The Department of Enterprise Trade and Employment has published a draft new law to protect Irish critical technology and infrastructure from potentially harmful non-European foreign investment.  The Screening of Third Country Transactions Bill 2022 legislatesto curb so-called “third country” (meaning non-European Union/non-European Economic Area countries) hostile actors using ownership of, or influence over businesses and assets in the Irish state to harm Ireland’s security or public order. 

First time to screen

It will be the first time Ireland has screened investment from a non-European country with a view to halting that investment if it poses such a threat.  The draft new law responds to the EU Investment Screening Regulation (EU) 2019/452 (“Regulation” – see more in Covington blogs here and here) which allows – but does not oblige – European Union Member States to screen foreign investment for risks to their security or public order.  

EU fears

The Regulation reflected a growing concern within Europe about the purchase of strategic European companies by foreign-owned firms, those concerns now heightened as a result of Covid and, more recently, by the war in Ukraine. 

The European Commission (“EC”) guided on June 22 2021, that “(s)uch transactions may put European collective security or public order at risk, especially when foreign investors are state owned or controlled, including through financing or other means of direction…while remaining open to investment, the EU is equipped to protect its essential interests.” 

On April 6 this year the EC issued the following additional guidance:

“In the current circumstances, there is a heightened risk that any investment directly or indirectly related to a person or entity associated with, controlled by or subject to influence by the Russian or Belarusian government into critical assets in the EU may give reasonable grounds to conclude that the investment may pose a threat to security or public order in Member States.”

For EU Member States “that currently do not have a screening mechanism, or whose screening mechanisms do not cover all relevant FDI transactions or do not allow screening before investments are made, the Commission calls on them urgently to set up a comprehensive FDI screening mechanism”. 

Ireland fell within this cohort and on June 26, the Irish government approved the publication of new law to enable such screening.  The draft Bill was published last Tuesday, August 2.

The 2019 Regulation

The Regulation increases the level of information sharing and co-operation within Europe relating to such threats to security and public order.  It obliges Member States to notify the EC and other Member States when undergoing national screening on an FDI transaction and to provide information on it upon request.  Member States may provide comments or raise questions regarding foreign investment that affects more than one Member State and, similarly, the EC may provide an opinion.  The Member State conducting the screening then has to take into account the comments and opinions received, although it is not bound by them, in deciding whether to authorize or prohibit the investment.  In accordance with the Regulation and based on practice reported by the EC, this consultation procedure usually takes 35 days.

The EC also has enhanced rights of comment (also non-binding) or where the investment could undermine a strategic project or programme of interest to the whole EU, such the European navigation satellite system, Galileo.

By October 2020, when the Regulation became operative, almost half of the EU Member States already screened foreign direct investment in some manner – including Ireland’s near neighbour France.  The UK, although now outside of the EU, has also enhanced its foreign investment screening laws (see our blog here). By the end of 2021 the number of EU Member States screening foreign investment had grown to 18 and this year, 2022, 5 other Member States, including Ireland, are expected to follow suit. The EC has asked Member States to accelerate their implementation plans, given current circumstances referred to earlier.

See Covington blog looking back on the impact of the first year of the regulation on European mergers and acquisitions.

Irelands FDI

Ireland is a small open economy and is heavily reliant on foreign direct investment for growth and jobs, with 18 of the top global 20 pharmaceutical companies and 9 of the top 10 global software companies operating here.  No doubt conscious of the potential chilling effect on FDI, the Tánaiste (deputy prime minister), while welcoming such investment has stated that it is important to “be on our guard against forces that threaten our security and strategic assets falling in to the hands of unfriendly foreign governments.” 

Public Consultation

In April 2020 the Irish government undertook a public consultation on Investment Screening of Foreign Direct Investments into the EU and the responses to the consultation informed the draft Bill.  This included feedback on the establishment of the Investment Screening Advisory Panel to inform and assist the Minister for Enterprise Trade and Employment on the screening of specific foreign transactions.  Advisory panels like this are a tried and tested mechanism in Ireland for informing Ministers in expert areas.

Key features of the draft legislation

The new Bill will enable the screening of third country (i.e. non-EU and non-EEA) investments in technologies identified  as sensitive, or in critical infrastructure such as health, electricity, military, ports and airports. It is designed to prevent investors circumventing the legislation by using family members and other connected persons to acquire control of assets in Ireland. The giving of false information is an offence with accountability built in for responsible individuals within corporates.

The screening will be based on ownership and transaction value criteria, currently set in the draft legislation at €2m but reviewable. 

Third country transactions impacting directly or indirectly on specific sectors, or involving sensitive and strategic activities, will require notification. The specific areas covered are a broad sweep of those identified in the Regulation (and which may be defined further in due course for the Irish context) as effecting:

  • critical infrastructure whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;
  • critical technologies such as AI, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies;
  • 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 or pluralism of the media. 

A change of control will occur to trigger mandatory notification where an investor increases his/her control from an existing 25% or less to more than 25%, or from an existing control of 50% or less to more than 50% control.  The notification must be made not less than 10 days before the transaction is completed. 

The Screening

The Minister has, under the draft Bill, a timeframe of 90 days – extendable to 135 days – in which to complete the screening review.  For the duration of the review the transaction cannot be progressed further.

Ultimately the new law will allow for the prohibition of an investment which fails the screening review.  Alternatively the Minister may attach conditions to the completion of the investment.  Where the Minister believes there is a risk in providing reasons for a screening decision he may decide not to do so. 

The draft new law has begun its journey through the Irish legislative system and will now be debated, discussed and fine-tuned.  Given the active encouragement by the EC to now implement foreign investment screening, it is anticipated that the Bill will progress quickly.