With a remarkable statement in an interview with the Financial Times published on 12 April 2020, the Commission Vice President Margrethe Vestager in charge of Competition was cited to have declared that the Commission has “no issues” with EU Member States buying shares in companies to prevent takeovers by foreign acquirers, in particular by State-backed enterprises.

Coming at a time of increased attention to Foreign Direct Investment (FDI) limitations in the wake of the COVID-19 pandemic, this takes up discussions about “Golden Shares”, a mechanism allowing a Member State to veto certain “critical” decisions such as takeovers on the basis of a minority shareholding in a company, and adds a new dimension to the discussion that has been raging across Europe, covering FDI, but also State aid and the principle of free movement of capital.

In the interview, Commissioner Vestager was recorded as repeating earlier Commission views that there is a “real risk” that vulnerable businesses become the target of foreign acquisitions during the current health crisis.  In this regard, the Commissioner commented that, while the EU remains open for business and to investment, Member States have a role to play in dealing with “unfair competition” — raising the perception that State-backed entities have unfair advantages as a result of the State resources at their disposal and relative financial stability.

Last month, Commissioner Vestager had already announced that the Commission is intensively working on ideas to help prevent hostile acquisitions of businesses in the EU by foreign companies that have financial backing from national governments.  Now she has confirmed that an EU paper covering this matter can be expected as soon as June 2020.

What’s on the table?

With her “no issue” statement, Commissioner Vestager seems to encourage Member States to prepare Golden Share initiatives.  However, the Golden Share mechanism is subject to a number of legal considerations, in particular to the principle of free movement of capital enshrined in Article 63 et. seq.  Its implementation therefore needs careful attention, and the Commissioner’s comments should not be misconstrued as a “blanc cheque” to proceed.

In addition, the acquisition of a Golden Share may be subject to State aid proceedings. The Commission made this clear in its Communication of 4 April 2020 on the “Amendment to the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak” and stated that “if Member States purchase existing shares of undertakings at market price or invest pari passu with private shareholders, this in principle does not constitute State aid.”  The Commission also made it clear that if Member States decide to purchase newly issued shares and/or provide undertakings with other types of equity support or hybrid capital instruments, this “should remain an intervention of last-resort” and “should therefore be subject to clear conditions as regards the State’s entry, remuneration and exit from the undertakings concerned, governance provisions and appropriate measures to limit distortions of competition.”

The discussion of the Golden Share instrument joins the earlier debate about the creation of “European Champions” which was launched by the French and German governments in the context of the prohibition of the Siemens/Alstom merger last year. Although technically unrelated, the Golden Shares discussion may give additional leeway for the implementation of a European Champions concept as well as the perceived concern in the EU that globalisation also created dependencies and the EU needs to strengthen manufacturing of critical goods in Europe.  It is thus important to place Commissioner Vestager’s remarks as reported into the wider perspective of the legal bounds imposed by the principle of free movement of capital and State aid and the overall economic strategy for Europe in the next decade.

The overall FDI discussion

Even so, from a broader perspective, the Golden Share instrument can be seen as one more measure in the larger “toolbox” of FDI screening mechanisms. As we reported in several preceding blogposts, during the COVID-19 crisis, initiatives to strengthen Foreign Direct Investment (“FDI”) screening mechanisms accelerate at both EU and Member State level.

On 25 March 2020, the European Commission (the “Commission”) published a policy paper to provide guidance to EU Member States regarding takeovers by non-EU (“foreign”) investors of EU companies and assets in “strategic industries” during the COVID-19 crisis (the “Guidance”). In the Guidance, the Commission encouraged Member States to vigorously deploy any FDI screening mechanisms already in place.  It further called on those Member States that do not have screening mechanisms to set up FDI rules and in the meantime use all other options to address cases where the acquisition would create a risk to public order or security in the EU. For more details we refer to our earlier blogpost.

Furthermore, several Member States have already strengthened their FDI screening regimes due to the COVID-19 crisis:

  • In Italy, the government took a number of measures to address the crisis. In an initial move, the government suspended review periods for ongoing FDI screening procedures until 15 April 2020. Further, on  6 April 2020 the government announced an expansion of the national powers to block foreign takeovers. With immediate effect the scope of Italian FDI screening will include a much wider range of sectors that are now subject to mandatory notifications for the acquisition of a stake of 10% or higher and above EUR 1 million. In addition, Italian FDI screening now also applies to acquisitions by companies and persons from other EU Member States; this intra-EU screening was introduced on a temporary basis until 31 December 2020. Additionally, the Italian financial markets authority (Consob) lowered the minimum threshold for transparency obligations in relation to the purchase of shares in key listed companies.
  • In Spain, on 17 March 2020 Royal Decree 8 was adopted as part of measures to address the COVID-19 crisis and supplemented by Royal Decree 11 on 1 April 2020. Under these new regulations, share acquisitions in Spanish companies of 10% or more are subject to prior approval if they operate in certain strategic sectors.

Other EU countries further tightened the respective national FDI screening regimes through new laws and by introducing draft bills. These initiatives are not (directly) linked to the current COVID-19 situation although we note a significant increase of EU Commission and Member State activities since the economic impact of COVID-19 became apparent.

  • In France, a reform of FDI rules came into force on 1 April 2020 having been approved in December 2019, and brought significant changes. The ownership threshold triggering an approval requirement for non-EU/EEA investors was lowered from 33.33% to 25%. In addition the scope of “strategic sectors” was extended to activities in relation to political and general information press services, agricultural products contributing to national food security objectives, quantum technologies and energy storage. The measures also amended the applicable timeframe of the review process and specified the information required for a filing.
  • In Germany, the government announced on 8 April 2020 that it had decided on sending a draft bill to parliament in order to amend the national FDI screening rules. Under the new law the national authorities will have significantly enhanced enforcement powers and any notifiable acquisition will be suspended pending FDI screening. We reported on this draft bill in this blogpost.
  • Meanwhile also in Austria, the government is pushing for a further tightening of FDI rules. The Austrian Minister for Economic Affairs Margarete Schramböck announced in an interview on 10 April 2020 that a draft bill tightening FDI screenings will be sent to parliament within the next 14 to 20 days. The new legislature with cover foreign (i.e. non-EU) investments of 10% or more in sectors such as artificial intelligence, robotics, infrastructure and food production.

It can be expected that further Member State and EU initiatives will follow in the coming months. With Commissioner Vestager’s remarks on the Golden Share mechanism now out there, we see a further dimension to the wider debate how Europe will be positioning itself as a haven for investment following the COVID-19 pandemic.

Covington will continue to monitor the situation and will provide regular updates on new developments.

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Photo of Horst Henschen Horst Henschen

Horst Henschen has been advising international companies on their significant strategic antitrust and competition matters for over 25 years. He acts for buyers, sellers, and financial investors in merger control proceedings including in Joint Venture scenarios and defending companies against unsolicited takeovers. Horst…

Horst Henschen has been advising international companies on their significant strategic antitrust and competition matters for over 25 years. He acts for buyers, sellers, and financial investors in merger control proceedings including in Joint Venture scenarios and defending companies against unsolicited takeovers. Horst advises companies in significant (international) cartel investigations and on dominance issues.

In addition, Horst has advised numerous investors and target companies in international and German Foreign Direct Investment (“FDI”) proceedings helping in building up the firm’s ex-US FDI initiative.

Horst is a member of the firm’s global antitrust and competition team and heads the firm’s German competition practice. He is part of our cross-office FDI team that works in close cooperation with the firm’s CFIUS colleagues.