Longer-Term Arrangements for the Foreign Direct Investment Screening Mechanism Are Being Developed
Author: Gašper Moškotevc
In Slovenia, the foreign direct investment screening mechanism came into force in 2020 with the entry into force of the Act Determining the Intervention Measures to Mitigate and Remedy the Consequences of the COVID-19 Epidemic (hereinafter “ZIUOOPE”). This is a procedure in which the Ministry responsible for economy decides whether a foreign direct investment in the field of certain activities is to be approved, if the conditions for its implementation are to be set, if the foreign direct investment is to be prohibited, or cancelled. The foreign direct investment screening mechanism is only temporarily regulated by the ZIUOOPE, as the relevant chapter of the Act ceases to apply as of 30 June 2023.
The Ministry of Economy, Tourism and Sport has therefore, in order to regulate the foreign direct investment screening mechanism in the long term, prepared a draft of the Act amending the Investment Promotion Act which would introduce a chapter on foreign direct investment screening in the Investment Promotion Act (hereinafter “Draft”). The Draft is currently undergoing a one-month public consultation period, during which comments and suggestions can be made until 23 March 2023.
At this stage, it is appropriate to summarize the significant differences with the current regime under the ZIUOOPE, which are foreseen in the Draft, and to point out possible problems which are not addressed in the Draft and which it would be appropriate to address through amendments before the adoption of the Act itself.
- Change of the Definition of a Foreign Investor
While the definition of a foreign investor under the ZIUOOPE covers a national of any country outside Slovenia or a legal entity established in any country outside Slovenia, the Draft envisages a national of a third country or a legal entity established in a third country as a foreign investor. In doing so, the Draft follows the definition set out in Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the Union (hereinafter “Regulation”).
Neither the Draft nor the existing Investment Promotion Act contains an explicit definition of a third country. Although a list of countries that would not be considered as third countries could be indirectly extracted from some provisions of the Draft, it would be more appropriate to add an explicit definition of a third country or an appropriate reference to it. This is particularly true in relation to European countries which are not EU Member States but with which Slovenia or the EU has specific economic links (e.g., Norway, Switzerland, the United Kingdom).
It would be very easy to circumvent the basic definition in the Draft by third-country persons carrying out transactions through direct acquirers not established in a third country, but e.g., in an EU Member State. As a safeguard, the Draft thus foresees that they would also be considered foreign investors if they hold, directly or indirectly, at least 10% of the capital or voting rights of a legal entity not established in a third country and intend to make a direct foreign investment in Slovenia.
Despite the safeguard, the Draft provides for a narrowing of the concept of a foreign investor compared to the ZIUOOPE. If a third-country national or a legal entity established in a third country with a sufficient participation does not appear in the ownership chain of the direct acquirer, it would not be a foreign investor according to the wording of the Draft, and thus not a foreign direct investment that could potentially be subject to a notification at all. Thus, if the direct acquirer were e.g. a German company, it would in any event be included in the definition of a foreign investor under the ZIUOOPE, whereas under the Draft it would only fall under the definition of a foreign investor if a third-country national or a legal entity established in a third country (e.g. its controlling company is established in Japan) appears somewhere in the ownership chain of the company with a sufficient participation.
- Change of the Definition of Foreign Direct Investment
According to the ZIUOOPE, a foreign direct investment is any investment made by a foreign investor and the purpose of which is to establish or maintain permanent and direct links between the foreign investor and a company established in the Republic of Slovenia by acquiring at least a 10% participation in the capital or voting rights. Unlike the ZIUOOPE, the Draft expressly provides that there is a foreign direct investment even in case of an indirect acquisition of a participation in the capital or voting rights and adds that this may be the case for the first as well as for any subsequent acquisition of a 10% participation in the capital or voting rights.
In practice, the Ministry has so far interpreted the provision of the ZIUOOPE in the foreign direct investment screening in such a way that the obligation to notify also includes cases of indirect acquisition of ownership. However, this is not clear from the ZIUOOPE, and the wording “maintaining direct links” even more strongly suggests that there is a foreign direct investment only in the case of direct acquisition of ownership. It is welcome that the Draft resolves this dilemma by explicitly stating that there is a direct foreign investment also in the case of indirect acquisition of ownership.
- Change of the Indication of Legal Transaction
According to the ZIUOOPE, a foreign direct investment in the field of certain activities must be notified to the Ministry responsible for economy by the foreign investor or the target company or the acquired company within 15 days of the conclusion of the merger agreement or the publication of the takeover bid. The Draft provides that the diction “from the conclusion of the merger agreement or the publication of the takeover bid” is replaced by “from the conclusion of the legal transaction by which the foreign investor acquires, directly or indirectly, at least 10% of the capital or voting rights in an business entity established in the Republic of Slovenia, or from the publication of the takeover bid”.
The Draft thus makes it clearer that transactions which do not involve either a merger or the publication of a takeover bid are also subject to screening.
- Acquisition of the Right to Dispose of Land and Real Estate Related to Critical Infrastructure Does not Constitute a Foreign Direct Investment
The ZIUOOPE also provides for notification if a foreign investor or its subsidiary acquires the right to dispose of land and real estate essential for critical infrastructure or land and real estate located in the vicinity of such infrastructure. The Draft provides for the deletion of this provision, which is welcome because the term “vicinity to critical infrastructure” was not defined under the ZIUOOPE and it was not possible to determine whether notification of the acquisition of certain real estate was required on this basis under other provisions either.
- Change of the Legally Required Information
For the purposes of the notification, the ZIUOOPE only requires the submission of certain information (annual turnover, number of employees, etc.). The notification form, which should have been adopted by an implementing act, has never been adopted under the ZIUOOPE. The Draft adds some more information that the notification will have to contain, by (additionally) providing for the submission of:
- a detailed description of the foreign direct investment,
- a detailed description of the foreign investor’s ownership structure,
- definitions as to whether the foreign direct investment may have an impact on security or public order (which would now also include definitions as to market shares),
- definitions and submission of evidence to demonstrate the veracity of the information referred to in the preceding indents.
In particular, the requirement to provide evidence demonstrating the veracity of the information submitted means that the amount of documentation to be attached to the notification is likely to increase significantly, as under the current regime in the ZIUOOPE there is virtually no need to attach any supporting documentation. Although the presentation of the main solutions in the Draft only mentions, as a change from the current regime under the ZIUOOPE, that the Draft would require the submission of the contract or legal transaction governing the transaction, it is clear from the text of the Draft that additional evidence will have to be submitted to demonstrate the veracity of the information provided, but it is not clear which. The veracity of some of the information required could probably be demonstrated by the submission of the annual report of the foreign investor and the target or acquired company, but certainly not all of it. In practice, it would be useful if the Draft or implementing act were to specify more precisely what evidence is required to prove each of the data. In any event, collecting the relevant evidence and translating the documentation in a foreign language is likely to make the preparation of notifications considerably longer and more expensive.
- Introduction and Definition of the Notification Commission in the Text of the Act
The Draft formalizes a specific additional Notification Commission to carry out a preliminary examination and to give an opinion on the initiation of the foreign direct investment screening procedure. The commission as known under the ZIUOOPE, which then carries out the screening process itself and submits to the Minister an opinion on the foreign investment, is renamed in the Draft as an expert group, while its tasks or competences under the Act remain unchanged.
- More Precise Definition of the Conditions for the Implementation of Foreign Direct Investment
Under the ZIUOOPE, based on the opinion of a commission (Draft: expert group), the Ministry issues a decision on whether to approve, set conditions for its implementation, prohibit, or cancel a foreign direct investment. The Draft provides for the same, but in addition, it lists, for example, the conditions for the implementation of a foreign investment that may be imposed to mitigate or prevent the identified impact of the transaction on the security and public order of the Republic of Slovenia. They may be imposed for a fixed period, which may not exceed 10 years. The conditions may include especially:
- a ban on the sale of copyrights and related rights owned by the target company to natural or legal entities from third countries,
- a prohibition on the sale of certain tangible and intangible fixed assets acquired through the investment,
- a ban on business cooperation with a legal or natural person affecting public policy and security in any of the Member States, if this has been established either by a Member State or by the European Commission,
- a ban on the acquisition of certain parts of the target company,
- an obligation to reduce the shareholding being acquired in the target company,
- a commitment that certain parts of the target company will be retained in the Republic of Slovenia,
- the obligation to transfer certain sensitive activities from the target company in the Republic of Slovenia to another legal entity established in the Republic of Slovenia,
- prohibiting certain practices on the market of the Republic of Slovenia,
- the obligation to continuously carry on the initial activity of the target company in the Republic of Slovenia,
- the obligation to provide goods and services from the initial activity of the target company at the request of the Republic of Slovenia, or at the request of another Member State or the European Commission.
The word especially indicates that the conditions in the Draft are listed by example and not exhaustively. The Ministry could therefore impose other comparable conditions if it considered that they could mitigate or prevent the impact on the security and public order of the Republic of Slovenia. It is possible that the conditions listed as examples will influence the Ministry to use them more often than it has done so far (or at all).
- Additional Sanctions
The ZIUOOPE provides for a fine only in the case of non-notification of a foreign direct investment, but the Draft also provides for a fine in the case of non-compliance by the foreign investor with the prohibition, cancellation, or conditions for implementation of the investment.
- The Problem of a Mechanism not Addressed in the Draft
A key ambiguity that arises in the application of the ZIUOOPE which also does not seem to be adequately addressed in the Draft is the ambiguity in the definition of the activities for which notification is required.
Under both the ZIUOOPE and the Draft, a foreign direct investment only has to be notified in the case of investments in the following activities:
- critical infrastructure and the land and real estate crucial for the use of such infrastructure;
- critical technologies and dual use items;
- supply of critical inputs and food security;
- access to sensitive information, including personal data, or the ability to control such information;
- the freedom and pluralism of the media, or
- certain projects or programs of interest to the European Union.
The areas are mostly defined in very general terms – it is an almost verbatim transcription of the risk factors proposed by the Regulation, which were not intended as a list of industries subject to notification.
As a result, it is very difficult to determine whether a transaction is notifiable or not. For example, the definitions of ”critical inputs“ and ”critical infrastructure“, which can only be vaguely defined by applying other rules, and ”access to personal data“, to which every company can access to some extent, are unclear. Also in practice, in the foreign direct investment procedures under the ZIUOOPE, these areas are interpreted rather broadly, which results in many transactions being notified “just in case” and will probably remain so if the Act in this part is adopted in the wording envisaged in the Draft. In practice, it would be useful if the new Act were to define more precisely the activities that are subject to notification. This could be done, for example, by referring to certain activities in the standard classification of activities.
In practice, the Ministry has usually considered the registered main activity of the company in the foreign direct investments screening procedures under the ZIUOOPE, which could be problematic in certain cases, as the choice and change of the main activity is largely left to the company itself. The Draft, for a change, speaks of the “actual and predominant exercise of the company’s activities”. This could address the above-mentioned concern, unless of course in practice the actual and predominant exercise of the company’s activities would then automatically be equated with the registered main activity of the company.
 The countries of the European Union, the countries of the European Economic Area, the Swiss Confederation and the United Kingdom of Great Britain and Northern Ireland.