A draft bill currently being considered in the grand duchy’s parliament would create a vetting mechanism for non-EU firms that want to take a controlling stake of Luxembourg companies in “critical” sectors. Three competition lawyers told Paperjam+Delano Finance that would likely bring clarity to M&A transactions involving non-EU investors and would likely have a minimal impact on Luxembourg’s funds sector.

Luxembourg lawmakers started working on the legislation following the passage of an EU regulation calling for all member states to implement foreign direct investment screening procedures. The guidelines do not apply to investments made between EU member states. Paperjam+Delano Finance understands the rules are a response to high profile acquisitions by Chinese and Russian players in recent years.

The draft bill identified energy, transport, water, health, communications, technology, aerospace, defence, finance and media as critical sectors.

What European bills are trying to accomplish

, partner specialised in EU competition law at Elvinger Hoss Prussen, said in an interview that FDI is “a sensitive topic” in the grand duchy. (Gloden is also an MP for the CSV party.) “On the one hand side, as a small country, we need foreign investment.... but on the other hand, we have also to protect our major infrastructure”, such as the financial centre, military logistics facilities and the airport. “It’s a balancing act for us.”

The proposed rules would only apply to controlling stakes in a Luxembourg company or infrastructure project. “So, if a third country company takes just 10%, it would not fall within the scope of the law,” Gloden stated. And that control must “affect the country’s infrastructure or the economy in such a way that we lose control over it, so that we cannot easily act in case of urgency or in case of serious financial or economic crisis.” He added that “our law will be based on the EU regulatory framework”.

‘Respectability’

In general such review procedures aim to establish “how acceptable the shareholders and the managers of the acquiring company are,” said , partner in charge of the EU financial and competition law practice at Arendt & Medernach. The objective is to find out “are they respectable or not? Because, once the acquisition is done, there is a risk of influence over the national economy. And there is the risk, to some extent, of some ‘conducts’ and perhaps economic criminality.”

In addition, certain countries may want “to keep control by national and EU companies over some sectors considered particularly promising or strategic,” Partsch said in an interview.

An investor could be deemed unsuitable if “it is an entity that is considered to be controlled by a non-EU government” that will, for example, dominate a particular technology or has “a past track record of handling certain activities” that raises flags, said Katrien Veranneman, counsel at Elvinger Hoss Prussen.

Positive points

There is an upside to this type of law: clearer rules will be put in place. “The fact of having an ex-ante control, before the completion of the investment, is a good thing, because once the investor is within the market, it is rather difficult to get them out,” said Partsch. Post-transaction unwindings could pose a risk to the national economy, to the company’s infrastructure and operations, and the “litigation can last” for an extended period.

He cited the principle that “it is better to prevent than to cure.”

Negative aspects

On the flip side, “depending on the country, the list of economic sectors considered sensitive or strategic can be extensive and even too extensive,” said Partsch. He pointed to the French government objecting to the acquisition of the Carrefour retail group by a Canadian outfit, resulting in the deal getting dropped last year.

At the same time, a “burdensome regime” will “discourage small acquisitions because it will represent too high a cost for the acquirer,” Partsch said.

Impact on investment fund sector

Last year, the Association of the Luxembourg Fund Industry concerns that “the scope of the draft law is extremely large.... Without clearer guidelines, every investment done in Luxembourg by a non-EEA person or undertaking taking ‘control’ of a Luxemburg entity might be subject to the screening mechanism.”

The three lawyers that Paperjam+Delano Finance spoke with downplayed that risk.

Financial firms themselves already are subject to regulatory supervision and any takeover must be approved in advance by its regulator, Partsch noted. The draft bill does nothing to change that current setup.

As for fund investments, the ‘portfolio investment’ clause means the FDI screening mechanism would not apply to Ucits retail fund holdings, Partsch and Veranneman both stated.

Private equity fund investments potentially fall under the legislation. But private equity funds based outside the EU rarely “acquire targets in Luxembourg,” Partsch observed.

Asked about the property sector, Partsch replied: “Now, that’s interesting. Real estate is not listed for the time being, whereas it is the second most important economic sector in Luxembourg. But that is telling. That shows that it’s not the necessarily the economic power of the target which is decisive or not.”

Few cases blocked

Veranneman said in an interview that fears about the FDI screening rules may be overblown. “From beginning of September” of this year, the number of “blocked transactions throughout the EU was only 1% of all the cases” where these types of FDI rules already apply and a decision was taken, she said. “It’s a very limited number where it actually leads to blocking of the deal.”

The bill is likely to face final committee and floor votes by the end of the year.

This article was published for the Paperjam+Delano Finance newsletter, the weekly source for financial news in Luxembourg. .