The EU is seeking improved screening of greenfield projects and a bigger say on which investments member states approve on national security grounds, as it expands its efforts to protect critical assets and know-how amid rising geopolitical tensions involving countries such as China. 

A package of reforms revealed by the European Commission on January 24 tackles these risks through trade and investment by toughening inbound screening rules and launching a public consultation on a prospective outbound screening tool that would follow in the footsteps of the US. 

The bloc’s current screening regime, which has seen an uptick in the number of transactions reviewed since its introduction in 2020, delegates the power to decide on deals to member states. However the Commission’s latest proposals, which look to deliver on the European Economic Security Strategy announced by its president Ursula von der Leyen last June and its China de-risking strategy, suggest the supranational authority now wants a more central role. 

“What comes out throughout [the reforms] is the Commission trying to give itself a … greater role in foreign investment screening,” says Christoph Barth, a partner in law firm Linklaters’s antitrust and foreign investment practice. 

Among the proposed changes to the inbound screening regulation, which must be approved by European parliament and council to take effect, is obliging member states to give ‘utmost consideration’ to the Commission’s input when assessing a transaction’s national security risks and an explanation when their views diverge. “The question is whether the Commission now makes its opinions more directive in the sense of achieving a particular outcome for a particular case,” says Mr Barth, adding that this could “result in a potential clash between the Commission and member states”.

The reforms also empower the Commission to initiate the review of transactions that have not been notified, and make national investment screening mechanisms mandatory for the first time. Currently, only five of the 27 member states lack these mechanisms — Bulgaria, Croatia, Cyprus, Greece and Ireland — although the latter is ready to kickstart a regime by mid-year. 

The Commission also wants to expand the scope of transactions caught by national security rules to include EU investors controlled by entities outside the bloc, and by encouraging member states to screen more greenfield projects. Today only a handful of countries capture deals beyond mergers and acquisitions (M&A), and the vast majority of greenfield foreign direct investments (FDI) are not scrutinised. It comes at a time when Chinese firms’ preference for investing in the bloc has shifted from M&A to greenfield — some suggest with the intention of skirting screening rules.

“The push toward a FDI screening of greenfield investments is likely to build another hurdle for investments in the energy, battery or e-car sector … sectors where foreign competitors of EU companies have been gaining significant market share,” said Udo Herbert Olgemöller, partner at Allen & Overy. “Such screenings are time-consuming and create a certain level of legal uncertainty as their outcome may be affected by political considerations that are hardly predictable.”

More on European investment screening:

• The rise of the EU's formal FDI screening
• FDI screening: CFIUS is the benchmark, the EU's is toothless (for now)
• Business groups hit back at EU outbound screening plan

Outbound preparations

The Commission has also progressed plans to screen outbound investments into critical technologies in countries such as China, where it fears sensitive technologies and know-how could be used to undermine national security. It is seeking industry feedback via a three-month public consultation, which will be followed by a year of monitoring outbound deals and a final decision on an outbound mechanism by August 2025.

One of the early questions is whether the challenging task of obtaining the buy-in of each member state, which is necessary to introduce an outbound mechanism, can be achieved. On January 17, the European parliament passed a resolution calling for the expansion of legislative initiatives to tackle risks emanating from Chinese investment in the bloc. But neither industrial policies nor views on China are fully aligned across EU countries.  

Nonetheless, Mr Barth reports that some corporates are already thinking about a European investment landscape with outbound screening. “Some companies are actively considering the implications of this and what it would mean for them,” he says. “We may see a wave of investment before such a regime comes into force.”

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