The Italian foreign direct investment (FDI) regime was introduced in 2012 following a decision of the Court of Justice of the European Union stating that the rules in force at that time were not in line with the EU principles on free movement of capital.
The FDI rules attribute special powers to the Italian authorities, including the power to impose conditions and, in certain cases, to prohibit acquisitions or resolutions to protect strategic assets in several industrial sectors.
The sectors under scrutiny during 2012 were defence and national security, energy, transportation and communications. In the following years, the scope of FDI rules has been expanded with the aim of complying with EU FDI Screening Regulation and to reflect the effects of the covid-19 pandemic.
Overview of the Italian FDI regime
Decree Law No. 21 of 15 March 2012 (Rules on special powers on corporate structures in the defence and national security sectors, and for activities of strategic importance in the energy, transport and communications sectors (the FDI Decree)) outlines the rules under which the Italian government is entitled to exercise its special powers to prohibit, or impose remedies on, acquisitions and corporate transactions concerning companies owning any assets that are deemed strategic for Italy.
Specifically, the FDI Decree enables the Prime Minister to exercise these special powers with reference to companies (1) that carry out activities deemed to be of strategic importance in the defence and national security sectors, including 5G-based broadband electronic communications services and (2) holding assets deemed to be of strategic importance in the fields of energy, transport and communications.
In this context, the government has adopted several measures with the aim of specifying the strategic activities included in the scope of the national security sector, as well as specific plants, networks, assets and relationships included in the energy, transport and communications sectors.
In particular, with reference to the strategic assets and activities concerning the defence and national security sectors, the use of special powers is based on the existence of a sufficiently serious threat to the essential interests of defence and national security.
The FDI Decree provides that companies that carry out activities of strategic importance in the aforementioned sectors are required to notify the Presidency of the Council of Ministers with complete information about certain resolutions or corporate acts, to allow the timely exercise of special powers by the government. In addition, the FDI Decree provides that anyone who acquires a stake in companies carrying out activities of strategic importance in the defence and national security sectors is required to file a notification to the Presidency of the Council of Ministers. If the acquisition relates to shares of a company admitted to trading on regulated markets, the notification must be made if the buyer comes to hold, following the acquisition, stakes exceeding certain thresholds as set by law.
Prime Minister Decree No. 108 of 6 June 2014 sets out a detailed list of the activities of strategic importance to the national defence and security system, consisting of the study, research, design, development, production, integration and support to the life cycle (including logistics) of, among other things:
- certain systems and materials (including command, control, computer and information (C4I) systems, advanced weapons and aeronautical systems, aerospace and military naval propulsion systems);
- specific technologies (including stealth technologies and nanotechnologies);
- systems and sensors to be employed for observation purposes, monitoring and control of the territory to protect public security, public rescue and civil defence;
- ballistic protection systems;
- information and communication systems, including any satellite-based systems, and systems for the collection, classification and management of information and data developed and employed for civil defence protection purposes; and
- connections used to establish and ensure the operation of inter-police networks employed by police forces and the Ministry of Defence.
With reference to strategic assets for the energy, transport and communications sectors, the use of special powers is based on the existence of a sufficiently serious threat to public interests relating to the safety and operation of networks and plants and the continuity of supplies. In this respect, the FDI Decree provides that the resolutions, deeds and transactions carried out by companies that hold strategic assets in the aforementioned sectors must be notified to the Presidency of the Council of Ministers, and that the purchase by a non-EU party of stakes in companies that hold strategic assets in the aforementioned sectors, of such importance as to determine a stable establishment of the buyer in the company, must be notified to the Presidency of the Council of Ministers.
Decree Law No. 105 of 21 September 2019 has further expanded the parameters outlined by Article 2 of the FDI Decree. Specifically, the 2019 Decree has identified the following strategic assets:
- energy networks of national interest (including the national network for the transportation of natural gas and gas storage facilities; the infrastructure for the supply of gas from non-EU countries, and onshore and offshore regasification plants; and the national network for the transmission of electricity);
- large transport networks and national interest facilities (including ports and airports of national interest and the rail network relevant to the trans-European rail networks); and
- telecommunications networks (including both dedicated networks and public telecommunications networks ensuring the connection of end users to the metropolitan area telecommunications networks, service routers, long-distance telecommunications networks, and the telecommunications facilities used to provide a universal telecommunications service to end users, as well as broadband and ultra-broadband services and related contractual relationships).
With reference to 5G-based broadband electronic communications services, the regulations are contained in Article 1-bis of FDI Decree, introduced by Decree Law No. 22 of 25 March 2019.
A company that proposes to acquire goods or services relating to the design, construction, maintenance and management of networks for broadband electronic communication services based on 5G technology, when put in place with subjects outside the European Union, must submit a notification pursuant to FDI legislation. In addition, the law specifies also that the acquisition of high-technology components that are necessary for the construction, maintenance and management of networks for broadband electronic communication services based on 5G technology are subject to notification.
As part of the emergency measures adopted following the outbreak of the covid-19 pandemic, the scope of strategic assets and activities was extended to include certain additional strategic assets and relationships within the scope of the FDI Screening Regulation.
Law No. 176 of 18 December 2020 extended the temporary regime until 31 December 2021. As a result, the transactions described below will continue to be subject to the FDI regime until 31 December 2021:
- resolutions and transactions by entities (from both EU Member States and outside the European Union (EU)) holding strategic assets in the energy, transportation, communications and high-technology sectors, resulting in a change of control, change of ownership or change of use with respect to those strategic assets or activities;
- acquisitions of shareholdings by non-EU entities, in which the target is a company holding strategic assets in the energy, transportation, communications and high-technology sectors, resulting in the acquisition of at least 10 per cent of share capital or voting rights, provided that the total investment value is equal to or higher than €1 million (the minimum investment threshold, however, does not apply, when the holding thresholds of 15 per cent, 20 per cent, 25 per cent and 50 per cent are exceeded); and
- acquisitions of shareholdings by EU or non-EU entities in companies holding strategic assets in the energy, transportation, communications and high-technology sectors, resulting in a change of control of the target.
As a consequence, the FDI Decree, as amended pursuant to the covid-19 regulation, currently provides that the government, to assess the existence of a threat to security and public order, including any possible risk to the security and operation of networks and plants and the continuity of supplies, is charged with identifying additional strategic assets and relationships in the following sectors:
- critical infrastructure, whether physical or virtual, including energy, transportation, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructures, and sensitive facilities, as well as land and real estate that is crucial for the use of such infrastructure;
- critical technologies and dual-use items, setting up a community regime for the control of exports, transfer, brokering and transit of dual-use items, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum technology 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 that information; and
- the freedom and pluralism of the media.
In this respect, the Italian Prime Minister issued:
- Decree No. 179 of 18 December 2020, identifying assets and relationships of strategic importance for the national interest, in addition to those identified pursuant to the FDI Decree; and
- Decree No. 180 of 18 December 2020, updating the list of strategic assets and activities in the energy, transportation and communications sectors.
In particular, Decree No. 179 aims to set out in more detail the scope of application of FDI regulation by identifying specific critical assets and strategic activities in all the sectors other than those already identified by the regulations for energy, transportation and communications and introducing, in certain cases, a specific materiality threshold relating to the target (i.e., an annual net turnover of at least €300 million and an average annual number of employees of at least 250).
Decree No. 180, while substantially reflecting the previously applicable provisions in terms of definition of the strategic sectors, updates the list of strategic assets by adding, as for the energy sector, the fundamental real estate properties that are essential for the use of strategic networks and facilities, and for the transport sector, spaceports, freight villages, roads and highways of national relevance.
The notification process
The notification of transactions and resolutions within the scope of the FDI regulation must be made in advance to the Presidency of Council of Ministers. Specifically, FDI regulation imposes an obligation to notify the government of:
- resolutions adopted or actions or transactions entered into by a company performing any strategic security activity or holding any strategic asset within 10 days and, in any event, prior to their implementation;
- purchases of interests in any company performing any strategic security activity or holding any strategic asset within 10 days of the acquisition and, in any event, prior to their implementation; and
- agreements relating to 5G assets or services within 10 days of execution.
Notifications must be made using the templates and forms as issued by the central government. Following notification, the general administrative coordination department of central government starts the review process.
The final decision on the use of the government’s special powers is taken with a decree of the President of the Council of Ministers, adopted in the context of a meeting of the Council of Ministers in which the competent ministries are involved, and is based on an assessment of whether the notified transaction leads to actual or potential threats to national security and public order.
There are general criteria that must be considered during the review process, but the assessment entails a relevant degree of discretion.
The duration of the review process varies depending on the strategic sector involved. In all strategic sectors (other than 5G technologies), the government has 45 days to carry out its review; in the 5G technologies sector, the duration is 30 days.
If the original notification is not complete, the initial review term starts only once the missing information or documents have been provided.
In all cases, the initial term may be suspended only once, for up to 10 days, if the government requests additional information from the interested entity, or for up to 20 days if the government requests additional information or makes enquiries of third parties.
If the government decides not to exercise its powers by the end of the standstill period or fails to make a decision, the proposed transaction can proceed.
Powers of the Presidency of the Council of Ministers
In the context of FDI regulation, the Presidency of the Council on Ministers has the following powers:
- In the defence and national security sector: (1) to impose specific conditions and requirements, which are a condition of proceeding with the transaction; (2) to prohibit the notified company resolution; and (3) to oppose the notified purchase of stakes.
- In the 5G technology sector: to prohibit, or impose specific conditions on, the signing and performance of relevant contracts or agreements.
- In the energy, transportation and communications sectors: (1) to prohibit the notified company resolution, action or transaction; (2) to make the notified purchase subject to the investor being obliged to undertake certain commitments with the aim of protecting the relevant public interests. The government may also veto these types of transactions if an acquisition represents an exceptional and serious threat to public interests.
With reference to the specific conditions and requirements that may be imposed, the government has full discretion in identifying the related scope and intensity. In fact, an analysis of cases in which the Italian government has imposed conditions in the past few years shows that these conditions are specific to the case under scrutiny. The following are two examples:
- When reviewing the transfer to a Malaysian company of a business branch producing radio components used in the military and defence fields, the government imposed (1) the adoption of management, organisational and technical solutions that guarantee the maintenance of control in Italy of research and development activities, and (2) the appointment of an executive with Italian citizenship who will have to ensure compliance with the legislation on production, export, transit, use, traceability, registration and archiving of armament components.
- When reviewing a resolution of a shareholders’ meeting of TIM SpA relating to the acknowledgment of the start of management and coordination activities by Vivendi SA, the government imposed on TIM SpA (1) the adoption of adequate plans, in terms of development, investment and maintenance of the networks and plants, to ensure their functioning and integrity and to guarantee continuity of the supply of telecommunications services to users and (2) the implementation of technical and organisational risk management measures with the aim of guaranteeing the integrity and security of the networks.
In the event of failure to notify a transaction, the government is entitled to use its powers to commence the procedure to screen the transaction. In such cases, the review is commenced once a violation of the notification obligations is ascertained with an administrative provision and the term for exercising the special powers starts on the date of issuance of that provision.
In the event of non-compliance with the government’s decisions following the review process or failure to make the initial notification, the consequences vary depending on the strategic sector and type of transaction.
For acquisitions of shares in companies that are active or hold assets in a strategic sector (excluding the 5G technology sector), voting rights attached to the shares are suspended pending compliance with the obligations imposed by the government. The practical consequence is that the owner of the shares whose voting rights have been suspended is not entitled to participate in, or to vote for, the adoption of any company resolution, under penalty of nullity of the resolution if the use of those voting rights was decisive in the resolution being adopted.
Moreover, the infringing party is subject to administrative fines of up to twice the value of the transaction and, in any event, not less than 1 per cent of the aggregate turnover of the involved companies resulting from the last approved balance sheet.
When a completed transaction is prohibited, the government may order the investor to sell the shares within one year. Pending the sale process, the investor cannot exercise the voting rights and, therefore, is not entitled to participate in, or to vote for, the adoption of any company resolution, under penalty of nullity of the resolution if that investor’s vote was decisive in the resolution being adopted.
Transactions, actions or corporate resolutions adopted and implemented in breach of the Italian FDI rules are also null and void and the government may order the infringing entity or individual to unwind the transaction at its own expense.
With reference to agreements relating to 5G technology, if an agreement has already been carried out or is being carried out at the time the government exercises its powers, the government may order the company that acquired the 5G-related product or service to unwind the transaction at its own expense.
In addition, if a company that is active or holds assets in the 5G technology sector breaches its notification obligation or fails to comply with the conditions prescribed by the government, it may be sanctioned with a fine of an amount to be determined of between 25 per cent and 150 per cent of the transaction value.
Enforcement practice and current trends
The extent to which the government has used its special powers in recent years has increased substantially, following an increase in the number of notifications: 30 in 2017, 46 in 2018, 83 in 2019 (the first year after the inclusion of 5G technology in the scope of FDI regulation), and 342 in 2020.
The covid-19 pandemic has forced the government to rethink the scope of national security and the scope of the FDI regime: specifically, during the covid-19 pandemic, the FDI regime was extended to cover not only sensitive sectors such as emerging technologies and 5G, but also pharmaceuticals, biomedicals and agriculture-food.
This is the picture emerging from a new Report to Parliament on the use of its special powers in 2020.
As for the outcome of the review processes, the Report shows that the majority of investigations are cleared by the government, including, in 2020, 40 with the imposition of conditions, 43 with a simplified procedure and 92 without any use of special powers.
The government has prohibited a transaction in just two cases: (1) on 23 October 2020, with reference to a contract for the 5G network between Fastweb SpA (an Italian telcommunications company) and Huawei; and (2) the purchase by Shenzhen Invenland Holdings of 70 per cent of LPE SpA, a small Italian company specialising in the production of microchips.
Given the recent changes to the FDI regime, and in particular its expanded scope, it is important to draw the attention of investors to the necessity to carefully assess whether a target falls within the scope of application of FDI regulation and to adopt a prudent approach. In this context, it is important to:
- anticipate as much as possible the analysis of the FDI application;
- carefully draft the notification to reduce the risk of suspension of the duration of the review process;
- consider the expanded scope of transactions subject to screening on a temporary basis until 31 December 2021; and
- draft the share purchase agreements, including regulatory clearance closing conditions, that clearly take into account the latest timelines and conditions relating to FDI regulation, possibly agreeing on the consequences of changes in the applicable laws between the signing and the closing.
1 Damiano Lipani and Luigi Mazzoncini are partners at Lipani Catricalà & Partners.
2 Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union.
3 Decree Law No. 21 of 15 March 2012 [FDI Decree], Articles 1 and 1-bis.
4 id., Article 2.
5 See id., Article 1, Paragraph 4.
6 See id., Article 1, Paragraph 5.
7 The law provides that the notification must be made whenever the buyer acquires a stake exceeding 3 per cent of the share capital of the target company. In addition, the buyer must notify any subsequent acquisition by which the participation exceeds 5 per cent, 10 per cent, 15 per cent, 20 per cent, 25 per cent and 50 per cent of the share capital of the target.
8 See FDI Decree, Article 2, Paragraph 2.
9 A stable establishment is assumed when the buyer acquires a stake that enables control of the target company.
10 See FDI Decree, Article 2, Paragraph 5.
11 See Article 10-ter.
12 Defined in Article 2, Paragraph 1 of Council Regulation (EC) No. 428/2009 of 5 May 2009 as ‘items, including software and technology, which can be used for both civil and military purposes, and shall include all goods which can be used for both non-explosive uses and assisting in any way in the manufacture of nuclear weapons or other nuclear explosive devices’).
13 The government provision containing the conditions and requirements must also (1) provide for specific criteria and methods of monitoring, (2) indicate the office in charge of carrying out the monitoring, and (3) specify the penalties in the event of non-compliance.
14 Thales Italia S.p.A. case – Decree of the Presidency of the Council of Ministers of 14 July 2016.
15 TIM S.p.A. case – Decree of the Presidency of the Council of Ministers of 2 November 2017.