The new Luxembourg FDI Screening Law

LU Law

On 18 July 2023, the Luxembourg law of 14 July 2023 establishing a mechanism for the national screening of foreign direct investments (“FDI") likely to undermine security or public order (the "Lux FDI Law") was published in the Official Journal of the Grand Duchy of Luxembourg. Benjamin Marthoz, Nicolas Pradel and Lucile Lebeaux give an overview of its implications.

The Lux FDI Law implements Regulation (EU) 2019/452 of 19 March 2019, which primarily aims to:

  1. set-up an EU-wide cooperation framework between the EU Member States and the European Commission; and
  2. establish common criteria to identify risks relating to the acquisition or control by foreign investors of strategic assets that might be a threat to EU Member States' security or public order.

The Lux FDI Law implements a compulsory “screening mechanism" and reporting process for transactions falling into its scope of application.

1. Date of entry into force

The Lux FDI Law will enter into force on the first day of the second month following its publication. As the law was published on 18 July 2023, the new regime will be applicable as of 1 September 2023.

The Lux FDI Law does not provide for retroactive review or enforcement powers. However, it will apply to transactions that were signed before the date of its entry into force, but that will close after such date (e.g. a sale and purchase agreement signed in May 2023 with a completion targeted after September 2023 will fall within the scope of the Lux FDI Law).

2. Important impact for in scope M&A transactions involving foreign investors

The screening mechanism established by the Lux FDI Law will apply to:

  • investments of any kind,
  • made by a foreign investor (meaning a natural person or an undertaking outside of the European Economic Area (EEA)),
  • which allows that investor to participate (alone, in concert or via an intermediary) in the control of an entity governed by Luxembourg law,
  • which carries out in the Grand Duchy of Luxembourg a “critical activity" listed in Article 2 of the Lux FDI Law.

It is worth noting that “portfolio investments" are excluded from the investments triggering the screening mechanism as long as they constitute acquisition of securities of a Luxembourg entity made with the intention of making a financial investment which do not enable the foreign investor to exercise, directly or indirectly, a control of that entity.

Under the Lux FDI Law, “control" is defined as the fact for a foreign investor, to directly or indirectly:

  • hold a majority of the voting rights of the Luxembourg entity; or
  • have the right to appoint/dismiss the majority of the members of the administrative, management or supervisory body of the Luxembourg entity and be a shareholder/partner of it; or
  • to be a shareholder/partner controlling the majority of the voting rights of the Luxembourg entity by virtue of an agreement with other shareholders/partners of that entity; or
  • crossing the threshold of 25% of the voting rights of a Luxembourg entity.

Finally, “critical activities" are listed by sector considered as strategic. They include, among others the following sectors:

  • energy;
  • transports;
  • water;
  • health;
  • communications;
  • data processing/storage;
  • aerospace;
  • defence;
  • finance;
  • media;
  • agribusiness, and
  • the development, exploitation and trade of dual-use items.

It should be noted that the notion of “critical activities" also encompasses the following activities if they are directly related to the ones mentioned under each sector:

  • research,
  • production,
  • linked activities that could allow access to sensitive information or to the premises in which critical activities are carried out.

3. Practical considerations for in-scope M&A transactions

Should a foreign direct investment fall within the scope of the Lux FDI Law, a specific notification will have to be made by the foreign investor to the Luxembourg Ministry of the Economy prior completion of the investment or within 15 calendar days in the event that the threshold of 25% voting rights in the Luxembourg entity is exceeded as a result of events modifying the distribution of the capital.

The Minister of the Economy has in principle up to two months to communicate its decision to open or not a screening procedure. In the affirmative, it will then have in principle up to 60 calendar days to complete this procedure.

Remedies and appeal against the administrative decision of the Minister are organised by the Lux FDI Law. They require the assistance and representation by a Luxembourg lawyer.

Accordingly, at an early stage of the contemplated transaction, it is critical to adjust appropriately the transaction documentation and timing for completion as well as to be assisted by local counsels in the notification process with the Luxembourg Ministry of the Economy.

For any questions, please feel free to reach out to our dedicated team composed of Benjamin Marthoz, Nicolas Pradel and Lucile Lebeaux.

The content of this article is intended to provide a general overview of the subject matter. Please do not hesitate to contact us should you require any further information.