Much like in other EU Member States, Foreign Direct Investments (FDI) screening has become a hot topic in the Netherlands. Although the Netherlands has FDI-like rules for certain specific sectors, general FDI legislation is not yet in place. However, a proposal for general FDI legislation has recently been sent to the Dutch House of Representatives for the next steps in the legislative process. As previously announced by the Dutch government, the future FDI legislation is intended to have retroactive effect (until 8 September 2020).
We frequently receive questions on the status of the legislative process in relation to FDI screening in the Netherlands and on the features of the possible legislation. This blog lists the key questions and their answers. Any other questions? Just get in touch with us and we will be happy to answer them.
The legislative process and status
What is the background and status of the general FDI screening legislation that has been announced in the Netherlands?
Initially, developments in the field of FDI legislation in the Netherlands were at a slow pace. However, the COVID-19 crisis and an increase in undesirable investment risks feared by the Dutch government led to an acceleration and a draft bill for general FDI screening was consulted in the fall of 2020. Following strong criticism from the Council of State, the screening rules were significantly amended and on 30 June 2021 the proposal for the ‘Investments, Mergers and Acquisitions Security Screening Bill’ (Wet veiligheidstoets investeringen, fusies en overnames) (ISSB) was sent to the House of Representatives for the next steps in the legislative process.
When does the ISSB come into force?
Based on the information currently available, it is not yet possible to make a reliable estimate of the ISSB’s entry into force.
What about the retroactive effect of the ISSB?
Although the Dutch government had initially announced that the future FDI rules would have retroactive effect as of 2 June 2020, the ISSB now provides for retroactive effect as of 8 September 2020.
The scope of the ISSB
Which companies are covered by the ISSB?
The ISSB focuses on (a) vital suppliers and (b) companies active in the field of sensitive technology.
- Vital suppliers: The ISSB contains a non-exhaustive list of categories of vital suppliers, including providers of heat transport, nuclear power, air transport, ports and banking services.
The ISSB further provides that other categories of vital suppliers may be identified in future secondary legislation.
- Sensitive technology: This term includes (i) dual use products (of which the export is subject to a license requirement pursuant to Article 3(1) of Regulation (EC) No 428/2009) and (ii) military goods as defined under Dutch law.
However, on the basis of future secondary legislation, dual use products and military goods can be excluded from the scope of the ISSB, and other technologies can be added to the scope under certain conditions.
Up to the day of writing, there is no information on the secondary legislation yet.
What kind of transactions can be investigated under the ISSB?
The ISSB applies to certain ‘acquisition activities’. A distinction can be made between (i) general acquisition activities that apply to both vital suppliers and companies active in the field of sensitive technology and (ii) acquisition activities that result in the acquisition or increase of significant influence over certain categories of companies active in the field of sensitive technology.
(i) General acquisition activities
The screening rules apply to the following acquisition activities with respect to companies based in the Netherlands that are vital suppliers and companies that are based in the Netherlands that are active in the field of sensitive technology (so-called “target companies”):
- Investments in a target company by an acquirer that lead to a change of control in that company;
- The merger of two or more previously independent companies into a target company;
- Establishment of a joint venture performing on a lasting basis all the functions of an autonomous economic entity, if it will become a target company;
- Division of a company if (a) the company being divided is an undertaking which is a vital supplier or is active in the field of sensitive technology and (b) the division involves a change of control in the company which will be a target company after the division;
- The acquisition of part of the assets of a target company, if those assets are essential for the company’s activities related to vital processes or sensitive technology;
- Other legal acts that result in the acquisition of control in a target company;
- Certain forms of acquisition of goods by universal title.
(ii) Acquisition or increase of significant influence over sensitive technology
In addition to the more general acquisition activities mentioned above, the acquisition or increase of significant influence can also be considered as an acquisition activity with respect to certain categories of companies in the field of sensitive technology. Significant influence refers to the possibility for a person to cast a certain percentage (a minimum of 10%, 20% or 25%) of the votes at the general meeting of shareholders in a target company or the obligation for the target company to promote the appointment of one or more directors on the recommendation of a third party.
However, these rules only apply if and insofar as the specific categories of companies are appointed by future secondary legislation. In these cases, the percentage of the voting rights that is considered to be significant (10%, 20% or 25%) will also be determined.
Up to the day of writing, there is no information on the secondary legislation yet.
Does the ISSB only apply to investments from abroad or does it have a broader scope?
The rules are ‘country neutral’ and apply regardless of the acquirer’s country of origin. This means that the rules do not only apply to acquisition activities from abroad, but also to acquisition activities within the Netherlands.
Notification requirement, test and procedure
Is notification mandatory?
Any intention to carry out an acquisition activity within the scope of the ISSB must be notified to the Minister of Economic Affairs and Climate (the Minister). However, in practice, the notifications are received and handled by the Investment Assessment Agency (Bureau Toetsing Investeringen). There is no statutory deadline for a (pre-closing) notification, but the review period will only start upon notification.
A (pre-closing) notification obligation does not apply if the acquiring company does not know, due to confidentiality requirements, that an activity of the target company falls within the scope of the ISSB. In that case, the target company shall report the intention of an acquisition activity to the Minister as soon as it becomes aware of it. Another exception concerns certain forms of acquisition of goods by universal title. In that case, the acquirer shall report the acquisition to the Minister within two weeks after the acquisition. Finally, in the event of a public bid for a listed target company, the notification shall be made simultaneously with the announcement of the public bid.
Is there a standstill obligation?
An acquisition activity may not take place before (a) the Minister has notified that no assessment decision is required or (b) the Minister has issued an assessment decision. Exceptions include certain forms of acquisition of property by universal title, in which case the acquirer shall report the acquisition activity to the Minister within two weeks after the acquisition.
In case of violation of this standstill obligation, the Minister may impose fines of up to €870,000 (reviewed annually) or, if a fine of this amount does not allow for appropriate sanction, a fine of up to 10% of the turnover of the company concerned (potentially involving the entire group’s turnover).
What does the substantive assessment entail?
In general, the Minister will verify after receiving a notification whether an assessment decision is required. This is only the case if an acquisition activity could lead to a risk to national security. If the Minister decides that an assessment decision is required, an assessment is then made as to whether the acquisition activity poses a risk to national security.
The term ‘national security’ refers to the security interests that are essential within the Netherlands for the democratic legal order, security or other important state interests, or social stability, provided that they relate to the interface of economy and security. These interests are explicitly referred to as follows:
- Maintaining the continuity of vital processes;
- Preserving the integrity and exclusivity of knowledge and information of critical or strategic importance to the Netherlands;
- Preventing undesirable strategic dependence of the Netherlands on other countries.
In the assessment of the ‘risk to national security’ criterion, the following factors are, inter alia, taken into account:
- The transparency of an acquirer’s ownership structure and relationships;
- Whether an acquirer is, or is controlled by, a natural or legal person or a non-state entity that is subject to restrictive measures such as Chapter 7 of the United Nations Charter;
- The security situation in the country of residence of an acquirer, in the country in which the head office of an acquirer is located or in the countries in the surrounding region;
- Any criminal offences committed by the acquirer.
The following factors shall also be taken into account when assessing an acquisition activity involving a vital supplier:
- The acquirer’s track record with respect to vital processes;
- The reputation of the state in which the acquirer is a resident, has its head office or is under the influence of in terms of offensive programmes aimed at disrupting or affecting certain processes;
- The financial stability of the acquirer;
- Whether the state in which the acquirer is a resident, in which its head office is located or of which it is under the influence, is bound by relevant treaties and decisions of international organisations and whether it has a good track record of compliance with these treaties.
The following factors shall also be taken into account when assessing an acquisition activity involving sensitive technology:
- The acquirer’s track record with respect to sensitive technology;
- Whether the state in which the acquirer is a resident, in which its head office is located or of which it is under the influence, has a state export control policy, or whether it has a good track record of export control and compliance with relevant treaties or decisions of international organisations;
- The degree of separation between civil and military research and development programmes in the state in which the acquirer is resident, has its head office or is under the influence of;
- The acquirer’s motives for the acquisition activity;
- Whether the state in which the acquirer is a resident, in which its head office is located or of which it is under the influence, has an offensive programme aimed at acquiring sensitive technology in order to achieve technological or strategic dominance;
- Whether the state in which the acquirer is a resident, in which its head office is located or of which it is under the influence, will exercise a strategic dominant position with respect to the availability, pricing or further development of the relevant technology.
What is the review period for transactions under the ISSB?
The Minister shall indicate within eight weeks after receipt of a notification whether an assessment decision is required. If an assessment decision is required and after the application has been submitted, the Minister shall decide on the application within eight weeks.
The deadlines for these two phases can be extended individually (but not more than 6 months in total) if further investigation is required. The review period can also be extended by 3 months if the activity in question falls within the scope of Regulation (EU) 2019/452. Finally, the review period can be suspended in case of requests for additional information.
Can a transaction be approved subject to conditions under the ISSB?
The Minister may approve acquisition activities subject to conditions. The Minister may impose conditions to a decision (only) if this is necessary to prevent or limit risks to national security. The ISSB contains a non-exhaustive list of possible conditions, including the following:
- Additional security and user requirements for the handling of sensitive information of purchasers of goods and services provided by the target company;
- Establishing a security committee or appointing a security officer to protect sensitive information and business processes and granting this committee or officer the authority, for example, to restrict or prohibit access to or exchange of information;
- The incorporation, in a separate subsidiary established in the Netherlands, of parts of the company that are part of vital processes in the Netherlands or that provide services to the Dutch government that are sensitive to national security;
- Setting up a separate supervisory board for a Dutch subsidiary;
- Mandatory certification of the acquirer’s shares (or part thereof) through a foundation.
There are also specific conditions for sensitive technology companies, including an obligation to deposit certain technology, source code, genetic code or knowledge with the state or a third party.
However, if the risk to national security cannot be sufficiently mitigated by conditions, the Minister will prohibit the activity.
What are the consequences if an acquisition activity is not reported?
There may be multiple consequences if acquisition activities are not reported. The acquisition activity may be void or can be annulled, or the Minister may impose an order to perform certain actions to prevent the undesirable effects of an acquisition activity or to undo the activity. If the control or significant influence has not been reduced in accordance with the Minister’s order, the Minister is authorised to dispose the shares in accordance with its order or otherwise implement the order.
In addition, the exercise of acquired rights may be suspended. In those cases, the rights acquired by an acquirer or target company via an acquisition activity may not be exercised (with the exception of, where applicable, the right to the income of the business, dividends and distributions from the reserves). This concerns, for example, cases where an acquisition activity is carried out before the Minister has notified that no assessment decision is required or if conditions to an acquisition activity are not or not properly implemented.
Failure to report an acquisition activity may also result in a fine of up to €870,000 (reviewed annually) or, if a fine of this amount does not allow for appropriate punishment, a fine of up to 10% of the turnover of the company concerned (potentially involving the entire group’s turnover).
If an acquisition activity has not been reported (correctly), the Minister may also order a notification of the activity concerned. However, the Minister may also announce ex officio that no assessment decision is required or take an ex officio assessment decision.
Can a decision be reversed?
In the event of a serious risk to national security, the Minister may reassess an activity within six months of becoming aware of that risk. In order to get to such a reassessment, there must be (a) a potential social disruption with economic, social or physical consequences or (b) an immediate and increased real threat to Dutch sovereignty.
Other legislation related to foreign investment screening
What other types of screening of foreign investments are provided for in Dutch law?
In May 2020, the telecommunications sector (undesirable control) bill (Wet Ongewenste Zeggenschap Telecommunicatie) (TUCB) was passed by the Dutch Parliament and retroactively entered into force as of 1 March 2020. The TUCB focuses exclusively on the telecommunications sector and provides that an investment or acquisition requires notification to the competent Minister if (a) predominant control is acquired and (b) this control leads to relevant influence in the telecommunications sector.
Other sector specific legislation that can affect foreign investments – not necessarily introduced as FDI screening mechanisms as we know today – can inter alia be found in sectors such as electricity, gas, drinking water, nuclear activities, defense and mining.
