The expansion of Italian foreign investment control in the COVID-19 era
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Amongst the set of measures issued by the Italian Government during the coronavirus outbreak[1] the Italian Government also expanded its power to veto or impose conditions on acquisitions of, or other transactions involving, Italian targets operating in certain strategic sectors.

Such new provisions extend and strengthen the existing Italian Government’s control/veto power by:

a) including new sectors amongst those where notification duties apply;

b) providing that notification duties apply also to intra-EU transactions.

1. Italian Legal Framework on Foreign Investment Control

The first set of general foreign control rules was issued in 2012[2] and established the Italian Governments’ veto/control power in the fields of (a) defense and national security and (b) energy, transportation and communications.

In 2019 specific provisions were introduced with respect to 5G technology[3] and, also, the original 2012 rules were strengthened and expanded to new sectors[4] consistently with the 2019 EU Regulation on control of foreign investments (which will enter into force on October 11, 2020) (the “EU Regulation”)[5].

Furthermore, several measures have been issued throughout the years aimed at identifying in detail the type of assets subject to the foreign control regime and setting forth the procedure to notify, etc..[6]

1.1. Defense and National Security

Veto/control power may be exercised by the Government in case of risk of serious harm to the essential interests of Italian defense and national security.

To this end, the Italian Government, following the notification of a transaction may:

a) impose specific conditions in case of acquisition of equity in companies that carry out strategic activities in the defense and national security sectors;

b) veto certain resolutions, acts and transactions of the equity-holders’ meeting and of the management bodies of the companies indicated in letter a);

c) veto acquisitions of equity in companies indicated in letter a) when, as a result of the transaction, the purchaser holds a percentage of equity with voting rights that could jeopardize defense and national security interests.

1.2. 5G Technology

Under the foreign control legislation broadband electronic communication services based on 5G technology (“5G Technology”) are considered as strategic activities for defense and national security.

In particular, if agreements for the acquisition of (a) goods and services relating to planning, production, maintenance and management of networks relating to 5G Technology or (b) high-tech components for the production and management of 5G Technology are entered into with extra-EU acquirors, purchasers must notify the acquisitions to the Italian Government and the Italian Government may impose specific conditions or veto such transactions.

1.3. Energy, Transport, Communications and Other Sectors

The veto/control power may be exercised by the Italian Government to protect assets in the energy, transport and communication sectors which are deemed strategic to protect national interests.

To this end, certain resolutions, acts and activities identified by law must be notified to the Italian Government and the Italian Government may veto them or impose specific conditions in case they trigger risk of serious harm to public interests relating to (i) safety and functioning of networks and systems and (ii) continuity of supplies.

In addition, acquisitions of controlling stakes in companies that hold strategic assets in the energy, transport and communication sectors by extra-European acquirors must be notified to the Italian Government and, in case of risk of serious harm to the abovementioned public interests, as well as of risk for national security and public policy, the Italian Government may make the transfers conditional to specific undertakings by the acquiror.  In extraordinary circumstances the Italian Government may also veto such acquisitions.

In 2019 certain new provisions were introduced to ensure consistency with the EU Regulation.  In particular[7], the duty to notify acquisitions of controlling stakes by non-European acquirors has been extended, on a temporary basis[8], to certain industrial sectors[9].

2. The New Set of Measures Issued during the COVID-19 Outbreak

Within this framework, the new set of measures[10] extends the duty to notify to all the industrial sectors indicated in Section 4 of the EU Regulation[11], and in particular includes the financial, credit and insurance sectors.

This extension applies on the same temporary basis as the 2019 extension[12] and, although the wording is generic, we understand that, consistently with the scope of the EU Regulation, it applies only to acquisitions by extra-EU acquirors[13].

Also reference to financial, credit and insurance sectors amongst those where notification duties apply is generic and not clear.  Section 4 of the EU Regulation refers to “critical financial infrastructure[14] which is not the same thing as the “financial, credit, and insurance sector” (as the new Italian legislation states).  In other words, the Italian legislation seems to suggest that financial sector is included in the EU Regulation, but it does not seem to be the case.

Furthermore, unlike other new provisions introduced during the COVID-19 outbreak which will apply until December 31, 2020, it seems as this extension is not aimed specifically at hindering the COVID-19 emergency and may survive such emergency (even if on a temporary basis).

In addition the new legislation[15] extends until December 31, 2020 notification duties to:

a) resolutions, acts and transactions entered into by companies that hold assets in all the sectors indicated in Section 4 of the EU Regulation, including financial, credit and insurance sectors (again, the EU Regulation does not actually include the entire financial sector), which trigger changes in the ownership, control or availability of such assets or determine changes to their end-use. It seems as this extension applies regardless of the nationality (EU or extra-EU) of the beneficiary of the resolution;[16]

b) acquisitions of controlling equity stakes (including by EU acquirors) in companies holding strategic assets in the energy, transportation and communication sectors, as well as in all the sectors indicated in Section 4 of the EU Regulation, including financial, credit and insurance sectors[17];

c) acquisitions of equity by non-EU acquirors in the companies indicated in letter b) if (i) as a result the acquiror holds at least 10% of the equity or voting rights in said companies and if (ii) the overall investment is equal to or higher than EUR1M;

d) acquisitions of equity by non-EU acquirors in the companies indicated in letter b) exceeding 15%, 20%, 25%, and 50% thresholds.

The most noticeable issue with all this is that notification duties apply also to EU acquirors, since such intra-EU restrictions could conflict with the 4 EU fundamental freedoms (in particular with the freedom to move capital and the freedom of establishment).

Intra-EU restrictions may be allowed, as an exception, if justified by public policy, public security and public health.[18]

In this respect, for example the broad based inclusion of the “financial, credit and insurance sectors” may be deemed too broad and somewhat difficult to justify.  According to EU interpretative principles, in no case intra-EU restrictions may be based on economic grounds.  It is difficult to imagine how this may be reconciled with such a broad notification requirement of transactions in the financial, credit and insurance sectors.

*   *   *

In conclusion, the new foreign control legislation continues the regulatory control trend begun in 2012, and which exists in many countries. The text poses many questions and many areas will require extensive interpretation in that they are not clear and not well coordinated with prior legislation on the topic. Extension of the notification requirement to the “financial, credit and insurance sector” as well as to EU acquirors will be subject in the coming months to significant scrutiny.

[1] Law Decree no. 23 of April 8, 2020.

[2] Law Decree no. 21 of March 15, 2012 converted into Law by Law no. 56 of May 11, 2012.

[3] Law Decree no. 22 of March 25, 2019 converted into Law by Law no. 41 of May 20, 2019.

[4] Law Decree no. 105 of September 21, 2019 converted into Law by Law 133 of November 18, 2019.

[5] Regulation (EU) 2019/452.

[6] Presidential Decree no. 85 of March 25, 2014; Presidential Decree no. 86 of March 25, 2014; Decree of the Italian Prime Minister of June 6, 2014; Decree of the Italian Prime Minister of August 6, 2014; Presidential Decree no. 35 of February 19, 2015.

[7] Section 4-bis, paragraph 3, of Law Decree no. 105 of September 21, 2019.

[8] i.e. until the issuance of the first Decree of the Prime Minister that will identify the specific assets and relationships that fall under the industrial sectors indicated in Section 4 of the EU Regulation.

[9] Those indicated in Section 4, letters (a) and (b), of the EU Regulation: “(a) critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defense, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure; (b) critical technologies and dual use items as defined in point 1 of Article 2 of Council Regulation (EC) No 428/2009, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies”.

[10] Section 15, paragraph 1, of Law Decree no. 23 of April 8, 2020 in the part where it amends paragraph 3 of Section 4-bis of Law Decree no. 105 of September 21, 2019.

[11] In addition to letters (a) and (b) mentioned above: “(c) supply of critical inputs, including energy or raw materials, as well as food security; (d) access to sensitive information, including personal data, or the ability to control such information; or (e) the freedom and pluralism of the media”.

[12] i.e. until the issuance of the first Decree of the Prime Minister that will identify the specific assets and relationships that fall under the industrial sectors indicated in Section 4 of the EU Regulation.

[13] Please refer to page 95 of the explanatory dossier released by the Italian Parliament on April 15, 2020.

[14] Section 4, letter (a).

[15] Section 15, paragraph 1, of Law Decree no. 23 of April 8, 2020 in the part where it adds paragraph 3-bis to Section 4-bis of Law Decree no. 105 of September 21, 2019.

[16] Please refer to page 95 of the explanatory dossier released by the Italian Parliament on April 15, 2020.

[17] Please see our comments above.

[18] Please refer mainly to (i) the Communication of the Commission on certain legal aspects concerning intra-EU investments (97/c 220/06 ) and (ii) the Communication of the Commission on protection of intra-EU investments of July 19, 2018.

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