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European Commission Blocks Hungary's Attempt to Veto Transaction Under FDI Rules

In Short

The Situation: The European Commission ("EC") issued its first decision ("Decision") regarding the intersection of EU merger control rules and the recent growth in national Foreign Direct Investment ("FDI") regimes. The EC found that the Hungarian government's decision to block a transaction under its domestic FDI rules infringed upon the EC's exclusive jurisdiction to review transactions with an "EU dimension," subject to certain exceptions.

The Context: This decision contrasts with recent EC efforts to support national-level development of FDI screening regimes. 

Looking Ahead: Although the EC's Decision may add another layer of EU approval for certain transactions subject to concurrent EU merger control and national FDI reviews, it limits the circumstances in which a Member State can block a transaction under its domestic FDI rules. The Decision also invites merging parties to challenge Member State attempts to block a transaction under domestic FDI rules where the EC has authority to conduct an EC-level competition review. 

The EC recently found that Hungary's veto of Vienna Insurance Group's ("VIG") acquisition of the Hungarian subsidiaries of the AEGON Group, an insurance, pension fund, and asset management company, breached EU merger control rules, which confer upon the EC exclusive authority to review transactions meeting EU jurisdictional thresholds. 

VIG's acquisition of AEGON's Hungarian subsidiaries formed part of a wider transaction, including acquisitions of several subsidiaries based in the EU and other States. Hungary rejected VIG's acquisition of the Hungarian subsidiaries under its FDI rules. The EC subsequently cleared the main transaction without conditions under the EU Merger Regulation ("EUMR"). 

The VIG transaction highlights potential limits to national FDI rules stemming from EU merger rules. Article 21 of the EUMR recognizes that Member States may take appropriate measures to protect the following legitimate interests: 

  1. Public security, plurality of the media, and prudential rules; or 
  2. Another public interest, provided it has been communicated to the Commission and approved by it (within 25 working days) after an assessment of its compatibility with general principles of EU law.

When a Member State FDI review pursues an interest not specifically recognized under point 1, the Member State must thus notify its intentions to the EC prior to implementing its decision. The EC's Decision found that the Hungarian authorities failed to (i) notify its intended veto with the EC prior to its implementation; and (ii) show that the veto was justified by legitimate interests. The EC ordered Hungary to withdraw its veto by March 18. If Hungary does not withdraw its veto by that date, the EC could launch an infringement action in the European Court of Justice to overturn Hungary's decision. 

Looking Ahead

The EU has encouraged the development of national FDI regimes, notably through the adoption of its March 2019 EU Screening Regulation (see our April 2019 White Paper). As a result of the EU Screening Regulation and a broader trend towards protectionism, there has been a significant increase in the number of Member States adopting FDI regimes, adding to the already (and increasingly) complex layers of antitrust and regulatory oversight in the EU (see our April 2021 Commentary regarding the EC’s expansive approach regarding non-reportable transactions). Those FDI regimes empower national authorities to review, and potentially condition or prohibit, transactions that may threaten various domestic interests, including national security and public order. Although the EU Screening Regulation encourages Member States to adopt FDI rules, it does not promote a set of common rules or establish a one-stop-shop, EU-wide FDI review.   

The EC’s Decision is a reminder that even in the field of FDI, Member States cannot disregard principles and rules of EU law. The decision feeds into consistent EU case law placing a duty on Member States to justify and ensure the proportionality of measures liable to restrict provisions of EU law, including limitations on free movement of capital or a company's right to engage in cross-border transactions within the EU. As a result, the EC's Decision may encourage Member States to be more cautious or selective in applying FDI rules to matters involving concurrent FDI and EU-level competition review. 

Finally, the EC's Decision draws attention to Member States' duty to inform the EC of certain measures liable to affect a concentration meeting EU jurisdictional thresholds. While the principle is clear—a Member State must communicate to the EC (and obtain prior approval of) any measure that does not genuinely aim to protect one of the recognized interests under the EUMR (i.e., public security, plurality of the media, and prudential rules)—the application of the rule in practice is less straightforward. EU and national authorities may have different views about what is a recognized interest and which measures a Member State must notify. The absence of guidance leaves room for different interpretations and, consequently, legal uncertainty and potential delays in the implementation of deals undergoing concurrent review at different levels. 

Four Key Takeaways

  1. Unlike the EU's competition law regime, there is no EC-level FDI review. Although either Member States or the EC have exclusive jurisdiction to conduct competition reviews, Member States perform FDI screening exclusively at the national level. As a result, a transaction requiring an EC-level competition filing also frequently involves one or more national-level FDI reviews. 
  2. Although the Member States usually have broad discretion in the field of FDI, a Member State must notify its intent to block a transaction subject to EC competition review to the EC if such a decision is not based on the limited EUMR recognized legitimate interests (i.e., public security, plurality of the media, and prudential rules). Any such notification will include a review of whether the measures are genuinely aimed at protecting a legitimate interest and therefore may lengthen FDI reviews. 
  3. Given the limited number of recognized legitimate interests and the lack of guidance on what could qualify as other public interests under which a Member State can reject a transaction reviewable at EC-level, the EC and Member States are likely to have different interpretations of such interests and of the measures that would be justified, suitable, and proportionate to achieve such interest. 
  4. In certain transactions, merging parties can choose whether to file merger control notices with the EC or Member States. In those matters, the parties should consider whether the possibility of EC oversight of a Member State's FDI decision tips the balance in favor of an EC filing, if they expect issues with a Member State's FDI review. 

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