Overview
Dutch Parliament has recently adopted a framework for the screening of certain investments in critical companies and companies active in sensitive technologies on the basis of national security.
Introduction of screening framework
The Dutch Parliament has adopted the ‘Act on security screening of investments, mergers and acquisitions’ (the Act) (Wet veiligheidstoets investeringen, fusies en overnames). The Act will introduce a notification obligation for investments in designated critical companies, and undertakings that are active in the area of sensitive technologies. The Act will apply in addition to existing sector specific screening mechanisms in the Dutch energy and telecom sectors. Transactions that are subject to a filing obligation must be notified to the Investment Screening Bureau (Bureau Toetsing Investeringen, BTI) prior to closing of the transaction. The Investment Screening Bureau is part of the Ministry of Economic Affairs and Climate Policy and will adopt the screening decision on behalf of the Minister of Economic Affairs and Climate Policy (the Minister).
The Act follows the adoption of the EU FDI Screening Regulation 2019/452 and the introduction and strengthening of investment screening mechanisms in various European countries. The content of the Act is the outcome of a balancing act between maintaining the liberal approach of the Dutch government towards foreign investments, and providing the government the possibility to address undesirable acquisitions that threaten national security in key industries. Given the open investment climate of the Netherlands, we anticipate that the proposed measures will only affect exceptional investments that give rise to a serious threat to national security.
Scope of application
The Act will apply to pre-defined categories of critical infrastructure, companies active in the area of sensitive technologies and managers of corporate campuses. Critical infrastructure companies under the Act are district heating operators, nuclear power companies, KLM, Schiphol Airport and ground handling service providers, the Rotterdam Port Authority, banks, certain financial market infrastructure companies, and certain companies active in the area of the exploration, transport and storage of natural gas. The government can designate additional categories of critical companies by means of government decree.
For the time being, the scope of application of ‘sensitive technologies’ is limited to military and dual use products. However, the government can designate additional categories of technologies as ‘sensitive technologies’ by means of government decree. The government intends to submit a draft decree to further define the scope of application of sensitive technologies for internet consultation this summer. This government decree on sensitive technologies is expected to enter into force late 2022. The Act also applies to managers of corporate campuses, i.e. areas where multiple companies work together in public-private partnerships in the area of technologies and applications that are of economic and strategic importance for the Netherlands.
The Act will apply to a wide range of transaction structures, including acquisitions of control, mergers, the creation of JVs and asset-transactions. In the case of sensitive technology companies, acquisitions of minority shareholdings of 10%, 20% and 25% and an acquisition of the right to appoint one or more board members are also caught by the regime. Increasing significant influence over sensitive technology companies, e.g. from 10% to 20%, can also trigger to a notification obligation.
Central test: national security
The central test under the Act is national security, which is defined as pertaining to (i) the continuity of the critical processes, (ii) the integrity and exclusivity of knowledge and information associated with vital processes and sensitive technology or (iii) the creation of strategic dependencies. The Act provides various elements that the Minister may take into consideration in this exercise, including factors relating to the investor (e.g. its track record, financial stability, transparent ownership structures, motives) and the investor’s home state (e.g. sanctions adopted against the state, stability of the state or region, geopolitical programmes, separation between civil and military R&D programmes).
Standstill obligation and timing
The Act introduces a standstill obligation, requiring the parties to obtain approval prior to closing. The government has eight weeks to decide on a notification, but can extend this period with six months (phase 1). If a formal screening decision must be taken (phase 2), the government has an additional eight weeks to decide, but can extend this period with six months, provided that the time extension used in phase 1 will be deducted, so that the total extension may not exceed six months. Furthermore, a stop-the-clock provision applies in case the screening authority requests information from the parties. Moreover, the timeline can be extended with another three months if the cooperation framework under the EU FDI Screening Regulation 2019/452 applies.
Mitigating measures
In the explanatory memorandum, the government stresses that an open society and economy are at the foundation of the Dutch society and prosperity. Therefore, the effects of the new Act for the Dutch investment climate should be as limited as possible, meaning that the government will always first seek to address potential concerns by means of mitigating measures. Such mitigation measures could consist of, for instance, additional security protocols, policies or commissions, placing certain sensitive activities in a separate entity established in the Netherlands, behavioural restrictions on commercial conduct, prohibition to acquire certain parts of the target undertaking or reduction of shareholding. For acquisitions of sensitive technologies such measures could notably also consist of the following: obligation to store certain technology, source code or genetic codes with a third party, prior approval rights for the Minister regarding a decision to terminate or move part of the business to a third country, or FRAND licensing access for certain IP rights to third parties. A prohibition will only be imposed as an ultimum remedium if the national security risks cannot be mitigated by means of remedies.
Retroactive effect
The Act will enter into force on the date provided in a royal decree. Once this royal decree is taken, the Act will enter into force with retroactive effect as of 8 September 2020. This means that investments in the covered critical infrastructures and sensitive technologies taking place as of 8 September 2020 may be screened retroactively if necessary in order to protect national security. Furthermore, the Minister may open an ex post investigation if after the approval of a transaction, new facts have arisen that result in a direct increase in a genuine threat to Dutch sovereignty or a potential disruption with societal, economical or physical impact.
