In the wake of the European trend towards increased controls on foreign direct investments (“FDI”) from outside the EU/EEA and Switzerland, the new Austrian Investment Control Act (“ICA”; Federal law enacting an Investment Control Act and amending the Foreign Trade Act 2011, BGBl. I No. 87/2020) entered into force on 25 July 2020. The ICA will replace the previously applicable FDI regime in Austria under the Foreign Trade Act (Außenwirtschaftsgesetz), whose scope of application was rather limited (overall, less than 10 permits have been issued under the old regime since it entered into force in 2013).
The ICA also implements the requirements introduced by the EU-FDI Screening Regulation (EU) 2019/452 (the “EU-FDI-Screening-Regulation”), establishing an EU-wide cooperation mechanism between the European Commission and EU Member States on so-called “FDI screenings”.
1. Broad scope of application combined with very low thresholds for FDI that require prior approval
The ICA leads to a considerable expansion of Austrian FDI requiring prior approval. In particular, the scope of activities that are considered (i) Highly Sensitive Sectors or (ii) Other Sectors that may affect security or public order and thus may be subject to the FDI approval mechanism is very broad:
1.1. Business areas/sectors subject to the new FDI approval requirement:
According to the ICA, Austrian undertakings (having their seat or head office in Austria) carrying out activities in any of the following areas are considered to belong to highly sensitive sectors (Part 1 of the Annex to the ICA) (the “Highly Sensitive Sectors”):
- Defence equipment and technology;
- Providing/operating critical energy infrastructure;
- Providing/operating critical digital infrastructure, in particular 5G infrastructure;
- Providing/operating systems that safeguard the data sovereignty of the Republic of Austria; and
- R&D in the fields of pharmaceuticals, vaccines, medical devices and personal protective equipment.
In addition, Austrian undertakings with activities in any of the following areas are considered to belong to other sectors that may affect security or public order (Part 2 of the Annex to the ICA) (the “Other Sectors”):
- Critical infrastructure, notably energy, information technology, traffic and transportation, health, food, telecommunications, data processing and storage, defence, constitutional institutions, finance, research facilities and institutions, social and welfare systems, chemical industry and investments in land and real estate crucial for the use of such infrastructure;
- Critical technologies and dual-use items as defined in EU Regulation No 428/2009; notably artificial intelligence, robotics, semiconductors, cybersecurity, defence technology, quantum and nuclear technologies, nano- and biotechnologies;
- The supply of critical inputs/resources, including energy or raw materials, food security, medicines, vaccines, medical devices and personal protective equipment as well as R&D in these areas;
- Access to sensitive information, including personal data or the ability to control such information; and
- Freedom and pluralism of the media.
Infrastructure, technologies and resources are only to be regarded as critical if they are infrastructure essential for the maintenance of important social and economic functions, because their disruption, destruction, failure or loss would have serious consequences for the health, safety or economic and social well-being of the population or the effective functioning of government institutions. The requirement that an undertakings’ activity has to be considered “critical” to fall under the ICA’s approval mechanism does not apply to undertakings active in areas that offer access to sensitive information or relate to freedom and pluralism of the media, leading to a (potentially) extremely broad scope of application.
1.2. Investors subject to the FDI approval requirement:
The ICA only covers transactions in which at least one acquiring party qualifies as a “foreign investor”. Under the ICA, a foreign investor is (a) an individual that is not a citizen of an EU/EEA country or Switzerland or (b) a legal person having its seat or head office outside the EU/EEA or Switzerland. According to the legislative materials, the foreign investor does not need to carry out a commercial or entrepreneurial activity. A private individual or fund that is not executing any commercial activity can therefore also qualify as a foreign investor.
1.3. Transactions subject to the FDI approval requirement:
FDI involving at least one foreign investor as acquiring party are subject to prior approval if the following conditions are met:
1.3.1. Foreign Direct Investment:
Only transactions resulting in the direct or indirect acquisition of:
- an Austrian undertaking with activities in any of the Highly Sensitive Sectors or any of the Other Sectors (a “Target”);
- voting rights in a Target if the thresholds of
(a) 10 %, 25 % or 50 % of the voting rights are reached or surpassed if the Target is active in any of the Highly Sensitive Sectors); or
(b) 25 % or 50 % of the voting rights are reached or surpassed if the Target is active in any of the Other Sectors (and not also in any of the Highly Sensitive Sectors);
- a decisive influence over a Target; or
- substantial assets of a Target
involving at least one foreign investor constitute FDI subject to prior approval under the ICA (provided that the other conditions described in points 1.3.2 and 1.3.3 below are also met).
The ICA also covers indirect acquisitions by a foreign investor. Thus, an acquisition carried out via a natural or legal person residing or having its seat or head office in the EU, EEA or Switzerland may also trigger a filing requirement if the direct acquirer is ultimately controlled by a foreign investor (in such situations, the approval requirement potentially conflicts with the EU’s fundamental freedoms of establishment and/or capital). Pursuant to the legislative materials, this provision is primarily aimed at preventing acquisitions using an acquisition vehicle domiciled in the EU that does not exercise a substantial genuine economic activity or does not have a presence in the EU with its own business premises, personnel or other assets. Additionally, according to the legislative materials, intra-group transactions resulting in a change of the indirect ownership of a Target are also principally subject to the approval mechanism.
1.3.2. Approval requirement does not conflict with countervailing provisions under EU or public international law:
The ICA contains one significant exemption: In cases where FDI approval requirements would conflict with countervailing provisions under EU or public international law, no approval is required. This exemption is particularly relevant for transactions falling under the EU’s fundamental freedoms of establishment and/or free movement of capital (in particular investments made by a direct acquirer from the EU controlled by foreign investor or minority investments) or if the foreign investor benefits from protections contained in bi- or multilateral investment treaties to which Austria is party.
The question of whether an FDI transaction can benefit from this exemption will typically require a case-by-case analysis, taking into account the peculiarities of the relevant transaction and the substance-over-form approach prescribed by the legislative materials. Given the potential sanctions for violations against the approval requirement, foreign investors seeking legal certainty concerning their FDI will therefore often rather opt to make a filing to obtain a comfort letter or approval rather than relying on this exemption.
The approval requirement in the ICA does not apply to FDI if the Target is a very small undertaking having (i) fewer than ten employees and (ii) a yearly revenue or total assets not exceeding EUR 2 Million.
2. Approval procedure and timeframe
If a transaction is subject to approval under the ICA, the acquirer must submit a written application for approval (the “Notification”) immediately after the conclusion/signing of the relevant transaction agreement or, in the case of a public takeover offer, after the announcement of the intention to make a bid. The Notification has to be submitted to the Minister for Digitalization and Economic Affairs as the competent secretary of the federal government. The competent secretary must then inform the Target about the notification.
For direct acquisitions, the obligation to make a Notification rests with the acquirer(s). If a Target is only acquired indirectly, the indirect acquirer(s) are obliged to submit a Notification. If a Target receives information about a transaction requiring an approval under the ICA that relates to it without having received information that the acquirer(s) have made a Notification, the Target is obliged to inform the competent secretary immediately about the transaction. In addition, the competent secretary can also assume jurisdiction and initiate ex officio proceedings under the ICA after obtaining knowledge about a transaction subject to approval where no Notification has been made (after requesting the acquirer(s) to file a Notification within three working days).
The information required for a Notification is quite extensive (in many aspects comparable to the information requirements of Austrian merger control filings). In particular, a Notification has to include (i) a detailed description of the business activities (including products, services and processes) of the acquirer(s) and the Target, including a description of the market(s) where these activities are carried out (competitors, market share), (ii) the ownership structure of the acquirer(s) and the Target (including information on the ultimate beneficial owners of the acquirer(s)), (iii) a detailed description of the transaction, (iv) any other EU Member States in which the acquirer(s) and Target have significant activities, (v) the financing of the transaction and the source of the funds, (v) the date of the transaction’s (scheduled) closing, and (vi) whether the transaction also requires a notification under the EU merger regulation.
After the approval procedure has been initiated, the competent secretary must immediately notify the European Commission. This triggers the EU consultation mechanism under the EU-FDI-Screening-Regulation: Within a 35-day period, the European Commission and the EU Member States can comment on a transaction (this consultation period is extended if information is only requested later or another EU Member State submits comments). After the consultation period expires, the competent secretary has to issue a decision within one month (a) approving the transaction or (b) initiating an in-depth investigation of the transaction. In the case of an in-depth investigation, the competent secretary has to take a decision within a period of two months (i) approving the transaction, (ii) approving the transaction subject to commitments, or (iii) prohibiting the transaction. If no decision is adopted within the statutory time limits, the transaction is deemed to be approved.
In addition to the approval proceeding, the ICA also contains provisions allowing the acquirer(s) or the target undertaking to request a comfort letter (Unbedenklichkeitsbescheinigung) declaring that a transaction is not subject to an approval requirement under the ICA. However, such an application must contain nearly all the information required for a Notification and is reviewed within a period of up to two months (following the receipt of a complete application). If the competent secretary considers that the transaction requires approval, the formal approval procedure will be initiated.
3. Sanctions and remedies
Agreements governing transactions requiring an approval under the ICA are subject to the statutory condition precedent that such approval is obtained. Any agreements violating the standstill obligation are therefore likely to be considered (provisionally) invalid until approval is obtained.
If a transaction requiring approval under the ICA has already been (partly) implemented without approval and there are reasonable grounds to expect that it is likely to endanger security and/or public order, commitments can be imposed. If commitments are insufficient to remedy the negative effects on security or public order, the full or partial revocation of a transaction can be ordered.
Implementation without approval of a transaction requiring approval under the ICA constitutes a criminal offence with a penalty of imprisonment of up to a maximum of one year (and up to three years in case of certain qualified offences). The same penalties apply if incorrect or misleading information is provided to fraudulently obtain a clearance decision or a comfort letter or if commitments are breached.
Additionally, a person who would be required to initiate an approval process on behalf of the Target or persons subject to information requirements are also subject to administrative (monetary) fines of up to EUR 40,000 for non-compliance.
4. Check list: When is an FDI approval required?
- Does the transaction involve a Target undertaking in Austria, i.e. an undertaking with its seat or head office in Austria, or its substantial assets (taking into account that the approval requirement also covers indirect acquisitions, for example cases where a non-Austrian company has an Austrian subsidiary).
- Does the Target undertaking (or the substantial assets subject to the transaction) have activities in any of the Highly Sensitive Sectors or any of the Other Sectors (see above point 1.1).
- Does the transaction concern a direct or indirect acquisition qualifying as a Foreign Direct Investment under the ICA (see above point 1.3.2) involving a foreign investor (see above point 1.2).
- Do any EU or public international law provisions (in particular the free movement of capital or freedom of establishment) exclude a filing obligation?
- De-minimis-exemption: Targets with (i) fewer than 10 employees and (ii) an annual turnover or annual balance sheet total of > EUR 2 million are excluded.
Future impact on FDI in Austria
Overall, the new regime introduced by the ICA is expected to significantly extend the scope of transactions requiring FDI approval in Austria. As some of the criteria concerning when approval will be required are not based on a bright-line test, we expect the number of applications/filings under the ICA (either requesting approval or a comfort letter for a transaction) to be high, at least initially. Because the procedure for obtaining approval or a comfort letter under the ICA is rather time consuming (especially compared to Austrian merger control proceedings where most transactions are cleared within the initial four week “phase I” review period), possible filing obligations under the ICA might have a significant impact on the timing of transactions and therefore have to be taken into account when planning and structuring FDI transactions.
In a nutshell, the new approval regime (potentially) introduces a lot of red tape to FDI transactions in Austria. Hopefully, the officials in charge of administering the new rules will adopt a pragmatic and transparent approach in applying the ICA, especially when it comes to transactions that are unlikely to affect security or public order despite being covered by the broad scope of the new rules.