the extraction of gravel, sand, and clay. According to the decision of the Minister, given that by way of the acquisition the Target would be indirectly owned by a company registered in Bermuda, longer-term risk would be posed to the security of supply to raw materials to the construction sector. By way of background, the regional market share of the Target was 20.77%, its national market share being only 0.52% while ca. 90% of the annual production of raw materials by the Target was purchased by Xella. Xella challenged the blocking decision of the Minister, and the proceeding national court requested the preliminary ruling of the ECJ.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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2. <\/span>Clarification in the judgment<\/strong><\/p>

While the Xella Judgment is rather specific, it also clarifies general points:<\/p>

i.<\/strong> As a specific conclusion, the ECJ set out that \u201cprovisions of the TFEU on freedom of establishment must be interpreted as precluding a foreign investment filtering mechanism provided for by the legislation of a Member State by means of which a resident company which is a member of a group of companies established in several Member States, over which an undertaking of a third country has decisive influence, may be prohibited from acquiring ownership of another resident company regarded as strategic, on the ground that the acquisition harms or risks harming the national interest in ensuring the security of supply to the construction sector, in particular at the local level, with respect to basic raw materials such as gravel, sand and clay\u201d (para. 74 of the Xella Judgement).<\/p>

ii.<\/strong> In its general dicta the ECJ:<\/p>

a. clarified that the scope of the EU FDI Regulation is limited to investments in the European Union (EU<\/strong>) made by undertakings constituted or otherwise organized under the laws of a third country<\/em> (with the exception of artificial arrangements that do not reflect economic reality and circumvent the screening mechanisms and screening decisions, where the investor is ultimately owned or controlled by a natural person or an undertaking of a third country (paras 32, 39 of the Xella Judgement)). In this perspective the Xella Judgment materially diverged from the opinion of the Advocate General.<\/p>

b. stressed that the freedom of establishment (set out in the TFEU) must be observed in relation to \u201cindirect\u201d foreign investments (e.g., by EU companies controlled by third-country entities)<\/em>. Accordingly, any restriction must be justified by a \u201cgenuine and sufficiently serious threat to a fundamental interest to society\u201d, meet an overriding reason relating to the public interest, appropriate to ensure that the objective pursued is achieved. It also must not go beyond what is necessary to achieve the objective pursued (para 60 of the Xella Judgement). The requirements for public policy, public security, or public health as grounds for restrictions may be determined by the Member States, nevertheless derogations must not be misapplied so as to serve purely economic ends (para. 66 of the Xella Judgement). It was also reiterated that the guarantee of the security of supply of public services (or products) in the petroleum, telecommunications, and energy sectors in the event of crisis may constitute public security reasons possibly justifying a restriction on a fundamental freedom (para. 68 of the Xella Judgment).<\/p>

3. <\/span>Takeaways<\/span><\/b><\/p>

In general, the Xella Judgment significantly weakens the screening position of the national FDI authorities. The clarification that the EU FDI Regulation does not cover \u201cindirect\u201d foreign investments (i.e., those carried out by EU investors over which a third-country entity has control) may:<\/p>

i.<\/strong> implicate national FDI screening regimes that cover also indirect investments, rendering their validity from an EU law perspective arguable. This follows from the Treaty of Lisbon based on which capital movements falling within the scope of \u201cforeign direct investment\u201d are within the exclusive common commercial policy competence (para. 34 of the opinion of the Advocate General).<\/p>

ii.<\/strong> in practice prove significantly advantageous to third-country investors that carry out their investments through their subsidiaries registered in the EU, as the cooperation mechanism under the EU FDI Regulation would not be set in motion. At the same time, the reiteration of the requirements for a restriction on the freedom of establishment will impact the practice of the national FDI authorities as it must be observed (and demonstrated) that restrictions should be justified by a \u201cgenuine and sufficiently serious threat to a fundamental interest to society\u201d.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Author: Blanka B\u00f6rzs\u00f6nyi<\/em><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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\n\t\t\t\t\t\t\t\tBlanka B\u00f6rzs\u00f6nyi\t\t\t\t\t\t\t<\/h3>\n\t\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t
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Senior Associate
Corporate\n\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\n\t\t\t

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\n\t\t\t\t\t\t\tBlanka B\u00f6rzs\u00f6nyi \t\t\t\t\t\t<\/h3>\n\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t
\n\t\t\t\t\t\t\tBlanka is a senior associate of considerable experience in Corporate and M&A deals, as well as financing transactions.\nAdvising domestic and international clients on share and asset deals, joint ventures, and key corporate matters, Blanka has significant experience in M&A deals across the IT, hospitality, health service, pharmaceutical, TMT and agri-food sectors.\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\tE-mailt k\u00fcld\u00f6k\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t<\/a>\n\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t
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References<\/strong><\/p>