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The Czech foreign direct investment screening regime entered into force on 1 May 2021. The Ministry of Industry and Trade ("MIT"), which is responsible for the screenings, has now published its first annual report. The report takes stock of the first year of enforcement. Below we discuss the enforcement trends that have emerged from the report.
The screening mechanism based on Act No. 34/2021 Coll. (the "FDI Act") covers investments by non-EU investors, including acquisitions on non-controlling minority shareholdings in companies active in the Czech market. A mandatory notification is required for investments into specific sectors important for public security. In addition, there is a voluntary consultation mechanism applicable across sectors. The Ministry published a list of sectors for which such a voluntary consultation is recommended.
For an overview of the screening mechanism, see our FDI info corner and the Czech section in our CEE FDI booklet.
The MIT's annual report covers the period from 1 May 2021 to 30 April 2022. The report provides a first snapshot of the enforcement practice and allows interesting trends that may shape the enforcement practice going forward to be identified.
In general, it is evident from the first year of practice that the MIT aims to establish itself as an active member of the EU enforcer community for foreign investment screenings.
The first year of enforcement confirms that the sectoral scope for mandatory notifications is construed narrowly. It is limited to production or service of military material (defence-related products), selected dual-use items, as well as the operation of critical infrastructure and critical information infrastructure. In the first year, only one mandatory notification was made to the MIT.
We expect that the number of mandatory notifications will rise in the coming years, but we believe that the number of cases will not exceed single digits per year.
Besides the one mandatory notification, the MIT received 10 voluntary requests for consultation. Such voluntary consultations are eligible for investments into all economic sectors and industries. The MIT's explanatory memorandum to the FDI Act identifies certain industries that it considers relevant for public security. Investments into these areas are recommended for consultation.
As the list includes various industries, it is not surprising that the requests for voluntary consultation covered a wide spectrum of industries in the first year, including aviation, IT, telecommunications, healthcare, chemicals, engineering, biotechnology and water supply. We expect that the level of voluntary consultations will continue to pick up in the coming years.
The first year saw only five full-scope (Phase II) screenings, but they were triggered by different situations. The first one was based on the only mandatory notification discussed above. In these situations, the full-scope screening is automatic. Another three full screenings followed a voluntary consultation, based on which the MIT used its discretion and initiated full screening proceedings. The fifth case led to a full screening based on notification of the transaction being made in another EU Member State. The MIT became aware of this transaction via the EU cooperation mechanism foreseen by the EU-FDI Screening Regulation (EU) 2019/452.
Despite the small number of full-scope screenings, the enforcement practice shows that the MIT will use the full range of its powers if it believes a transaction could threaten Czech public security, regardless of whether the MIT was notified, consulted or otherwise informed of the transaction, for example, via the EU cooperation mechanism.
As mentioned, the MIT received 10 voluntary requests for consultation. Only three of these cases resulted in a full-scope screening, while one transaction was approved without conditions and the other two transactions were withdrawn by the investor.
The remaining cases were presumably approved without the initiation of the full screening proceedings (it is unclear whether some of them were not pending by the end of the considered period). This means that they were approved without conditions already in the consultation phase (Phase I), which is limited to 45 days if no requests for information are issued.
The report states that there have been 389 notifications of foreign investments from other EU Member States. As evidenced by the one case discussed above, the MIT also makes use of the EU Cooperation Mechanism to identify potential candidates for Czech screening for which it may initiate ex officio. By the same token, the MIT systematically feeds investments which proceed to its full-scope screening into the EU Cooperation Mechanism.
Information from other EU Member States is presumably the largest (systematic) source of information about investments that could potentially threaten public security in the Czech Republic. The Ministry may review the investments within five years after closing. We expect that with the enforcement mechanism becoming settled, ex-post reviews of investment may play a larger role in the MIT's activities.
The annual report shows that the MIT did not block any investment in the first year or impose conditions for investment approval. The MIT also emphasises that prohibitions of investments are an extraordinary measure. This is in line with trends across the EU, where only 2 % of transactions notified were prohibited in 2020.1
This shows that the MIT takes a cautious approach with the aim of avoiding unnecessary impediments to the inflow of investments into the Czech Republic. However, certain investments will clearly require an in-depth review by the MIT, meaning that full-scope screenings will be initiated. As long as it concerns the first year of practice, however, investors must bear in mind that the full-scope screening does not automatically lead to threats to public security being found and conditions or outright bans on the transactions being imposed.
While it is too early to say what the future will hold for FDI screening in the Czech Republic, the first 12 months of enforcement provide a sneak peek into emerging enforcement trends. This includes a limited number of cases of mandatory notifications opposed to a number of voluntary consultations across various industry sectors, the importance of the EU Cooperation Mechanism and the MIT's cautious approach thus far in intervening against transactions or making them subject to conditions.
We expect that in the years to come the MIT's enforcement activities will pick up, given that the Czech mechanism covers a rather extensive set of non-controlling stakes acquired by non-EU investors or investors controlled by non-EU entities, as the threshold is generally only a 10 % stake. Moreover, the mechanism is not explicitly limited to target companies established in the Czech Republic but covers all targets economically active in the Czech Republic. Thus, cross-border activities in the Czech Republic may trigger a screening. By the same token, the MIT's actions show that it will not shy away from meticulously examining such investments that come to its attention.
1 REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL, First Annual Report on Foreign Direct Investment in the Union, p. 11, 2021, https://eur-lex.europa.eu/legal-content/CS/TXT/PDF/?uri=CELEX:52021DC0714&from=EN.
author: Jan Kupčík
Attorney at Law