July 13, 2020

Volume X, Number 195

July 13, 2020

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July 10, 2020

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Czech FDI Screening Bill – Get Ready For New Regulatory Challenges

As we recently observed in many states across the EU, national lawmakers have been coming up with bills that put in place mandatory non-EU FDI (foreign direct investment) approval requirements. The purpose of this legislation is to give state authorities competence to assess risks to national interests arising from such FDI and, if necessary, take protective measures. As of October 2020, national regimes will be further supplemented by a new EU-wide FDI framework represented by the FDI Screening Regulation (EU 2019/452). The FDI Screening Regulation lays down rules for cooperation and sharing of information between EU member states and the Commission and confers new powers to the Commission to issue non-binding advisory opinions. To keep up the pace with Germany, France, Italy and others, on 21 April 2020 the Czech Government submitted to the Chamber of Deputies its bill for the new FDI Screening Act.

There is no doubt that recent cases, such as the widely reported attempt of a takeover of a German company CureVac developing COVID-19 vaccination, as well as the increasing vulnerability of EU industries lacking capital, demonstrate the necessity of such regulation in the internal market. FDI screening should bring protection to essential businesses struggling with the global slowdown against predatory takeovers.

The bill defines FDI as an investment of any kind by a non-EU investor aiming to perform economic activity in the Czech Republic if such investment creates an effective level of control of the investor over such economic activity.

The effective level of control will be established if the investment allows (i) a control of at least 10% of voting rights, (ii) membership of the investor or its close person in a body of the target, (iii) disposal of an asset through which the target performs its economic activity, or (iv) other control that provides the ability to access information, systems or technologies valuable for the protection of security, internal or public order.

The FDI screening proceedings will be commenced either by a mandatory filing by an investor or by the Ministry of Trade acting on its own motion (ex officio) following a consultation with the investor or its own FDI risk assessment. The Ministry of Trade will be entitled to commence the proceedings within 5 years (and in specified cases even later) after the completion of the investment.

Mandatory filing applies particularly if the target engages in (i) production, research or development of military material, (ii) operation of critical infrastructure, (iii) administration of essential information or communication systems, or (iv) development or production of dual use items.

The Ministry of Trade will be entitled to commence FDI screening proceedings also in case of any other FDI that may affect security, internal or public order. This category of investments, subject to a case-by-case basis assessment, is likely to bring uncertainty as to whether a particular investment falls within its scope. In order to avoid the risks of any post-closing screening and imposition of protective measures, investors will have the option to consult the investment with the Ministry of Trade prior to the transaction.

It follows that parties to a transaction, together with their advisors, will need to determine whether the transaction is subject to mandatory filing, and if not, whether it may lead to FDI screening commenced by the Ministry of Trade. In case of any doubts, the investor should rather consult the investment with the Ministry of Trade prior to the transaction. During legal due diligence, advisors will also need to review other FDI to the target (FDI that will take place after the bill comes into effect) to see if there is any risk of further screening of such completed investments by the Ministry of Trade.

Though the Ministry of Trade will act as a central authority for the FDI screening, it will also closely cooperate and collect opinions from other institutions, such as the Ministry of the Interior, police, intelligence services or the Czech National Bank, as well as other EU member states and the Commission (in case of EU relevance). If any authority concludes that the FDI poses a risk, the Ministry of Trade will submit the case to the Government for its decision. In case the Government decides that the FDI may affect security, internal or public order, the Ministry of Trade will prohibit the FDI or set conditions for such FDI.

Notably, a failure to notify the investment (where obligatory) does not lead to its invalidity. Instead, the bill provides for other measures, ranging from monetary penalties to non-monetary precautions, such as a ban on execution of voting or ownership rights of the investor or mandatory divestment.

There is still a long way for the bill to make it through the whole law-making process and there will almost certainly be some changes to its current wording. Nevertheless, stakeholders may already get a basic picture of the future framework that will bring new regulatory challenges into high-profile and sensitive transactions.

© Copyright 2020 Squire Patton Boggs (US) LLPNational Law Review, Volume X, Number 140

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About this Author

Marek Hurbek, Legal Trainee, Corporation
Legal Trainee

Marek focuses his practice primarily on corporate matters.

Marek joined Squire Patton Boggs as a fourth year student of the Faculty of Law at the Charles University in Prague and winner of the Squire Patton Boggs Prague office annual essay competition.

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