An amendment of the Austrian Foreign Trade Act (FTA), in force since 08/12/2011 subjects the acquisitions of relevant interests in enterprises in specific industries, including telecoms and energy, to review and approval by the Austrian Ministry of Economic Affairs
Summary: Under the 17/11/2011 amendment to the Foreign Trade Act (FTA) which became effective as of 08/12/2011, acquisitions of 25 percent or more or a controlling interest (the "Relevant Interest") by non-EU, non-EEA and non Swiss persons in an Austrian enterprise engaged in a particular – protected - industry sector defined under the Act will be subject to advance approval by the Austrian Ministry of Economic Affairs. The list of protected sectors is extensive and includes inter alia not only the defense equipment industry but telecoms, energy, water supply, hospitals, railway and road traffic as well as universities (the "Protected Sector"). The application for approval by the Ministry will have to be submitted before entering into a legally binding agreement to acquire the Relevant Interest or before announcing the launch of a public offer in an enterprise of the Protected Sector. Additionally, the FTA provides for an ex officio review procedure. The waiting time for the approval is between 1 to max 3 months from the notification. Any prohibition will have to be reasoned and is subject to appeal. The sanctions for violation of the approval requirement include the invalidity of the acquisition agreement. Additionally, even negligent violations of the approval requirements are subject to fines amounting to up to 360 days income or up to 1 year imprisonment; intentional violation is subject to up to 3 years imprisonment. The approval procedure and sanctions are broader in scope than the foreign investment procedure of other EU regimes, in particular the ex post review regime in Germany. Unfortunately, the FTA includes many ambiguities including as to scope of applicability. Practice by the Ministry of Economic Affairs over the next 12 months will tell how uncertainties and ambiguities under the FTA will be resolved.
Which transactions qualify for advance approval under the FTA?
Transactions resulting in the acquisition of an enterprise, of a participation of 25% or of a (co-)controlling interest in an enterprise with seat in Austria, engaged in a Protected Sector as listed under sec 25a FTA by a foreign investor who is either a non-EU or non-EEA or non-Swiss citizen or has its seat in a third country, if such country is not a member of the EEA or Switzerland (the "Foreign Investor"), fall under the scope of the ex-ante approval requirements.
Which industry sectors qualify as "Protected Sectors"?
The FTA defines and lists the following industry sectors as Protected Sectors:
(a) The sectors relating to the internal and external security of Austria, in particular of the defense equipment industry and security services.
(b) The sectors relating to public order and safety and to procurement and crisis services. These sectors include (i) hospitals, ambulance and emergency physician services, (ii) fire fighters and civil protection service, (iii) energy and gas supply, (iv) water supply, (v) telecoms, (vi) railway, water and road traffic, and (vii) universities, schools of various types and pre-schooling institutions.
Who qualifies as "Foreign Investor"?
No approval is required if the foreign investor is an EU / EEA or Swiss citizen or has its seat in the EU / the EEA (i.e. Iceland, Liechtenstein and Norway) or Switzerland.
Thus, third country investors subject to the approval regime are non-EU, non-EEA and non-Swiss.
Political commentators suggested that the approval regime was introduced specifically to protect the partially state-owned oil group OMV, currently co-controlled by the Austrian state holding ÖIAG and IPIC, Abu Dhabi, and Telekom Austria, currently controlled by ÖIAG, against unwanted takeovers by non-EU acquirers. Clearly, all overseas investors, including from the US, Australia, Asia, Central Europe (if not EU) and CIS and Middle Eastern countries need to review whether a particular intended investment into a specific Austrian target requires advance approval by the Austrian Minister of Economic Affairs.
Compliant avoidance of Approval Requirement?
Pursuant to the legislative materials, indirect investments by Foreign Investors via EU or EEA acquisition vehicles are not captured by the approval regime, since EU law would not allow such investment restrictions. Accordingly, in case a Foreign Investor invested via an EU domiciled acquisition vehicle, in particular with a multilayered ownership structure or under a technical non-control structure involving non-controlled private foundations, no approval requirement should apply. However, Austrian Ministry practice could still – initially – establish and apply a substantive review in application procedures, resulting in a beneficial ownership test. Moreover, any structure could be tested under the ex-officio review procedure as to – illegal – circumvention of the approval requirement.
Given that (i) participations of parties acting in concert are to be added together, and (ii) approval is required prior to entering into a legally binding agreement and in case of a public offer prior to the announcement of such public offer, and (iii) sanctions in case of a violation of the approval requirement include invalidity of the acquisition agreement, monetary fines and even imprisonment of up to 1 year (negligent violation) and up to 3 years (intentional violation), (iv) the Minister for Economic Affairs also has ex post ex officio investigation rights (without statutory time limit) and (v) there are ambiguities as to the scope of application and possible exemptions under the FTA, the new approval requirement will likely caution Foreign Investors to invest at or above 25% without approval by the Austrian Minister of Economic Affairs.
Which procedures apply, what are the timelines to obtain approval?
The FTA distinguishes two types of procedures, (i) the ex ante approval procedure, and (ii) the ex officio review procedure. The ex ante approval procedure is 1 month (phase I) and, in case of in depth review, additional 2 months (phase II). The ex officio procedure has no trigger date within which such ex officio review must be initiated.
The application in the ex ante approval procedure must be submitted before (i) entering into a binding commitment to acquire the relevant interest in the target engaged in a Protected Sector, (ii) announcing the launch of a public offer in such target. During phase I of the approval procedure, the Minister of Economic Affairs must either approve the acquisition within 1 month from the filing of the application or issue a decree initiating a phase II; if no decree is issued, the acquisition is deemed approved. The phase II procedure is up to 2 months. During phase II the Minister may prohibit the acquisition. Alternatively the Minister may issue an unconditional approval decree or approve the transaction subject to the fulfillment of certain conditions to mitigate the risks associated with the acquisition. If the Minister prohibits the transaction, the prohibition order can be appealed. Unfortunately, the FTA does not provide for a fast track non-binding assessment or negative statement procedure as to a contemplated transaction. To obtain legal certainty, Foreign Investor would need to formally initiate the approval procedure.
The ex officio review procedure under sec 25a/11 FTA applies in limited cases (i.e. the sectors relating to internal and external security of Austria), however the requirements and trigger events are not entirely clear. From the statutory wording the ex officio review is aimed at suspicious circumvention structures and requires a reasonable suspicion as to a reasonable threat to certain protected interests. Unfortunately, the FTA does not provide for a time limit within which the ex officio procedure must be initiated. An ex post prohibition order following from a late ex officio review may be practically impossible to implement.
What are the legal consequences and sanctions of a violation of the approval requirements?
The FTA requires the Foreign Investor to file for approval prior to entering into a legally binding agreement regarding such acquisition. Any acquisition entered into without required approval is invalid and, if implemented, can be unwound. Additionally, even negligent violations of the approval requirements are subject to fines amounting to up to 360 days income or up to 1 year imprisonment of the managers of the acquirer; intentional violation is subject to up to 3 years imprisonment.