On August 25, 2021, the Swiss Government released a broad framework for the possible introduction of a screening regime of foreign direct investments or FDI in Switzerland. A draft bill is expected to be issued for public consultation by the end of March 2022.
The Swiss government has traditionally been opposed to the introduction of an FDI screening regime on the basis that the cost-benefit ratio would be adverse to Switzerland and the existing industry- and sector-specific regulatory framework was sufficient. The announced preparation of a bill was triggered by binding motions mooted by the Swiss parliament. It is thus not surprising that the government articulated, as a matter of policy, that when introducing a proposed bill, it would seek to maintain Switzerland's openness and attractiveness to foreign investment and ensure the compatibility of the FDI screening regime with Switzerland's international commitments.
The potential threats that the new bill is expected to target in connection with FDI include (i) disruptions in the supply of essential services that cannot be replaced within a short timeframe, (ii) the potential access to large volumes of personal data requiring special protection, (iii) any potential harm to any critical reliance of the Swiss military on key defense components, of government authorities on key cyber security infrastructures or of international space projects in which Switzerland participates on essential components, as well as (iv) major distortions in the competitive landscape where a company would be taken over by a foreign state or state-owned or state-related investors.
Below is a summary of the key elements of the policy framework issued by the government:
1. Who is affected?
The FDI screening regime is expected to apply to investments by foreign investors. The government's policy statement does not further define what "foreign" means for this purpose but makes it clear that as a matter of policy, the new bill will focus on investors with any direct or indirect foreign state affiliation. In particular, all mergers and acquisitions by a foreign state or state-owned or state-related investors will be reportable and must be cleared, regardless of the sector involved. For private foreign investors, the policy statement does not yet delineate which sectors will be subject to a mandatory reporting and approval regime.
2. What type of transactions must be notified?
The policy statement appears to focus on change in control transactions affecting Swiss domestic companies and does not refer to minority investments. What will be deemed to be a "Swiss domestic company" for this purpose will be defined in the upcoming draft consultation paper for public comments. The policy statement raises in particular whether or not a domestic subsidiary of a foreign parent should be considered a domestic company. The policy statement does not refer to any turnover or other threshold metrics. We believe it will be critical for the scope of application of the FDI regime whether any thresholds are established and at what level any such thresholds will be set.
3. Which authority must be notified?
Procedurally, the State Secretariat for Economic Affairs (the SECO) will be responsible for the implementation of the FDI regime. The SECO will also be tasked with coordinating with any other state departments and authorities involved in the review of a transaction. Where the SECO and the other departments and authorities involved determine that a transaction should not proceed, the Swiss Federal Council will ultimately be the competent authority to decide whether to veto the transaction. The Swiss Federal Council will also be competent to veto a transaction in case of disagreement among the departments involved.
4. What does the approval process look like?
The approval process will consist of two phases. The first phase is expected to be a short examination of whether an in-depth approval procedure must be initiated. Where the transaction does not raise any concerns with public interests or safety and is not expected to lead to significant distortions in the competitive landscape, there will not be any second phase leading to an in-depth review and the transaction can complete.
5. Where is the investment control regulated?
The investment control procedure will be regulated in a new and separate federal law. The bill will also contain provisions allowing for cooperation as well as mutual exemptions from the investment control with other states.
In light of the proliferation of FDI screening regimes worldwide and the parliamentary debates, this development does not come as a surprise. The Swiss government's policy statement is helpful to gain an understanding of the general direction of travel of a future FDI screening regime in Switzerland but it still needs to be fleshed out and the parliamentary review process could lead to substantial changes in policy. We believe that it will be essential for the scope of application of the new bill to be clearly defined in order to minimize uncertainties as to whether a transaction is reportable. Given the wide range of M&A actors, which may include corporate buyers, financial sponsors with investors across the world and special acquisition vehicles, the scope of application of an FDI screening regime can in practice be tricky if vaguely defined. Furthermore, how extensively any FDI screening regime will reach will also significantly depend on turnover and other threshold metrics triggering a review. Of course, a transaction reportable from an FDI perspective may additionally be subject to merger control review by the Swiss Competition Commission, which would conduct its own investigation in parallel.
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