The Foreign Investment Regulation Review: Austria
In 2020, there were two major developments that significantly impacted the screening of foreign investments in Austria. First, in July 2020, a new regime on foreign investment controls replaced the existing (limited) foreign direct investment (FDI) screening mechanism. Second, Regulation (EU) 2019/452 (Foreign Direct Investment Screening Regulation) became applicable in October 2020, thereby initiating the establishment of the EU consultation mechanism to strengthen communication among Member State FDI regulators and enhance transparency of relevant foreign investments throughout the bloc.
For almost three years there have been political discussions in Austria around the necessity of strengthening Austrian controls on foreign investment. While these discussions slowed down during 2019, in the wake of the covid-19 pandemic, they gathered significant pace, bringing with them a shift in focus, which is now mainly on the pharmaceutical or healthcare and technology or digital sectors.
The result is a new Austrian foreign investment control regime with a significantly expanded scope of foreign direct investment controls both in terms of potentially sensitive economic sectors and types of transactions involving Austrian businesses that trigger mandatory FDI filings in Austria. More details on the scope and process are provided below, but it is fair to say that the new Austrian FDI regime is now one of the broadest foreign investment controls in Europe and the Austrian regulator is taking an active approach to imposing these rules.
Year in review
The most notable development over the past year is the entry into force of a completely new foreign investment control regime in Austria in combination with an EU-wide consultation mechanism. Comparing the Austrian FDI controls in place until the summer of 2020 with the current screening mechanisms, it is clear that there are very few similarities remaining. While under the previous FDI regime, in place until July 2020, FDI reviews were limited to the most sensitive sectors (e.g., defence, energy, water and telecommunication) with a 25 per cent (of voting rights) threshold and limited national review, the new regime provides for a comprehensive up-to-date and state-of-the-art foreign investment review. The types of transactions (share and asset deals), the relevant thresholds (from 10 per cent of the voting rights upwards), the range of sensitive sectors, the combined EU-wide and national review process, and the extended timeline are all clear indicators that foreign direct investment review in Austria has changed significantly.
These changes to the legal framework in combination with a very active regulator (on a national level as well as within the EU consultation mechanism) have led to a significant increase in Austrian FDI filings in the last 12 months, which in turn has led to lengthier FDI approval proceedings.
Foreign investment regime
A mandatory FDI filing requirement is triggered if the following four requirements are fulfilled: a non-EU/EEA/Swiss investor (1) acquires a certain amount of voting rights or other forms of control (2) in an Austrian (target) undertaking (3), which is active (4) in certain sensitive sectors.
Austrian (target) undertaking
For the purposes of the Austrian Investment Control Act (ICA), an Austrian undertaking can be defined as any permanent organisation of independent economic activity (even if it is non-profit-making) that has its registered office or headquarters in Austria. A mere branch office of a non-Austrian entity that does not have any legal personality cannot be regarded as an Austrian (target) undertaking.
To be controlled by the ICA, a direct investment in an Austrian undertaking needs to be made either by:
- a natural person without EU citizenship or without citizenship of an EEA state or Switzerland; or
- a legal entity with its registered office or headquarters outside the European Union, the European Economic Area or Switzerland.
The ICA controls the direct or indirect acquisition of the following undertakings:
- an Austrian undertaking;
- voting shares in such an undertaking;
- a controlling interest in such an undertaking; or
- a controlling interest in substantial assets of such an undertaking.
Micro enterprise exception
The ICA provides for an exception for micro enterprises, including start-up enterprises, with fewer than 10 employees and an annual turnover or an annual balance sheet total of less than €2 million, in which case no authorisation is required.
Mandatory approval requirement
In summary, a foreign direct investment requires approval if:
- the Austrian target undertaking is active in one of the sensitive sectors listed in the Annex to the ICA;
- EU and international legal provisions do not preclude the obligation to obtain an authorisation; and
- a minimum share of the voting rights, or irrespective of specific shares of the voting rights a controlling interest, or a controlling interest in substantial assets, of an Austrian target undertaking is acquired.
ii Laws and regulations
In Austria, the Federal Minister for Digital and Economic Affairs (the Austrian regulator) is the competent authority for evaluating and granting investment control authorisations.
Committee for Investment Control
In addition, an advisory council, the Committee for Investment Control (CIC), consisting of representatives from different ministries and sometimes provincial bodies, is established to advise the Austrian regulator on investment control issues. The principal tasks of the CIC are as follows:
- to deal with all matters submitted under the ICA;
- to advise on annual reports that have to be submitted under the ICA;
- to advise on developments in foreign direct investment at international, European and national level; and
- to advise on fundamental questions of the implementation of the ICA and the Foreign Direct Investment Screening Regulation.
The relevant legal act is the Austrian Investment Control Act, which became effective on 25 July 2020 (the relevant ICA provisions implementing the European cooperation mechanism came into force on 11 October 2020).
Under the ICA, mandatory FDI filings are triggered by the direct or indirect acquisition of the following undertakings:
- an Austrian undertaking;
- voting shares in such an undertaking;
- a controlling interest in such an undertaking; or
- a controlling interest in substantial assets of such an undertaking.
Relevant voting shares
If the investment constitutes an acquisition of voting shares and the target carries out an activity in a sector that is considered particularly sensitive pursuant to the ICA and listed in Part 1 of the Annex, an authorisation is required if more than 10 per cent, 25 per cent or 50 per cent of the voting shares is acquired. For all other sectors, an authorisation is required if 25 per cent or 50 per cent of the voting shares is acquired. This is designed as a staggered approval model where approval is required each time one of these thresholds is exceeded.
If an acquisition is carried out jointly by several foreign persons, their respective shares of voting rights in the target undertaking are added together.
As regards asset deals and other instances where a controlling interest is acquired (rather than voting rights), a controlling interest means the possibility of exercising decisive influence over the activity of the Austrian target undertaking, either individually or jointly, through rights, contracts or other means, taking into account all circumstances, even if the minimum share of voting rights required by the ICA is not reached. Pursuant to the ICA, a controlling interest may be exercised in particular by:
- ownership or right of use of all or substantially all of the tangible or intangible assets of a target undertaking; or
- rights or contracts that confer a decisive influence within the meaning of Council Regulation (EC) No. 139/2004 on the control of concentrations between undertakings (EC Merger Regulation) on the composition, deliberations or decisions of the organs of that undertaking.
iv Voluntary screening
In addition to submitting a formal investment control application, an acquiring person or the target undertaking may also submit an application for a clearance certificate. The application must contain – with limited exceptions – almost all the information that is also required for submitting a formal application. Within two months of receipt of the complete application, the Austrian regulator shall issue a clearance certificate by administrative decision, if it is established that the direct investment is not subject to an authorisation requirement. Otherwise, the applicants must be notified that the application will be treated as an application for authorisation and the normal authorisation proceedings will commence. If within two months of receipt of the complete application neither an administrative decision nor notification that the application will be treated as an application for authorisation is served, the clearance certificate shall be deemed to have been granted.
Responsibility for filing an application
If an authorisation is required, either:
- the directly acquiring person or persons; or
- the indirectly acquiring person (depending on whether the acquisition of the Austrian target undertaking is direct or indirect) is obliged to submit a written application to the Austrian regulator.
The Austrian regulator must inform the target undertaking of the application. If the target undertaking becomes aware of an intended acquisition requiring approval and has not been provided with any information about an application, it is obliged to notify the Austrian regulator in writing immediately after having become aware of such an acquisition.
Timing for submitting an application
With regard to timing, an application for authorisation shall be submitted immediately after signing or, in the case of a public offer, immediately after the announcement of the intention to make an offer.
Required information for application
An application for authorisation shall contain the following information:
- the name, address and, if available, telephone number and email address of each acquiring person;
- the name, address and, if available, telephone number and email address of the Austrian target undertaking;
- a precise description of the business activities (including products, services and business transactions) of the acquiring persons and the Austrian target undertaking including a description of the market in which these business activities are carried out (competitors, market share);
- an indication of the natural or legal person in whose ownership or under whose control each acquiring person is ultimately located (i.e., the ultimate beneficial owner or (UBO));
- a detailed description of the planned transaction and the detailed ownership and shareholding structure in the target undertaking;
- the other EU Member States in which each acquiring person and the target undertaking conduct relevant business operations;
- the funding of direct investment and the source of any such funding;
- the anticipated date of completion of the direct investment or on which date it was completed;
- whether the process must also be reported under the EU Merger Regulation;
- the name of one or more persons with power of attorney in Austria for each acquiring person; and
- whether the process has or may have an impact on a project or programme of EU interest within the meaning of Article 8, Paragraph 3 of the Foreign Direct Investment Screening Regulation.
European cooperation mechanism
After receipt of the complete application, the Austrian regulator must – without delay – notify the European Commission to start the European cooperation mechanism. The European Commission and the EU Member States are then provided with the opportunity to submit comments. Comments from one or more EU Member States and an opinion issued by the European Commission shall be taken into consideration under the Austrian authorisation procedure if they are submitted within 35 calendar days of the notification to the European Commission, or within 20 calendar days of receipt of additional information from either the acquiring person or the target undertaking, or notification by the Austrian regulator that it has not been possible to obtain the additional required information. An opinion of the European Commission issued after comments from other EU Member States shall also be taken into account if it is received no later than five calendar days after expiry of these deadlines.
If the European Commission or at least one EU Member State has notified its intention to issue an opinion or comments within 15 calendar days of the notification to the European Commission, a decision on the application may be issued only after expiry of all deadlines for the submission of opinions and comments as described above.
In cases of exceptional urgency, particularly if a potential threat to security or public order requires immediate action or if the process must be carried out quickly for important economic interests, an administrative decision may be issued before the expiry of the time limits provided by the European cooperation mechanism as mentioned above. The European Commission and the other EU Member States must be informed immediately after the exceptional urgency has been established and the reasons for the urgency must be explained to them.
Austrian authorisation procedure
Within one month of the expiry of the relevant deadline provided by the European cooperation mechanism or in cases of extreme urgency after receipt of the complete application, the Austrian regulator shall:
- determine by administrative decision that an authorisation procedure is not initiated because such procedure would be contrary to obligations under EU or international law;
- determine by administrative decision that there are no objections to the acquisition because there is no well-founded suspicion of a threat to security or public order; or
- give notification that an in-depth investigation will be initiated because a more detailed examination of the impact on security or public order is required.
If neither a decision nor a notification as described above is delivered within the aforementioned time period, the authorisation shall be deemed to have been granted. All parties will be notified of the beginning of the one-month period.
Within two months of notification of the initiation of an in-depth investigation, the Austrian regulator shall issue an administrative decision to:
- approve the transaction if it does not pose a threat to security or public order; or
- if such threat exists as a result of the transaction, either grant the authorisation subject to the conditions necessary to eliminate that risk, or refuse the authorisation if conditions are not sufficient to eliminate that risk.
If no administrative decision is received within this period, the authorisation shall be deemed to have been granted.
The transaction may not be carried out before such decisions have been issued or the relevant time periods have expired.
Ex officio proceedings
If the Austrian regulator becomes aware of a process that is subject to an authorisation obligation for which no application for authorisation has been submitted, it shall request the acquiring person or persons to submit an application within three working days. If none of the acquiring persons complies with this request within this period, the Austrian regulator shall initiate an ex officio authorisation procedure and inform the acquiring persons of this initiation. If the transaction has already been completed in whole or in part and if it is established that there is a well-founded suspicion of a threat to security or public order, the administrative decision shall prescribe conditions that deal with the elimination of such a threat. If conditions are not sufficient to eliminate the threat, the notice shall order the unwinding of the entire process or the completed parts thereof.
Threat to security of public order
When assessing whether a foreign direct investment may lead to a threat to security or public order, including crisis management and services of general interest, its effects in the areas listed in the Annex to the ICA will be examined by the Austrian regulator. When assessing such a possible threat, particular account shall be taken of whether:
- an acquiring person is controlled directly or indirectly by the government, including government agencies or the armed forces of a third country, inter alia, by means of ownership structure or in the form of substantial financial resources;
- an acquiring person, or a natural person who holds a senior position in an acquiring legal entity, is or has been involved in activities that have or have had an impact on security or public order in another EU Member State; and
- there is a significant risk that an acquiring person, or a person who holds a management position in an acquiring legal entity, is or has been involved in illegal or criminal activities.
vi Prohibition and mitigation
While there are no official statistics on the number of transactions subject to review and any prohibited or conditionally approved transactions in Austria, the number of transactions under review has significantly increased over the past 12 months and reached an all-time high in the summer of 2021.
i Prohibited sectors
While there are no sectors under the ICA in terms of economic sectors in which foreign investment is per se prohibited, there is a broad catalogue of restricted sensitive sectors.
ii Restricted sectors
The ICA distinguishes between two types of sensitive sectors that are listed in the Annex to the ICA.
Part 1 of the Annex to the ICA lists particularly sensitive sectors where the acquisition of 10 per cent of the voting shares triggers a mandatory FDI filing. The list is exhaustive and includes the following sectors:
- defence equipment and technologies;
- operation of critical energy infrastructure;
- operation of critical digital infrastructure, in particular 5G infrastructure;
- operating systems guaranteeing the data sovereignty of Austria; and
- research and development in the fields of pharmaceuticals, vaccines, medical devices and personal protective equipment.
Part 2 of the Annex to the ICA includes other sensitive sectors where a threat to security or public order including crisis management and services of general interest may arise. The list is illustrative only (meaning that the Austrian regulator could also control sectors or items that are not listed) and includes sectors relating to:
- critical infrastructure;
- critical technologies;
- security of the supply of critical resources;
- access to sensitive information, including personal data, or the ability to control such information; and
- freedom and plurality of the media.
The sectors listed in Part 2 of the Annex of the ICA are as follows:
- Critical infrastructure (institutions, systems, facilities, processes, networks or parts thereof); these include in particular:
- information technology;
- traffic and transport;
- data processing or storage;
- constitutional institutions;
- research institutions;
- social and distribution systems;
- chemical industry; and
- investment in land and buildings essential for the use of the infrastructures referred to in the bullet points above.
- Critical technologies and dual-use goods as defined in Article 2 Paragraph 1 of Council Regulation (EC) No. 428/2009, including:
- artificial intelligence;
- defence technologies;
- quantum and nuclear technologies;
- nanotechnologies; and
- Security of the supply of critical resources, including:
- energy supply;
- supply of raw materials;
- food supply; and
- supply of medicines and vaccines, medical devices and personal protective equipment, including research and development in these areas.
- Access to sensitive information, including personal data, or the ability to control such information.
- Freedom and plurality of the media.
Pursuant to the ICA, infrastructures are critical within the meaning of Item 1, technologies within the meaning of Item 2 and resources within the meaning of Item 3, if they are of essential importance for the maintenance of important social functions because their disruption, destruction, failure or loss would have serious effects on the health, safety or economic and social well-being of the population or the effective functioning of government institutions.
Typical transactional structures
Foreign entities seeking to set up new facilities or businesses and carry out mergers and acquisitions in Austria should take into account the following legal considerations from a foreign investment review perspective:
- the United Kingdom (including all British overseas territories) is now considered a foreign investor under the ICA; so UK investors acquiring companies in Austria may require FDI approval;
- while this has previously not been entirely clear and not specifically regulated, the ICA now specifies that share and asset deals may trigger a mandatory FDI filing if the other criteria for a filing are met;
- generally internal re-organisation measures within a group can be subject to FDI review if such re-organisation is executed in a sensitive sector; and
- even if the direct transaction is executed via an EU/EEA/Swiss-based vehicle, foreign investment approval may be required if the UBO is located outside the European Union, European Economic Area or Switzerland.
Other strategic considerations
Other strategic considerations potentially relevant to foreign investments in Austria include:
- while there is no established communication channel between the Austrian merger control and FDI authorities and investment control applications are not published, these two authorities may communicate, and we have been made aware that they regularly exchange information. Investors should therefore be aware that transactions in relation to which merger control filings are made may also be scrutinised from an FDI perspective;
- the FDI regulators throughout the European Union – particularly in Western European jurisdictions – seem to communicate and update each other, in particular through the EU FDI consultation mechanism. The past year has shown that this increase in transparency has led to an increased number of requests for information from other EU Member State FDI regulators and, as a result, more filings; and
- we have recently experienced that transactions in the pharma or healthcare sectors and generally transactions involving foreign sovereign wealth funds or other state-owned entities are subject to particularly thorough screenings to ensure that there is no threat to public order or security, or both.
Looking forward, it seems likely that the Austrian regulator will continue its active approach, which will keep the number of FDI applications at a high level. We expect the Austrian regulator, as well as applicants, to use the experience gained over the past 12 months and to determine certain transactions that, although touching upon sensitive sectors, do not actually trigger mandatory approval requirements. It further seems likely that the timeline for approvals will stabilise in the coming year.
1 Stephan Denk and Maria Dreher are partners, Lukas Pomaroli is a principle associate and Iris Hammerschmid is an associate at Freshfields Bruckhaus Deringer Rechtsanwälte PartG mbB.