Five Basic Questions Answered
A new regulatory clearance regime is on the horizon for persons wishing to invest in Ireland.
Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the Union (the "Screening Regulation") entered into force on 11 October 2020. The Screening Regulation governs the screening of foreign direct investment ("FDI") by EU Member States and also requires co-operation between Member States in respect of FDI on their territories.
FDI is defined in that legislation as an investment of any kind by an investor from outside the EU aiming to establish or to maintain lasting and direct links between the investor and the target entity. The Screening Regulation does not require Member States to implement a screening mechanism, but sets out minimum criteria for those who do. Currently, more than half the 27 EU Member States have a mechanism in place. An investment screening regime has long existed in the US while other jurisdictions including the UK, Canada and Australia also have equivalent rules in place.
The Government has agreed the heads for an Investment Screening Bill, which would create a new Investment Screening Board (the "ISB") with the power to clear or block relevant transactions, or clear them subject to conditions. This follows a public consultation that was conducted by the Department of Enterprise, Trade and Employment ("DETE") in spring/summer 2020.
FDI screening operates similarly, but separate, to merger control, which is already enforced in Ireland by the European Commission and the Irish Competition and Consumer Protection Commission (as applicable).
What is investment screening?
Screening operates as a regulatory barrier to making an FDI. In the Screening Regulation, screening is defined as "a procedure allowing to assess, investigate, authorise, condition, prohibit or unwind foreign direct investments".
FDI screening regimes can take different forms. In a suspensory regime, a proposed FDI would need to be notified to the ISB in advance of completion; under a non-suspensory regime, such notification would only be required only after a transaction has closed. Under a mandatory regime (whether suspensory or not), notification must be made provided the transaction meets certain thresholds (e.g., based on the turnover of the target or the sector it operates in). It remains to be seen what form of regime will be in place in Ireland, although several responses to DETE's consultation were in favour of a mandatory, suspensory regime that would mirror the Irish merger control regime.
The question of what event "triggers" notification is also very pertinent. Importantly, in the Screening Regulation, FDI is defined to "include" investments enabling control. Therefore, its ambit may be wider than the acquisition of "control" for the purposes of merger control rules under EU/Irish competition law, where only the acquisition of "control" (i.e., the ability to exercise decisive influence over the activities of a business) above a certain turnover-based threshold generally triggers the notification requirement.
Notifying parties will be required to provide certain information to the ISB, which must then be transmitted to other EU Member States and the European Commission under the Screening Regulation's co-operation mechanism. Under Article 9 of the Screening Regulation, this includes information on:
The respective ownership structures and economic activities of the foreign investor and the target.
The approximate value of the FDI.
The Member States where the investor and target conduct relevant business operations.
The ISB will be required to treat such information as confidential.
Why is such a regime being considered?
FDI is vital for Ireland's economic interests. Therefore, it is important to consider why a screening mechanism is being considered. Much of the commentary, including in the responses to DETE's consultation, focuses on achieving the correct balance between these interests and the protection of national security.
The Screening Regulation aims to protect security and public order across the EU. In order to do so, it expressly permits Member States to enact mechanisms to conduct screening, while establishing criteria such mechanisms must satisfy. These include:
Non-discrimination between third counties. Importantly from an Irish perspective post-Brexit, this means that any regime may not treat FDI from the UK (our nearest neighbour) any more or less favourably than FDI from any other third country.
Factors which investment screening authorities may take into account when reviewing a transaction. These factors include a transaction's effects on critical infrastructure and technologies, supply of critical inputs, access to sensitive information and freedom and pluralism of the media. Separately, Member States may take into account the identity of a would-be investor including whether that investor is linked to the government of a non-Member State.
The requirement that the would-be investor and the target entities can seek "recourse" against screening decisions adopted. In Ireland, this is likely to mean the possibility of seeking judicial review against a screening decision.
The Screening Regulation is also interesting when one considers the respective competences of the EU and its Member States. The law was adopted under Article 3(1) of the Treaty on the Functioning of the European Union, under which the EU retains exclusive competence in setting the common commercial policy. At the same time, it is stated to be without prejudice to Member States' exclusive competence in protecting their essential security interests, i.e., the policy area sought to be protected.
Who will be affected?
The Irish screening regime will apply to any foreign investor, i.e., an individual or undertaking from a third country wishing to make an FDI in Ireland. By extension, it will also affect the target business, which risks losing out on investment if an FDI is prohibited. It may also affect businesses in certain sectors more than others – Article 4(1) of the Screening Regulation permits Member States to consider a transaction's effects on critical infrastructure and technologies and names several sectors including "energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure". Some jurisdictions have enacted specific rules for certain sectors.
Where will the regime apply?
Naturally, the Irish regime will apply in Ireland.
However, the Irish regime will operate in tandem with those in other Member States. As soon as Ireland adopts its regime, it will be required to notify all other Member States and the European Commission of FDI undergoing screening for comments or, in the Commission's case, a non-binding opinion. Ireland must give "due consideration" to any such comments and/or opinion received. In practice, this possibility may arise where an investor has previously made an investment in one or more other Member States which may wish to comment.
When will it come into force?
Although Ireland has not yet enacted am FDI screening regime, the co-operation mechanism under the Screening Regulation is already in force. This means that Ireland must share information regarding FDI in Ireland with other Member States at their request. Such information includes the information which would be provided in a notification under Article 9 (see above).
As regards the screening regime, it was hoped following the 2020 consultation that the Investment Screening Bill would be published later that year. However, due to other priorities, we understand it will likely be later in 2021 before this happens. It is understood that the relevant drafts people in the Office of Parliamentary Counsel are heavily focused on legislation dealing with the ongoing COVID-19 situation.
That said, the new rules are very much on the horizon – a dedicated Investment Screening Unit has already been established within DETE. Therefore, sooner or later, affected businesses will have to comply.