New FI regimes in the Czech Republic and Denmark - what you need to know
Ever since the EU passed its regulation on the screening of foreign direct investments into the EU in 2019 and then called upon Member States to make full use of foreign investment control rules on 25 March 2020, Member States have been introducing new FDI regimes, and tightening existing ones, like never before – see for example our recent post on the new Dutch FI regime. While the EU Regulation does not, strictly speaking, require countries to adopt screening mechanisms, it strongly encourages them to do so. The Czech Republic and Denmark have recently taken heed of the Commission’s recommendation and, as of May and July this year respectively, new FDI screening mechanisms have become applicable in these countries.
Let’s take each in turn.
While the Czechs did not exactly get up with the chickens (a Czech saying for at the crack of dawn), they have now taken their seat at the table and are ready to crack a few eggs. The Czech regime applies to all foreign investors (defined as non-EU investors) who acquire an effective degree of control over a Czech target. The bill to create a mechanism to screen foreign investments was signed in February and became effective on 1 May 2021.
Control under the regime is understood very broadly and extends to acquisitions of a minority stake (at least 10%) in the target company. There are no turnover, asset or market share based thresholds, and a mandatory filing is triggered when the target is active in certain specified industries. These industries include the usual suspects (i.e. defence and military equipment, dual-use items) but also the catch-all “critical infrastructure” concept which promises to attract the attention of deal makers in (inter alia) the healthcare, transport, communication, financial markets, food and energy sectors. The length of the review process is 90 days, but the Ministry of Trade and Industry can extend this by an additional 30 days when deemed necessary.
However, even when a mandatory filing is not triggered, the Ministry reserves the right to review any acquisition by a foreign investor for up to five years after closing. And importantly, the Ministry is vested with powers to force the foreign investor to sell the investment within a specified time period.
To ease this uncertainty, the Czech government has promised to allow companies to reach out for voluntary consultation on whether a deal should be notified. This may be advisable in borderline cases to avoid unwanted surprises long after the deal has been implemented.
The Czech government has estimated that the regime will capture approximately 300 transactions per annum – almost one a day – and we will be keeping a close eye on how this all plays out in practice.
Across the Baltic Sea, the new Danish foreign investment screening regime has also now come fully into force. The screening legislation, which was formally passed in May, applies to transactions which have closed since 1 September this year.
The Danish regime applies where a foreign investor (including EU/EFTA investors) acquires a 10% stake in a Danish entity in a sensitive sector or, importantly, where a foreign investor increases its existing stake to meet other thresholds – specifically 20%, 1/3, 50%, 2/3 or 100%. For example, a filing obligation may be triggered where the stake of a foreign investor increases only marginally (e.g. from 19.9% to 20.1%).
The Danish regime is also notable in that it applies beyond M&A. Specifically, for non-EU/EFTA investors, “special economic agreements" with Danish entities (e.g. joint ventures, supplier agreements, operating agreements and service agreements) in sensitive sectors may also trigger a filing obligation.
As far as the sensitive sectors are concerned, the Danish regime covers: (i) companies in the defence sector, (ii) companies involved in IT security functions or the processing of classified information, (iii) companies producing dual-use items, (iv) companies involved in critical technology, and (v) critical infrastructure companies.
To address the question of what makes technology or infrastructure “critical”, the Danish government has published an Executive Order, which provides helpful guidance to foreign investors. The order sets out a list of types of critical technology (excluding widely available consumer products) and, in relation to critical infrastructure, details 11 critical sectors, as well as 39 critical functions within those sectors. The Danish Business Authority (DBA) must inform the foreign investor of whether permission to complete the investment/special economic agreement is granted within 60 business days from the date of an application – and this can be extended further, until the DBA has completed its assessment.
Finally, for acquisitions of more than 25% of a Danish company in any “non-sensitive” sector (i.e. beyond those described above), a foreign investor may self-assess whether the investment poses national security or public order concerns, and whether they should voluntarily submit a notification to the Danish authority.
If a notification is not submitted voluntarily, the DBA can examine investments that it considers pose national security or public order concerns for up to five years after their implementation – and the Authority has the power to issue an unwinding order for the investment by such companies if, upon further analysis, they are deemed to constitute a threat to Denmark’s national security or public order.
Implications for investors
There are numerous differences between these two FI regimes and, in fact, the regimes in other EU Member States, from their thresholds to the type of investors and investments caught by the rules. But investors should consider both countries’ regimes carefully when planning their deals – in particular given their wide scope of application and the potential for investments to be scrutinised, in certain circumstances, long after they were entered into. We will keep these regimes under review, and provide an update on their operation in due course. In any event, the introduction of these rules is a strong reminder to companies engaged in M&A not to underestimate the complexity and reach of today’s foreign investment rules – which go far beyond the scope of merger control rules – and the importance of conducting a thorough assessment of filing requirements, potential risk profile, and timeline implications for a transaction. Considering Czech Republic and Denmark as the new kids on the block, we will keep these regimes under review, and provide an update on their operation in due course.