The objective of an EU Member State to ensure the supply of gravel, sand, and clay to the construction sector cannot justify a restriction on the freedom of establishment

The Court of Justice of the European Union (“EU Court“) in case no. C‑106/22, concerning the freedom of establishment within the EU, considered whether the defendant, the Hungarian competition authority Innovációs és Technológiai Miniszter (“Ministry“), was justified in rejecting the notified merger of the plaintiff, the Hungarian company Xella Magyarország Építőanyagipari Kft (“Xella Magyarország”).

 

The Hungarian company Xella Magyarország, owned by a German company, which is ultimately owned by a company registered in Bermuda and is a manufacturer of concrete construction materials, challenged the Ministry’s decision before a Hungarian court, which prohibited its acquisition of the Hungarian company Janes és Társa, operating a gravel, sand, and clay quarry.

 

The Ministry took a position that Janes és Társa should be considered a “strategic company” under the national foreign investment screening mechanism, the establishment of which is required by Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (“Regulation 2019/452”). According to the Ministry, the transfer of ownership of a strategic company to an indirect owner registered in a third country, namely Bermuda, would pose a long-term risk to the reliability of the supply of raw materials, such as gravel, sand, and clay, to the construction sector.

 

During the preliminary ruling procedure, the Hungarian court referred a question to the EU Court, asking whether the relevant national foreign investment screening mechanism, which allows the prohibition of investment in a company regarded as strategic:

  • When there is a concentration of a strategic company with another company belonging to a group of companies established in several Member States, over which an undertaking from a third country exercises a majority control, or
  • When the concentration would harm or could harm the national interest in ensuring the reliability of supply to the construction sector, in particular at the local level, concerning basic raw materials, such as gravel, sand, and clay

is compatible with EU law.

 

The EU Court ruled that the question must be examined solely in the light of the freedom of establishment enjoyed by EU companies and that such foreign investment screening mechanism opposes the fundamental freedom, as set out in Article 49 TFEU, allowing individuals or legal entities to pursue economic activities, stably and continuously in one or more Member States, without impediments created by those Member States.

 

The EU Court found that the relevant merger does not fall within the scope of Regulation 2019/452 and, therefore, cannot be subject to review under the foreign investment screening mechanism, as this regulation exclusively applies to investments by companies from third countries into the European Union. The fact that a company registered in a third country exercises majority control over an investor with a permanent residence in the European Union does not justify the application of Regulation 2019/452. According to the EU Court, the relevant foreign investment screening mechanism clearly constitutes a limitation of the freedom of establishment. These limitations, however, cannot be justified with the goal of ensuring a reliable supply of gravel, sand, and clay for the construction sector as it does not concern a fundamental societal interest, within the meaning of the established case law of the EU Court, as is the case of ensuring the supply to the petroleum, telecommunications, and energy sectors.

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