New foreign investment screening process adopted

On 1 March 2023, Act No. 497/2022 Coll. on the screening of foreign investments and on amendments and supplements to certain acts, as amended (the “FDI Act”) entered into force. The new FDI Act introduced a comprehensive screening process of foreign investments in the Slovak Republic.

The Slovak Republic has thus become one of the countries that have introduced a foreign investment control process. This new foreign investment screening process in the Slovak Republic is governed by the standards set out in Regulation (EU) 2019/452 of the European Parliament and of the Council setting out a framework for the screening of foreign direct investment in the EU. Previously, the Slovak Republic lacked a complex legal framework for screening foreign investments due to the protection of security and public order in the Slovak Republic and security and public order in the EU. A partial regulation concerning the control of transactions with critical infrastructure elements was stipulated by Act No. 45/2011 Coll. on critical infrastructure, as amended. This act was repealed by the new FDI Act.

The purpose of the FDI Act is not to reduce the inflow of foreign investments to Slovakia, but to introduce the possibility of assessing foreign investments on the grounds of protection of security and public order of the Slovak Republic or the EU.

Who is a foreign investor under the FDI Act?

In general, any person outside the EU is considered a foreign investor, i.e. if a person is not an EU citizen or does not have a registered seat or place of business in the EU.

However, a person who is an EU citizen or has a registered seat or place of business in the EU but is controlled by a person outside the EU or by a public authority of a third country that is the ultimate beneficial owner or finances the transaction, will be also considered a foreign investor.

What is considered a foreign investment under the FDI Act?

A foreign investment is any investment (regardless of its amount) carried out by a foreign investor that allows the person to acquire a target (directly or indirectly), to exercise effective participation or control therein, to acquire substantial assets or to increase effective participation in the target.

It is not relevant whether the investment is a planned investment or the result of the exercise of a pledge, execution or other enforcement right.

On the contrary, what should not be considered a foreign investment under the FDI Act?

Mgr. Barbora Mihaliková, attorney, SOUKENÍK - ŠTRPKA

An investment between related parties (i.e. intra-group reorganisations), the creation of a pledge over the target or a transaction in the ordinary course of business for the purpose of selling or purchasing goods, products, stocks or services is not considered a foreign investment.

What does a target mean?

A target is an existing legal entity with its registered seat in the Slovak Republic, or a legal entity planned to be established in connection with a foreign investment, regardless of its legal form, existence of legal capacity, method of financing and focus of its activities, including profit-making activities.

What types of enterprises and foreign investments are covered by the FDI Act?

The FDI Act recognizes two types of investment, i.e. (i) critical foreign investment and (ii) “common” foreign investment.

Critical foreign investment is defined by the FDI Act as the acquisition or exceeding of a 10 %, 20 %, 33 % or 50 % participation interest in a target in the sectors stipulated in the regulation of the government of the Slovak Republic No. 61/2023 Coll. as follows: (i) designated products, in particular weapons, explosives, pyrotechnic products, (ii) defence industry products, (iii) dual-use items, (iv) biotechnology, (v) critical infrastructure, (vi) essential service according to cybersecurity regulations, (vii) digital cloud computing service, (viii) national cryptographic protection assets, (ix) media services, (x) content sharing platforms, with annual turnover of more than EUR 2 million, (xi) publishing a periodical publication, (xii) operating a news web portal, (xiii) news agency.

The FDI Act defines a “common” foreign investment as the acquisition or exceeding of a 25 % or 50 % participation interest in any target, excluding the sectors listed above, regardless of the turnover of the target or the value of the transaction.

Mgr. Michaela Kováčiková, junior associate, SOUKENÍK - ŠTRPKA

How is the process of foreign investment screening carried out?

The competent authority for screening is the Ministry of Economy of the Slovak Republic (the “Ministry of Economy”).

The procedure may be initiated at the request of a foreign investor or ex officio by the Ministry of Economy. This procedure has several phases that include: (i) assessment of the risk of negative impact of the foreign investment, (ii) screening of the foreign investment and (iii) consultations.

The assessment of the risk of a negative impact of a foreign investment is only applied in the case of a “common” foreign investment. The Ministry of Economy then informs the Ministry of Interior, Defence, Foreign Affairs and other affected ministries, together with the police and intelligence services (i.e. consulting authorities) about the initiation of the procedure. These authorities shall provide their opinion on the risk of negative impact of the foreign investment within 30 days. If no risk has been identified at this stage, the Ministry of Economy shall send a confirmation to the foreign investor and to the target. On the contrary, if a risk of negative impact is identified, the Ministry of Economy will initiate the screening process.

Foreign investment screening is always applied to a critical foreign investment and in respect to a “common” foreign investment only if a risk of negative impact was identified at the first stage. In this process, the Ministry of Economy informs the consulting authorities again and they provide their opinion within 40 days. Subsequently, the Ministry of Economy drafts a final opinion on (i) the authorisation, (ii) the conditional authorisation or (iii) the rejection of the foreign investment. The foreign investor and the target may provide comments thereto within 15 days (this process is also referred to as consultations).

After the consultations, the Ministry of Economy issues a decision approving the foreign investment or a decision approving the foreign investment conditionally (in such a case, also determining the mitigation measures) or puts forth an opinion on the rejection of the foreign investment to the government. If the government agrees with the opinion, the Ministry of Economy issues a decision to ban the foreign investment. If the government disagrees, the foreign investment shall be allowed. If the Ministry of Economy does not issue a decision or does not put forth a final opinion to the government within 130 days from the date of commencement of the screening, the foreign investment is deemed not to have a negative impact. However, the FDI Act does not specify any time period within which the final opinion should be scrutinised by the government. The foreign investor may file in an appeal against the decision of the Ministry of Economy that will be resolved by the Minister of Economy. The decision of the minister may be examined by the Supreme Administrative Court of the Slovak Republic on the basis of an administrative action.

What are the practical implications for M&A transactions?

The new process may have a significant impact on the conduct of M&A transactions. From a practical point of view, in early stages of the transaction it is necessary to assess whether the transaction will be subject to mandatory screening, i.e. whether it is considered a critical foreign investment. In case it is not a critical but a “common” foreign investment, it is necessary to assess the level of risk that the transaction would be additionally screened ex officio by the Ministry of Economy and, on that basis, to consider whether to apply for optional screening before closing the transaction. Screening needs to be considered within the timing of the transaction as it may take up to 130+ days. A critical foreign transaction cannot close without prior approval.

What are the penalties for violation of the obligations under the FDI Act?

If a foreign investment is carried out without prior approval, the Ministry of Economy may initiate a procedure to verify the transaction ex officio and impose an obligation on the foreign investor to reverse the transaction. This authorisation may be exercised within two years after the transaction has been carried out.

In the event of a breach of obligations, the foreign investor may be imposed a fine. Fines may be imposed also repeatedly and not only for serious breaches (such as making a critical foreign investment without approval), but also for those deemed less serious (such as the breach of the obligation to notify the completion of an investment or to register in the registry of public sector partners).

The amount of the fine depends on the nature of the breached obligation and ranges from 1 % to 2 % of the aggregate total net turnover of the foreign investor, the person controlling the foreign investor, and the person controlled by the foreign investor, generated in the previous financial year (in the case of a foreign investor who is a legal person) or from EUR 100,000 to EUR 1 million (in the case of a foreign investor who is a natural person). If the investment value exceeds 2 % of the investor’s aggregate total net turnover, the value of the investment is used as the upper limit of the fine.

Conclusion

With respect to the above, potential foreign investors should consider conducting detailed due diligence prior to a transaction to determine whether such investment will be considered critical foreign investment within the meaning of the FDI Act. In the case of foreign investment of a larger financial range or investment concerning critical infrastructure, e.g. through various acquisitions of subcontractors, investors would thus ensure the highest possible level of legal certainty, e.g. with regard to possible petitions filed with a vision of frustrating or prolonging the negotiation process.