In the future, new rules will apply to Foreign Direct Investments (“FDI”) in the European Union and the Netherlands: A screening mechanism will be introduced that may affect M&A transactions with non-EU investors. More information about this screening mechanism and how this is expected to affect FDI and M&A in the Netherlands can be found below.
FDI in the Netherlands and the EU
According to the OECD’s Foreign Direct Investment Regulatory Restrictiveness Index, the European Union is the world’s most important destination for FDI. According to this index, the Netherlands is one of the least restrictive countries for FDI.
At EU level, the only restriction to FDI currently is merger control, which aims at preventing transactions from affecting competition within the EU.
FDI Screening Regulation
In order to protect and defend its strategic interests and strategic assets, the European Union currently implements a centralized framework to screen FDI transactions.
The European Parliament recently adopted the EU regulation establishing a framework for the screening of foreign direct investments into the Union (Regulation (EU) 2019/452) (the “FDI Screening Regulation”). The FDI Screening Regulation officially entered into force on 10 April 2019 and will apply in the Netherlands – and in all EU Member States – effective from 11 October 2020. It may lead to retrospective screening of FDI as far back as 10 April 2019.
FDI according to the FDI Screening Regulation
The FDI Screening Regulation targets investors from non-EU countries and includes a broad definition of “FDI” to cover all types of share or asset deals, joint ventures or undertakings by which a non-EU investor controls the management or assets of an EU undertaking. The definition of FDI as provided by the FDI Screening Regulation is:
“investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in an EU Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity”
In principle, the FDI Screening Regulation affects portfolio investments or investments in listed companies.
Focus on sectors and background of FDI investors
The EU screening framework introduced by the FDI Screening Regulation focuses on FDI’s that are likely to affect security or public order of EU Member States or the EU as a whole, thereby aiming to protect strategically significant sectors which are included in the following, non-exhaustive, list:
In addition to these listed sectors, another factor to be taken into account when assessing if an FDI imposes a risk to security or public order is whether the foreign investor is directly or indirectly controlled by a third country’s government, through its ownership structure or by significant funding. It is also relevant if the foreign investor has already been involved in activities that affect security or public order in an EU Member State or whether there is a serious risk that the foreign investor engages in illegal or criminal activities.
National Screening Mechanisms
The FDI Screening Regulation introduces minimum requirements that the EU Member States, including the Netherlands, are to incorporate in their national FDI screening mechanisms. The mechanisms should fulfil the following requirements:
All EU Member States have to inform the EU Commission on existing and new FDI screening mechanisms. These are published on this website.
Current Dutch screening mechanisms: Electricity Act and Gas Act
For the Netherlands, there are currently specific screening mechanisms related to the Electricity Act and to the Gas Act. These have been published by the EU Commission on the above website.
The Electricity Act and the Gas Act require notification to the Dutch Ministry of Economic Affairs (and Climate Policy) in case of any change of control with respect to an electricity or gas company. This is thus not a screening obligation that is related to FDI only and applies to any change of control, regardless the identity of the investor. A change of control may be prohibited or be subjected to certain conditions for reasons of public safety or supply security. If parties fail to notify the Ministry, a transaction is voidable.
Future Dutch screening mechanisms
The current plan is to introduce sector specific screening mechanisms into Dutch legislation rather than introducing one general screening mechanism for all FDI. Vital sectors will be specifically protected where necessary.
Legislation is pending to amend the Telecommunications Act by a legislative proposal called “Act Undesirable Control Telecommunications” (Wet ongewenste zeggenschap telecommunicatie).
The Dutch government has furthermore decided to protect Dutch national security with FDI related to the (cryptographic) protection of state secrets.
The current Dutch screening mechanisms for the Electricity Act and Gas Act will have to be adjusted to the FDI Screening Regulation by introducing the possibility of cooperation between the Netherlands and other EU Member States.
Cooperation between EU Member States
The FDI Screening Regulation aims to increase the cooperation between EU Member States and the EU Commission in respect to FDI’s.
If a EU Member State is screening an FDI, it will have to inform the other EU Member States and the EU Commission about such FDI.
If a EU Member State or the EU Commission is of the opinion that an FDI in another, or a, EU Member State could affect security or public order, such EU Member State or the EU Commission may provide comments to such EU Member State. If a EU Member State provides comments to another EU Member State, it will have to simultaneously inform the EU Commission about this. The EU Commission will then inform all other EU Member States. The EU Member State in which the FDI takes place will then be asked to share information about the FDI. Such comments may be drawn up until 15 months following completion of an FDI (please note that this applies for all FDI completed as of 10 April 2019).
The information to be shared about an FDI shall include:
Apart from the above list, a EU Member State or the EU Commission may request additional information.
Moreover, each EU Member State must send an annual report on (i) the FDI transactions in its territory and (ii) the requests for comments received from other EU Member States and/or the EU Commission under the FDI Screening Regulation. Based on the national reports, the EU Commission will issue an overall report, which report will be made public.
Effect of FDI Screening on M&A
International M&A deals will, in certain sectors, become more difficult, for a number of reasons. It is inevitable that an FDI that is subject to the FDI Screening Regulation will have a longer cycle time. Also, due to the possibility to comment on an FDI within 15 months after its completion, a deal may be affected post-closing by the FDI Screening Regulation.
What the exact legal consequences of the comments will be, depends on the applicable screening mechanism and is at this stage, for Dutch legislation, not known yet. Dutch (draft) legislation in this respect is expected by the end of this year.
We will update you on this topic as soon as more information about the implementation of the FDI Screening Regulation is available.
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