New guidance on the interpretation of Austrian investment control rules

By Johannes Barbist, Binder Grösswang, Regina Kröll, Binder Grösswang and Armin Nimmrichter, Binder Grösswang 

 

More than five years after the Federal Act on the Control of Foreign Direct Investments (Investment Control Act – ICA) came into force, the Federal Ministry for Economy, Energy and Tourism (Bundesministerium für Wirtschaft, Energie und Tourismus - "BMWET") has published new information on its website (only available in German) on the interpretation of the ICA. While the FAQs previously provided by the BMWET were very concise and focused primarily on formal and procedural aspects, the BMWET has taken a broader approach this time. According to the large number of screening cases in Austria, it is to be presumed that the experiences thus far have informed the BMWET’s work on the clarifications. 

The authors have summarised the most important takeaways and will try to analyse what added value the BMWET’s long awaited guidance has and which burning questions in connection with the BMWET’s interpretation and enforcement practice remain open. The clarifications concern the sectors subject to screening as lined out in the Annex to the ICA (I.), substantive aspects concerning the notion of a foreign direct investment and the exemption for micro-enterprises (II.), as well as certain additional information in connection with applications (III.). Concludingly, the authors will summarize the main findings and point out where unclarity remains (IV.). For previous blog posts by one of the authors on the first court decision rendered under the ICA as well as on the number of screening procedures, see here and here.  

 I. Clarifications regarding Part 2 of the Annex to the ICA

The Annex to the ICA is divided into two parts:  

• Part 1 contains an exhaustive list of five "highly critical sectors". If an Austrian target undertaking is active in one of these sectors, the acquisition of 10% of the voting rights is already subject to approval.  

• Part 2 contains a non-exhaustive list of numerous, very broadly defined sectors, for which the relevant voting rights threshold is 25%. These broad categories are not defined in more detail in the ICA or in other regulations and have thus been the subject of repeated criticism and discussion since the introduction of the Austrian FDI regime.  

With its guidance, the BMWET tries to narrow down the scope of these broad categories in part 2 of the Annex - at least for certain sectors:  

1 Energy

The collection, treatment, recycling, energy recovery from and disposal of solid municipal waste does not fall under the "energy" sector. 

2 Information technology

If information technology related activities merely serve as an ancillary activity for the Austrian target’s main activity and the main activity does not fall under a sector listed in part 2 of the Annex to the ICA and is also not otherwise critical within the meaning of the definition of this term at the end of part 2 of the Annex to the ICA, the “information technology” category does not apply. 

 In addition, the BMWET does not consider the following activities to come within the ambit of the “information technology” category: Marketing and communication services (in particular in the form of the conception, planning and implementation of marketing strategies, advertising campaigns and communication measures, as well as IT services for the creation and maintenance of websites and applications for marketing purposes and the development of digital sales promotions). 

3 Traffic and transport

It has been clarified that that the category "transport and traffic" includes passenger transport, freight transport, railways, road transport, motor vehicles, shipping, aviation and cable cars. However, it does not apply to the distribution of paints and coatings and products for smart repair and dent removal technology for motor vehicles. 

4 Health

The BMWET does not provide any specific examples in this context. It merely clarifies that the terms “health” and “food” refer exclusively to human medicine (and not veterinary medicine) and exclusively to food (and not animal feed). 

5 Food

The legislator has included the category "food" as an abstract critical infrastructure in part 2 of the Annex. However, the BMWET deems this general assumption of criticality to be too broad. Instead, the relevant factor is whether the activity can be considered "abstractly critical". An activity which is not even “abstractly critical” does not fall under part 2 of the Annex. Refreshments from vending machines, the sale of burgers and deep freeze fries are not abstractly critical according to the BMWET’s administrative practice. This is not surprising, given that it is not conceivable how these activities could ever pose a risk to security or public order. In particular, a risk to security of supply can be ruled out in regard to the mentioned activities.  

The BMWET does not provide general criteria to establish when an activity cannot even be considered “abstractly critical”. While the examples are helpful, they only allow for a relatively rough assessment of the scope of the BMWET’s interpretative approach. As far as can be seen, the BMWET applies this interpretative approach only to the “food” sector. 

6 Finance

According to the BMWET, gambling falls under the “finance” category. In this context, the BMWET points out that gambling could be used for money laundering or terrorist financing and as a source of income for criminal syndicates, and pose a potential risk to the stability of the financial market. 

7 “Non-critical” areas within the meaning of the ICA

Contrary to what the wording of the Annex to the ICA suggests, the BMWET assumes that not only infrastructures, technologies and resources but also other areas can be "critical" within the meaning of the ICA (e.g. security services). In order to cover unlisted sectors, the BMWET uses the definition of "critical" at the end of the Annex to the ICA as a catch-all clause. The definition reads as follows:  

“’Critical’ are infrastructures within the meaning of Item 1, technologies within the meaning of Item 2 and resources within the meaning of Item 3 that are of essential importance for the maintenance of important social functions because their disruption, destruction, failure or loss would have serious effects on the health, safety or economic and social well-being of the population or the effective functioning of government institutions.” 

Pursuant to the BMWET’s administrative practice, certain services (e.g. mere consulting services without own operational business activities), certain packaging and marketing and communication services fall neither under the Annex to the ICA nor under the definition of "critical" within the meaning of the ICA. However, the BMWET points out that these decisions were made on a case-by-case basis. 

II. Clarifications regarding the applicability of the FDI regime

The BMWET provides further insight into two of the four possible types of ‘acquisitions’ within the meaning of the ICA and the criteria to determine the applicability of the micro-enterprise. 

1 Acquisition of substantial assets

The acquisition of substantial assets of an Austrian company (asset deal) in a critical sector by a foreign person is notifiable under the ICA. According to the legislative materials relating to the ICA, the decisive factor in asset deals is whether the acquiring person has a controlling interest over the acquired substantial assets.[1] The “substantiality threshold” is relatively low: The BMWET has e.g. considered the acquisition of marketing authorizations for medicines to be a sufficient trigger. 

2 Acquisition of a controlling interest

According to the legislative materials relating to the ICA, the concept of control under the EU Merger Regulation[2] serves as an orientation for the term "controlling interest" as set out in the ICA. However, the term “controlling influence” may (have to) be interpreted wider from an investment control perspective.[3] According to the BMWET, a controlling influence may be assumed if the acquiring person, alone or together with others, can exercise a decisive influence over the activities of the Austrian company. Whether such decisive influence is actually exercised is not relevant. Pursuant to the BMWET veto rights in strategic areas (e.g. in relation to the budget, which could result in the discontinuation of supplies to customers in Austria) are sufficient to convey a controlling interest within the meaning of the ICA. 

 3 Micro-enterprise exemption

Clearance under the ICA is not required if the Austrian target is a micro-enterprise pursuant to Section 2 (2) ICA and has fewer than 10 employees and an annual turnover or annual balance sheet total of less than two million euros. For the interpretation of this exemption, the BMWET refers to the European Commission's SME Recommendation[4] :

• The micro-enterprise status changes if the thresholds (i) are not reached or (ii) are exceeded in two consecutive financial years. 

• The number of employees is calculated on the basis of full-time equivalents (within the meaning of Article 5 of the Annex to the SME Recommendation). 

• If there are several target companies, each individual target company can benefit from the micro-enterprise exemption. 

• When assessing the micro-enterprise exemption, the Austrian target company as a whole is taken into account, rather than the assets to be sold, such as business divisions. This interpretation aims at preventing a circumvention of the FDI regime by means of a “piecemeal” sale of assets. 

III. Additional information in connection with applications

In addition to the mandatory application components specified in Section 6 (4) of the ICA, the BMWET recommends submitting the following documents as part of the application documentation: a customer list for the target undertaking for the last three years; the form for the EU cooperation mechanism (Form B); an English working translation of the application; information on the unique selling points of the target company’s products/services and on the acquirer's plans after the acquisition. 

The BMWET recommends the submission of additional information on the target company’s activities if the target undertaking carries out the following activities: 

• Research and development activities (e.g. nature and scope of these activities) 

• Data processing and/or storage as its main activity (e.g. whether sensitive data is stored) 

• Activities in the field of artificial intelligence (e.g. list of all AI systems used in the company).  

VI. Summary and outlook

The BMWET has taken quite some time to release a guidance on its administrative practice. This is hardly surprising: The ICA is not just another new regulatory instrument among numerous other administrative laws. On the one hand, it serves to protect strategic assets in Austria, and its implementation has both security related and geo-economic implications. At the same time, the BMWET must strike a balance between national and economic security interests and the needs of Austrian businesses, since fresh capital is the basis for innovation and growth. Against the backdrop of this balancing act, legal advisors welcome the BMWET’s endeavours to share information on its decision-making practice. In particular, the clarifications regarding Part 2 of the Annex are a helpful "guard rail", as legal advisers otherwise depend solely on the experience from the procedures in which they participated. 

However, some key questions remain, exemplified by the following: 

• The scope of the term “controlling interest” is unclear. According to the wording, an interest can only be controlling if it enables significant influence to be exerted on the target company, likely across several levels in a vertical ownership chain. Such an influence can hardly be argued on the basis of single veto rights. The definition should therefore be clarified in the context of the next amendment to the ICA. 

• There is still considerable uncertainty when internal restructurings are notifiable under the ICA. Practice-oriented criteria would thus be extremely helpful. 

• Acquisitions by EU-based listed companies are not per se exempted from the application of the ICA. The BMWET should share the criteria it applies to determine whether an EU-based listed company is considered ‘foreign’ within the meaning of the ICA. 

• It should be clarified how voting rights are determined/aggregated across multiple levels in the vertical ownership chain (e.g. in case of indirect acquisitions or limited partners in fund structures).  

The authors therefore hope that this first step towards transparency will be followed by further steps.

 

Footnotes:

^[1] See ex explanatory notes on Section 2 ICA, ErlRV 240 BlgNR 27. GP 3.

^[2] Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings, 29.1.2004, OJ L 24, 1.

[3] Fellner/Gappmayer/Trebuch/Chausse, Das österreichische Außenwirtschaftsrecht § 1 Investitionskontrollgesetz (Stand 1.11.2021, rdb.at).

[4] Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises, 20.5.2003, OJ L 124, 36.