Foreign direct investment screening — the review of cross-border investments for national security and public order concerns — has become one of the most significant procedural considerations in European M&A. The EU FDI Screening Regulation, which established a cooperation framework among member states and between member states and the Commission, entered into force in October 2020. Since then, the majority of EU member states have established or significantly strengthened national FDI screening mechanisms, and the pace of notifications, investigations, and blocked transactions has increased year on year. For international investors targeting European businesses in sensitive sectors, understanding the FDI screening landscape is no longer optional — it is a fundamental element of deal planning.
The EU FDI Screening Regulation: A Cooperation Framework, Not a Single Window
A common misunderstanding about European FDI screening is that the EU Regulation creates a single centralised approval mechanism similar to the CFIUS process in the United States. It does not. The EU Regulation establishes a cooperation and information-sharing framework: member states that have FDI screening mechanisms are required to notify the Commission and other member states of transactions under review, and the Commission and member states may provide opinions that the reviewing state must take into account. However, the final decision on whether to approve, condition, or block an investment remains with the individual member state where the target is located. There is no EU-level veto and no single EU filing.
The Regulation designates certain sectors as relevant for cooperation: critical infrastructure (including energy, transport, water, health, communications, media, data processing, aerospace, defence, and financial infrastructure), critical technologies (including AI, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum, and nuclear), critical inputs (including rare earths), sensitive information (including personal data), and freedom and pluralism of the media. Transactions in these sectors that are reviewed by one member state are subject to the EU cooperation mechanism, allowing other member states and the Commission to flag concerns.
National Screening Mechanisms: Diversity and Expansion
The majority of EU member states now have operational FDI screening mechanisms, though their scope, thresholds, and procedures vary significantly. Germany’s mechanism under the Foreign Trade and Payments Act (AWG) and its implementing Ordinance is among the most active in Europe, with a mandatory notification requirement for acquisitions of 10% or more in certain sensitive sectors and a 25% threshold in other designated sectors. The German Ministry of Economics can review any transaction involving a non-EU/EEA/Swiss investor where it raises public order or security concerns, regardless of sector, for acquisitions above 25% without sector restriction.
France has one of the most comprehensive FDI screening regimes in the EU, covering a broad range of sensitive activities and applying to acquisitions of 10% or more of voting rights in listed companies and effective influence in unlisted companies. The French regime has been applied in technology, defence supply chain, media, and health sector transactions, and France has been relatively active in attaching behavioural conditions — such as requirements to maintain French production capacity, preserve employment levels, or maintain supply relationships with French defence customers — as a condition of approval.
Italy introduced mandatory FDI notification requirements that have been expanded progressively since 2019 and now cover a wide range of sectors including energy, transport, communications, health, agri-food, financial infrastructure, data, AI, robotics, semiconductors, and space. Italian FDI screening has drawn attention for its application to investments in Italian listed companies by non-EU investors, including several cases involving Chinese investors in Italian technology and infrastructure businesses.
The Netherlands adopted its Investment Screening Act, which applies to sensitive technology companies and vitally important providers, in 2023. Belgium enacted its FDI screening law in 2023, following years of political debate. Spain has maintained FDI restrictions since 2020 that have been progressively refined. The consequence is that a cross-border acquisition involving an operating company in multiple EU member states may require notifications in several countries simultaneously, each with different sector definitions, thresholds, timelines, and procedural requirements.
What Triggers Review: Sector, Investor, and Transaction Characteristics
The factors that trigger FDI review vary by member state, but several common themes emerge. Sector is usually the primary trigger: critical infrastructure, dual-use technology, defence supply chains, semiconductors, AI, and data processing are the sectors most consistently in scope across member states. The nationality of the investor is relevant in many systems: non-EU/EEA investors (particularly investors from China, Russia, and other countries considered geopolitically sensitive) attract more scrutiny than EU-based investors, though most European FDI screening mechanisms formally apply to all non-EU investors without explicit country targeting.
The ownership threshold triggering notification varies widely. Germany’s sector-specific thresholds of 10% and 25% mean that minority investments well below controlling interests are subject to review. France’s 10% threshold for listed company acquisitions is similarly low. This matters for private equity and venture capital investors: a fund acquiring a 15% stake in a French technology company as part of a growth equity round may be subject to mandatory FDI notification in France, a requirement that many fund managers find surprising given that they are not acquiring control.
Indirect acquisitions — where the investor acquires a holding company or fund interest that in turn holds the target — are generally subject to screening as well, to prevent circumvention through layered structures. Debt-to-equity conversions, rights issues, and restructurings that change the proportional shareholding of existing investors may also trigger notification requirements if they result in a non-EU investor exceeding a relevant threshold.
Timeline and Procedural Implications for Deal Execution
FDI screening timelines add deal execution risk that must be managed through careful structuring of the transaction agreement. Most national mechanisms provide an initial review period of approximately thirty to forty-five calendar days after a complete notification, with a further extended review period of sixty to ninety days (sometimes longer in complex cases) if the authorities open a detailed investigation. During these review periods, the transaction typically cannot close.
For transactions requiring notifications in multiple member states plus EU cooperation mechanism review, the total pre-closing timeline for FDI clearance can extend to six months or more in complex cases. This uncertainty is reflected in deal documentation through long-stop dates that accommodate the maximum anticipated review period, and through regulatory condition precedent provisions that specify what happens if FDI clearance is not obtained — including whether the buyer or seller bears the risk of deal failure due to a blocked or unresolvable FDI review.
Reverse break fees — payments from buyer to seller in the event that the buyer cannot obtain required regulatory clearances — have become standard in transactions with material FDI screening exposure. The quantum of the reverse break fee and the trigger conditions (unconditional block vs. conditions that the buyer refuses to accept) are negotiated based on the parties’ respective assessments of FDI approval risk.
The Commission’s Proposed FDI Regulation Recast
The Commission published a proposal in January 2024 to recast the EU FDI Screening Regulation and replace it with a more comprehensive framework that would establish minimum requirements for national screening mechanisms across all member states and strengthen the EU-level cooperation mechanisms. The recast proposal aims to close the current gap where some member states lack effective FDI mechanisms or apply them inconsistently, and to extend screening obligations to cover greenfield investments in sensitive sectors — which are currently outside the scope of most national mechanisms that focus on acquisitions of existing businesses.
If adopted in broadly its proposed form, the recast Regulation would significantly expand the geographic scope of FDI screening across the EU and increase the volume of notifications in member states that currently have minimal review activity. For international investors with EU-wide investment programmes, the recast would represent a major increase in the regulatory compliance burden associated with European investment activity.
Strategic Implications for International Investors
International investors targeting European businesses in sensitive sectors must integrate FDI screening analysis into their investment process at an early stage — ideally before exclusivity or heads of terms are agreed, when the deal economics and structure can still be adjusted to manage FDI risk. Key questions to address include: which member states are relevant for FDI review based on the target’s operations; what are the applicable thresholds and notification requirements in each; what is the realistic timeline for obtaining clearances; are there structural modifications (for example, ring-fencing sensitive operations, offering behavioural commitments, or adjusting the ownership structure) that would mitigate review risk; and how does the FDI exposure affect deal pricing and the reverse break fee structure?
Investors with government or state-linked capital — including sovereign wealth funds, state-owned enterprises, and funds with significant government limited partner participation — should expect heightened scrutiny in FDI reviews regardless of the specific identity of the investor, as European authorities have become increasingly attentive to the risk of state-directed investment in critical sectors. Proactive engagement with reviewing authorities, presentation of the transaction’s economic benefit to the member state concerned, and willingness to offer appropriate undertakings are all elements of a well-managed FDI clearance process for state-adjacent investors.
Conclusion
FDI screening has transformed from a niche regulatory consideration into a mainstream deal risk for any international investor acquiring European businesses in sensitive sectors. The patchwork of national mechanisms, each with different scope, thresholds, and procedures, creates a compliance challenge that requires both transactional legal expertise and familiarity with the political and regulatory context in each relevant member state. The Commission’s recast Regulation, if adopted, will further expand and harmonise these obligations. Managing FDI screening risk well — through early identification, strategic transaction structuring, and proactive authority engagement — is now a core competence for international M&A practitioners operating in the European market.