Starting from March 1st, a new law on the screening of foreign investments has taken effect, focusing primarily on the country's security and protection of critical infrastructure. The state may prohibit investments and impose fines in the millions. Details are explained by the law firm RUŽIČKA AND PARTNERS.
In addition to the existing sanctions concerning business transactions with companies from Russia and Belarus, this is yet another measure to bolster the scrutiny of investors from third countries. The new Act on the Screening of Foreign Investments introduces stricter oversight of entities outside Slovakia or the European Union or those based in the EU but controlled by entities from third countries.
"Act No. 497/2022 Coll. on the screening of foreign investments and the amendment and supplementation of certain acts ("Foreign Investments Act") came into effect on March 1st, 2023, and applies to foreign investments made after this date. It does not apply to investments made before this date," says František Mark Molnár of RUŽIČKA AND PARTNERS.
"In addition to the existing restrictive measures, this new legislation is yet another reason for companies to conduct a thorough due diligence, to screen their contractual partners based in third countries and to keep an eye on the subject of the contracts they made," the lawyer adds.
Critical foreign investments subject to government screening
The Act distinguishes between critical and non-critical foreign investments. The legislation subdivides the rights and obligations attached to such investment types accordingly.
A critical foreign investment is an investment where there is an increased risk of adverse impact on the security or public order of the Slovak Republic. Such investments are expressly prohibited without prior screening. The government will further specify these types of investments in its regulation.
"For example, these may include various investments in defense, digital services, or other critical infrastructure elements," specifies JUDr. Ján Azud, a partner at RUŽIČKA AND PARTNERS.
A foreign entity planning a critical foreign investment must submit a screening request to the Ministry of Economy of the Slovak Republic before investing.
The ministry will closely examine the risk of any adverse impact of the investment and subsequently issue a decision permitting, provisionally permitting, or altogether banning the investment.
Regarding other non-critical foreign investments, the entity may also submit a request for screening. This precautionary examination enables entities to avoid any undesirable situations should the Economy Ministry decide to initiate a screening based on any other ground.
"Unlike critical foreign investments, this is a two-stage process. In the first step, the Economy Ministry assesses whether a foreign investment carries any risk of adverse impact. At this stage, the investment is not yet thoroughly scrutinised. If the Ministry identifies a risk, it applies the same procedure as for critical investments," Molnár explains.
If the Ministry does not consider an investment to carry any risk, it will merely send a confirmation to wrap up the process. The same legal effects apply if the Economy Ministry does not send a notification of initiating a screening procedure for foreign investment within 45 days from the date of receipt of the request for review.
What is being assessed?
The Economy Ministry and other consulting agencies will assess whether a foreign investment could compromise the security and public order of Slovakia or the EU. They will especially consider any potential effects on physical and virtual critical infrastructure, including energy, transportation, water management, healthcare, defense, electoral or financial infrastructure, sensitive facilities, and land and real estate necessary for such infrastructure.
"Concerning the foreign investor entity, the main consideration will be whether the entity is under the direct or indirect control of a third country's government, a state agency, or armed forces. Also, whether the foreign investor has already been involved in activities affecting security or public order in any member state; or whether there is a serious risk that the foreign investor is involved in any illegal or criminal activities," Ján Azud explains.
Oversight and fines for up to two years
In addition to the possible assessment and screening of a "non-critical" foreign investment based on the investor's request, the Economy Ministry may initiate screening at its discretion or upon the request of any of the designated agencies. In such a case, the adverse impact risk evaluation is skipped, and the Ministry thoroughly examines the foreign investment.
"An ex-officio assessment may take place within two years from the date of the foreign investment," Azud notes; the Ministry may approve or provisionally approve the investment subject to additional measures or may prohibit investment and order the foreign investor to reverse the investment.
What other consequences may result from the screening of foreign transactions and investments? In addition to reversing a foreign investment and restoring the state that existed before its completion, the Economy Ministry may impose a fine ranging from 1% to 2% of the combined turnover, or, where the determination of such turnover causes delays in the proceedings, the fine may be anywhere from 100,000 EUR to 1,000,000 EUR.
"The new legislation enables anyone to indirectly affect the length of negotiation processes for foreign investments through submitting a request for an ex officio examination. Of course, the Economy Ministry is not bound by such a request. If however, it decides to launch an examination, the proceedings may be unexpectedly prolonged, and this may in turn negatively impact the entire negotiation process," explains Matej Škultéty of RUŽIČKA AND PARTNERS.
Therefore, legal practitioners recommend that potential foreign investors submit a request for examination to the ministry. Before engaging in any transactions, they should conduct due diligence to determine whether the transaction constitutes a foreign investment under the new law. "If the foreign investment is of greater financial scope or it may marginally concern any critical infrastructure, such as through various acquisitions of subcontractors, we believe that investors could so secure the highest possible level of legal certainty, especially given the uncertain political situation in Slovakia or any conceivable requests that could be submitted with the prospect of thwarting or dragging out negotiation processes," Škultéty concludes.
---
BASIC TERMS
What is considered a foreign investment
In general, a foreign investment is any investment that is planned or made by a foreign investor if it allows the foreign investor to directly or indirectly acquire the target company or a part thereof, to effectively exercise rights attached to the interest in the target company or to expand such exercise of rights, to exercise control over the target company or to acquire ownership title or other rights to the assets of the target company, where the investment is a critical foreign investment.
Exceptions to foreign investments mainly include situations where it concerns foreign investments made within a group with the same parent company (holdings) or transactions made in the ordinary course of business.
Who is considered a foreign investor
A foreign investor is an entity that does not have its registered office or place of operation in Slovakia or any other EU member state, meaning the entity is based in a third country. The foreign investor definition does not distinguish between investors from individual third countries, meaning that investors from countries of the European Economic Area and the Swiss Confederation are also considered foreign investors.
Likewise, an entity with its registered office or place of operation in Slovakia or any other EU member state is considered a foreign investor, mainly if it is controlled by an entity based in a third country, its beneficial owner is a person from a third country, or the financing of the foreign investment is secured through resources provided by a public agency of a third country.
Measures preventing circumvention of the law
Even though the legislation generally targets contracts with a foreign element, when it comes to various acquisition agreements, the existence of a choice of law clause is irrelevant to applying the Foreign Investments Act, as the Act applies whenever the target company is a Slovak entity.
The target company need not necessarily be an existing entity doing business in the Slovak Republic, but it can also be an entity that is the product of foreign investment. Likely, creating various vehicles for specific investments/purposes will also be considered an acquisition of a target company (by definition, the transaction is regarded as a foreign investment).
About RUŽIČKA AND PARTNERS
RUŽIČKA AND PARTNERS is one of the largest and oldest law firms in Slovakia. It has been operating successfully in the Slovak legal market since 1992. In over 30 years of its existence, the firm has become one of the most awarded local law firms offering general as well as specialised legal advice in all areas of business practice.