Complications for foreign investors: the law on the examination of foreign investment

Are you planning an enter of an investor from a country outside the EU or are you already negotiating with him? In such case you will be interested in the new law on the examination of foreign investments, which will come into force on May 1, 2021 and applies to all investments that have not been completed by that date. Therefore, even if you already have a signed contract, but you are waiting for the conditions precedent to be met, the new law may affect you.

WHICH INVESTMENTS ARE SUBJECT TO EXAMINATION?

Special obligations under the Act on the Examination of Foreign Investments ("ZPZI") fall on foreign investments made by a foreign investor that can endanger the security of the Czech Republic or its internal or external order.

Foreign investments

Foreign investment means any property value provided by a foreign investor for the purpose of performing an economic activity in the Czech Republic, which enables him to exercise an “effective degree of control” over the performance of this activity.

An effective degree of control over the acquisition of at least 10% of the voting rights in the target entity, participation in any body, the ability to dispose of ownership rights to the target thing or another degree of control, which results in access to information relevant to the security of the Czech Republic.

In our opinion, the definition of foreign investment does not distinguish between whether it is a direct or indirect investment (ie direct or indirect acquisition of an effective degree of control) and according to ZPZI will also examine investments in the parent or holding company of the group to which the entity belongs. or thing, investments in which, according to ZPZI, it can endanger the security of the Czech Republic and its internal or external order.

Foreign investor

According to ZPZI, a foreign investor is anyone who has made or intends to make a foreign investment in the Czech Republic and:

1. is not a citizen of the Czech Republic or another EU Member State, resp. is not based there, or
2. is directly or indirectly controlled by those who meet the requirements of point a.

In our opinion, ZPZI is applied even if the foreign investment has already been allowed once, but after its implementation there will be a change of foreign investor or a change of controlling foreign investor, if the new investor or person controlling the original foreign investor is another foreign investor. Thus, there may be a situation where a foreign investment will be allowed but subsequently prohibited, because, for example, the original foreign investor will be controlled by another foreign investor, who will be found to be a potential risk to the security of the Czech Republic.

Investments capable of endangering the security of the Czech Republic and its internal or external order.

The law distinguishes between two basic groups of investments to be examined. The first group includes investments that are subject to a permitting regime, ie they may not be made without the prior permission of the Ministry of Industry and Trade ("MPO"). These are mainly investments into:

1. entities carrying out the production, research or development of military equipment or dual-use[1] items (these are primarily goods for civilian use, but can also be used or misused for the production of weapons[2]); or into things used for that purpose;
2. entities operating a critical infrastructure[3] element or a basic service[4];
3. entities that are administrators of a critical information infrastructure information or communication system or administrators of a basic service information system[5];

The second group includes investments that are subject to a consultation regime (ie some form of notification regime). These are investments that do not fall into the categories listed above, but nevertheless may be "capable of endangering the security of the Czech Republic and its internal or public order". These are then divided into two sub-categories, namely investments in the media, for which the investor is always required to consult before completing the investment, and other investments, for which he is not required to consult, but if he does not, he risks that the MPO itself will initiate proceedings to verify foreign investment, up to 5 years from the completion of the investment.

In particular, the second ("residual") category brings considerable practical difficulties and legal uncertainty. Investments capable of endangering the security of the Czech Republic or internal or public order is a very broad concept, and only time will show what the state authorities will include under it. It can therefore be assumed that foreign investors will solve the dilemma of their investments in the Czech Republic, whether to ask the MPO for a consultation as a precaution, thus exposing the MPO to submit extensive investment documentation including detailed information on the ownership structure of the foreign investor and target entity or bear the risk for the next 5 years[6] that the MPO will initiate proceedings to verify the given investment ex officio and, for example, the further duration of the investment will be prohibited.

INVESTMENT AND SANCTION VERIFICATION PROCEDURE

Investment verification proceedings

The MPO is the competent authority for issuing permits, mandatory and voluntary consultations, and proceedings on the verification of foreign investment and the discussion of misdemeanors. The proceedings are conducted in accordance with the Administrative Procedure Code as a standard (however, without the possibility of an appeal - dissolution) and can subsequently be defended in the administrative judiciary (however, it is not possible to grant a suspensive effect to the lawsuit). If the MPO considers that the given investment may endanger the security of the Czech Republic or its internal or external order, it shall refer the matter to the Government of the Czech Republic and ask it for a statement. The whole procedure can take up to half a year or even more.

The result of the foreign investment verification procedure may be:

1. permission (for those which are being permitted) or admission (for those which are being consulted) of a foreign investment;
2. conditional authorization (for those which are being authorized) or admission (for those which are being consulted) of a foreign investment;
3. non-granting of a permit (for those which are being permitted) or prohibition of making (for those which are being consulted). a foreign investment;
4. a ban on further duration of the investment

As part of the ban on further duration of the investment, for example, the sale of the subject of the investment within a specified period or restrictions or a ban on the exercise of ownership or voting rights may be ordered.

Sanctions

For a breach of obligations, a foreign investor may be fined up to 1 or 2% of his net total turnover for his last completed accounting period; if this value cannot be determined, then in the range from CZK 50,000 to CZK 100,000,000.

FURTHER PROCEDURE

If you are currently negotiating an investment that should be permitted or consulted according to ZPZI, it is strongly recommended to complete it by April 30, 2021, at least to avoid delays associated with the examination of the foreign investment.

All future transactions with a foreign investor will include an assessment of whether there is a risk that the transaction will be affected by ZPZI, whether it is necessary to apply for a permit or request a consultation, or whether it is appropriate to request a consultation. The investment verification procedure will then have to be considered when preparing the schedule of the transactions in question.