Implementation of the Regulation (EU) No 2019/452 from March 19, 2019 establishing a framework for the review of foreign direct investment to the Union in the Czech Republic
The New Foreign Investment Review Act shall introduce a mechanism for screening foreign investments in key sectors in the Czech Republic
In April 2019, Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019, which will enter into force on 11 October 2020, established a framework for the screening of foreign direct investment into the European Union. The Czech legislation responded to the adopted regulation, with a bill prepared by the Ministry of Industry and Trade, which shall establish a mechanism for the control of some foreign investments in the Czech Republic, and shall introduce the right of the Czech state to restrict or forbid some risky investments. The new draft of the Czech Act should be effective starting in January 2020. We assumed that for specific M&A transactions in the Czech Republic, in addition to the approval of the Czech Antimonopoly Office, the approval of the Czech Ministry of Industry and Trade will be required as a condition for concluding the transaction.
Although the Regulation does not directly require Member States to adopt or amend national law regulating foreign investment, such national law already exists in 14 EU Member States, and the Ministry of Industry and Trade has been inspired in many respects by the already existing laws.
In Germany, this area is regulated by the „German Foreign Trade and Payments Ordinance“, which was amended at the end of 2018 in the light of new developments in EU law. It extends the competence of the German Ministry of Economy and Energy to prohibit certain direct or indirect acquisitions of shares in German companies by foreign investors if such an acquisition constitutes a threat to the security of the Federal Republic of Germany. It further reduces the limit of what is already considered to be an effective influence for foreign entities, from the original 25% to the new 10% threshold, which is also the limit used by the new Czech draft bill on foreign investment screening.
In Austria, only foreign investment in the field of public security and public order is limited by law, the „Austrian Foreign Exchange Act“ of 2004, which binds Austrian entities to notify certain types of foreign investment to the respective Austrian authorities.
In Poland, the „Polish Act on Control of Certain Investments“ was adopted in 2015, which sets a limit on the influence of a foreign entity in a Polish entity at 20% of the voting rights, while entities with a higher foreign participation are already considered foreign entities and subject to control according to the applicable Act. The Polish law protects investments in strategic sectors, with the power to decide on the authorization of an investment or acquisition resting with the Prime Minister, or alternatively with another competent minister.
Other Member States that already have national arrangements for the control and approval of foreign investment include France, Italy, Lithuania, Hungary, Denmark, Spain, and the Netherlands.
According to the new bill, the Czech regulation of foreign investment control in key sectors should cover a relatively wide range of transactions, which will be assessed on the basis of several criteria. In particular, the identity of the foreign investor, the essence of foreign investment and the focus of foreign investment will be crucial.
Who is a foreign investor for the purpose of Czech Foreign Investment Screening?
The definition of a foreign investor in the draft bill is defined to include both third-country investors and EU investors controlled by a legal entity or by means of other legal arrangement from a third country. This can be either a legal or natural person with its registered office (residence) outside the EU, but also any “legal arrangement without a legal personality” established under the law of a foreign state. The draft bill also applies to companies from EU countries (i.e. Czech companies, for example), whose activities are actually performed outside the EU.
The explanatory memorandum shows that the main intention is to capture all risky or potentially risky investments in the Czech Republic and to limit the possibility of circumventing the purpose of the proposed law. Furthermore, for the purpose of assessing the riskiness of an investment, it also defines what is meant by an effective influence on the management of a business entity, such that it is possible to dispose of at least 10% of voting rights or to exercise corresponding influence in the business entity.
What is foreign investment for the purpose of Foreign Investment Screening in Czech Republic?
A foreign investment is an investment of any nature carried out by a foreign investor that serves to establish or maintain a long-term and direct relationship between the foreign investor and the target company (business entity). At the same time, the investment is aimed to perform economic activity in the Czech Republic and enables a foreign investor to exercise effective influence on the management of a business entity or to gain access to information that is important in terms of security and internal order of the Czech Republic.
What foreign investments will be subject to control in Czech Republic?
The last and fundamental criteria are also the focus of foreign investment in the Czech Republic, i.e. whether the investment interferes with the interests protected by the new bill. Foreign investments to Czech business entities, which are subject of the screening are investments which do the following:
- deal with military material,
- operate a critical infrastructure element,
- manage information systems for critical information infrastructure or basic services (e.g. energy, transport, banking, financial market infrastructure, health, water, digital infrastructure, chemical industry, pharmaceutical industry),
- develops or manufactures dual-use goods (i.e. such goods, software and technology that are used primarily for civilian purposes but which are also usable for military purposes within the meaning of Czech Act No. 594/2004 Coll. implementing the European Community regime for the control of exports, transfer, brokering and transit of dual - use items).
The main target of controlled investments will primarily be the administrators, resp. information system operators of critical information infrastructure or basic services, and as defined in Czech Act No. 181/2014 Coll. on cyber security this category may include, for example, larger gas vendors, hospital operators, or water supply operators.
A specific “consultation” process will be concerned with investments in licensees for nationwide broadcasting or a periodical publisher with a minimum average print run of 100,000 copies / day in the last calendar year.
Competence of the Czech Ministry of Industry and Trade and retroactive cancellation of foreign investment
The competent body responsible for the foreign investment control should be the Czech Ministry of Industry and Trade (“the Ministry”), which is designated by the draft bill as a supervisory and control body with the authority to approve foreign investment. Authorization will be obligatory for foreign investments in Czech Republic that meet all the above criteria (i.e. foreign investor(s) and foreign investment(s) with a focus in one or more of the above categories). Foreign investors will also have the opportunity to voluntarily apply for approval of an investment that may or may not meet the set criteria; however, in all cases, the Ministry will also have the power to act ex officio, using information from other public authorities, including the secret services.
In cases where the Ministry will have doubts about a specific foreign investment, the Government of the Czech Republic will decide, and will be entitled to conditionally approve the foreign investment, prohibit it or even cancel it retroactively. Under the new bill, it will be possible to cancel any investment (for example by compelling a sale) up to five years retroactively, starting from 2020. A decision to not allow the investment can be contested by an administrative action.
Since the Ministry should properly review each specific foreign investment that is subject to review under the draft bill and only decide based on the outcome of the review, the draft bill sets deadlines for decisions that are relatively long in practice. In the case of voluntary notification, the Ministry will have 40 days to respond, and in cases where proceedings will be initiated ex officio, 90 to 120 days. Therefore, the foreign investors will have to decide in the future whether, in unclear cases, they would prefer to announce the foreign investment in advance and have it screened and approved, or risk significant subsequent complications if the Ministry obtains information on the realized foreign investment, which could be considered risky for the Czech Republic. A court action against the negative decision shall be possible.
If the Ministry will not receive information in the foreign investment review procedure, that would imply that the foreign investment may pose a threat to the security of the Czech Republic or its internal order, and if the Ministry has no reason to believe so, even after considering the opinion of other EU member states and the European Commission in accordance with Regulation (EU) 2019/452, the Ministry shall authorize the foreign investment.
Ad hoc expansion of controlled investment
The draft bill of the new Czech Act on Foreign Investment Examination allows not only the verification and authorization of investments according to set criteria, but also extends the Ministry's overall competence towards foreign investments that are capable of endangering the security of the Czech Republic or its internal order.
The bill defines the capability to jeopardize security and internal order relatively freely and generally, providing for an exhaustive list of areas whose protection is essential for the Czech Republic, which determine whether a foreign investment is likely to jeopardize the security of the Czech Republic or its internal order. The following are areas that can be considered e.g. infrastructure, including energy, transport, water, health, communication, critical technology and dual-use goods, the possibility of significantly influencing public opinion through the media, access to information important for the protection of the security of the Czech Republic and its internal order and others. In the list, the draft bill uses verbal phrases such as "linked to", "could endanger" or "are important", and it can therefore be concluded that the Ministry will be authorized to initiate an ex-officio review of a very wide range of foreign investments. The control and necessary authorization of an investment may, therefore, also concern investments in the media, infrastructure or in land and/or real estate, which may be linked to important interests of the Czech Republic.
Control of foreign investments in key sectors in the Czech Republic
The bill entered into the comment procedure on August 14 2019, no more substantial changes can be expected, and the bill will likely go through a legislative process in a phrasing that will correspond to what has been stated above.
Due to the very broad definition of foreign investor and foreign investment, it can be assumed that in future any investment from a non-EU-based entity or an entity controlled by such a foreign-owned entity will be subject to, at the very least, review by the Ministry.
As the draft of the new Czech Foreign Investment Review Act is a public law regulation, where the authorized entity is mainly the Ministry in the position of an administrative authority, it will be possible to fully assess the real impacts of the new legislation only on the basis of its implementation. In particular, it will depend on how the Ministry will implement strict procedures and how it will be able, in accordance with the new law, to assess and possibly permit all risky foreign investments. Given the broad definition used by the new bill, only time will show whether it is possible to fulfill the purpose and objective with which it was primarily adopted, thus protecting the Czech economy in particular from risky investments from third countries.
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JUDr. Mojmír Ježek, Ph.D.
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