The Act No. 497/2022 Coll. on the screening of foreign investments and on amendments and supplements to certain acts, as amended, and Slovak Government Regulation No. 61/2023 Coll. establish critical foreign investments rules (the "FDI legislation"). In cooperation with the Ministry of Economy of the Slovak Republic (the "Ministry") we have prepared an overview of some practical issues in connection with the FDI legislation.
We would like to thank the Ministry and in particular, Mrs. Martina Stratena for co-operation that was crucial in writing this article.
1. Determining whether an investment meets the characteristics of a critical foreign investment
In the event that the foreign investor cannot assess, with certainty, whether the planned investment meets the characteristics of a critical foreign investment under the FDI legislation, the Ministry provides support – informal consultations, on whether the foreign investor must submit an application for screening.
The Ministry provides consultation mainly by e-mail. An outcome of such consultation is directly influenced by the quantity and quality of information provided by the foreign investor. In absence of sufficient information, the Ministry may not be able to provide advice.
In such case, the Ministry recommends closer cooperation with the target. In specific cases where the proposed closer cooperation is not possible or does not lead to a definitive determination of whether the foreign investment is critical, the Ministry recommends filing a voluntary submission for screening with a brief explanation of the situation.
The proceeding will not only establish whether the subject of the assessment is a critical foreign investment or not but at the same time, the foreign investor will gain certainty of not violating the FDI legislation; hence, the foreign investment in question will not be subject to ex officio review in the future.
The Ministry plans to prepare guideline facilitating the process of voluntary filing of an application for foreign investment screening, hoping that these guidelines will be helpful in understanding the new legislation.
2. Termination of activities due to which the investment meets the characteristics of a critical foreign investment
Even if the foreign investor decides immediately after acquiring the target to cease all activities for which the investment meets the characteristics of a critical foreign investment, it is obliged to submit a request for review before the investment is made. This obligation is imposed regardless of the foreign investor's intention/plan to cease all such activities. The rationale is, that in some case, it may be the termination of the activity that triggers negative impact of the foreign investment on security or public order.
3. Voluntary submission
At voluntary submission, the foreign investor may also make the investment before the conclusion of the screening. However, it bears the responsibility for any subsequent additional restrictions or prohibitions of foreign investment. The Ministry advises investors to stay the investment if the investor is unsure about whether the investment is critical.
4. Consequences of failing to apply for a critical foreign investment screening
If a foreign investor concludes, on the basis of the self-assessment of the critical foreign investment, that it does not meet the prerequisites, but later it is discovered that such assessment was incorrect, the Ministry will additionally examine such foreign investment ex officio.
The Ministry stresses that in such a case, foreign investment is neither invalid nor automatically prohibited. Along with the ex officio procedure, an administrative offence procedure under the FDI legislation will be initiated, in which the foreign investor may be fined. However, when imposing a fine, the Ministry shall consider all circumstances of possible infringement, such as gravity, manner, duration, consequences, the repetition of infringement and failure to provide cooperation during an investigation. The legislation does not provide for a minimum amount of the fine.
If a foreign investor wishes to invoke liability against the target, the Ministry recommends examining whether the assessment of foreign investment as non-critical was based on incorrect information provided by the target and it can be proven.
5. Criteria for permitting a critical foreign investment under the FDI legislation
In case of a voluntary submission for review of a "non-critical" foreign investment, primary subject of assessment is whether it may have a negative impact on the security and public order of the Slovak Republic and the European Union. In assessing the risk of a negative impact, a number of factors are taken into account under the FDI legislation.
The screening of a foreign investment under the FDI legislation focuses on the precise identification of possible vulnerability and negative consequences that threaten as a result of the foreign investment, including their severity.
In relation to the target, the Ministry takes into account, inter alia, the customer-supplier chain, existence of a business relationship with the Slovak Republic, the relationship of the target with other persons with a specific status (e.g. an operator of an critical infrastructure element, an economic mobilisation entity, supplier of the state etc.), the position of the target person in the market, the uniqueness of its product/services, the availability of alternative products/services or suppliers in the EU market, the involvement of the target in projects of interest to EU, the specific position of the target itself, etc.
In a case of a foreign investor, the Ministry takes into account, inter alia, the foreign investor's previous business activities, e.g., crossover with the target's activities, the long-term strategy of its activities, the strategy under which the foreign investment is planned, investor’s ownership structure, the ultimate beneficiary owners and their strategy and influence on the foreign investor’s management.
A good example of the criterion to be considered is the financing of the foreign investment, i.e., the capacity of the foreign investor to finance the investment, the use of external funds where appropriate, their origin, etc.
In assessing a critical foreign investment, the Ministry takes holistic approach. It sees higher level of risk (without taking into account other relevant information) in case of a foreign investment where 1% of turnover consists of specified products supplied to the armed forces than in case of a foreign investment in a target where, even though, specified products account for a higher proportion of turnover these are not supplied to the state.
6. Proceedings of the Ministry ex officio
In case of ex officio proceedings, the FDI legislation, in general, does not provide for obligations of the foreign investor in relation to the functioning of the target. This does not apply when a foreign investor makes a critical foreign investment without prior permit or conditional approval. An exercise of rights acquired by the foreign investor as a result of making a foreign investment in violation of the FDI legislation is prohibited. The prohibition lasts until the issuance of a decision on the authorization (or conditional authorization) of the foreign investment.
This prohibition does not apply to rights that are necessary for
- the reversal of the foreign investment and the fulfilment of other obligations imposed in the decision on the prohibition of the foreign investment,
- ensuring the orderly operation of the target,
- securing the supply of critical inputs related to energy, raw materials or food security.
7. Consequences of a ban on foreign investment
The prohibition of a foreign investment that has already taken place may be imposed in ex officio proceedings, as well as in voluntary submission for screening of a "non-critical" foreign investment.
The Ministry stresses that the prohibition is a mean of protecting security and public order and is sought only as a last resort. It is invoked only when the use of sectoral legislation or the conditional authorization is not sufficient to protect security and public order.
Given the above, in practice, prohibition is imposed exceptionally; however, once imposed, there are no options for the foreign investor to continue with the banned investment.
Prohibition of a specific foreign investment does not automatically mean prohibition of any other business activity of a foreign investor in Slovakia or other foreign investment.
8. Capacity for voluntary screening
Based on available information and communication with relevant stakeholders, the Ministry does not expect a large number of voluntary submissions aiming to prevent incorrect assessment. In the event of increased activity (for whatever reason), the Ministry will take the necessary steps to ensure that each request is properly assessed within the statutory deadlines.
9. Open space for discussion
At the same time, the Ministry advises targets and their owners who enter negotiations regarding contemplated foreign investment to check, to the extent possible, the history of the foreign investor, as well as the foreign investor's strategy and plans.
In general, the Ministry recommends that both groups monitor Ministry’s website for up-to-date information on foreign investment screening, including the necessary forms.
By Katarina Mihalikova, Partner, and Veronika Haladova, Trainee, Majernik & Mihalikova, PONTES