The foreign direct investment (FDi) screening by a host country is an economic tool that for years has been a part of public economic policies around the globe, amid a vivid discussion among economists and policy makers as to its efficiency. having said that, it is a concept that is relatively new in the european union (eu) and a trend for such a protection seems to have been on the rise in the eu for a few years now. there are already a number of eu member states where the FDi screening regime is well established.
At the same time, the CoVID-19 pandemic became a catalyst for the introduction of measures seeking further protect the national economies from unrestricted inflow of foreign investments which economic policymakers can perceive as ‘predatory buying’ of strategic assets. EU did not decide to introduce supranational measures concerning the FDI screening, neither before the Covid-19 or after its outbreak. At the same time, the EU is an active proponent of increasing the scrutiny of such FDI. Member states seem to echo this. for instance, recently Spain has introduced an enhanced screening regime for investors from outside the European Economic Area (EEA).
Poland is also looking into strengthening the screening regime applicable to FDI. the revised regime, expected to enter into force at the turn of June and July, is expected to apply to acquisitions of Polish companies active in strategic sectors by investors from outside the eea. After years of a very open approach towards FDI in poland, the planned changes signify an important economic policy shift which could have a momentous impact on the future of foreign direct investments in Poland, in particular those concerning capital and innovation intensive sectors, such as energy. What should we expect from the revised Polish fDI as concerns energy FDI, in particular energy M&As?
Regulatory landscape concerning the FDi screening in the EU
When considering the legal aspects of fDI in Poland, one should take into consideration that poland is a member of a single economic area the EU. It has an impact on both the FDI into poland originating from other member states, as well as those originating from third countries.
One of the four fundamental freedoms of the internal market within the eU is the free movement of capital. this means that, as a rule, restrictions on capital movement both between member states, as well as with third countries are prohibited. How is the FDI screening possible in compliance with the EU law then?
The EU law permits restricting the free movement of capital, also in the form of FDI, on grounds of public policy or public security. Any such measures have to be adequate, necessary and proportionate to attaining the pursued objectives. Based on that exception, national FDI screening mechanisms have already been introduced in some form by 14 member states. the right to introduce the FDI screening rests with the member states and there is no separate supranation- al FDI screening on the EU level, as opposed to, for instance, EU merger control.
the eU, however, co-ordinates the member states’ ef- forts concerning FDI screening mechanisms through the means of a framework regulation that entered in the force in april 2019.1 In March 2020, already af- ter the CoVID-19 pandemic outbreak, the european Commission released a guidance to member states pointing to the need to balance openness to FDI and the need to protect critical healthcare assets and technology in light of the economic circumstances affected by the pandemic. To this end the European Commission encouraged the member states to make the full use of the FDI screening mechanisms they al- ready have in place to protect the critical healthcare infrastructure, the supply of critical inputs and other critical sectors. the member states with no or limited screening mechanisms were encouraged to set-up a full-fledged FDI screening mechanism and use all other available options to enhance the protection of the national economies.
What mechanisms applies in Poland?
As of now poland does not have a general foreign in- vestment regime. However, a transaction concerning acquisitions of more than 20% of shares or votes of a company regarded as a “protected entity” requires clearance from the relevant authority.
The polish FDI regime is set out in the polish act on the control of certain investments (act) that is in force since october 2015. the act specifies 15 sectors of the economy – companies active in these sectors can be regarded as protected entities and put on the list issued in the regulation of the Council of Ministers. If placed on the list, any transaction concerning acquisition of shares or voting rights exceeding 20% in such a company, requires a notification to and clearance from the relevant authority. Depending on the sector in which the company is active, it could be the minis- ter responsible for the state assets, for the maritime industry or for public defence.
The act covers both direct and indirect acquisition by an investor. What is important, the act does not distinguish between foreign and domestic investors. Consequently, any investor, regardless the domicile, will need to obtain the required clearance if the trans- action concerns a protected entity and falls within the parameters specified by the act.
Historically, the energy sector has been the focus of the polish FDI screening. Currently, there are nine companies on the list of protected entities, three of which are active in the energy sector: innogy stoen operator sp. z o.o., PKP Enegretyka and Tauron Polska Energia s.a. In the past, two other energy com- panies where protected, i.e. EDF polska s.a. and engIe energia polska s.a. at the same time, according to the publicly available data, the decisions implementing the FDI screening on the basis of the act have so far been issued only with regard to the energy companies.
Polish approach to FDi in the times of the COVID-19 pandemic
The revised polish FDI screening regime constitutes an element of the COVID-19 response package, whose objective is to protect the Polish economy from “hostile takeovers” and acts of predatory buying of strategic companies and assets. Poland, therefore, follows the path of other member states, which are strengthening the FDI restrictions amid the CoVID-19 pandemic.
In practical terms, the bill provides for an FDI regime that covers a broad scope of mergers and acquisi- tions performed by investors from outside of the eea with preclosing, in principle, suspensory approval requirement from the President of the office of Competition and Consumer Protection (the “President of the oCCP”).
The revised polish regime will cover direct and indi- rect acquisitions of a 20% or more stake in companies that are domiciled in poland, whose turnover in one of the two financial years preceding the transaction exceeded eUr 10 million and which, at the same time, meet one of the criteria below, i.e. are a public company; hold assets considered as critical infrastructure (e.g. communication and information systems, health- care systems, energy supply systems) or develop the software to operate the specified systems; or are ac- tive in the sectors that are considered in the draft as strategic, e.g. telecommunications, energy, defence, chemical, pharmaceutical, food & beverage sectors. If these premises are met, the transaction will have to be notified and receive clearance from the President of the OCCP.
In principle, the obligation to notify will rest with the acquirer. After the notification, the President of the oCCP will have 30 days to decide whether the trans- action requires a further in-depth review. If so, the authority will have 120 days to issue its final decision. the president of the oCCp will be verifying whether the transaction may even potentially endanger the public policy, public security or public health in Poland.
What is important, the requirement to receive the foreign investment clearance will apply on top of the merger clearance requirement from the OCCP or the European Commission (or any other national competition authority) if required for a given transaction.
The revised polish FDI screening regime is envisaged to be temporary and apply for 24 months after it enters into force.
What will be the practical consequences of the new FDI screening regime for the polish energy sector?
In practical terms the revised polish FDI screening regime will cover much broader scope of the M&A transaction than currently, also in the energy sector. Imposing additional administrative requirement to perform the M&A deal in the already heavily regu lated energy sector, in particular amid the CoVID-19 pandemic, may be a deterrent for the foreign investors to get involved in this sector, in particular as it requires high degree of capital involvement and innovation.
When implementing the new fDI screening regime, the president of the oCCp will face two main challenges when dealing with the expected influx of the FDI notification. first is the timing of the review of the notification. second is providing clear guidelines what is the scope of the notification requirement and how to interpret the substantive test for the transactions that seems to be broad and ambiguous.
The practice of the authorities responsible for FDI screening in other member states proves that effec- tive FDI review does not need to result in excessive burden or be a deterrent factor for investors. the key for success are clear principles governing the review that are known for investors from the outset. therefore, the President of the oCCP should quickly create a transparent rulebook for its FDI screening and allocate sufficient resources to perform it seemingly. Without that the Polish energy sector may likely face reduced capital inflow due to increased regulatory uncertainty and consequently prolonged recovery time after the COVID-19 pandemic.
Authors: Barbara Wanat, Wojciech Podlasin