The article was firstly published in the Bulgarian “Capital” newspaper on 11.01.2024.

Zhulieta Mandazhieva, LL.M, admitted to the Sofia Bar

The bill to amend the Investment Promotion Act (IPA) initiated by the Movement for Rights and Freedoms party (“RFM“) is about to produce significant negative results for the business environment in Bulgaria1. The draft amendments should protect Bulgaria and the EU from "investments with "corrosive capital" according to their promoters. In principle, the screening must be limited to "investments or acquisitions that have the potential to damage national security and public order". Allegedly the screening mechanism is based on EU Regulation 2019/452).

The detailed texts in the draft act, however, practically introduce a licensing regime for a huge part of the foreign direct investments (FDI) in the country. They will have to obtain a prior approval from a specially established Inter-ministerial Council for screening of foreign direct investments related to security or public order.

The dense filter

In general, there is no harm in trying to stop corrosive capital from infiltrating Bulgarian investment scene. The problem in this case is that almost every investor with a shareholding other than "a Bulgarian one" will have to pass muster (with the exception of investors from the EU and other whitelisted countries – see next article).

The text of the bill stipulates that any FDI should get a prior permission from the screening council if it is in any of the areas of activities referred to in Article 4(1) of the Regulation (EU) 2019/452 provided its value exceeds 2 000 000 EUR or their equivalent in Bulgarian leva.

However, the text in question provides a rather extended list of sectors that an investment has the potential to affect. This includes, in the first instance, "critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aeronautics, defence, electoral or financial infrastructure, sensitive facilities, as well as land and real estate critical to the use of such infrastructure".

Dual-use goods are listed separately, which can include "artificial intelligence, robotics, semiconductors, cybersecurity, aerospace and defense technologies, energy storage technologies, quantum and nuclear technologies, and nanotechnology and biotechnology." Investments in critical resources (energy, raw materials, food), access to sensitive information (personal data) and media freedom and pluralism can also be the object of screening, as any "high-tech company". By reference to the regulation, screening could in fact cover any company that has access to personal data.

This makes for an unlimited range of activities where any major investment would have to be authorised by the Inter-Ministerial Council.

After the adoption of the text at the first reading, amended criteria were introduced. They propose that investments that meet at least two of the five conditions listed above should pass through the special procedure. This wording means that it is possible to control investments in areas other than the otherwise broadly defined range, as well as below the minimum threshold. Consequently, it appears that most technologic investments in Bulgaria must be made with a state sanction. It is currently unclear whether the council will have the capacity to assess all investments and, therefore, whether it will act within the set deadlines, which in themselves will delay any investment.

The legal aspects

From a legal point of view, the draft amendment to the IPA is contradictory for several reasons.

Any member-state mechanism based on Regulation 2019/452 on screening out of FDI must follow its frame, otherwise it cannot draw legitimacy from EU law. The Regulation states unequivocally that only investments that pose a risk to the public order or security of a Member State and only foreign investors within the meaning of the Regulation may be subject to restrictive measures. The latter covers only investors established or registered outside the EU.

The Bulgarian bill also nominally refers to the screening mechanism under the Regulation. However, this is not confirmed by the powers and scope of control as defined in the law - firstly the procedure is permissive, and by condition the control under the Screening Regulation should be risk-based and only authorised where there are reasonable grounds to suspect a risky investment from a public order or national security perspective (remarkably, the chairman of the National Security Service is not even a member of the Inter-Ministerial Council, and her or his opinion, given the subject matter of the assessment, should be decisively important).

The restrictive measure - prohibition of investment, should be justified only if it is necessary and proportionate, i.e. the protective effect against the intended investment in relation to the national interest is imperative and cannot be otherwise achieved.

For this reason, national laws of the leading EU Member States provide for a notice, a formal assessment of the investment and only in the presence of sufficiently motivated reasons - the issuance of a decision for a thorough risk assessment, which would end with an authorisation, conditional authorisation or a refusal in the most severe cases, for a specific investment. Establishing of a licensing procedure reverses the logic of the Screening Regulation and creates a rebuttable presumption that any investment (through which the investor will gain access to personal data, for example) is inherently affecting security and public order in Bulgaria - something that is contrary to EU law, formal logic, and text of the Constitution of the Republic of Bulgaria, protecting free enterprise. In practice, this legislative solution, combined with the very low unlocking threshold for control, would close the Bulgarian economy exclusively to quality and diversified foreign capital, which would have a devastating effect on the FDI landscape.

Encompassing any foreign investor that acquires more than 10% of the capital of a local company (regardless of where it is established) to the scope of control, the Bill enters the scope of the restrictions on freedom of establishment permitted under the EU treaty framework, which have a different basis in the Treaty on the Functioning of the EU - Article 65(2). In practice, it so happens that the Bulgarian legislator introduces two different authorisation mechanisms for FDI: one related to the Screening Regulation, the public order and security, and a national one, but without specifying it explicitly in the reasoning and purpose of the law.

In conclusion, a clear, specific, and substantiated national security link is not uniformly pushed throughout the bill and the requirements for meeting certain criteria grounds on which an effective judicial defence can be built are absent. The vague wording extends the object of scrutiny to practically all foreign direct investments (except those from white listed countries), while the draft law introduces a new licensing procedure, covers acquisition of minority interests, and may cover past transactions.

Among the prerequisites listed in the characteristics of the covered FDI, there is a lack of a specification that it must constitute risk to national security or public order. As a result of the legislative amalgam, Bulgaria will introduce political controls on the entry of foreign capital in general and/or or make investment in Bulgarian companies or projects "greenfield" prohibitively complex and expensive. I fear that the effect will be the same as during the financial crisis, when foreign capital shrank towards their headquarters, and key Bulgarian industries were taken over by domestic 'buyers of last resort', the most famous of which was the CCB, which became an emblem of the merger of political and corporate interests.

And this is not going to lead to a brightening of the economy and protect it from corrosive capital (be it national).