Safeguarding Slovenian Strategic Assets Against Unwanted Foreign Investors On 30 May 2020, the National Assembly adopted the third package of COVID-19 measures. Chapter 11 of the Act (ZIUOOPE), which provides for the screening of foreign direct investments, has come under intense scrutiny.

The foreign direct investment screening mechanism under the new Act Determining the Intervention Measures to Mitigate and Remedy the Consequences of the COVID-19 Epidemic (Official Gazette of the Republic of Slovenia, No. 80/20, ZIUOOPE) is designed to identify foreign investments that pose a threat to security and public order in Slovenia. In particular, undertakings that are (i) directly or indirectly controlled by the government of a third country, (ii) have already been involved in activities affecting security or public order in a Member State, or (iii) are engaged in illegal or criminal activities. ZIUOOPE introduces some vague, even controversial provisions, which we will look at in more detail below.

Any natural or legal person who is a citizen or has its registered office in an EU Member State (which also includes Slovenia), the European Economic Area, Switzerland or in third countries is considered a foreign investor. This provision is in direct conflict with the fundamental rules of EU law, which provide for the free movement of capital between EU Member States. It is also contrary to Regulation (EU) 2019/452 of 19 March 2019, which will be directly applicable in all EU Member States from 11 October 2020. The Regulation makes provision for the screening of direct investments that may affect security or EU public order; however, under this Regulation only a natural person or company from a third country is considered a foreign investor.

While the Regulation is without prejudice to a Member State's competence to further protect its security interests, such additional protection concerns the provision of national security, the threat to which must be clearly defined and explained. A foreign direct investment is an investment by which a foreign investor acquires at least 10% in the capital or voting rights of a company with its registered office in the Republic of Slovenia.

Any foreign direct investment that may affect critical infrastructure (energy, transport, water, health, media, defence and financial infrastructure, etc.) or land or real estate that is essential for the use of or located in that critical infrastructure must be notified. Additionally, investments that may affect (i) critical technology (robotics, cyber security, aviation, nuclear science, healthcare, pharmacy, etc.), (ii) the supply of critical resources, raw materials or protective medical equipment, (iii) access to sensitive information, including personal data, or (iv) freedom and pluralism of the media, must also be notified. Given the broad range of forms that foreign direct investments can take and inevitable ambiguity surrounding interpretation of the terms “critical risk factors” and “proximity of critical infrastructure”, legal advisors will be left with little option but to advise their clients to notify (out of caution) any investment located near a public road. Foreign direct investments must be notified to the Ministry of Economic Development and Technology within 15 days of signing the contract, after which the Ministry then has two months to either approve the foreign investment, determine the conditions for its implementation, prohibit it (prospectively) or cancel (retroactively) it.

This means that legal transactions linked to the activities or transactions described above are subject to Ministry approval and is similar to merger notification procedures before the Slovenian Competition Protection Agency. The Ministry's decision may be appealed to the Government of the Republic of Slovenia. Since the rules of administrative procedure apply mutatis mutandis to the entire procedure, it can be concluded that the final decision of the Ministry is an administrative act which in accordance with the second article of the Administrative Dispute Act (ZUS-1), may be the subject of an administrative dispute before the Administrative Court. In this context, there is particular cause for concern about the Ministry's right to screen all foreign direct investments over the past five years in the areas listed above and the possibility of those investments being retroactively cancelled. Namely, the cancellation of an investment means the nullity of the contract as well as the nullity of the decision on entry (of new share deals) in the register or registration of brownfield/greenfield sites in the land register. How the act will be enforced in practice remains to be seen but it is certain do give rise to several problems. This jeopardises investor security and has stymied further investments in the Republic of Slovenia.

Despite the brief explanation in the ZIUOOPE justifying the retroactive provision by claiming it does not violate the rule prohibiting retroactive application of statutory provisions, it merely explains that retroactivity is determined by law. Furthermore, it states that the legislator is justified in doing so to ensure the public interest and that a mitigation measure is also envisaged whereby the investment may be made subject to the conditions set down by the Ministry and thus rule it out as a threat to public safety. However, the proposal fails to mention the third condition for the admissibility of retroactive provisions under Article 155(2) of the Constitution of the Republic of Slovenia, which stipulates that retroactivity must not interfere with already acquired rights.

It is possible that, in this part, ZIUOOPE regulates cases where the investment has not yet been fully completed (and it is therefore possible to consider quasi-retroactivity), but this is not clear from the provisions. The described regulation of the screening of foreign direct investments may pursue legitimate protection of the public interest, whereby such a restriction (concerning the review of investments being made in the Republic of Slovenia) may be in conflict with the Constitution of the Republic of Slovenia, which guarantees free economic initiative and prohibits the establishment of an environment that restricts competition on the free market. Such rules (as are now valid since ZIUOOPE) may also be in conflict with internationally binding rules, which might, in relation to EU Member States, interfere with the right to free movement of capital as a fundamental element of the EU single market.

For third countries, the rules may interfere with various bilateral or multilateral agreements governing the right of companies to invest in third countries, including within the framework of the World Trade Organization, to which the Republic of Slovenia is a signatory. When assessing the justification for such restrictive measures, the Republic of Slovenia will have to demonstrate at all three levels (both before the Constitutional Court, European Union bodies or other international decision-makers) that (i) the adopted measure pursues public interest in ensuring security and public order; (ii) good faith in the preparation of the act, (iii) non-discrimination in the implementation of measures (whether all foreign investors were treated equally and whether any distinction between foreign investors as well as between foreign and domestic investors was justified) and (iv) appropriate proportionality of the measure in in terms of the proportionality test.

Thus, the Republic of Slovenia will have to prove that ZIUOOPE can achieve the desired goal of preventing the threat to security and public order, as well as that the adoption of Chapter 11 of ZIUOOPE is necessary for the state, that this is the only way to achieve the goal and that the restrictive effects are not excessive vis a vis the rights of investors affected by this measure. Given that the screening of foreign direct investments has nothing to do with preventing the spread of CoVID-19, the necessity for and effectiveness of this measure should be examined against that background. It is probably too early for a final assessment as the ramifications for the Slovenian economy will only become fully apparent in the coming months. Only then will it be possible to assess the economic aftermath and whether banning foreign investments is the only way to stem the tide of damage. It is worth noting that the preparation of such a measure in advance may also lead to its unfoundedness.

Author: Matevž Klobučar, Attorney-at-law