In April 2020, in order to mitigate the negative impact of the COVID-19 pandemic, the Italian Government introduced a new provision to protect strategic assets of the Italian economy from ‘hostile’ actions by foreign (non-EU) investors. Such provision is enshrined in Article 15 of Law Decree No 23/2020 (COVID-19 stimulus package – ‘Decreto Liquidità’), which has extended the scope of Governmental prerogatives regarding the exercise of the Golden Power, by imposing a notification obligation to a number of investment operations and/or corporate resolution in strategic sectors of the Italian economy. Because of such recent amendment, the Government is now entitled to intervene in a broader category of sectors, among which the ‘dual use sector’.
1. The meaning of “Golden Power”?
The Golden Power can be defined as the specific set of Government prerogatives (e.g. the right to prevent a company acquisition by foreign investors, the right to veto corporate resolutions or to impose specific conditions in contractual agreements), which can be exercised in connection to business operating in specific strategic sectors of the economy. Under the current legal framework, the Italian Government may elect to trigger the Golden Power provision not only regarding publicly owned companies, but also in respect of private transactions (between private entities) that might entail a hostile intrusion.
The Italian legislative framework regarding foreign investments (at that time known as the ‘Golden Share’) traces its origins back to the 1990s, in the aftermath of the privatization process of strategic public entities. Under the Golden Share framework, the Government exercised control over strategic assets (to protect the economy from foreign intrusions) from within the corporate structure, by maintaining a minority share (although with relevant powers) in the companies’ equity capital. Such an approach was abandoned for what is now, undoubtedly, a broader set of powers, whose exercise is in stark contrast with the fundamental principles of free-market economy which are at the very core of the EU treaties and characterize the essential traits the great majority of the global economy.
The choice of granting the Government such extensive powers, in contrast with the globally accepted principles of trade and open economy, reflects the need to strike a delicate balance between liberalism, on the one hand, and national security on the other hand. Such a restrictive approach, however, is not unprecedented in a comparative perspective; over the past 50 years, the US (the US Committee on Foreign Investments in the United States was built on 1975 – CFIUS) and many other countries have introduced similar provisions, including 14 of the EU Member States.
The European Union adopted a Framework Regulation only in March 2019 (Regulation (EU) 2019/452). Shortly after, in March 2020, the European Commission issued a Communication urging the Member States to take measures to protect their strategic assets – with particular attention to the health care sector – from hostile actions by non-EU investors (Communication from the Commission on 25 March 2020).
In Italy, prior to the recent amendment, the sectors covered by the Golden Power were the following: defense and national security, energy, transportations, telecommunications and the 5G networks (Law Decree 21/2012 as amended and converted into Law 56/2012, and Law Decree 105/2019 as amended and converted into Law 133/2019). Hence, before the enactment of the ‘Decreto Liquidità’, the notification requirement to the Presidency of the Council of Ministers pertained only to certain corporate transactions in those strategic sectors. For example, the acquisition of shares in companies owning strategic assets in energy, transports or telecommunications, or agreements for the purchase, by non-EU entities, of goods or services connected to the planning, the construction, the maintenance and the operation of 5G broadband related electronic telecommunication network, etc.
As a consequence of the recent amendment, the notification obligation now lies with all foreign investment targeting the sectors singled out in Article 15 by means of a cross reference to the EU Regulation (among which, the ‘dual use sector’).
2. Definition of dual use products?
According to Article 2.1 of Regulation EC No 428/2009, dual use items include all products, including software and technology, that can be used both for civil and military purposes, as well as goods which can be used for both non-explosive uses and assisting in any way in the manufacture of nuclear weapons or other nuclear explosive devices.
Dual use items are listed in Annex I to the Regulation (e.g. certain categories of pipes, pumps, lasers, heat exchangers, electronic material, gaskets, software). Any export outside of the EU requires an authorization from the competent national authorities (in Italy, the UAMA office within the Ministry of Foreign Affairs and International Cooperation). It is important to note that the Ministry has a faculty to impose an authorization requirement for specific export operations if such transactions might contribute to proliferation of weapons of mass destruction (catch all provision).
3. The broader scope of Golden Power following COVID-19 emergency – Article 15 of ‘Decreto Liquidità’
Article 4 of Regulation (EU) 2019/452 identifies five main areas in which national authorities can impose foreign investments restrictions within the EU framework: ”(a) critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defense, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure; (b) critical technologies and dual use items as defined in point 1 of Article 2 of Council Regulation (EC) No 428/2009, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies; (c) supply of critical inputs, including energy or raw materials, as well as food security; (d) access to sensitive information, including personal data, or the ability to control such information; or (e) the freedom and pluralism of the media.
A reference to letters a) and b) had already been inserted in Article 4 of Law decree 105/2019; Article 15 of ‘Decreto Liquidità’ has now been broadened to include all sectors listed in Article 4. From a drafting perspective, the provision appears to be complex and somewhat cryptical, due to many cross references, but in short it has now imposed the notification requirement to all sectors (including critical technologies and dual use items as defined in point 1 of Article 2 of Council Regulation (EC) No 428/2009) listed in Article 4 of Regulation (EU) 2019/452.
The emergency legislator’s choice to ‘protect the Italian economy’, at least until the end of 2020, appears understandable in light of the critical situation currently affecting the country. However, such a decision raises some question in terms of its application inasmuch as there is no definition (neither at a UE nor at an Italian level) of ‘dual use sector’. As we mentioned above, the law only refers to goods and technology included in Annex I to Regulation 428/2009. Therefore, a possible interpretative solution could be to consider the ‘dual use sector’ as referred to all the companies manufacturing (or provide services) subject to Regulation 428/2009.
For all those companies it must be considered that:
(I) the acquisition by entities outside the European Union of shares in companies holding assets and relations in the field of critical technologies and dual use goods (including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnology and biotechnology) must be notified to the Italian Presidency of the Council of Ministers;
(II) resolutions, acts or transactions adopted by a company holding assets and relations in the dual use sector and which have the effect of changing the ownership, control or availability of such assets or changing their destination (including, for example, resolutions of the shareholders’ board or administrative bodies concerning the merger or demerger of the company or the transfer abroad of the registered office) must be notified to the Presidency of the Council of Ministers;
(III) purchases of shares in the ‘dual use sector’ by foreign and EU entities, “of such importance as to determine the permanent establishment of the purchaser by reason of the acquisition of control of the company” as well as purchases of shares by foreign entities, which attribute a share of voting rights or capital of at least 10%, are also subject to above-mentioned notification.
It should be noted that the Law Decree confers to the President of the Council of Ministers the power to initiate the procedure ex officio (if the investors has not notified the transaction to the Government) in the sectors covered by the Golden Power and, therefore, also in the dual use sector.
The new provision will be in force until 31 December 2020. However, the acts and measures adopted by the Presidency of the Council of Ministers following the exercise of such special powers will remain valid even after that date.
The extension of the scope of Golden Power in Italy appears to be justified by the need to protect strategic assets and prevent ‘hostile intrusions’ in an already distressed economy.
The Italian Government opted for a blanket solution which seems to mirror the ‘stay-athome’ orders of the past weeks. The recent amendment may both discourage investments but also create a paperwork overload for the Government’s administrative staff, and therefore impinge negatively on the already struggling national businesses, trying to emerge after weeks of lock-down.
To have a grasp of the dimensions of the ‘dual use sector’ in terms of figures, we note that in 2018 Italian exports of dual use products was worth about two billion euros (Ministry of Economic Development Economic Observatory and Data Exchange Questionnaire on the implementation of Regulation (EC) 428/2009). The vast majority of Italian exporters are however SMEs, which might be found largely unprepared to deal with the bureaucratic burden imposed by the new rules on the Golden Power.
We remain available for any form of assistance.
Export Control Team