Kevin Gerretz (Ellex Circle Law Firms) authored this publication

Estonian security policy considers the well-being of the economy as dependent on both (1) exports to stable and trustworthy foreign markets on one hand and (2) reliable foreign investments into the Estonian economy on the other hand. It is therefore of national importance to ensure investments into strategic companies (primarily energy, transport and communications) are beneficial to their sustainable development and quality of services. At the same time, Estonia is one of the few EU Member States where there has been no foreign direct investment (FDI) review mechanism in place.

Following the COVID-19 pandemic and resulting global economic retrenchment, including relocation of resources and lines of power, coupled with Russia's military aggression against Ukraine, Estonia has acknowledged that its small and open economy is an attractive and vulnerable target for achieving geopolitical ambitions and recognizes that the establishment and implementation of measures for FDI control is important and relevant.

Therefore, a Foreign Investment Prudential Assessment Act (unofficial translation from Estonian, the FIPAA) was adopted by the Parliament on January 25, 2023. The FIPAA will regulate foreign investments into companies active in pre-defined economic sectors for the purpose of preventing adverse effects on Estonian security and public order. In practical terms, this means that as the FIPAA comes into force on September 1, 2023, certain foreign investments will need to apply for clearance before the transaction can be closed.

Recent updates

Estonia contemplated changes to its FDI regime, which were adopted in early 2023.

Who files

The FIPAA is intended to apply to any direct or indirect acquisition of (i) significant holding in, (ii) control over, or (iii) a part of (incl. assets) an Estonian target undertaking by a foreign investor.

A significant holding is defined as (A) holding (i) at least 10 percent of shares, or (ii) at least 10 percent of votes; or (B) giving decisive influence over the management by other means. Control is defined as either: (i) holding of the majority of votes represented by shares; (ii) the right to appoint or remove the majority of management members; (iii) control over the majority of votes pursuant to an agreement entered into with other shareholders; (iv) exercise or the power to exercise dominant influence or control.

The term "foreign investor" within the meaning of the FIPAA includes a (i) natural person who is a national of a third country (in case of dual- nationality, at least one nationality of a third country) or stateless; (ii) undertaking (within the meaning of competition law) which is established under the laws of a third country; (iii) any undertaking under the control of a natural person specified under (i) or undertaking specified under (ii) regardless of the country of establishment. "Third country" is defined as any non-EU country.

If the relevant transaction is subject to the FIPAA, the law provides for a process of review and approval of foreign investments to determine whether the foreign investments bring about negative effects on Estonian (or any other EU Member State's) security and public order. The FDI regime is mandatory and suspensory in nature, meaning that if the transaction is subject to review in accordance with the FIPAA, the foreign investor must file an application for review and the transaction is subject to a standstill obligation until the clearance has been issued by the competent authority (Consumer Protection and Technical Regulatory Authority).

The review will start upon making a complete obligatory filing under the FIPAA by the foreign investor. The FIPAA does not allow voluntary filings. If the transaction is not subject to FDI control, the authority will terminate the process. However, the competent authority may be approached before filing in order to request a preliminary assessment as to whether the transaction is subject to a mandatory filing requirement or not.

Types of deals reviewed

The FIPAA provides for an exhaustive list of economic sectors and/or criteria to determine if the Estonian target will be subject to the mandatory FDI review process and approval. The types of targets in scope include e.g., providers of vital services (such as suppliers of electricity, natural gas or liquid fuel; providers of data transmission services, payment services and cash circulation services; providers of district heating and water supply and sewage), all state-owned companies (in which the state holds a significant holding), suppliers of military or dual-use goods, providers of nationwide TV and radio services, newspapers, magazines and online/print news, railway infrastructure managers, certified operators of aerodromes, heliports and air navigation service providers; as well as operators of Estonian maritime ports that are a part of the trans-European transport network.

Scope of the review

During the review process, the authority will assess the impact of the foreign investment on the security and public order of Estonia or any other EU Member State (where such Member State raises concerns) in regard to the foreign investor target's economic activities, and the economic sector in which the target operates.

Review must always occur before closing, and a standstill obligation applies until approval is obtained. Transactions that run the risk of being subject to FDI review should seek clearance by submitting an application to the authority well before the planned date of closing (at least 30 calendar days, although the review process may be extended up to 180 calendar days in certain cases—see further details on timing below). If the foreign investment would be blocked under the FIPAA, the authority may clear the foreign investment conditionally, whereby the foreign investor or the target is obligated to offer remedies to avoid risks to the security or public order of Estonia or any other EU Member State, including to divest a certain shareholding in the target or maintain existing service or supply agreements.

The authority may annul an earlier clearance after it has been issued on certain grounds, including where the investor does not comply with conditions specified in the decision (in case of a conditional clearance) or the investor has submitted false or misleading information and/or documents that constituted a decisive factor for the clearance. Upon annulment, the foreign investor or the target is required to immediately reverse the transaction (by returning to the initial state of affairs to the maximum extent possible).

Where a foreign investment subject to the FDI regime is completed without a clearance, the authority may issue a precept requiring (i) divestment of the shareholding or business; (ii) reversal of the transaction; or (iii) the taking of any other measures to return to the initial state of affairs.

Review process timeline

The process can take up to 180 calendar days from the date of submission of a complete application to the authority. By default, the authority is required to adopt a decision within 30 calendar days from the submission of a complete application. The process may be extended once by up to 90 calendar days where (i) this is necessary for the assessment of the foreign investment's impact, or (ii) another EU Member State or the European Commission intends to provide comments on the foreign investment in accordance with Regulation (EU) 2019/452. Furthermore, where clearance can be given only conditionally, the authority may extend the above deadlines by up to 60 calendar days for discussions on remedies.

How foreign investors can protect themselves

Where a transaction gives rise to the risk of being subject to FDI review and approval, non-EU investors should consider filing the application with the authority at least 30 calendar days prior to the planned closing. For a foreign investment that risks having an adverse effect on the security and public order of either Estonia or another EU Member State, the time of filing an application should be brought further forward to account for the potential extension of the review process up to a total of 180 calendar days.

After the FIPAA enters into force on September 1, 2023, it will therefore become critical for foreign investors to consider also Estonian FDI review issues in planning and negotiating transactions. In particular, a foreign investor must ensure that it includes a closing condition predicated on obtaining FDI clearance in Estonia, where appropriate, and take this into account for setting the long-stop date. It may also be appropriate for the parties to assess the national security risk.

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