Introduction
With national and economic security remaining a key focus around the globe, the European Commission recently published its proposal for the Industrial Accelerator Act (“IAA”) (see our previous contribution for a helicopter overview of the IAA’s key measures). The overarching goal of this new regulation is to raise the manufacturing industry’s share of EU GDP, but in doing so it quietly adds another layer to the European Union’s scrutiny of foreign direct investment (“FDI”). Even though the timing of this initiative parallels the EU’s overhaul of its primary regulation on FDI screening, the two regimes are not particularly well aligned. The IAA and existing FDI regimes pursue different objectives and are expected to complicate the legal landscape for foreign investors.
Against that backdrop, we take a closer look in this contribution at the impact of the new regulation on foreign direct investments into the EU, clarifying the new initiative and explaining its – at times fundamentally different – concepts and criteria.
Contrary to “traditional” FDI regimes (for an overview of the Belgian FDI screening mechanism, see here), the IAA’s additional approval regime covers only four critical industries, applying only to very substantial (> EUR 100 million) foreign direct investments originating from third (non-EU) countries that dominate global production capacity in those industries. Approval under this regime will then require foreign investors to fulfil certain conditions that are meant to add value to the EU economy. Given the introduction of conditionalities for inbound FDI, including technology transfers, job creation and local-content requirements, dealmakers and their legal counsel will have to think differently about investments into the EU. At the same time, some of the major economic powers of the world have had such measures in place for several years now, most emblematically China but also the US and Canada.
The nature of the beast: an FDI approval regime focused on “added value”
It is crucial to understand that the IAA differs from, yet complements, national FDI screening mechanisms already in place. Whereas the latter scrutinise certain investments on national security or public policy aspects, the former is an industrial policy instrument. Indeed, by applying the IAA’s FDI requirements, national Investment Authorities (to be designated by each Member State) must ensure that the investments in scope add sufficient value to, and come with meaningful benefits for, the EU economy.
Since the sectors targeted by the IAA (see below) will generally be considered strategic under national FDI screening regimes, investments caught by the IAA will in most cases also trigger notification obligations under national FDI screening rules, in particular as the latter employ lower thresholds in terms of investment amount (if, indeed, any) and control. Consequently, unless a Member State decides to designate its national FDI screening authority (in Belgium, this is the Interfederal Screening Committee) as the responsible national Investment Authority under the IAA, investors whose investment falls within the scope of both regimes will have to notify to, and obtain approval from, two separate FDI authorities. As the two regimes serve different purposes, such a scenario is not unlikely.
The scope: what investments should be notified?
Concretely, the draft IAA requires individuals or undertakings from a third (non-EU) country to notify both their own and their subsidiaries’ investments in an EU target (whether an undertaking or an asset) to the relevant national Investment Authority where the following conditions are cumulatively fulfilled:
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the EU target is active (or will be, in the case of a greenfield investment) in manufacturing in one of the four so-called “emerging strategic sectors”: (i) battery technologies, (ii) electric vehicles (EVs), including components for electrification and digitisation, (iii) solar photovoltaic technologies, or (iv) the extraction, processing and recycling of critical raw materials;
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the third countrywhere the investment originates accounts for 40% or more of global manufacturing capacity in the relevant emerging strategic sector (given the strategic sectors listed under (a), China immediately springs to mind). Importantly, investors from third countries with which the EU has concluded relevant partnership or free-trade agreements are exempted from notification;
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the value of the investment exceeds EUR 100 million. In this regard, investors need to bear in mind that all previous investments made by them after the entry into force of the IAA in the same EU target will also be taken into account for the purpose of determining whether the value threshold is reached; and
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through the investment, the investor (directly or indirectly) acquires “control” of the EU target. Most notably, the draft IAA introduces an autonomous notion of control for this purpose, distinct from the concept of control used in EU and national merger regulation: an investor is deemed to acquire control as soon as the investment confers 30% or more of the shares or voting rights in the EU undertaking. For acquisitions of EU assets, the threshold is set at ownership of 30% or more of the asset.
The draft IAA empowers the Commission to extend the list of emerging strategic sectors to other industries critical to the Union’s economic security, including net-zero technologies. However, the addition of digital technologies, AI, quantum technologies or semiconductors would require a legislative amendment by the European Parliament and the Council.
The test: a positive assessment on 1+3 “value added” criteria
The national Investment Authority must ensure that the investment notified will add value to the EU’s economy, and the draft IAA sets out six conditions to operationalise that standard, each relating to either ownership, innovation or sourcing and employment to the benefit of the EU. An investment will be authorised if it receives a positive assessment on at least four of these criteria. However, criterion 5 (employment) should always be satisfied, meaning that the IAA effectively establishes a “1+3” test.
Investors should treat the IAA’s 1+3 test as a checklist to be borne in mind from day one when designing a deal. In practice, this means analysing whether the transaction could fall under the IAA at an early stage and, if so, structuring it in such a way that it meets the required 1+3 criteria, as further detailed below. Advance planning and strategic thought will be required to select those criteria that make most sense for the deal in question.
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Criterion 1 – ownership |
The foreign investor does not, as a result of the investment, hold more than 49% of the share capital, voting rights or equivalent ownership interests in the EU target, or equivalent rights conferring control over an EU asset. |
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Criterion 2 – joint venture |
The investment is carried out through a joint venture (“JV”) together with one or more EU entities. To ensure the latter’s effective participation, the foreign investor cannot hold more than 49% of the shares, voting rights or equivalent ownership interests in any of those EU entities. |
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Criterion 3 – IP |
The foreign investor agrees to license IP rights to, and share its know-how with, the EU undertaking or the entity owning the EU assets. In addition, IP developed by the EU entity prior to the investment, or independent of the foreign investor, remains under the exclusive ownership of the EU entity, while IP developed through collaboration or by the JV will be jointly owned. |
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Criterion 4 – R&D |
The foreign investor commits to annual research and development spending in the EU equivalent to at least 1% of the EU target’s gross annual earnings (or the earnings generated by the EU asset), proportionate to the foreign investor’s share of control. |
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Criterion 5 – employment |
At least 50% of the workforce will consist of EU workers (this percentage applies across all job categories, including management), both when the investment is implemented and throughout its operation. In the case of an investment in an existing entity (“brownfield”), the foreign investor will prioritise maintenance of the existing workforce. |
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Criterion 6 – sourcing |
The foreign investor will publish a strategy aimed at strengthening EU value chains, prioritise the sourcing of manufacturing inputs from the EU and will seek to source at least 30% of inputs for products placed on the EU market from within the EU. |
Crucially, the 1+3 test must be satisfied not only at the time the investment is made, but throughout its entire operation. The draft IAA therefore requires the Investment Authority that clears the transaction to monitor continuous compliance with the relevant conditions. To that end, the investor will have to file regular compliance reports.
The legislative road ahead
The text of the IAA is now up for discussion by the European Parliament and the Council. As the proposal touches upon several contentious issues, it may well undergo significant change during the legislative process. We expect two issues to form the crux of the discussions. First, the list of strategic emerging sectors, as the question of which sectors should qualify as “strategic” also gave rise to considerable debate during revision of the FDI Screening Regulation. Second, the sourcing rule (criterion 6), as similar local-content requirements under the public procurement chapter of the IAA caused several delays in the tabling of the proposal.
Once a final text is formally adopted (likely in mid or late-2027), Member States will have one month to designate an Investment Authority. Eleven months thereafter, the IAA’s requirements for FDI will become effective.
One final note for now is that, unlike (many) national FDI screening regimes, the IAA does not empower Investment Authorities to retroactively apply the value-added criteria to investments recently completed before its entry into force. Hence, investors can regard as “safe” such transactions of theirs that closed before the IAA’s FDI requirements come into effect.
We will be carefully monitoring developments at the EU and national levels, so please stay tuned!
