In the shadow of Brexit negotiations, the European Parliament agreed on 14 February 2019 to set up an EU level tool to screen FDIs on grounds of security or public order to protect sectors. The new "Regulation (EU) 2019/452 establishing a framework for screening of foreign direct investments into the European Union" (EU-FDI Regulation) shall apply from 11 October 2020 and be binding in its entirety as well as directly applicable in all member states.
In view of the increasing number of the FDI into the EU in the form of acquisitions in high-tech sectors such as aircraft manufacturing, specialized machinery and pharmaceuticals, skepticism towards such FDIs seems to be growing. With more than 35% of total EU assets owned by foreign-owned companies, the EU has one of the world's most open investment regimes according to the FDI Regulatory Restrictiveness Index of the OECD.
In 2015 and 2016, for example, the EU received the most direct investments in the world. In 2017, Chinese investors invested $57.6 billion in European companies. Just to give a few examples from the recent past: in August 2016, Greece sold 51% of the shares in the Port of Piraeus (OLP), the country's largest port, to the Chinese state-owned logistics group China COSCO SHIPPING Corporation Limited. In Germany, investments were made through Chinese acquisitions in connection with KUKA Aktiengesellschaft, AIXTRON SE und OSRAM GmbH. In Austria, the Chinese Wanfeng Auto Holding Group acquired the leading Austrian aircraft manufacturer Diamond Aircraft.
Following a joint letter from the Economy Ministers of Germany, France and Italy to the European Commission in February 2017, the European Commission presented a proposal for a "Regulation establishing a framework for screening of foreign direct investments into the European Union" on 13 September 2017. The first EU-wide investment screening framework shall establish a close cooperation between the member states of the EU and the European Commission to screen FDIs on grounds of security or public order to protect critical sectors, technologies and infrastructure such as energy, transport, communications, data, space and finance as well as semiconductors, robotics and artificial intelligence.
According to an initial analysis, the new EU-FDI Regulation would have the following consequences for foreign investments in Austria:
1. Investments covered by the Austrian Foreign Trade Act (Außenwirtschaftsgesetz 2011)
Subject matter and scope of the new EU-FDI Regulation is to establish a framework for the screening by member states of FDIs into the EU on grounds of security or public order and for a mechanism of cooperation between member states, and between member states and the European Commission, with regard to FDIs likely to affect security or public order. In addition, it includes the possibility for the European Commission to issue opinions on such investments.
Each member state has the right to decide whether or not to screen a particular FDI within the new framework. However, in case the Federal Ministry of Republic of Austria for Digital and Economic Affairs decides to initiate an examination procedure according to the Austrian Foreign Trade Act, it shall notify the European Commission and other member states of any FDI that is undergoing screening by providing certain information (e.g., ownership structure of foreign investor, approximate value of FDI, products, services and business operations of the foreign investor, funding and source of investment) "as soon as possible".
A transaction within the meaning of Section 25a Para 1 in conjunction with Section 25a Para 2 Austrian Foreign Trade Act requires approval by the Federal Ministry of Republic of Austria for Digital and Economic Affairs – provided it does not conflict with an obligation to obtain approval under EU and international law – if:
i. the company concerned with its seat in Austria is subject to the accounting provisions of the third book of the Austrian Commercial Code (e.g., limited liability companies or stock companies); and
ii. operates in an area relating to the public security and order within the meaning of Art 52 and 65 Para 1 TFEU; and
iii. the acquisition is made by a natural person who is not a citizen of the EU, a citizen of the EEA or Switzerland, or a legal person or company having its seat in a third country other than the EEA and Switzerland.
In summary, there is a national approval requirement for the acquisition of a (i) company having its seat in Austria and operating in an area relating to the public security and order, (ii) participation in such a company (at least 25% of the voting rights) or (iii) controlling influence over such a company.
Pursuant to Section 25a Para 2 Austrian Foreign Trade Act, the respective transaction (i.e., any transaction or transaction leading to an acquisition within the meaning of Section 25a Para 1 Austrian Foreign Trade Act) may not be carried out prior to the granting of the required approval. Until the required approval has been granted, the respective legal transaction is pending and ineffective (schwebend unwirksam). The unauthorized execution of an acquisition is also punishable by law.
2. Potential delay in the approval procedure
The member states and the European Commission shall notify the member state undertaking the screening of their intention to provide comments or an opinion no later than 15 calendar days following the receipt of the information mentioned above (Art 6 Para 6 EU-FDI Regulation).
The comments and the opinion shall be addressed to the member state undertaking the screening and shall be sent to it within a "reasonable period of time", and in any case no later than 35 calendar days following the receipt of the respective information. There is the possibility to request additional information – in such a case the comments or the opinion shall be issued no later than 20 calendar days following the receipt of the additional information. In addition, the European Commission may issue an opinion following the comments from other member states where possible within the deadlines referred to in this paragraph, and in any case no later than five calendar days after those deadlines have expired (Art 6 Para 7 EU-FDI Regulation).
However, in the exceptional case where the member state undertaking the screening considers that its security or public order requires immediate action, it shall notify the other member states and the European Commission of its intention to issue a screening decision before the timeframes referred to above and duly justify the need for immediate action (Art 6 Para 8 EU-FDI Regulation).
3. Examination of the factual control of a foreign company
According to the recital of the EU-FDI Regulation, the member states having a screening mechanism in place (such as Austria) should take the necessary measures, in compliance with the Union law, to prevent circumvention of their screening mechanisms and screening decisions. Such measures shall cover investments from the Union made through "artificial arrangements" that do not reflect the economic realities and circumvent the screening mechanisms and screening decisions, where the investor is ultimately owned or controlled by a natural person or an undertaking of a third country.
According to the Austrian Foreign Trade Act, the acquisition by a company having its seat in a third country, with the exception of the EEA and Switzerland, is subject to approval (provided the requirements are fulfilled as stated above in item 1.). To date, the acquisition of an Austrian company, of a certain participation in an Austrian company or a "controlling influence" over an Austrian company through a subsidiary with its registered seat in the EU, the EEA or Switzerland was not subject to approval.
It is questionable whether this procedure will continue to be possible in Austria because this would constitute a "circumvention of the screening mechanism" which the member states shall prevent according to the EU-FDI Regulation. In such a case, the current Austrian Foreign Trade Act would have to be adapted so to that the competent minister would consider the economic reality, the ultimate owner or the control of the respective investor and not merely the registered seat of the buying company when deciding on approval procedures.
4. Consideration of comments / opinion
A member state where a foreign direct investment is planned or has been completed shall give "due consideration to the comments" of the other member states and to the opinion of the European Commission. The member state must take the opinions of the European Commission into account when applying the Union law and when interpreting national law – thus within the framework of the interpretation in conformity with the Union law.
In case a foreign direct investment is likely to affect the "projects or programmes of Union interest" on grounds of security or public order and the European Commission issues an opinion addressed to the member state where the foreign direct investment is planned or has been completed, the respective member state shall "take utmost account" of the European Commission's opinion and provide an explanation to the European Commission if its opinion is not followed (Art 8 EU-FDI Regulation).
It should be noted that the new EU-wide investment screening framework may lead to a delay of at least two months in the local approval procedure under the Austrian Foreign Trade Act. In any case, this potential delay must be taken into account in advance when structuring acquisitions as any application for approval under the Austrian Foreign Trade Act must be submitted prior to concluding the respective agreement (Signing) – the respective legal transaction is pending and ineffective (schwebend unwirksam) until the required approval has been granted by the competent ministry.
The member states' comments and/or the European Commission's opinion on foreign direct investments will in practice not be insignificant for foreign investors and will to some extent also influence the local authorization procedure because the authorities may have to justify if they do not take into account the European Commission's opinion.
Finally, it is to be expected that numerous questions will arise in connection with the establishment of the new FDI screening framework, in particular because terms such as "critical infrastructure" or "sensitive facilities" are not precisely defined in the new EU-FDI Regulation. A possible concretization of these terms by the European Court of Justice (ECJ) could take years, which is why increased legal uncertainty within the EU is to be expected in case of transactions with direct or indirect investments from third countries.
By Christoph Mager, Partner and Tugce Yalcın, Associate, DLA Piper