«They say things are happening at the border, but nobody knows which border» (Mark Strand)
by Lorenzo Locci and Pablo Velázquez
Abstract: This paper briefly analyzes the Italian and European regulation on Foreign Direct Investments and the possibility of strengthening such measures in order to avoid the risks of buy-out of each country’s economy by foreign investors.
In this scenario, we also provide a brief overview of the FDI control measures implemented in certain South and Latin American countries, which should promote FDI in order to close the productive and social gaps in the region by means of the integration processes between economies in the world.
Summary: 1. Introduction. – 2.The discipline of the Italian “Golden Powers” in the sector of national defense and security. – 3. … and in the energy, transport and communication sectors. – 4. The perspective of a new European framework on FDI screening. – 5. FDI control measures in South American countries: a general overview. – 6. Conclusion.
1. Economic liberalism – which aims at protecting market freedom with minimum government intervention – is efficient only when there is a proper balance between public intervention in the economy and the autonomous functioning of the market.
In particular, public intervention in economy should aim at establishing a solid and healthy economic environment by providing rules which regulate the activity of all the market operators involved, without precluding the possibility for one country to grow through the implementation of integration processes and trades with foreign countries (this is particularly true for developing countries).
In this perspective, statistics of the last decades show that Foreign Direct Investments (FDI) have been considered crucial to achieve such objective. More specifically, Foreign Direct investments are defined as “a category of cross-border investment made by the direct investor with the objective of establishing a lasting interest in an enterprise that is resident in an economy other than his. The main motivation of this person is to exert some degree of influence over the management of its direct investment enterprise. The motivation to that influence or control an enterprise is the underlying factor that differentiates direct investment from cross-border portfolio investments”.
FDI represent a key element in the evolving process of international economic integration and globalization due, at least, to the following reasons:
That said, we are now assisting worldwide to a renewed tension between market globalization, on the one hand, and the strengthening of populist positions and sovereign logics, on the other hand, both aimed at bringing back to light national-statist concepts which imply a return to a full sovereignty of each nation in the believe that the welfare of one country depends on the possibility for that country to autonomously determine the management guidelines of its economy.
In this scenario, the recent trend shows an increasing use by governments – inside and outside Europe – of foreign investment control measures which aim at safeguarding national security and avoiding the buy-out of each State’s economy (so called “Golden Powers”). As a consequence, any cross-border M&A practice which involves target companies located in countries where Golden Powers exist and are frequently used needs to adapt to such new regulatory environment.
Given the above, this paper first provides a short overview of the Golden Powers regulation in Italy and in Europe as a paradigm of the strengthening of such “economic neo-protectionism” focused on avoiding that public interests concerning strategic sectors could be harmed by FDI.
In comparison, the second part of the paper briefly analyzes the level of implementation of foreign investment control measures adopted in certain South and Latin American countries, who should welcome FDI in order to close the productive and social gaps in the region and to pursue the above-mentioned benefits deriving from the implementation of integration processes between economies in the world.
2. The regulation governing the special powers granted to the Italian Government in order to control FDI towards certain strategic sectors is provided by the Law Decree no. 21 dated 15 March 2012 (the “Law Decree”), converted with amendments into Law no. 56 dated 11 May 2012, as subsequently amended. The Law Decree governs the regulation of the Golden Powers by redefining their conditions and modalities of exercise by the Italian Government, in order to bring the national regulation in line with the rules provided by the “Treaty on the Functioning of the European Union”, further to the objections raised by the European Court of Justice, according to which the former provisions of law governing the matter were contrary to the European principles concerning the right of establishment, the freedom to provide services, as well as the free movement of capital.
The regulation provided by the Law Decree affects companies operating in sectors deemed strategic, regardless of a shareholding held by the Italian State in the latter companies (hence the transition from the so-called “golden share” to the “golden powers”), while providing the Government with instruments deemed proportional to the concrete envisaged risk.
More specifically, the Golden Powers regulation provides for different rules depending on whether (i) companies carrying out activities having a strategic relevance in the sector of the national defense and security are concerned (Article 1 of the Law Decree), or (ii) companies holding strategic assets in the energy, transportation and communications sectors as well as in sectors having a high technological intensity are concerned (Article 2 of the Law Decree).
With reference to the companies carrying out activities having a strategic relevance in the national defense and security sectors, the events triggering the potential exercise of the special powers are the following:
In this scenario, Article 1 of the Law Decree grants the Italian Government with certain special powers – to be exercised in case a threat of serious prejudice to the essential interests of national defense and security occurs – and namely:
In order to allow the Italian Government to evaluate whether to exercise or not the special powers provided under Article 1 of the Law Decree, the “strategic companies” (with reference to the significant resolutions) and the relevant purchaser (with reference to the significant acquisitions) are required to submit a notification in accordance with the provisions set forth under Article 1 of the Law Decree and in the Presidential Decree no. 35 of 19 February 2014. The decision concerning the exercise of the special powers shall be communicated by the Italian Government within fifteen days starting from the abovementioned notification. Once the term has elapsed, any significant acquisition or significant resolution may be implemented, even if the Government has not issued its green light. Pending the notification procedure and, in any case, the expiration of the abovementioned terms (i) the effectiveness of any significant resolution is suspended and (ii) the voting rights and the other administrative rights related to the shares representing any significant acquisition are suspended.
3. The discipline of Golden Powers provided by Article no. 2 of the Law Decree with reference to companies holding assets considered significant for the national interest in the energy, transport and communication sectors – as well as in sectors having a high technological intensity – is similar, but not coincident, in comparison to the regulation set forth under Article no. 1 of the Law Decree.
In particular, the events triggering the potential exercise of the special powers pursuant to Article no. 2 of the Law Decree consist in:
Given the described perimeter of relevant transactions considered by Article 2 of the Law Decree, the Italian Government is granted with certain special powers – to be exclusively exercised on the basis of objective and non-discriminatory criteria and having regard to the nature of the relevant transaction – and namely:
As well as for the procedure provided under Article no. 1 of the Law Decree, also Article no. 2 requires any interested company (with reference to significant transactions) and any purchaser (with reference to significant acquisitions) to submit a notification should a relevant transaction occur, in accordance with the provisions set forth under the same Article no. 2 of the Law Decree and in the already mentioned Presidential Decree no. 86 of 25 March 2014.
4. The circumstance that there is currently no comprehensive framework at the European Union level for the screening of FDI on the grounds of security or public order, while the major trading partners of the European Union have already developed such frameworks (like Italy, as briefly described above), pushed the European regulator to adopt, on 13 September 2017, a “Proposal for a Regulation of the European Parliament and of the Council establishing a framework for the screening of foreign direct investments into the European Union”.
In particular, the proposed Regulation aims at providing legal certainty for Member States’ screening mechanisms on the grounds of security and public order, and at ensuring Union-wide coordination and cooperation on such matter, without renouncing to the necessary flexibility which should be granted to each Member State in screening FDI by taking into account individual situations and national specificities. This in the believe that “foreign direct investment contributes to the Union’s growth by enhancing its competitiveness, creating jobs and economies of scale, bringing in capital, technologies, innovation, expertise, and by opening new markets for the Union’s exports. It supports the objectives of the Investment Plan for Europe and contributes to other Union projects and programs”.
In a nutshell, Article no. 1 defines the objectives pursued by the proposed Regulation, which consist in the establishment of a framework for the screening by the Member States and the Commission of foreign direct investments in the Union on the grounds of security or public order.
Art. 4 of the Regulation identifies certain elements which the Member States and the Commission may take into account in determining whether a foreign direct investment is likely to affect security or public order. In particular, they shall look at the potential effects of the FDI on, inter alia: critical infrastructure, including energy, transport, communications, data storage, space or financial infrastructure, as well as sensitive facilities; critical technologies, including artificial intelligence, robotics, semiconductors, technologies with potential dual use applications, cybersecurity, space or nuclear technology; the security of supply of critical inputs; or access to sensitive information or the ability to control sensitive information. In addition, paragraph 2 of Article no. 4 specifies that in order to determine whether a foreign direct investment is likely to affect security or public order, Member States and the Commission may take into account whether the foreign investor is controlled by the government of a third country, including through significant funding.
The proposed Regulation also aims at establishing a mechanism for cooperation according to which each Member State shall notify the Commission and the other Member States of any FDI in their territory that is undergoing screening. In this context, where the Commission considers that a FDI undergoing screening is likely to affect security or public order in more than one Member State, or has relevant information in relation to that FDI, it may issue an opinion addressed to the Member State undertaking the screening, and the Member State undertaking the screening shall give due consideration to such opinion, as well as to the comments of the other Member States (if any). In addition, the Commission may also issue an opinion with reference to FDI planned or completed in a Member State which is not undergoing screening in that Member State. Moreover, an opinion may be issued by the Commission also where it considers that a FDI is likely to affect projects or programs of Union interest on grounds of security or public order: in that case, the Commission may issue an opinion addressed to the Member State where the FDI is planned or has been completed.
5. The comparison between the regulatory framework on FDI screening currently in place in Italy and in Europe, on the hand, and the regulation adopted by certain South American countries (like Argentina, Chile, Paraguay, Colombia and Peru), on the other hand, shows that Golden Powers regulation in the latter countries is quite similar and only sometimes less invasive.
For example, all of such countries adopted provisions which aim at protecting certain strategic sectors (such as transport, electricity and telecommunications) by imposing a cap to the voting rights which may be held by a foreign investor in national strategic companies; on the other hand, no veto powers or powers of prior approval of FDI are provided by the laws and regulations of such countries.
Other South American countries, especially more developed ones such as Mexico and Brazil, impose stricter restrictions to FDI in a larger number of sectors deemed strategic, such as media, telecommunications, internal and external transportation, and energy, which sometimes are closed to FDI. For instance, Mexican law imposes restrictions to FDI in certain sectors, such as the cargo transport by rail, cargo transport by inland waterways, wireless and digital communications, infrastructure, services, life and health insurance, and higher education, while, according to Brazilian laws, foreign investors cannot held more than the 20% and 30% of the share capital of, respectively, national companies operating in the airline sector and media.
Without prejudice to the above, certain South American countries are taking initiatives to remove restrictions to FDI in order to reverse the current trend which shows a significant contraction of FDI towards such countries in the last years. In particular, the economic slowdown in the whole region, lower commodity prices and a decrease of profitability negatively affected FDI flows to Latin America and the Caribbean, in coherence with the statistics which show that, in a period of strong technological and geopolitical transformations, FDI flows to developing economies have fallen while flows to advanced economies have risen.
In this scenario, the energy transition to achieve a low-carbon economy enhanced by the Paris Agreement, adopted in December 2015, is seen as an opportunity for Latin American countries to become more attractive with respect to FDI since, according to the Renewables 2017 Global Status Report of the Renewable Energy Policy Network for the 21st Century, the Latin American and Caribbean countries are well placed to deploy renewable energies. Indeed, renewable energy project announcements have increased steadily over the past decade due to the fact that this sector attracted the most greenfield investment in 2016, with its share of the total climbing from an average of 6% for 2005-2010 to 18% in 2016, making it the fastest-growing sector in that period. Many of these developments are the result of investment by transnational corporations, led by Spanish firms including Abengoa, Iberdrola and Acciona; the Italian company, Enel; Ireland’s Mainstream Renewable Power; France’s Engie; and firms from the United States and Canada.
6. We briefly analyzed the Italian discipline on Golden Powers and the new framework on FDI screening to be established at the European Union level in order to provide an example of the recent trend which shows the strengthening and the increasing use of measures aimed at restricting the possibility for a foreign investor to establish a lasting interest in an enterprise operating in sectors which are deemed strategic for the recipient country.
Such measures should be less invasive in countries which want to reach economic growth through the implementation of integration processes with foreign states in order to pursue the benefits connected to FDI. Coherently, the example of South American countries – which suffer a decrease of the flows of FDI in the last decades – shows an opposite trend aimed at weakening the mechanisms for FDI screening.
In any case, such measures appear to be necessary for avoiding the risks of buy-out of each country’s economy by foreign investors, but they should be balanced and applied consistently in order not to make the country less appealing for investors. The recent proposal to adopt a new framework on FDI screening at the European Union level shall be appreciated in this perspective.
 For detailed statistics on inward and outward foreign FDI flows and positions of OECD Countries see OECD, OECD International Direct Investment Statistics 2014, OECD Publishing, Paris, 2014, available at http://www.oecd-ilibrary.org.
 See OECD, OECD Benchmark Definition of Foreign Direct Investment 2008, Fourth edition, p. 14. See also Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions – Towards a comprehensive European international investment policy, COM(2010)343 final, Bruxelles, 7 July 2010: “FDI represents an important source of productivity gains and plays a crucial role in establishing and organising businesses and jobs at home and abroad. Through FDI, companies build the global supply chains that are part of the modern international economy. Innovation in transportation and information technologies has in turn facilitated trade and the globalisation of business enterprise beyond the confines of large corporations. Investment and trade are today inter-dependent and complementary. Around half of world trade today takes place between affiliates of multinational enterprises, which trade intermediate goods and services” (p. 3).
 See Capriglione, Non luoghi. Sovranità, sovranismi. Alcune considerazioni, in Rivista Trimestrale di Diritto dell’Economia, 4/2018, pp. 393 and following.
 See ECJ judgement C-326/07 – Commission v Italy (26th March 2009), where the Court deemed the original regulation on special powers attributed to the Italian Government in order to control FDI – i.e. Law Decree no. 332 of 31 May 1994 (converted into Law no. 474 of 30 July 1994) and subsequently amended by Law no. 350 of 2003 – in breach of the European provisions governing the criteria for the exercise of special powers. See on this topic Sacco Ginevri – Sbarbaro, La transizione dalla golden share nelle società privatizzate ai poteri speciali dello Stato nei settori strategici: spunti per una ricerca, in NLCC, 2013, pp. 109 and following.
 See Pellegrini – Sacco Ginevri, Il ruolo dello Stato nei settori strategici dell’economia, in Corso di diritto pubblico dell’economia (a cura di Pellegrini), Padova, 2016, pp. 453 and following; Scarchillo, Dalla Golden Share al Golden Power: la storia infinita di uno strumento societario. Profili di diritto europeo e comparato, in Contr. Impr. Europa, 2015, pp. 219 and following.
 The Law Decree is implemented by (i) the Decree of the President of the Council of Ministers no. 108 of 6 June 2014, concerning the identification of the activities having a strategic relevance in the sector of the national defense and security are concerned; (ii) the Presidential Decree no. 35 of 19 February 2014, concerning the identification of the procedures to be followed for the use of the Golden Powers in the sector of the national defense and security; (iii) the Presidential Decree no. 85 of 25 March 2014, concerning the identification of the assets in the energy, transportation and communications sectors, and (iv) the Presidential Decree no. 86 of 25 March 2014 concerning the identification of the procedures to be followed for the use of the Golden Powers in the energy, transportation and communications sectors.
 Should the significant acquisitions concern an Italian listed company, the relevant thresholds triggering the potential exercise of the golden powers provided under Article 1 of the Law Decree are the following: the acquisition of a stake exceeding 3% of the share capital of the company (i.e. the threshold provided under Article 120, paragraph 2, of the Consolidated Financial Act); as well as any other acquisition of a stake exceeding the thresholds of 5%, 10%, 15%, 20%, and 25%.
 Article 1 (and namely paragraphs 2 and 3 of the Law Decree) provides the criteria on the basis of which the Government shall evaluate, from time to time, the existence of such threat arising from any significant resolution or any significant acquisition pursuant to Article no. 1 of the Law Decree.
 To this end, it also must be taken into account the shareholding held by third parties with which the purchaser has entered into one of the shareholders’ agreements provided under Article 122 of the Consolidated Financial Act under the Legislative Decree February 24th, 1998 no. 58, and subsequent amendments or of one of those provided under Article 2341-bis of the Italian Civil Code.
 In the event of adoption of any Art. 1 Significant Acquisition – potentially subject to the powers to impose specific conditions and to forbid any Art. 1 Significant Acquisition – the purchaser is required to notify to the Presidency of the Council of Ministers a complete informative upon the content of the abovementioned Art. 1 Significant Acquisition (Art. 1, Paragraph 5, of the Law Decree). The notification shall provide for all necessary information, including a general description of the acquisition project, of the purchaser and of the relevant business activity.
 By means of the Law Decree no. 148 of 16 October 2017, the Italian Government has, inter alia, extended the application of the provisions set forth under Article 2 of the Law Decree to the sectors having a high technological intensity. Such sectors include (i) critical or sensitive infrastructures, including storage and management of data, financial infrastructures; (ii) critical technologies, including artificial intelligence, robotics, semiconductors (semiconduttori), technologies with potential dual-use applications (tecnologie con potenziali applicazioni a doppio uso), network security, spatial or nuclear technologies; (iii) security of supply of critical inputs (sicurezza dell’approvigionamento di input critici); (iv) access to sensitive information or ability to control sensitive information.
 Any non-EU person shall mean any individual person or legal entity which is not resident, habitual resident, does not have the registered office or the administration office or the center of main activity in a State Member of the European Union or of the European Economic Area or which is not established therein.
 In particular, the Government shall take into account the following criteria in order to assess whether to exercise or not the special powers provided by Article no. 2 of the Law Decree: (a) the existence, taking into account also the official positions of the European Union, of objective reasons which lead to deem possible the existence of links between the purchaser and third countries which do not recognize the principles of democracy or the rules of the State of law, which do not comply with the rules of international law or which have assumed behaviors at risk vis à vis the international communities, inferred from the nature of their alliances, or have relationships with criminal or terrorist organizations or with subjects in any case connected to them; (b) the suitability of the arrangement resulting from the legal act or the transaction, taking into account also the methods of financing of the acquisition and the economic, financial, technical and organizational capacity of the purchaser so to ensure: (i) the safety and continuity of supplies; (ii) the maintenance, safety and operation of the networks and installations; (b-bis) for the Art. 2 Significant Acquisitions, further to the threat of serious prejudice to the public interests relating to the safety and operation of networks and installations and the continuity of supplies, also the danger to security or public order is assessed.
 COM (2017) 487, available at www.eur-lex.europa.eu.
 See whereas no. (1) of the Proposal.
 For instance, Chile imposes a 49% cap on voting rights in companies operating the internal transport sector; Colombia provides for a cap of 40% for the foreign ownership of companies in the television transmission sector, while voting rights held by a foreign investor in companies established in Peru which operate in the sector of international air transport of passengers are limited to the 49% of the share capital of such company.
 For instance, in 2016, Chile established a new foreign investment promotion and attraction strategy that included the creation of a new national investment promotion agency, “InvestChile”, that assists overseas companies with their investments in the country.
 For instance, the energy reform in Mexico was passed in August 2014, amending the General Act on Climate Change adopted on 2 June 2012. The reform affected not only the oil and gas market, but also liberalized electric power generation. Previously, most of the country’s electricity was generated by the Federal Electricity Commission (CFE), a State utility. The reform package created an independent transmission grid operator, the National Electricity Control Centre, which controls a new market and allows clients to buy energy directly from generators. The establishment of CENACE created a market of independent power producers (IPPs) for the first time in Mexico. According to the International Energy Agency (IEA) scenarios to 2040, the reform will boost the production of oil, increase the proportion of renewable energy sources in the energy sectors, increase energy efficiency and reduce CO2 emissions growth.
Lorenzo Locci, Associate at Chiomenti Studio Legale (e-mail: firstname.lastname@example.org)
Pablo Velázquez (e-mail: email@example.com)
Although this article is the result of a joint reflection of the authors, Lorenzo Locci and Pablo Velázquez wrote paragraphs 1 and 6; Lorenzo Locci wrote paragraphs 2, 3 and 4; Pablo Velázquez wrote paragraph 5.