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MC, FDI, and FSR – Or the Three Game-Changing Acronyms for Investment Control in Romania

MC, FDI, and FSR – Or the Three Game-Changing Acronyms for Investment Control in Romania

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While the business landscape is well-acquainted with the established Merger Control regime (MC), characterized by extensive practice and ongoing efforts by the Competition Council to streamline processes, attention must also be directed towards two additional control regimes that have been implemented: the investment control regime and the subsidy control regime.

1. Investment Control Regime in Romania

Romania's Investment Regime (FDI) has seen notable revisions, having expanded the scope of scrutinized investments, and introducing an examination fee. With penalties of up to 10% of global turnover and the risk of investment cancellation, Romania's regime stands out in Europe.

Key considerations for investors include:

A. Targeted investors

Despite maintaining the term "foreign investment" in the title of the regulatory act and at odds with the recent Xella case law of the EU Court of Justice, the present investment framework in Romania does not consider the nationality of the investor.

Consequently, the updated legislation is applicable to both natural and legal persons:

  • investors from non-EU countries (such as the United States or the UK),
  • investors from the EU member states, including Romania.

B. Targeted investments

The targeted investments are those surpassing EUR 2,000,000 (or less if they "may have an impact on or present a risk to public security or public order") and falling within strategic sectors like energy, transportation, critical infrastructure, finance, environmental protection, etc.

These encompass various types of investments, such as traditional M&A, share capital increases, acquiring minority shareholdings with management participation rights, and investments in tangible or intangible assets for launching new businesses, expanding capacity, or diversifying production.

C. Authorisation procedure

  • Notification: The transaction must be notified prior to implementation, and it halts until approved (stand-still obligation).
  • Authorisation fee: There's a EUR 10,000 fee, but it's refunded if the Foreign Direct Investment Review Commission ("FIDIC") finds that the conditions for examining the authorization request are not met.
  • Dual Notification: If the transaction represents both a foreign direct investment / EU investment and a merger, the investor must notify both the FIDIC and the Competition Council.
  • Priority: FDI clearance takes precedence over merger authorization by Competition Council.
  • Opinion Timeframe: FIDIC issues an opinion within 60 days of complete notification. For EU investments, authorization is quicker if there are no issues.

D. Necessary Actions

  • Guideline Clarity: The Competition Authority must promptly adopt a guideline to clarify unclear aspects (for example, the method of determining the value of the investment)
  • Strategic Sectors Clarification: It's important for the business environment to clarify strategic areas for national security. This could involve reviewing CSAT Decision no. 73/2012 and possibly incorporating its provisions into primary legislation. Publishing all decisions/opinions of FIDIC could help too.
  • Legislation Monitoring: Investors should closely monitor changes in primary legislation. While turnover sanctions currently apply only to non-EU investments, it is expected that through the approval law of Emergency Ordinance no. 108/2023 (already submitted to Parliament), the sanctioning regime will be extended to EU and new investments.
  • Investment Planning: Careful consideration of planned investments and inclusion of authorization timelines in business plans are advised.

2. Foreign Financial Contributions Regime in the European Union

The regime for foreign financial contributions in the European Union  ("FSR") fills a legislative gap, adding an extra assessment level for non-EU countries' contributions to EU economic operators in relation to mergers and public procurements. Penalties can be severe, potentially reaching fines of up to 10% of the company's annual turnover.

Key considerations for companies include:

A. Economic Activities Subject to Regulation

a. Concentrations that meet the following cumulative conditions: (i) Turnover threshold: at least one of the merging undertakings, the acquired undertaking or the joint venture is established in the EU and achieves a turnover of at least EUR 500 million; and (ii) Contribution threshold: undertakings have received financial contributions exceeding EUR 50 million in the last three years.

b. Public procurement meeting the following cumulative conditions: (i) Procurement threshold: at least EUR 250 million or EUR 125 million in the case of division of the procurement into lots; and (ii) Contribution threshold: the economic operator has received financial contributions of at least EUR 4 million over the last three years.

c. General instrument: the European Commission can investigate any other potentially distortive financial contributions (including related to mergers or public procurement procedures below the thresholds described above).

B. Targeted contributions

In essence, the regulation uses "subsidy" broadly, encompassing any "financial contribution" ('FCC') benefiting the company. For example, these contributions can involve:

  • Transfer of funds or liabilities (such as capital injections, grants, loans, tax incentives, compensation for losses, etc.).
  • Waiver of income due (such as tax exemptions).
  • Provision of goods or services or the purchase of goods or services etc.

These contributions undergo scrutiny if they can be traced back to a non-EU state through public authorities at all levels (central, regional, local) or private entities whose actions can be attributed to the third country.

C. Authorisation procedure 

  • Prior and mandatory notification. Mergers must be notified to the European Commission prior to their implementation. Similarly, economic operators participating in a procurement procedure must notify the contracting authority of all financial contributions with the contracting authority subsequently forwarding the notification to the European Commission. Like in the FDI context, businesses have a stand-still obligation, meaning that notification halts proceedings until the European Commission completes its analysis, preventing the conclusion of economic concentrations or awarding of public procurement contracts. 
  • European Commission powers. Wide range of powers, including the ability to conduct inspections, impose provisional measures, request clarifications, initiate ex officio analyses, and enforce fines or sanctions. The Implementing Regulation (IR) offers essential guidance on procedural rules, calculation of timelines, details about the information to be transmitted, powers of the European Commission, file access, notification forms etc. However, uncertainties persist, particularly regarding the Commission's approach to analysing financial contributions in connection with economic concentrations or public procurements below specified thresholds. 

3. Conclusions and Recommendations

Companies must prioritize competition-related aspects in their operations.

Here's what they should do:

  • Conduct due diligence processes with specific questions about FDI and FSR.
  • Streamline processes and prepare for potential transactions or procurement participation by gathering necessary information in advance, including monitoring foreign financial contributions as defined by legislation.
  • Adjust transaction schedules to accommodate additional durations for FDI and FSR authorizations. Note that FDI and FSR procedures take precedence over concentration authorization before the Competition Council.

Given the legislative uncertainties and risk of substantial fines, seek specialized legal assistance and engage in proactive investment planning for any transaction.

By Andrei Petre, Senior Associate, Act Legal

Romanian Knowledge Partner

Țuca Zbârcea & Asociații is a full-service independent law firm, employing cross-disciplinary teams of lawyers, insolvency practitioners, tax consultants, IP counsellors, economists and staff members. It also operates a secondary law office in Cluj-Napoca (Romania), and has a ‘best-friend’ agreement with a leading law firm in the Republic of Moldova. In addition, thanks to the firm’s dedicated Foreign Desks, the team provides the full range of services to international investors seeking to gain a foothold or expand their existing operations in Romania. Since 2019, the firm and its tax arm are collaborating with Andersen Global in Romania.

Țuca Zbârcea & Asociaţii is providing legal services in every aspect of business, covering all major areas of practice: corporate and M&A; litigation and international arbitration; corporate tax; public procurement; TMT; employment; insurance; banking and finance; capital markets; competition; healthcare and pharmaceutical; energy and natural resources; environmental; intellectual property; real estate; regulatory legal services.

Țuca Zbârcea & Asociaţii is a First-Tier law firm in all international legal directories and a multiple award-winning law firm both locally and internationally. It received the CEE Deal of the Year Award (DOTY Awards 2021) and the Law Firm of the Year Award: Romania (IFLR Europe Awards 2021). 

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