In May 2022, the Swiss Federal Council initiated the consultation procedure on a new legislation to screen foreign direct investment ("FDI") in Switzerland. The proposed FDI control regulation seeks to prevent threats to public order and security as a potential consequence of foreign investors acquiring control of Swiss companies. The consultation runs until 9 September 2022, followed by a final draft which will be deliberated in the Swiss parliament.
The Swiss government, the Federal Council, has in the past been opposed to the introduction of an FDI control regime in Switzerland, arguing that the cost-benefit ratio would be unfavorable for Switzerland and that the existing industry- and sector-specific regulatory framework was sufficient. Still, the Federal Council was obliged to prepare corresponding legislation after a binding motion in this regard was passed by the Swiss parliament.
In drafting the law, the government emphasizes that it wants to maintain Switzerland's openness and attractiveness to foreign investment and ensure the compatibility of Switzerland's FDI control regime with its international obligations. The FDI control regime aims are, therefore, to be targeted, effective and to keep administrative processes to a minimum. The regulations are further meant to be as transparent and predictable as possible, so that they provide a high degree of legal certainty and that responsibilities are clearly defined.
1. Who is affected?
Foreign investors who intend to take over a domestic company.
The preliminary draft currently includes possible alternatives regarding the definition of a Swiss domestic company, which could be a target under the draft FDI rules, i.e. either a company that is registered in the Swiss commercial register, or a company that is registered in the Swiss commercial register and is not part of a group of companies with its headquarters and head office outside Switzerland.
2. What type of transactions must be notified?
With regard to the approval requirement, a differentiation is made between foreign state or state-related investors, and foreign private investors.
Takeovers by state-owned or state-related foreign investors would generally be subject to FDI control. This includes all foreign investors directly or indirectly controlled by a foreign state agency and applies to any kind of the domestic target company, irrespective of its activities.
Takeovers by private foreign investors would only be subject to FDI control if the domestic target company operates in a sector that is critical to public order and security. In some cases, the domestic company would also have to meet a certain turnover threshold.
In addition, there is a general de minimis threshold: Companies which in the past two business years have had an average of less than 50 full-time positions and generated an annual worldwide turnover of less than CHF 10 million are not subject to FDI control.
Finally, the Federal Council may subject further categories of domestic companies to the FDI approval requirement for a maximum of 12 months if this would be necessary to ensure public order or security.
3. Which authority must be notified?
The State Secretariat for Economic Affairs ("SECO") will be responsible for carrying out the FDI control procedures as well as the coordination with the co-interested administrative units. The foreign investor must notify the SECO of the takeover before the transaction is closed. Until clearance by the SECO, the civil law effects of the transaction remain suspended and any closing prior to the clearance may trigger a sanction.
The SECO would designate the co-interested administrative units on a case-by-case basis. The State Secretariat of the Federal Department of Foreign Affairs ("FDFA") and the General Secretariat of the Federal Department of Defense, Civil Protection and Sport ("DDPS") would be deemed as co-interested units in all cases. Additionally, only federal administrative units would qualify as co-interested administrative units. The Federal Intelligence Service ("FIS") would only have the right to be heard.
4. What criteria are considered?
If there is no reason to assume that public order or security is endangered or threatened by the takeover, SECO shall approve the takeover. The assessment is to be made from an ex ante perspective and approvals may also be subject to certain remedies in the form of conditions or obligations.
The risk arising from a takeover for public order or security is understood as the product of the probability of occurrence and the potential extent of damage. In particular, the following factors are to be considered:
The foreign investor's willingness to cooperate, in current or recent FDI controls, can be taken into account in the decision. Further, a takeover may, instead of being prohibited outright, also be approved subject to conditions or requirements, which are determined on a case-by-case basis via a proportionality test.
5. What does the approval process look like?
A two-stage approval procedure is currently being considered. In phase 1, following the filing of a notification by the foreign investor, a decision is to be made by SECO within one month of reception of an FDI-application as to whether the takeover can be approved directly or whether a review procedure (i.e. phase 2) is to be initiated. A phase 2 review procedure would take a maximum of another three months.
The decision on whether the transaction can be directly approved in phase 1 must be taken by consensus among the administrative units involved (i.e. SECO and the co-interested administrative units) and after hearing the FIS. Absent an agreement by all involved units, a phase 2 review procedure would be initiated.
In case of an initiation of a phase 2 review procedure, SECO would decide in agreement with the co-interested administrative units involved and after hearing the FIS whether the takeover can be approved. If there is disagreement between the co-interested administrative units involved in a review procedure or agreement that the takeover should be prohibited, the Federal Council will need to decide whether to approve it.
On the basis of the proposed text of the draft law it appears as if the notification and authorization requirements for the proposed FDI procedure are generally defined, but there is potential room for interpretation that could lead to uncertainties on the scope of the FDI regime. Furthermore, the circumstances under which a takeover could be prohibited, remain to some extent vague. On the procedural side, while it is to be expected that an implementing ordinance will be issued, which defines the procedural details of the notification and its process, some legal uncertainty may still arise and remain until a clear practice of the competent authorities has been developed. It is also possible that the FDI control may lead to a deceleration in the process of certain takeovers in Switzerland.
It is also to be kept in mind that a takeover subject to FDI control in Switzerland may, additionally, be subject to merger control review under the Swiss Cartel Act by the Swiss Competition Commission ("ComCo"). A merger control review by ComCo would be conducted in parallel to the FDI control procedure, leading to additional administrative hurdles to overcome.
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