Investment Screening: No Discretion for foreign direct investment from Russia and Belarus

The EU Commission wants to further promote a comprehensive and restrictive application of investment screening mechanisms by the competent authorities in the member states. This can be derived from the guidelines on dealing with foreign direct investment from Russia and Belarus published at the beginning of April 2022. It is expected that the German Federal Ministry of Economics and Climate Action[Bundesministerium für Wirtschaft und Klimaschutz, BMWK] will keep a close eye on M&A transactions with Russian participation on the acquirer side. In the future, the acquisition of stakes in sensitive companies by Russian and Belarusian companies with any government involvement will be assumed to be detrimental to public security interests.

On 6 April 2022, the EU Commission published guidelines for member states on dealing with foreign direct investment from Russia and Belarus. In these guidelines, the EU Commission calls on member states to make particular use of their national investment screening instruments for investors from these countries, making reference to EU Screening Regulation ((EU) 2019/452). In  further response to Russia's ongoing breach of international law, the Commission urges member states to use the instrument of investment screening uniformly and consistently across the Union and through that application mirror the effect of current sanctions. Although the Commission's guidelines are not binding on the member states, one should not underestimate their importance for the practice of the national authorities.
 

Specifically, the EU Commission calls on member states to consider any investment in critical assets in the EU which directly or indirectly involves persons or entities linked to the Russian or Belarusian governments as being a potential threat to public security or order.

Applied to the German investment screening process, this means: Acquisitions in which a Russian or Belarusian investor directly or indirectly acquires a shareholding of 10% or 20% (depending on the case at hand) of the voting rights in a domestic company that falls into one of the particularly sensitive categories,  are regularly deemed detrimental to the public security of the Federal Republic of Germany. Relevant sensitive categories are set forth in Sec. 60 (1) German Foreign Trade Ordinance [Außenwirtschaftsverordnung, AWV] (e.g. weapons and armaments) or in Sec. 55a (1) AWV (e.g. critical infrastructure or technologies).

Usually, security concerns concerning the acquisition of stakes in sensitive companies can be mitigated by taking appropriate precautions, such as by entering into a security agreement. By contrast, there is barely any discretionary scope if the acquirers are Russian or Belarusian investors. Rather, the authority's margin of judgement when examining a detrimental effect on public safety is ultimately reduced to zero. In these cases, the Russian or Belarusian background of the direct or indirect acquirer is already sufficient to assume a detrimental effect.  

Acquisitions subject to scrutiny may also include other forms of obtaining control, increases in existing shareholdings and intra-group restructurings beyond the exemption in Sec. 55 (1 b) AWV. In addition, the BMWK can include any forms of circumvention constellations in which the identity of Russian or Belarusian investors is to be concealed.

Furthermore, in the case of investments not relating to critical assets, the EU Commission recognises a greatly increased risk of a threat to public security and order in the event of direct or indirect participation by Russian or Belarusian investors. When applied once again to the German investment screening process, this means: even outside the categories subject to notification under Sec. 60 (1), Sec. 55a (1) AWV, i.e. in the case of acquisitions of domestic enterprises without any special security relevance, the participation of a Russian or Belarusian investor of at least 25% of the voting rights may trigger the initiation of an investment screening procedure ex officio.

This has particularly the following consequences for the transaction practice:

• Any and all direct or indirect participation of Russian or Belarusian investors above 10% should be examined. In case of doubt, such participation should be notified to the BMWK as part of a mandatory filing or a voluntary application for a certificate of non-objection.
• If the investment in the domestic company is made through multi-level holding structures, it is essential that the participation of Russian or Belarusian companies or persons is checked at each level of the investment chain (i.e. by checking the registered and business address of companies or domicile and habitual residence of individuals).

When assessing suitable transaction structures, one must bear in mind that payments, share transfers or the transfer of certain technologies in the context of an acquisition to Russian or Belarusian companies could be subject to financial sanctions and trade restrictions.

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