Screen time for FDI

A new bill aims to give the minister the power to review foreign direct investment into the State from outside the European Economic Area and Switzerland. Cormac Little powers up the tricorder.

Unlike many of its key trading partners, Ireland does not currently have a regime for screening foreign investment (FDI) into key infrastructure. However, this is set to change. With the long-awaited publication of the Screening of Third Country Transactions Bill last year, the Government outlined its plans for the introduction of rules giving the Minister for Enterprise, Trade and Employment the power to review foreign direct investment into the State from outside the European Economic Area and Switzerland.

If and when the bill is adopted by the Oireachtas, Irish law will contain, in common with many other EU member states (and in addition to the UK and the US), a regime allowing for, on the grounds of security or public order, the prohibition or modification of FDI into key infrastructure and industries from hostile actors seeking to use ownership of, or influence over, strategic businesses and assets to harm the State. While the bill has not been mandated by the EU, its adoption has, nonetheless, been strongly encouraged by the European Commission. 

Relevant EU legislation

The publication of the bill was preceded by EU Regulation 2019/452 establishing a framework for the screening of FDI in the EU. The FDI Screening Regulation came into effect in October 2020 and seeks to encourage cooperation and information exchange between EU member states and the European Commission regarding FDI from third countries.

While the Screening Regulation neither gives the commission the power to block or suspend FDI, nor requires member states to introduce such rules, it does promote intra-EU cooperation, while also suggesting some potential harmonisation measures.

To the extent member states decide to adopt or, indeed, amend their national rules on the review of foreign investment, the regulation contains a non-exhaustive list of factors that may be taken into consideration in determining whether a proposed investment is likely to undermine national security or public order.

The regulation also requires member states to inform their fellow member states of any ongoing screening. If a particular FDI elsewhere affects its security or public order, an EU member state may issue comments to the screening member state, which it will be obliged to take into account in its relevant review.

Member states are also required to inform the commission of any ongoing screening. The latter institution may issue a non-binding opinion if the relevant FDI affects security or public order in more than one member state and/or projects receiving significant EU funding.

Key elements

The bill is relatively lengthy, comprising four parts and 42 sections. Its key focus is the creation of a mandatory notification obligation for parties to third-country transactions, acquisitions, agreements, or other activities with a value of €2 million or more in designated sectors, or involving sensitive or strategic activities that result in a change of control of an asset or undertaking in the State.

Under section 9 of the bill, transactions that satisfy each of the following criteria trigger a mandatory notification to the minister:

• •A party to the transaction is a third-country undertaking or a person connected with a third-country undertaking,
• The value of the transaction is equal to, or greater than, €2 million (or such other amount as may be prescribed by the minister),
• The transaction directly or indirectly relates to, or impacts upon, one or more areas likely to affect security or public order, including critical infrastructure (whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure), critical technologies (including artificial intelligence, robotics, cybersecurity, defence, and energy storage), or the supply of critical inputs (including energy or raw materials, as well as food security),
• The transaction relates, directly or indirectly, to an asset or undertaking in the State, and
• Having satisfied the above criteria, the transaction results in a change in control, in terms of the percentage of shares or voting rights, over an asset or undertaking from 25% or less to greater than 25%, or from 50% or less to greater than 50%.

Submitting the notification

Under section 10, parties to a notifiable transaction must generally file a notification with the minister at least ten calendar days prior to the planned date of completion. Key details regarding the relevant investment must be included in the notification, including:

• The identities of the parties involved,
• The ownership structure of the parties to the transaction,
• The approximate value of the transaction,
• Information on the products, services, and business operations of the parties to the transaction,
• The nature of the economic activities carried out in the State by the parties,
• The funding of the transaction and its source, and
• Details of any sanctions imposed on the parties to the transaction by the EU.

While all parties to a particular investment have a notification obligation, section 11 of the bill establishes a procedure for one party, upon agreement with the remaining party(ies), to make the necessary notification to the minister, resulting in deemed compliance by the remaining party(ies) with their respective statutory obligation(s).

‘Call-in’ provisions

Section 12 of the bill allows the minister to ‘call-in’ for review non-notified transactions that affect the security or public order of the State, either for up to five years after the date on which the transaction is completed, or for up to six months after he/she becomes aware of the transaction (whichever is the later).

Under the same section, non-notifiable transactions may be ‘called in’ for up to 15 months post-completion for similar reasons. The relevant provisions are likely to apply retrospectively. Transactions completed in the 15 months before section 12 comes into operation may be reviewed, again based on the security or public order of the State.

Prohibited transactions?

Under section 13, the minister’s screening of a transaction for any threat it poses to security or public order will take account of several specific factors, including:

• Whether an investor is controlled by a third-country government, where such control is inconsistent with the policies and objectives of the State,
• The extent to which the relevant parties are/have been involved in activities related to security or public order of the State,
• Any evidence of illegality/criminality among the parties to the investment,
• The likelihood of the transaction resulting in actions that are disruptive or destructive to people, assets, or undertakings in the State, and/or
• Involve espionage affecting the interests of the State.

Having screened a transaction, the minister has, under section 16 of the bill, up to 90 days (extendable by 45 days) from when the transaction was notified to decide whether to allow the transaction to proceed (with or without conditions) or not.

The substantive test is whether the relevant FDI is manifestly contrary to the security or public order of the State. If no screening decision is issued within the 90-day period, the transaction is deemed approved.

The 90-day period, however, may stand suspended where a notice requesting additional information is issued. Specific timelines for such information requests to one or more parties are contained in section 19 of the bill.

Section 18 stipulates the types of conditions the minister may impose following the screening of a transaction, including requiring parties:

• Not to complete the transaction or specific parts of the transaction, whether before a specified date or
• at all,
• To sell or divest itself of any business, assets, shares or property,
• To prevent the flow of competitively sensitive information between undertakings or within an undertaking,
• To report on compliance with conditions imposed by the minister, and
• To pay the reasonable costs of the minister in monitoring compliance with any conditions imposed.

Appeals

A party to a transaction may, under section 27, appeal a screening decision made by the minister and/or a decision by the minister not to divulge the reasons for the decision in full. Appeals will be heard by an adjudicator appointed under section 22.

The adjudicator has, under section 29, the power either to allow the appeal while remitting the matter to the minister for reconsideration within a defined period, or to affirm the minister’s decision. The findings of an adjudicator may, under section 34, be appealed to the High Court on a point of law, not later than 30 calendar days from the date on which the party was notified of the relevant decision.

Key considerations

The overall purpose of the bill is to protect key infrastructure in the State from the influence of third-country entities with malign political or other objectives.

For any practitioner advising on mergers and acquisitions, the possibility of an FDI notification should be added to any transaction checklist. While such solicitors are well familiar with the need to confirm whether the relevant transaction requires merger clearance under either EU or Irish (or other national) merger control rules, they will, when the bill is adopted, also need to consider whether clearance from the minister under FDI screening rules is necessary.

If clearance is required, the parties would be well-advised, given the relevant review timelines, to submit a notification a number of weeks before they wish to complete the relevant transaction. Indeed, solicitors who regularly advise on international transactions will already be familiar with the need to consider whether the relevant deal might require approval under other national screening regimes (such as the UK’s National Security and Investment Act 2021 and/or the US Committee on Foreign Investment in the US (CFIUS) rules.

As mentioned above, both the US and the UK are third countries for the purposes of the bill. Indeed, given that entities based in either country are regularly involved in transactions with an Irish nexus, allied to the low transaction value of €2 million, it is likely that the bill, if adopted in its current form, will trigger a significant number of notifications to the minister each year.

Those practitioners already conversant with the preparation of merger notifications will notice some familiar features in the bill. However, there are certain key differences. For example, it is unclear whether a notification to the minister may be made based on a letter of intent, or whether an actual agreement is required.

The bill was first presented to the Dáil in August 2022 but, since then, progress has been slow. Surprisingly, the bill is not listed in this spring’s legislation programme. That said, given recent international developments, most notably Russia’s ongoing invasion of Ukraine, there is certainly recognition, allied to encouragement from the EU, for the need to adopt an Irish FDI screening regime. We can thus expect the bill to continue making its way through the Oireachtas over the coming months.

Look it up

LEGISLATION:

• CFIUS Rules (US)
• FDI Screening Regulation (EU Regulation 2019/452)
• National Security and Investment Act 2021 (Britain)
• Screening of Third Country Transactions Bill 2022

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