21
Wed, Feb
59 New Articles

ECJ Gives its Judgment in the Xella Case: Key Takeaways

Hungary
Tools
Typography
  • Smaller Small Medium Big Bigger
  • Default Helvetica Segoe Georgia Times

In July 2023 the European Court of Justice (ECJ) gave its judgment in case no. C-106-22 (Xella Judgment). The case was referred by the Fővárosi Törvényszék (Budapest High Court, Hungary) for preliminary ruling on the interpretation of Article 65(1)(b) TFEU in conjunction with recitals 4 and 6 of Regulation (EU) 2019/452 (EU FDI Regulation) and Article 4(2) TEU.

Facts

The catalyst for the review was the blocking decision of the Hungarian Minister for Innovation and Technology that relied on the ground of “national interest” referred in the Hungarian FDI screening legislation (Act LVIII of 2020). The decisions related to the acquisition by Xella Magyarország Kft. (a Hungarian company, the parent company of which is established in Germany, and the indirect shareholders of which are established in Luxembourg and Bermuda, respectively) of the shares in Janes és Társa Kft. (Target).

The Target is a Hungarian strategic company engaged in the extraction of gravel, sand and clay. According to the Minister’s decision, given that the acquisition would mean the Target would be indirectly owned by a company registered in Bermuda, longer-term risk would be posed to the security of supply to raw materials in the construction sector.

The regional market share of the Target was 20.77%, and its national market share was only 0.52%. Around 90% of the annual production of raw materials by the Target was purchased by Xella. Xella challenged the Minister’s decision, and the proceeding national court requested the preliminary ruling of the ECJ.

Clarification in the judgment

The Xella Judgment is quite specific, but it also clarifies general points:

  • As a specific conclusion, the ECJ set out that “provisions of the TFEU on freedom of establishment must be interpreted as precluding a foreign investment filtering mechanism provided for by the legislation of a Member State by means of which a resident company which is a member of a group of companies established in several Member States, over which an undertaking of a third country has decisive influence, may be prohibited from acquiring ownership of another resident company regarded as strategic, on the ground that the acquisition harms or risks harming the national interest in ensuring the security of supply to the construction sector, in particular at the local level, with respect to basic raw materials such as gravel, sand and clay” (para. 74 of the Xella Judgement).
  • In its general dicta:
    • The ECJ clarified that the scope of the EU FDI Regulation is limited to investments in the EU made by undertakings constituted or otherwise organised under the laws of a third country (with the exception of artificial arrangements that do not reflect economic reality and circumvent the screening mechanisms and screening decisions, where the investor is ultimately owned or controlled by a natural person or an undertaking of a third country (paras 32, 39 of the Xella Judgement)). In this perspective the Xella Judgment materially diverged from the opinion of the Advocate General.
    • The ECJ also stressed that the freedom of establishment (set out in the TFEU) must be observed in relation to “indirect” foreign investments (eg by EU companies controlled by third-country entities). Accordingly, any restriction must be justified by a “genuine and sufficiently serious threat to a fundamental interest to society,” meet an overriding reason relating to the public interest, appropriate to ensure that the objective pursued is achieved. It also must not go beyond what is necessary to achieve the objective pursued (para 60 of the Xella Judgement). The requirements for public policy, public security, or public health as grounds for restrictions may be determined by the Member States, nevertheless derogations must not be misapplied so as to serve purely economic ends (para. 66 of the Xella Judgement). It was also reiterated that the guarantee of the security of supply of public services (or products) in the petroleum, telecommunications, and energy sectors in the event of crisis may constitute public security reasons possibly justifying a restriction on a fundamental freedom (para. 68 of the Xella Judgment).

Takeaways

In general, the Xella Judgment significantly weakens the screening position of the national FDI authorities. The clarification that the EU FDI Regulation does not cover “indirect” foreign investments (ie those carried out by EU investors over which a third country entity has control) may:

  • implicate national FDI screening regimes that also cover indirect investments, rendering their validity from an EU law perspective arguable. This follows from the Treaty of Lisbon based on which capital movements falling within the scope of “foreign direct investment” are within the exclusive common commercial policy competence (para. 34 of the opinion of the Advocate General); and 

in practice prove significantly advantageous to third-country investors that carry out their investments through their subsidiaries registered in the EU, as the cooperation mechanism under the EU FDI Regulation would not be set in motion. At the same time, the reiteration of the requirements for a restriction on the freedom of establishment will impact the practice of the national FDI authorities as it must be observed (and demonstrated) that restrictions should be justified by a “genuine and sufficiently serious threat to a fundamental interest to society.”

By Blanka Borzsonyi, Senior Associate, DLA Piper Hungary

Our Latest Issue