Slovakia Tightens Grip on Financial Inclusion with Stringent FDI Rules

The Slovak government has introduced new regulations governing foreign direct investment (FDI) in mergers and acquisitions, which will have far-reaching implications for financial inclusion and compliance for non-EU creditors.

Impact on Financial Inclusion and Compliance

The revised regulations require foreign investors to navigate a complex web of requirements to ensure compliance with FDI laws. This includes:

• Pledge over shares or assets: The establishment of a pledge over shares or assets of a Slovak company may be considered a foreign investment if it grants specific rights to the pledgee regarding business decisions.
• Enforcement of security arrangements: Enforcement of security arrangements can also trigger FDI screening, treating it as a standard M&A transaction.
• Convertible bonds and financing arrangements: Convertible bonds or financing arrangements involving the acquisition of an equity stake in a borrower can be subject to FDI screening in Slovakia.

Applicability to Non-EU Creditors and Intra-EU Investors

The regulations apply not only to non-EU creditors but also to certain intra-EU investors who secure their finance through funds provided by third-country public authorities or entities with equity participation from outside the EU. For example:

• Norwegian Sovereign Fund: A security package involving a Norwegian Sovereign Fund would be subject to Slovak FDI screening.

Compliance Requirements for Financial Institutions and Investors

To ensure compliance, financial institutions and investors must carefully evaluate their transactions for potential non-EU elements, such as a non-EU security agent or ultimate beneficial owner outside the EU. They should also:

• Request representations from investors: Request representations from investors regarding financing from public authorities.
• Consider enforcement of pledges and convertible rights: Consider that enforcement of a pledge and convertible rights constitute an M&A transaction from an FDI screening perspective.

Conclusion

The Slovak government’s move to strengthen its regulations on FDI is expected to enhance financial inclusion and compliance in the country, but it will undoubtedly pose significant challenges for foreign creditors navigating the complex landscape.