A new regulation sets up a system for controlling investments from outside the EU in strategic assets relevant to the security and internal order of the Czech Republic. From 1 April 2021, certain foreign investments in Czech assets (including private) will thus be subject to prior approval by the Ministry of Industry and Trade. The ministry will also be entitled to review any foreign investment up to five years after its completion. The Act defines a wide variety of entries into the target as foreign investment (not only asset ownership but also, for example, membership of a body). There is no experience with investment approval procedures yet, but failure to notify can lead to enormous fines (up to 1% of turnover). Comprehensive preparation of the required documents and information and legal representation in negotiations with the Ministry of Industry and Trade are therefore highly recommended.
Edit: Due to unexpected delays with publishing of the FDI Act, it will enter into force on 1 May 2021, contrary to what is stated in the article. Apologies for inconvenience.
The Act on Foreign Investment Screening (the "FDI Act") will enter into effect on 1 April 2021. It establishes a regime for screening foreign investment in undertakigns relevant from the perspective of protecting the security or public order of the Czech Republic. By the way of the FDI Act, the Czech Republic will join other countries with a foreign investment screening regime. In principle, the FDI Act is based on EU regulation. However, the regulation only lays down a basic framework for foreign investment screening and for cooperation between Member States. As a result, the regimes for reviewing foreign investments, including the types of investment subject to approval, differ (sometimes substantially) from one Member State to another. Due attention should be paid to individual national legislations, including the new regulation in the Czech Republic.
Foreign investments which meet the conditions laid down by the FDI Act must be approved by the Ministry of Industry and Trade (the “MPO”). As is the case with notifications of concentrations to competition authorities, investors are prohibited from implementing the investment before the MPO’s approval (the so-called standstill obligation). We recommend foreign investors from third countries to take the new obligations into account in investments involving Czech assets and evaluate in a timely manner whether their entry into the target is subject to approval under the FDI Act.
The next pages will provide you with a basic overview of the rules laid down by the FDI Act.
FOREIGN INVESTMENT WITHIN THE MEANING OF THE FDI ACT
The FDI Act will only apply to foreign investments. Who is considered a foreign investor and what level of control must be gained in the target (Czech) person is defined directly by the FDI Act.
- Foreign investor
Under the FDI Act, a foreign investor is any person who:
- is not a national of the Czech Republic or another EU Member State;
- does not have a seat in the Czech Republic or another EU member state; or
- is indirectly controlled by a person meeting conditions under the points above.
In contrast to the FDI regulation in some other EU Member States (i.e. Germany or France), the scope of the FDI Act is broader, as it also applies to investors from countries belonging to the European Economic Area, including Norway and Liechtenstein. After Brexit, natural and legal persons from the United Kingdom will also have to be considered foreign investors within the meaning of the FDI Act.
- Foreign investment
FDI Act defines as foreign investment any entry of a foreign investor into a target person which enables the investor to exercise an effective degree of control over the economic activity of the target. An effective degree of control over the economic activity of the target is considered to be:
- the possibility for the investor to control at least 10% of the voting rights and/or the possibility to exert a corresponding influence in the target;
- appointment of the investor to the target's body (i.e. board of directors, supervisory board);
- the ability of the investor to dispose of property rights to an object through which the target persons carry out an economic activity; or
- another level of control that allows the investor access to information, systems or technology, important from the point of view of the security of the Czech Republic or internal and public order.
It is evident that the FDI Act does not only focus on the acquisition of equity interests in the target, but on a wide range of other types of investor involvement, including membership in a target’s body or access to information or technology important for the security of the Czech Republic. As a result, a significantly wider portfolio of investors’ entries will be subject to notification under the FDI Act than in the case of notifications to competition authorities. Meanwhile, for some types of "investments," investors' legal uncertainty may considerably increase – after the FDI Act comes into effect, it will not be possible, for example, to appoint a foreign investor as an executive director until the MPO issues its approval. If there are delays in the MPO’s approval proceedings and it will not be possible to retain an existing director in the company, this can lead to the company's decision-making being temporary paralysed.
PROTECTED ACTIVITIES UNDER THE FDI ACT
Under the FDI Act, it is mandatory to notify investments in case the target person engages in specified activities relevant to the security of the Czech Republic or its internal order. These activities include the following:
- Production, research, development, innovation or life cycle of military material (within the meaning of the Act on Foreign Trade with Military Material).
- Operation of critical infrastructure elements (under the Crisis Act). Such elements include all energy distribution systems, as well as animal or plant production which meets certain parameters, or areas of data centres, certain networks and stations. Critical infrastructure elements may be operated by the state (typically the Fire Rescue Service), but also by private persons. More than a thousand of these elements are currently defined.
- Operation of an information or communication system of critical information infrastructure or an essential service (as defined by the Act on Cyber Security);
- Development or manufacture of dual-use items (listed in Regulation No. 428/2009), i.e. items that can be used for both civilian and military purposes.
Additionally, it is also mandatory to consult an investment with the MPO in case the target:
- holds a license for nationwide radio or television broadcasting;
- publishes periodicals with an aggregate minimum average print run of 100,000 copies per day for the last calendar year.
The consultation can be considered as a preliminary step before the FDI screening procedure – the consultation may either lead to initiation of approval proceedings, or to a notice to the investor that the investment does not pose a threat to the Czech Republic and thus does not require approval.
In addition, if the target’s activities do not fall under the categories above, the investment may be consulted with the MPO on a voluntary basis. Such consultation might be useful to increase investor’s legal certainty, because the FDI Act enables the MPO to initiate proceedings on approval of any foreign investment within 5 years after its completion in case it has concerns it could pose a risk to security or internal or public order (even in cases in which the target’s activities do not concern any of the activities set out in points a. – f. above). This subsequent review might be avoided by engaging in the voluntary consultation of the investment and obtaining a confirmation from the MPO that the investment cannot endanger the security or internal order of the Czech Republic.
FDI SCREENING PROCEDURE
If the foreign investment meets the criteria described above, the investor is obliged to file a notification and obtain the MPO’s approval. The notification of the investment includes the investor's obligation to provide a wide range of information, including information about the investor’s and target’s ownership structure, its business activities or source of financing of the foreign investment. Notifications will be filed on a unified form, the details of which will be set by government regulation [note: as of the publication date, the details about the form are unknown].
It does not follow from the text of the FDI Act or the explanatory memorandum to the act whether the notification will be subject to an administrative fee. However, it is questionable whether there will be a change in this respect in the future, as most similar filings (e.g. merger clearance by the competition authority or foreign person authorisation under the Act on Management Companies and Investment Funds) are subject to a filing fee.
In the event of failing to comply with the notification obligation, the MPO will initiate the approval procedure ex-officio and will be entitled to impose a fine on the investor, which could reach up to 1% of its total turnover for the last accounting period.
Once the investment screening procedure under the FDI Act is initiated, the MPO reaches out to other ministries and state agencies, including the intelligence services, with a request for an opinion. The details on exactly how the review will be conducted and what parameters will be assessed are not clear yet. However, the outcome of the screening procedure can in principle be as follows:
- If the investment does not raise concerns, the MPO will issue an approval decision within 90 days from the initiation of the proceedings (the period might be extended by 30 days in particularly complex cases).
- In case the investment is likely to threaten security, internal or public order, the MPO may negotiate on conditional approval with the investor. The conditions may consist, for example, of the obligation to enter into consultations with the MPO in cases of an increase in shareholding in the target. The MPO then submits the matter to the Czech Government, which issues a resolution within 45 days. The resolution may either approve the MPO’s proposal of conditions or reject it in case the investment does not pose a risk (which should lead to unconditional approval of the investment). The MPO will then issue an administrative decision in line with the Governmental Resolution.
- In case the investment could threaten security or internal/public order and that risk could not be eliminated by conditional approval, the government may, on the basis of a proposal by the MPO and within 45 days after the proposal being submitted, issue a resolution prohibiting the investment. The MPO will subsequently issue an administrative decision on the prohibition.
The procedure only has one instance, it is not possible to file an appeal against the MPO’s decision. The decision can be challenged by an action filed before an administrative court; the action does not have a suspensory effect.
ENTRY INTO EFFECT OF THE FDI ACT
The FDI Act will come into effect on the first day of the third calendar month following its publication. Therefore, the FDI Act will apply from 1 April 2021.
The FDI Act will also apply to investments that have not been completed before the FDI Act comes into effect. Under the FDI Act the date of completion is the date:
- of conclusion of the last contract;
- the investor gains control in the target; or
- of commencement of business;
depending on whichever of these events occurred later.
Under the definition of the date of completion, the notification obligation arising from the FDI Act must also be taken into account in transactions and investments that are currently being negotiated. In case the notification criteria laid down by the FDI Act are met and the investment is not completed before 1 April 2021, the foreign investor will be obliged to file a notification to the MPO.
- Some foreign investments will be subject to the MPO’s approval starting from April 2021.
- Mandatory for investments in strategic sectors such as military material or critical infrastructure elements (e.g. energy).
- The MPO is entitled to review any foreign investment up to 5 years retrospectively (not applicable to investments completed before the FDI Act becomes effective).
- The prior approval obligation applies to all investors (natural/legal persons) from outside the EU.
- “Investments” include the purchase of shares in target persons, but also the appointment of the investor to statutory or other bodies or access to information and technology.
- The MPO can impose a fine for the implementation of an investment without approval (up to 1% of turnover).
The FDI Act brings another regulation that non-EU investors must take into account when structuring their investments involving businesses active on the domestic market. According to the explanatory memorandum to the FDI Act, the Ministry expects dozens of applications for screening procedures, consultation proposals and ex officio proceedings every year. However, given the wide definitions in the FDI Act, we expect that an assessment of the notification obligation and also consultation with the MPO may be relevant in hundreds of transactions each year.
Investors will face certain uncertainty as to whether their investment will be approved for foreign investments subject to mandatory approval. The FDI Act does not provide any specific criteria the MPO should evaluate in order to identify whether the investment may threaten security, internal or public order. The MPO and the Government will be granted wide discretionary power whether to approve or prohibit the investment. Investors should take into account that the government decisions can also be influenced by the political environment, which makes the outcome of the procedure harder to predict. In addition, investors’ uncertainty will also be higher due to the MPO’s power to review investments that were not subject to mandatory notification within 5 years after their completion. Such reviews may also occur following changes in the political environment. Foreign investors should therefore consider the possibility of prior consultation with the MPO in order to avoid the risk of a subsequent review of their investment.
By Robert Neruda, Partner, Roman Svetnicky, Senior Associate, and Martin Rott, Junior Associate, Havel & Partners