Adoption of FDI regulation

1. Adoption of the Luxembourg FDI law

On 14 July 2023 was adopted the law establishing a mechanism for the national screening of Foreign Direct Investments (FDI) (the Law) which transposes the European Regulation 2019/452 of 19 March 2019 establishing the same mechanism at EU level. This Law will come into force on 1st September 2023.

The Law thrives to find the right balance between maintaining the attractiveness of Luxembourg as a place for foreign investments while protecting activities the country from being the object of uncontrolled takeovers on key Luxembourg sectors affecting public order or national interests by non-EU investors. This Law will set up a filter mechanism on such FDI.

Luxembourg was one the last EU remaining countries to implement the EU Regulation 2019/452.

This Law will significantly impact the timing and proceedings of Luxembourg M&A transactions that fall into its scope. The Law will apply to any acquisition which would be signed before but effective at the date when the Law comes into force. The Law does not foresee any de minimis rule for small transactions which would not be caught by the filter mechanism of FDI.

2. Which investors are affected?

FDI are investments in Luxembourg made by any non-European resident investor (being any legal person, whether physical person or entity) only.

Out of scope are portfolio investments (investissements de portefeuille) which correspond to acquisitions of shares in a Luxembourg company carried out for the purpose of receiving a financial investment and which does not entitle the foreign investors to exercise a direct or indirect control over the Luxembourg entity.

Real estate investments, i.e. investments in Luxembourg companies holding real estate properties are also out of scope.

The definition of “control” covers two different situations. In the first one, it means the situation in which the investor is, directly or indirectly, (i) holding a majority of the voting rights of Luxembourg entity or (ii) has the right to appoint or revoke a majority of the members of the management or supervisory board of a Luxembourg entity while being a shareholder or partner of such entity or (iii) a shareholder or a partner of the Luxembourg company and controls the majority of voting rights under a shareholders agreement entered into with other shareholders/partners of the entity.

In the second situation, the mere crossing (franchissement de seuil) of the 25% threshold in the holding of the voting rights of a Luxembourg entity is also in itself sufficient to be caught by the definition of control. By referring to a 25 % threshold of the voting rights and not of the subscribed capital, the Law aims to catch non-EU shareholders with minimum capital but exercising substantial voting rights.

Although the definition of “control” does not expressly include the possibility of meeting the threshold of 25% of the voting rights by a group of persons acting in concert (agissant de concert), it seems that such threshold can be met not only by one non-EU investor acting alone but also when acting in concert with other investors. The definition of FDI given by the Law encompasses investments by non-EU investors aiming at reaching or maintaining long lasting relationship between such investor and a Luxembourg company which enable the said investor “to participate alone, in concert or by interposition in the control” of the said Luxembourg target company.

Another question that can be raised is the treatment of (i) Luxembourg entities having certain branches (succursales) abroad and especially outside the European Union and the European Economic Area, or (ii) in the process of merger with a non-EU company.

3. What are the high-risk sectors targeted by the law?

The Law lists 12 sectors and four categories of related ancillary activities ranging from energy to defense, data processing and storage, water, aerospace, health, transport, finance, the media but also the financial sector linked to the activities of the central bank or linked to the financial infrastructure...

The very broad scope of some sectors could be problematic, as duly pointed out by the Luxembourg fund industry association (ALFI) or the Chamber of Commerce. In particular, the Law refers to ancillary activities (activités connexes) likely to enable access to sensitive information or restricted areas in relation to those protected industries but does not give any definition of what can be considered as “activités connexes”. About the defense sector, it has been criticized for not having covered cybersecurity-related activities.

4. Procedure - Notification and screening and timing

Before anything, each potential non-EU investor must assess if its target investment in Luxembourg could qualify as a FDI. If it believes it might, it must notify its contemplated transaction to the relevant Luxembourg authorities.

Concerned transactions must be notified to the Minister of Economy, who will have the power to decide whether to start a screening procedure with the help of an inter-ministerial committee. After having received the request, once it is deemed complete, the Minister must take his/her decision within 2months. During this notification period the investment is not suspended, which suggests that the investor can initiate its investment with the possibility that it could be rejected by the Minister.

Note that there is no specific timeframe or guidance as to when the Minister should be notified of the said contemplated transaction other than the fact that it must be done before foreign direct investment becomes effective. This would necessarily be before the closing date of the acquisition and likely around signing.

Once notified, if the minister gives a negative clearance, a screening procedure is launched. This filtering procedure lasts for a period of 60 days. During this period, the contemplated transaction is blocked and cannot have any effect. The Law compels the Minister to take into consideration at least 5 key criteria for assessing his/her screening, such as for instance the possible negative impact to the integrity, security, and continuity of the supply of critical infrastructures, sustainability of activities related to critical technologies and dual-use goods, supply of essential inputs like raw material and food, access to sensitive information. Other factors can of course be considered, the Minister keeping some discretionary power while respecting the principle of proportionality.

Alike the Chamber of commerce, one can criticize this 2-month period as being too long save for complex cases. Above all, once this -month period has lapsed, there is no tacit approval of the transaction.

5. What are the penalties?

In the event of a failure to comply with the notification requirement, the Minister may suspend the voting rights related to the investment exceeding the 25% voting rights threshold. Such suspension may however be lifted if the investor begins a regularization. Where the right to vote has been exercised in defiance of the suspension, the court may, at the request of a shareholder or a third party with an interest, annul the decision of the general meeting.

If the conditions under which the Minister gives his/her authorization are not met, the Minister may order the foreign investor to comply with such conditions within a certain period of time and may suspend the exercise of voting rights exceeding the 25% threshold until due compliance.

The Minister must notify the foreign investor in writing of any injunction measures. The investor has 15 days to make certain observations. On the expiry of a period of 30 days following the notification of injunctions measures or conditions by the Minister, the Minister may sentence a fine of up to € 1,000,000 for the individual investor and € 5,000,000 for investors being legal entities.

If the fine is contested, it must be appealed against within one month of its notification.

6. Conclusion

The Law aligns Luxembourg to other EU countries in terms of procedure and sectors concerned.

In Luxembourg, the FDI Law has a very wide scope not only because of the number and categories of strategic sectors concerned but also because of the definition of control associated with the one of FDI and the absence of any de minimis rule. It is questionable whether such scope will discourage foreign investors in small transactions.

All no-EU investors contemplating investments granting more than 25% of the voting rights in Luxembourg strategic companies are strongly advised to make an upstream assessment of their targeted investment.

However, it is anticipated to have a minor impact on the Luxembourg economy. Experience abroad reveals that FDI formal screenings are applied to a limited number of transactions and an even more limited number of transactions have been blocked (2% of investments were blocked in 2020 at European level).