Italian FDI control: bumpy road for foreign investments following the "Pirelli case"?

On 15 June 2023, the Italian Government exercised its special powers in relation to the renewal of the Pirelli Group's shareholders agreement (SHA). The decision confirms that foreign investments by certain third-country investors may be subject to tighter screening when they concern strategic assets and may raise potential national security issues.  

Key takeaways

• Italian foreign direction investment (FDI) rules may apply to intra-group transactions and even where there is no change in the shareholders. Intra-group transactions may also be caught by FDI regimes in many countries, including the UK, Italy, France and Germany.
• Parties need to check whether any FDI clearances are required before undertaking intra-group transactions or amending / renewing governance rights (for example, when one shareholder exits and sells to the other shareholders or amending an SHA).
• Where a shareholder could raise substantive national security or FDI concerns, there is greater risk of remedies or a block of the transaction.
• In this case, remedies were imposed to limit the governance rights and the information being made available to an existing Chinese state-owned shareholder. Parties to an SHA should therefore be aware that it is possible for FDI measures many years after the original investment.

Background

On 5 April 2023, China National Tire & Rubber Corporation Ltd. (part of the Chinese state-owned group held by Sinochem), Marco Polo International Italy S.r.l., Camfin S.p.A. and Marco Tronchetti Provera & C. S.p.A. notified the Italian Government of the renewal of the shareholders' agreement relating to the Pirelli Group. 

Under Italian FDI rules (set out in Law Decree No 21/2012, also known as the Golden Power Law), the Italian Government has "golden" or special powers to approve investments. In principle, the mere renewal of an SHA which does not lead to a change in control of the relevant company is not included in the list of intra-group transactions in relation to which the Government can exercise its powers. 

Renewal of the Pirelli Group SHA

According to the press release, the Italian Government exercised its special powers in relation to the renewal of the Pirelli Group SHA to protect "the autonomy of Pirelli & C. S.p.A. and its management; the security of procedures; the protection of information of strategic importance; the know-how possessed by the company". The strategic asset in question was cyber sensors that can be implanted in tyres. The improper use of these sensors would entail particular risks for the confidentiality of users' data, as well as the possible transfer of information relevant to security. 

The Italian Government has imposed a number of measures on Pirelli (see the Pirelli press release for further details). The measures include "a strategic industrial security clearance with limits on accessibility to information" and the establishment of an "autonomous organisational unit for security". For certain strategic decisions by the board of directors, a 4/5 majority is required: for example, this would prevent even the majority shareholder, Sinochem appointing Pirelli's CEO.

This case confirms that:

• investments in Italian strategic assets by certain foreign investors (e.g. Chinese State-owned entities) are likely to be subject to tighter scrutiny; and
• Italian FDI rules may apply to transactions that do not prima facie fall within the scope of the law if the transaction relates to "strategic" assets or a "national champion" and there is a risk that certain foreign investors may take control of those assets/company.

In this respect, the first appeal against a decision of the Italian Government concerning the prohibition by Chinese-owned group Syngenta of the integrated global seed production company Verisem, the Italian Council of State also clarified that the Italian Government has a high level of discretion in relation to FDI decisions. 

Comment

The Pirelli decision also confirms that Italy is one of the most active jurisdictions on FDI screening. According to the Annual Report submitted by  to the Italian Parliament on 5 July 2023, there has been a significant increase in the number of transactions notified under the Golden Power rules in recent years. Of the 608 transactions notified in 2022, more than half (314) transactions were excluded form the scope of the Golden Power rules, meaning that these notifications were made on a precautionary basis. The Italian Government exercised its special powers in relation to 8% of the cases (approximately 20 transactions).

In general, the Italian Government rarely prohibits transactions pursuant to the Golden Power rules. However, the Italian Government has taken an increasingly tough stance on transactions concerning Italian strategic assets (particularly where the transaction involves Chinese or Russian companies) following the Covid-19 pandemic. While only one transaction was blocked before 2019, there have been seven recent cases: 

• Chinese-owned Shenzhen Invenland Holdings Co. Ltd's acquisition of 70% of the shares in the Italian semiconductors company, LPE S.p.A. (decision of March 2021);
• the acquisition by Chinese-owned group Syngenta of the integrated global seed production company Verisem, which was considered to be a strategic asset for Italy (decision of October 2021). The Council of State confirmed the Italian Government's decision, highlighting the geo-political dimension of the Golden Power rules;
• the purchase of business units of Applied Materials Italia S.r.l. by the Chinese-owned Zhejiang Kesheng lntelligent Equipment Company Ltd (decision of November 2021);
• the 2018 acquisition by Mars of a 75% stake in military drones company, Alpi Aviation (decision of March 2022). Notably, this decision was four years after the transaction took place. Despite the parties failure to notify the transaction, the Italian Government did not impose a fine and required the transfer of the shares within a year;
• the purchase of gas cylinder producer, Faber Industrie, by a subsidiary of a Russian company, Rosatom (decision of May 2022);
• the acquisition of robotics maker, Robox, by Chinese Efort Intelligent Equipment (decision of June 2022); and
• the purchase of Tecnologia Intelligente, an Italian cloud services company, by Nebius, a Dutch technology company, because of its ties to Yandex, a Russian internet giant (decision of March 2023).

Notably, the Italian Government did not exercise its special powers in relation to earlier investments by Chinese companies in Italian businesses that likely concerned strategic assets / national security. For example:

• the acquisition by China State Grid of 35% of energy infrastructure company Cdp Reti in 2014;
• acquisition by Shanghai Electric of 40% of Ansaldo Energia in 2014;
• the acquisition of Medtech Esaote S.p.A. in 2017 by a consortium of investors; and
• the acquisition by SARI of bio-technology NMS Group S.p.A. in 2018.

It will be interesting to see whether the Pirelli case is a "one-off" or whether it paves the way for the Italian Government reviewing existing investments by Chinese (or other non-EU) companies in other Italian businesses that may probably be considered more strategic than "tyres". Similarly, it will be important to see whether new investments in Italy by Chinese, Russian or other non-EU countries will be blocked or made subject to significant measures to safeguard strategic assets and national security. 

The lesson to be learned from the Pirelli case is that when considering a proposed investment, the future shareholders will have to carefully negotiate appropriate safeguard clauses to foresee the possible impact of FDI screening controls on the transaction.  

With thanks to Nicolo Tucci of Ashurst for his contribution.