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The FDI Clearance Check – A Mandatory Check Box for All Lithuania-Related M&A Transactions?

The FDI Clearance Check – A Mandatory Check Box for All Lithuania-Related M&A Transactions?

Issue 9.12
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Lithuania had the rules regarding FDI control in place before Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the Union of March 19, 2019, was adopted. However, the regulation has contributed to a speedier increase in the awareness and development of FDI screening.

While at least two-thirds of all EU member states already have FDI screening mechanisms in place, the rules regarding FDI screening differ from country to country. A country-by-country approach must therefore be taken to identify whether FDI screening is mandatory in the relevant jurisdiction in each cross-border M&A transaction. As practice has shown that the Lithuanian FDI screening requirement may come up as a surprise in certain cases, below we share some key takeaways every M&A professional should bear in mind when structuring a transaction related – in one way or another – to Lithuania.

What M&A Transactions Can Trigger FDI Screening?

Under the Law on the Protection of Objects Critical for National Security of the Republic of Lithuania (the Law), M&A transactions that trigger FDI screening are: (1) the acquisition of 1/4 or more voting rights or shares in a Category I entity, a Category II entity, or an entity operating in either an economic sector of strategic importance or in the territory of the protection zone; (2) acquisition of 1/3 or more voting rights in a Category III entity; and (3) acquisition of rights to assets or infrastructure which is important for national security.

The Law provides a list of companies that are considered Category I, Category II, and Category III entities. A list of company names is not available, but it is not hard to identify the exact entity behind a definition such as “entity managing the international airports of Vilnius, Kaunas, and Palanga.” Of course, there are a few more challenging exceptions. The same is the case with the list of assets and infrastructure. It must be noted that FDI screening is also triggered by the indirect acquisition of shares, voting, or other rights, as described above. This means that the acquisition of the target established in, e.g., France can trigger FDI screening in Lithuania if such a target has a subsidiary company established in Lithuania which is operating in one of the sectors of strategic importance.

What Are the Sectors of Strategic Importance and Territories of the Protection Zone?

The Law lists five sectors as sectors of strategic importance: (1) energy; (2) transport; (3) IT, telecommunications, and other high-tech; (4) finance and credit; and (5) military equipment. The breakdown of activities falling under each sector is established under government resolution. As an example, if the economic activity is payment services, in most cases, there are no further questions about whether FDI screening is applicable. However, if we take as an example production of military equipment, there is already uncertainty about what military equipment includes. For instance, whether the production of a component that in itself is not military but can be used in military equipment falls within or outside the definition of such activity. In practice, this is decided on a case-by-case basis. The question of the entity under consideration operating in the protection zone is fact-based.

What Other Transactions Can Trigger FDI Screening?

In addition to M&A transactions that have a clear connection to Lithuania, there are some specific rules which make the FDI clearance procedure applicable when certain transactions of Category I, Category II, and Category III entities are concluded. This means that Lithuanian FDI screening may be triggered even if the target entity is not operating in Lithuania but, for example, has a high-value contract with a Category I entity. Even though the failure of filing for clearance under such circumstances would most likely not result in the invalidity of the whole M&A transaction, this may still lead to the invalidity of a contract of significant value or importance to the target.

Check the Box

FDI screening is a rapidly developing requirement. Even though some similarities between different jurisdictions can be found, it is hardly possible to predict whether FDI clearance will be required, without having local experts involved. Therefore, it must be concluded that the FDI clearance check has already become – or is, at least, becoming – a mandatory box to be checked in most M&A transactions related to Lithuania. 

By Rasa Zasciurinskaite, Partner and Head of Competition, and Manvydas Borusas, Senior Associate, Cobalt

This article was originally published in Issue 9.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here

 

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