Ireland Introduces Foreign Investment Screening Regime
The Development: The Screening of Third Country Transactions Act 2023 (the "STCT Act") was signed into law on October 31, 2023, introducing a new investment screening regime in the Republic of Ireland ("Ireland") with a mandatory filing system and a broad call-in power.
The Result: Transactions involving the acquisition of assets or undertakings active in specified sectors in Ireland by "third country" acquirers will need to be notified for clearance to the Minister for Enterprise, Trade, and Employment (the "Minister") prior to their implementation.
Looking Ahead: The Irish government has indicated that the STCT Act is expected to come into force in the second quarter of 2024. Parties involved in transactions that might not be closed by this period will need to factor in the possibility of a mandatory Irish notification requirement. The Minister will also be able to call in transactions that completed up to 15 months before the legislation takes effect, so companies should start to consider the risk of such an intervention in transactions closing earlier but connected to sensitive sectors.
Ireland Joins Other European Jurisdictions With Broad FDI Regimes
Ireland joins a growing number of European jurisdictions with broad foreign direct investment ("FDI") regimes, adding further regulatory complexity to multijurisdictional deals in Europe. Within the last six months, new FDI regimes have been introduced in the Netherlands, which came into effect in June 2023 (see our Commentary), Belgium, which came into effect on July 1, 2023 (see our Commentary), and Luxembourg, which came into effect on September 1, 2023 (see our Commentary).
In short, under the Irish STCT Act, a transaction must be notified where a "third country" undertaking (or a person connected with such an undertaking) acquires control of a business or asset in Ireland which "relates to, or impacts upon" specified sectors.
Investors Subject to the STCT Act
The new regime applies to acquisitions by:
- Investors that are constituted or otherwise governed by the laws of a third country;
- Entities that are controlled by at least one director, member, or other person that is ordinarily resident in a third country; or
- Natural persons or partnerships that are ordinarily resident in a third country.
When compared to other European FDI regimes, the Irish rules exclude investors from a relatively broad range of jurisdictions from the application of the STCT Act, with the definition of third country not extending to member states of the European Union, the European Economic Area ("EEA"), and Switzerland (this is similar to the approach taken in jurisdictions such as Spain and Austria).
This is in contrast to a patchwork of alternative approaches taken throughout Europe which creates significant complexity for multijurisdictional deals. For example:
- The FDI regimes in the United Kingdom and the Netherlands apply to investors from all countries including, respectively, the United Kingdom and the Netherlands themselves;
- The Belgian regime applies only to non-EU investors;
- The Polish regime applies only to non-EEA/OECD investors;
- The French regime applies to all non-French investors, although with greater thresholds for EEA investors;
- The German regime applies to non-German investors in some highly sensitive sectors and non-EFTA investors in other sectors; and
- The Italian regime applies (depending on the size of the equity interest involved) to all investors in relation to equity investments in defense, national security, energy, transportation, communications, health care, agri-food, and finance, but excludes EU investors in other sectors.
Transactions Caught by the Regime
Mandatory notification requirements under the STCT Act apply to transactions which result in the acquisition of control of either undertakings or assets in Ireland. To be covered, undertakings must be constituted or otherwise governed by the laws of Ireland or have their principal place of business in Ireland, while assets must either be physically located in Ireland or, in the case of intangible assets, be owned, controlled, or otherwise in the possession of an undertaking in Ireland.
In addition to an acquisition of control, the acquisition of an interest which does not permit control in an undertaking in Ireland can still give rise to a mandatory notification requirement if the percentage of shares or voting rights held in the undertaking changes from 25% or less to more than 25%, or 50% or less to more than 50%.
While relatively unusual among European FDI regimes, mandatory notification requirements can apply in connection with the acquisition of an interest in assets regardless of whether these constitute an enterprise or business, provided the transaction relates to, or impacts upon, one of the specified mandatory notification matters. Further, assets include both tangible and intangible assets, so the mere sale or acquisition of intellectual property rights (including a license to use such rights) in Ireland could potentially give rise to notification requirements in some circumstances.
Importantly, the STCT Act does provide a de minimis exception to the notice requirement if the cumulative value of both the current transaction and any prior transactions between the same parties (or related parties) in the 12 months before the date of the transaction amounts to less than €2 million (or such other amount prescribed by the Minister).
Mandatory Notification Matters
Unlike a number of other EU FDI regimes, the Irish regime directly mirrors the list of sensitive sectors identified in Article 4(1) of "EU Regulation 2019/452 establishing a framework for the screening of foreign direct investments into the Union." Specifically, transactions will potentially come within the remit of the mandatory notification requirement if they relate to, or impact upon:
- Irish critical infrastructure whether physical or virtual;
- Land and real estate crucial for the use of such infrastructure;
- Critical technologies and dual use items;
- Supply of critical inputs including energy or raw materials, as well as food security;
- Access to sensitive information, including personal data or the ability to control such information; or
- The freedom and pluralism of the media.
It should also be noted that the STCT Act provides the Minister with a broad power to call in for review transactions that are not connected to these mandatory notification sectors.
Notification Requirements and Procedure
If a transaction is subject to a mandatory notification requirement, that obligation applies to all parties to the transaction. However, the rules permit agreement to be reached between the parties that a single notification be made on behalf of all parties, and in practice we expect the acquiring party will typically take primary responsibility for the notification. Failure to notify a transaction can give rise to significant fines of up to €4,000,000 and in some cases potential imprisonment, so it will be important to document any such agreements apportioning responsibility for making the notification appropriately.
Once a notification is accepted, the Minister will issue a screening notice to the parties. The Minister is then required to make a decision within 90 days from the date of the screening notice, with the possibility of this time frame being extended to a maximum of 135 days. While the review is ongoing, the transaction cannot be completed, and the parties to the transaction are not permitted to take any action for the purpose of completing or furthering the transaction.
If the Minister determines that a transaction would affect security or public order in Ireland, they have the power to impose a broad range of conditions on it including:
- Imposing information controls;
- Requiring the sale or divestment of parts of any of the parties’ businesses;
- Limiting or constraining the future conduct or practice of the parties;
- Requiring monitoring arrangements to be put in place (with the costs of such arrangements potentially to be borne by the parties); and
- Prohibiting completion of the transaction.
The Irish Government is expected to issue further guidance on the intended application of the STCT Act in coming weeks.
Three Key Takeaways:
- The implementation of the STCT Act adds further regulatory complexity for cross-border transactions in Europe, particularly those touching on sectors considered sensitive. This will make it all the more important for deal parties to settle their strategy for navigating multijurisdictional regulatory clearance requirements at an early stage.
- The application of mandatory notification requirements to acquisitions of interests in assets including IP rights means that businesses will now need to carefully consider potential filing requirements under the STCT Act in asset transactions that are not typically caught by FDI filing requirements in other jurisdictions.
- Parties should start to consider STCT Act filing requirements for any transactions that might not close before Q2 2024 to ensure any potential notification requirements are factored into the deal structuring and timeline.