Federal Council publishes Preliminary Draft Regulation for Swiss Investment Control

On 18 May 2022, the Swiss Federal Council opened the consultation process for a new Federal Act on Foreign Direct Investment Control. It is proposed to introduce a notification and approval requirement for certain takeovers of domestic undertakings. The focus is on state-owned and state-related foreign investors. However, in certain particularly security-relevant sectors, private investors may also be subject to the notification and approval requirement. This article provides an overview of the most important provisions of the Preliminary Draft of the Federal Act on Foreign Direct Investment Control, followed by a brief appraisal and an outlook. The consultation ends on 9 September 2022.

Initial situation

Switzerland is one of the world’s largest recipients of direct investment in terms of capital stock (over CHF 1,200 billion in 2020 according to the Swiss National Bank). This is due in particular to the attractiveness of Switzerland as a business location, but also to an open policy towards foreign investment. Switzerland does not yet have an investment control system, i.e. a procedure for the systematic review of foreign investment projects in domestic undertakings, as has now been introduced in numerous larger economies.

In February 2019, the Federal Council opposed the introduction of investment controls in its report on Cross-border Investments and Investment Controls, arguing that the overall cost-benefit ratio was unfavourable and that the existing legal foundations already addressed any risks. With the adoption of the Rieder Motion «Protection of the Swiss economy through investment controls» (18.3021) the Federal Council was nevertheless instructed by the Swiss Parliament in March 2020 to draft the legal basis for a Swiss investment control regime. On 25 August 2021, the Federal Council already presented the key principles for a corresponding act in a media release (see our article here).

On 18 May 2022, it opened the consultation on the Preliminary Draft of the Federal Act on Foreign Direct Investment Control (Preliminary Draft or PD-FDI), which it published together with an Explanatory Report and a Regulatory Impact Assessment. Due to the unchanged initial situation, the Federal Council is still opposed to the introduction of an investment control.

 The most important provisions of the Preliminary Draft at a glance

Introduction of a notification and approval requirement

The purpose of the PD-FDI is to prevent takeovers of domestic undertakings by foreign investors that endanger or threaten the public order or security of Switzerland (art. 1 PD-FDI). To this end, the Preliminary Draft provides for a notification and approval requirement for certain takeovers by foreign investors prior to their closing.

Notification thresholds (pick-up criteria)

Apart from takeovers within the de minimis threshold pursuant to art. 4 para. 2 PD-FDI, the notification and approval requirement applies to all takeovers of domestic undertakings by state-owned or state-related foreign investors, i.e. investors that are directly or indirectly controlled by a state body (art. 4 para. 1 lit. a PD-FDI). These are the focus of the planned investment control.

In addition, in particularly security-relevant sectors, takeovers by private foreign investors are also subject to the notification and approval requirement, partly depending on whether the notification threshold of CHF 100 million annual turnover (or gross earnings in the case of banks) is reached cumulatively (art. 4 para. 1 lit. b and c PD-FDI). This concerns in particular:

• Producers of military equipment and of so-called dual-use goods that can be used for both civilian and military purposes;
  
  
• Undertakings that operate critical infrastructures (e.g. certain electricity, gas and water suppliers, telecommunications providers, railway companies, providers of security-relevant IT systems, hospitals, operators of central transport hubs like the Geneva and Zurich airports, certain food distribution centers as well as systemically important banks and other systemically important financial market infrastructures); and
  
  
• Certain manufacturers of medicines, medical products or vaccines.
  
  

Takeover of domestic undertakings that have had an average of less than 50 full-time employees and a worldwide annual turnover of less than CHF 10 million in the past two business years are not subject to approval (de minimis threshold pursuant toart. 4 para. 2 PD-FDI; for a schematic overview of the thresholds, see Table 1 below).

Table 1: Schematic overview of the notification thresholds.

A «takeover» is defined as any process by which one or more investors directly or indirectly acquire control over an undertaking or parts thereof, in particular by merger, takeover of a participation or significant assets, or by conclusion of a contract (art. 3 lit. a PD-FDI).

The term «undertaking» is understood to mean any buyer or supplier of goods and services in the economic process, irrespective of the legal or organisational form (art. 3 lit. b PD-FDI).

The Preliminary Draft proposes two alternative legal definitions for the term «domestic undertaking» (art. 3 lit. c PD-FDI):

• An undertaking that is registered in the Swiss Commercial Register (variant 1); or, more narrowly formulated,
  
  
• an undertaking that is registered in the Swiss Commercial Register and is not part of a group of undertakings with headquarters and head office outside Switzerland (variant 2).
  
  

A «foreign investor» is a person who intends to take over a domestic enterprise and (art. 3 lit. d PD-FDI):

• is an undertaking with its headquarters and head office outside Switzerland;
  
  
• is an undertaking with assets controlled by one or more persons abroad or by another state; or
  
  
• is a natural person without Swiss citizenship who acts as a direct investor.
  
  

Natural persons from EU/EFTA Member States who intend to take over a domestic undertaking on the basis of the Agreement of 21 June 1999 between Switzerland, of the one part, and the European Community and its Member States, of the other, on the free movement of persons (Agreement on the free movement of persons between Switzerland and the EU) or the Convention of 4 January 1960 establishing the European Free Trade Association (EFTA) (EFTA Convention) in order to be able to pursue a self-employed activity in Switzerland are not considered foreign investors.

Approval criteria (intervention criteria)

According to the Preliminary Draft, the State Secretariat for Economic Affairs (SECO), as the competent authority, approves takeovers if there is no reason to assume that public order or security is endangered or threatened by the takeover (art. 5 para. 1 PD-FDI; cf. the two-stage approval procedure below).

The risk from a takeover for public order or security is understood as the product of the probability of occurrence and the potential extent of damage. According to the Explanatory Report, if one of these variables approaches zero, the risk from a takeover also tends towards zero. According to the Preliminary Draft, when assessing the risk, SECO must take into account in particular whether (art. 5 para. 2 PD-FDI):

• the foreign investor engages or has engaged in activities that are or have been detrimental to the public policy or security of Switzerland or other states;
  
  
• the foreign investor or its home state has attempted or is attempting to acquire information about the domestic undertaking by means of espionage;
  
  
• the foreign investor engages in or has engaged in espionage;
  
  
• sanctions have been imposed directly or indirectly on the foreign investor under the Embargo Act of 22 March 2002;
  
  
• the services, products or infrastructure of the domestic undertaking can be replacedwithin a reasonable period of time;
  
  
• the foreign investor gains access to central security-relevant information or to data requiring special protection under the Federal Act on Data Protection of 19 June 1992 as a result of the takeover; and
  
  
• significant distortions of competition result from the takeover.
  
  

These criteria are not an exhaustive list. In addition, the foreign investor’s willingness to cooperate with the authorities may be taken into account in the decision (art. 5 para. 3 PD-FDI).

Instead of prohibiting a takeover, it may be made subject to appropriate types of requirements or conditions, provided that the threat or endangerment to public policy or public security is thereby eliminated (art. 5 para. 4 PD-FDI).

 Two-stage approval procedure

The foreign investor must submit an application to SECO prior to the execution of the takeover (art. 6 para. 1 PD-FDI). This is followed by a two-stage examination procedure:

• Phase I: Upon receipt of the (complete) application, SECO decides within onemonth, in consultation with the co-interested administrative units and after hearing the Federal Intelligence Service (FIS), whether the takeover can be approved directly or whether a review procedure is to be initiated (art. 7 para. 1 PD-FDI).
  
  
• Phase II: If an in-depth examination procedure is initiated, SECO decides in agreement with the co-interested administrative units involved and after hearing the FIS within three months of the initiation whether the takeover is approved (art. 8 para. 1 PD-FDI).
  
  

The Federal Council shall decide on approval at the request of the Federal Department of Economic Affairs, Education and Research (EAER) if:

• SECO or a co-interested administrative unit opposes approval of the takeover (art. 8 para. 2 lit. a PD-FDI); or
  
  
• SECO and the co-interested administrative units are of the opinion that the decision is of considerable political significance (art. 8 para. 2 lit. b PD-FDI).
  
  

In principle, the decision of the Federal Council should be taken within the three-month period pursuant to art. 8 para. 1 PD-FDI. However, it is possible that no Federal Council meeting will be held at the end of this period (e.g. in summer or at the end of December/beginning of January). For this reason, art. 8 para. 3 PD-FDI provides that the Federal Council must decide on a takeover at the latest on the occasion of the first ordinary Federal Council meeting held after the expiry of the three-month period. This may lead to further delays for the parties to the transaction.

Administrative measures and sanctions

If a takeover requiring approval is executed without approval, the Federal Council may order the necessary administrative measures to restore the proper state of affairs (in particular divestments as ultima ratio; art. 17 PD-FDI).

In addition, a fine of up to 10% of the value of the transaction is to be imposed on whoever (art. 18 para. 1 PD-FDI):

• completes a takeover subject to approval without approval;
  
  
• completes a takeover that was approved on the basis of intentionally made false statements and is prohibited after reconsideration; or
  
  
• fails to carry out a measure to restore the proper condition.
  
  

The sanction addressee is the respective foreign investor.

 Appraisal and outlook

Whether a Swiss investment control should be introduced is a political question. From our point of view, however, we welcome the fact that the Preliminary Draft is limited to the protection of public order and security and that the investment control is not intended to pursue other regulatory objectives such as the protection of certain industries or technologies or the prevention of the loss of jobs or know-how. In other respects, too, the Federal Council has succeeded with the Preliminary Draft in producing a regulatory proposal that is lean by international standards and limited to what is necessary. The approval criteria for transactions subject to approval nevertheless appear vague and unclear. In the interest of legal certainty and predictability, these should be formulated more clearly – as far as this is possible without excessively restricting the discretionary powers of the authorities. Furthermore, it is then up to SECO’s practice to quickly provide clarity in this regard.

If the Federal Act on Foreign Invest Control were to be introduced as envisaged, there would be an additional notification and approval requirement for certain transactions in addition to those under merger control law. In this case, other notification thresholds and approval criteria would apply. For the undertakings concerned (in particular the buyers, but also the sellers and target undertaking), this means a considerable additional effort and, depending on the case, an additional delay of the transaction.

The consultation period ends on 9 September 2022, after which the Swiss Parliament will debate the introduction of a Swiss investment control.