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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, this is about to change: On 17 May 2022, Dutch Senate adopted the ‘Investments, Mergers and Acquisitions Security Screening Bill’ (Wet veiligheidstoets investeringen, fusies en overnames) (ISSB) which contains FDI-like rules that are not limited to specific sectors. The ISSB is expected to enter into force by the end of 2022, but will also have retroactive effect as of 8 September 2020. The announced legislation may therefore already impact transactions completed prior to the ISSB’s entry into force.
We frequently receive questions on the contents and status of FDI screening legislation in the Netherlands. 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.
1. What is the background 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 a higher risk of undesirable investments feared by the Dutch government resulted in a draft bill for general FDI screening which was consulted in the fall of 2020.
Following strong criticism from the Council of State, the text of the consulted regulation was significantly amended and the proposal for the ISSB was sent to the House of Representatives on 30 June 2021. After several amendments from the House of Representatives, the bill was adopted by the House of Representatives in April 2022 and by the Senate on 17 May 2022.
2. When will the ISSB enter into force?
In april 2022, the responsible minister indicated that the ISSB is expected to enter into force by the end of 2022.
3. What is known about the retroactive effect of the ISSB?
The ISSB provides that the rules will have retroactive effect as of 8 September 2020. This means that the future rules may already apply to transactions completed prior to the ISSB’s entry into force.
However, the retroactive effect does not concern an active notification obligation: the Minister can only order a notification within 8 months after the entry into force of the law. However, that retroactive effect will not apply (i) in relation to sensitive technology other than dual use products or military goods (see also Question 4) and (ii) target undertakings that are an operator of a high tech campus.
4. Which undertakings and sectors are covered by the ISSB?
The ISSB applies to undertakings based in the Netherlands that are (a) vital suppliers,(b) an operator of a high tech campus or (c) undertakings active in the field of sensitive technology (so called “target undertakings”). The ISSB uses the EU competition law concept of undertaking.
In contrast to the regular procedure, (possible) future secondary legislation on the scope of vital suppliers and sensitive technology will be submitted to the Senate and the House of Representatives at least 4 weeks before entry into force.
5. What kind of transactions can be investigated under the ISSB?
The ISSB applies to certain ‘acquisition activities’ with respect to target undertakings. A distinction can be made between (a) general acquisition activities related to target undertakings, applying to both vital suppliers, operators of high tech campuses and undertakings active in the field of sensitive technology, and (b) the acquisition or increase of significant influence in a target undertaking active in the field of sensitive technology.
(i) General acquisition activities
The screening rules apply to the following general acquisition activities:
(ii) Acquisition or increase of significant influence over highly sensitive technology
The acquisition or increase of significant influence in a target undertaking active in the field of ‘highly sensitive technology’ is also considered an acquisition activity. Significant influence concerns the possibility for a person to cast (or have cast) at least 10%, 20% or 25% of the votes in the general meeting of shareholders in a target undertaking, as well as the obligation for a target undertaking to appoint or dismiss one or more directors on nomination of a third party.
The application of the rules on significant influence is limited to specific categories of highly sensitive technology. On 19 July 2022, draft secondary legislation designated certain technologies as “highly sensitive” (Annex 3). This concerns (i) certain technologies from the Dual-Use Regulation ((EU) 2021/821), (ii) certain military products and (iii) quantum technology, photonics technology, semiconductor technology and High-Assurance products. Due to the highly sensitive nature of these technologies, all (voting) thresholds apply. As the draft secondary legislation is currently consulted, its exact scope is still subject to change.
Only an acquisition or increase of significant influence that meets the applicable threshold is subject to notification. If, for example, both the 10% and 20% voting thresholds apply to a certain category of undertakings, an increase from 12% to 17% is not subject to notification, whereas an increase from 12% to 21% must be reported.
6. Does the ISSB only apply to investments from abroad or does it have a broader scope?
The ISSB is ‘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.
7. 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). In practice, the notifications will be received and handled by the Investment Assessment Agency (Bureau Toetsing Investeringen). There is no statutory deadline for the submission of a (pre-closing) notification, but the review period will only start upon notification. On 19 July 2022, secondary legislation was consulted on procedural aspects of the ISSB, which, among other things, proposed that a specific notification form will be established.
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 undertaking falls within the scope of the ISSB. In that case, the target undertaking must 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 undertaking, the notification shall be made simultaneously with the announcement of the public bid.
8. Is there a standstill obligation?
An acquisition activity may not take place before (a) the Minister has indicated that no assessment decision is required or (b) the Minister has issued an assessment decision. Exceptions include public bids and certain forms of acquisitions of goods (by universal title), in which case the acquirer shall report the acquisition activity to the Minister within two weeks after the acquisition.
Failure to comply with the standstill obligation may result in a fine of up to €870,000 (reviewed annually) or 10% of the undertaking’s turnover (potentially the entire group’s turnover).
If the public interest is at stake, with a risk of economic, physical or social damage to (parts of) society, the Minister may grant (a limited) exemption from the standstill obligation.
9. What does the substantive assessment entail?
After receiving a notification, the Minister will assess whether an assessment decision is required. An assessment decision is only required if an acquisition activity could lead to a risk to national security. If an assessment decision is required, the acquisition activity’s risk to national security will be assessed.
The concept of national security regards 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:
The assessment of the criterion risk to national security takes multiple factors into account. These factors include the following:
The following factors are also taken into account when assessing an acquisition activity involving a vital supplier:
The following factors are also taken into account when assessing an acquisition activity involving sensitive technology:
10. What is the review period for transactions under the ISSB?
After receipt of a notification, the Minister decides within eight weeks whether an assessment decision is required. If an assessment decision is required and the application has been submitted, the Minister shall decide on the application within eight weeks.
The deadlines for each of these two phases can be extended if further investigation is required, but not more than 6 months in total. In addition, the review period can 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.
11. 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:
There are also specific conditions for sensitive technology undertakings, 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 acquisition activity.
12. 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 undertaking 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 result in a fine of up to €870,000 (reviewed annually) or 10% of the undertaking’s turnover (potentially 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.
13. Can a decision be reversed?
In the event of a serious risk to national security, the Minister may, with the approval of the Council of Ministers, 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.
14. 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 entered into force with retroactive effect 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.
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