EU investment restrictions for investing in strategic companies

Equity markets have recently recovered almost half of their steep initial losses supported by multi-trillion dollar emergency support measures around the world. Now they face challenges from a difficult earnings season about to get underway and from anxieties about how to end lockdowns safely.

Meanwhile the EU has signalled a willingness for member states to take stakes in strategically important local companies to defend against the risk of hostile takeover. It is a move which fits with the increased protectionism of our post-COVID scenario.

Regulation (eu) 2019/452, of 19 March 2019, of the European Parliament and of the council, establishing a framework for screening of foreign direct investments (fdi) into the union webinar 15/04/2020.

It is the first regulation, at a Union level, seeking to establish a uniform mechanism for screening of FDI into the Union. This Regulation shall be applicable from 11 October 2020. It aims to provide legal certainty as to the screening of FDI and to ensure a Union-wide coordination and cooperation between Member States and the European Commission (EC).

The decision upon setting up a screening mechanism or screening a concrete FDI remains the sole responsibility of the Member State concerned.

Definition given of FDI is an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in a Member State. This concept expressly includes “investments which enable effective participation in the management or control of a company”. The scope of FDI also covers indirect investments from within the Union, “by means of artificial arrangements that do not reflect the economic reality and circumvent screening mechanisms and screening decisions, where the investor is ultimately owned or controlled by a natural person or an undertaking of a third country.

Factors to take into consideration by the Member States or the Commission for the screening of FDI likely to affect security or public order are listed, in a non-exhaustive manner.

The EC has issued on 25 March 2020 a Guidance to the Member States providing essential guidelines to the screening of FDI after the outbreak of COVID-19, encouraging them to restrict movements of capitals from investors of third countries (i.e. China) in European companies, which might fall prey of hostile takeovers.

Italy

In Italy, Law Decree 21/2012 provides for a screening mechanism aimed at assessing foreign direct investments which may entail a threat of serious damage to security, public order or other national public interests. 

The screening mechanism is currently applied to foreign investments in: i) defence and national security sectors; ii) energy, transport, communications and high-tech sectors. 

Until 31 December 2020 (because of pandemic Covid-19), the screening mechanism has been extended to investments regarding sectors set out in European Regulation 452/2019, such as:

• critical infrastructures (energy, transport, water, health, communications or finance);
• critical technologies (artificial intelligence and cybersecurity);
• supply of energy and raw materials;
• food security;
• personal data and media; and, the credit and insurance sectors. 

Notifications for the acquisition of shareholdings are compulsory: for EU investors, the purchase must involve a controlling stake; for Non-EU investors, the purchase must involve a stake of at least 10% of the share capital (with a minimum value of 1 million euros); the notification must be made also in case of purchase of shares exceeding the thresholds of 15%, 20%, 25% and 50%. 

The Italian Government has the power of imposing specific conditions or rejecting the purchase of shareholdings by foreign investors; and, the right of veto concerning certain important resolutions of shareholders’ meetings or of administrative bodies of the interested company (i.e. merger or division of the company, transfer of the company or of its branches or subsidiaries, change to the company’s corporate purpose, winding-up of the company, etc.).

The Italian Government has up to 45 days following the notification by the company to exercise its special powers and during this period, the transaction or the company’s decision is suspended until the Government adopts the decision. However, the suspension expires if the Government fails to act by the deadline. 

Non-compliance to foreign direct investment provisions may imply, inter alia: the nullity of the resolutions, transactions and of other acts implemented in violation of the Government decisions; a fine up to twice the transaction value and in any case not less than 1% of the cumulative turnover (in the last fiscal year) of the companies involved.

France

Foreign investment in certain sensitive sectors for French national interests is subject to prior clearance by the Minister for the Economy.

The "sensitive" business activities and sectors concerned by the foreign investment prior approval process are: i) businesses relating to specific facilities and infrastructures, goods, or services (like energy, water, public health, transportation, space, electronic communications, agriculture and food industry; and publishing); ii) activities relating to national security and national defence (including crypto and data storage and processing); and, iii) research and development activities in the area of critical or dual-use technologies.

The French regulation on foreign investment applies to European and Non-European investors.

The transactions which are subject to foreign investment control in France are:

• the acquisition of direct or indirect control over a French entity by a non-French investor;
• the acquisition of all or part of a business line of a French entity by a non-French investor; or
• the direct or indirect crossing of the threshold of 25% of the voting rights in a French entity by a Non-European investor.

The Ministry has to give a first answer within 30 business days and a final authorisation or rejection within 45 additional business days. Absence of answer within the applicable timeframe results in the request being deemed rejected. The authorization may be denied, but the rejection needs to be motivated.

The Ministry may also request from the investor some undertakings and impose some conditions. These conditions may be revised in case of certain specific changes in circumstances. Also, a broad range of sanctions and remedies could be apply. In addition to the various criminal and administrative sanctions, any transaction completed in violation of this regulation will be null and void.

Netherlands

Only limited measures have been taken in the Netherlands in connection with the implementation of EU-regulation 2019/452. A parliamentary bill was published that only regulates the elements necessary for the effective application of the EU-regulation:

• establishment of a point of contact, being the Minister of Economic Affairs and Climate;
• the authority to process, collect, and provide information to and by administrative bodies;
• responsibility for enforcement of the obligation for investors and companies receiving investment to provide certain information to the authorities.

The bill does not introduce new Dutch investment tests or screening mechanisms, nor change existing ones.

A separate bill shall cover the further introduction of the framework for investment screening in the Netherlands, of which the enactment is expected in 2021.
 
UPDATE: On 19 May 2020, the parliamentary bill for the Telecommunication Sector (Undesirable Control) Act was adopted, introducing a screening mechanism for the telecommunication sector. This law subjects investments leading to a controlling interest in a telecommunications party to the scrutiny of the Minister of Economic Affairs and Climate (if such control would lead to relevant influence).

Other existing screening mechanisms are sector specific and cover all investments, regardless of whether from foreign or domestic origin. These sector-specific screening mechanisms relate to investments in (a) (electric or gas) power stations, facilities or companies, (b) suppliers of the Ministry of Defence, or (c) the financial sector. A general screening mechanism does not (yet) exist.

Other than the (rather concise) pending bill, no legislation regarding screening of FDI’s has been proposed following the EU Directive nor following the current COVID-19 conditions. However, the Dutch government is actively considering and preparing legislation regarding sector specific and general FDI screening mechanisms.

Spain

In March 2020, Spain approved a new regulation for screening foreign investments in Spanish companies. The new regulation imposes certain restrictions on foreign investors resident in any country outside the EU or EFTA (“Foreign Investors”). For these purposes, an investor is considered a Foreign Investor if more than 25% of its shares or voting rights are directly or indirectly controlled by non-EU/EFTA investors.

The restrictions apply to the acquisition of holdings equivalent to 10% or more of the share capital of a Spanish company or that result in the control or effective participation in the management of the relevant company (“Foreign Investments”). The restrictions apply to holdings in shares, financial instruments that entitle to acquire shares, such as convertible bonds or subscription rights, and voting rights.

The restrictions apply to Foreign Investments in certain sectors and to Foreign Investments made by certain investors:

• Restrictions to Foreign Investments in certain sectors: the acquisition by Foreign Investors of Foreign Investments (as defined above) in Spanish companies that carry out activities in certain sectors that affect public order, public security or public health require the prior authorisation of the Spanish Government. The affected sectors are: (i) critical infrastructures, both physical and virtual (energy, transport, water, healthcare, communications, media, data storage and processing, aerospace, defence, finance or sensitive installations); (ii) critical technology and dual-use products; (iii) essential supplies (energy, hydrocarbons, electricity, raw materials and food); (iv) sectors with sensitive information such as personal data or with the capacity to control such information; and (v) media.

• Restrictions to Foreign Investors that have invested in affected sectors in other EU member States: Foreign Investors that have invested or participated in sectors affecting the security, public order or public health in another EU Member State (in particular the sectors listed above) require a prior authorisation of the Spanish Government to acquire a Foreign Investment (as defined above) in any Spanish company.

• Restrictions to certain Foreign Investors: Foreign Investors (a) controlled directly or indirectly by the government of a third country, including public bodies or armed forces; or (b) is subject to administrative or judicial proceedings for carrying out illegal or criminal activities require a prior authorisation of the Spanish Government to acquire a Foreign Investment (as defined above) in any Spanish company.