After pressure from Parliament, the Swiss Federal Council has against its own intentions opened the consultation process on new legislation to screen foreign investments in future also in Switzerland and has published a draft investment control law (“Draft ICL“). By implementing foreign investment control mechanisms, Switzerland would follow the global trend towards stricter regulation of foreign investments.
According to the Draft ICL, the new law would apply to acquisitions of domestic companies by foreign investors. The main objective is the aversion of possible threats to public order and national security resulting from acquisitions of domestic companies by foreign investors. The final aim is to create investment controls in a new and stand-alone federal law.
However, the Federal Council continues to oppose the introduction of investment controls, considering the cost-benefit ratio to be unfavorable and the existing regulations to be sufficient to the extent required. Indeed, for a country like Switzerland depending largely on exports and foreign trade, this new foreign and security policy driven instrument straight from the trade and investment tool box in times of increased trade (supply chain) disruptions and restrictions may come at a price for Switzerland.
While the consultation has been opened, the law is not expected to enter into force before 2024. Upon deliberations by Parliament the final law could be subject to a referendum vote by the Swiss public. It will depend very much what will ultimately see the light of day and how Switzerland will apply such instrument.
Should the Draft ICL enter into force, the following is noteworthy:
Switzerland ranks among the world’s largest recipients of foreign investments, welcoming foreign investment flows worth USD 37 billion in 2021. It is vital for Switzerland to have an open policy towards foreign investments to ensure both the inflow of sufficient capital and of knowledge to Swiss companies, thereby strengthening economic growth, competitiveness, employment and innovation which Switzerland can boast of. Despite Switzerland’s position as a key investment hub, it has not yet, as opposed to many other countries, introduced a cross-sector regime for the systematic screening of foreign investments, and that probably for valid reasons, at least also in the view of the Swiss government.
Today, Switzerland relies on a set of sector-specific measures and regulations such as the state-ownership of critical infrastructures, merger controls, financial market regulations and restrictions on the acquisition of real estate by foreigners. In addition, investments in regulated industries or industries subject to governmental licensing may be subject to authorization or review by the competent Swiss authorities. In such sectors, the origin of the investment or the character of the transaction does not trigger such authorization or review per se, and the relevant laws generally concern both foreign and domestic investments and transactions.
By adopting Motion 18.3021 Rieder, Parliament instructed the Federal Council to draft the necessary legislative basis for foreign investment screening in Switzerland with the aim to tackle perceived threats to public order and security posed by foreign investors acquiring Swiss companies. Possible threats are especially conceivable in cases where an investor has ties to foreign governments. While the Swiss Parliament requests the introduction of foreign investment controls, the Federal Council continues to oppose the introduction of investment controls, considering the cost-benefit ratio to be inadequate and the existing regulations to be sufficient to the extent required.
On 18 May 2022 the Federal Council published the Draft ICL. Continue reading to find out what the Draft ICL entails and could mean once adopted.
The Draft ICL distinguishes between cross-sector and sector-specific reviews of acquisitions. In particular, the following acquisitions fall under the Draft ICL and would therefore be subject to approval:
The Draft ICL provides for a general exemption for acquisitions of small domestic companies with less than 50 full-time employees and a worldwide annual turnover of less than CHF 10 million in the past two business years.
According to the Draft ICL, only investors acquiring control over a company or parts of a company fall within the law. Therefore, minority shareholders, that do not attain control through the acquisition, are not covered by the law. Furthermore, it is still uncertain whether a domestic subsidiary, which is part of a group of foreign companies, will be classified as a domestic target company or not.
According to the Draft ICL, the following investors are considered as foreign investors:
The State Secretariat for Economic Affairs (SECO), so the same authority which is also responsible for trade restrictions, will be responsible for the implementation of the investment control law. The Draft ICL introduces a two-stage approval procedure:
In principle, SECO will decide on approval in collaboration with any other interested governmental unit and after consultation with the Federal Intelligence Service. In case of disagreement between the offices involved or in case the decision is of considerable political significance, the Federal Council will decide.
SECO will approve the acquisition if there is no reason to believe that the acquisition could endanger public order or safety. In particular, SECO will consider the following assessment criteria which at least partly go beyond typical security concerns and touch on other regulations:
Sanctions of up to 10% of the transaction value may be imposed if the investment is implemented without notification or implemented based on false statements made in the approval procedure.
Numerous European and Anglo-Saxon countries have already introduced controls on foreign investment in recent years and up to 60% of global investments are now subject to investment controls. This global rise can be attributed to the privatization of certain sectors of sensitive assets that were previously state-owned as well as to digitalization which facilitates access to the transfer of sensitive data. In addition, countries are starting to see investments through the lenses of public order and national security as investments can generate a change in the control of domestic companies.
The US introduced investment controls as early as 1975 to address concerns about investments from OPEC (Organization of the Petroleum Exporting Countries) countries. Other countries such as Japan and Australia have also already established investment control mechanisms. India, at the very beginning of the pandemic, even introduced a foreign investment control scheme specifically targeting its largest neighbor, without naming it. Over the past decade, many European countries have also become active. Notably the EU has set out a framework for controls which it coordinates with respect to other EU countries. For an in-depth overview of all jurisdictions where foreign investment screening is in place please visit our FINS Blog.
Although foreign investment controls are designed to tackle corporate acquisitions, only very few planned investments have been banned globally in the past years. In 2018, 2019 and 2020, one planned investment was banned in each of these years in Australia, Germany and the US, two in Canada, and none at all in New Zealand. It is yet to be seen how exactly the Draft ICL, that has clearly been inspired by the various foreign investment control laws, will play out for Switzerland. In its report of 2019, the Federal Council predicted that the new law could lead to over 100 cases a year. The Draft ICL allows for the Federal Council to exempt investors of specific countries from the approval requirement, provided that public order and security are not jeopardized by doing so, a concept which already exists in export controls. This could well lead to the negotiation of bilateral and multilateral agreements on trade or investments between Switzerland and countries with comparable value systems to reciprocally waive controls on private investments in specific sectors, which could transform into opportunities for stronger relationships between Switzerland and its key partner countries. What remains clear is that the Swiss market will still continuously aim at remaining as attractive for foreign investors as possible.
Philippe Reich is a partner of Baker McKenzie Switzerland based in Zurich. He serves as head of the Firm’s Antitrust, European and International Trade Practice Group in Switzerland. Philippe is a key member of the Firm’s International Trade & Commerce and Antitrust & Competition Law Practice Groups. Philippe is regularly ranked as leader in his field in Who’s Who Legal and is a recommended practitioner in Legal 500 and Chambers. In 2022, he was ranked among the top 100 foreign lawyers for India related matters. Philippe is also the European representative on the steering committee of Baker McKenzie’s Global India Practice, chairman of the Swiss-Indian Chamber of Commerce and forms the India Desk of Baker McKenzie in Switzerland.
Boris Wenger is a partner in Baker McKenzie’s Zurich office, where he advises on competition law, public procurement, healthcare, export control, customs and energy law matters. Chambers Europe and Legal 500 have ranked Mr. Wenger as a leader in the field of competition and antitrust for many years.
Roger Thomi is a counsel in the Antitrust & Competition Practice Group and in the Commercial Practice Group in Zurich. He has extensive experience in his area of expertise and focuses on all aspects of competition law and commercial law, particularly distribution law and product regulatory compliance. The Legal 500 ranked Roger as a “Rising Star” in competition law who is “highly qualified,” “pro-active” and “delivering high-quality and practical advice within a short time.”
Meera Rolaz is an associate at Baker McKenzie’s Antitrust, EU & Trade Law and Compliance & Investigations Practice Groups in Zurich. She is also part of the Data & Technology team. After graduating from Oxford University with a Bachelor of Arts and a Master degree, she completed her LLB at the London University of Law and qualified as a UK solicitor in 2016. She worked over 7 years at Baker McKenzie in London and has spent time in the Amsterdam office before joining Baker McKenzie Zurich in 2022. Meera is bilingual in French and English.
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