On 13 July 2023 the Court of Justice of the EU published the judgment in the case C-106/22 ruling that the objective of ensuring the supply of gravel, sand, and clay to the construction sector at the regional level cannot justify a restriction on the freedom of establishment. In this case, the Hungarian company Xella Magyarország (concrete construction products) challenged, before a Hungarian court, the decision of the Hungarian minister for innovation that prohibited it from acquiring the shares of “JANES ÉS TÁRSA” Szállítmányozó, Kereskedelmi és Vendéglátó Kft., another Hungarian company, which is considered to be ‘strategic’, within the meaning of the national legislation establishing a foreign investment screening mechanism (Law No LVIII of 2020 on transitional provisions relating to the end of the state of emergency and to the pandemic crisis of 17 June 2020, ‘the Vmtv’). The request for preliminary ruling has been made in proceedings between Xella Magyarország Építőanyagipari Kft. (‘Xella Magyarország’), a Hungarian company, and the Innovációs és Technológiai Miniszter (Minister for Innovation and Technology, Hungary; ‘the Minister’), concerning a decision by which the Minister prohibited the acquisition by Xella Magyarország of all the shares in Janes és Társa.
Facts
On 29 October 2020, Xella Magyarország concluded a sale agreement for the purpose of acquiring 100% of the shares in Janes és Társa and sent the Minister a notification under Paragraph 277(1)(a) of the Vmtv, requesting it to take note of the transaction concerned in accordance with Paragraph 283(2)(a) of the Vmtv or to confirm that that formality was not necessary in view of its ownership structure. By decision of 30 December 2020, the Minister prohibited the execution of the legal transaction notified pursuant to Paragraph 283(1)(b) and (2)(b) of the Vmtv, relying on the ground of ‘national interest’ referred to in Paragraph 276(1) of the Vmtv. The Fővárosi Törvényszék (Budapest High Court, Hungary), the referring court, annulled that decision on the ground that the Minister had not complied with the procedural rules and had failed to fulfil his obligation to state reasons, and ordered him to conduct a new procedure. In a decision of 20 July 2021 (‘the decision at issue in the main proceedings’), delivered at the end of that new procedure, the Minister again prohibited the execution of the notified legal transaction, on the basis of Paragraph 283(2)(b) of the Vmtv, having regard to Paragraph 276(1) and (2), Paragraph 277(2)(a)(aa) and Paragraph 283(1)(b) thereof.
In the grounds of that decision, the Minister classified Xella Magyarország as a ‘foreign investor’, within the meaning of Paragraph 276(2) of the Vmtv, because it is indirectly owned by LSF10 XL Investments, a company registered in Bermuda. In addition, it maintained that the security and foreseeability of the extraction and supply of raw materials were of strategic importance. According to the Minister, the COVID-19 pandemic clearly showed that serious disruption to the functioning of global supply chains could occur in a short period of time, with negative repercussions that could harm the national economy. The Minister highlighted that the production of aggregates, such as sand, gravel and crushed stone, for the construction sector was already dominated by foreign-owned Hungarian producers. The Minister took the view that if Janes és Társa were to be indirectly owned by a company registered in Bermuda, this would pose a longer-term risk to the security of supply of raw materials to the construction sector, particularly in the region where Janes és Társa is established, given that its market share in that region would be 20.77%. Moreover, the acquisition by a foreign owner of a strategic company would reduce the proportion of domestic-owned companies, which could harm the ‘national interest’, in the broad sense.
Xella Magyarország challenged the decision at issue in the main proceedings before the referring court, arguing that that decision constituted arbitrary discrimination or a disguised restriction on the free movement of capital in the light, inter alia, of Articles 54 and 55 TFEU, which afford, in parallel, the benefit of freedom of establishment to companies established in the European Union. It pointed out that, ultimately, it is owned by a person who is a national of an EU Member State. The only reason why the acquisition was prohibited was the ‘non-national’ nature of its ownership structure. It also argued that the lack of clarity of the concept of ‘national interest’, within the meaning of the Vmtv, was capable of breaching the fundamental principle of the rule of law.
In those circumstances, the Fővárosi Törvényszék (Budapest High Court) decided to stay the proceedings and to refer the following questions to the Court:
(1) Must Article 65(1)(b) TFEU be interpreted as meaning – having also regard to recitals 4 and 6 of Regulation 2019/452 and to Article 4(2) TEU – that it permits the laying down of rules such as those in Section 85 of the Vmtv, and in particular those in Paragraph 276(1) and (2)(a), and Paragraph 283(1)(b) of that law?
(2) If the answer to the first question is in the affirmative, does the mere fact that the Commission has conducted a merger control procedure, exercised its powers and authorised a concentration affecting the chain of ownership of a foreign indirect investor preclude the exercise of the decision-making power under the applicable law of the Member State?’
Admissibility
Concerning the admissibility the court stated that the provisions of the TFEU on freedom of establishment are not applicable to a situation which is confined in all respects within a single Member State (Cilevičs and Others, C‑391/20). In the decision at issue in the main proceedings, that national provision was applied in the light of the fact that the group of companies, namely the Xella group, which includes, in addition to the acquiring company, inter alia, the parent German company and its ‘grandparent’ Luxembourg company, is in turn controlled by another group of companies, namely the Lone Star group, the ultimate parent company of which is registered in a third country, that is to say, in Bermuda. Consequently, the cross-border ownership structure of the resident acquiring company within the European Union which characterises the situation at issue in the main proceedings is a relevant foreign element for the purposes of answering the first question referred for a preliminary ruling. That question was therefore admissible.
Whether there is a restriction on the freedom of establishment
According to the Court’s settled case-law, all measures which prohibit, impede or render less attractive the exercise of freedom of establishment must be considered to be restrictions on that freedom within the meaning of Article 49 TFEU (judgment of 27 February 2019, Associação Peço a Palavra and Others, C‑563/17, EU:C:2019:144, paragraph 54 and the case-law cited). The national legislation concerned, as applied in the decision at issue in the main proceedings, in so far as it allows the authorities of a Member State to prohibit an EU company, on grounds of security and public policy, from acquiring a shareholding in a ‘strategic’ resident company allowing it to exert a definite influence on the management and control of that company, clearly constitutes a restriction on the freedom of establishment of that EU company, in this case a particularly serious restriction.
As to whether the restriction on the freedom of establishment is justified
The Court also stated that it follows from settled case-law of the Court that a restriction on a fundamental freedom guaranteed by the TFEU may be permitted only if the national measure in question meets an overriding reason relating to the public interest, that it is appropriate to ensure that the objective it pursues is achieved and that it does not go beyond what is necessary to achieve it (Fussl Modestraße Mayr, C‑555/19). The Court analyzed the case in the light of Article 52(1) TFEU and the justification of the recent restrictions on the on the freedom of establishment based on whether it harms or threatens national interests. In that regard, Article 52(1) TFEU provides that a restriction on the freedom of establishment may be justified on grounds of public policy, public security or public health. It is settled case-law that purely economic grounds, such as, in particular, promotion of the national economy or its proper functioning, cannot serve as justification for an obstacle to one of the fundamental freedoms enshrined in the Treaties (Associação Peço a Palavra and Others, C‑563/17). However, the Court has acknowledged that reasons of an economic nature in the pursuit of an objective in the public interest or the guarantee of a service of general interest may constitute an overriding reason in the public interest capable of justifying an obstacle to one of the fundamental freedoms enshrined in the Treaties (see, to that effect, judgments Essent and Others, C‑105/12 to C‑107/12, and Associação Peço a Palavra and Others, C‑563/17).
It did not appear, in the light of the documents before the Court and subject to verification by the referring court, that, as regards the supply of basic raw materials to the local construction sector, the acquisition prohibited by the decision at issue in the main proceedings is actually capable of giving rise to a ‘genuine and sufficiently serious threat’, within the meaning of the case-law referred to above. As regards specifically an objective linked to security of supply, the Court has held that such an objective may be relied on only if there is a genuine and sufficiently serious threat to a fundamental interest of society (Commission v Greece, C‑244/11).
In that regard, it appears to be common ground, first, that, prior to that acquisition, the acquiring company had already purchased approximately 90% of the production of the basic raw materials concerned from the quarry of the acquired company in order to process them in its factory near that quarry and that the remaining 10% of that production were purchased by local undertakings in the construction sector. Secondly, it is well known that, since those raw materials have, by their very nature, a relatively low market value compared, above all, with their transport cost, the risk that a significant part of the basic raw materials extracted from that quarry would be exported rather than sold on the local market appears unlikely or even non-existent in practice.
In the light of all the foregoing considerations, the Court answered the first question as follows: the 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 from 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.
Since the referring court has asked its second question only in the event that the first question is answered in the affirmative and the first question has been answered in the negative, there is no need to answer the second question.
(Reference for a preliminary ruling – Free movement of capital – Freedom of establishment – Regulation (EU) 2019/452 – Legislation of a Member State establishing a mechanism for filtering foreign investment in resident companies considered to be ‘strategic’ – Decision adopted on the basis of that legislation, prohibiting the acquisition by a resident company of all the shares of another resident company – Acquired company considered to be ‘strategic’ on the ground that its primary activity concerns the extraction of certain raw materials such as gravel, sand and clay – Acquiring company considered to be a ‘foreign investor’ on the ground that it forms part of a group of companies whose ultimate parent company is established in a third country – Harm or risk of harm to a national interest, public security or public order of the Member State – Objective intended to ensure the security of supply of raw materials to the construction sector, in particular at the local level)
