Overview
Dutch government proposes a new Act on the Resilience of the Defence and Security related Industry (the Act), amongst others introducing obligations on companies in the defence industry and expanding the scope of the Dutch investment screening regime to additional categories of companies in the defence sector.
Introduction
The Act (in Dutch; Wet weerbaarheid defensie en veiligheid gerelateerde industrie), proposed by the Dutch Minister of Economic Affairs (the Minister) together with the Dutch Minister of Defence, consists of three elements:
- The designation of certain companies as providers of services of general economic interest (SGEI) or the execution of a strategic stockpiling plan;
- A sector-specific investment screening for the defence industry that operates in addition to the general Act on Security Screenings of Investments, Mergers and Acquisitions (the Vifo Act, see an earlier blog post on this act here); and
- The introduction of a formal legal basis for issuing suitability statements (geschiktheidsverklaring) to Dutch companies to compete for foreign defence contracts and subsidies, demonstrating that such companies are considered, in short, reliable.
The Act is part of a broader action plan to scale up the production and supply of military equipment in the Netherlands, and closer monitoring and regulation of the so-called Dutch Defence and Security related Technological and Industrial Base (NLDTIB) (Nederlandse defensie en veiligheid gerelateerde technologische industriële basis). The Act has been submitted for public consultation.
Regulation of the NLDTIB
Under the Act, the Dutch government may designate:
- companies with a SGEI that are active in the field of military goods or dual-use products and to which a decisive importance can be attributed to the operational relevance or the deployment security of the Dutch armed forces; and
- companies with the execution of a strategic stockpiling plan. Such plans pertain to the stockpiling of goods and products that are of essential importance for the operational relevance and deployment security of the Dutch armed forces.
SGEI are commercial services that are of broader interest and therefore subjected to certain public service obligations. Common examples of SGEI include certain public transport, energy, communications, and postal services. The Act thus increases the scope of SGEI activities to certain activities in the area of defence or dual use goods. Companies designated with a SGEI can be tasked with carrying out various types of prescribed activities, such as the development of new technologies or production methods aimed at a specific operational need of the Dutch armed forces. A company that is designated may notably also be required to make the developed technologies, production methods or production and research facilities available to third parties, to maintain production methods and facilities in the Netherlands, carry out services relating to maintenance or modernisation, or to give priority to the execution of orders by the Dutch Ministry of Defence over other orders accepted by the company. A market-based compensation or subsidy may be provided for the fulfilment of some of these tasks, but such compensation is not a given for each of the obligations that may be imposed under the Act.
Companies may also be designated with the execution of a strategic stockpiling plan if they are active in the field of the relevant goods and products, and insofar as they may implement this more efficiently or effectively than the Dutch government. The designation specifies the scope and composition of the goods and products to be kept in stock, the stockpiling activities with which the company is responsible, and any regulations for the protection and security of the stock held. This authority is not limited to companies active in the defence industry or dual use goods. Companies designated with a SGEI must maintain separate accounts for designated activities. If the financial stability or continuity of a designated company is at stake resulting in serious negative effects, an administrator may be appointed to manage, restructure or wind up the company. The Minister can grant a compensation or a subsidy for the fulfilment of the strategic stockpiling tasks. The statutory duration is ten years for SGEI designations and five years for stockpiling designations.
Investment Screening
The Act also expands the scope of investment screening in the Netherlands to the following categories of companies:
- essential armed forces suppliers, which consists of:
- companies that are active in the Netherlands in the area of military goods under Article 2 of the Strategic Goods Implementation Regulation 2012 (Uitvoeringsregeling strategische goederen 2012); and
- companies that have concluded an agreement with the State with a term of at least three years that is not yet expired, to make available an agreed form of transport capacity on demand at short notice, suitable for its immediate deployment by the armed force; and
- companies designated under the aforementioned tasks that are considered of decisive or essential importance for the operational relevance and deployment security of the Dutch armed forces, namely:
- companies charged with a SGEI; or
- the execution of a strategic stockpiling plan.
The investment screening of the Act is aimed at managing national security risks relating to investments regarding these two categories of companies (each having two sub-categories), including amongst others mergers, acquisitions and investments resulting in the acquisition of more than 10% of the voting rights (so-called significant influence). The Act will introduce a filing obligation for both the acquirer and the target company carrying out a transaction, and the possibility for the Dutch government to impose conditions or prohibit the transaction.
The investment screening regime proposed under the Act will operate in addition to the Vifo Act. There will, however, be a considerable amount of overlap. Notably, companies active in the area of military or dual use goods are already active in “sensitive technologies” falling under the scope of the Vifo Act. Insofar as an investment activity falls under both the Act and the Vifo Act, the screening regime under the proposed Act will apply. This screening test focusses more closely on risks relating to the national security in the context of essential defence interests. 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, motives, ownership structure) and the investor’s home state (e.g. military-technological programmes, stability of the state or region, potential impact on sovereignty, territorial integrity or political independence of the Netherlands or its allies). Screenings will be carried out by the Ministry of Economic Affairs in cooperation with the Ministry of Defence.
Suitability statement
The Act also provides for the possibility of companies registered in the Dutch Trade Register to apply for a suitability statement (geschiktheidsverklaring) from the Dutch government. Such suitability statement can be used to compete for international defence and or security-related contracts and subsidies, such as defence projects of foreign countries, the EU or NATO. The Explanatory Memorandum explains that third countries and organizations increasingly require a suitability statement from the host country of the defence contractor.
The Act introduces a legal basis in the Netherlands for such assessment that, according to the Explanatory Memorandum, does justice to the special need for reliability where defence and or security interests are concerned. The Explanatory Memorandum considers that the strong legal basis for suitability statements issued by the Dutch government contributes to the improvement of the international position of Dutch entities when competing for defence contracts and subsidies in third countries and international organisations.
Conclusion
The proposal primarily provides for a set of rules to better align the production, innovation and development capacity of the NLDTIB with the needs of the Dutch armed forces, both in terms of availability and further development of capabilities and with an eye for the allied perspective within which the Netherlands operates, such as that of NATO. The Ministry considers that this is necessary to prevent a threatening erosion of the NLDTIB and to reduce the strategic dependence of the Netherlands on foreign suppliers. The proposal of the Act also forms part of a broader trend towards broadening the scope of investment screening and initiatives for European strategic autonomy in the defence sector. The Act notably demonstrates an increased attention to the security of supply, research and development, alliance interests and the economic and financial viability of NLDTIB.
The Act provides a legal basis to designate companies as a provider of SGEI in the defence sector, or to charge companies with the execution of strategic stockpiling plans. Investments in such companies, as well as companies active in the area of military goods and providers of transport capacity will be subject to the sector-specific investment screening regime. The Act also provides a legal basis for the Dutch government to issue suitability statements for Dutch companies seeking to compete for foreign defence and or security-related contracts and subsidies.
The internet consultation of the Act is open until 31 August 2024. The Act will subsequently be submitted for advice from the Dutch constitutional advisor, the Council of State. After review by the Council of State, the (potentially amended) Act will be submitted to the Dutch Parliament.
Please reach out to us if you would like to discuss how the Act may impact your business.
