ECJ Rules on National FDI Laws and EU Laws

The European Court of Justice (ECJ) delivered a significant decision on July 13, 2023, regarding the application of the EU FDI Screening Regulation and the respect for EU internal market rules by national screening mechanisms. The case was a preliminary reference submitted by the Budapest High Court and involved cross-border ownership structures of companies outside the EU.

The ECJ concluded that the EU FDI Regulation generally applies to investments in the EU made by companies from third countries. However, the fact that an EU-based investor has a parent company registered in a third country does not automatically trigger the regulation’s application. Indirect ownership structures with a parent company in a third country would only be relevant to the EU FDI Regulation if there is evidence of circumventing the foreign investment screening mechanism, which was not the case in this instance.

The ECJ emphasised that national foreign investment mechanisms must be examined in light of the freedom of establishment (rather than the freedom of capital, as the Hungarian High Court had referred). The court found that there was a “particularly serious restriction” on the freedom of establishment in the specific case, as it involved cross-border ownership. The ECJ concurred with the Advocate General’s opinion that legitimate aims and proportionality should be assessed in relation to restrictive measures under EU internal market rules. Any individual restrictive measures adopted under national FDI laws of EU Member States should undergo a justification and proportionality review.

In the case at hand, where a Hungarian company’s acquisition by an EU-based investor with a parent company in Bermuda was prohibited under Hungarian FDI law, the ECJ found that the restriction was not justified. The Hungarian Government’s concerns about the security of raw material supply and the impact on the construction sector were not considered a “fundamental interest of society” according to EU case law. The court doubted whether the acquisition would pose a “genuine and sufficiently serious threat to a fundamental interest of society.”

This ECJ ruling offers clarity on how the EU FDI Regulation applies to cross-border ownership structures and serves as a counterweight to the expanding powers of national foreign investment screening mechanisms in EU Member States. The judgment can be used as a reference for EU companies facing challenges in obtaining transaction approvals or facing unreasonable commitments from governments restricting their right of establishment under foreign screening regimes.