Analysis: The Screening of Third Country Transactions Bill — looking forward and backwards
Sean O’Reilly and Michael O’Halloran of RDJ LLP provide a comprehensive overview of the Screening of Third Country Transactions Bill 2022.
The Screening of Third Country Transactions Bill 2022 will, if enacted, “establish a screening mechanism for third country investment into Ireland for the first time”.
In addition to providing for the screening of transactions completed after it is commenced, the bill also provides for a process for the retrospective review of transactions entered into before the legislation is commenced.
This will not be a purely theoretical power. The power of retrospective review has already been used by the UK in the case of Newport Wafer Fab.
Overview of the bill
An amended version of the bill was published on 25 January 2023 and it has now completed its third stage in Dáil Éireann. The bill seeks to establish a mandatory notification procedure and a review process for transactions which may pose risks to the security of the Irish State; it also aims to give further effect to Regulation (EU) 2019/452 on the screening of foreign direct investments into the European Union.
The main provisions of the bill have been summarised below.
1. Obligation to notify notifiable transactions
The parties to a notifiable transaction will be obliged to notify the transaction to the Minister for Enterprise, Trade and Employment not less than 10 days before the transaction is completed. As soon as practicable following receipt of a notification, the Minister is obliged to review the transaction and when so reviewing it consider whether it affects or would likely affect, the security or public order of the State.
In its current form, the bill defines a notifiable transaction as one where:
- a third country undertaking or a person connected with such an undertaking, as a result of the transaction—
- acquires control of an asset in the State, or
- changes the percentage of shares or voting rights it holds in an undertaking in the State—
- from 25 per cent or less to more than 25 per cent, or
- from 50 per cent or less to more than 50 per cent;
- the value of the transaction is equal to or greater than—
- where the Minister has not prescribed a figure, €2,000,000, for one natural person or body corporate in a period of 12 months, or
- the amount prescribed by the Minister; and
- the transaction relates to, or impacts upon, one or more of the following matters:
- 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 and dual use items, including artificial intelligence, 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;
- the freedom and pluralism of the media.
All three conditions (a)-(c) must be fulfilled in order for the transaction to be considered notifiable.
The bill defines a transaction as “any acquisition, agreement or other economic activity resulting in-
- a change in control of an asset in the State, or
- the acquisition of all or part of, or of any interest in, an undertaking in the State.”
A third country undertaking is an undertaking that is:
- constituted or otherwise governed by the laws of a third country,
- controlled by at least one director, partner, member or other person, that— (i) is a person referred to in paragraph (a), or (ii) is a third country national, or
- a third country national.
A third country is a country that is not: (a) Ireland, (b) an EU Member State, (c) an EEA Member or (d) Switzerland.
A third country national is (a) a natural person resident in a third country or (b) an unincorporated group/partnership of natural persons, at least one of whom is ordinarily resident in a third country.
The notification must contain all information stipulated in section 10 (b) of the bill, which includes the following:
- the ownership structure of the parties
- information on the products, services, and business operations of the parties
- the nature of the economic activities carried out by the parties in Ireland
- the funding of the transaction and its source
- the EU Member States in which the parties carry out economic activities
- the annual turnover and total number of employees of each party
- details of any sanctions or restrictive financial measures imposed on the parties by the European Union.
Failure to notify a notifiable transaction is an offence liable:
- on summary conviction, to a class A fine (max €5,000) or to imprisonment for a term not exceeding 6 months, or to both, or
- on conviction on indictment, to a fine not exceeding €4,000,000 or to imprisonment for a term not exceeding 5 years.
Furthermore, where a party to a notifiable transaction fails to notify it before it completes, the transaction shall be deemed to be subject to a screening decision that it affects or, or would be likely to affect, the security or public order of the State made on the day before the transaction completed. The implications of a screening decision being made in respect of a transaction are considered further below.
2. Minister’s discretion to review
In addition to imposing an obligation to notify notifiable transactions for Ministerial review, the Minister will be empowered to himself or herself review a transaction regardless of whether it has been notified or whether it is notifiable provided that:
- the Minister has reasonable grounds for believing the transaction affects or would be likely to affect the security or public order of the State; and
- a third country undertaking or a person so connected to a third country undertaking is acquiring/changing the extent to which it has:
- control of an Irish asset;
- control of or an interest in an Irish undertaking;
- legal rights in relation to an Irish person/asset/undertaking;
- the ability to exercise effective participation in the management or control of an Irish undertaking; or
- the ability to exercise control over an Irish undertaking through a change in ownership or legal structure of that undertaking.
This power of Ministerial review will also capture transactions entered into before the legislation comes into operation.
If the Minister wishes to exercise his or her power to review transactions, he or she must do so before the expiry of the following deadlines:
- in respect of a transaction which is not notified (as required), the later of:
- 5 years from completion of the transaction, or
- 6 months from when the Minister first becomes aware of the transaction;
- in respect of a transaction that is not notifiable, subject to (iii) below, no more than 15 months after the completion of the transaction; and
- regardless of whether or not the transaction is notified or notifiable, where the transaction completed more than 15 months before the legislation comes into operation.
3. The review process
Section 13 of the draft bill provides a detailed list of considerations to which the Minister must have regard to in assessing whether the transaction affects or would be likely to affect, the security or public order of the State.
These include whether or not a party to a transaction is controlled by a government of a third country (to include its state bodies and armed forces), the extent to which a party to a transaction is already involved in activities relevant to the security or public order of the State and whether or not the transaction is likely to have a negative impact in the State on the stability, reliability, continuity or safety of one or more of critical infrastructure, critical technologies and dual use items, supply of critical inputs, access to sensitive information or the freedom and pluralism of the media.
When the Minister commences his/her review of a particular transaction, he/she must as soon as practicable issue a screening notice to inform the parties to the transaction that a review is taking place. Where a screening notice is issued, and a transaction has not been completed, the transaction will be suspended until a screening decision (described below) is made.
4. The screening decision
Upon reviewing the transaction, the Minister must decide whether the “transaction affects, or would be likely to affect, the security or public order of the State” (the “screening decision”).
The Minister is required to make a screening decision on or before the later of:
- 90 days from the date on which the screening notice was issued, or
- up to 135 days from the date on which the screening notice was issued, where the Minister has informed the parties in writing within the 90 days from the issuing of the screening notice that the deadline for making the decision is being extended.
The 90/135-day review period can be suspended where the Minister issues a notice for information under section 19 of the bill.
Where the 90/135-day period has elapsed without any decision having been made, the transaction will be deemed to be subject to a screening decision to the effect that the transaction has not affected or would not be likely to affect, the security or public order of the State.
Where the Minister decides that a transaction affects or would likely affect the security of the Irish State, he/she is entitled to:
- direct the parties not to complete the transaction or take any steps to further the transaction other than subject to such conditions as the Minister may specify for the purposes of protecting the security or public order of the State; or
- direct the parties to take such actions as the Minister may specify for the purpose of protecting the security or public order of the State.
Section 18(4) of the bill provides a non-exhaustive list of examples of actions. This list includes amongst other things requiring the parties to the transaction whether jointly or separately:
- not to complete the transaction or parts of the transaction;
- to divest itself of any matter, including business, assets, shares, real property or intellectual property;
- to cease, modify or constrain its conduct or practice;
- to report to the Minister on the parties’ compliance with conditions imposed by the Minister;
- to pay to the Minister or such other person as the Minister may specify, reasonable costs associated with monitoring compliance with the conditions imposed.
5. The right to appeal the screening decision
It will be possible to appeal a screening decision to a panel of adjudicators to be appointed by the Minister and further appeal to the courts on a point of law.
It is to be hoped that the Department of Enterprise, Trade and Employment will publish detailed guidance on key elements of the legislation.
After the legislation is commenced, it will be a legal requirement for parties to a notifiable transaction to notify the Minister of the principal details of the transaction not less than 10 days before completion. Parties and advisers involved in, or funding M&A or investment transactions will need to assess whether the transaction is notifiable and if it is, factor in the cost, timing, and execution implications of the notification process.
Even if the criteria for a notifiable transaction are not fulfilled, parties should be aware that a completed/non-completed third country transaction can still be reviewed (subject to the time limits set out above).
Third country transactions completed within the 15 months prior to commencement of the Act can be reviewed by the Minister. This could have implications for proposed or ongoing transactions.
In November 2022, the UK Secretary of State for Business, Energy and Industrial Strategy exercised for the first time its power to retrospectively review a transaction which had completed prior to the commencement of the UK National Security and Investment Act 2021 on 4 January 2022. Nexperia has been ordered to divest itself of the 86 per cent shareholding it acquired in July 2021, in Newport Wafer Fab, the ‘UK’s largest semiconductor manufacturer’ on national security grounds.
In light of the similar power granted under the Irish bill to retrospectively review transactions which complete within the 15 months prior to commencement of the legislation, parties to a third country transaction should be aware of the progress of the bill as it moves through the Oireachtas and consider its potential application to the transaction.
- Sean O’Reilly is a partner in the corporate and commercial team at RDJ LLP. Trainee solicitor Michael O’Halloran also contributed to this article.