The global pandemic has impacted all markets, with subsequent ramifications for M&A. Investors are now seeking greater protection against general lock-downs and supply-chain disruptions, while governments aim to protect critical supplies and services by imposing new regulations on foreign investment in crucial or strategic industries.
If you are considering investment opportunities in Latvia, take a look at this overview to get insight into the regulations on foreign investment in strategic industries.
The following overview is an extract from the Foreign Direct Investment in Central Europe publication, which gives insight into the regulations on foreign investment in strategic industries in the region.
Have FDI screening rules been implemented (or will they be implemented) in the country?
Yes. In Latvia a mechanism for the screening of direct investments, including foreign direct investments has already been introduced. In particular, the amendment of 23 March 2017 to the National Security Law, which entered into force on 29 March 2017, includes Chapter VI, which contains restrictions on both transactions with critical infrastructure and the acquisition of influence in a commercial company important for national security, providing that a Cabinet of Ministers permit is required. So, the Questionnaire will be filled with regulations from previously stated National Security Law.
Concerning the REGULATION (EU) 2019/452 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 19 March 2019. The Regulation does not oblige Member States to introduce an evaluation mechanism, but rather provides for the introduction of a cooperation mechanism in each Member State and the Commission. In order to make it possible to introduce the requirements of the Regulation (establishment of a contact point and information exchange), the Ministry of Economics has prepared the draft law, which aims to provide the Cabinet of Ministers with the powers to determine the authority which will implement the functions of the contact point, ensuring the cooperation mechanism referred to in the Regulation between Member States and the Commission. The draft law has been adopted and included as the amendments to the National Security Law, which came into force on 1 January 2021.
Definition of FDI
Definition of foreign investor
Investments made by a foreign investor in the form of a business in the EU to establish or maintain stable and direct links between a foreign investor and an entrepreneur or enterprise, including investments that provide participation in the management or control of such an enterprise.
Do the following scenarios trigger the screening?
1. Acquisition of 10% or more of voting rights in the company: Yes
2. Establishment of a new branch: Yes
3. The production of new products: Yes
4. Establishment of a new company in which foreign investor will have more than 10% voting rights: No
5. The transfer of use or operational rights in infrastructure or assets that are indispensable for the operation of strategic companies: Yes
6. Other screening triggers:
In relation to capital companies:
- obtaining of decisive influence;
- transition of an undertaking;
- preservation of the status of a stockholder or shareholder or preservation of the right to exercise indirect holding (right to vote), if the beneficial owner changes.
In relation to partnership:
- joining of a new member;
- preservation of the status of a member if the beneficial owner changes
Deadline for notification of the relevant screening body
A permit of the Cabinet of Ministers shall be necessary before a person or several persons who act in a co-ordinated manner obtain qualifying holding or decisive influence in a commercial company of significance to national security or become a member of such commercial company, or also obtain influence in a capital company registered in the Republic of Latvia which is a member of a commercial company of significance to national security (stated in column "Screening procedure").
As well as, a company shall, within five working days from the day when it conforms to any of the conditions referred to in the section “Screening
procedure” of this Questionnaire:
submit a notification to the Commercial Register Office regarding its conformity with the conditions for a commercial company of significance to national security;
make an entry in the register of stockholders or shareholders regarding the status of the capital company;
inform the shareholders or stockholders of the relevant capital company and persons who exercise indirect holding (right to vote), or members of the partnership regarding its conformity with the conditions for a commercial company of significance to national security;
inform the institution stipulated by the Cabinet of Ministers regarding its shareholders, stockholders and persons who exercise indirect holding (right to vote), or regarding members, as well as beneficial owners - natural persons who directly or indirectly have qualifying holding in this commercial.
The Commercial Register Office shall publish the information regarding conformity of the commercial company with the conditions for a commercial company of significance to national security on the website of the Commercial Register Office.
The restrictions specified in the National Security Law are applicable to a commercial company registered in the Republic of Latvia which conforms to at least one of the following conditions:
is an electronic communications merchant with a significant market power which has been imposed liabilities for tariff regulation and cost accounting in accordance with the procedures provided for in the Electronic Communications Law;
is an audible electronic mass medium the coverage zone of the programme of which, using technical means for terrestrial broadcasting, according to the broadcasting permit issued by the National Electronic Mass Media Council is Latvia or at least 60 per cent of its territory, or is an audio-visual electronic mass medium the coverage zone of the programme of which, using technical means for terrestrial broadcasting, according to the broadcasting permit issued by the National Electronic Mass Media Council is Latvia or at least 95 per cent of its territory;
has received a licence in the Republic of Latvia for transmission, distribution, storage of natural gas or has, in its ownership, a liquefied natural gas facility connected to a transmission system;
is an electricity or thermal energy producer the installed actual capacity of which exceeds 50 megawatts;
is a thermal energy transmission and distribution operator which has heat supply networks in its ownership in length of at least 100 kilometres;
has received a licence for electricity transmission in the Republic of Latvia.
A decision of the Cabinet is taken within one month from the day of receiving an application concerning any triggering scenarios. Upon taking a decision, the Cabinet of Ministers shall evaluate the restriction on the rights of the person, its commensurability with the national security interests, and the opinion of a State security institution, as well as the conformity with the principle of legitimate expectations.
Are fines or other penalties prescribed due to failure to notify the FDI?
If a person or several persons who act in a co-ordinated manner, obtain qualifying holding or decisive influence in a commercial company of significance to national security or become a member of such commercial company without receiving the permit from the Cabinet of Ministers, then a transaction concluded or action carried out in Latvia is not valid from the moment of concluding or carrying out.
By Ivita Samlaja, Managing Associate, ZAB Deloitte Legal