Protection of strategic assets: Foreign direct investment screening launched in Slovenia
Authors: Jera Majzelj, Nataša Pipan Nahtigal
On 29 May 2020, the Slovenian Parliament adopted the proposed third package of COVID-19 support measures, all bundled into one piece of legislation: The Act on Intervention Measures to Mitigate and Remedy the Consequences of the COVID-19 Epidemic. As expected, the new intervention Act is mostly dealing with subsidies for part-time workers, holiday vouchers, continuing compensation scheme for workers in tourism, etc.
However, one section sticks out. The Government has included a set of rules on foreign direct investment screening that are intended to protect Slovenia’s strategic assets from unwanted foreign investors on the grounds of security or public order. These rules have not received a lot of attention in the media, however, they will have significant impact on M&A, restructuring, greenfield and real estate investments to be made, and potentially also those that have already been closed. The end result of the screening could namely be the conditioning, prohibition or unwinding of a transaction.
As with all intervention laws adopted recently, the new Act entered into force the day after being published in the Official Gazette, i.e. on 31 May 2020. The respective Act does not contain any transitional period rules and it is therefore not clear how these rules affect transactions that have already been signed but not yet closed. Provisions relating to foreign direct investment screening shall apply until 30 June 2023.
Significant parts of the new regime are based on the wording of Regulation (EU) 2019/452 (“FDI Regulation”), which encourages Member States to adopt such screening rules and also provides for ways in which Member States and the EU Commission may participate in the individual Members State’s screening processes. The Regulation, however, only applies from 11 October 2020. In many ways, the below-described national rules are wider in scope. Also, the FDI Regulation does not contain detailed rules on the screening procedures, which are left to individual Member States.
Foreign investor definition
The screening is not limited to investments from non-EU countries, but covers investments from any foreign investor, i.e. any individual or legal entity from outside Slovenia.
Foreign direct investment definition
The new Act partially follows the definition of FDI Regulation and covers investments of any kind by a foreign investor aimed at establishing or maintaining lasting and direct links between the foreign investor and the business entity having its seat in Slovenia. The threshold is set at 10% participation in the capital or voting rights.
When talking about the notification obligation, the Act only refers to merger agreements and takeover offers, which could imply that only transactions involving mergers and publication of takeover offers are subject to the screening, leaving out for example purchases of shares in private transactions. However, based on the above definition (and some other clues in the wording), it seems that this was only poor drafting. It is unclear whether only direct acquisitions or also indirect acquisitions are covered by the new regime.
The definition also covers incorporations of new entities in Slovenia by a foreign investor. In this respect, the Act refers to a definition of an “initial investment” under the EU state aid rules, which does not seem entirely applicable, as it is not limited to new incorporations: “an investment in tangible and intangible assets related to the setting-up of a new establishment, extension of the capacity of an existing establishment, diversification of the output of an establishment into products not previously produced in the establishment or a fundamental change in the overall production process of an existing establishment”.
As regards real estate transactions, the new regime extends the screening to any contracts that grant the foreign investor or its subsidiary in Slovenia the right to dispose with land or real estate that are material for critical infrastructure or that are located in the vicinity of such infrastructure. The screening process could thus also effect domestic transactions.
Not all foreign direct investment will be subject to screening. Foreign direct investment must be notified if it represents an investment in the following fields of activity:
- critical infrastructure, whether physical or virtual, including infrastructure in the fields of energy, transport, water, health, communications, media, data processing or storage, aviation and aerospace sector, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure or land and real estate in the vicinity of such infrastructure;
- critical technologies and dual use items as defined in point 1 of Article 2 of Council Regulation (EC) No 428/2009 (15), including artificial intelligence, robotics, semiconductors, cybersecurity, aviation and aerospace and defence technology, energy storage technology, quantum and nuclear technologies, nanotechnologies and biotechnologies, and health, medical and pharmaceutical technology;
- supply of critical inputs, including energy or raw materials, as well as food security, medical and protective equipment;
- access to sensitive information, including personal data, or the ability to control such information;
- the freedom and pluralism of the media;
- projects and programmes of Union interest, as set out in Annex I to the FDI Regulation (e.g. Horizon 2020, Copernicus, Trans-European Networks for Energy).
The above list is more or less a copy of risk factors proposed by the FDI Regulation, which were not intended to be used as a list of industries that are subject to notification. Therefore, it will be very difficult to determine in practice whether or not a certain transaction is notifiable, which may – combined with the severity of consequences of failure to notify – result in a number of transactions being notified “just in case”. It seems that the mentioning of personal data could be especially problematic as almost any entity is likely to control at least some personal data. Another issue could be the fact that the Government included land that is located in the vicinity of critical infrastructure, with no clear definition of what kind of vicinity is required. Open ended definitions of “critical infrastructure”, “critical technologies”, “critical inputs” and “sensitive information” are also likely to prove problematic in practice when deciding whether or not a transaction is notifiable.
Notification process and fines for failure to notify
Any foreign direct investment that qualifies under the above criteria, must be notified to the Ministry of Economic Development and Technology within:
- 15 days as of the conclusion of the merger agreement or the publication of a takeover offer. As mentioned above, it seems that this would also apply to other agreements, such as share purchase agreements, subscription of shares in capital increases, etc.;
- 15 days as of the incorporation of a corporate entity in Slovenia;
- 15 days as of the conclusion of an agreement under which a foreign investor or its subsidiary in Slovenia is granted the right to dispose with land or real estate that are material for critical infrastructure or that are in the vicinity of such infrastructure.
The notification must be made by the foreign investor or the target (subsidiary) company. The Act foresees a notification form which is not yet available. However, it is clear that notification must be made in Slovenian and should also include, amongst other, the following information: ownership structure of the foreign investor (including the ultimate investor), the funding of the investment and its source, and the countries in which the foreign investor and the target company conduct relevant business operations.
The penalty for not notifying a transaction may reach EUR 250,000 for small companies and even EUR 500,000 for medium and large companies. The highest penalty for sole entrepreneurs is set at EUR 150,000 and for natural persons at EUR 5,000. The responsible person within the legal entity may be fined up to EUR 10,000.
The screening is initially performed by a commission of 3 to 10 members. At least 3 members are appointed from the Ministry ranks, while other members may be appointed from other governmental bodies, local communities, entities exercising public powers or even private legal entities. The commission may also ask for opinions from such bodies or entities, and is also entitled to ask for additional information and evidence from the notifying party.
The risk factors that the commission shall consider will actually be the same as the industry sectors listed above. If the direct foreign investment affects the above-listed fields, such investment may be regarded as a threat to security and public order. Given that only investments that have some sort of connection with the listed fields are notifiable, this seemingly brings us to the conclusion that any notified investment may be considered a threat, but this was probably not the intent of the legislation. Additional factors that the commission shall consider are as follows:
- whether the foreign investor is directly or indirectly controlled by the government, including state bodies or armed forces, of a third country, including through ownership structure or significant funding;
- whether the foreign investor has already been involved in activities affecting security or public order in a Member State; or
- whether there is a serious risk that the foreign investor engages in illegal or criminal activities.
The commission is allowed to considered other factors, as those mentioned above are only provided as most relevant examples.
The commission finishes its task by issuing an opinion on whether the investment should be approved, prohibited, conditioned or un-wound. The final decision lies with the Ministry. If the investment is prohibited or un-wound, the transaction on which the investment is based shall be deemed void. With respect to imposing conditions, the Act does not state what kind of conditions may be set by the Ministry for the closing of a transaction nor what are the consequences of a transaction being closed in breach of the conditions.
The Ministry must issue its decision within 2 months of receiving the notification. However, this term will in practice likely be considered just as an informal guideline: if this deadline is not respected, the transaction is namely not deemed approved.
The remedy against the decisions of the Ministry is an appeal to the Government. The same applies in case the Ministry does not issue the decision in time. There is no presumption of approval.
The new Act also contains a provision granting the Ministry the right to screen foreign direct investments in the fields mentioned above for 5 years after the transaction was signed / takeover offer published / new entity incorporated. It would be compliant with the general prohibition of retroactivity if this only applied for transactions after the entry into force of these new rules. However, the (otherwise scarce) explanations of the new rules seem to suggest that past transactions may also be subject to review. It is thus unclear whether the possibility of review applies to transactions done during the past 5 years before these rules enter into force, to those that have been signed after the entry into force of the new rules, or only to those that have been signed after the entry into force of the new rules and have not been notified.