The proposal for a regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union (Draft Proposal) presupposes (some would even say: proposes) investment screening and control mechanisms (ISCMs) at member state level. Approaching ISCMs from the angle of legal redress raises three questions:
- Legal redress
to what end?
- Legal redress
- Legal redress
by which material standards?
Sorting out these
questions is of vital interest for stakeholders. For investors and
their counsel confronted with a new layer of regulation and
uncertainty, as much as for member states and the EU itself which
have to make use of the ISCMs’ powers without violating pertinent
constitutional rights or fundamental freedoms.
To what end is legal redress sensible?
In most instances,
compensation will take priority over actions for annulment of what
the Draft Proposal refers to as screening
decision relating to an investment.
Isolated legal action against member state laws establishing ISCMs or
against the Draft Proposal itself shall be omitted here, being
onetime and longterm efforts.
fall apart only on a whiff of regulatory encroachment. Experience
and the German
ISCM in the Aixtron takeover is only one illustration for this
“power of fact”: Public announcement of the German authorities to
the takeover (regarding German-based Aixtron
SE) together with its partial prohibition
by the US President (regarding the US-based subsidiary Aixtron
the deal’s fate. So, on the one hand, pending review of a
particular investment suffices to scare investors to a degree that
they withdraw from a takeover altogether. On the other hand, one
should not forget that shareholders invested in the target company
also face significant devaluation in consequence of pending review or
background, how sensible is it to review a screening
decision of an ISCM, i.e. the decision
to initiate a review, to make a transaction contingent upon certain
conditions or even to prohibit an investment altogether? Mildly so.
Court cases take time, and even preliminary injunctions will
overstrain the patience of the market. It seems unlikely that
adjudication is a solid basis to save a deal that has (publicly) run
into the prospect of review. This impression is reaffirmed by the
fact that one lawsuit in one jurisdiction would often not be enough:
In the Aixtron example, both the prohibitive decision of the US as
well as the (pending) decision of the German ISCM would have had to
be subject to legal action. In addition, there was no decision by the
Federal Ministry for Economic Affairs (BMWi)
to be dragged before court, only the prospect of one in the future.
What should investors do here? Sue the administration for a
(potentially dealkilling) decision? Again, only mildly sensible.
This is not to say
that seeking legal redress against screening decisions is not
possible or irrational per se (there may be sound legal reasons to do
so), but it seems to be of little avail to actually save investments
under review. Naturally, there are exceptions to the rule: For
instance, the 2014 Ralls
case, the only lawsuit involving the
Committee on Foreign Investment in the US (CFIUS) in history. But the
case involved a divestment
decision by the US President, i.e. a situation where claimants were
trying to save money already invested.
In most cases,
however, the most sensible course of action for frustrated investors
(or shareholders in the target company) seems to be to sue for
damages due in consequence of a withheld, delayed or issued screening
decision. Given the fragility of investments, it will also be
interesting to see whether the (nominally innocent) opinions,
comments and information requests provided for in the Draft Proposal
will cause damage and entail litigation. In any case, legal action is
dependent on whether screening decisions are reviewable or
justiciable at all (and if yes: by who and by what standards).
Who can be called upon for legal redress?
It boils down to
national and EU courts. Arbitral tribunals would have to rely on
justiciable market access provisions, which are something of a rarity
in the EU (and member state) bilateral investment treaty (BIT)
tradition(s). Again, the exception to the rule is for investments
already made, for which BITs will usually offer protection against
divestment decisions by ISCMs.
Moving from state to
supra and interstate level, from litigation to arbitration, the
obvious fora are: member state courts, the Court
of Justice of the European Union (CJEU)
and arbitral institutions such as the
International Centre for Settlement of Investment Disputes (ICSID).
By comparison, calling upon the World Trade Organisation (WTO)
Dispute Settlement Body would require a WTO member state to back its
investors’ interests and sue (Art. 1 (1) DSU). But
since the General Agreement on Tariffs and Trade (GATT) has no and
the General Agreement on Trade in Services (GATS) little material
protection to offer to investors anyway, the WTO Dispute Settlement
Body can be neglected, as previous
cases have shown.
Member state courts,
in Germany for example the Berlin
administrative court (competent for legal actions against
screening decisions made by the BMWi)
and civil district courts (competent for damages claims), apply
national law to national acts, such as a decision by German
authorities or losses suffered as a consequence of such. Judges at
the CJEU apply Art.
340 TFEU, which requires “damage caused by [the EU’s]
institutions or by its servants in the performance of their duties”.
ICSID and other arbitral institutions have never been shy to award
compensation to investors for state actions in violation of BITs; the
investment court could do the same in the future. However, both
require market access provisions which investors can invoke; the
EU model BIT does offer such provisions, but, in contrast to
typical US and Canadian BITs, they are not justiciable (for
instance CETA, the EU-Vietnam FTA and the EUSingapore FTA).
What are the material criteria?
It is decisive to
pinpoint the material standards for legal review. Every ISCM has to
let investors know what its understanding of a covered
transaction is (with interesting
subquestions such as what are foreign
industries and infrastructure etc.) to
ensure that the scope of review is clear and investors follow the
pertinent (notification and application) procedures. It is noteworthy
that most ISCMs target investments that give the foreign
acquirer some sort of control over
centerpiece of any ISCM is usually the national
security standard (or a semantical
equivalent). Foreign investments imperiling national security are
what ISCMs aim (or purport) to prevent, at least in liberal
economies. In ISCMs’ legal minutiae, this term is never
exhaustively defined, sometimes enigmatic and in many cases not
revisable by adjudicative bodies. Thereby, it is subject to wide,
perhaps infinite administrative discretion.
This may sound
puzzling. One would naively expect this decisive criterion to
incarnate the whole purpose of ISCMs in a clearcut fashion. Not
quite: CFIUS has been called a “church
without a bible” mocking the ambiguity of its crucial criterion
of review—and it is fair to extend this aphorism to ISCMs in
general. National security has been construed in such broadness to
include even economic
security of states. And although
studies by Moran
have compiled CFIUS casuistry and deduced from it what–in
practice–national security means, a justiciable definition has
neither been the fruit of these studies nor of pertinent OECD
guidelines. The Draft Proposal does not seem to curb these
tendencies, as it refers to security and
public order and provides a
(nonexhaustive) catalogue of factors which may be taken into account
when determining whether they are affected.
Perhaps even more
surprising, the quest for a justiciable definition of national
security is no issue lain into the hands of adjudicators, who are
accustomed to vague legal terms (and capable of substantiating them).
On the contrary, national security is often not justiciable at all by
the competent adjudicative bodies. This is true for CFIUS, as Ralls
reaffirmed, and for many BITs, which usually contain a security
exception clause loosely inspired by the GATT.
To be sure, EU law would appear to offer protection either through
the freedom of establishment (Art.
49 TFEU) or the free movement of capital (Art.
63 TFEU) and a meaningful casuistry of what public
policy and security
means. But if the CJEU were to
transplant its somewhat
quixotic reasoning developed in the context of direct taxes to
ISCMs, then this protection would be illusory. This is because ISCMs
target controlling investments
by thirdstate nationals,
which—according to the CJEU’s settled
enjoy no protection by fundamental freedoms at all, since they do not
fall into the personal scope of the freedom of establishment and the
free movement of capital only applies to portfolio,
i.e. noncontrolling investments. In
addition, whenever an acquisition of defense sector companies stands
to reason, Art.
346 TFEU gives member states additional leeway to protect
essential security interests.
sum up, legal
redress against ISCM decisions is significantly limited from
practical and legal points of view. In this regard, radical change is
not to be expected from the Draft Proposal, whose only reference to
legal redress (“Foreign investors and
undertakings concerned shall have the possibility to seek recourse
against screening decisions of the national authorities.”
[Art. 3 (5) Draft Proposal]) leaves much room for interpretation.
redress for thirdstate investors is a prerequisite for legal
certainty, which is held dear by the
Draft Proposal. It could also reduce suspicions of ISCMs being
protectionist instruments against whoever turns out to be the latest
“economic enemy”. And while
it is understandable that sovereign states are eager to retain
matters of national security where they can (cf. Art.
4 (2) TEU), it can be questioned whether a liberal, open economy
is really able to say (without blushing) that an investment imperils
national security for the sole reason that the investor is Chinese.
Giving ISCMs this sort of power, unrestrained by judicial review, is
questionable, all the more during times in which economic policy is
increasingly subjected to political polemics and even populism.