Recent and Upcoming Investment Screening Reforms in the European Union

In May 2021, we reported on certain changes to the German investment screening rules, which further expanded the scope of the regime in terms of both type of transactions and targeted sectors subject to screening (see Sidley Update of May 2021). Other EU countries have similarly adopted rules to expand or introduce screening mechanisms. Below we (a) report the recent and upcoming reforms in Czech Republic, Denmark, the Netherlands, and Slovakia, and (b) touch on certain other EU initiatives for scrutinizing foreign investments.

Czech Republic

A new investment screening regime entered into force on May 1, 2021. It requires investors to seek preclosing approval in the following cumulative circumstances:

• covered investments: acquisitions of at least 10% voting rights or other material control rights
• covered investors: investors established outside the EU or otherwise controlled by non-EU persons
• covered targets: certain identified critical businesses, including businesses operating in the military sector or dealing in dual-use items, and critical infrastructure in, for example, the energy, transportation, telecom, or health sectors

Additionally, parties planning an investment in the media sector must consult with competent authorities prior to making any such investment. Parties may also engage in voluntary consultations for investments in sectors other than those subject to mandatory screening or consultation (e.g., emerging foundational technologies). Following either mandatory or voluntary consultations, the authority may initiate the screening procedure to approve or restrict the transaction. Voluntary consultation may mitigate the risk that the authorities call in the transaction for review and subject it to conditions (or order the divestment of the target) at a later time, which is possible up to five years following the transaction’s completion.

Denmark

Denmark recently adopted an investment screening regime that started applying to deals not yet completed on September 1, 2021. The regime requires investors to seek preclosing approval in the following cumulative circumstances:

• covered investments: (a) acquisitions of at least 10% equity or voting rights or equivalent control rights, (b) greenfield investments, or (c) certain special arrangements giving considerable influence over covered targets (e.g., joint ventures and research and development arrangements)
• covered investors: investors established outside Denmark or otherwise controlled by non-Danish persons (with the exception of special arrangements where covered investors are those established outside the EU and the European Free Trade Association (EFTA), encompassing also Iceland, Liechtenstein, Norway, and Switzerland)
• covered targets: certain identified critical businesses, including defense and dual-use items, IT security functions, critical infrastructure, and other critical technologies

Further, non-EU/EFTA investors may voluntarily seek approval for certain covered investments (i.e., acquisitions of at least 25% equity or voting rights or equivalent control rights, or certain special arrangements) in domestic businesses that operate in any sectors other than those covered by the mandatory regime. This may mitigate the risk that the authorities call in the transaction for review and subject it to conditions (or order its unwinding) at a later time, which is possible up to five years following the transaction’s completion.

The Netherlands

The Dutch government, after long debate, finally adopted a legislative proposal on July 1, 2021, which will now be subject to parliamentary discussion. The regime as currently contemplated will require investors to seek preclosing approval in the following cumulative circumstances:

• covered investments: transactions (a) that grant control, which is the ability to exercise a decisive influence over the activities of a business on the basis of factual or legal circumstances, and (b) specifically with respect to investments in sensitive technologies (see below), that grant significant influence (e.g., by acquiring 10%, 20%, or 25% voting rights)
• covered investors: any person, including both foreign and domestic investors
• covered targets: businesses that (a) qualify as vital processes, currently covering primarily businesses in the energy, transport, banking, and financial sectors, or (b) deal in sensitive technologies, that is, military and dual-use items

The regime is expected to enter into force later this year or in early 2022, but it will have retroactive application. Parties to transactions that fall within the scope of the regime, which have signed but not yet closed by the time the regime enters into force, will need to seek preclosing approval. In any event, the Dutch authority will be able to call in for review transactions that completed on or after September 8, 2020.

Slovakia

A new investment screening regime entered into force on May 1, 2021. It requires operators in certain sectors to seek preclosing approval in the following cumulative circumstances:

• covered investments: assets transfer or sale of at least 10% equity or voting rights or other major control rights
• covered investors: any person, including both foreign and domestic investors
• covered targets: operators in narrowly defined industries – that is, mining, electric energy, gas, oil and petroleum products, pharmaceuticals, metallurgy, and chemical industries

Further, operators of critical infrastructure covered by the Slovak Critical Infrastructure Act are required to report to the competent authorities any change in ownership or sale of at least 10% equity or voting rights or other major control right. Covered critical infrastructure includes infrastructure in transportation, energy, water management, heavy industry, postal services, information and communication technologies, finance, agriculture, and healthcare.

Other notable reforms

As we reported earlier this year (see Sidley Update of May 2021), the EU is planning to adopt a set of tools to counter potential distortive effects of foreign subsidies. This tool would operate in parallel and in addition to existing investment screening and merger control procedures. The current proposal envisages, among others, a mandatory and suspensory preclosing notification requirement for merger and acquisition (M&A) transactions that (a) result in a change of control, (b) where at least one of the merging companies is established in the EU and generates an aggregate turnover in the EU of at least €500 million, and (c) where the entities concerned received foreign subsidies amounting to more than €50 million in the three preceding calendar years.

Takeaways

As the above-reported reforms show, investment screening has become a crucial part of M&A transactions.

• Notification requirements: Failure to comply with investment screening rules may have serious consequences, including orders of divestment, high monetary penalties, and criminal sanctions. Investors and sellers should be ready to assess investment screening risks upfront and to conduct adequate and timely diligence to identify notification requirements. An attentive analysis is key, especially in view of the regular reforms to investment screening regimes.
• Contractual provisions: Transaction documents should take into account notification requirements, including a sign-and-close mechanism and cooperation obligations that ensure that all parties cooperate in obtaining required approvals. Also the outside date should be carefully calculated to take account of applicable review periods. In case of risks under upcoming regimes, parties should consider including springing conditions that allow investors to seek approval where relevant requirements come into force before completion.
• Remedial actions: Competent authorities may prohibit or impose conditions on investments. Parties should therefore identify and assess potential concerns that authorities may raise in connection with proposed transactions, identify remedial actions, and allocate risks.

Sidley continues to follow closely and advise on developments on global foreign investment screening, especially in the EU and its Member States, and on U.S. foreign investment screening by the Committee on Foreign Investment in the United States (CFIUS).