By Conor Hand, Deputy Director Investment Screening Unit at the Department of Enterprise Trade and Employment (Ireland)
In an increasingly interconnected world, the national and global security environment is becoming more contested and complex. Reflecting this changing environment, and the increasing diversification of threats, the Irish Government has passed a key piece of legislation designed to protect security and public order.
In recognition of the need to protect Ireland’s critical technology and infrastructure from potentially harmful foreign investment, the Screening of Third Country Transactions Act 2023 will introduce an inward investment screening mechanism into Ireland for the first time. It is intended that the new screening mechanism will come into force during the second quarter of 2024.
The screening mechanism will provide for reviews of certain third country investments relating to sensitive technologies and activities, to determine whether these transactions pose a risk to Ireland’s security or public order. The Act empowers the Minister for Enterprise, Trade and Employment to investigate, authorise, condition, or prohibit foreign investments based on a range of security and public order criteria.
The EU Regulation
The legislation has been signed into law against the backdrop of the EU Investment Screening Regulation – a Regulation which in turn was a response to the growing concerns amongst Member States regarding the purchase of a number of strategic European companies by foreign-owned firms (and in certain cases, state-owned firms).
The Regulation which creates a cooperation mechanism through which Member States and the European Commission can exchange information and raise specific concerns about a foreign direct investment on security or public order grounds, serves as a catalyst for the Irish screening regime, not the raison d’être.
The EU Regulation does not provide for the actual screening of investments, nor does it require Member States to introduce a screening mechanism. Any decision to screen third-country investments remains a decision for individual Member States. Therefore, to ensure that the State is sufficiently empowered to address potential security and public order risks that might arise from potentially hostile investments, the Irish parliament has passed the Screening of Third Country Transactions Act 2023 to create an Irish inward investment screening mechanism.
Rationale for Legislation
Establishing a formal inward investment screening mechanism is a recognition of the threat posed by the strategic and potentially hostile State-backed investment strategies being deployed by some third-country corporations. It also represents an opportunity to design and tailor a system appropriate to Ireland’s needs, and the agreed-upon approach balances Ireland’s longstanding FDI Strategy whilst also acknowledging the challenge posed by potentially hostile investments. The Act represents a pragmatic response to the global security environment: it provides protection without adversely impacting the investment environment; it is not envisaged that large numbers of transactions will require notification; of those that are notified, it is likely that most will be quickly cleared without flagging any security or public order concerns.
The Screening Act
As noted, the Act will introduce an inward investment screening regime in Ireland for the first time. Specifically, the Act ensures that Ireland can, to the extent possible, fulfil its’ obligations as set out in EU Regulation 2019/452.
More specifically, the Act defines the nature, scale and type of investments that should undergo investment screening (e.g., critical technologies, infrastructure, raw materials, or sensitive data); sets out the factors that will be considered when applying screening to particular foreign investments (i.e., the threat posed to security and public order as a result of the target being acquired, the degree of control being applied, or the risk associated with the acquiring party); and empowers the Minister to assess, investigate, authorise, condition, or prohibit foreign investments based on a range of security and public order criteria.
Significant administrative procedures and processes are also outlined – for example, the Act establishes an Investment Screening Advisory Panel to inform and advise the Minister in relation to the screening of specific foreign investments.
One of the most significant elements of the Act relates to the approach taken to appeals, balancing the need to ensure fair procedure whilst protecting the security interests of the State. The appeals process will consist of an initial review of the Minister’s decision by an independent Adjudicator. Thereafter, a party to a transaction in relation to which a screening decision has been made and which has been reviewed by the independent Adjudicator, may appeal to the High Court.
Finally, the range of criminal penalties that may apply to those parties failing to fulfil all of the criteria required for an investment undergoing screening, or parties that breach Ministerial orders arising as a result of the screening process are set.
The Act provides for a mandatory element and a discretionary element. Essentially, mandatory notification of a transaction is required where all of the follow conditions are met:
- a third country undertaking, or a person connected with such an undertaking, acquires control of an asset or undertaking in the State, or increases the percentage of shares or voting rights it holds in an undertaking in the State to more than 25 percent (or from less than 50 per cent to more than 50 percent).
- the cumulative value of the transaction (and other related transactions between the parties) is equal to or greater than €2,000,000 in the 12 months prior to the date of the transaction.
- the same undertaking does not control all of the parties involved in the transaction (i.e., transactions relating to exclusively internal restructuring are not within scope).
- the transaction relates to, or impacts upon, one or more of the matters referred to in Article 4(1)(a)-(e) of EU Regulation 2019/452 (i.e., critical infrastructure, critical technologies and dual use items, the supply of critical inputs, access to sensitive information; or the freedom and pluralism of the media).
The Department of Enterprise, Trade and Employment intends to publish comprehensive guidance in advance of the screening mechanism coming into effect. This guidance will provide more detailed information on each of these categories in order to provide increased certainty to investors – to the extent possible, the Department will draw on definitions already in use. It will make as clear as possible, the obligations and responsibilities arising for investors as a result of the Act.
However, the interpretation of some transactions may be somewhat subjective, and it will remain the responsibility of the parties to an investment to determine whether their transaction falls within the scope of the mandatory notification regime. The legislation provides for criminal offences to apply to investors that do not adhere to the mandatory notification requirements. Such offences are intended to counter deliberate attempts to circumvent the screening regime.
The Call-In Power: A Safety Net
In addition to the mandatory notification regime, the Minister will be able to initiate screening of other investments which do not require mandatory notification, but which the Minister deems, on reasonable grounds, may pose a risk to security or public order. While the Minister is not empowered to unwind or revoke a transaction after the fact, mitigation measures may be imposed to eliminate the harm caused by the transaction.
This call-in power ensures that the screening system is flexible enough to adapt to changing economic and technological developments and allows the Minister to respond to deliberate attempts to circumvent the screening mechanism. To provide as much certainty as possible to investors, time limits are provided to ensure that this is not an open-ended power: in the case of a transaction that is not notifiable, the Minister cannot “call-in” a transaction for review more than 15 months after the transaction is completed.
Interpreting the Act
The scope of the Act can be further understood based on a number of other considerations.
The new regime applies to acquisitions by third country investors – that is, investors that are constituted or otherwise governed by the laws of a third country; entities that are controlled by at least one director, member, or another person who is ordinarily resident in a third country; or natural persons or partnerships that are ordinarily resident in a third country.
Concerns relating to security and public order can potentially arise from anywhere. Non-discrimination among foreign investors is a key principle of both the EU Regulation and of the Act. The sole grounds for screening a foreign investment are risks to security and public order, regardless of the foreign investor’s origin, and the Act clearly sets out the criteria determining which investments will be screened. The intent, therefore, is to screen, where necessary, investments from all third countries (i.e., from outside of the EU, EEA and Switzerland).
The concept of “control” is a key aspect of the screening regime and is clearly defined in Section 2 of the Act and reflects the concept of control used in both EU and Irish merger control. Control of an asset is exercised when a person has ownership of, or the right to use, all or part of the asset, while control of an undertaking exists where a person can exercise decisive influence over the activities of an undertaking. In assessing notifications, the Department will draw on the approach of the European Commission which defines “decisive influence” as the power to “determine the strategic commercial behaviour of an undertaking” in particular in relation to matters such as the budget, the business plan, major investments or the appointment of senior management”.
Notification requirements may apply in relation to transactions relating to the acquisition of an interest in assets regardless of whether these assets constitute an enterprise or business: if the transaction relates to, or impacts upon, one of the specified mandatory notification matters, it must be notified. Furthermore, assets include both tangible and intangible assets, so even the acquisition of intellectual property rights by a third country undertaking could potentially give rise to notification requirements. Parties to transactions must determine whether the transaction meets the criteria for notification; the Department of Enterprise, Trade and Employment will determine whether risks to the security or public order of the State arise as a result of the transaction.
The Act sets out a range of factors that may be considered by the Minister in making their determination about the risks associated with a transaction – these include an assessment of whether an investor is controlled by a third country government; the extent to which parties to the transaction are involved in activities related to security or public order; and the likelihood of the transaction resulting in actions that are disruptive or destructive to people, assets, or undertakings in the State. A transaction that is subject to a screening review may not be progressed or closed until such point as the review has been completed in line with the requirements set out in the Act. It is envisaged that the majority of screening reviews will be completed within 90 days, although this timeline may be extended in more complex cases.
Possible Outcomes from Screening
A range of decisions are available to the Minister in relation to the outcome of a screening review. Whatever decision is made, however, once it is determined that a transaction impacts upon security or public order, parties to the transaction must comply with the Minister’s direction. Failure to comply with a Ministerial screening decision is an offence. In terms of the specific options available to the Minister, these are set out in Section 18 of the Act.
Where there is a finding that a transaction poses a threat to security or public order, the Minister may allow the transaction to proceed subject to certain conditions being fulfilled. Examples of these mitigation measures are set out in S18(4) and will be subject to further guidance.
Alternatively, where mitigation measures would be insufficient, the Minister may prohibit the transaction. Of course, where no concerns are identified, the transaction may proceed without any further intervention.
The Act provides significant detail on all of the procedures and obligations involved at every stage of the screening process. These will be further developed and elaborated on through the aforementioned guidance which will be published well in advance of the screening regime commencing operations during the second quarter of 2024.