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01 February 2024

A ground-breaking ruling in the Xella Hungary case

In a recent judgment in Case C-106/22, the Court of Justice of the European Union (CJEU) ruled that under one of Hungary's foreign direct investment screening regimes the objective of securing a regional supply of gravel, sand and clay for the construction industry cannot justify restrictions on freedom of establishment. The CJEU declared that this objective is not a fundamental social interest that could justify such restrictions on the grounds of public policy or public security.

Xella Hungary, a Hungarian producer of construction concrete, whose parent company is based in Bermuda and whose beneficial owner is an Irish citizen, was at the centre of this legal milestone. It sought to acquire its supplier Janes & Társa, a company mining gravel, sand and clay (essential raw materials for the construction industry), also registered under Hungarian law.

Janes & Társa operates in a "strategically significant" sector under the relevant Hungarian FDI screening act. As such, its 100 % acquisition had to be approved by the Minister of Innovation and Technology. Xella Hungary duly submitted a request for approval, but the Minister prohibited the acquisition citing "state interest". His decision was based on the concern that the acquisition of Janes & Társa, particularly within that region, could be a long-term risk to the supply of raw materials to the Hungarian construction industry.

Xella Hungary appealed to the Budapest-Capital Regional Court, which suspended the proceedings and requested guidance from the CJEU on the compatibility with EU law of the FDI screening mechanism used in its case. The CJEU clarified that the origins of Xella Hungary's shareholders, specifically that its parent company is incorporated in a third country, cannot be used as grounds to deny freedom of establishment under the FDI screening.

On the other hand, the CJEU emphasised that restrictions on the freedom of establishment can be justified under the Treaty on the Functioning of the European Union where public policy, security or health considerations are involved. It further clarified that invoking the objective of supply security is only warranted when there is a genuine and sufficiently serious threat to a fundamental social interest.

In light of the CJEU's ruling, the need to secure the local supply of essential raw materials like gravel, sand and clay to ensure the construction sector's supply security clearly does not qualify as a fundamental social interest. The CJEU concluded that the prohibited acquisition would not be a "real and sufficiently serious threat" to the supply of essential raw materials to the local construction sector within the meaning of its case law.

authors: Adrián Menczelesz & Noémi Suller


Attorney at Law