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Slovakia’s New FDI Screening Mechanism – Stuck in Limbo

Slovakia’s New FDI Screening Mechanism – Stuck in Limbo

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In 2021 the Slovakian legal framework was set to be updated with a new FDI screening mechanism, echoing the wave of similar legislative updates throughout the European Union. However, after almost a full year, the proposed draft act has not yet come to pass. CEE Legal Matters spoke with Ruzicka and Partners Banking & Finance Partner Jan Hanko about the process, the draft itself, and its potential consequences on the Slovakian market.

Strong Reactions

“Generally speaking, the process has been quite slow,” Hanko begins. The draft of the legislative act which is poised to overhaul the foreign direct investment screening procedures in Slovakia has been stuck in the public comments and consultation phase since June 2021. “The draft act received many comments – more than 300 – including from the general public, business associations, as well as other regulatory bodies and authorities.” He points to the fact that “top companies in Slovakia, those at the very summit of the business world in the country, top employers – most of whom are usually silent when it comes proposed legislation – were quite vocal now.” At the same time, “some of the comments came from other ministries, so there’s the extra weight of that as well, meaning we could see a redraft eventually.”

“If you take a closer look at the comments themselves,” Hanko highlights, “you notice that a lot of them don’t relate to specific provisions but focus more on the philosophical approach the act takes.” For example, “the American Chamber of Commerce in Slovakia was quite critical of the proposed draft, indicating that far too many investments could be targeted – which was not the raison d’etre of the mechanism, to begin with.”

To Protect or Impede Busines

However, such gatekeeping has not been, at its core, perceived as a bad idea. “Don’t get me wrong, it is not that the idea of such a screening mechanism is frowned upon. Indeed, the need to defend strategic industry sectors from predatory investments is felt as very real in Slovakia,” Hanko says. Much like in other EU member states – especially amidst the COVID-19 pandemic-induced economic crisis – “there was a palpable desire among the citizens of Slovakia to defend against potentially malign and predatory investments from Russia and China. Even more in the current tense geopolitical situation,” Hanko adds.

Additionally, Hanko clarifies the types of investments susceptible to being screened, per the new draft act. “Firstly, there are critical infrastructure sectors where such screening will be mandatory. This is a good take, seeing as how it is prudent, of course, to keep sensitive sectors secure and protected,” he says.

“The main concern,” Hanko says “is that the proposed act goes far beyond what the EU legislation proposes. The general standards that the draft act sets are quite wide and seek to establish a mechanism that would have a huge reach.” He believes this regulatory approach could impede the normal flow of business.

Reversing Gears?

Hanko says that the initial proposal came as a surprise, given the “background of the liberal party SaS, which spearheaded the effort. For the past 15 years that it has been in politics, it has been trying to create a rather liberal environment for businesses, getting rid of unnecessary bureaucratic procedures and excess paperwork – the draft act proposal goes against the grain on that front.” He feels that “the proposed draft, in a way, undermines efforts made by the government in 2021 to attract more FDI.”

The draft act, Hanko explains, would establish an environment in which it would be too easy to seek the initiation of screening and control procedures. “The draft act would establish an international investment threshold of a 10% equivalent of the registered capital of the target company as the limit that would allow for screening and control procedures to occur,” he says. “This is quite low and would mean that even minor foreign investors would be susceptible to screening – which would, ultimately, give too much power to state authorities, especially the Ministry of the Economy as the body that would be in control of the process.”

Hanko believes that such a low threshold would present a significant obstacle to foreign investments, with “the regulatory authorities and the Ministry being in the position of sole gatekeepers to FDI in Slovakia.” Additionally, he highlights that “failure to cooperate and provide all information and data required – be it from the target or from the investor – is sanctioned with fines as steep as 1% of global turnover. Substantial fines, coupled with a far reach – this could be another impediment to smooth business operations on the market.”

Ultimately, “the draft act is constructed in such a way that it allows for almost anybody to submit a request for control,” Hanko explains. “This means that, for example, it would not be unimaginable for market competitors to wish to use the screening regime to impede each other’s business transactions.”

Please Tread Softly

Hanko ultimately feels that, when it does get enacted, the FDI screening mechanism should not be used frequently. “Honestly, it shouldn’t be used more than once or twice a year, regarding specific investments, from specific investors, in specific sectors – it should not be a daily occurrence by any measure,” he says.

He predicts the FDI screening mechanism would make legal work all the more complicated. “As a lawyer, I believe that in its current form the draft act would present a significant obstacle for investment deals – it’s a whole new aspect we would all have to take into account at every turn,” he says. Not only would it make it more complicated for lawyers to give a green light on the legality of a deal, but Hanko believes that the investors themselves could alter their behavior in such a way as to lead to a slowdown. “It is not at all difficult for me to imagine a diligent investor seeking to do everything by the book and opting to have the investment cleared in this aspect as well,” he says.

It remains to be seen in which direction the FDI screening mechanism implementation goes since “authorities have been silent regarding the draft for a while now – which is not a surprise given the overall situation of the pandemic. At present, all we can do is watch and wait,” Hanko concludes.

This Article was originally published in Issue 9.4 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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