The case is significant since it confirms that the Italian Government deems Italian foreign investment control legislation applicable also to cases where the direct target entity is a non-Italian entity. Furthermore, based on our understanding of said rules, in certain cases a transaction may need to be notified also when no Italian entity at all is involved (when, for example, there is some other connection with Italy).
Therefore, foreign counsels working on cross-border transactions need to assess whether an FDI notification in Italy is required even if very tenuous connections with Italy exist in the specific transaction (i.e. even in the case were there are no Italian subsidiaries or assets held in Italy).
Verisem, is a worldwide producer of seeds. It has 5 production sites (3 in Italy, 1 in France and 2 in the United States), it distributes seeds in 117 countries and its turnover is generated in Europe (54%), in the US and South America (20%), in Asia and the Pacific area (19%) and in the Middle East (6%).
Syngenta is a Swiss agribusiness giant which was acquired in 2017 for $43 billion by the Chinese company ChemChina.
According to the Italian press, the reason behind the Italian Government veto is that the acquisition of Verisem would have shifted entirely to Asia the control of seeds for the production of vegetables and aromatic herbs.
While no official documents are presently available on the Italian Government’s veto, but only news from the press, based on our understanding there are different aspects of the Government’s announced veto decision which should be taken into account:
- agri-food is a sector which has been included within foreign investment control rules starting only from April 2020. The circumstance that the Italian Government has exercised powers and vetoed a transaction in this new sector proves that the agri-food sector is actually strategic for the Italian national interest and that transactions in such sector are under the Government’s radar;
- this is the second time that the Italian Government vetoes a transaction in 2021. Two veto decisions in one year may seem a small number, but the contrary is true: from 2014 through 2019 the Italian Government vetoed only 1 transaction. Another transaction was vetoed in 2020. As anticipated by us in previous alerts, the 2020 expansion of the scope of foreign investment control rules has triggered an exponential expansion of notifiable transactions and, as a consequence, of vetoable transactions. We believe this trend towards more vetoes will continue.
- the Italian companies involved in the Syngenta-Verisem deal are subsidiaries of a Dutch entity (Verisem BV). This confirms the “long arm” nature of Italian foreign investment control legislation: that is, the government intends to apply its veto power also to transactions where the direct target entity is a non-Italian entity (and an Italian entity is changing control by virtue of an upstream transaction). If we look at foreign investment control rules closely enough, one realizes that in certain cases the government may argue that a transaction may need to be notified also when no Italian entity at all is involved. This may occur for example when the target is a foreign entity which processes data relating to Italian clients (when such data relate to more than 300.000 Italian individuals and/or entities and other conditions provided by law are met); another example is when the target is a foreign bank providing services in Italy (when the Italian turnover is at least EUR300,000,000 and the bank employs at least 250 people in Italy);
- when assessing the nationality of the acquiror under foreign investment control rules it is necessary to look at the ultimate controlling owner(s) (which, in the case at hand, was a Chinese entity, while the direct acquiror was a Swiss company).
The case at hand poses several questions (as expected, since Italian rules on foreign investment control introduced in the last couple of years are vague and unclear in many cases).
One of the crucial questions is if exercise of veto powers or of the power to impose conditions on the purchaser’s part or on the target company by the Italian Government can affect other jurisdictions in a cross-border transaction and, hence, if Italian foreign investment control legislation may have some extra-territorial effects.
Answering this question will require a case-by-case analysis, and the answer will vary significantly depending the sectors where target companies operate, if there is any indirect effect involving the Italian market (e.g. when there is no Italian subsidiary but foreign target companies process data relating to Italian clients, etc.).
We deem therefore that some form of extra-territorial effect cannot be excluded, even if based on our interpretation the Italian Government must exercise powers granted to it under Italian foreign investment rules so to have the less impact possible on foreign jurisdictions.
Indeed, even if in certain cases (especially transactions which are not media eye-catchers) it may be difficult for the Italian Government to be aware of a transaction and assess if a transaction carried out abroad (not involving Italian companies or assets in Italy) falls under Italian foreign investment control regulations, we strongly suggest to investigate whether Italian foreign investment control rules are applicable also in scenarios where the Italian jurisdictions does not seem to be involved at first glance.
Indeed, in many cases, notification is only a matter of formality and the Government clears the transaction in a couple of weeks’ time, while sanctions and other consequences arising from not fulfilling notification duties under Italian foreign investment control rules are severe.