Corporate / M&A

New Approval Requirement in the Austrian Foreign Investment Regime

Ever thought about investing in Austria? Well, foreign investors beware. At the end of 2011, an amendment to the Austrian Foreign Trade Act (FTA) entered into force. It requires advance approval by the Austrian Ministry of Economic Affairs for an acquisition of a relevant stake in enterprises in certain industries, comprising a wide range of sectors.

Foreign investment control – Austria in good company

For­eign invest­ment con­trol is not unusu­al. Even the Econ­o­mist (Octo­ber 6, 2012, “The state advances”) acknowl­edges that it is not uncom­mon for coun­tries to have for­eign invest­ment review regimes. Amer­i­ca is judged as hav­ing “a murky secu­ri­ty-review process which has been used to chase away Chi­nese ener­gy and tele­coms investors”. How­ev­er, with the excep­tion of Chi­na, which is crit­i­cised in the arti­cle for its pro­tec­tion­ism of state enter­pris­es, for­eign invest­ment approval regimes are typ­i­cal­ly nation­al-secu­ri­ty relat­ed.

This is not nec­es­sar­i­ly so under the new Aus­tri­an regime.

The scope of rel­e­vant indus­try sec­tors under the FTA is quite wide. It cov­ers not only indus­tries con­cern­ing inter­nal and exter­nal secu­ri­ty, such as defence and secu­ri­ty ser­vices, but also pub­lic order and safe­ty, and pro­cure­ment and cri­sis ser­vices. The lat­ter include hos­pi­tals, ambu­lance and emer­gency med­ical ser­vices; fire fight­ers and civ­il pro­tec­tion ser­vices; ener­gy and gas sup­ply; water sup­ply; tele­coms; rail­ways; road traf­fic; uni­ver­si­ties; and schools of var­i­ous types and pre-school­ing insti­tu­tions.

Is a transaction caught by the FTA?

Apart from the ques­tion whether a rel­e­vant indus­try sec­tor is affect­ed, whether a poten­tial trans­ac­tion is caught by the FTA depends pri­mar­i­ly on two fac­tors.

  • Is the acquir­er a “for­eign investor”? Only investors who are non-EU, non-EEA or non-Swiss cit­i­zens, or have their cor­po­rate seat out­side this geo­graph­i­cal region, are con­sid­ered “for­eign” for the pur­pos­es of the FTA regime (pur­suant to the par­lia­men­tary mate­ri­als, indi­rect invest­ments via EU or EEA acqui­si­tion vehi­cles are not caught; how­ev­er, such struc­tures may be inves­ti­gat­ed ex offi­cio under cir­cum­ven­tion con­sid­er­a­tions).
  • Does the trans­ac­tion result in the acqui­si­tion of an enter­prise, of a par­tic­i­pa­tion of 25% or more or of a (co-)controlling inter­est in a (rel­e­vant) enter­prise with cor­po­rate seat in Aus­tria?

There are two dif­fer­ent pro­ce­dures under the FTA: (i) an ex ante approval, and (ii) an ex offi­cio review. The ex ante approval pro­ce­dure takes one month from sub­mis­sion of the appli­ca­tion for approval (phase I) and, in case of in-depth review, an addi­tion­al two months (phase II).

Under the ex ante approval regime, the poten­tial acquir­er must sub­mit the appli­ca­tion before (i) enter­ing into a legal­ly bind­ing com­mit­ment to acquire the rel­e­vant stake or (ii) announc­ing the launch of a pub­lic ten­der offer with respect to such tar­get.

Dur­ing a phase I review, the trans­ac­tion must be approved or a phase II review must be ini­ti­at­ed. If the Min­istry of Eco­nom­ic Affairs issues no deci­sion dur­ing the one-month time­frame, the trans­ac­tion is deemed approved. The FTA does not, how­ev­er, pro­vide for any pro­ce­dure for a (non-bind­ing) assess­ment or a neg­a­tive clear­ance. An investor would thus have to ini­ti­ate the for­mal approval process to obtain legal cer­tain­ty.

When can a deal be blocked?

A trans­ac­tion can be blocked only dur­ing a phase II review. Alter­na­tive­ly, the Min­is­ter can issue an uncon­di­tion­al approval or approve the trans­ac­tion sub­ject to con­di­tions to mit­i­gate risks asso­ci­at­ed with the deal. If a trans­ac­tion is pro­hib­it­ed, the deci­sion can be appealed. Whether that is a com­mer­cial­ly fea­si­ble rem­e­dy and real­ly helps an investor is a dif­fer­ent sto­ry. One just has to con­sid­er, for exam­ple, the over­all time­line and the neg­a­tive pub­lic­i­ty that will like­ly come with a blocked deal.

The ex offi­cio pro­ce­dure applies only in lim­it­ed cir­cum­stances (inter­nal and exter­nal secu­ri­ty sec­tors), but the require­ments and trig­gers are not entire­ly clear. Based on the word­ing of the FTA, it is aimed at cir­cum­ven­tion struc­tures and requires a rea­son­able sus­pi­cion as to a threat to cer­tain pro­tect­ed inter­ests. Unfor­tu­nate­ly, the FTA does not pro­vide for a time lim­it with­in which this pro­ce­dure must be ini­ti­at­ed.

If a deal falls under the FTA and is entered into with­out the nec­es­sary approval, it is invalid and, if imple­ment­ed, can be unwound. Addi­tion­al­ly, even neg­li­gent vio­la­tions of the approval require­ments are sub­ject to fines of up to 360 days of income or up to one year impris­on­ment of the man­agers of the acquir­er. Wil­ful vio­la­tions are sub­ject to up to three years impris­on­ment.

Conclusion

Time will tell how the new for­eign invest­ment regime is han­dled and what its prac­ti­cal con­se­quences will be to trans­ac­tions con­sid­ered by for­eign investors. It is hoped that the Aus­tri­an Min­istry of Eco­nom­ic Affairs will con­sid­er the eco­nom­ic impor­tance of invest­ment activ­i­ty and, as the Econ­o­mist con­cludes with respect to its exam­ple Chi­na, that (for­eign) invest­ment “can kick-start the flag­ging econ­o­my in a way that shov­el­ling cash at inef­fi­cient state-owned enter­pris­es can­not”.

If a deal falls under the FTA and is entered into without the necessary approval, it is invalid and, if implemented, can be unwound.