The global pandemic has impacted all markets, with subsequent ramifications for M&A. Investors are now seeking greater protection against general lock-downs and supply-chain disruptions, while governments aim to protect critical supplies and services by imposing new regulations on foreign investment in crucial or strategic industries. If you are considering investment opportunities in Lithuania, take a look at this overview to get insight into the regulations on foreign investment in strategic industries.
The following overview is an extract from the Foreign Direct Investment in Central Europe publication, which gives insight into the regulations on foreign investment in strategic industries in the region.
Have FDI screening rules been implemented (or will they be implemented) in the country?
Yes. A recast of the Republic of Lithuania Law on the Protection of Objects of Importance to Ensuring National Security, applicable as of 1 August 2020, provides, inter alia, new amendments regarding FDI, which shall apply from 11 August 2020.
Definition of FDI
FDI is defined as an investment:
- made by a foreign investor and
- the purpose of which is to establish or maintain permanent and direct links between a foreign investor and an economic entity established in the Republic of Lithuania, by acquiring at least 10% participation in capital or in voting
Definition of foreign investor
Lithuania does not have a precise definition of a foreign investor. In the previously mentioned Law, investor from the Republic of Lithuania or a foreign investor shall mean a citizen of the Republic of Lithuania or another Member State of the European Union (EU) or of a member of the North Atlantic Treaty Organization (NATO), the European Free Trade Association (EFTA) and/or the Organisation for Economic Co-operation and Development (OECD) or a legal person or organisation established in these states, except for the cases where 1/4 or more of the voting rights at the meeting of participants of such a legal person or another organisation are held by a third country, legal persons controlled by it or its citizens.
Do the following scenarios trigger the screening?
1. Acquisition of 10% or more of voting rights in the company: No
2. Establishment of a new branch: Yes, if the branch is being established in the economic sectors of strategic importance for national security.
3. The production of new products: No
4. Establishment of a new company in which foreign investor will have more than 10% voting rights: Yes, if the company is being established in the economic sectors of strategic importance for national security. Yet having more than 10% voting rights would not trigger the screening, since it is only applicable from acquiring 25% or more shares of voting rights.
5. The transfer of use or operational rights in infrastructure or assets that are indispensable for the operation of strategic companies: Yes
6. Other screening triggers:
– Acquisition of 25% or more voting rights in the Category I enterprise of importance to national security, Category II enterprise of importance to national security, economic sector of strategic importance or in the territory of the protection zone.
– Acquisition of 1/3 or more voting rights in the Category III enterprise of importance to national security.
Deadline for notification of the relevant screening body
Relevant screening body – the Commission (Commission for Coordination of Protection of Objects of Importance to Ensuring National Security) – must be notified before making the respective investment. Upon receipt of such notification, Commission initiates a procedure for the assessment whether the interest of the prospective investor complies with the national security interest. The respective investment cannot be made until the national security screening is completed.
An investor’s transactions which are in conflict with national security interests shall be unlawful and invalid from the moment of conclusion thereof.
Screening procedure
The Commission shall review the respective investment. The decision on the review is limited to whether the interest of the prospective investor comply with national security interest of the Republic of Lithuania.
In determining whether an FDI may affect national security, the Commission shall take into account in particular, whether the applicant:
- is a dominant importer of fossil energy resources of any kind into the Republic of Lithuania, a person controlled by such importer or related thereto by cooperation or partnership relations;
- maintains or, in the past, maintained relations with institutions of foreign states or natural or legal persons from those states which increase the risk or pose a threat to national security;
- maintains or, in the past, maintained links with organised groups, special services or groupings of foreign states related to international terrorist organisations or maintaining relations with persons suspected of membership thereof;
- has, by an effective court judgement, been found guilty of a grave, serious or less serious crime under the Criminal Code of the Republic of Lithuania or of a crime under criminal laws of foreign states which corresponds to the elements of a grave, serious or less serious crime or the person is subject to criminal prosecution for commission of such crime and the investor’s conviction for the committed crime has not expired or has not been expunged;
- has, by an effective court judgement, been found guilty of a crime/crimes against the independence, territorial integrity and constitutional order of the State of Lithuania and/or has, over the last 24 months, violated the provisions of legal acts regulating the activities of objects of importance to ensuring national security
- fails to provide proof of real possibilities to implement the actions provided from recommendations;
- has been notified by Commission of the envisaged verification of his conformity to national security interests and fails, within the time limit, to submit to the Commission the documents and information specified in the Rules of Procedure of the Commission and, due to failure to submit such documents and information, a decision that the investor conforms to national security interests is not adopted by the Commission or the Government;
- is an investor from a specific third country, given that in compliance with other laws he may not be an investor;
- poses a threat to security or public order of the EU member or EU project or programmes;
- there is other justified data concerning his non-conformity to national security
Screening decision
In a review procedure Commission assesses the prospective investor’s interest conformity with the national security interest. Commission adopts a conclusion not later than within 20 days from the date of launching verification, in which states that investor:
- Conforms to national security interests
- Possesses a risk to national security interests – in such case, recommendations are set compliance with which should prevent an investment from posing a threat to national security interests
- Does not conform to national security interests
A conclusion on an investor’s non-conformity to national security interests shall be submitted to the Government not later than within 2 working days following its adoption.
On the basis of the Commission’s conclusion and recommendations the final decision on an investor’s conformity to national security interests, substantiated de jure and de facto, and, where necessary, on the full or partial investment ban and compulsory requirements or conditions to be set shall be adopted by the Government within 15 days from the receipt of the Commission’s conclusion and recommendations.
The Government’s decision confirming an investor’s non-conformity to national security interests shall imply that the investor’s transactions or actions specified are in conflict with national security interests and that the investor may not conclude the transactions and/or perform actions specified in paragraphs until the causes posing a threat to national security interests indicated in the Government’s decision are removed, provided that such causes may be removed, and the Government adopts a new decision confirming the investor’s conformity to national security interests after having received the new conclusion and recommendations from the Commission.
Are fines or other penalties prescribed due to failure to notify the FDI?
Transactions which are in contrary to the national security are null and void from the moment of their conclusion. If an investor has acquired shares in the entity important for national security or has acquired the right to exercise non-property rights granted by the shares of the entity important to the national security in violation of the requirements of the law or if the investor who has acquired shares in the entity important for national security has been acknowledged as being not in the interests of national security, such investor shall not have the right to participate and vote in the general meeting of shareholders of the company important for national security and may not exercise other non-property rights granted to him in violation of this law or the transfer of voting rights.
By Tomas Mieliauskas, Managing Associate, Deloitte Legal APB