Foreign investment control in the Benelux … Part 2 – The Netherlands initiates a general investment screening regime
The new Dutch investment screening regime entered into force on 1 June 2023.
The rules already apply retroactively to investments completed after 8 September 2020. In practice this means that transactions that have closed between 8 September 2020 and 1 June 2023 can be called in for (post-closing) review. This creates legal uncertainty. However, our expectation is that the Dutch government (specifically the Minister of Economic Affairs and Climate) will be conservative in exercising its call-in power.
The Dutch regime is a general investment control regime that will apply equally to non-EU, EU and Dutch investors. Contrary to many other FI control regimes (including the Belgian regime, which only applies to non-EU investors), the scope of the Dutch regime is primarily driven by the target of the investment rather than by the identity of the investor. The underlying rationale for the regime is to protect sensitive infrastructure and technologies from any investments. In other words, it is a national security control regime rather than a foreign investment control regime. It also explains why the scope of the regime is relatively limited (compared to FI regimes in other EU Member States).
The regime will apply to companies based in the Netherlands that are either: (a) a "vital” supplier, (b) an operator or manager of a high-tech campus or (c) active in the field of sensitive technologies.
To qualify as a Netherlands-based company, it is sufficient that an entity carries out activities and has its effective management in the Netherlands. Formalities such as its place of incorporation are not conclusive. Importantly, the regime also covers indirect acquisitions. So, for example, in cases where an investor acquires control of a company that has a subsidiary which falls within the scope of the regime, the transaction itself falls within the scope of the regime. This prevents circumvention of the rules.
The limitation of the scope of the regime to vital processes/infrastructure, managers of high-tech campuses and sensitive technologies means that the number of companies covered by the regime will be limited (between 700 and 1500). These three categories are explained in more detail below.
Vital suppliers are undertakings that operate, manage or make available a service, the continuity of which is vital to Dutch society. The regime contains a list of vital suppliers, including: NAM, GasTerra, KLM, Schiphol Group and the Rotterdam Port Authority. It also includes a number of categories of companies, such as companies active in: (a) the storage, production and processing of nuclear power, (b) operators of heat transportation networks and (c) the provision of ground (fuelling) services and the provision of financial market infrastructure services (for example clearing and settlement systems, payment and/or electronic money institutions and interbanking services).
High tech campuses
Included in the scope of the regime are companies that manage a site on which companies are active and where public-private cooperation takes place in technologies and applications that are of economic and strategic importance to the Netherlands.
This category refers to companies active in (i) the sale or development of dual-use products whose export is subject to a license requirement (pursuant to Article 3(1) of Regulation (EU) 2021/821) and (ii) military goods (as defined under Dutch law). On the basis of a ministerial decree, dual-use products and military goods can be excluded from the scope of the regime, while other technologies can be added to its scope. Over the summer, the Dutch government published for consultation a draft Decree on the Scope of Sensitive Technologies, which excluded a limited number of specific technologies from the scope of the regime (because they do not affect national security) and, at the same time, added four further technologies: quantum technology, photonic technology, semiconductor technology and high assurance products. The retroactive effect described above will however not apply to technology designated as “sensitive” in in the Decree. The Dutch government is considering whether to include biotechnology within the scope of the regime.
The regime will cover a broad scope of transaction types:
- An acquisition of control over a company (or part thereof) covered by the regime (whereby the definition of control is similar to that used in merger control).
- The merger of two or more previously independent undertakings into a single undertaking whose activities fall within the scope of the regime.
- The establishment of a full-function joint venture whose activities fall within the scope of the regime (whereby again the concept of full-functionality is the same as that used in merger control).
- The demerger of an undertaking covered by the regime.
- The acquisition of part of the assets of a company covered by the regime if those assets are essential for the undertaking’s activities related to vital processes, operation of a high-tech campus or sensitive technology.
- Other legal acts that result in the acquisition of control in a company (or part thereof) covered by the regime.
- Last, but not least, the acquisition of - or an increase of significant influence over - highly sensitive technology. This is a lower threshold than control. Essentially, significant influence over companies active in a highly sensitive technology industry can arise when the investor holds 10%, 20% or 25% of the voting rights or has the ability to appoint or dismiss one or more directors. This category of transaction is limited to highly sensitive technologies, which in the aforementioned draft Decree on the Scope of Sensitive Technologies includes technologies for nuclear goods, sensors and lasers, navigation and airplane electronics, quantum technology, photonics technology, semiconductor technology and high-assurance products. Importantly, each time a voting share threshold is surpassed a notification is triggered. So, for example, an increase from 12% to 18% would not be notifiable but an increase from 18% to 22% would.
Sector regimes (covering telecommunication services and infrastructure, gas and electricity) will prevail over the general investment regime. There is also a sectoral regime in the making specifically covering the defence sector.
The regime is mandatory and suspensory, i.e. approval needs to be obtained pre-closing and there is a stand-still obligation on the parties.
Notifications must be made to the Bureau Toetsing Investeringen (BTI), which is part of the Ministry for Economic Affairs and Climate. There is no statutory deadline for the submission of a (pre-closing) notification, but the review period will only start upon notification.
Screening can take place in one or two phases and can be time-consuming, depending on the complexity of the case:
- During Phase I, the BTI decides whether or not the investment could create national security risks and whether an assessment decision is required. Phase I lasts, in principle, eight weeks, but can be extended up to six months in total.
- During Phase II, the BTI renders an “assessment decision”, i.e. it clears the investment subject to remedies or blocks it if no suitable remedies are proposed/available. Phase II also takes eight weeks, again extendable for a reasonable time period, but up to a maximum of six months in total (i.e. any extension already used in Phase I must be subtracted from these six months during Phase II).
Timing can be impacted by the application of the EU FI screening mechanism which allows coordinated actions to foreign investments across the EU. The Dutch regime foresees a possible extension of three months if the EU Cooperation Mechanism is triggered. This potential extension is long compared to other regimes - Belgium, for example, intends to introduce only a 25-day extension.
To address identified risks, investors can offer various kinds of remedies, which will be assessed on a case-by-case basis. The new regime provides a non-exhaustive list of potential remedies including, for example, the imposition of additional security requirements regarding access to sensitive information, appointing a security officer, or transferring those parts of a target undertaking that are linked to vital processes into a separate Dutch subsidiary.
Gun jumping or providing incorrect or misleading information may result in fines of up to 10% of annual (global) group turnover of the companies involved.
How to safely navigate your next deal through Dutch screening waters
Though the impact of this screening regime is not to be underestimated, the Dutch government has emphasised that the Netherlands will remain an attractive destination for investors – even if both foreign and Dutch investors will have to contend with the new regime. Moreover, implementing a prohibited transaction makes it null and void and a number of other civil and administrative sanctions could be imposed.
Over time, the application of the screening mechanism will lead to more certainty and clarity on which deals are considered in scope and which are liable to raise concerns. For now, extra caution is warranted to avoid potential hiccups in the deal process:
- Both for pending transactions and transactions closed after 8 September 2020, perform a risk assessment as soon as a targeted investment has any nexus with the Netherlands.
- Prepare for potential delays in completing the deal if the target is active in a relevant sensitive sector, and especially when national security or strategic interests in the Netherlands are at stake.
- To avoid surprises later on, consider appropriate FI control conditions precedent, risk allocation, co-operation mechanisms and strategy well before signing.