Screening of foreign direct investments could take place through European company law. The harmonization of company law in the European Union as well as the CJEU’s case law offer mechanisms which could be used for the screening of foreign direct investments. Although their primary objective is “the protection of the interests of members and others”, they could also contribute significantly to an effective screening of foreign direct investments.
are five main avenues in European company law that could be used to
screen foreign direct investment: the Takeover Bids Directive in the
context of listed companies, the lawful golden shares in privatized
companies, the newly adopted Shareholders Rights Directive II, and
the Cross-border Mergers Directive as well as the European Company
Statute to block the process of a cross-border merger or the
establishment of an SE.
with the Takeover Bids Directive (Directive 2004/25/EC), the two main
1) the board neutrality rule, which does not allow the board of the target company to adopt defensive measures against a hostile bid submitted by an unwelcome bidder (Article 9), and
2) the breakthrough rule, under which any restrictions on the transfer of securities or on voting rights constituting unsurmountable barriers to the takeover bid do not apply (Article 11).
these two main provisions of the Takeover Bids Directive are
optional. Art. 12 of the Takeover Bids Directive introduces a
complicated multi-level optionality and reciprocity system. According
to the optionality system, Member States may reserve the right not to
require companies to apply the board neutrality rule and the
breakthrough rule. Moreover, where a Member State makes use of
optionality, it shall nevertheless grant its companies the option,
which shall be reversible, of applying the board neutrality rule and
the breakthrough rule. According to the reciprocity system, Member
States may, under the conditions determined by national law, exempt
companies which apply the board neutrality rule and/or the
breakthrough rule, if they become the subject of an offer launched by
a company which does not apply the same Articles as they do, or by a
company controlled, directly or indirectly, by the latter.
adoption of both the optionality and the reciprocity systems by
Member States gives their listed companies the possibility to
frustrate hostile takeovers by bidders controlled by unwanted foreign
investors. On the one hand, in a Member State applying the
optionality regime, a target company could allow its board of
directors to adopt various defensive measures capable of frustrating
a bid launched by a hostile company controlled by a foreign investor.
Optionality could also permit the introduction of restrictions on the
transfer of securities or on voting rights capable of inhibiting
permanently the takeover by a hostile bidder controlled by a foreign
investor. On the other hand, in a Member State applying the
reciprocity regime, a target company could retaliate and could allow
defensive measures and restrictions on the transfer of securities or
on voting rights against a company, which is not open itself to
takeovers by adopting defensive measures.
the Takeover Bids Directive has certain provisions obliging the
bidder to disclose its plan and intentions regarding the target
6 is dedicated to important information concerning bids. According to
Article 6(2), the “offeror
is required to draw up and make public in good time an offer document
containing the information necessary to enable the holders of the
offeree company’s securities to reach a properly informed decision
on the bid”. Art.
6(3) requires the offer document to provide certain details about the
identity of the offeror, the number of securities which the offeror
undertakes to acquire and its other holdings, the offeror’s
intentions regarding the future business of the offeree company
and its strategic
plans for the two companies, information
concerning the financing for the bid and the identity of any persons
acting in concert. All this required information could be used as a
screening mechanism of foreign investors by both the target company
and the relevant supervisory authority. In addition to the
information disclosed by the offer document, any other important
information about the bid must be provided on an ad hoc basis by the
companies participating in a bid to the relevant supervisory
authority on its request. Similar disclosure obligations are also
prescribed for cross-border mergers of companies.
State-owned companies in various Member States could also attract the interest of foreign investors. Many of these State-owned companies belong to strategic areas of the economy. In privatizations of State-owned companies, where foreign investors are seeking to acquire their corporate control, golden shares compatible with internal market rules could constitute an effective screening mechanism. Golden shares or special shares constitute special rights and privileges that Member State continue to enjoy in privatized companies after their privatization. The CJEU had the chance to examine many golden shares schemes in privatizations of State-owned companies at many Member States. These golden shares were considered to infringe the freedom of establishment (Arts. 49, 54 TFEU) and the free movement of capital (Art. 63 TFEU). In its golden shares case law, the CJEU structured the criteria under which a golden shares scheme could be compatible with internal market rules.
In Commission v Belgium, the CJEU stipulated the conditions under which golden shares could be justified and, as a result, could be lawful (Case C-503/99 Commission v Belgium). Belgian golden shares had certain characteristics, which convinced the CJEU to accept their justification and their lawfulness and which distinguished them from the golden shares of other Member States.
The Belgian golden shares scheme prescribed a right to oppose, ex post facto, some corporate decisions in privatized companies. More specifically, these shares entailed a right to oppose only specific decisions, did not allow any arbitrary exercise of the rights deriving from these prerogatives, required full justification of these decisions to oppose and opened the door to the possibility of judicial review by Belgian Courts. These conditions for lawful golden shares could be used by Member States in order to structure an effective screening mechanism for foreign investments. Lawful golden shares could either block a foreign investor from investing in the capital of a privatized company or could control and restrict its actions when the foreign investor is already the (controlling) shareholder of the privatized company.
newly adopted Shareholders Rights Directive II (Directive 2017/828)
could also play a major role in this field. There is a new provision
for the identification of shareholders (Art. 3a), which could assist
in the screening of foreign investors participating in the capital of
EU companies. More specifically, companies have the right to identify
their shareholders. There are also provisions obliging intermediaries
holding shares to transmit specific information from the company to
the shareholder (Art.
3b). The exercise of shareholder rights is also facilitated: “Member
States shall ensure that the intermediaries facilitate the exercise
of the rights by the shareholder, including the right to participate
and vote in general meetings” (Art.
foreign investors, who are shareholders in EU companies, cannot hide
behind intermediaries as easily as in the past. Additionally, foreign
investors must disclose specific aspects of their plans for the
investee company (Art. 3g regarding shareholder engagement policy).
There are also provisions for the investment strategy of
institutional investors and arrangements with asset managers
(Art. 3h) and for
transparency of asset managers (Art.
Shareholders Rights Directive II has also some new provisions on
transparency and approval of related party transactions which are
crucial for screening certain activities between the investee company
and other subsidiaries of the foreign investor. These provisions
could restrict transactions planned by the foreign investor and
aiming at technology transfer or asset stripping from the investee
company. In addition to the Shareholders Rights Directive II, the
foreign investor should be obliged to provide certain information
(e.g. information about major holdings) in accordance with the
Transparency Directive (Directive 2004/109/EC).
of foreign investments could also take place through public interest
considerations in the context of cross-border corporate
restructuring. Member States enjoy discretion under the Cross-border
Mergers Directive (repealed and consolidated into Directive
2017/1132) and the European Company Statute (Societas Europaea-SE) to
block the process of a cross-border merger or of the establishment of
a European Company (SE), when such processes are against public
interest. Article 121 of Directive 2017/1132 regulating conditions
relating to cross-border mergers states that: “The
laws of a Member State enabling its national authorities to oppose a
given internal merger on grounds of public interest shall also be
applicable to a cross-border merger where at least one of the merging
companies is subject to the law of that Member State. This provision
shall not apply to the extent that Article 21 of Regulation (EC) No
139/2004 is applicable.”
a foreign investor might be interested in acquiring the control of a
company through the formation of a European Company (SE), an EU
supranational corporate type. The formation of an SE by merger could
be prohibited by Member State’s competent authorities on the basis of
grounds of public interest, which are subject to judicial review
(Art. 19 of Regulation on the Statute for a European company (SE)).
The transfer of the registered office of an SE and the
confidentiality duty of members of an SE’s organs are also subject to
public interest considerations (Arts. 8 and 49 of Regulation on the
Statute for a European company (SE)). These public interest
considerations capable of restraining a foreign investor to
participate in the capital of a company (domestic public or private
limited company or SE) could constitute an effective screening
mechanism against undesirable foreign investors.
is clear that EU company law could play an important role in
investment screening. The
optionality and the reciprocity regime of the Takeover Bids Directive
could operate as a screening mechanism. However, we should not forget
that the EU needs a special legal framework for investment screening.
These company law instruments cannot play alone the role of a strong
and consolidated institutional framework for screening of foreign
direct investments, but they can contribute significantly to this