Investment control in Switzerland
Current legal situation and political initiatives
Several Member States of the European Union (EU) have recently enacted national laws to screen foreign direct investments. These laws are inter alia based on the so-called EU Screening Regulation that enters into force on October 11, 2020. The efforts in neighboring countries have also led to parliamentary initiatives in Switzerland. This bulletin provides an overview of the current status of these initiatives.
On October 11, 2020, the Regulation establishing a framework for the screening of foreign direct investments (Regulation (EU) 2019/452 of March 19, 2019; so-called Screening Regulation) enters into force in the EU. On this basis, several national laws to screen foreign direct investments have been enacted or amended in Germany and Austria, among other countries.
Unlike neighboring countries, Switzerland does not currently have an investment control regime in place, although direct investments in and from Switzerland are of major economic importance. In the area of investment control, Switzerland is considered to be liberal compared to other countries. Critical infrastructure is mainly protected against foreign control due to it being publicly owned. In addition, there are sector-specific and cross-sector regulations that may hamper investments. With the acceptance of the parliamentary motion 18.3021 Rieder in spring 2020, the Federal Council has been given the task to present a draft bill to the Parliament to serve as the basis for the regulation of foreign direct investments in Swiss companies.
What Investment Control Means
Direct investments are cross-border investments that enable direct investors to establish a long-term participation in a company in another country and thereby acquire at least 10% of the share capital with voting rights. The aim of direct investors in such cases is to be able to exert considerable influence on the companies in which they invest. Another type of direct investment is when an investor establishes a subsidiary or branch in another country.
Switzerland is one of the world’s largest recipients of foreign direct investments and also one of the world’s largest direct investors. In 2017, the volume of foreign direct investments in Switzerland amounted to around CHF 1,088 billion, while Swiss direct investments abroad amounted to around CHF 1,228 billion.
Investment control consists of a legal mechanism for the systematic screening of foreign investment projects.
Current Legal Situation in Switzerland
To date, there is no investment control in Switzerland. Rather, Switzerland has adopted an open policy towards foreign investments. This policy ensures that Swiss companies have sufficient inflow of capital and knowledge and contributes to the creation of value as well as the maintenance of existing and creation of new jobs.
Despite the lack of comprehensive investment control in Switzerland, there are mechanisms to protect national security as well as sector-specific and cross-sector regulations which attenuate unrestricted influence by foreign investors.
National security concerns through the sale of critical infrastructure can be addressed by maintaining public ownership over the relevant companies and infrastructure. Critical infrastructure comprises infrastructure to protect the population, ensure national security and maintain economic prosperity. This includes public institutions, energy, finances, health, information and communication, food, public safety and transportation.
If critical infrastructure is not publicly owned, it may be questioned whether such infrastructure is system-relevant. When assessing system relevance, the key question is whether a certain company provides services that are critical to the national economy and that are indispensable. Another key question is whether other market participants would be able to replace said company’s system-relevant services within an amount of time which would still be acceptable to the national economy. Currently, only the five largest Swiss banks are considered to be system-relevant, two of them being under State control.
Consequently, with respect to a risk to national security as a result of the sale of critical infrastructure, the Federal Council’s view is that there is currently no need to act and the introduction of investment control to systematically screen investment projects would not increase national security.
Furthermore, there are sector-specific and cross-sector regulations in Switzerland.
These sector-specific regulations include financial market regulations and restrictions on the acquisition of real estate by persons in foreign countries (Lex Koller), the latter requiring authorization to purchase real estate in some cases. Following the acceptance of the parliamentary initiative 16.498 “Inclusion of Strategic Energy Infrastructure under the Lex Koller” proposed by Jacqueline Badran (National Councilor, SP, Zurich), a bill is currently being drafted to strengthen this tool. Under this parliamentary initiative, strategic energy infrastructure would be included under the Lex Koller.
Telecommunication regulations are another set of sector-specific regulations. According to the Telecommunications Act (TCA), a telecommunication service provider must register with the Swiss Federal Office of Communications to be allowed to provide telecommunication services. This allows the Federal Communications Commission to prohibit companies organized under foreign law from providing telecommunication services in Switzerland if no reciprocity is being granted.
With respect to cross-sector regulations, a distinction can be made between international public law regulations and domestic regulations.
In the international public law context, there is no multilateral agreement that comprehensively governs market access to investments. The WTO’s General Agreement on Trade in Services (GATS) governs investments by service providers of one Member State in the form of commercial business establishments in the territory of another Member State. In addition, there are multilateral and bilateral free trade agreements that govern mutual access for investments (business establishments) in the service sector and in the non-service sector. Furthermore, OECD States must observe OECD rules. Switzerland has issued various reservations for all of these international agreements, in particular with regard to critical infrastructure.
In the national context, antitrust, corporate, disclosure and takeover laws may represent barriers that hamper investments. In the case of antitrust law, this is particularly the case for merger control, whereby a merger can be prohibited or conditionally approved if it creates or strengthens a dominant position capable of eliminating effective competition. In corporate law, the general assembly of shareholders disposes of two tools to control the composition and influence of shareholders: statutory restrictions for the transfer of registered shares and statutory limitation of voting rights. Disclosure and takeover laws ensure transparency regarding control over publicly listed companies and govern the obligations of the bidder and the target company in the case of (planned) takeovers.
On February 26, 2018, Beat Rieder (member of the Council of States, CVP, Valais) submitted the parliamentary motion 18.3021 “Protecting the Swiss Economy through Investment Control.” The aim of this motion is to task the Federal Council with the drafting of a legal basis for the control of foreign direct investments in Swiss companies. Among other things, it foresees the creation of an approval authority for transactions that are subject to investment control. Although the Federal Council requested that the motion be rejected, the Council of States approved it on June 17, 2019 and the National Council on March 3, 2020. The Federal Council now has a two-year deadline to submit a corresponding draft bill to the Parliament. The elaboration of the draft bill is, within the limits of the motion, up to the Federal Council.
It is not clear when the bill will be submitted to the Parliament, what its exact wording will be and whether the Parliament will accept it or not.
A majority of EU Member States and major national economies (e.g. all G7 Member States) have investment control regimes in place and screen foreign investment projects. Proposals for introducing an investment control regime are currently being discussed in some countries (e.g. the Netherlands), while screening mechanisms of this sort were recently introduced or amended in others (e.g. in Germany and Austria).
On October 11, 2020, the EU Screening Regulation enters into force. The regulation creates a framework for the screening of foreign direct investments in the EU for security and public order concerns. It also creates the basis for a cooperation mechanism between Member States and the EU Commission. However, the decision regarding whether or not to introduce a national screening mechanism and scrutinize foreign direct investments continues to be within the sole responsibility of each Member State.
The investment control process generally consists of the following elements:
- Reporting obligation for foreign investment projects;
- Initiation of a screening mechanism for foreign direct investments or investment projects based on pre-defined criteria;
- Decision by the national investment control authority on whether to approve, conditionally approve or prohibit the investment project.
This Homburger Bulletin expresses general views of the authors at the date of the Bulletin, without considering the facts and circumstances of any particular person or transaction. It does not constitute legal advice. This Bulletin may not be relied upon by any person for any purpose, and any liability for the accuracy, correctness or fairness of the contents of this Homburger Bulletin is explicitly excluded.