Understanding the FDI legal lands

Saša Sodja
So, speaking about the entire region of CEE, the main hurdle, I think, is the diverse regulatory environment across different countries. As an investor that is interested in entering the CEE, a lot of them, if not the majority, are interested in entering the specific sectors that are deemed sensitive for FDI purposes, such as technology, infrastructure, energy. So the investor is faced with the complexity and basically the variability of national security considerations across the region. In addition, the not so transparent nature of the approval processes and the political climate can also introduce additional uncertainties. So it's not just the decision-making process of which country to enter first, but also the process of filing and waiting for this specific condition to be fulfilled. So, not all countries have standstill clauses in place that would necessarily affect them and the timeline. But in practice, everyone wants to be cleared, right, first before they close the deal. Nobody wants to close the deal and then have to adjust it, or maybe it could even be rescinded by the authorities. So navigating these hurdles requires a proactive and informed approach. And I know that this might seem very “marketing for lawyers”, but it's crucial to understand the impact of specific FDI regulations, also both for the target country and the sector. And having engaged lawyers that are in communication with the local authorities early in the process, that know how the process is run, often smooths it. We get a lot of feedback – I don't know if Célia is going to comment on this, but we get a lot of feedback from regulators about the aggressive and demanding approach with which the lawyers or clients or parties to the M&A transactions approach them. And I think it's important to understand that it's not in anyone's interest to stall the transaction. So if everyone is allowed to do their job, the process is smooth.

Sašo Papp
Thank you, Saša. Soňa, if we can switch to you. Welcome to the show, by the way.

Soňa Hanková
Thank you. Hello!

Sašo Papp
How does the legal framework in Slovakia accommodate or restrict FDI, and what impact does this have on the attractiveness of Slovakia for M&A activities?

Soňa Hanková
Slovakia introduced its Act on Foreign Investment Screening in 2022, and it became effective in March 2023. This new law updates Slovakia's approach to foreign investments, and it replaces the older investment screening mechanism according to the older Act on Critical Infrastructure from 2011. This old regime still remains valid and effective, also after March 2023, but in a modified form. The new FDI law aligns Slovakia's legislation with EU standards. It introduces detailed screening mechanisms for specific foreign investments meeting specific investment thresholds, and it introduces different legal regimes for critical investments and for non-critical investments. The main difference is that critical investments are mandatorily screened by FDI authorities, and the non-critical investments can opt for voluntary screening. So far, the new law has not adversely affected M&A in Slovakia. It preserves a climate which is favourable to investors. Most foreign investments do not fall within the mandatory screening regime, which is good news. However, details on the impact of the new law are still emerging because the whole screening process is confidential. Thus, we do not have relevant data to comment in detail, but all of us are keen to read the first annual report to be published soon by the Slovak Ministry of Economy, which could provide some details and statistics. The increase in investments, particularly from China, suggests a growing trend in FDI activities. And some critics have raised concerns over the potential of FDI to favour domestic investors or investors from the EU. And I think it will be very important to find a balance between the need for transparency and the need to safeguard strategic investments. And this will be a key point for Slovakia to consider: to keep its attractiveness for investors from abroad and also to support economic growth in the country.

Sašo Papp
Thank you. Saša, how does the FDI review process affect the timeline of M&A transactions in the CEE region?

Saša Sodja
So, of course, the FDI identification process can significantly extend the timeline of M&A transactions. I mean, this is most obvious in transactions that are supposed to be quick and simple, where the targets are small but fall into the sensitive sectors. In bigger transactions, especially when there's also a merger clearance requirement as well, FDI filing is more or less just a parallel procedure worked on by the same team – usually. I don't know how it is in all the CEE countries, but the way I understand it, mostly the competition law specialists cover FDI matters as well. So in the smaller transactions, where merger clearance thresholds are not met, we get the question a lot whether FDI filing is at all necessary, as it seems like just a formality. But the answer is yes, if not for anything else, at least to avoid the significant fines that are really substantial. It's especially difficult sometimes to explain how certain targets are related to sensitive sectors, as it seems that at least in Slovenia, the authorities understand these sectors in a very broad manner. So for example, a company producing labels may also be relevant for safety of food or supply of food, or any IT company automatically falls within the scope of review. And that's something that certain clients, especially not coming from the region or the country, are having difficulty to understand.

Sašo Papp

Okay, thank you. Let's move to Austria now. Célia, how does Austria's investment control framework address and evaluate foreign direct investments involving mergers and acquisitions within the country?

Célia Chausse

Yes, hello everyone. First of all, let me say it's a pleasure to be here. Austria first ventured into investment screening in 2011 with the introduction of Section 25A of the Foreign Trade Act, focusing on FDIs in sensitive sectors such as defence, energy, and telecommunications. Initially, the impact was quite modest, with only 25 procedures in eight years, highlighting the limited scope and challenges in addressing indirect acquisitions, unless there was a clear intent to circumvent the screening provisions. The landscape shifted significantly with the EU’s FDI Screening Regulation in 2019, necessitating a more robust national framework. In response, Austria enacted the Investment Control Act in 2020, significantly expanding its investment control screening regime. This new era introduced a specialised investment screening unit within the Federal Ministry of Labour and Economy, bolstering the staff from one to five case handlers, not counting leadership roles. The Investment Control Act aligned Austria with the EU regulation, establishing a contact point for European cooperation and ensuring that Austria's screening authority could comprehensively assess transactions within both the national and European frameworks. Additionally, the Austrian Investment Control Committee, comprising members from various ministries and federal regions, was set up to advise the Minister of Labour and Economy, further strengthening Austria's approach to scrutinising FDIs on both the national and European level. This comprehensive structure underscores Austria's commitment to safeguarding its security and public order through meticulous investment screening.

Sašo Papp
Okay, and so when does a transaction require approval in Austria?

Célia Chausse
In Austria, a transaction basically requires authorisation if it meets specific criteria. First, the target must be an Austrian company of a significant size, registered or headquartered in Austria. Second, it must operate in a sensitive sector as detailed in the Investment Control Act. Annex 1 provides an exhaustive list of critical sectors such as, for example, defence, critical energy infrastructure or 5G infrastructure, with a 10% ownership threshold for screening. And then Annex 2 covers a non-exhaustive list of broader areas such as finance and cybersecurity, with a 25% threshold indicating sectors where security or public order might be at risk. Third, the acquirer must be a foreign entity or individual, distinct from other jurisdictions that also screen EU investors or local investors. This means the acquirer should be from outside the EU, the EEA or Switzerland. And fourth, the investment must be direct, meaning acquiring a certain percentage of voting rights, with thresholds at 10%, 25% or 50%, or a controlling influence in the company, or through asset deals that imply control over certain parts of the company. Therefore, the ICA approach includes share deals, asset deals, and acquisitions of controlling interests, but not greenfield investments and joint ventures, focusing on transactions that could influence Austria's sensitive sectors and ensuring a foreign link in the acquirer structure.

Sašo Papp
Thank you, Célia. Soňa, how do varying FDI regulations across CEE countries impact the structuring and execution of cross-border M&A deals, especially when dealing with multiple jurisdictions?

Soňa Hanková
FDI is definitely a key factor in the EU and in the CEE region which is significantly influencing M&A processes these days. Investors who are interested in the CEE region must consider FDI screening mechanisms which can delay their transactions. Usually, screening mechanisms have an impact on transaction timelines, on the way the transaction itself is implemented, and its closing. It is thus very important for investors to properly assess whether their transaction falls within the FDI screening mechanism, whether such screening is mandatory or voluntary, and whether the closing must wait for clearance from the screening authorities or can proceed prior to having this clearance. FDI procedures, similarly to merger controls, which were mentioned by Saša, require preparation of transaction documentation, and waiting for clearance can delay the whole transaction and can make investors impatient.

For example, according to the Slovak FDI Act, non-critical investments can be implemented prior to having local clearance. However, critical investments must wait for clearance from local authorities before they can be implemented on a global level. This is a complexity which requires, in multi-jurisdictional deals, real planning and coordination of all teams and jurisdictions so that the transaction can be properly implemented. Another tricky point is that in the CEE region, there is no uniform practice on when to notify authorities of transactions. In Slovakia, applications for screening have to be filed prior to implementation of the transaction, which is obviously a broad term. The law does not provide for a specific deadline when to file. So there might be doubts across jurisdictions whether filing should happen after signing and prior to closing or before the signing itself. So investors need to factor all these specifics of each jurisdiction into their transaction planning and transaction documentation, and what is also worth mentioning is the results of the screening mechanism, which can result in prohibition of the deal or in alterations of the deal by screening authorities, which can have an adverse effect on the whole transaction documentation. So it is also important to think about this risk and to implement and redraft clauses in the document, such as break fees.

Sašo Papp
Okay, thanks. What criteria or factors are taken into account when reviewing foreign investments related to mergers and acquisitions in sectors deemed strategic or sensitive for Austria?

Célia Chausse
In Austria, a transaction requires approval if it involves a strategically important sector and meets the other criteria under Section 2 of the ICA that I've mentioned before, triggering a security and public order risk assessment. To initiate this, investors must provide detailed information, including, for example, contact details, business descriptions, ownership structures, funding sources, and, for example, potential impacts on Union projects. The process considers risks both from the investor and the target company. A flexible approach is used, so more sensitive targets might raise immediate concerns, while less sensitive ones might require additional risk factors to warrant action. Key investor-related criteria include government control, involvement in activities affecting security or public order, and legal compliance, such as adherence to EU sanctions. Decisions by other authorities or concerns from other Member States about the investor's trustworthiness are also considered. The motivation behind the investment, whether strategic or purely financial, is analysed for its potential security risks. The importance of the target to Austria's security and public order is scrutinised, looking at its activities, R&D, and patents. The transaction's broader impact, including effects on other EU Member States and involvement in projects or programmes of European interest, alongside market dynamics like supply chain disruptions, are also evaluated.

Sašo Papp
Interesting. Célia, are there common challenges that applicants encounter in the Austrian FDI application process? And maybe, could you share some examples of the typical conditions or requirements that foreign investors must meet in M&A deals to adhere to Austrian FDI regulations?

Célia Chausse
Certainly. Navigating the Austrian FDI application process does present some common challenges, as shared by legal experts working on FDI transactions. One primary issue is the broad scope of application defined in the ICA's annexes, covering sectors like energy, telecommunications, and healthcare without detailed definitions. This ambiguity often raises questions about the extent of activities covered, such as whether it includes sales in addition to production, or if a company is exempt if its main activities are outside sensitive sectors. The general approach by the Austrian authority has been to interpret these sectors broadly, with the opportunity for investors to seek a clearance certificate for clarity, enhancing legal certainty. Another aspect is the startup exemption intended to shield smaller enterprises from screening, which sometimes leads to confusion regarding eligibility based on the size and financial metrics of the target company. Deadlines also pose a significant challenge, especially given the time-sensitive nature of M&A deals. The procedural timelines are quite strict, with a notable pressure point being the phase where the authority assesses risks and considers imposing mitigating measures without the possibility of pausing the clock, a feature that some other jurisdictions offer. Cross-border deals of course introduce additional complexity due to varying timelines across different jurisdictions, emphasising the importance of early engagement with the authority to avoid procedural delays. Moreover, the investor being the sole party in the proceeding can complicate matters, particularly when sensitive information about the target is required or in hostile takeover scenarios. When it comes to mitigating measures to address security or public order risks, these are tailored to individual cases and can range from ensuring local production continuity to imposing restrictions on technology and sensitive data access. Such measures are unilaterally decided by the authority but typically discussed with the investor to ensure enforceability. They are designed to be proportionate and might include periodic reporting obligations to ensure compliance, offering a balanced approach to safeguarding Austria's interests while facilitating FDI.

Sašo Papp
Saša, in your experience, what are the primary challenges faced by multinational corporations when navigating FDI regulations while pursuing M&A opportunities in the CEE region?

Saša Sodja
I think it's already been said, you know, the countries in the CEE region are so very diverse, so it's not unusual that the FDI review procedures and rules are diverse as well. So, FDI policies in general are very dynamic and often reflect geopolitical and economic shifts, and the balance between securing investment opportunities and complying with inflexible regulatory requirements is always very demanding. So I think the balance now is still in favour of attracting investments, at least based on the statistics we obtained from our local regulator. I mean, the amount of transactions that are rejected is basically insignificant. Although I guess for those investors that have been rejected, it's not insignificant. What is true for the countries in the CEE region is that bureaucracy is quite robust, and the approach is formalistic. So for the multinational companies that come from different, more pragmatic environments, it's difficult for them to understand our regulatory landscape. So, you can prevent all these misunderstandings by engaging in early and transparent communication with the regulatory authorities and also all the stakeholders. That can help identify potential issues early in the process, you know, because this proactive approach usually results in a more efficient review process and reduces the risk of delays, especially in the form of requests for further information and having meetings and such.

Sašo Papp
Soňa, given the diverse regulatory environments across CEE, what strategies do you recommend for conducting due diligence effectively in cross-border M&A transactions involving FDI?

Soňa Hanková
I agree with Saša. In the last three years, CEE countries have rapidly implemented local FDI legislation, and FDI laws are relatively new and their practical implementation leaves many open questions. And those investors who are interested in the CEE region should understand all these legal frameworks in detail and well, so they are able to update their transaction timelines and documentation. We recommend early consultation on compliance requirements to prepare the investments also from an FDI perspective, to avoid any penalties and unpleasant surprises at later stages. It is beneficial for investors to proactively engage in consultations with FDI authorities so they can prepare their filings as well as possible. And this will then speed up the process before the authorities. We’ve observed that investors often face challenges in determining whether their transactions fall within the FDI screening regimes. And this is especially true when they do not have access to complete information about the target because of very sensitive transaction deals and because of confidentiality obligations. So in such cases, investors do not have all relevant data to assess whether their transaction falls within FDI screening regimes. Therefore, we recommend including FDI analyses in the due diligence process. When investors are starting to deal with the right questions in due diligence, we are able to collect relevant data, which then enable them to assess whether their deal falls within the screening regime, whether such regime is mandatory or voluntary, and also, it will help them to assess when to file the notification and when is the proper time. And all this information has an impact on the transaction timeline and on the transaction documentation.

Sašo Papp
Okay, thank you very much. Just a last question, Saša, for you. In your practice, how have recent changes in FDI regulations across CEE countries influenced the approach to and the structure of M&A transactions? In short, please.

Saša Sodja
So, increased scrutiny always increases the need for more strategic planning, right? Like Soňa already said, now buyers have to increasingly focus on pre-deal assessment of any regulatory risk. We're also noticing a growing emphasis on contingency planning in cases where the regulators might object or challenge the transactions. So it's not always black and white. There are also these grey zones where the buyers don't really know what's going to happen. So they want to ensure that the investment can proceed smoothly under different circumstances, for example, by offering certain adjustments to the transactions or certain acts that would promote the investment. As filing for FDI consent is usually in the sphere of the buyers, the impact of the process on the sellers also needs to be assessed and the impact on the dynamics between the two parties. It's often that the question of filing opens a long discussion, whether it's even necessary, if it's required, what are the information requirements, because before the deal closes, the sellers don't really want to give all the information to the buyer. So, yeah, it definitely impacts the approach to M&A transactions in the region.

Sašo Papp
Thank you. Célia, could you provide an overview of the FDI application landscape in Austria, including maybe the volume of applications, approval rates, and any notable trends in the process timeline?

Célia Chausse
Yes. Since the ICA came into effect on July 25th, 2020, up until the end of February 2024, we've seen over 320 authorisation applications. Remarkably, no transaction has been blocked so far. In 2022 and 2023, only about 4% of the cases required mitigating measures, with the vast majority being cleared without conditions. Additionally, there were 45 requests for clearance certificates, 39 of which confirmed no approval was needed. On a broader scale, we've handled over 1,100 transactions at the European level, averaging about 27 notifications per month from other Member States. The efficiency of the process has improved significantly, with the average duration dropping from 36 days in 2021 to just 22 days in 2023 for authorisation procedures. I would say it's advisable for transactions clearly meeting the ICA's criteria to apply directly for authorisation, bypassing the clearance certificate route, which can extend up to two more months. In the most extended scenario, combining the EU cooperation mechanism and the national procedure, the process could stretch to half a year. However, prompt responses to additional information requests can notably accelerate the timeline, emphasising the role of the applicant's responsiveness in the overall duration.

Sašo Papp
Last, last question, Célia. What insights can you share for foreign investors looking to navigate Austria's FDI regulations, particularly in M&A activities, and how does Austria balance welcoming foreign investments with safeguarding national interests?

Célia Chausse
Navigating Austria's FDI landscape, especially in time-sensitive M&A deals, requires a proactive approach. Even though, in Austria, the national procedure starts after the EU cooperation mechanism, the Austrian authority begins the risk assessment during the EU cooperation mechanism, aiming for efficiency. My advice for investors is to provide, right from the start, all necessary details and documents, including a clear description of the transaction and any public sector involvement of the target company. Prompt and complete responses in German for national requests, and preferably also in English for EU interactions, can significantly streamline the process. Legal representation, while not mandatory, is also recommended for complex cases. To sum up, I would say Austria is a small and open economy which values foreign investments for business growth and innovation, but at the same time is not naive and remains vigilant about national security. The Investment Control Act embodies this balance with exemptions for startups to encourage venture capital without burdensome procedures. Procedural deadlines are set to ensure swift processing, maintaining predictability and transparency within a stable legal framework. The right to be heard and the possibility of legal recourse provide a safety net for investors, alongside accessible guidance and annual reports on FDI trends. This balanced approach ensures, in my view, that Austria remains an attractive destination for foreign direct investments while protecting its essential interests.

Sašo Papp
Célia, Saša, Soňa, it was a pleasure. Big, big thank you for your time. Thanks for listening, everyone. If you missed any of our previous episodes, you can find them on our website or revisit and rewatch them via your LinkedIn profile. Be sure to stay tuned for our upcoming episode.