Czech authorities to screen future foreign investments from 1 May

With effect from 1 May 2021, a new law will enable the Czech authorities to screen future foreign direct investments in the Czech Republic (FDIs). Foreign investors will now have to consider the implications of this law for their FDIs and how to address them. The following is a brief overview of the new rules.

The FDIs to be screened

The FDIs covered by the new legal framework and the screening procedure established under the final version of the law do not significantly differ from the draft that we reported in our Law-Now in October 2020.

In a nutshell, FDI screening may apply to all investments made by entities from outside of the EU or entities directly or indirectly controlled by entities outside of the EU, regardless of whether the investment involves the acquisition of shares or assets. The FDIs may be subject to screening if the foreign investor:

• acquires at least 10% of the voting rights;

• becomes a member of a corporate body of the target;

• exercises ownership rights to an asset through which the economic activity is performed; or

• has access to sensitive information or technology.

The authors of this article typically expect that no prior approval by the Ministry of Industry and Trade (the “Authority”) would be needed to carry out the FDI. However, the Authority could be in a position to investigate the FDI and impose certain limitations on it up to five years after its completion.

For FDIs in sensitive sectors, however, prior approval is required. This is relevant for FDIs into sectors such as military and critical infrastructure (e.g. energy, water management, food and agriculture, healthcare, transportation, communication and IT systems, financial markets and currency, emergency services and public administration). Investments in national media require prior consultation with the Authority.

Practical use cases

As is often the case with legislation, the devil is in the detail and many definitions and clauses of the new law leave room for interpretation. This is particularly true for the ability of the authorities to curtail a FDI if it impacts Czech security, public order or internal order.

The Ministry's practices will offer important insight into its interpretation of the new law. The following includes two cases where we assess the impact of the new FDI law on contemplated transactions. These cases include a general preliminary assessment of how FDI law is applied in individual scenarios and should not be considered specific legal advice.

Intra-group restructuring should not be subject to the FDI law

A non-EU entity that directly and indirectly owns various companies in the Czech Republic is planning an intra-group restructuring where one of its Czech entities would partially spin-off into another Czech entity ultimately owned by the same entity. No payment would be made by any of the parties at any level.

Our preliminary view is that such restructuring would not fall within the scope of the FDI law because restructuring does not fall into the definition of FDI or any other investment since no payment is forthcoming. It can be argued that the same conclusion would apply to restructuring on different levels of a holding structure, provided that the controlling entity remains the same.

Determining the right regime under the FDI law

Investments into 'sensitive' sectors or 'critical' infrastructure can be a grey zone. Although such investments may require prior approval, a foreign investor may not always have all the information necessary to determine whether such prior approval is required.

However, the target and the seller should have the information to assess the appropriate regime determining whether prior approval is required to carry out the FDI. In such cases addressing the matter early in the transaction process is recommended. The nature of the assets can be verified during due diligence. In addition consultation with the Authority can be considered. Such consultation can be informal or take the form of a “voluntary consultation process” regulated by the new law.

For more information, see the EU FDI Control Guide prepared by CMS in cooperation with LexisNexis on the implementation of EU Regulation 2019/452 (19 March 2019), which establishes a framework for the screening of foreign direct investment in the EU, Czech Republic and other European countries.

For any questions about the new FDI regime, investments in the Czech Republic or Czech corporate and M&A law, contact your regular CMS adviser or local CMS experts.