Will the new Screening Bill close the door on FDI into Ireland?

On 2 August 2022, the Irish Government published a draft of the highly anticipated Screening of Third Countries Transactions Bill 2022 (Screening Bill). The Screening Bill provides for the introduction of the first ever screening regime for foreign direct investment (FDI) into Ireland. Under the Screening Bill, the Minister for Enterprise, Trade and Employment (Minister) will have wide-ranging powers to review (and ultimately block) investments which meet specified criteria and create national security and/or public risks. In this insight, we outline what the Screening Bill covers, pick out areas for refinement, and compare Ireland’s proposed approach with the now up-and-running UK FDI regime.

What will it catch?

In essence, the Screening Bill provides for a mandatory and suspensory prior notification regime for investments in “Sensitive Sectors”. The Sensitive Sectors are those contained in Regulation 2019/452 (EU FDI Regulation) – and include “critical” infrastructure, technology and inputs across a wide range of sectors such as energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure.

The need to notify will arise where:

(a) the ‘value of the transaction’ (not yet defined) is EUR2 million or higher;

(b) involves a ‘third country’ firm or person or connected person (i.e., any country outside of the EU, EEA and Switzerland); and

(c) involves shares or voting rights in a firm in Ireland moving from:

i. 25% or less to more than 25% of shares or voting rights in that firm; or

ii. from 50% or less to more than 50% of shares or voting rights in that firm.

In addition, the Minister will have broad powers to review non-notifiable transactions where there are reasonable grounds for believing that the transaction may affect security or public order in Ireland.

Wider Context

In recent years, there is growing political appreciation that “open” globalization has come with strategic disadvantages. For instance, 18 of the 27 jurisdictions in the EU had notified the Commission as of May 2022 that a form of FDI screening regime was in place based on the EU FDI Regulation. Many other jurisdictions around the world have also taken the opportunity to introduce FDI screening regimes as detailed in DLA Piper’s Global FDI Guide (here), including Ireland’s closest non-EU neighbour: the UK (see DLA Piper’s podcast series, Understanding the UK National Security & Investment Regime, here).

Most recently, in September 2022, President Biden issued an Executive Order (EO) directing the Committee on Foreign Investment in the United States (CFIUS) to consider a specified list of national security risks when reviewing covered transactions. This is the first time a US president has issued an EO formally directing the scope and focus for CFIUS actions since the committee was established in 1975 (here).

Although Ireland is following a well-worn path, there is concern that the Screening Bill, as drafted, opts for a maximalist approach that is out of step with Ireland’s long-standing investor-friendly environment, with the potential to adversely impact a range of ordinary course transactions across multiple sectors in the Irish FDI landscape.

Where the Screening Bill might undergo re-calibration

We recognize that the new rules need to enable the Minster to intervene where necessary, while at the same time seek to preserve Ireland’s economy as an attractive FDI location – a key growth driver over the past three decades. Yet, at this juncture, we speculate that the Screening Bill would benefit from further refinement and calibration during the legislative review process. For instance, the Screening Bill currently appears overly expansive and broadly scoped as it:

 

a. captures investment activity from non-problematic jurisdictions (e.g., the UK or the US);

b. sets a EUR2 million value threshold that is too low for “critical” assets; and

c. defines “transaction” to include any ‘other economic activity’ relating to a change of control of an asset in the State, thus bringing in scope a wide range of associated activity, such as financing, arranging, brokering or advising;

d. includes where a third country national is “a party” to the transaction to be within the scope of the mandatory notification process, even where such a party is a vendor;

e. provides for unduly lengthy periods for Ministerial review which are currently in excess of CCPC Phase 2 merger control review periods and are longer than most other FDI regimes around the globe;

f. includes within scope non-problematic internal corporate group re-organisations on the basis of the draft language; and

g. opens up minority investments to potential screening requirements, and avoids cross-referring to the extensive body of EU / Irish case law developed in relation to existing concepts under the EU Merger Regulation.

Arguably, the objective of safeguarding Irish security and public order could be achieved with a narrower category of sensitive sectors and a revised (higher) financial threshold to reduce the scope of the screening regime. Although the EU FDI Regulation prohibits Member States from discriminating between third country persons, it is argued that an appropriately scoped white-list should be in place. We also note the Minister intends to publish guidance notes on how the Screening Bill will be implemented and how the notification obligations will operate in practice – and this may become a basis for further refinement.

A comparative look at the UK NSIA

By way of contrast, the UK’s National Security and Investment Act (NSIA) entered into force on 4 January 2022. Similar to the Screening Bill, the NSIA requires mandatory notification for transactions in specified sectors, has retrospective effect and includes a call-in power for certain non-notifiable transactions (and includes a longer back-stop period of 5 years rather than the 15 months under the Screening Bill). The NSIA regime is broader than the Screening Bill in particular because it captures all changes of control of entities carrying on certain activities in the UK, even if the new controlling entity is a UK company.

Experience from our UK FDI Team illustrates the importance of key procedural and technical mechanisms within the NSIA regime. Broadly, these include: an IT interface to allow for electronic upload of notifications, a searchable notification database, a predictable (and shorter!) review period, a single notification for multiple transaction steps (e.g. intra-group transfers etc.), clear guidance on jurisdiction, adequate resourcing and availability of staff to advise on any questions in pre-notification.

Now in operation for just over nine months, the UK Secretary of State (SoS) had prohibited two deals under the NSIA regime by the end of August 2022, the first of which was blocked in July 2022. That deal is especially notable since it was notified on a voluntary basis. It concerned an IP asset transaction by a Chinese investor related to vision processing technology (for cameras used in robotics, virtual reality devices and CCTV). On the basis of potential dual-use application, the SoS blocked the investment. The second NSIA prohibition concerned the proposed acquisition of Pulsic Limited, a UK company specialising in electronic design automation (EDA) products, by Super Orange HK Holding Limited, a Chinese chip manufacturer. The SoS concluded that Pulsic’s EDA products could be exploited to introduce (automatically and/or without the knowledge of the user) features that could be used to build defence or technological capabilities.

For reference – we contrast key approaches to FDI screening in the UK and Ireland:

UK NSIA Irish Screening Bill
Mandatory	Yes	Yes
Transaction Threshold	A “qualifying acquisition” requires: (a) the acquisition of a right or interest in, or in relation to, a qualifying asset or qualifying entity; (b) the entity or asset is from, in, or has a connection to the UK; and (c) the level of control acquired meets or passes certain thresholds: (i) the shareholding stake or voting rights acquired in a qualifying entity meets or crosses certain percentage thresholds (specifically, 25%, 50% or 75%); (ii) the voting rights acquired in a qualifying entity allow the purchaser to pass or block resolutions governing the affairs of the entity; (iii) the acquirer gains “material influence” over the policy of a qualifying entity; or (iv) the acquirer is able to use a qualifying asset, or direct or control its use, or is able to do so more than it could prior to the acquisition. For the mandatory portion of the regime, the “qualifying acquisition” must be in a qualifying entity which operates in one or more sensitive sectors (see below).	A transaction is notifiable where it satisfies each of the following criteria: (a) a third country undertaking or a person connected with such an undertaking, is a party to the transaction; (b) the value of the transaction is equal to or greater than: (i) where no amount stands prescribed under subsection (3), EUR2,000,000, or (ii) the amount that stands prescribed under subsection (3); (c) the transaction directly or indirectly relates to, or impacts upon, one or more of the matters referred to in points (a) to (e) of Article 4(1) of the Regulation; (d) the transaction related, directly or indirectly, to an asset or undertaking in the State. (2) A transaction that results in the acquisition, by any person, of shares or voting rights in an undertaking in the State shall not be notifiable unless (a) the criteria in subsection (1) are satisfied; and (b) the percentage of shares or voting rights held by the person in the undertaking as a result of the transaction changes (from 25% or less to more than 25%, or from 50% or less to more than 50%)
Suspensory	Yes	Yes
Sensitive Sectors	Advanced Materials; Advanced Robotics; Artificial Intelligence; Civil Nuclear; Communications; Computing Hardware; Critical Suppliers to Government; Cryptographic Authentication; Data Infrastructure; Defence; Energy; Military and Dual-Use; Quantum Technologies; Satellite and Space Technologies; Suppliers to the Emergency Services; Synthetic Biology; and Transport	Energy; Transport; Water; Health; Communications; Media, Data processing or storage; Aerospace; Defence; Electoral or financial infrastructure; Sensitive facilities; Land and real estate crucial for the use of such infrastructure Artificial intelligence; Robotics; Semiconductors; Cybersecurity; Energy Storage; Quantum and nuclear technologies; Nanotechnologies and biotechnologies; Energy or Raw materials; and Food security
Review Period	Consideration of transactions is divided as follows: (a) the review period of 30 working days, which is applicable to all notified acquisitions; and (b) the assessment period of 30 working days (extendable by 45 working days), which is only applicable if an acquisition requires detailed consideration.	Notified transaction The Minister will make a screening decision the case of a notified transaction, on or before the later of : (i) 90 days from the date on which the Minister was notified of the transaction under section 10; or (ii) such date, not being more than 135 days from the date on which the Minister was notified of the transaction under section 10, as the minister may specify in a notice in writing to the parties to the transaction within the period refereed to in subparagraph (i) Discretionary review In the case of a transaction other than a notified transaction, the Minister will make a screening decision (i) 90 days from the date on which the screening notice in relation to the transaction was issued; or (ii) such date not being more than 135 days from the date on which the screening notice was issued
Penalties	The transaction is void as a matter of law. Breaching parties may also be liable to: (a) for corporations, a fine of up to 5% of an organisation’s global turnover or GBP10 million, whichever is greater; or (b) for individuals, imprisonment for a term not exceeding 5 years and a fine.	Breaching parties may be liable to: (a) On summary conviction, a fine of up to EUR2,500 and / or 6 months imprisonment, (b) On conviction on indictment, a fine of up to EUR4 million and / or 5 years imprisonment.

 

Next steps

The Screening Bill is on the Irish Government’s Priority Legislation list. Most recently, on 21 September 2022, Minister of State Dara Calleary presented the Screening Bill to the Irish Parliament for a second time (here) where it passed and was referred to the Select Committee on Enterprise, Trade and Employment. Adoption is intended for late 2022, with commencement to follow in early 2023. Among other comments, Minister Calleary noted that the 90-day review period is “very much an outer boundary” and that “decisions will be made as quickly as possible”.

For now, we recommend parties to be aware of the Screening Bill and to be aware of the need to reflect these considerations in transaction documents (e.g., notification and clearance may become a prevalent pre-condition to completion) and there will be a corresponding impact on deal timelines, in much the same way as merger clearance.

The Irish Government press release and Screening Bill is available here.

With thanks to Max Mitscherlich and Dara McDonald for their input in drafting this insight.