Right at the beginning of the COVID-19 crisis, the Austrian Minister of Economic Affairs announced a new investment control act. Its aim: to prevent the "sell-out" of the Austrian economy. On 3 June 2020, the draft bill was published for consultation. In this briefing, we provide a summary of the draft and analyse whether it achieves the stated objective.
At the outset, it should be noted that imposing restrictions on foreign investments on a broad scale would be contrary to EU law and to Austria's obligations under public international law. This is not what the draft does. Rather, the draft contains targeted expansions of Austria's already existing foreign direct investment ("FDI") review mechanism which are inspired, in particular, by legislative changes in Germany. Like the existing rules, the new law will apply to investments by non-EEA nationals in Austrian companies. The scope of FDI review is broadened by decreasing the minimum shareholding threshold which triggers the authorisation requirement from 25 % to 10% for certain sectors. Transactions which come within the scope of the new rules may be prohibited if they are capable of giving rise to a threat to security or public order.
In addition, the draft implements EU FDI Regulation (EU) 2019/452 which will be fully applicable from 11.10.2020 and which creates a new mechanism for EU-wide cooperation and information exchange in FDI review cases between the EU and its Member States.
The main aspects of the draft may be summarized as follows:
Until now, Section 25a of the Austrian Foreign Trade Act provides for the review of foreign direct investments of at least 25 %. However, the current rules only define security-relevant sectors in general terms. The new Investment Control Act lists the areas and sectors in which FDI may give rise to a threat to security and public order. These are:
Based on the draft, the threshold triggering the authorisation requirement will be reduced from 25% to 10% in the following particularly sensitive areas:
Depending on the sector (see above), foreign direct investment is subject to approval if at least 10% or 25% of the shares are acquired. Increases in the shareholding to 25% and 50% give rise to additional approval requirements. For purposes of determining whether the thresholds are met, the voting rights of several foreign acquirers must be added together. In addition, voting rights held in the target company by foreign parent, subsidiary and sister companies of the acquirer as well as by companies affiliated with the acquirer through syndicate agreements must also be added.
The approval requirement also applies if a controlling influence is acquired over the Austrian target company irrespective of the acquired shareholding, e.g. by means of syndicate agreements. For the definition of control, the Austrian government's explanatory memorandum refers to the EU Merger Regulation. In addition, asset deals require approval if the acquirer acquires a significant influence over part of the company by purchasing significant assets. Start-ups with fewer than 10 employees and an annual turnover/balance sheet total of less than EUR 2 million are exempt from the approval requirement.
One major innovation compared to the previous rules is that indirect acquisitions may also be subject to Austrian FDI review. Indirect acquisitions require FDI approval if they are entered into by a (legal) person other than the one who will actually be able to exercise influence over the target post-transaction. Whether this is the case has to be assessed according to the true economic content of a transaction. The Economic Ownership Act may be used to determine the ultimate controlling person. However, the control of indirect acquisitions is subject to limits under EU law: Acquisitions by companies based in the EU may not be restricted, even if these companies themselves have foreign shareholders. According to the explanatory memorandum, the intent of the law is to capture circumventions of the FDI review rules (in analogy to the German Foreign Trade and Payments Regulation), notably cases in which the direct acquirer does not carry out any significant independent economic activity in the EEA.
Transactions may be prohibited if they are capable of giving rise to a threat to security or public order, including the provision of basic needs and crisis prevention. According to the case law of the European Court of Justice and the Communication of the EU Commission of 25.3.2020 (C(2020) 1981 final), restrictions of the free movement of capital may be justified if there is a threat to a fundamental interest of society. Threats may also be posed by natural persons who have a management function with the foreign buyer. Examples include persons with a particular proximity to the government of a third country, persons who have been engaged in activities which affected public order or security in another EU Member State, and persons who have been involved in illegal or criminal activities. Purely economic national interests (keyword: "prevention of the sale of Austrian companies") however do not justify the refusal of approval.
A new feature is that a non-jurisdiction letter (Unbedenklichkeitsbescheinigung) can be requested for certain foreign direct investments. The non-jurisdiction letter is a decision confirming that the transaction is not subject to approval under the Investment Banking Act.
The application for approval must be submitted immediately after the transaction has been entered into (signing) or, in case of a public offer, prior to publication of the decision to submit an offer. Applications for approval may be submitted by the acquirer, by the target company, or jointly. In the event of a violation of the FDI approval requirement, the competent Federal Minister may initiate proceedings on his or her own initiative.
Phase I of the procedure begins with a 35-day period within which the EU Commission and other EU Member States may comment on the transaction. If an EU Member State exercises its right to comment within the 35-day period, the Commission has five (additional) days to comment. These comments must be taken into account by the Republic of Austria in the proceedings. After the period for comments (35 or 40 days), the authority has one month in which to carry out its Phase I examination. At the end of Phase I, the authority either initiates an in-depth examination procedure (approval procedure) or issues an official decision approving the transaction because there is no security or public order concern. A possible in-depth investigation (phase II) must be completed within a further two months. If no decision is issued within the statutory deadline during Phase I or Phase II, the approval is deemed to have been granted.
Violations of the authorisation requirement are punishable by prison sentence of up to one year. In case of violations on a commercial basis or based on qualified deception, the penalty is even up to three years' imprisonment. Transactions are transitionally void until authorisation is granted. In the case of transactions that have already been carried out, where there is a reasoned suspicion of a threat to security or public order, conditions can be imposed, up to and including reversal of the transaction.
Bernhard Müller and Heinrich Kühnert for the DORDA foreign trade law team