The new FDI screening mechanism is expected to be established soon in the Netherlands

In our article last year, we provided an overview of the foreign direct investment (FDI) screening regime applicable to the European Union (EU) and more specifically The Netherlands. For the Netherlands, the draft bill for a general FDI screening mechanism was publicly consulted in September 2020. After critical remarks of the Dutch Council of State, that draft bill has been taken of the table.

On 30 June 2021, the new Investments, Mergers and Acquisitions Security Test Act (Wet Veiligheidstoets investeringen, fusies en overnames) (Security Test Act) was submitted to the Dutch House of Representative. The Security Test Act would offer more transparency and increase legal certainty to the screening of transactions that involve vital providers or companies active in sensitive technology compared to the earlier draft bill.

In this article we will deepen the object and scope of the Security Test Act and discuss the key changes compared to the earlier draft bill.

Scope

The Security Test Act will apply to companies that are:

I. based in the Netherlands; and
II. supplying in the (a) vital infrastructure or undertaking in (b) sensitive technology.

I. Netherlands
In order to determine whether a company is based in the Netherlands, the activities and management of its business are decisive rather than its statutory seat. That way indirect acquisitions that have an impact on Dutch national security will also be subject to a security test. 

 II. (a) vital infrastructure
The Act provides a non-exhaustive list of vital infrastructure providers, including companies active in the fields of internet, gas storage, drinking water supply and nuclear energy. Schiphol Airport, the Port of Rotterdam and the Dutch Central Bank (De Nederlandsche Bank) are also considered as vital providers. This list is new compared to the earlier draft bill, pursuant to which vital infrastructure providers would be further designated by government decrees.  

II (b) sensitive technology
The definition of “sensitive technology” includes military and dual-use products as defined inter aliain the Wassenaar Arrangement and the EU Regulation 428/2009 (Dual-Use Regulation).

The Dutch government retains the right to include or exclude certain vital infrastructure or sensitive technologies companies from the scope by separate governmental order.

The Security Test Act shall apply to all investment transactions – e.g. mergers, acquisitions, joint ventures, asset deals, demergers – involving vital infrastructure or sensitive technology enterprises that will lead to the acquisition of control.

For sensitive technology companies, an additional change will trigger the mandatory screening test, i.e. if the significant influence in a company change. Significant influence exists in the following cases:

• acquisition of a minority shareholding of 10%, 20% or 25%, depending on the category of a sensitive technology (a separate government decree will specify which percentage of the minority shareholding will apply to which category of sensitive technology); or
• the right to appoint or dismiss of one or more board members.

National security test
Both the target company active in the vital infrastructure / sensitive technology and its potential investor are required to report the transaction to the Bureau for Investment Screening (Bureau Toetsing Investeringen) (BTI). The BTI falls under the responsibility of the Dutch Ministry of the Economic Affairs and Climate.

The Security Test Act does not yet state when the notification to the BTI is due.

Upon receipt of the notification, the BTI will examine whether the transaction can lead to a risk for the national security, in particular the continuity of vital processes, the prevention of undesirable strategic independencies and the integrity and exclusivity of knowledge and information. The BTI shall also take other factors in consideration, including:

• the investor’s ownership structure and transparency,
• the investor’s financial stability;
• the investor’s motives for the transaction;
• the investor’s criminal record;
• the investor’s home state or region;
• governmental control; and
• with respect to an investment in sensitive technology: the track record of the investor on information security.

In principle, the BTI shall give its approval within 8 weeks of receipt of the notification. In the event that a formal assessment is required, the BTI has an additional 8 weeks for further investigation. Each phase can be extended separately but for the maximum period of 6 months in total cannot be exceeded. Only if any additional information is required from the parties involved, the assessment period can be extended.

As long as the BTI has not given its approval to the transaction, a standstill obligation applies to the parties involved. All communication with and decisions of the BTI is confidential and will not be made public.

Listed companies
In the event of a public offer for a listed company, a notification must be made to the BTI at the same time as the public offer is announced. This prevents market abuse as there is no insider information.

Exemption
The BTI may, on request, grant exemption of the approval on carrying out an acquisition. An exemption is allowed if the public interest is at stake, which may cause economic, physical or social damage. 

Consequences of non-compliance
Failure to comply with the notification obligations under the Security Test Act may lead to a direct suspension of all voting rights of the investor pursuant to the transaction. The target company will be obliged to cooperate with its best efforts.

Furthermore, the BTI may require that a certain notification still need to be made by the parties involved within a period of 3 months after the transaction became known. The rights of the investor will in the meantime be suspended. The BTI may also impose an administrative fine with a maximum of 10% of the turnover.

In the event that the transaction has not been approved by the BTI but does take place, the Security Test Act provides that the acquisition shall be declared null and void. The exercise of the acquired rights by the investor will be suspended and a fine can be imposed.

Retroactive effect
Once adopted, the Security Test Act shall have retroactive effect until 8 September 2020. This date differs from the earlier announced date of 2 June 2020. Also, the BTI will have the right, within a period of 8 months after the date of entry into force of the Security Test Act, to call in all relevant transactions if there is a reasonable suspicion of a genuine threat to the Dutch national security. Given the fact that the Security Test Act is country-neutral, no distinction will be made between Dutch and non-Dutch investors.

Conclusion
Although the Security Test Act still needs to be approved by the Dutch parliament, it is recommended to take the assessment into account when entering into new M&A deals in the Netherlands. In view of the retroactive effect of the Security Test Act, do advise to include wording in the transaction documentation that the seller will cooperate if a post-closing filing is required with the BTI in relation to the transaction.