COVID-19 Is Prompting EU To Protect Strategic Health Assets

By Mathieu de Korvin
Law360 is providing free access to its coronavirus coverage to make sure all members of the legal community have accurate information in this time of uncertainty and change. Use the form below to sign up for any of our weekly newsletters. Signing up for any of our section newsletters will opt you in to the weekly Coronavirus briefing.

Sign up for our Financial Services UK newsletter

You must correct or enter the following before you can sign up:

Select more newsletters to receive for free [+] Show less [-]

Thank You!



Law360 (April 9, 2020, 6:36 PM EDT) --
Mathieu de Korvin
Mathieu de Korvin
While the current coronavirus pandemic leads to a global race for finding equipment and drugs to fight the virus, and to the undervaluation of the stock markets, companies are particularly vulnerable to buyouts, especially those facing with liquidity risks.

In this context, the European Commission issued guidance to the EU member states on March 25, urging them to use all legal means available to screen new foreign direct investments, or FDIs, in health care-related companies and technologies.

Beyond providing guidelines, this guidance confirms a shift by the European authorities regarding the protection of EU strategic assets, in line with the Foreign Direct Investment Screening Regulation[1] which will enter into force on Oct. 11.

According to the European Commission guidance, while the EU is and aims to remain an attractive destination for FDI, such openness shall be balanced by appropriate screening tools. The commission is particularly concerned that there could be an increased risk of attempts by foreign investors to acquire key strategic assets core to European well-being such as health care capacities or research establishments (for the production of drugs or the development of vaccines, for instance).

Consequently, member states are called upon to be vigilant in ensuring that any potential foreign investment would not harm the EU's capacity to respond to the health needs of its citizens.

Member states shall consider the impact of FDI on the whole single market. In line with the FDI Screening Regulation, there is no screening contemplated at the EU level. Member states remain fully responsible for reviewing FDI. However, they should take into account the impact of such FDI on the European Union as a whole, in particular to ensure the continued critical capability of EU industry, going beyond the health care sector.

Also, since risks linked to an investment are not necessarily delimited to the borders of the member state where the investment occurs, the commission is encouraging member states to seek advice and coordinate in cases where foreign investments "could, actually or potentially, now or in the future, have an effect in the single market."

FDI screening shall be run regardless of the amount of the transaction. It comes out of the guidance that the need to screen a transaction is linked to the strategic nature of the targeted and is independent from the value of the potential investment.

Therefore, small and medium-sized enterprises and small startups, for instance, may have a relatively limited valuation but may be of strategic importance on issues such as research or technology, especially, but not limited to, in the health care sector. In this intent, the FDI Screening Regulation does not designate a threshold for the foreign investment deemed in scope.

Specific attention shall be brought on transaction involving programs of EU interest. A specific attention shall be brought on foreign acquisitions which are likely to affect projects or programs of European Union interest. The commission includes in this category foreign investments in EU undertakings that have received funding under the EU research and innovation program Horizon 2020.

Such FDI shall be subject to a closer scrutiny by the commission, and member states shall take into utmost account its opinions. Thus, it is anticipated that particular attention will be paid to all Horizon 2020 projects related to the health sector.

Mitigating measures can be contemplated. FDI screening does not necessarily result in a prohibition of the investment contemplated. Mitigating measures may suffice, such as the implementation of conditions guaranteeing the supply of medical products/devices, or the protection of the technological assets and critical knowledge.

The commission highlights that member states may also intervene outside of screening mechanisms, for instance by imposing compulsory licenses on patented medicines in case of a national emergency (such as a pandemic), or by retaining special rights in certain undertakings, such as so-called golden shares. Like other restrictions to capital movements, such measures must be necessary and proportionate to achieve a legitimate public policy objective, according to the FDI Screening Regulation.

Portfolio investments may be considered. Portfolio investments, which do not confer the investor effective influence over management and control of a company, should not constitute FDI targeted by the FDI Screening Regulation. Nonetheless, member states may consider screening portfolio investments, for instance when the acquisition of a qualified shareholding is contemplated, which would confer certain rights to the investor.

In any case, the commission specifies that where screening a portfolio investment is considered, it shall be reviewed in strict compliance with the European treaties' provisions on the free movement of capital. This balance appears to be essential to maintaining the ability of EU companies to raise funds.

The guidance is particularly of interest since it confirms a shift in the EU authorities' way of thinking, which are historically hard defenders of free trade principles, even where certain EU trade partners were implementing FDI restrictions or, at least, controls. It also shows the new ability of the European Commission to react promptly to consequences of geopolitical and international developments on the EU strategic industries, after years of apathy.

Such a shift was initiated in 2019, with the adoption by the European Council of the FDI Screening Regulation which will come into effect on Oct. 11. This regulation introduced at the EU level a framework for the scrutiny of FDI by member states for security and public order reasons, including the provision of certain common standards, and the possibility for the commission to participate by issuing opinions on a considered transaction.

It also promotes cooperation and information-sharing between national governments themselves. Whereas the implementation of such screening scheme into member states laws remains optional, this was a mean to confirm the compatibility with EU treaties of the national schemes already set in place.

Further to this regulation, the guidance confirms the willingness of the new European Commission College that took office at the end of last year to protect EU strategic assets and to play a role in the screening of transaction, first by encouraging member states to take actions and to cooperate between themselves, and also by issuing opinions on specific cases.

Moreover, it shows its awareness on possible weaknesses in certain EU health care-related industries, especially in the context of the COVID-19 pandemic crisis. For the first time, the European Commission urges member states which have not set up such a screening mechanism to implement one and, in the meantime, to use all other available options to address cases where a considered foreign investment could raise a significant risk.

With regard to member states which have implemented an FDI screening mechanism (which is the case in France), they are called upon to make full use of such tool, to the extent permitted by law, to protect critical health infrastructures, supply of critical inputs and other essential sectors.

Within few months, the awareness of the EU authorities (and, behind them, the member states themselves) about the necessity to control transactions involving highly sensitive sectors has increase drastically, pushed by the public opinions and recent developments in the news which have shown predatory behaviors by certain EU trade partners.

However, such FDI screening policy should not prevent foreign investors from considering opportunities in the EU. The principle remains that foreign investments in the EU are free. The screenings will remain limited to specific investments and even where a transaction is reviewed, the process will not necessarily end with the prohibition of the investment, especially since member states are sensitive to the funding needs for EU companies to support their development.

Furthermore, it is not contemplated to create a European regulator with supranational jurisdiction, unlike the merger control regime. Finally, the implementation of the FDI screening mechanism within the EU legal scheme may facilitate legal actions before the EU jurisdictions where a member state undeservedly prohibited or otherwise limited a transaction.



Mathieu de Korvin is an associate at FTPA Avocats.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union.

For a reprint of this article, please contact reprints@law360.com.

Hello! I'm Law360's automated support bot.

How can I help you today?

For example, you can type:
  • I forgot my password
  • I took a free trial but didn't get a verification email
  • How do I sign up for a newsletter?
Ask a question!