14 August – need2know
Direct investments from third countries are increasingly viewed critically. Politically the “sell-out” of technology is feared.
On 25 July 2020, the Federal Act on the Control of Foreign Direct Investments (“Investment Control Act – ICA“) came into force.
The Covid-19 crisis has accelerated the legislative process and intensified its content. It is feared that economically weakened companies could more easily become the target of hostile takeovers by foreign investors. In addition, the ICA supplements the EU-FDI-Screening Regulation (EU) 2019/452, which provides for a coordinated European investment control process. This EU-Regulation has also reinforced the trend towards stricter national investment controls.
What exactly does the Investment Control Act change? What are the effects on corporate transactions?
Previous legal situation
Prior to the ICA, the control of foreign direct investments was regulated in Section 25a of the Foreign Trade and Payments Act 2011. Investments in Austrian target companies by third country acquirers were subject to approval only in limited situations: Just a few security-relevant areas were affected. The threshold was generally 25%. Only a direct acquisition of shares was subject to approval, but no indirect acquisition (e.g. via a European intermediate holding company) or asset deals.
The ICA replaces Section 25a of the Foreign Trade and Payments Act 2011. The investment control regime will be considerably tightened and more broadly applied.
What is a direct investment that is subject to approval?
A “foreign direct investment” is subject to approval (Section 2 ICA) if
- the target company is active in a control-relevant area (Annex to the ICA); and
- a minimum share of the voting rights is reached or exceeded through the investment or a controlling influence is achieved in some other way or a significant influence over a part of the company is acquired through the acquisition of significant assets.
A foreign direct investment is the direct or indirect acquisition of (Section 1(3) and (6) ICA) of
- an Austrian company;
- shares of voting rights in such company;
- a controlling influence over such company; or
- of material assets of such company by a foreign person.
The ICA therefore also requires approval for indirect acquisitions and for asset deals in which the company or significant individual assets of the company are acquired rather than shares in the company.
Start-up and de-minimis exception
Micro-enterprises and start-ups with fewer than ten employees and an annual turnover or annual balance sheet total of less than two million euros are exempt from the approval requirement (Section 2 (2) ICA).
Which security-relevant areas are affected?
The Austrian target must be active in a security-relevant area in which takeovers could endanger security or public order.
The ICA distinguishes:
- Particularly sensitive areas, which are conclusively defined in Part 1 of the Annex to the ICA.
The areas are defence equipment and technologies, the operation of critical energy infrastructure and critical digital infrastructure, water, the operation of systems that guarantee the data sovereignty of the Republic of Austria, and research and development in the field of drugs, vaccines, medical devices and personal protective equipment;
- Other areas in which a threat to security or public order, including crisis and existential threats within the meaning of Art 52 and 65 TFEU, may arise. These areas are listed as examples in Part 2 of the Annex.
The security-relevant areas are broader defined and further specified. Areas that were previously not subject to an approval (e.g. critical infrastructures and technologies) are now included.
Which voting rights thresholds apply? When does the new 10% voting rights threshold apply?
Acquisition of shares is only subject to approval if a minimum share of the voting rights as defined in Section 4 ICA (so-called “voting rights threshold”) in an Austrian target company is reached or exceeded.
In the particularly sensitive areas (Part 1 of the Annex), the new 10% voting right threshold applies. For all other areas (Part 2 of the Annex), the 25% voting right threshold applies, as before. A further approval requirement also exists if shares are increased to 25% and 50%.
In the case of research and development of drugs and medical products, the reduction of the minimum threshold from 25% to 10% is limited until December 31, 2022.
How does the approval procedure work?
The application must be filed at the latest at or immediately after the conclusion of the legal transaction (signing). Pursuant to Section 6 (1) ICA, the acquiring party is still required to submit an application for approval.
New on the one hand is that the competent authority must inform the target company of such an application. On the other hand, the Austrian target company has a fall-back obligation to notify the competent authority if it is aware of an intended acquisition process that requires approval and it has not been provided with information on an application for approval. If the target company fails to comply with this notification obligation, an administrative penalty of up to EUR 40,000 – depending on the degree of fault – may be imposed.
In addition, the competent authority (Federal Minister of Digitalization and Business) is entitled to initiate an approval procedure ex officio.
The transaction shall not be approved, if the direct investment may lead to a threat to security or public order whereby any effects of such investment in the areas listed in the annex shall be examined (Section 3 ICA). In addition, the following shall be taken into account:
- whether an acquiring person is directly or indirectly controlled by the government of a third country, i.e. due to the ownership structure or in the form of substantial financial resources;
- whether an acquiring person, or a natural person who holds a management position in the acquiring legal entity, is or has been involved in activities that have had an impact on security or public order in another EU Member State; and
- whether there is a significant risk that an acquiring person, or a natural person who has a leading position in the acquiring legal entity, is or has been involved in illegal or criminal activities.
The new approval procedure also integrates the cooperation mechanism between the Member States and the European Commission provided for in the EU-FDI-Screening Regulation. The new approval procedure is thus divided into two phases:
Within one month after the expiry of all EU consultation periods as defined in Section 12 (5) ICA (i.e. 35 or 40 days after the notification to the European Commission), the Federal Minister for Digitalization and Business either
- issues an official notice stating that no approval procedure will be initiated because there are no objections to the acquisition (or because obligations under EU or international law stand in the way of such a procedure); or
- notifies that an in-depth investigation (Phase II) is being initiated.
If neither a notice nor a notification is received within the one-month period, the approval is deemed to have been granted.
Within two months of notification of the initiation of an in-depth investigation procedure, either
- the transaction must be approved by notice (with or without conditions); or
- the approval must be refused if conditions are not sufficient to eliminate the risk.
If the two-month period expires without prohibition (or approval of the transaction with conditions), the approval is again deemed to have been granted.
Ex-lege suspensive condition
Legal transactions for which approval is required under the ICA are deemed to be concluded under the condition precedent that the approval is granted. Execution of the legal transaction (closing) prior to approval is therefore not permitted; a transaction that is nevertheless closed is statutorily ineffective.
Transaction security through clearance certificate
A clearance certificate for a certain acquisition may be obtained in advance (Section 9 ICA). By this means it can be clarified upfront whether a transaction is subject to any approval requirement under the ICA.
When does the new ICA apply?
The Investment Control Act applies to foreign direct investments for which an approval is required pursuant to the Investment Control Act after the date of entry into force of this Act (25 July 2020). However, the approval requirement already applies to pending transactions signed before July 25, 2020, but so far not closed.
Authors: Tamara Tomic, Christoph Nauer
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