The review of foreign direct investment in Austria
The new Investment Control Act
On 15 July 2020, the Federal Act enacting an Investment Control Act and amending the Foreign Trade and Payments Act 2011 passed the Bundesrat (Federal Council). This paves the way for a new era in the control of foreign direct investments (FDI) in Austria. The tightened regime reflects a European and international trend: The issue has been on the radar of Europe's largest trading partners for quite some time. Meanwhile, investment control in the EU has also evolved from the tight "corset" of "national security and order" to the broader concept of protecting public interests. The efforts to create fair competition (keyword "level-playing-field") and the protection of legitimate interests are of course welcome, but at the same time Austria should remain attractive as an investment location.
Previous legal situation
Since 2013, Austria has operated an FDI control regime to review acquisitions of entities located outside the EEA and Switzerland (Section 25a Foreign Trade Act 2011). Investments by third country acquirers in Austrian target enterprises were subject to approval under strict conditions.
In practice, however, this regime has played an almost negligible role in M&A transactions, in particular for the following reasons:
- a legal situation with considerable gaps (e.g. with regard to asset deals, indirect acquisitions, etc.).
- an investor-friendlier view of the transactions or areas which involve a "threat to public security and public order within the meaning of Article 52 and Article 65(1) TFEU".
In recent years, the attitude of decision-makers at European and national level to foreign direct investment has changed considerably. Examples include the adoption of Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investment in the Union (EU FDI Screening Regulation) and various "policy papers" of the Commission aiming at fair conditions of competition and the protection of the European economy/technology. The COVID 19 crisis has also reinforced the trend towards stricter investment control.
Key elements of the new regime
The Investment Control Act (Investitionskontrollgesetz, InvKG) provides for the national rules accompanying the EU FDI Screening Regulation. Also, the InvKG considerably tightens FDI rules:
- The gaps as regards transactions covered by the Austrian FDI control are closed. For example, asset deals are explicitly mentioned as one type of direct investment.
- The areas in which a "threat to security or public order" may arise are listed in an extensive catalogue (Part 1 and Part 2 of the Annex). Any acquisition in one of these areas is subject to prior investment control approval if this results in a foreign investor acquiring directly or indirectly
1. a controlling influence over an Austrian company,
2. all / material assets of an Austrian company or
3. voting rights in an Austrian company, whereby a minimum share of 25% or 50% is reached or exceeded.
For particularly sensitive areas (Part 1 of the Annex), a sector-specific foreign investment control applies. In this case, approval is already required if the transaction results in a 10% share of voting rights in an Austrian company that is active in one of the following sectors:
1. defence equipment and technologies;
2. operation of critical energy infrastructure;
3. operation of critical digital infrastructure, in particular 5G infrastructure;
5. operation of systems that guarantee the data sovereignity of the Republic of Austria;
6. research and development in the fields of medicinal products, vaccines, medical devices and personal protective equipment.
- FDI control already applies if the investment is capable of "threatening security or public order". Investor-related factors are also taken into account in such assessment.
- The closing of the transaction prior to approval is prohibited, a transaction that is nevertheless completed is invalid ex lege and subject to criminal sanctions that can be imposed on board members of the acquiring legal person. This represents a draconian threat of legal consequences. Compliance with FDI rules will therefore play a key role in assessing the lawful implementation of future M&A transactions.
- The competent authority (Federal Minister for Digital and Economic Affairs) is given extensive powers, e.g. the right to initiate an approval procedure ex officio and to impose measures ex post (clearance with conditions, prohibition to implement the transaction, administrative order to reverse the transaction). The authority also has extensive rights of access, questioning and inspection.
- A de minimis threshold is newly introduced. Foreign investment control shall not apply if the target is a micro-enterprise. A micro-enterprise is defined as an enterprise
1. which employs fewer than 10 persons and
2. whose annual turnover and / or annual balance sheet total does not exceed the threshold of EUR 2 million
The new review procedure not only integrates the cooperation mechanism with the European Commission and the other member states provided for in the EU FDI Screening Regulation; it also clearly reflects the tightening of the substantive investment control rules.
- The application for FDI approval must meet more detailed standards.
- Target companies are subsidiarily obliged to notify if the acquiring person does not submit an application for FDI approval.
- The application for FDI approval must be submitted at the latest "immediately after conclusion ..." of the legal transaction (signing).
- The procedural deadlines are significantly extended, not least due to the need to operate the cooperation mechanism established by the EU FDI Screening Regulation (from 11 October 2020 onwards). Moreover, the deadline for the in-depth review (Phase 2) has been doubled from one month to two months.
- Phase 2 is no longer initiated by a decree that can be challenged in front of an administrative court, but by simple notification. Only the final decree concluding the proceedings can be contested.
- The authority is given extensive powers. These include the possibility of initiating an official approval procedure and subsequently reviewing an unauthorised transaction and, if necessary, imposing conditions or prohibiting it altogether.
- With an application for a “clearance certificate” (Unbedenklichkeitsbescheinigung), the acquirer can seek an administrative decision as to whether the transaction is subject to FDI approval.
Pitfalls in practice
In our ongoing advisory practice, also and especially in this critical transition phase, the following legal issues have come up; they may have a significant impact on the structuring of the due diligence and closing process:
- Investment control shall ensure that foreign acquirers do not obtain access to critical technologies and sensitive information, viewed from the perspective of a "threat to security or public order", prior to FDI approval of the transaction. This requires cautious and careful transaction planning (timing, drafting of contracts, due diligence with clean teams, etc.) and permanent monitoring. "Information leaks" ahead of schedule could already qualify as "gun jumping".
- Transition between old and new regime: The transitional provisions of the InvKG are unclear. The date of signing will likely be decisive. If the signing date is before the entry into force of the InvKG, the Foreign Trade Act 2011 will still apply; if the signing is after such date, the new regime will apply.
- Determination of the minimum threshold of voting rights (10%, 25%, 50%): In practice, considerable legal uncertainty exists, e.g. with regard to the aggregation of voting rights of two or more foreign investors, and the attribution of affiliated companies (upstream, downstream, sidestream). This may also impact the applicability of the de minimis threshold.
- Transaction subject to approval: Whether an acquisition is subject to approval can only be examined on a case-by-case basis. The sensitive areas listed in the Annex to the InvKG are quite vague and can be interpreted very broadly. In addition, the catalogue of Part 2 of the Annex is likely exemplary (not exhaustive).
- Application: It is not entirely clear whether or in which phase of the negotiations an application can be filed before signing (e.g. to obtain a clearance certificate).
Prohibition of implementation and sanctions
As in the past, a transaction requiring FDI approval may only be implemented following approval by the Federal Minister for Digital and Economic Affairs. As long as FDI clearance has not been granted, an acquisition requiring approval is deemed to have been concluded subject to the condition precedent that approval is granted. In the transaction practice, the approval under investment control law will continue to be reflected as a closing "condition" (condition precedent for the completion of the transaction).
A closing of the legal transaction is not permitted prior to approval, and a transaction that is nevertheless completed is a criminal offence punishable by imprisonment of up to one year (possibly up to three years). Furthermore, the underlying legal transaction is invalid under civil law. The transaction can be "cured" by subsequent approval.
In the interest of transaction security, the application for approval must be complete and correct, otherwise, apart from (administrative) criminal sanctions, there is a risk of subsequent obligations being imposed or the transaction being prohibited and reversed.
The InvKG is expected to come into force around 20 July 2020, except for the provisions on the cooperation mechanism within the EU, which will only enter into force on 11 October 2020.
We hope that we have put you in the mood for our upcoming commentary on the Federal Investment Control Act. The book will be published in the next few weeks.
To main menu