In our commentary of last year we examined some of the key features of foreign direct investment (FDI) regimes in the European Union and the Netherlands. Such regime and screening mechanism may affect M&A transactions. In this commentary we provide you with more and up-to-date insights on this topic.
FDI regimes in Europe
For many years, the United States was the only major jurisdiction with FDI regimes that could impact M&A deals and deal timetables. Europe has been catching up recently, with France, Germany, Italy and Spain, among others, now having mandatory pre-closing approval requirements. In addition, the EU has passed the EU Regulation 2019/452 (FDI Regulation) last year on the basis of which investors from outside the European Union must be screened by local authorities if such FDI is likely to affect security or public order of EU Member States or the EU as a whole. We summarized the FDI Regulation in our last year’s post (link above).
Following the COVID-19 pandemic, it is expected that national FDI regimes will be enforced even more strictly and widened in scope further still. Virtually all European governments have made statements to that effect. The EU is urging national governments to coordinate FDI screening with the European Commission to prevent predatory takeovers of EU businesses struggling with the global slowdown.
Implementation of the FDI Regulation
Legislation in the Netherlands for implementation of the FDI Regulation is in the making. On 17 December 2019 the draft bill “Foreign Direct Investments Screening Regulation (Implementation) Act” (Uitvoeringswet screeningsverordening buitenlandse directe investeringen) (Bill) was published.
The Bill serves to implement the FDI Regulation and, inter alia, regulates enforcement of the obligation to screen FDIs from outside the EU in the Netherlands. Both investors and the enterprises invested in may be required to provide certain information to the Dutch authorities.
The Bill regulates the elements necessary for an effective application of the FDI Regulation:
The Bill does not introduce new Dutch investment tests or screening mechanisms, nor change existing ones. It is expected that the Bill will enter into force at the end of 2020 or early 2021.
FDI regime is upcoming in the Netherlands
The Dutch economy is characterised by a liberal approach towards foreign investments. As a result, there is currently no general FDI screening regime in the Netherlands, other than an assessment of certain transactions in the energy and telecom sectors.
However, an FDI regime is upcoming in the Netherlands. On 11 November 2019, the Dutch government announced that it would introduce a general framework for the screening of investments on the basis of national security. An act introducing a screening mechanism to prevent undesirable investments in critical infrastructures and high-end sensitive technologies is in the making of which the enactment is expected in 2021.
Recently, on 2 June 2020, the Dutch government announced that it has expedited the preparation of this proposal. The rationale of that is that the current economic circumstances, against the backdrop of the COVID-19 outbreak, have increased the risk of undesirable acquisitions and investments.
The government announced that part of the proposed investment screening will enter into force with retroactive effect as of 2 June 2020. Investments in critical infrastructures and high-end sensitive technologies taking place as of 2 June 2020 may be screened retroactively if necessary in order to protect national security.
It is proposed that the Minister may review transactions that (i) result in risks to the continuity of critical processes, (ii) impair the integrity and exclusivity of knowledge and information associated with vital processes and sensitive technology or (iii) result in the creation of strategic dependencies.
Principles for retroactive screening of acquisitions and investments
By including the reference date 2 June 2020 in the Bill, the Minister may - once the Bill is in force - retroactively review any acquisitions or investments made for risks to the national security, provided it is within the scope of the law.
While the precise scope of the notification requirements is still unknown, the government announced that the scope of the screening mechanism, which will enter into force with retroactive effect, is twofold:
The Bill for the investment screening assessment is currently yet under preparation. Although high priority is given it is expected that the Bill will be dealt with in parliament no sooner than the fourth quarter of 2020.
If an acquisition falls under the scope of the investment screening and it turns out that there are risks to national security, Dutch authorities may take (retroactive) mitigating measures. The acquisition or investment may be subjected to additional conditions, such as providing a (patent) license on certain know-how to keep the knowledge or technology available for Dutch vital processes.
The Dutch government informed the parliament that FDIs will only be prohibited in exceptional cases.
The general screening mechanism will apply in addition to existing sector-specific investment screening tests in the energy and telecom sector.
Other sector specific restrictions
The parliamentary bill for the Telecommunication Sector (Undesirable Control) Act was adopted on 19 May 2020, introducing a screening mechanism for the telecommunication sector of FDIs. This law subjects FDIs leading to a controlling interest in a telecommunications party to the scrutiny of the Minister.
Other existing sector specific screening mechanisms cover investments, regardless of whether from foreign or domestic origin. These sector-specific screening mechanisms relate to investments in (i) (electric or gas) power stations, facilities or companies, (ii) suppliers of the Ministry of Defense or (ii) the financial sector.
Successfully navigating the challenges of FDIs often requires an interplay between legal arguments and an understanding of the political concerns attached to a specific investment, in particular in relation to defence and essential infrastructure. There are many ways in which an investor can address such concerns as part of the approvals process in an M&A transaction.
At BUREN we are well positioned to advise on these issues in by combining our legal and regulatory expertise in cross-border acquisitions.
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