On 13 June 2023, the Luxembourg Parliament adopted Draft bill No. 7885 establishing a national screening mechanism for foreign direct investments likely to affect security or public order for the purposes of implementing Regulation (EU) 2019/452 of European Parliament and of the Council of 19 March 2019, establishing a framework for the screening of foreign direct investments in the EU, as amended (“Law“).
Because a request for its exemption from the second round of voting was filed with the State Council, the Law is expected to enter into force soon.
The purpose of this alert is to inform you about the key features of the Law.
For further information on what these developments mean for you as a foreign investor or for your organization as a Luxembourg entity, please get in touch with your usual Baker McKenzie contact.
The national screening mechanism applies to foreign direct investments, apart from portfolio investments, likely to affect the security or public order, in an entity governed by Luxembourg law carrying out critical activities in Luxembourg.
More specifically, the Law applies to investments that allow a foreign investor, acting alone, in concert or through interposition, to effectively exercise control over an entity governed by Luxembourg law that carries out critical activities in Luxembourg.
Under the Law, a foreign investor is defined as a natural person or an entity governed by foreign law that is not a national of a member state or of a state party to the European economic area (other than an EU member state), and that intends to make or has made a foreign direct investment within the meaning of the Law.
To be included within the scope of the Law, the foreign direct investment must provide the foreign investor with control over the Luxembourg entity that carries out critical activities in Luxembourg.
How is control defined in the Law?
Control that triggers a notification is defined as follows in the Law:
1. Whether the investor, directly or indirectly:
- Has the majority of the voting rights of the shareholders or partners of an entity governed by Luxembourg law; or
- Has the right to appoint or remove the majority of the members of the administrative, management or supervision body of a Luxembourg legal entity, and at the same time is a shareholder or partner in this entity; or
- Is a shareholder or partner of an entity governed by Luxembourg law and controls, pursuant to an agreement entered into with other shareholders or partners of this entity, the majority of the voting rights of the shareholders or partners of that entity; or
2. Whether the investor crosses, directly or indirectly, the threshold of 25% of holding of the voting rights of an entity governed by Luxembourg law.
What activities are deemed critical under the Law?
The following activities, together with related research and production activities, as well as ancillary activities that may grant access to (i) sensitive information directly connected to the following activities or (ii) premises where the following activities are carried out, are deemed critical:
- The development, operation and trade of dual-use goods (within the meaning of article 2, paragraph 1) of Regulation (EC) n°428/2009)
- In the energy sector: the production and distribution of electricity; the packaging and distribution of gas, and storage and trading of petroleum; and the quantum and nuclear technologies
- In the transport sector: land, water and air transport
- In the water sector: the collection, treatment and distribution of water; the collection and treatment of wastewater; and the collection, treatment and disposal of waste
- In the health sector: activities related to health care and laboratories; medical analyses; and nanotechnology and biotechnology
- In the communications sector: wired telecommunications; wireless telecommunications; satellite telecommunications; and postal and courier services
- In the data processing or storage sector: the installations of data processing, hosting information services and internet portals; and technologies relating to artificial intelligence, semiconductors, and cybersecurity
- In the aerospace sector: space operations and the exploitation of space resources
- In the defense sector: activities related to national defense and the production and trade of weapons, ammunition, powders and explosive substances intended for military purposes or materials of war
- In the finance sector: the activities of the central bank, as well as the infrastructures and systems for the exchange, payment and settlement of financial instruments
- In the media sector: publishing, audiovisual and broadcasting activities
- In the agri-food sector: activities related to food safety
A foreign investor is not required to notify of the investment it intends to make in an entity governed by Luxembourg law when the following is applicable:
- The Luxembourg entity in which it intends to invest does not carry out any critical activities as defined by the Law.
- Its investment does not grant the investor control over the relevant Luxembourg entity, even though that entity carries out critical activities in Luxembourg.
- Its investment qualifies as a portfolio investment.
Under the Law, a portfolio investment is defined as an acquisition of securities made for the purpose of completing a financial investment that does not allow the investor to exercise, directly or indirectly, a control of the relevant Luxembourg entity.
The Law introduces two types of mandatory notifications: respectively before completion of the foreign direct investment and following the crossing of the 25%-voting right threshold of a Luxembourg entity following a corporate event amending the allocation of the share capital of that entity.
Before completion of the foreign direct investment
The foreign investor must notify the Minister in charge of economy (the “Minister“) of its intention to make a foreign direct investment that falls within the scope of the Law.
However, the notification carries no suspensive effect. After notifying of its intention, the foreign investor may continue its operations to implement the preliminary steps necessary for the realization of the investment.
Following the crossing of 25% of the voting rights
The foreign investor must notify the Minister in case it crosses the threshold of 25% of the voting rights in the Luxembourg legal entity following a corporate event amending the allocation of the share capital of that entity. That notification must be made within fifteen (15) calendar days.
The following information must be included in the notification:
- The ownership structure of the foreign investor and of the relevant Luxembourg entity before completion of the foreign direct investment or following events that have modified the breakdown of capital, including information on the beneficial owner, and the shareholding structure
- The approximate value of the foreign direct investment
- The products, services and commercial operations of the foreign investor and of the relevant Luxembourg entity
- The countries in which the foreign investor and the relevant Luxembourg entity carry out commercial activities
- The financing of the foreign direct investment and its source
- The date on which the foreign direct investment is planned or has been carried out
The purpose of the screening procedure will be to determine whether the takeover of the Luxembourg legal entity carrying out critical activities, through the investment, risks constituting a threat to security or public order.
Concretely, the Minister will carry out a first analysis to determine who the investor is and what its project is. The information provided by the investor as part of the notification will be a key element in this regard. In this context, it will be verified in particular that the investor is indeed who it claims to be and who is the ultimate beneficiary of the investment. The investor will be assessed based in particular on their profile, reputation or past experiences.
After a maximum period of two months, except in the case of an incomplete notification, the Minister will notify the investor, on the basis of this first analysis, to inform said investor as to whether the contemplated investment presents any risk, and a formal investigation will be triggered.
In the best-case scenario, the investor will therefore have (at the latest, two months after filing its notification) the certainty that its investment is not considered problematic and that it is free to complete the transaction.
Screening procedure activated
If a formal investigation is triggered, it will last up to sixty (60) calendar days (unless additional information is required). Unlike the notification, the decision to start a screening implies that the foreign investor is made aware that its investment may actually pose a risk to security or public order and therefore its investment cannot be completed before a formal screening decision that authorizes the investment in question has been taken.
To determine whether a foreign direct investment is likely to affect security or public order, the following potential effects are taken into account:
- Integrity, security and continuity of supply-critical infrastructure (whether physical or virtual)
- Sustainability of activities related to critical technologies and dual-use goods
- Supply of essential inputs, including raw materials as well as food safety
- Access to sensitive information, including personal data or the ability to control such information
- Media freedom and pluralism
The following factors may also be taken into consideration in the assessment:
- Whether the foreign investor is directly or indirectly controlled by the government of a third country, including public bodies or armed forces
- Whether the foreign investor has already participated in activities that undermine the security or public order of a member state
- Whether there is a serious risk that the foreign investor will carry out illegal or criminal activities
- Outcome of the screening procedure
There are three possible outcomes. The foreign direct investment subject to screening procedure may either be (i) authorized, (ii) authorized subject to certain conditions to ensure that the foreign direct investment does not affect the security or public order or (iii) prohibited.
The screening decision is notified in writing to the foreign investor before the expiry of the sixty (60) calendar days period (a request for additional information may however suspend the timelines until the additional information is provided).
Measures and sanctions
If a foreign direct investment has been made without a prior required notification or without authorization obtained within the framework of the screening decision, the Minister may suspend the exercise of voting rights related to foreign direct investment and attached to securities directly or indirectly held by the foreign investor exceeding the threshold of 25% of the voting rights of the relevant entity governed by Luxembourg law until the situation is regularized.
The Minister may further order the foreign investor (i) to modify the transaction, (ii) to reinstate, at its own expense, the situation prior to the completion of the transaction or (iii) to comply within a certain timeframe with the conditions attached to the authorization to proceed with the foreign direct investment (“Injunctions“).
Failure to comply the abovementioned Injunctions may lead to the issue by the Minister of a fine in a maximum amount of EUR 1 million if the foreign investor is an individual and of a maximum amount of EUR 5 million if the foreign investor is a legal entity.
Foreign investors have one month from the date of notification of the screening decision to dispute the fine before the administrative court.