A world of opportunity - Foreign investment in Europe

19 March 2019

The EU enacted the EU Screening Regulation, which provides for a cooperation mechanism for screening foreign direct investments in EU Member States. The Regulation gives EU Member States and the European Commission the ability to:

• exchange information;
• provide comments; and
• issue opinions

on foreign direct investments.

Member States retain the power to set up national screening mechanisms and to review and block foreign investments on security and public order grounds. There are no harmonised rules and Member States can and do adopt different approaches.

25 March 2020

The Commission issued Guidance to the Member States concerning:

• foreign direct investment;
• free movement of capital from third countries; and
• the protection of Europe’s strategic assets.

This Guidance was issued ahead of the application of the EU Screening Regulation and as a reaction to the economic effects of the COVID-19 pandemic.

In the Guidance, the Commission urged Member States to:

• be particularly vigilant to avoid a selling off of EU businesses;
• make full use of their foreign investment screening mechanisms to take fully into account the risks to critical health infrastructures, supply of critical inputs, and other critical sectors; and
• for those Member States that did not currently have a (fully-fledged) screening mechanism, to set up such mechanism and in the meantime to use all other available options to address cases where a foreign acquisition would create a risk to security or public order in the EU, including a risk to health infrastructures and supply of critical inputs.

This Guidance also pointed to the possibility of introducing restrictions on the free movement of capital on public interest grounds or public security exceptions set out in Article 65 of the Treaty on the Functioning of the European Union. Restrictive measures could be taken to:

• ensure security of supply or provision of essential public services;
• address threats to financial stability; and
• restrict “predatory buying” by foreign investors of companies with valuations on capital markets well below their true or intrinsic value based on the actual or potential impact of those investments on the safeguard of the public interest.

11 October 2020

The EU Screening Regulation came into effect.

March 2022

More than one year on, it is understood that around 15 deals per month are being reviewed under the cooperation mechanism between the European Commission and the Member States. This number is likely to increase as more Member States introduce FDI rules.

Belgium maintains an investor friendly approach that does not differentiate between foreign and domestic investors. As a general rule, no approval is required from any governmental authority to invest in Belgium other than general merger control rules and certain exceptions in some regulated industries.

Sectors affected

Certain regulated sectors, including:

• financial services;
• energy;
• food production;
• telecoms; and
• postal services.

Other activities require an environmental permit or another type of permit before a company can commence activities. For example, a permit may be required for activities in relation to food production, transport services, energy production or pharmaceuticals. Rules on permit requirements are, for most sectors, decided upon the regional governments.

Filing/authorisation requirement

No specific filing requirements. But note exceptions in some regulated industries which apply to both domestic and foreign investors.

Regional restrictions

In December 2018, the government of the Flemish Region adopted a decree which enables it to annul (with retroactive effect) a transaction:

• resulting in control by a foreign person of a Flemish or local governmental entity or any other entity controlled by the Flemish government,
• provided the transaction threatens the strategic interests of the Flemish Community or Region and the government attempted to safeguard those strategic interests by other means.

This power does not apply to exclusively privately held companies but it can be applied to any strategic sector.

Proposed reforms

On 30 April 2021, the Belgian federal government announced that it will introduce a national foreign investment screening mechanism. The draft legislation is still pending.

According to the announcement, a Foreign Investment Screening Committee (FISC) will be created within the Ministry of Economy to screen non-EU direct investments in Belgian critical infrastructure (such as the energy, transport, health, communication and defence sectors).

All non-EU investors that intend to acquire 25% or more of the voting rights in Belgian companies active in the specified sectors will need to notify the FISC in advance. Following a national security review, the FISC will be able to impose conditions on the investment or, as a last resort, to reject the investment.

Generally, foreign investments in France only require declarations to be made to the Banque de France after completion. However, prior consent must be sought for investments in certain sensitive or strategic sectors.

Sectors affected

Any activity involving the exercise of public authority or which relates to activities:

• likely to jeopardise public order, public safety or national defence; or
• in relation to research, production or marketing of weapons, ammunition and powders or other explosive substances.

The French Monetary and Financial Code sets out a list of business sectors that are considered “strategic” (including defence, transport, energy, water, health, R&D activities relating to critical technologies etc.).

Trigger events

• Acquisition of control over a French-based entity by a non-French investor;
• Acquisition of all or part of a line of business of a French-based entity by a non-French investor;
• Acquisition, whether direct or indirect, alone or in cooperation, of ≥ 25% of the voting rights of a French-based entity (≥ 10% for listed companies until 31 December 2022), by a non-EU/EEA investor.

Filing/authorisation requirement

Filing is mandatory and authorisation must be granted before the investment can be completed.

Review period

30 business day screening period to assess whether the transaction is in scope or is authorised without condition.

A further 45 business day period if a more in-depth review is needed, including if conditions need to be imposed.

Assessment criteria

Whether the investment affects French national interests. The authorisation can also be refused if French authorities consider that the investor:

• has connections with a foreign government or public body;
• is likely to commit or has been sentenced in the last 5 years for certain criminal offences; or
• has been subject to a sanction based on non-compliance with foreign investment regulations.

Sanctions

For making an investment without required prior authorisation or non-compliance with conditions:

• an order requiring the investor to file an authorisation request, unwind or modify the transaction, or compliance with conditions, such order may be subject to a fine of up to €50,000 per day;
• the transaction will be deemed null and void;
• fines may be imposed, not exceeding the greater of twice the amount of the investment at stake, 10% of the annual turnover of the target, €5m for companies or €1m for individuals; and
• criminal sanctions may also be imposed on individuals, including imprisonment for up to 5 years.

Proposed reforms

Currently no significant reforms are planned.

Germany has an established foreign direct investment review mechanism which allows the Federal Ministry of the Economy to review investments for national security concerns.  There are two regimes: the cross-sectoral review and the sector-specific review.

Sectors affected

Cross-sector review: transactions in any sector may be called in. However, 27 sectors have been specified as potentially giving rise to security concerns (including energy, IT, telecommunications, finance, transport, health, water supply and critical technology sectors such as AI, robotics etc.).

Sector-specific review: certain defence and IT security companies (including manufacturers/developers of weapons and certain other military technology and companies with IT security features used for processing classified government information).

Trigger events

• Acquisition of 10% of voting rights in companies operating in the defence and IT security sectors and in certain specified sectors;
• Acquisition of 20% of voting rights in companies operating in certain specified sectors;
• Acquisition of 25% in any other German companies;
• Asset deals;
• Add-on acquisitions of further voting rights above certain thresholds which depend on the field of activity of the target;
• Acquisition of effective control by any other means.

Filing/authorisation requirement

Cross-sector review: for acquisitions by non-EU resident investors relating to 27 specified activities notification is mandatory. For any other acquisition, filing is voluntary.

The acquirer may also seek a certificate of non-objection for non-notifiable transactions.

Sector-specific review: filing is mandatory for acquisitions by non-German investors.

Review period

Cross-sector review and sector-specific review: 2 months to initiate a review and, if a review is initiated, up to 4 months to review the proposed investment. In certain circumstances, the review period may be extended.

Assessment criteria

Cross-sector review: whether the acquisition poses a threat to the public order or security of Germany, another EU Member State or certain projects of EU interest. Particular factors which may suggest a threat to public order or security include:

• the target company operating in one of the 27 specified sectors;
• the acquirer being controlled, directly or indirectly, by a government of a third country;
• if the acquirer has already been involved in activities which have had an adverse effect on public order or security;
• if there is a considerable risk that the acquirer has been involved in certain criminal or administrative offences (including money laundering, terrorist financing etc.).

Sector-specific review: whether the acquisition poses a potential threat to the essential security interests of Germany.

Sanctions

Failure to comply with notification obligations, prohibitions or orders issued by the Ministry of Economy or with gun-jumping provisions may be sanctioned as a criminal offence, as well as incur administrative fines of up to €500,000.

Proposed reforms

Currently no significant reforms are planned.

Generally, Italy does not distinguish between domestic, European and foreign investors. However, in respect of specific strategic sectors, the Italian Government has the power to veto certain transactions in order to protect the national interest.

Sectors affected

Any activity involving:

• owning strategic assets in the energy, transportation, communication sectors and certain other sectors (including financial services, healthcare, cybersecurity);
• national defence and national security (this applies to EU and non-EU investors); and
• the 5G communication sector.

Trigger events

Defence and national security: Any acquisition which exceeds the following thresholds:

• 3%, 5%, 10%, 15%, 20%, 25% and 50% of shares.

Other sectors: Acquisition of

• 10% of the shares, with a value of over €1m; and
• 15%, 20% and 50% of the shares.

Filing/authorisation requirement

Approval is mandatory.

Timing

45 business days, provided the Italian government does not request clarifications.

30 business days for 5G networks, but this may be extended by 40 business days depending on the complexity of the case.

Assessment criteria

The Italian government will assess whether the resulting situation:

• affects security of supply, or management and maintenance of networks and plants; and
• entails a threat of serious damage to the national interest.

It will also take into account the position of the EU (if any) and the existence of sector regulations.

Sanctions

For implementing a transaction prior to clearance, fines may be imposed amounting to:

• twice the value of the investment and at least 1% of last year’s turnover;
• in relation to 5G networks, between 25% and 150% of the transaction’s value.

The transaction will also be void.

Proposed reforms

The Italian government enacted certain measures following the outbreak of Covid-19. These temporary measures are expected to lapse at the end of 2022.

Currently, Luxembourg does not have a foreign investment regime. However, investment in certain sectors requires specific procedures to be followed by both domestic and foreign investors.

Sectors affected

A licence is required to operate certain businesses in the financial sector and certain other businesses may require authorisations. These requirements apply equally to foreign and domestic investors.

Filing/authorisation requirement

No specific filing requirements for foreign investments but note exceptions for certain activities apply to both domestic and foreign investors.

Proposed reforms

The Luxembourg Parliament has proposed two new bills of law to implement a foreign direct investment regime. It is not yet clear when the two bills will be adopted but we expect this to take place in the first half of 2022.

Foreign Investment Bill of Law (7578)

The Foreign Investment Bill of Law provides that a foreign investment which is defined as the acquisition of significant influence (defined as holding at least 10% of the voting rights) over a Luxembourg company is notified to the Minister of Economy. The proposed review period is three months, after which a foreign investor would be able to proceed with the investment if it has not been notified of a decision.

Critical Foreign Investment Bill of Law (7885)

The Critical Foreign Investment Bill of Law provides that every investment by a foreign investor which allows it to effectively participate in the control of a Luxembourg entity which is exercising a critical activity in Luxembourg must be notified to the Minister of the Economy. Investments which do not confer control in such an entity (e.g. financial placement investments below 25% of the share capital) would not be subject to this notification requirement. Critical activities include certain activities in the energy (in particular, production and distribution of electricity), transport, public health, data processing and storing, aeronautical, defence, media and finance sectors.

The Ministry of the Economy (together with the Ministry of Finance) will have two months to decide whether to launch a screening procedure which will involve an in-depth inquiry to determine if the investment is likely to affect security or public order.

Once a screening procedure has been launched, the investment may not proceed without authorisation from the Ministry of the Economy. However, the parties may continue to take preparatory steps in anticipation of completion (at their own risk)

Foreign investment in Spain is subject to certain authorisation and/or declaration requirements. Traditionally, foreign investments within the defence sector have been subject to prior authorisation by the Council of Ministers which also has the power to require prior authorisation for foreign investment on an ad hoc basis. In March 2020, the Spanish Government enacted a new regime applicable to non-EU/EFTA investors in the context of the ongoing Covid-19 crisis and extended it in November 2020 to EU/EFTA investors in certain cases (“New FDI Control”). As the former regime was not repealed, there are currently two parallel regimes in force in Spain.

Sectors affected

Ex-post declarations: all sectors.

Prior authorisation: defence activities and under the New FDI Control:

• certain strategic sectors: (i) critical (physical and virtual) infrastructure, (ii) critical technologies and dual-use items, (iii) supply of fundamental inputs, (iv) sectors with access to sensitive information and the media; and
• any sector for “risky investors” (defined as: investors directly/indirectly controlled by a third party government investors who have made investments in sectors affecting security, public order or public health in another EU Member State or if there is a serious risk that the investor carried out criminal or illegal activities affecting those areas).

Trigger events

Ex-post declarations are required for the following investments by foreign investors:

• Acquisition of a stake in a Spanish company;
• Incorporating a branch in Spain or increasing its capital;
• Subscribing or acquiring loan securities issued by Spanish residents;
• Acquiring participation in investment funds registered with the relevant Spanish registry;
• Acquiring property/property assets in Spain at a price exceeding €3m (unless the investor is from a tax haven);
• Incorporating/participating in a joint venture where the investment exceeds €3m (unless the investor is from a tax haven).

Investment in a listed company carrying out activities related to national defence will require authorisation where the investment represents more than 5% of the target’s share capital or allows the investor to participate in the target’s managing body.

Prior authorisation is required for acquisitions of stakes of 10% or more of a target’s share capital, or control of a target, active in the “strategic sectors” by non-EU/EFTA investors (non EU/EFTA residents, or EU/EFTA residents whose ultimate beneficial owner ("UBO") corresponds to residents of non-EU/EFTA countries), provided that (i) the target is active in a “strategic” sector; or (ii) the investor is deemed “risky”.

Until 31 December 2022, EU/EFTA investors (EU/EFTA residents excluding Spain, or Spanish residents whose UBO corresponds to residents of other EU/EFTA countries) have to notify such investments in companies listed in Spain or unlisted companies if the investment exceeds €500m, provided that the target is active in “strategic” sectors.

Transactions of less than €1m in value are exempt from the requirement for prior authorisation.

Filing/authorisation requirement

Both declarations and prior authorisations (if required) are mandatory.

An investor may carry out an investment immediately after submitting a declaration, but must wait for prior authorisation where that is required.

Timing

6 month review period.

Under the New FDI Control, a fast-track procedure with a review period of 30 days is available for transactions whose value is between €1m and €5m.

Assessment criteria

Assessment will generally be based on the Spanish public interest. Under the New FDI Control, transactions will be assessed to determine whether they may jeopardise security, public order and public health in Spain.

Sanctions

The transaction may be rendered void.

Failure to submit the relevant declaration may also lead to fines.

• If the investment exceeds €6m, a fine of between €6,000 and 50% of the amount of the investment and a public or private warning.
• If the investment does not exceed €6m, a fine of between €3,000 and 25% of the amount of the investment and a private warning.

Failure to obtain authorisation prior to investment (where required) may result in a fine of between €30,000 and the total amount of the investment and a public or private warning.

Proposed reforms

A new draft Royal Decree has been proposed and we expect it to be approved in Q1 2022. The draft Royal Decree:

• merges the two existing regimes;
• clarifies some aspects, such as the beneficial ownership of the foreign investor, the procedure and the “strategic” sectors;
• introduces certain exceptions to the requirement for prior authorisation (notably in the energy sector); and
• reduces the review period to 3 months.

In November 2020, the UK government announced a new national security and investment regime for the UK. The regime entered into force on 4 January 2022 and applies to domestic and foreign investors.

Sectors affected

The government has identified 17 sectors as potentially raising particular national security concerns (including civil nuclear, communications, data infrastructure, defence, energy, transport, military and dual-use, critical suppliers to the government and various technology sectors such as artificial intelligence, cryptographic authentication, advanced robotics, computing hardware, quantum technology and advanced materials). Specific activities in these sectors are subject to mandatory prior approval.

The Secretary of State also has the power to call in transactions in any sector.

Trigger events

Acquisition of control over a qualifying entity which falls within the specified activities within the 17 sectors are subject to mandatory notification.

Control is generally defined as acquiring more than 25% of the shares/voting rights. Acquisitions which result in an investor holding more than 50% or 75% will be treated as new trigger events.

A qualifying entity:

• is any entity that is not an individual and covers all forms of companies and partnerships;
• does not need to be a UK entity;
• does not need to have a minimum level of activity in the UK – it is sufficient if the entity carries on activities in the UK or supplies good/services to persons in the UK.

However, in order to be subject to mandatory notification, the qualifying entity must generally carry on the relevant specified activities in the UK.

Filing/authorisation requirement

Transactions which fall within the mandatory notification regime must be notified and approved before completion.

Parties may choose to make a voluntary filing for transactions which do not fall within the mandatory regime. The Secretary of State has the power to call in a transaction for up to five years after the event, but this is reduced to six months from when the Secretary of State is made aware of the trigger event.

Timing

Initial 30 working day review period.

If the transaction is called in for a more detailed review, the Secretary of State has an additional period of 30 working days following the call-in notice, extendable by a further 45 working days. Further extensions may be agreed.

Assessment criteria

When deciding whether to issue a call-in notice, the Secretary of State expects to primarily consider whether:

• the target could be used in a way that poses a risk to national security. This is most likely for targets falling within the mandatory regime or active in closely linked areas.
• the acquirer has characteristics (including its activities, ultimate controller, any links to criminal or illicit activities related to national security) that suggest there is or may be a national security concern.
• the amount of control being acquired poses a risk to national security. A higher level of control may increase the national security risk.

If a transaction is called in, the Secretary of State will then determine whether it gives rise to a national security risk and if so, what remedies should be imposed.

Sanctions

If a transaction which falls within the mandatory regime is closed prior to approval, it will be void. Other sanctions include:

• penalties of up to (the greater of) 5% of worldwide turnover or £10m; and
• potential imprisonment of relevant individuals for up to five years.