Introduction of screening framework
The Dutch Minister of Economic Affairs and Climate Policy (the Minister) has submitted a second draft of the proposed Dutch investment screening act to the Dutch Parliament (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. Investments taking place as of 8 September 2020 may be screened retroactively if necessary. 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.
The Dutch economy is characterised by a liberal approach towards foreign investments. As a result, there is currently no general foreign direct investment screening regime in the Netherlands, other than an assessment of certain transactions in the energy and telecom sectors. In the recent years, there have been increasing concerns over undesirable acquisitions that could threaten national security.
Following geopolitical developments and the outbreak of Covid-19, several European countries have introduced or strengthened their foreign direct investment screening mechanisms. In light of these developments, the Dutch government announced late 2019 that it would introduce a general framework for the screening of investments on the basis of national security. Following critical remarks provided during the public consultation in September 2020 and by the Dutch Council of State (Raad van State), the government has significantly amended the draft Act, aiming to provide a greater degree of legal certainty for investors, especially with respect to critical infrastructures.
Scope of application
The Act will apply to pre-defined categories of critical infrastructures, namely 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 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. Sensitive technologies are 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 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.
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 will introduce 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 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 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
Once adopted, 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 point to a direct increase in a genuine threat to Dutch sovereignty or a potential disruption with societal, economical or physical impact. The government had previously announced that the Act would apply with retroactive effect until 2 June 2020. Following criticism by the Dutch Council of State, this date has been pushed back to coincide with the publication of the first draft of the Act in September last year. The Dutch parliament may issue questions to the Minister prior to 9 September 2021.
