Alvisory-Ghellal

Introduction: "Fide Sed Cui Vide" or -in a more prosaic style -"trust does not exclude control". This deep-rooted principle has governed the set-up of an Investment Screening Mechanism (ISM) in most countries in the world eager to protect strategic autonomy in sectors considered essential. ISM first appeared in the United States, Canada and Australia in the mid-1970s. They became widespread in successive waves following (i) the 2008 subprime crisis, (ii) then to deal with the rise of sovereign investments from China, Russia or the Middle East and (iii) more recently as a reaction to the effects of the Covid-19 crisis. It is now widely acknowledged that the enactment of ISM is necessary to reconcile openness to growth-fostering inward FDI with States’ ability to prevent unwelcomed investments. Algerian investment law is part of this global trend and aims at striking a balance between inbound investments incentive and the legitimate need to subject some business sectors to specific oversight. A peculiar feature of ISM in Algeria is that it has primarily appeared as a reaction to unamicable change of control in strategic sectors. In the aftermath of the subprime crisis, Algeria enacted a stringent ISM in 2009 based on a cross-sectoral approach (i.e. applying to all economic sectors), and a pre-emption right to the benefit of the State designed as a shield against “aggressive” cross-border transactions. Since the enactment of the 2020 Supplementary Finance Law and subsequent amendments thereof (2020 SFL), the ISM has shifted to a sectoral approach, as it only applies in strategic sectors. Likewise, the 2009 preemption right has been replaced by an approval requirement prior to any equity transfer to foreign investors. These legislative amendments metabolize a deep evolution of the Algerian ISM towards simplification and greater legal certainty. One of the main progresses of the 2020 reform was to specify the scope of the ISM. Lawmakers have indeed taken care to specify the sectors deemed strategic and then - within these sectors - to list the activities referenced in the Nomenclature of Economic Activities (NEA) subject to the ISM. This double-trigger mechanism considerably enhances the predictability and efficiency of the ISM. From an investor perspective, this positive development is to be highlighted but also nuanced. Despite the ISM's facelift, FDI screening still entails a certain level of complexity requiring in-depth review. This is due to the very fact that, in strategic sectors, ISM does not apply to all activities nor is the exclusive legal basis regarding matters it address (I). Moreover, in non-strategic sectors, some activities remain subject to specific regulations having ISM-similar effects (II). In strategic sectors, ISM does not apply to all activities, nor is the exclusive legal basis regarding matters it address: In strategic sectors, the reformed 2020 ISM enshrines 2 core principles: The limitation to 49% of foreign shareholders’ equity stake. The mandatory approval requirement prior to any equity transaction to the benefit of foreign investors. Within this legal playfield, the main challenge remained to define - or at least to clarify - the scope of strategic sectors. From this point of view, the legislator has shown a remarkable proactivity  that breaks with the “catch-all” approach prevailing under the 2009 regime. Under the 2020 ISM (as amended) the following are considered strategic: The exploitation of the national mining domain, as well as any underground or surface resource resulting from an extractive activity on the surface or underground, with the exception of quarries for non-mineral products The upstream of the energy sector and any other activity governed by the law on hydrocarbons, as well as the operation of the distribution and transmission network of electrical energy by cables and gaseous or liquid hydrocarbons by overhead or underground pipelines; Industries initiated or related to military industries under the control of the Ministry of National Defense for the local market and export; Railways, ports and airports; Pharmaceutical industries, with the exception of investments related to the manufacture of innovative, high value-added essential products requiring complex and protected technology, intended for the local market and for export. Fertilizer production has also been added to the list of strategic sectors following the 2025 Finance Law. Within these strategic sectors, Executive Decree 21-145 has subsequently listed 43 activities of the NAE subject to the ISM. This normative architecture has considerably enhanced the predictability of the ISM. However, it still calls for specific attention in critical respects: Not all activities in strategic sectors are subject to the ISM. In the pharmaceutical industry, the manufacture of innovative products has been excluded to not discourage international players from producing locally high value-added drugs requiring massive investments. It should also be noted that in the vital energy sector, activities such as drilling, pipeline construction or study and engineering activities are not listed in Executive Decree 21-145 and therefore escape the ISM. In terms of military and defense industries, Executive Decree 21-145 does not list any activity subject to the ISM but simply specifies that activities initiated by or in relation to entities under the control of the Ministry of National Defense must be considered strategic. Here, the strategic feature does not rely on a material assessment of the activities but on a mere organic criterion. Executive Decree 21-145 has not yet been updated to specify the fertilizer production- related activities subject to the ISM. In strategic sectors, another layer of complexity stems from the coexistence of IMS with other sectorial regulations having the same purpose. For instance, in the hydrocarbons industry, transfers of rights and obligations related to a contract are subject to (i) prior approval of the sectorial regulator and (ii)  a preemption right of Sonatrach, as a state-owned monopoly. In the same vein, in the event of a change of control of one of the persons constituting the contracting parties, the Minister in charge of hydrocarbons may decide that this operation is incompatible with the continued participation of the person concerned in the hydrocarbon contract. The way this prerogative articulates with the IMS prior approval requirement is not clear since the relevant  implementing decree is yet to be taken. From a more general point of view, under Article 49 of the 2020 SFL import for resale as is activities remain subject to the 51/49 rule but are not considered strategic. In this sector of activity, transfers of shareholdings to foreigners are therefore not subject to any specific prior approval requirement. This hybrid regime of import for resale as is exemplifies that even in non-strategic sectors a number of activities are subject to specific regulations producing ISM-similar effects. In non-strategic sectors, a number of activities are subject to specific regulations producing ISM-similar effects: Activities in non-strategic sectors do not ipso jure escape from any kind of investment screening. Due to their features, some are subject to specific regulations. Executive Decree 15-234 defines “regulated activities” as those likely to directly affect concerns or interests related to: public order; security of property and people; the preservation of natural resources and public goods that make up the national heritage; public health; environment. The concerns addressed by Executive Decree 15-234 are broad and can therefore give rise to a wide range of grounds for regulatory intervention. Out of 1600 activities of the NEA, 318 are regulated. A significant part of these regulations is totally unrelated to FDI screening and simply relates, for instance, to diploma requirements in some professions or concerns urban planning and safety rules in all places open to the public (restaurants, malls, sports facilities, cinemas, etc.). However, other activities regulated based on the Executive Decree 15-234, are subject to different type of controls that may entail effects close to a formal ISM. In the galaxy of sectoral regulations, foreign investments can indeed be subject to a  wide spectrum of measures, encompassing: Exclusion: Foreign investments are sometimes prohibited. This is the case, for instance, with activities related to information and the media, which can only be carried out by (i) natural persons of Algerian nationality, exclusively, and (ii) legal entities incorporated in Algeria whose capital is held exclusively by natural persons of Algerian nationality. Limitation: In some sectors, foreign investments are not prohibited but remain restricted by the 51/49 rule. This is the case in the smoking tobacco manufacturing sector, in which foreign investors can only hold a minority stake. Enhanced control: In the telecommunications sector, operators are subject to enhanced technical, commercial and legal scrutiny from the regulatory watchdog. The legal control relates, first of all, to licenses and authorizations which cannot be assigned due to their intuitu personae The control also covers operators’ shareholding structures. Indeed, for licensees (4G, 3G, GSM, V-Sat), any direct or indirect acquisition of a stake in the share capital and/or voting rights must be subject to the prior approval of the regulator, under penalty of nullity or withdrawal of the license. For authorization holders (ISP, cloud services, VoIP, audiotex), ex ante approval requirement applies only if the proposed transfer relates directly to more than one third of the share capital or voting rights. Enforceability: In the financial field, transactions involving the share capital of banks and financial institutions are also subject to prior scrutiny. Additionally, amendments to the articles of association of a foreign bank or financial institution having a branch in Algeria shall be submitted, in order to become enforceable in Algeria, to the Council of Money and Credit when they relate to the purpose of the company. Restriction on dividends: Algerian investment law has consistently and very effectively enshrined the right of international investors to repatriate their dividends and any other proceeds arising from their activities. A notable exception remains for imports for resale as is businesses, for which the repatriation of dividends is not permitted and which – as previously shown - also remains subject to the 51/49 rule. This restriction on the repatriation of dividends is justified by the fact that foreign investments in this field are not deemed productive investments. The above examples reflect how foreign investments in "regulated activities" can be subject to specific scrutiny even though they fall outside the list of strategic sectors. Despite the considerable improvement resulting from the latest reform of the ISM, foreign investment remains subject to a fragmented regulatory framework. This heterogeneous framework is far from being specific to Algeria. In the US, the cross-sectoral IMS resulting from the FIRRMA (Foreign Investment Risk Review Modernization Act) has led to the scrutiny of 20% of incoming foreign investments in all economic sectors. In the European Union, Member States have notified around 100 different ISMs under the cooperation mechanism and the Commission reported that in 2023 more than 1800 investments had been subject to approval request. In China, the National Development Commission recently updated its "Negative List" prohibiting or restricting foreign investment in more than 100 sectors or economic activities. Conclusion: Algerian IMS is now well-anchored in the business environment and the principles thereof have been stabilized. However, it could still be finetuned in the following respects: From a procedural point of view, it is essential to clarify the rules pertaining to the approval requirement prior to equity transfers to foreign investors. This clarification is necessary to anticipate the issues encountered in recent years with regard to transactions that have not obtained a certificate of renunciation of the exercise of the pre-emption right that was required before the 2020 reform. To mitigate the consequences related to the nullity of such transactions, the lawmaker has been compelled to set up an ex-post regularization procedure that can be implemented until December 31, 2026. However, this regularization process does not apply to transactions carried out in strategic sectors, nor those carried out after the entry into force of the 2020 SFL. From a substantive point of view, consideration could be given to removing the nexus between import for resale as is and the principles governing the IMS. In this industry, the prohibition of dividends repatriation resting on foreign shareholders seems self-sufficient to justify the abolition of the 51/49 rule. Similarly, it could be envisaged to relax the rules relating to the mining sector in order to make it more FDI-friendly. By its very nature, the IMS must remain evolving to allow constant adaptation to new risks likely to jeopardize States’ strategic interests. This level of agility should not be perceived as detrimental to the legal certainty but is rather to be appraised in relation to the need to adapt the concept of strategic autonomy to an ever-changing environment. In this respect, it is noticeable that investments in activities involving the access and management of personal data are subject to increasing attention due to the specific risks they entail. Another major trend is the increase of IMS dedicated to outbound investments, as evidenced by the EU Recommendation issued on January 15, 2025 urging Member States to scrutiny outbound investments outside of the EU in three strategic sectors, namely: semiconductors, artificial intelligence ("AI"), and quantum technologies What makes us different? Our FDI experts work seamlessly with clients and international law firms, implementing coordinated strategies designed to navigate within ever-moving complex regulatory landscapes. As a trusted independent law firm, we have developed solid working relationships with administrative and regulatory bodies entitled to screen investments. Our FDI experts work in close cooperation with our M&A team to offer fully integrated solutions to our clients. Authors: Mahieddine RAOUI, Partner, [email protected] Steven ALDRICH, Partner, [email protected]