Italy’s Exercise of Foreign Investment Screening Power against Chinese Takeover An Assessment under International Law

In March 2021, Italy vetoed the acquisition of an Italian company operating in the field of semiconductors by a Chinese group. It did so by using its so-called golden power, meaning the power to interfere with the management of companies to protect strategic economic sectors, introduced in 2012 and substantially revised in 2019 and 2020. The present comment offers an evaluation of the compatibility of Italy’s inward investment screening powers with international law norms on the promotion and protection of foreign investments by trying to outline the limits posed by the latter on domestic foreign investment screening mechanisms.


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in the Italian Lpe S.p.A -a company operating in the field of semiconductors -by the Chinese Shenzhen Investment Holdings Co. The news was reported by Italian media as an exceptional use by the State of its so-called golden power, i.e., the power to interfere with the management of both public and private entities operating in certain strategic sectors,1 as it was the first time since 2017 that Italy actually prevented a foreign entity from purchasing shares of an Italian company.2 Thus far, little details on the operation have been divulged by the Government, and the Decree through which the veto was exercised is not entirely public. Nevertheless, the case still offers much food for thoughts as it constitutes the opportunity to delve into the issue of the international 1 See, among others, "Draghi ferma i cinesi con il 'golden power': cos'è e perché l'italiana Lpe è stata protetta", Corriere della Sera, 9 April 2021, available at: <https://www.corriere.it/ economia/aziende/21_aprile_09/draghi-ferma-cinesi-il-golden-power-cos-e-perche-l-italianalpe-stata-protetta-ec7b7088-98fa-11eb-9898-68a50e5b3d06.shtml>; "Il governo Draghi usa per la prima volta il Golden power: bloccata l'acquisizione cinese di un'azienda lombarda dei semiconduttori", La Repubblica, 9 April 2021, available at: <https://www.repubblica.it/ economia/2021/04/09/news/golden_power_dis-295721717/>; "Perché Mario Draghi ha usato il golden power sui semiconduttori", Huffington Post, 9 April 2021, available at: <https://www. huffingtonpost.it/entry/perche-mario-draghi-ha-usato-il-golden-power-sui-semiconduttori_ it_60703033c5b6a74b3bd979a1>; "Governo Draghi, primo sgambetto a Pechino. Bloccata l'acquisizione cinese dell'azienda di semiconduttori lombarda Lpe", Il Fatto Quotidiano, 9 April 2021, available at: <https://www.ilfattoquotidiano.it/2021/04/09/governo-draghiprimo-sgambetto-a-pechino-bloccata-lacquisizione-cinese-dellazienda-di-semiconduttorilombarda-lpe/6160229/>. 2 In November 2017, the Government then presided by Paolo Gentiloni vetoed the acquisition by the French Altran of shares in Next Ast S.r.l., a company active in the field of information technology for airport security, control of ports and naval bases and surveillance systems. See Senato della Repubblica, "Relazione concernente l'attività svolta sulla base dei poteri speciali sugli assetti societari nei settori della difesa e della sicurezza nazionale, nonché per le attività di rilevanza strategica nei settori dell'energia, dei trasporti e delle comunicazioni (Aggiornata al 31 dicembre 2018)", available at: <https://www.governo.it/sites/governo.it/files/ GP_RelazioneParlamento_2018.pdf>, p. 11. However, while the right to put a veto on economic transactions is seldom exercised, it is less uncommon that the golden power is exercised via the imposition of conditions on transactions involving companies operating in strategic sectors. Against this backdrop, one could question whether Italy's actions were consistent with public international law rules pertaining to the promotion and protection of foreign investments. Indeed, starting from the 1950s, international law has progressively developed a corpus of norms aimed precisely at liberalizing foreign investments and limiting the sovereignty of host States with respect to them. Thus, the present work will briefly assess the compatibility of the Italian golden power regime with these norms. It will do so by first providing an overview of such regime; then, it will analyse the possible interference between domestic screening legislations and international investment agreements (iia s). Lastly, it will focus on the mechanisms which exist in this field of international law aimed at protecting States' essential interests.
As already recalled, the Italian golden power regime was introduced in 2012, with Law No. 56. Originally, it only applied to entities operating in the areas of defence and national security, communications, energy and transport. Since then, however, the normative framework has been revised several times on account of different circumstances.
First, in 2019, the EU adopted Regulation 2019/452 establishing a common framework for the screening of fdi into the Union. The Regulation does not establish a common EU screening mechanism, but it i) sets forth common features for the different screening mechanisms adopted by Member States; ii) provides the latter with objective criteria according to which the screening 436 of foreign investments should be carried out; iii) ensures cooperation among Member States and between Member States and the European Commission on fdi likely to affect security or public order.7 Furthermore, the will of States to protect critical domestic infrastructure and other sensitive industries has only been made stronger by the outbreak of the Covid-19 pandemic. On the 25th of March 2020, the European Commission issued a Communication to EU Member States in which it called upon the latter to monitor foreign investments so as to ensure that they do not have a harmful impact on the EU's capacity to cover the health needs of its citizens; thus, it encouraged Member States which already had in force screening mechanisms for fdi entering their territory to use them fully and effectively also to protect critical health infrastructure and urged other Member States that do not have a screening mechanism to adopt one.8 As a result, in 2019 and 2020, the Italian golden power regime was extended to companies operating in the areas of 5G electronic communications, critical infrastructure, critical technologies and dual use items, supply of critical inputs, access to sensitive information, freedom and pluralism in the media, banking, finance and insurance and agri-food sectors. In addition, until the 31st of December 2022, the regime also applies -to a certain extent -to intra-EU operations.9 Whenever a significant transaction identified by the law is planned in one of the mentioned sectors, the Presidency of the Council of Ministers shall be notified of it within ten days from the date of the closing or the signing of a deed or resolution or any binding agreement providing for such transaction. Then, within forty-five days from the notification, the Government can exercise its powers. Broadly speaking, the latter consist in the opposition to the 437 purchase of shares, the veto on resolutions, deeds and transactions and the imposition of conditions on the transaction. The exercise of the powers must be based on objective criteria such as the technical and financial suitability of the purchaser and the existence of a relationship between the latter and a Country which does not abide by the principles of democracy and the international rule of law, or which has engaged in conduct threatening the international community. Moreover, the powers must always be exercised respecting the principles of proportionality and reasonableness.10 As can be clearly observed from this brief overview of the Italian screening mechanism, the State enjoys a great margin of discretion in deciding whether or not to admit fdi. Such a wide margin of discretion is justified under general international law. Actually, from the perspective of the latter, States are in no way obliged to admit foreign investments. Quite the contrary, the "economic dimension of territorial sovereignty"11 confers States the right to decide whether or not and to what extent to open their economies. Thus, while many fdi screening systems usually share common features (like the focus on sectors such as telecommunications, energy or defence), governments are free to tailor them on their countries' needs.12 This does not entail, however, that no interference between public international law and the power of States to adopt these screening regimes is possible. Indeed, while from the standpoint of general international law there is no obligation to admit foreign investments, international investment law is today articulated in a conundrum of iia s, mostly bilateral, in which States can well assume obligations relating to the admission of investments. In this respect, different scenarios can be envisaged.
In the first and most simple one, iia s are silent on the treatment to be accorded to investors in the pre-establishment phase or even explicitly provide that the admission of investments is regulated by domestic law. An example of this approach can be found in the Bilateral Investment Agreement (bit) between Switzerland and Trinidad and Tobago, whose Article 3(1) reads that so-called "Decreto Liquidità" (Law Decree of 8 April 2020, No. 23, available at: < https://www. gazzettaufficiale.it/eli/id/2020/04/08/20G00043/s>). 10 On the Italian golden power regime in general see Scarchillo, cit. supra note 7, p. 584 ff.; Mauro, "'National Security' , Foreign Investments and National Contrariwise, several iia s explicitly extend to the pre-establishment phase of an investment the standards of treatment therein provided. For instance, Articles 3 and 4 of the 2012 U.S. Model bit define the national treatment and the most-favoured nation treatment obligations as applicable to the "establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments" (emphasis added).14 A similar wording is also adopted by the 2021 Canada Model bit.15 The bit concluded between China and Italy in 1985 appears to fall within the former category of iia s. Indeed, its Article 2 defines the investments covered by the treaty as "every kind of asset accepted in accordance with the respective laws and regulations of either Contracting Party […]" (emphasis added). 16 However, it must be stressed that the very definition of the term "investment" under international law is far from clear; iia s today usually adopt very broad definitions. Accordingly, investors have often tried to invoke the protection of investment agreements also in relation to pre-investment expenditures which can constitute a relevant part of the entire economic operation they carry out. For example, investors can spend substantial sums in feasibility studies or to participate in tender proceedings. Although the majority of cases dealing with pre-investment expenditures were concluded with arbitral tribunals declining their jurisdiction,17 there are cases in which these expenditures can be considered as falling within the protection of the relevant iia. In the case of Nordzucker v. Poland,18 a dispute arose out of the Respondent's implementation of a privatization programme for its sugar industry. The Claimant alleged that Poland had breached several of the standards of treatment contained in the Germany-Poland bit by retracting from the selling of two State-owned sugar producers. The Tribunal noted that, under Article 2(1) of the bit, "[i]nvestments that have been admitted in accordance with the respective law of one Contracting Party shall enjoy the protection of this Treaty. Each Contracting Party shall in any case accord investments fair and equitable treatment".19 Therefore, it interpreted the words "in any case" in the last sentence of this provision as requiring that fair and equitable treatment (fet) had to be granted also to investments not already admitted in accordance with the law of the host State and thus "in the making".20 This example clearly evidences that an economic operation which has not yet undergone the host State's screening mechanism -and has thus not been admitted in accordance with the law of the host State -could already be deemed worthy of the protection granted by one of the iia s the host State itself has ratified.
In the event a State has assumed obligations with respect to the admission of the investment, it is evident that its fdi screening mechanism -if one exists -must comply with such obligations. Accordingly, whenever the concerned investor alleges that the latter have been breached, it could trigger the arbitration clause, usually contained in iia s, allowing it to start arbitral proceedings against the host State to claim their violation.
However, as far as the merits of investors' claims is concerned, it must be borne in mind that international investment law has today developed a set of tools to respond to the need of host States to protect certain fundamental interests, even when this would entail an infringement upon investors' rights.
First and foremost, the faculty for a host State to adopt measures interfering with investors' rights with a view to protect its essential interests can be regulated by iia s themselves. Many investment agreements, indeed, contain so-called "Non-Precluded Measures" (npm) clauses, i.e., provisions allowing States to act in a way that would otherwise be inconsistent with the treaty when the actions are taken with the aim to pursue certain fundamental objectives, such as the protection of security interests or the conservation of exhaustible natural resources.21 In addition, the case law of investment arbitral tribunals has developed techniques to obviate the possible lack of npm clauses in iia s and allow host States to reconcile the protection of investments with other, non-investment considerations. One of the most important is the recognition of the existence of a host State's power to regulate, that is "the legal right exceptionally permitting the host state to regulate in derogation of international commitments it has undertaken by means of an investment agreement without incurring a duty to compensate".22 Pursuant to such power, arbitral tribunals have taken the stance that actions by host States aimed at safeguarding their fundamental interests cannot be considered to be violations of iia s and thus do not entitle investors to receive any compensation.23 Nevertheless, the power to regulate doctrine does not endow States with unrestrained freedom. Arbitral tribunals have actually stressed that it is not up to the host State to draw the line between a violation of an investment agreement and a legitimate regulatory intervention, and that a legitimate exercise of the State's regulatory powers is subject to conditions to avoid abuses. In greater detail, a regulatory measure must be proportionate, meaning that: i) it must actually be suitable to achieve a certain objective; ii) it must be -among all the potential alternative measures -the least intrusive; iii) it must be intended to pursue an objective which, balancing the different interests at stake, has to prevail for its importance. 24 A recent example of this line of reasoning is the Marfin v. Cyprus case,25 arising from the allegation that the respondent State, through a series of different acts, had acquired the control of the Cypriot bank Laiki in which the claimants had shares and had thus indirectly expropriated the latter's investment. The Tribunal held that the challenged measures could not be deemed to be an expropriation, inasmuch as the investor was not made to bear an excessive burden and they were enacted to protect the public welfare and to support the Cypriot banking sector.26 This approach has been almost unvaryingly endorsed by arbitral case law, also in cases dealing with the fet obligation. Indeed, this was considered as a standard requiring "a weighing of an investor's expectations and the State's regulatory interests"27 and "entailing reasonableness and proportionality. It ensures basically that the foreign investor is not unjustly treated, with due regard to all surrounding circumstances".28 It emerges from the brief analysis carried out above that, under international investment law, States retain the power to protect their fundamental interests, even when this means infringing investors' rights. Thus, to submit certain investments to a screening upon their entry into a State could well be qualified as an exercise of States' regulatory powers.29 It follows that even in the event States do have obligations under iia s with respect to the admission of investments, to disregard them by means of the exercise of screening mechanisms could still be permissible, provided that the use of such mechanisms respects the principle of proportionality.
In conclusion, despite the almost complete lack of information on the details of the operation, Italy's exercise of its golden power to protect a domestic company operating in the field of critical technologies seems to fit perfectly within the worldwide protectionist trend that has interested all major economies, including the EU. Like most investment entry regulations, the Italian legislation on fdi screening confers the Government a great margin of discretion in deciding whether or not to admit a foreign investment. In addition, the list of economic sectors in which the golden power can be exercised significantly On another aspect of the complex relationship between golden power and power to regulate see also Palombino, "Golden Power e Power to Regulate a fronte dell'emergenza sanitaria: due facce della stessa medaglia", Democrazia e diritti sociali, special issue "Pandemia, normazione dell'emergenza e modelli d'intervento socio-economici", 2020, p. 237 ff., where the author explores the possibility of the use of the power to regulate with respect to investments that have already successfully undergone screening for admission.
an assessment under international law The Italian Review of International and Comparative Law 1 (2021) 433-442 expanded over the last years. This is not surprising: international law poses little limits to the enactment and design of such regulations. As for general international law, it imposes no such limit and allows States to freely determine how and when to open their economies to foreign actors. Obligations relating to the admission phase of an investment could only be found in some iia s, which could also be sometimes construed as covering pre-investment expenditures. However, screening mechanisms are usually intended to protect States' fundamental interests; thus, even in the latter case, States could still disregard these obligations to use them and exercise their regulatory powers, inasmuch as they respect the principle of proportionality when interfering with investors' rights.