On November 7, 2024, M&A experts from Austria, Bosnia & Herzegovina, Croatia, Greece, Hungary, Moldova, Romania, and Ukraine participated in a virtual round table moderated by CEE Legal Matters Managing Editor Radu Cotarcea to discuss the FDI screening regimes in their country and key developments in the area on the horizon.
Round Table Participants:
- Mykola Stetsenko, Managing Partner, Avellum
- Naida Custovic, Independent Attorney at Law in Cooperation with Wolf Theiss
- Panagiotis Drakopoulos, Managing Partner, Drakopoulos
- Razvan Stoicescu, Deputy Managing Partner, Musat & Associatii
- Roman Ivanov, Partner, Vernon David
- Sandra Tomaskovic, Partner, NLaw
- Valerie Mayer, Counsel, Herbst Kinsky
- Zsofia Fuzi, Partner, Forgo, Damjanovic & Partners
CEELM: What have been the main drivers for foreign direct investments in your jurisdiction? Which sectors are the primary targets and what makes them particularly attractive?
Drakopoulos: Well, in Greece, beyond our usual sectors like tourism, hospitality, real estate, construction, and energy, there’s been a lot of appetite for manufacturing, services, transportation, fintech, and healthcare. The main drivers are geopolitics – Greece’s strategic position amid current global events. Given what’s happening with the two wars, we’re at the crossroads of the Middle East and Southern Europe, acting as a gateway to the rest of Europe. This unique position enhances our appeal to investors.
Additionally, the political climate is very favorable for investors and has been for the past few years, which helps a lot. There’s significant funding available from the Recovery and Resilience Fund, which has provided financing for many projects. This influx of capital has spurred investment across various sectors.
Ivanov: I was having a similar conversation to this one last year, and interestingly, nothing has changed in Moldova: banking and finance remain at the forefront. Most deals are in this area as the sector is undergoing restructuring – a lot of banks in Moldova are merging, acquiring others, or buying microfinance companies.
Then there’s IT, of course. A few years ago, the government decided to implement IT-related tax incentives, so we are slowly becoming a regional IT hub. Many international companies are setting up back offices in Moldova – over a thousand right now. If they engage in sales in the US or EU, a Moldovan back office is often part of their setup.
Third is renewables. As the war started, Moldova began to diversify to reduce reliance on Russian gas. By looking for new sources of natural gas and electricity, we are investing in green energy.
Mayer: In 2023, Austria’s top five sectors for FDI showcased some clear trends. Leading the pack was the IT sector, which accounted for over 25% of FDI activity – this isn’t surprising, as IT has consistently been a key focus in Austrian FDI screenings since the Investment Control Act came into effect. The energy sector also saw a notable uptick in investment during 2022 and 2023, a trend likely influenced by the ongoing war in Ukraine. Transport and infrastructure experienced growth as well, along with the telecommunications sector. Meanwhile, the healthcare sector played a significant role in 2022, also drawing more than 25% of FDI. However, investments in healthcare dropped sharply in 2023, likely due to the waning impact of the COVID-19 pandemic.
From my perspective, the IT, energy, and healthcare sectors are particularly appealing to investors in Austria and there are a few factors that drive this interest. Austria offers substantial funding programs, especially for IT and energy projects. The domestic market also hosts strong and competitive players in these areas. For energy investments, renewables like wind, solar, and biomass are especially prominent. As for healthcare, Austria’s well-developed system and high levels of research and development make it an attractive option.
Beyond specific sectors, Austria offers a range of qualities that appeal to investors across the board. These include a highly educated and skilled workforce, a stable political and economic environment, and advanced infrastructure. There’s also a strong emphasis on sustainability, further enhancing Austria’s appeal as a target market for FDI.
Custovic: Building on what Valerie said about renewable energy, according to publicly available reports from the Central Bank of Bosnia and Herzegovina and the Foreign Investment Promotion Agency, the most attractive sectors for FDIs in 2023 have been production, banking, trade, and telecommunications. In our experience over the past 12 to 18 months, there’s been increased interest from foreign investors in energy – specifically renewable energy sources (RES), due to the country’s rich potential.
The IT sector is also gaining attention because of our qualified workforce. Additionally, the pharmaceutical industry and other financial services – particularly fintech, crypto trading, payment services, and microcrediting – are attracting investors. Bosnia and Herzegovina is in the process of improving the legislative and regulatory framework in these areas, which makes them particularly appealing.
Fuzi: In Hungary, we’re seeing a significant focus on the automotive sector and electric vehicle battery production. Another significant sector is renewable energy. We’re somewhat behind the EU’s climate goals, so there are government initiatives and support to promote renewables, which is driving investments in this area.
Other frequently targeted sectors include IT and software development, pharmaceuticals, and biotechnology. Focusing on renewables, government support is a major driver for investments. In the automotive industry, it’s the combination of a skilled yet cost-effective workforce compared to Western Europe. Well-established supply chains make it easier for companies to source materials, and there is government support as well.
In IT, the availability of skilled employees is a crucial factor, and this also applies to the pharmaceutical and biotechnology sectors. Overall, the cost of labor and operation in Hungary is generally lower compared to Western Europe, but the central positioning of the country makes it an attractive gateway to the rest of the EU.
Stetsenko: Given the ongoing war in Ukraine, it’s no surprise that defense and logistics are at the forefront of foreign investments. Ukraine is poised to boost its military equipment production and is creating numerous joint ventures with major US, British, and European investors.
On the logistics side, major European transportation companies see Ukraine as a crucial part of the main transportation corridor for containers, raw materials, and foodstuffs. This creates a demand for logistical hubs in Western Ukraine along the border with the EU.
Stoicescu: From what we’ve observed in Romania, retail and renewables are the main drivers here. For example, the acquisition of Profi by Delhaize will lead to a partial divesture of stores, due to competition concerns and we’re expecting a Polish investor to enter the market very soon on this premise.
If we look at FDI lately, we’ve covered a lot of sectors, we had telecommunications, life sciences, oil and gas. The spectrum it’s quite diverse.
The renewable trend of pushing for a more green, solar-, wind-, and even gravitational-powered economy. There’s room to develop, and this is alluring for investors. Looking at the market in general, finding these spots where there is room to grab something within the EU is rare, so Romania is an appealing place to be from this perspective – the legal framework is stable, the investment environment is one of an established rule of law, and there’s untapped market potential.
Tomaskovic: Adding to what everyone has mentioned, the main sectors attracting FDIs in Croatia, according to the Croatian National Bank – which collects annual FDI data and publishes the countries and target sectors receiving the most investment – are financial services, retail, real estate, telecommunications, wholesale, IT, construction, hospitality, manufacturing, and energy.
Several factors contribute to their attractiveness. First, our EU membership provides investors with security and regulatory synchronicity. Croatia’s strategic location – as part of the EU and its proximity to Balkan markets – makes it an appealing gateway for investors looking to access both Western and Eastern Europe. Additionally, we have a skilled workforce; over the past years, there has been a large pool of highly educated individuals in Croatia, especially in the IT and R&D sectors.
Moreover, sectors like tourism and hospitality, accommodation, and real estate are particularly attractive due to Croatia’s natural beauty and strong tourism industry. These sectors have consistently drawn interest from foreign investors seeking opportunities in a thriving market.
CEELM: Who are the main buyers in terms of origin? Are they predominantly strategic investors or private equity firms?
Stetsenko: As I mentioned earlier, the primary investors in Ukraine are strategic partners from the US, UK, and Europe. So far, there’s been little interest from private equity firms, with the notable exception of Horizon Capital, which recently raised a new capital round and is actively investing in Ukraine.
Drakopoulos: Greece has seen a mix of strategic and private equity investors. We have both types, and obviously, the ticket sizes differ, and the sectors they target are different as well.
Strategic investors handle larger deals, going for infrastructure projects like port privatizations, marina privatizations, and similar ventures. For example, the Athens airport is getting floated. On the other hand, PE firms focus mostly on day-to-day companies in sectors like services – which is somewhat surprising, as I never would have thought that foreign investors would invest heavily in services because it’s a people-centric industry.
In terms of geographical origin, besides the US, UK, and China – which are legacy investors in Greece – we also have investors from Germany, France, Italy, and Hong Kong. This diversity reflects Greece’s global appeal and the trust international investors have in our market.
Tomaskovic: In Croatia, we see both strategic buyers and private equity firms active in our market. Strategic buyers mostly invest in infrastructure, manufacturing, and retail sectors. On the other hand, PE firms typically focus on tech, hospitality, and energy sectors.
Recently, we’ve seen a rise in PE investments. I attribute this to developments in the country – we don’t have a vast amount of manufacturing, production, and infrastructure projects that are alluring to strategic investors, whose levels have remained relatively stable. Therefore, PE firms are finding opportunities in other growing sectors like technology and hospitality.
Ivanov: In Moldova, we’re seeing a slightly different trend. The majority are strategic investors. People invest in Moldova because they want to stay here. In the finance sector, there’s no significant private equity involvement – it’s mainly banks acquiring others or their subsidiaries.
Such is the case in IT as well – there’s not much private equity activity. The Moldovan back office usually comes as part of the same package as the hub in the US or EU, so it’s a continuous investment. The majority of investments, however, come from strategic investors, looking at the market as a whole.
Historically, the biggest investors are Romanians – not just standalone Romanian companies, but also Romanian subsidiaries of other Western companies. For example, an EU company expands to Romania, then learns that Moldova is a neighboring, similar market with investment allure, and they use their Romanian subsidiary to establish a Moldovan subsidiary. These aren’t just Romanian companies; there are others too – for instance, we’ve seen a lot of Ukrainian investors in the past few years, particularly in energy and IT. This trend will likely continue for a few more years.
Mayer: In 2023, the largest share of screened foreign direct investments in Austria was attributable to the United States, followed by the United Kingdom and Canada. Further substantial foreign direct investment activities originated from investors in Singapore, Japan, the Cayman Islands, Jersey, the United Arab Emirates, and China. However, the intention of the EU to seek greater independence in specific sectors from third countries, in particular China, has to be taken into account.
The majority of investments in the relevant period were made by strategic investors – the private equity market still plays a comparatively limited role in Austria. Nevertheless, in 2023 the top three M&A deals involving foreign investors – which, under Austrian law, are persons established or domiciled outside the EU, EEA, and Switzerland – included two investments by private equity investors.
Custovic: According to publicly available sources which I mentioned in my previous answer, the highest volume of FDIs in Bosnia and Herzegovina comes from neighboring countries, specifically Croatia, Serbia, and Slovenia, followed by Austria and Germany – with whom we traditionally have strong economic ties. In our experience, there seems to be a noticeable trend of increasing FDIs from investors in the USA and the UK, alongside a decrease in investments from Russia and China. Other notable investments come from the Middle East, Turkey, and other Western countries.
Stoicescu: Interestingly, in Romania, the situation is a bit different. We’ve had dealings with Middle Eastern investors, US investors, and EU investors. The portfolio is quite varied.
I’d say that, when it comes to these investors, those from the US are mostly venture capital or private equity. From the Middle East, it’s more strategically driven; the Middle East strategy is to tap into the resources and their potential – like acquiring means of production such as land, animal farms, etc. – that’s not something you do for the short term.
US investors are mostly focused on IT, nuclear energy, or industry.
There are more private equity investors overall – they are more speculative by nature and try to find smaller deals.
Fuzi: Overall, it seems that strategic investors dominate in many of our jurisdictions. In Hungary, historically, Germany has been the largest investor. German companies invest heavily in manufacturing, automotive, and the IT sector. Germany remains very important in terms of FDI stock in Hungary. Austria is probably the second-largest EU investor, but we’re seeing increasing activity from the CEE region, especially Poland and the Czech Republic.
Outside of Europe, the United States is quite significant – US companies have made successful investments in Hungary. Additionally, South Korea has been very active in recent years, particularly in the electronics and automotive sectors. China is also becoming more and more important; the climate is improving for Chinese investments. Almost 50% of the FDI from China to the EU landed in Hungary, so we expect increased investment volumes from China.
Typically, the investors are strategic. The investments come from multinational companies looking to establish Hungarian branches, manufacturing plants, R&D centers, and service centers. While there is private equity involvement as well, strategic investments are more common and dominant.
CEELM: What are the latest regulations in terms of FDI screening mechanisms in your jurisdiction, and how have recent geopolitical events influenced these regulations?
Tomaskovic: Well, in Croatia, much like in Greece, we have yet to implement specific FDI screening procedures. Currently, Croatia, along with Greece and Cyprus, has yet to implement specific FDI requirements and screening procedures. As part of the EU, we follow the acquis communautaire, but we have not yet adopted a special act dedicated to FDI screening.
It was planned to happen in the second quarter of 2024; the draft is underway but has not been published, has not undergone a consultation procedure, and is not yet in effect. The Ministry of Finance announced that it has been working on this act since October 2023 – we expect the act to be adopted by early 2025.
Additionally, at the level of the Croatian National Bank, there is a regulation for FDI reporting obligations. All investors who invest at least 10% or more of equity in legal entities in Croatia are required to report their investments. The deadline for reporting is 30 days following the end of the month in which the transaction took place. However, this is purely for statistical purposes – there are no specific misdemeanors, administrative penalties, or other sanctions associated with it.
Drakopoulos: As Sandra pointed out, we’re among the last countries to adopt the EU FDI screening mechanism. We’re getting there, but currently, there’s no system in place for that in terms of notification and pre-screening.
We do have traditional measures – for instance, when foreign nationals acquire real estate or invest in regulated sectors of national security importance like defense or telecommunications. But there’s nothing as comprehensive as a general FDI screening mechanism. So, at the moment, FDI regulations don’t impose significant hurdles for investors in Greece.
Mayer: In Austria, the EU’s FDI Screening Regulation was put into effect through the newly enacted Investment Control Act, which came into force in July 2020, replacing the previous screening rules under the Foreign Trade Act. The EU legislation, along with Austria’s new law, has provided a more effective and comprehensive framework for monitoring foreign direct investments. The main changes included an expanded and detailed list of sensitive and critical sectors, improved monitoring possibilities for foreign indirect investments, a lower threshold of 10% of voting shares applying to certain sectors, and new rules on cooperation with other EU Member States.
Since the protected sectors in the Investment Control Act are described only with keywords, legal practitioners have been asking for more guidance on how to interpret them and what areas they cover – for example, through clearer definitions – to more precisely define the Act’s scope of application. However, no significant changes to the statutory framework have been adopted so far, as the competent authority wants to retain flexibility to react quickly to new geopolitical events and crises.
Regardless of Austria’s FDI regime, a downside of FDI screening in the EU is that the national legislation of Member States that have already introduced an FDI regime varies. For instance, notification requirements differ, as do administrative deadlines. These varying legal requirements pose challenges when planning and executing multijurisdictional M&A transactions.
In January 2024, the European Commission proposed a revision of the current EU FDI Screening Regulation. The draft outlines specific mechanisms for greater harmonization of FDI screening in the EU. This revision will presumably lead to changes in Austrian FDI legislation.
Ivanov: Moldova is in an interesting spot because our FDI law was passed at the start of 2022. Since we’re not in the EU, EU regulations are not directly applicable. We either transpose – copy and adapt – EU laws to fit our local realities. Sometimes this is a 100% copy; other times, it’s adapted. The current FDI law is somewhat adapted.
It was passed in 2022 but wasn’t applied until January 2024 due to the war, energy crisis, and other issues. Starting in 2024, the implementation wasn’t quite formal – the authorities are still onboarding with how to use the act itself. Because of this, last year, the American Chamber of Commerce think tank in Moldova hired several consultants to redraft the law and make proposals for the current legislation; our law firm acted as a local consultant in cooperation with a reputed German law Blomstein. So, it’s an ongoing effort to amend it to fit reality.
Custovic: Our situation in Bosnia and Herzegovina is quite similar to what Roman described. Bosnia and Herzegovina has not yet adopted new legislation harmonizing its FDI regime with the EU FDI screening rules. The country has made significant efforts to open its economy to foreign investors, as such investments are the main drivers of the economy. Accordingly, the applicable legal framework is rather liberal.
It’s substantially regulated by the Foreign Investment Policy Law, adopted at the state level, which generally provides for limited screening and restrictions on investments in certain sectors, specifically defense, and media.
Stoicescu: What’s important to note is how different countries are transposing these regulations. In Romania, we’ve pushed FDI to the limit. We’ve gold-plated many of the existing EU principles, which were relatively narrow in their application.
Now we apply these not just to outside-of-EU FDI but also to those within the EU – everything over EUR 2 million is now screened. Any and all investments, even if there is an existing one.
I’m not sure if this is good or bad – it depends on who you ask – but it is another hoop to jump through – even if you are already in the market and a local player.
FDI is a tap to regulate the flow of investments – some countries have tightened it, and some have loosened it.
Fuzi: In Hungary, we’ve taken additional steps due to recent events. Our first FDI screening system was introduced at the start of 2019, implementing the EU regulation on the screening of FDI into the EU. It covers companies that provide strategic services or control critical infrastructure like military, public utilities, and financial services. This system applies to non-EU investors.
Then, in 2020 during the pandemic, we introduced a new, special FDI system. This regime is still in force, now due to the war in Ukraine. Hungary has been in a continuous state of emergency since early 2020, initially because of the pandemic and now because of the war. This new regime covers basically all activities – trade, retail, wholesale, education, manufacturing, and transportation. The important point is that it applies to EU investors as well, not just non-EU ones. So, if a company is an EU resident and wants to acquire a major stake in a Hungarian company, and the transaction value is over EUR 1 million, it most probably falls under this new system.
This essentially means that most M&A deals are covered by FDI screening in Hungary now.
Stetsenko: Currently, Ukraine doesn’t have FDI screening regulations, but they’re being developed at the expert level. However, Ukraine has extensive sanctions legislation that prohibits sanctioned investors from aggressor states from investing in Ukraine.
CEELM: How are FDI regulations affecting the structuring and timelines of M&A deals? Are there any protections that parties can engage in to mitigate FDI-related risks?
Stoicescu: In Romania, it’s becoming quite challenging because as a business operating here, it’s quite unusual and unexpected that you cannot grow without FDI approval. For example, if you want to undertake a long-term investment, the approach might vary – do you notify every time and lose a few months before breaking ground on an expansion?
FDI screening requires additional time for implementation – fines representing percentages of investor turnover apply if implementing an investment without prior FDI clearance. So, say you want to expand and have the capital – you have to wait for the clearance. If you don’t get the clearance, that’s another problem.
Another issue is that if you need capital – for example, seed capital from foreign investors like those from the US or Middle East – jumping through all these hoops and going through all these steps endangers volatile transactions. If investors decide to fall back or change their idea of what they need, this creates logistical problems. If you start a notification and the investor structure changes, you have to start over. Not ideal, and the regulation doesn’t address specifics – the list of matters of interest is very broad, including telecoms, food supply, and health – issues with such breadth mean that almost all investments, even internal restructurings, are likely to require notification to avoid running into a fine.
The sectors are so loosely drafted that one ends up notifying even in cases where the national security element is quite vague (e.g., cosmetics, or online sale of tickets).
Mayer: I can relate to that, as we’re experiencing similar delays here in Austria. FDI regulations are significantly impacting M&A transactions in several ways based on my practical experience. First, the timelines of deals are substantially postponed due to the duration of the screening process. Second, the requirement for FDI approval introduces an additional uncertainty factor. Third, there are higher transaction costs.
In Austria, straightforward FDI proceedings typically take seven to ten weeks. This includes the EU cooperation mechanism, which lasts 35 days, followed by a subsequent national phase 1 that lasts one month. Unlike authorities from other EU member states, the competent Austrian authority shares every transaction with the other screening member states in the EU cooperation mechanism – which generally delays the FDI process. The strategy of the Austrian authority is occasionally criticized, with some arguing that screening under the EU cooperation mechanism should only be conducted in complex cases, potentially leading to phase 2, to speed up the majority of FDI proceedings.
Complex FDI proceedings, however, can take several months. The specific duration depends on whether questions are raised by other EU member states in the EU cooperation mechanism. Such questions lead to a “stop the clock” situation, meaning the applicable time periods are paused until all answers are provided. Additionally, the national authority can initiate a national phase two lasting up to two months.
This lengthy process, especially in straightforward cases, can be baffling to the parties involved and may even jeopardize targets that urgently need a cash injection. In complex cases, though, both the authority and the parties often need more time.
To mitigate these issues, my advice is to carry out an FDI assessment at a very early stage of the transaction process to determine whether an FDI application is required – ideally, this review should be done before or at the beginning of the due diligence process. It’s also important to remember that the FDI filing must be notified to the authority immediately after signing, which means no later than two weeks after the signing date. Alternatively, if the parties wish to file before signing, they need to sign a written and binding Letter of Intent or Memorandum of Understanding to allow earlier filing.
When structuring the transaction and drafting the transaction documents, it’s essential to include conditions precedent concerning the FDI approval. Closing a transaction that is subject to FDI screening prior to approval by the competent authority is strictly prohibited – so there may be no gun-jumping. Violating the prohibition of implementation prior to approval may result in the transaction being declared void and other severe legal consequences, such as substantial penalties for the parties involved. Therefore, it’s important to discuss potential closing dates with clients in advance, taking into account the timeframe of the FDI process and potential delays due to a stop-the-clock or phase 2, and to provide an appropriate timeline regarding the implementation of the transaction, including scheduled closing dates and long-stop dates.
Clients should also be warned about the implications if the transaction is approved but subject to remedies and conditions. When negotiating the SPA, it’s crucial to address the allocation of costs and risks, as well as the duties of the parties to cooperate regarding such remedies and conditions, particularly if they are extremely onerous for one party. In such cases, a right of termination may be appropriate.
Ivanov: In Moldova, we’ve had our share of issues. Even with the law in place, we haven’t applied it to many transactions because it’s not 100% precise. Unfortunately, the authorities sometimes use it as a stick against unfavorable investments – they check other investments made five, seven, or even ten years ago. The transactions we’re currently involved in, particularly in banking and IT – the banking sector is excluded from a specific regulation that has similar provisions. You don’t do FDI screening but rather a banking-related screening. It does fall under the law but under certain circumstances. So far, we haven’t seen FDI regulations specifically used for our M&A deals.
However, as of next year, we will be obliged to comply with these regulations in our transactions.
Fuzi: To mitigate these challenges, we advise conducting an FDI analysis at the very start to see if the transaction falls under either or both of the systems. If the general regime is applicable, then from a structuring point of view, there’s not much that can be done. However, the timing required to obtain approval needs to be taken into account – this process takes approximately four months.
In the case of the new regime, there is an exemption that might be relevant in certain cases. Transactions that take place at a foreign-to-foreign level, affecting a Hungarian company only indirectly, are exempt. So, in certain cases, some structuring could be applied to avoid having to undergo screening. These approvals are quite time-consuming, usually taking two to four months. Typically, obtaining FDI approval is a precondition for getting the transaction across the line, so it’s treated as a condition precedent in agreements.
Stetsenko: While we don’t have FDI screening, sanctions play a big role in Ukraine. We have to take into account sanctions on both the sell side and the buy side when structuring M&A deals. Thorough due diligence and Know Your Customer (KYC) procedures are essential in such transactions. This ensures compliance with sanctions legislation and mitigates potential risks associated with prohibited investors.
Tomaskovic: Fortunately, in Croatia, we’re not facing such hurdles yet. Since there are currently no screening procedures and restrictions, FDI regulations do not negatively affect M&A deals in Croatia, and they have no impact on the structuring or timelines of such transactions.
However, there is an intent to protect specific sectors including military, energy, agriculture, healthcare, media, water management, transportation, cybersecurity, financial security, and real estate. But without specific regulations in place yet, these do not currently pose any hurdles or require special considerations in M&A deals.
Custovic: Similarly, in Bosnia and Herzegovina, given the limited screening of FDIs, we do not see FDI regulations as a particular hurdle for M&A transactions. In sectors that are subject to FDI screening and restrictions, investors are generally advised to start the relevant processes early and to be transparent, patient, and proactive in terms of providing the necessary documentation and information to the competent authorities. Furthermore, structuring the transaction can, in certain situations, help overcome the relevant restrictions.
Drakopoulos: Despite these challenges in other jurisdictions, in Greece, FDI regulations don’t impose significant hurdles for investors at the moment, so they aren’t affecting M&A deals substantially. However, as always, being prepared and proactive is important.
CEELM: What overall strategies can companies employ to overcome regulatory hurdles in FDI, and how can early engagement with authorities facilitate smoother approval processes?
Drakopoulos: I think everyone agrees, from general experience and practice, that it’s crucial to prepare well and start planning early. Be transparent and forthcoming with information, have everything well-structured, and deliver it comprehensively and simply.
Engaging with authorities is important – be in touch and be prepared to respond swiftly. It’s similar to undergoing a due diligence process; when doing due diligence, be ready to tick all the boxes so that the authorities can be easily convinced of your compliance and intentions.
So, good groundwork is essential. Start from the beginning, start early, be transparent, and maintain open communication. This approach not only facilitates smoother approval processes but also builds trust with regulatory bodies.
Mayer: I absolutely agree with your statements, Panagiotis.
In Austria, we do not have formal pre-notification proceedings, although it might be useful in specific and highly complex cases. However, the authority is open to informal talks. Occasionally, it can be useful to engage with them, in particular, to inquire about ongoing proceedings. While the information provided is always non-binding, it can be useful to start this dialogue.
In some rare cases where it is unclear whether a transaction needs to be screened, Austrian law provides for the possibility of applying for a clearance certificate. If granted, it confirms that screening isn’t necessary; if not, you must apply for approval. This approach may – from a timing perspective – make sense if there is still sufficient time – from my personal experience three to four weeks – before signing.
Ivanov: We’re working towards amendments that will allow for prior consultations with the council established by the law. This council includes the government and regulatory representatives – all working hard to amend the draft to accommodate prior consultations and to provide opinions on whether a notification is needed.
Another amendment introduces a two-tier structure. After the submission of the filing, within 15 days, the council would perform a preliminary analysis and determine whether it’s a complex transaction requiring a Phase 2 review or if it’s a simple transaction that doesn’t need further notification. Phase 2 would take about 45 days, whereas Phase 1 would take 15 days at most.
Custovic: Investors are generally advised to start the relevant processes early, be patient, and be proactive in providing the necessary documentation and information to the competent authorities. Structuring the transaction can also help overcome relevant restrictions.
Fuzi: Unfortunately, in Hungary, early engagement isn’t always possible. There’s no formal possibility of consulting with the ministries beforehand, so we can’t actually engage early with the authorities in a meaningful way. It’s possible to approach them in writing, but they’re not obliged to respond to these inquiries, and even if they do, their response isn’t binding for the ministry or the parties involved.
Stoicescu: It’s very difficult because of the fines – you either assume the risk of being fined or you budget two to three months for this process to avoid a fine later on. Still, you can be hit with a fine even years later – if the authority thinks that a transaction should have been notified and it wasn’t, they can still impose penalties or corrective measures.
CEELM: What role do legal advisors play in assisting clients with FDI compliance? How can due diligence processes be adapted to address FDI screening concerns?
Custovic: Having a qualified and experienced lawyer is very often key for the success of foreign investment, both in terms of FDI compliance as well as in terms of utilizing the relevant benefits available to foreign investors in Bosnia and Herzegovina. Our recommendation is to engage attorneys early and to ensure that the due diligence process is expanded to include these matters. This proactive approach can help identify any potential issues and address them effectively.
Mayer: Advisors need to alert their clients as early as possible that an FDI assessment must be made. If it turns out that a notification is required, it does create a burden for the parties involved, but this burden can’t be avoided. The key task for the advisor is to ensure the proceeding runs smoothly – close cooperation between the parties and maintaining a good relationship with the authority are essential. Moreover, the parties should be as transparent as possible. During the due diligence process, information required from the target for the FDI workstream can be requested to avoid duplicate information requests from the advisors, for example from both the due diligence team and the FDI counsel.
Stoicescu: The due diligence process itself – when you conduct due diligence, it becomes apparent quite early, in the earliest stages of the deal, that FDI notification is required. The rule is – you account for it and then see if you don’t need it, but the starting assumption is that FDI is a condition precedent.
In our practice so far, we’ve seen very few cases where FDI notification was not required; this is very, very rare. As I said, the moment you start from the premise that FDI will be a part of it, you keep notification drafting in mind to explain the transaction in the simplest terms so the authorities have a few things to follow up on.
So, legal advisors are there to simplify the transaction, streamline the entire information chain to the authorities, and make them feel at ease in approving the process. And it works! There are cases where you get a follow-up question or two, but the process as a system works – we’ve never had a case that took longer than two to three months tops. These are very complicated matters, depending on the nature of what’s being notified. If the companies have global activities and receive subsidies in states like China, for example, this is relevant. So, the more you simplify, the better you are.
The most difficult part of notification is data collection. Part of the notification concerns the investor’s structure, where it operates, and its relations to other states. If I’m a US investor but subsidized by the Chinese state, this would complicate the situation. You have to go up the economic chain to figure out where the investors are if they have any direct or indirect subsidies, and from whom. The most challenging part is gathering all this information, navigating it, and informing the authorities.
Stoicescu: The due diligence process itself – when you conduct due diligence, it becomes apparent quite early, in the earliest stages of the deal, that FDI notification is required. The rule is: You account for it and then see if you don’t need it, but the starting assumption is that FDI is a condition precedent.
In our practice so far, we’ve seen very few cases where FDI notification was not required; this is very, very rare.
The legal advisor’s role in FDI is to simplify the transaction, streamline the entire information available to the authorities, and make the approval process easier. And it works! There are cases where you get a follow-up question or two, but the process as a system, works – we’ve never had a case that took longer than two to three months tops. These are very complicated matters, depending on the nature of what’s being notified. If the companies have global activities and receive subsidies in states like China, for example, this is relevant. So, the more you simplify, the higher the chances you will get a quicker response.
The most difficult part of notification is data collection. Part of the notification concerns the investor’s structure, where it operates, and its relations to other states. If I’m a US investor but subsidized by the Chinese state, this would add to the complexity of the situation. You have to go up the economic chain to figure out where the investors are if they have any direct or indirect subsidies, and from whom. The most challenging part is gathering all this information, navigating it, and informing the authorities.
Ivanov: We would recommend, right now, waiting for the draft to be approved. But most importantly, be ready, be patient, and be vigilant. Staying mindful and awaiting analysis and replies from the authorities is crucial. Our mission is to help assemble the necessary documents and information. We do our best to do everything early, but ultimately, it’s up to the authorities to proceed.
Fuzi: Legal advisors play an essential role in assessing the need for notification, and this should be done at the earliest stage – at the start of or even before the due diligence process begins. The lengthy approval period might affect the business decisions of the parties even before negotiations start.
If filing is necessary, legal advisors prepare the submission and gather the necessary client information in a form that will enable the approval to be obtained as quickly as possible. The FDI screening work focuses more on the buyer in this case, so it doesn’t result in double work when it comes to due diligence.
In Hungary, the submission should focus on the buyer – their activities, group structure, and plans with the target company – so we can facilitate the process by addressing all the information the ministry needs. The due diligence process isn’t significantly affected, but it needs to be conducted in parallel with the FDI assessment. This is important because the filing deadlines are tight – notifications must be submitted within ten days of signing the SPA, and all documents need to be translated into Hungarian. Starting the process after signing wouldn’t give enough time to meet the deadlines, so parallel processing is essential.
CEELM: What changes do we anticipate in FDI screening regulations in the near future, and how should businesses prepare for evolving FDI scrutiny?
Stetsenko: We’re currently developing FDI regulations in Ukraine at the expert level, but no laws have been introduced so far. However, Ukraine is expected to harmonize its legal and regulatory framework with EU requirements. Accordingly, we can expect that Ukraine will, in the future, adopt similar FDI screening rules applicable in the EU. Businesses should stay informed about these developments to prepare adequately for any changes in the FDI landscape.
Drakopoulos: No clear changes are anticipated yet. When the EU FDI mechanisms are adopted, we don’t expect significant problems. The attitude in Greece is very investor-friendly, and it doesn’t burden investors by forcing them to wait for approvals. Oftentimes, tacit approval is given by regulatory bodies simply by not acting.
Even with the changes to the EU FDI regulation, it will be business as usual here. Historically, the EU was opposed to stringent FDI regulation frameworks, but now, with the changing winds and broader support, the mechanism remains more of a notification system than a tool for blocking investments, I believe. It’s really about monitoring and enhancing transparency, not about impeding investment.
The idea is not to block but to ensure that investments align with national and EU interests. Businesses should stay informed about any regulatory developments but can remain confident that Greece will continue to welcome foreign investments.
Tomaskovic: It’s very difficult to say at this stage without a clear draft of the act or any notion of what it will entail. The draft still needs to go through a consultation procedure, be finalized, and then voted on and adopted by the parliament. Historically, however, our legislators have often modeled laws after those of Austria and Germany. Therefore, we could venture a guess that looking at those legal frameworks might prove informative to potential investors when it comes to figuring out which sectors are more likely to be protected and how the overall process might look.
For businesses, it’s advisable to monitor developments closely and perhaps familiarize themselves with Austrian and German FDI regulations to anticipate potential changes. This way, they can begin to prepare for possible future FDI scrutiny.
Ivanov: Another good question! The law will not be a barrier for a good investor. An investor who is in a good position, knows what they want to achieve, has all of their documents ready, and knows they’re going to pass AML and KYC procedures – given that the incoming draft will be most similar to the EU one – procedures are already market-known. Investors should collect and prepare the same documentation requirements as with other EU FDI screenings.
Fuzi: Regarding the general FDI regime, which implements the EU regulation, we don’t expect any changes unless there’s a change at the EU level – in which case, Hungarian regulations would follow suit.
As for the special regime, it’s a bit of a tricky question. It was introduced in 2020 for an interim period of a few months, but we’ve now had it in place for over four years. Regardless of the reasons, it seems that the government intends to keep it for as long as possible. When the war in Ukraine ends, it remains to be seen whether this special regime will have any reason to stay in place. But as of now, no significant changes are anticipated. Businesses should continue to prepare for FDI scrutiny as it currently stands and ensure they incorporate FDI assessments early in their transaction planning.
Mayer: As mentioned, the EU Commission is seeking a revision of the EU FDI Screening Regulation. Based on their proposal, any EU member state that does not have an FDI screening regime in place will be required to introduce one within 15 months. There will also be a greater focus on high-risk transactions and increased coordination between EU member states to prevent such high-risk transactions from slipping through. With regard to multi-jurisdictional transactions, an obligation is planned to submit all FDI notifications on the same day. However, national authorities will continue to have their own deadlines, so that decisions will not be taken simultaneously. Based on the European Commission’s proposal, a greater harmonization of FDI screening would be desirable.
The reform of FDI screening at an EU level will also lead to changes in Austrian legislation. Still, as the Austrian authority is already one of the screening Member States that already cooperates closely with other EU screening authorities, I expect less need for adoption than in other EU member states.
However, there are also discussions about future outbound screenings. Such regimes already exist in countries like China and Japan and soon in the United States.
As mentioned, a reform of the EU FDI Screening Regulation is expected, which will impact Austrian law as well. I hope we can achieve a more harmonized system among EU member states, but I don’t anticipate significant changes.
There should be increased cooperation between member states, and all EU countries should have an FDI screening mechanism in place – currently, 24 out of 27 do. Increased coordination is required to avoid risky transactions slipping through the cracks, and hopefully, there will be a stronger focus on higher-risk transactions.
From an M&A perspective, there might be changes for multijurisdictional deals, such as filing on the same day across different jurisdictions. However, I don’t expect much change in Austrian law – the list of sectors is already extensive, and systems are already implemented.
We’re still hoping for the introduction of an outbound screening regime at the EU level. This would mean that if an EU company invests in non-EU countries in sensitive sectors, it would also have to be filed, notified, and screened for the same security concerns. Such regimes already exist in countries like China and Japan.
For businesses, it’s a matter of waiting to see what the new regulation will look like. From an Austrian perspective, I don’t expect significant changes, but from an EU perspective, improvements are possible. In some instances, in certain countries or sectors, there might be increased scrutiny and additional work required, while in others, that might not be the case.
Stoicescu: I think we’re at a point where the regulations have been changing constantly – amendments were good for the authorities’ side, but they’ve made it even harsher for investors. Now, with the EU screening in play, with fines and all, the system has already evolved. Before, we had no EU screening, and no fines – but now every deal is sanctionable if not notified. They’ve also added fees – EUR 10,000 per notification. This is already a pretty detailed, highly elaborated framework, so I don’t expect things to become more complicated.
People need to understand that globalization has made it necessary to have these screenings and tests – much like with competition law matters. So, businesses need to be mindful to budget for it; it’s an occurrence that happens throughout the world. Plan for it, budget for it, and expect it to take some time. Wanting to do business in Romania and the EU, this is the requirement, plain and simple.
In terms of preparation, the most sensitive areas are funding origins, keeping track of shareholding, and how it changes – if any particular change or restructuring would trigger FDI. Thirdly, have a close look at your investment plan, and explore if it triggers FDI, especially for new investors. Fourthly, in your day-to-day operations, try to have all data already organized – monitor state subsidies contracts, monitor your presence in other markets – have an integrated, holistic view of the entire business and have this information readily available to avoid high fines.
Custovic: We are not aware of any imminent legislative changes. However, Bosnia and Herzegovina is expected to continue the harmonization of its legal and regulatory framework with EU requirements. Accordingly, we can expect that Bosnia and Herzegovina will, in the future, adopt similar FDI screening rules applicable in the EU. Businesses should stay informed about these developments to prepare adequately for any changes in the FDI landscape.
