by Francesco Salerno
This article is the first of two parts written by me concerning governmental control of investments in strategic enterprises following the Covid-19 pandemic. The articles will be published on two consecutive days. The Covid-19 outbreak has been followed by a raft of measures to lessen its impact on the world of production. Indeed, the majority of countries have intervened in various branches of the law ‒ starting with contract, company and insolvency/bankruptcy rules ‒ with the stated intent of supporting the economy. Among the many other forms of intervention, changes have been made to the rules on the control of companies operating in strategic sectors. This is because companies often tumble in value in crisis situations, making it easier for them to be snapped up “cheaply”: hence the special attention paid to rules that give governments the power to control investments in strategic enterprises.
These rules date back to the eighties, when EU Member States began to implement privatisation policies, accompanied by changes in company law designed to exclude, through specific clauses in articles of association, the risk of hostile takeovers of strategic enterprises by foreign investors. The first jurisdiction to take steps in this direction was the United Kingdom, which introduced a mechanism enabling the state to retain control over privatised businesses. This “golden share” mechanism introduced clauses to the articles of such businesses, granting certain powers to government. Analogous instruments were then adopted in many other counties.
In Italy, these measures were adopted through Law no. 474/1994, which established that, before the state could relinquish public control over companies operating in certain sectors (energy, transportation, defence, telecommunications, and other public services), those companies should grant special powers to the government, by including special clauses in their articles. However, after their introduction in various countries, these golden share rules attracted considerable criticism, especially from the Court of Justice of the European Union (CJEU), which questioned whether they were compliant with the principles enshrined in the Union. Following these criticisms from the CJEU, various Member States have preferred to abandon golden share rules and have favoured new investment control rules instead.
In Italy, these new rules were introduced by Decree Law no. 21 of 15 March 2012. Essentially, this legislation granted the Italian state the power to prohibit certain important corporate transactions (changes of control, mergers, demergers, transfers of businesses/business units, changes in business purpose, etc.) and to oppose the entry of undesirable shareholders. Unlike the golden share rules, which embedded this power in specific clauses of a company’s articles, these new rules embedded it directly in law. By analogy with ‘golden share’ it was called the ‘golden power’. Italy then reinforced the rules in 2017 and 2019. Not only did it introduce sanctions, it also extended the rules to cover new sectors (such as, in particular, the hi-tech industry and 5G broadband networks) and coordinated them with Regulation (EU) 452/2019 of the European Parliament and of the Council.
This regulation, which came into force on 10 April 2019, but will apply from 11 October 2020, has established a European framework for the screening of foreign direct investments into the Union. Its purpose is to ensure Union-wide coordination and cooperation on the screening of foreign direct investments likely to affect security or public order. In particular, the aim of the regulation is to establish an integrated system to combat predatory acquisitions by investors in third countries, on the premise that article 207 TFEU grants the EU exclusive competence with respect to the common commercial policy. The regulation therefore exhorts each Member State to base its screening mechanisms on rules and procedures that are transparent, that do not discriminate between third countries, that lay down timeframes for the screening, and that allow foreign investors and the enterprises concerned to seek recourse against screening decisions.
It was in this context that on 26 March 2020 a communication from the Commission was published, laying down “Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452 (FDI Screening Regulation)” (Communication 2020/C 99 I/01).
In this communication, the Commission ‒ which is aware that the economic fallout of the pandemic could include the cheap sale of strategic assets ‒ has suggested the adoption of measures that will guarantee, inter alia, the procurement and supply of essential public services. In general, the Commission has invited Member States to implement or adopt FDI screening mechanisms even before Regulation (EU) 2019/452 becomes applicable, also in order to “take fully into account the risks to critical health infrastructures, supply of critical inputs, and other critical sectors as envisaged in the EU legal framework”.
In relation to the compatibility of domestic rules with EU law, the Communication also reminds Member States that article 63 TFEU provides for free capital movements not only within the EU but also between Member States and third countries and that, pursuant to article 65 TFEU, any restriction can be introduced only on grounds of public policy or public security. However, it also specifies that additional grounds of justification may be acceptable in the case of restrictions on transactions involving third countries and that the permissible grounds of justification may also be interpreted more broadly.
The author, Francesco Salerno is a responsible partner of the legal sector of Studio Associato (KPMG), a professional association under Italian law belonging to the KPMG International network. He teaches and participates as a speaker at conferences. He is also the author of monographic writings and essays on issues relating to corporate, banking, financial and commercial matters in general.