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New Slovak Act on Screening of Foreign Direct Investments

New Slovak Act on Screening of Foreign Direct Investments

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The planned legislation will introduce a screening of foreign direct investments to Slovakia from third countries. The aim of the screening mechanism should be the protection of Slovakia’s security and public order, whereas security and public order in the EU shall also be considered.

The competent Slovak public authority, the Ministry of Economy (MoE), states that despite the generally positive impact of foreign investments, it is necessary to pay closer attention to them and identify their capability to negatively impact security or public order.

The basis for the new legislation stems from EU law, namely from EU Regulation 2019/452, which entered into force on October 11, 2020 (FDI Regulation). However, the FDI Regulation as such (deliberately) does not set out, in every detail, what the form and content of the EU member state FDI screening mechanisms should be. The FDI Regulation, among other things, merely sets out certain key elements to be reflected in any national FDI screening mechanism.

The introduction of the FDI screening mechanism as such remains at the discretion of each EU member state. It follows from the European Commission's First Annual Report on the screening of foreign direct investments into the Union, dated November 23, 2021, that (as of August 1, 2021) Croatia, Bulgaria, and Cyprus were the only three EU member states that do not have an FDI screening mechanism in place and, at the same time, do not contemplate setting up one. However, according to the report, it remains the European Commission's strong expectation that all EU member states will put national FDI screening mechanisms in place.

When preparing the Slovak legislation, the MoE was inspired by the legislation and practical experiences from selected EU member states but also by the legislation and experiences of non-EU countries (e.g., the US, where the national security implications of foreign investments into US companies or operations are reviewed by the Committee on Foreign Investment in the United States).

Initially, the MoE anticipated that the new legislation will come into effect on January 1, 2022. The legislative process has been delayed, however. The MoE submitted the draft legislation to the intradepartmental consultation process on June 2, 2021 (the process lasted until June 22, 2021). The draft has drawn substantial attention and 311 comments were submitted overall. Out of these, 116 are classified as essential.

The MoE is now trying to reflect the submitted comments and is preparing a revised draft of the new legislation. Therefore, the effectiveness of the new legislation will be shifted. Initially, our understanding was that the MoE envisaged July 1, 2022, to be the effective date, however, even this date might not be feasible.

Despite the expectation that the draft legislation submitted by the MoE in summer 2021 will be substantially changed, once the comments are reflected, it nevertheless provides a good indication of what the nature of the Slovak FDI screening mechanism will be, once adopted. The draft introduces a wide definition of foreign investments from third countries that fall under the screening regime. The MoE will be the screening authority, however, it will consult other Slovak public authorities as well as other EU Member States and the European Commission on the investments. In addition to direct investments, indirect investments should also be affected. In the case of a share deal, as the most common form of acquisition of an entity in the Slovak M&A environment, the threshold is set at 10% for new acquisitions. The draft legislation stipulates that so-called critical foreign investments (e.g., investments in military technology and materiel, dual-use items, digital services, etc.) cannot be effected without the MoE’s permit or conditional permit. The MoE should also have the competence to ban a foreign investment, screen past foreign investments, and order their divestment.

It will be interesting to see how the MoE deals with some of the submitted comments and what the final wording of the legislation will be. Some of the comments, for example, aim to increase the above-mentioned threshold to 25% or 33%. In any case, FDI screening will very soon become a new element to be considered within M&A transactions in Slovakia. Currently and until then, a sector-specific and very limited investment screening under the Slovak Critical Infrastructure Act applies.

By Michaela Stessl, Country Managing Partner, and Andrej Liska, Associate, DLA Piper

This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.