CJEU Rules that FDI cannot Restrict Fundamental Freedoms

In a recent response to a request for a preliminary ruling made by a court in Hungary, the Court of Justice of the European Union (the ‘CJEU’) delivered an interesting ruling on the applicability of the Foreign Direct Investment Regulation (the ‘FDI Regulation’).[1]

The FDI Regulation establishes a framework for the screening of foreign direct investments into the European Union (the ‘EU’) on the grounds of security or public order by the Member States. In the recent Xella judgment,[2] the Hungarian Court asked the CJEU whether preventing foreign investors – including companies based in the EU but over which a third-country investor has the majority of ownership – is compliant with the FDI Regulation.

Xella, a Hungarian company operating in the market for the construction of materials, is ultimately owned by an Irish national but has an entity registered in Bermuda up its structure. In this case, Xella wanted to acquire 100% of the shareholding of Janes és Társa – a company registered in Hungary which is in turn owned by a Hungarian company – and notified the sale to the Minister for Innovation and Technology in terms of Hungarian law. The Minister prohibited the execution of the sale of Janes és Társa on the basis that Xella classified as a foreign investor and that having Janes és Társa being indirectly owned by a company registered in Bermuda would pose a threat to the security of the supply of raw materials in the region where Janes és Társa is established.[3]

The CJEU found that Hungary’s implementation of the FDI Regulation was not compatible with EU law and, in so doing, delivered an interesting take on the interpretation of the FDI Regulation.

In its ruling, the CJEU limited the scope of the FDI Regulation to those investments made by undertakings that are constituted under the laws of a non-EU Member State.[4] It, thus, disagreed with the Opinion of Advocate General  Ćapeta, who argued that the FDI Regulation should capture all investments that pose a threat to the EU’s security or public policy, even where the investor is registered in an EU Member State but which is controlled by a company registered in a third country. The CJEU also stated that the Hungarian law in question should be assessed in the light of the freedom of establishment, which is established by article 54 of the Treaty on the Functioning of the European Union. It emphasised that this freedom of establishment, “is enjoyed, inter alia, by companies or firms constituted under civil or commercial law, provided that they are formed in accordance with the law of a Member State and have their registered office, central administration or principal place of business within the European Union”.[5]

Through the Xella ruling, CJEU is clearly demonstrating that FDI screening cannot be used as a protectionist tool, noting that the EU’s fundamental freedoms may only be restricted if there is an overriding reason related to public interest. “Purely economic grounds” cannot justifiably serve an obstacle to the fundamental freedom enshrined in the EU Treaties. The Commission is currently in the midst of evaluating the FDI Regulation and is expected to issue a report on the functioning and effectiveness of this Regulation towards the end of 2023, but in the interim it will be interesting to note how the national FDI offices will approach FDI screenings following this ruling.