Case C‑106/22

Xella Magyarország Építőanyagipari Kft.

v

Innovációs és Technológiai Miniszter

(Request for a preliminary ruling from the Fővárosi Törvényszék)

Judgment of the Court (Second Chamber), 13 July 2023

(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)

1. Common commercial policy – Screening of foreign direct investments into the European Union – Regulation 2019/452 – Scope – Investments made by undertakings of a Member State over which an undertaking of a third country has decisive influence – Not included

   (Regulation 2019/452 of the European Parliament and of the Council)

   (see paragraphs 32-34)

2. Freedom of establishment – Company formed in accordance with the law of a Member State and having its registered or actual head office there – Determination of the connection with the legal system of a Member State – Location of the registered office, central administration or principal place of business of companies – Establishment of the company’s right to rely on the freedom of establishment – Criteria – Location of the head office and connection with the legal system – Nationality of shareholders – Irrelevant

   (Art. 54 TFEU)

   (see paragraphs 45-49)

3. Questions referred for a preliminary ruling – Jurisdiction of the Court – Limits – Question raised concerning a dispute confined within a single Member State – Acquiring company and acquired company which are companies resident in the same Member State – Acquiring company forming part of a group of companies established, inter alia, in different Member States – Jurisdiction having regard to the cross-border ownership structure of the resident acquiring company within the European Union

   (Art. 54 TFEU)

   (see paragraphs 50-52, 56)

4. Freedom of establishment – Companies – Screening of foreign direct investment into the European Union – Resident companies regarded as strategic – Interest in ensuring the supply of basic raw materials – Acquisition by a resident company of all the shares in another resident company – Acquired company regarded as strategic in view of its primary activity, linked to the supply of basic raw materials – Acquiring company regarded as a foreign investor since it forms part of a group of companies whose ultimate parent company is established in a third country – Acquisition prohibited because of the potential harm to the interest in ensuring supply – Not permissible

   (Arts 49-54 TFEU)

   (see paragraphs 58, 60, 61, 64-68, 74, operative part)

Résumé

Janes és Társa is a Hungarian company whose main activity is the extraction of gravel, sand and clay from its quarry situated in Lázi (Győr-Moson-Sopron County, Pannonhalma District, Hungary).

Because of that activity, Janes és Társa is regarded as a ‘strategic company’, within the meaning of a law establishing a foreign investment screening mechanism. Its market share on the Hungarian market for the production of the raw materials concerned is 0.52%.

Xella Magyarország is another Hungarian company which forms part of a group of companies whose ultimate parent company is established in Bermuda and which belongs, ultimately, to an Irish national. It operates on the Hungarian construction materials market and is primarily engaged in the manufacture of concrete construction products. It purchases about 90% of the annual production of Janes és Társa with a view to the processing of those raw materials into sand-lime bricks in its factory near the quarry.

In October 2020, Xella Magyarország concluded a sale agreement for the purpose of acquiring 100% of the shares in Janes és Társa and requested the competent Minister to take note of the transaction concerned or to confirm that that formality was not necessary in view of its ownership structure. By a decision adopted in July 2021, that Minister prohibited the execution of the notified legal transaction, classifying Xella Magyarország as a ‘foreign investor’ because it is indirectly owned by LSF10 XL Investments, a company registered in Bermuda.

In addition, that Minister maintained that the security and foreseeability of the extraction and supply of raw materials were of strategic importance, particularly in the light of the serious disruptions to the functioning of global supply chains caused by the COVID-19 pandemic. 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. Accordingly, 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, such as those at issue in this case, which could harm the ‘national interest’, in the broad sense.

By its judgment, the Court of Justice concludes that the provisions of the TFEU on the freedom of establishment preclude the foreign investment screening mechanism in question. By means of that mechanism, 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. The Court thus rejects the Hungarian Government’s argument that such an 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.

Findings of the Court

First, the Court finds that national legislation allowing 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.

Secondly, the Court examines whether that restriction may be justified by an overriding reason relating to the public interest. In that respect, the Court notes that, in accordance with its case-law, such a justification presupposes that the restriction is appropriate to ensure that the objective it pursues is achieved and that it does not go beyond what is necessary to achieve it.

In this case, the specific interest at issue, namely in ensuring the security and the continuity of supply to the construction sector as regards certain basic raw materials, is capable of falling within the scope of Article 52(1) TFEU. That provision provides that a restriction on the freedom of establishment may be justified on grounds of public policy, public security or public health.

However, according to the case-law, while Member States are still free to determine the requirements of public policy and public security in the light of their national needs, those grounds may be relied on only if there is a genuine and sufficiently serious threat to a fundamental interest of society.

As regards specifically an objective linked to the security of supply to the construction sector, in particular at the local level, as regards certain basic raw materials, the Court finds that it cannot constitute a public security reason and, therefore, possibly justify an obstacle to a fundamental freedom at issue in the main proceedings, in this case a particularly serious obstacle. It cannot be considered that that objective concerns a ‘fundamental interest of society’, within the meaning of the Court’s case-law.

Moreover, it does not appear that 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 Court’s case-law. First, prior to that acquisition, the acquiring company already purchased approximately 90% of the production of the basic raw materials concerned from the quarry of the acquired company; the remaining 10% of that production being purchased by local undertakings in the construction sector. Secondly, it is well known that those basic raw materials have, by their very nature, a relatively low market value compared, above all, with their transport cost. Accordingly, the risk that a significant part of those extracted raw materials would be exported appears unlikely or even non-existent in practice.