The European Court of Justice ("EJC") has recently ruled its first judgment¹ on the foreign investment mechanism screening. The judgment provides guidance and more clearly delineated limits on how the foreign investment mechanism screening is applied.

The case concerned Hungary's foreign investment screening mechanism. The Hungary's Minister for Innovation and Technology had blocked the acquisition of the Hungarian company Janes és Társa, which is involved in mining raw materials such as gravel, sand and clay, and the Hungarian company Xella Magyarország, ultimately owned by an Irish citizen. Part of the Irish national company's group is registered in Bermuda.

The ECJ interpreted many elements of a foreign investment mechanism screening and decided as follows:

- foreign direct investment screening based on national security considerations is primarily a national competence;

- the scope of application of Regulation (EU) 2019/452² (the "Regulation") is "limited to investments in the European Union made by undertakings constituted or otherwise organised under the laws of a third country." In other words, investment provided by an EU-based undertaking that is under "majority control" by third-country investors falls beyond the Regulation’s scope;

- as expected, the ECJ stressed out that when prohibiting investments coming from third countries, the basic rights and freedoms of the European Union (freedom of establishment, in particular) must be assessed at all times; any restrictions of third countries' investments must be justified on grounds of national security, public policy or public health;

- the ECJ further stated that the acquisition of a construction company does not present a "genuine and sufficiently serious threat" to national security, public policy or public health, and prohibition of investment in the given area is not justifiable (moreover, when considering that the Irish/Bermudian company already owned the majority share of the acquired company);

- the ECJ concluded that purely economic interest cannot sufficiently justify restriction of freedom of establishment in EU countries and the Regulation cannot serve as a protectionist tool of national economy.

[1] Case C‑106/22, Xella Magyarország Építőanyagipari Kft. v Innovációs ésTechnológiai Miniszter, EU:C:2023:568.

[2] Regulation (EU) 2019/452 of the European Parliament and of the Councilof 19 March 2019 establishing a framework for the screening of foreign directinvestments into the Union.

Author: Vladěna Svobodová

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