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Italy tightens foreign investment scrutiny over 5G technology


On 25 March 2019, the Italian Government (“Government”) passed Law Decree No. 22 (“Decree 22/2019”) which includes, among others, provisions on the so-called “special powers” of the Government in relation to broadband electronic communications based on 5G technology. Decree 22/2019 became effective on 26 March 2019 and will need to be converted into law by no later than 24 May 2019.

The express intent of Decree 22/2019 is to adjust the Government’s special powers (“Special Powers”) to the new technological developments with specific reference to 5G technology and the associated risks of misuse of data, with implications for national security.

Special Powers of the Government

The Special Powers were established in 2012 through Law No. 56 dated 11 May 2012 (“Law 56/2012”). Such powers essentially allow the Government to impose conditions on, or veto, certain transactions whenever the Government holds that these would result in the threat of serious harm to Italian public interest in the areas of national defense and homeland security and, in certain circumstances, in the energy, transportation and telecommunications industries, including critical hi-tech infrastructures and technologies.

5G is viewed as strategic for national security.

5G as a Strategic Asset

The deals under the Special Powers are those transactions – such as acquisitions, mergers, asset deals or share deals – which trigger a direct or indirect change of control over companies that hold so-called “strategic assets” in the above-mentioned sectors (“Strategic Assets”).

Examples of Strategic Assets include systems and equipment such as command, control, communications, computers, and intelligence systems (‘C4I’); advanced sensors integrated with C4I networks; air and naval military propulsion systems; nanotechnologies; certain systems and equipment related to public order, security, national emergency; communication systems for data and information management, including sensitive data; virtual private networks held by State agencies; telecommunications networks held by the Ministry of Interior; critical technologies including artificial intelligence, robotics, semi-conductors, dual use technologies; and certain protection systems for nuclear, biological, chemical and radiological threats.

Now, Decree 22/2019 amends Law 56/2012 and introduces two significant innovations:

(a) 5G-based broadband electronic communications services (“5G ECS”) are now listed among the Strategic Assets for national security; and

(b) Any individual or entity entering into 5G-related contracts or arrangements with non-EU individuals or entities must notify, and obtain approval from, the Government when such contracts or arrangements concern:

(i) The purchase of goods or services connected to the design, implementation, maintenance and management of networks relating to 5G ECS; or

(ii) The acquisition of high tech components that are instrumental to the aforesaid 5G implementation or management

The contracts and arrangements under (b)(i) and (b)(ii) above may be referred to as “5G Contracts”.

Non-EU individuals or entities are not only those natural or legal persons that have their residence, registered office or place of business in a Member State of the EU or EEA, but also those entities with registered office or place of business in such a Member State, which are directly or indirectly controlled by a non-EU individual or entity or which have established their residence, registered office or place of business in such a Member State in order to circumvent the application of the Special Powers rules.

Parties’ Notification Obligations and Government Veto Powers

All of the foregoing is meant to allow the Government to impose conditions on, or veto, the entering into of 5G Contracts, regardless of any change of control in any of the contractual parties involved.

To this end, entering into 5G Contracts with non-EU entities must be notified in advance to the Government. Lack of notification triggers an administrative penalty equal to a maximum of twice the value of the 5G Contracts under scrutiny and, in any event, no less than 1% of the aggregate turnover of the companies involved. In addition, if 5G Contracts are implemented in breach of the veto or the conditions imposed by the Government, such 5G Contracts are null and void and the Government may oblige the parties to reinstate the previous situation at their expense.

Once notified, the Government will have 15 working days (plus additional 10 working days if clarifications are needed) to look at whether the 5G Contracts could result in the threat of serious harm to Italian public interest in national defense and homeland security. In carrying out its assessment, the Government will also take into account possible technical weaknesses which could jeopardize the soundness and security of the networks and data.

As a result of its assessment, the Government may veto or impose conditions on the 5G Contracts. By contrast, if the above-mentioned terms expire without any Government’s objection, then the 5G Contracts are deemed as cleared and may be validly entered into.

Key Implications

The amendments set forth in Decree 22/2019 were introduced in a rapidly evolving national and international context – amidst intense debate around the strategic relevance of 5G networks and services – and might give rise to further discussions. Indeed, on the one hand, the Government extended its Special Powers to activities relating to the development of new generation networks. On the other hand, stakeholders, hi-tech players, service providers in the telecommunications arena and information technology businesses will have to consider the possible application of the Special Powers – and the consequent need to notify the Government – also when carrying out 5G-related transactions in the ordinary course of their operations.

While it is too early to determine the ramifications of Decree 22/2019 and its side effects, the new rules already allow the Government to establish simpler terms and conditions for the notification and assessment of 5G Contracts, with subsequent possible streamlining of the overall process.

The Parliamentary act that, within 24 May 2019, would convert Decree 22/2019 into law will likely shed light on the above-mentioned aspects as well as on the more controversial ramifications of the new provisions.

Contributors: Antonio Lattanzio & Jacopo Liotta.