Key Contact: Ronan Dunne – Partner

Published in the Irish Examiner, August 21 2022.

The IDA reported in June that Ireland had experienced a 9% increase in inward investment for the first six months of this year, marking the highest ever increase in foreign direct investment, or FDI, in the State.

There has been an estimated 18,000 new jobs created, no mean feat in an increasingly uncertain global economy.

Ireland has consistently highlighted the nature of its open economy and welcomed FDI as a means of continuing to drive economic growth. It’s in that context that recent developments in respect of the scrutiny of FDI become relevant.

The European Union decided to enact a regulation in 2019 to provide for a comprehensive screening framework on investments within the union.

The regulation acknowledged that there was previously “no comprehensive framework at union level for the screening of foreign direct investments on the grounds of security or public order”.

Indeed, the majority of EU states had no screening mechanisms in place at the time of the regulation’s enactment to consider whether outside investment may potentially give rise to security concerns. The regulation was designed to encourage states to implement domestic screening regimes. It has been highly successful, in this regard.

Spurred by the EU’s regulation, the Irish Government announced the “Screening of Third Country Transactions Bill 2022” last month. The bill will, for the first time in Ireland, introduce a screening mechanism for FDI.

The new regime is intended to act like the current one for mergers and acquisitions under Irish competition law rules, which require deals to have the prior approval of the Competition and Consumer Protection Commission, before they can be completed.

Under the bill, parties will be obliged to consider whether their transactions are notifiable to the Minister for Enterprise Leo Varadkar for approval from a FDI perspective.

The bill envisages mandatory notification of transactions which meet the following criteria, including that the transaction has a value of €2m or more; the deal involves FDI from a business or national of a third country, specifically any country that it is not a member of the EU or EEA, or Switzerland; and that the transaction relates, directly or indirectly, to a change in control of an Irish asset, or the acquisition of a significant interest in an Irish business.

The regime applies to both tangible asset transactions where the asset is physically located in the State, and intangible assets where the relevant asset is owned, controlled or otherwise in the possession of an undertaking in the State.

Further, while minority interests are exempted, a notifiable transaction may arise where the proportion of shares or voting rights in an undertaking in Ireland changes.

Whether the transactions relate to one of the target areas for screening set down in part of the EU’s 2019 regulation are based on physical or virtual critical infrastructure, critical technologies and dual-use items, supply of critical inputs, access to sensitive information, or the freedom and pluralism of the media.

Any transaction which meets the above requirements must be notified to the minister not less than 10 days before the deal’s proposed completion. Similar to the Irish merger control regime, a “standstill” obligation applies, meaning that parties may sign the deal but it cannot be completed until approval has been granted by the minister, or until the relevant prescribed time periods for review have elapsed.

Crucially for deal-makers, the bill states that the review timeline for the minister can be up to 135 days after the notification is received, with the first decision timing point not being until day 90.

Clearly this may be a significant issue for notifiable transactions. Failure to notify a mandatorily notifiable transaction is a criminal offence, and the bill envisages significant penalties for such failures.

In addition, if a mandatorily notifiable deal is completed without notification then the transaction will be deemed void under Irish law, which will obviously give rise to significant uncertainty.

The Covid-19 pandemic helped highlight that when the chips are down, countries often put their own interests and those of their nationals first, rather than focusing on the greater good. It’s in this context that the introduction of Ireland’s proposed regime is to be welcomed.

However, the screening mechanism as introduced raises many questions that will need to be addressed. The bill casts a wide net, and the definition of third countries will capture investment in Ireland from the likes of the UK and the US. This will arguably disproportionally affect Ireland when compared to our EU neighbours.

Further, the bill does not provide any guidance on what exactly constitutes the critical target areas that are the subject of the proposed screening regime.

Given the fact that failure to notify will be a criminal offence, and coupled with the low monetary threshold of €2m per transaction, deal makers will expect the department to provide comprehensive guidance.

These initial uncertainties are confounded by the fact that, somewhat surprisingly, the bill is intended to have retroactive effect, allowing the minister to call in transactions that have been completed up to 15 months prior to the law coming into force.

In addition, the bill also makes it possible for non-notifiable transactions, for those deals for which no mandatory notification obligation arises, to be called in by the minister for review for a period of 15 months after the deal has been completed.

The Department of Enterprise has said that the “Bill represents an opportunity to design and tailor a screening mechanism appropriate to Ireland’s needs” with a “robust, but proportionate, screening mechanism”.

Striking a balance in this case, and introducing a proportionate mechanism, is a difficult challenge. We await to see how the bill will progress through the Oireachtas.