New Dutch FI regime on the horizon – what you need to know
The Netherlands is in the process of adopting a general FDI control regime. It is a bit late to the party compared to other EU Member States but progress on the new regime has been accelerated by the COVID-19 crisis, similar regimes being adopted in neighbouring countries and geopolitical developments. Earlier in the summer, a legislative proposal for an Act on the national security screening of mergers, acquisitions and investments was submitted to the Dutch Parliament and debate will start on it this week. The five key takeaways from the proposal are summarised below.
1. Entry into force and retroactive application
We do not expect the rules to come into force before the end of 2021. The Lower House of the Dutch Parliament will discuss the proposal on 9 September and the legislative process is likely to take several months at least.
Once they do enter into force, the rules will apply retroactively to transactions that fall within the scope of the regime and were completed after 9 September 2020. A post-closing filing obligation may be imposed (in other words a transaction can be “called in” for review) within 8 months from the rules coming into force. This retroactive call-in power is in line with developments in some other jurisdictions that are introducing new regimes, such as the UK (see our Q&A on the new NSI Act). The Dutch government proposed this retroactive power to prevent strategic and bad faith avoidance of the rules and to protect companies that are vulnerable as a result of the COVID-19 crisis. Given the liberal and generally open investment climate of the Netherlands, we expect that the retroactive application of the rules will only affect very few investments that may prima facie be regarded as giving rise to a threat to national security.
2. Nature of the regime
The proposed rules will introduce a mandatory, ex-ante and suspensory notification requirement. This means there is a stand-still obligation: the parties cannot close the transaction until approval has been obtained from the Investment Screening Bureau, a designated body within the Ministry of Economic Affairs and Climate.
The proposed rules will apply equally to EU and non-EU investors, including Dutch investors. As a result, the regime is not a standard “FDI control” but rather a general control regime that covers any investments in specific sensitive sectors that are related to national security.
The proposed rules cover transactions in business undertakings that are:
- based in the Netherlands*; and
- supply vital infrastructure needed for the continuity or resilience of vital processes or are active in or develop sensitive technologies.**
* To determine whether a business undertaking is based in the Netherlands, reference is made to the location of its activities and management, rather than its statutory seat. Importantly, however, the proposed regime also covers indirect acquisitions. This means that transactions involving companies that are not based in the Netherlands but that control companies that meet the criteria could also be covered by the regime.
** The legislative proposal provides a list of critical infrastructures, namely specific providers of: (1) energy related services (NAM and GasTerra for the exploration and trading of natural gas, gas storage operators and district heating operators); (2) storage, production and processing of nuclear power; (3) services for Schiphol and the Rotterdam harbour (Schiphol Airport, KLM, ground handling (fuelling) service providers and the Rotterdam Port Authority); and (4) financial market infrastructure services (clearing and settlement systems, payment and/or electronic money institutions and interbanking services). Sensitive technologies are limited to military and dual use products.
The Dutch government may further define or expand the scope of critical infrastructure and sensitive technologies by means of a government decree (for example by extending the scope of the legislation to cover the health sector or introducing technologies considered to be sensitive but also by setting turnover or asset value thresholds). Interestingly, the Dutch government has decided not to adopt all of the categories from the EU Screening Regulation. This indicates that the Dutch government intends to continue take a more liberal approach compared to other EU FDI regimes (see, for example, Germany).
The rules will apply to a wide range of transaction structures, including acquisitions of control (as defined in merger control), legal (de-)mergers, the creation of (full-function) JVs and asset acquisitions (if those assets are essential for offering vital processes or sensitive technologies as explained above).
For specific sensitive technology, being able to exercise ‘significant influence’ - a lower threshold than control - is sufficient to bring the transaction under the regime. This would cover, among others, acquisitions of a minority shareholding of as little as 10%, or the right to appoint a board member.
4. Implications for sectoral regimes
Specific FDI sector regimes (covering telecommunications, gas and electricity) will prevail over the future general FDI regime. There is also a sectoral regime in the making covering specifically the defence sector, although this is still at an early stage.
5. Implications for current deals
Although the rules are not yet in effect, parties to a potential transaction should take the potential effects of the regime (including its retroactive provisions) into account. For current deals that may fall within the scope of the regime, you should consider including the following in your transaction documents:
- wording to ensure the necessary co-operation of the seller in case a post-closing filing is required for the transaction; and
- a condition precedent to cover the possibility that the regime enters into force before completion of the transaction.