Russia’s continued invasion of Ukraine is broadly impacting foreign direct investment (“FDI”) screening. A range of governments have announced they will apply close scrutiny to investments from Russia and its allied countries in general, and not only to investors that are subject to sanctions or other restrictive measures. The European Commission (“Commission”) has published guidance on the screening of investments from Russia and Belarus.

The German government has already intervened, appointing a fiduciary for an operator of critical gas infrastructure. Canada issued a policy statement targeting Russian investors and Italy permanently broadened its FDI regime. Our blog provides a summary of these developments below.

Commission Communication calls for systematic assessment of Russian and Belarusian investments

On 6 April 2022, the Commission published a Communication (“Communication”) with guidance on screening of FDI from Russia and Belarus. The Communication emphasizes greater vigilance towards Russian and Belarusian investments into the EU and stresses that FDI screening goes beyond investments by persons or entities that are subject to sanctions. While the Communication is a direct response to the military aggression of Russia against Ukraine, it also elaborates on more general principles of FDI screening in the EU.

The Commission calls upon Member States to systematically assess and prevent threats related to Russian and Belarusian investments. In particular, the Commission encourages Member States to ensure close cooperation both on the national and EU level in relation to FDI screening activities, as well as in the implementation of EU sanctions. The EU FDI Regulation already provides for such cooperation and facilitates information exchange among Member States and the Commission. In particular, Member States may learn about a transaction through the cooperation mechanism and assess FDI filing requirements within their own jurisdiction. As discussed in our blogpost concerning “One Year of the EU FDI Regulation”, Member States have found the cooperation mechanism to be “a very useful instrument” and to have fostered valuable discussions in relation to transaction screening and critical sectors.

But a number of Member States do not have FDI screening regimes in place, including Belgium, Estonia, Greece, Ireland, Luxemburg, the Netherlands, Portugal and Sweden. Where FDI regimes are not yet in place or do not allow for pre-investment screening, the Commission calls to urgently set up a comprehensive FDI screening mechanism and in the meantime to use other suitable legal instruments to address security or public order risks. For those Member States that are in the process of setting up a screening mechanism, the Commission calls on them to accelerate adoption and prepare implementation, including supporting it with appropriate resources.

The Communication notes the potential screening of FDI after the completion of a transaction. While FDI screening is usually undertaken before closing of a transaction, the EU FDI Screening Regulation also allows for the screening of FDI post-closing. If a Member State launches the formal screening of an FDI, it is subject to EU cooperation mechanism irrespective of its planned or completed status. Furthermore, the cooperation mechanism may be initiated within 15 months after the investment has been completed when an investment is not subject to screening at national level. This may occur when the Member State does not have a screening mechanism or when the Member State maintains a screening mechanism but the specific FDI transaction was not submitted by the parties for ex-ante screening.

The Commission reports that based on 2020 data, Russian individuals or entities control about 17,000 EU companies, and have potentially controlling stakes in another 7,000 companies and minority stakes in a further 4,000 companies. The Commission strongly encourages Member States to apply FDI screening to intra-EU investments that are ultimately controlled by Russian or Belarusian persons or entities. In that context, the Communication describes the conditions under which Member States may be permitted to impose restrictions on the free movement of capital and freedom of establishment.

Germany intervenes firmly to protect gas supplies

The German FDI regulator, the Federal Ministry for Economic Affairs and Climate Action (“BMWK”), has firmly intervened to protect gas supplies in Germany. Using its respective enforcement powers for the first time, the BMWK has temporarily appointed the Federal Network Agency (“FNA”) as fiduciary for Gazprom Germania GmbH (“Gazprom Germania”).

Gazprom Germania served as a holding company of the Russian based Gazprom Group for the activities in Germany and other European countries, including in particular the operation of critical infrastructure (like energy trading, gas transport and the operation of gas storage facilities). The BMWK’s order to appoint the FNA as fiduciary to operate the company’s business was adopted in connection with changes to Gazprom Germania’s ownership structure. The BMWK indicates that Gazprom Germania was indirectly acquired by two Russian entities, JSC Palmary and Gazprom export business services LLC. The BMWK asserts that this acquisition of Gazprom Germania has been implemented in violation of a mandatory obligation to notify the acquisition and seek clearance under German FDI laws.

The Federal Minister Robert Habeck stated that, “[t]he order of fiduciary management serves to protect public security and order and to maintain the security of supply”. Fiduciary management of Gazprom Germania by the FNA has been ordered until 30 September 2022. Among other things, the measures prohibit the exercise of all voting rights deriving from shares in Gazprom Germania. Accordingly, the company is under control of the FNA and the latter is authorized to remove members of the management and appoint new members. Moreover, the FNA may issue instructions to the management. The right to manage and dispose the assets of Gazprom Germania GmbH is restricted for the period of fiduciary management and is made subject to the approval of the authority. The BMWK’s press release cites the Federal Minister Habeck that “The Federal Government is doing what is necessary to uphold security of supply in Germany. This also includes not exposing energy infrastructures in Germany to arbitrary decisions by the Kremlin.

Canada

On 8 March 2022 the Canadian Minister of Innovation released a Policy Statement under the Investment Canada Act (“ICA”). According to the statement, the Canadian authorities will apply close scrutiny to Russian investments into Canada. Investors that are found to be controlled or subject to influence by the Russian state will face security concerns. For the planning of investment filings, all non-Canadian investors are asked to pro-actively identify any potential connections to Russian investors and entities. Investments involving Russian investors are likely to face prolonged review periods. These developments have the potential to significantly impact transactions involving a Canadian business and transaction parties are therefore recommended to consider the role of Russian entities and individuals as part of their transaction planning well in advance.

Italy

During March 2022 and in response to the Ukraine crisis and continued global tension concerning the ownership of advance technology, Italian regulators have extended the reach of “Golden Power” laws to companies operating in 5G and cloud technologies. In connection with these measures, Italy has also provided the Italian FDI regulator with permanent powers to review (i) acquisitions of controlling stakes by European Economic Area (“EEA”) investors (including Italian persons) in targets active in communications, energy, transportation, agri-food, health, finance, and (ii) minority investments made by non-EEA investors, in every “strategic” sector. Similar FDI screening powers that were introduced on an emergency basis in connection with the Covid-19 crisis had been expected to expire by the end of 2022.

Conclusions

FDI laws continue to have a significant impact on deal making and transaction planning. This is even more the case in light of the recent geopolitical fractions involving Russia’s invasion of Ukraine. FDI regulators around the globe will thoroughly assess investments from Russia and its allied countries regardless whether an investor is subject to sanctions or other restrictive measures. While the number of interventions generally remain low, regulators are demonstrating their willingness to intervene against transactions that are associated with the Russian state or government. Beyond that, all transaction parties need to consider shareholder and ownership structures well in advance and factor in the potential impact of closer FDI scrutiny and lengthy proceedings for deal planning.

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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.

Photo of Martin Juhasz Martin Juhasz

Martin Juhasz is an associate in Covington’s Frankfurt office and a member of the antitrust and EU competition team. He advises clients on all aspects of European and German competition law from a broad range of sectors, including technology, internet, healthcare, and manufacturing.

Martin Juhasz is an associate in Covington’s Frankfurt office and a member of the antitrust and EU competition team. He advises clients on all aspects of European and German competition law from a broad range of sectors, including technology, internet, healthcare, and manufacturing. He also counsels foreign investors with regard to foreign direct investment regulations (FDI).