The Hungarian Minister for Innovation and Technology intervened in 2021 to stop one Hungarian company from acquiring another. The target company was a key player in the extraction of sand, clay, and gravel from a quarry. The Minister cited concerns that allowing a company with indirect ownership ties to Bermuda to take control of such a strategically important firm would not be in Hungary’s best interests, particularly with regards to ensuring the secure supply of these critical raw materials.

Given the factual and legal circumstances, the Budapest High Court, (F?városi Törvényszék) ,has decided to halt proceedings and seek clarification from the Court of Justice through a preliminary ruling. Essentially, the question being posed to the Court of Justice is whether Hungary is allowed under EU law to enact legislation that restricts foreign direct investment in EU-based companies if such investments are carried out through other EU-based companies.

Advocate General opinion states that the Foreign Direct Investment Screening Regulation encompasses foreign direct investments from third-country sources, which involve any form of effective participation or control over an EU-based company by the third-country investor. This also includes cases where the third-country investor indirectly obtains control over an EU company by acquiring another EU company owned by that third-country company.

The investment falls within the scope of Article 207 TFEU and the EU’s exclusive competence in the field of common commercial policy. Therefore, the Foreign Direct Investment Screening Regulation, which empowers Member States to introduce screening mechanisms, should be viewed as “delegating” competences back to the Member States in an area where they had previously lost them due to the Lisbon Treaty’s entry into force.

In her Opinion released today, Advocate General discusses the compliance of national screening mechanisms with the rules of the internal market, enabled by the Foreign Direct Investment Screening Regulation. She emphasizes that national legislation must require the responsible bodies to provide legitimate justifications for restricting capital flows. The Regulation specifies that restrictions on capital movements are only permissible on grounds of security or public order and only if there is a genuine and sufficiently serious threat to a fundamental interest of society. Additionally, any measure restricting capital flows must be proportional to its aim.

The Advocate General has analyzed the rationale behind the Minister’s veto in the current case and acknowledged that protecting the supply of certain raw materials could potentially justify limitations on foreign direct investment, particularly during times of crisis, on the grounds of public policy or public security. Such justifications may even legitimize restrictions on capital movements from third countries that are not otherwise permissible within the internal market.

In order to assess the lawfulness of the decision to impede the transaction in question, the domestic court must scrutinize whether there is sufficient justification for why the quarry’s indirect foreign ownership poses a substantial and tangible hazard to the domestic supply. The court must also assess whether there were less restrictive measures that could have ensured the security of such supply.

As the Advocate General’s opinion is not binding for the Court of Justice, the Court Judges are currently deliberating on this case and will issue a judgment at a later time.