The rise of FDI monitoring in the European Union

Although Belgium is a relatively small country, it maintains a fifth positon in the ranking of European countries for foreign direct investment (FDI) (2021). It attracts large investments in strategic sectors such as technology and life sciences. The importance of monitoring such investments from a national security point of view has increased in recent years. To streamline efforts across the European Union to introduce such FDI monitoring mechanisms, a European Regulation of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union was introduced, setting out a number of core principles for member states to draft their mechanisms and to facilitate cooperation between member states when screening foreign investments.

To which foreign investment will the Belgian mechanism apply?

The regional government of Flanders already introduced a limited FDI screening mechanism in 2019 which applies to public institutions and authorities under control of the Flemish government. No FDI screening mechanism is currently in force in the regions of Brussels and Wallonia. Our contribution does not further discuss this mechanism, but focuses on the federal rules that have been proposed and will target a broader range of investments.

On 23 February 2021, the Belgian Federal Government issued a first proposed law to introduce a screening mechanism for direct foreign investments in Belgium which have an impact on the national security interests and strategic sectors. This law is still under discussion in Parliament, but already provides the first principles with which foreign investors will have to deal with in the near future.

The screening mechanism will only apply to natural or legal persons from countries outside the European Union who invest in Belgium. Under the following cumulative conditions such foreign investor will have to notify the investment to the screening commission (which will operate under the authority of the federal Minister for Economic Affairs):

  • if no voting rights in an entity is acquired: the value of the investment must be equal to or greater to 4.500.000 EUR; or
  • if voting rights in an entity are required: the investor must directly or indirectly obtain 10% or more of the voting rights, or must obtain the right to appoint a majority of the directors of the entity;
  • and the investment is made in one or more of the following domains:
    • critical infrastructure, both physical and virtual, including infrastructure in energy, transport, water, health, communications, media, data processing, data storage, aerospace, defense, elections, finance, sensitive installations;
    • real estate (including plots of land) that can be crucial for the use of critical infrastructure;
    • critical technologies, including artificial intelligence (AI), robotics, semiconductors, cyber security, aerospace, defense, energy storage, quantum technology, nuclear technology, nanotechnology and biotech;
    • the provision of critical inputs, including energy and raw materials, and food;
    • the access to sensitive information, including personal data, or the possibility to control such information; and/or
    • the freedom and plurality of the media.

How may the proposed screening procedure look like in Belgium?

The following information will at least have to be provided to the screening commission before the investment is completed (and of course the investor is free to provide additional information) by the investor, who is responsible for the applying for the screening process:

  • the ownership structure of the foreign investor and the entity used to proceed with the investment, including information on the ultimate beneficial owner;
  • the estimated value of the foreign direct investment;
  • an overview of the products, services and other activities of the foreign investor and the acquiring entity;
  • the member states in which the investment is to be conducted, including an overview of all entities to be invested in (if any);
  • the source of the financing for the investment; and
  • the date or planned date of the investment.

Following receipt of this information, the screening commission will proceed in two phases. First, a short investigation will be completed within 21 days to verify whether or not the investment falls under the FDI screening rules. If not, it can be immediately approved by the Minister. The regional governments must be notified hereof and can still request the federal government to proceed with a further investigation of the investment.

If the screening commission concludes during the first phase that there is a potential risk, it will request more information from the investor and third parties. These powers are very broad as all relevant information can be requested. Moreover, the commission can also consult other governmental authorities, such as the state security services, the Center for Cybersecurity Belgium, sectoral regulators, supervisory authorities, other EU Member States and the European Commission. The more detailed, second phase, must be completed within 6 months after receipt of the final requested information from the foreign investor.

The proposed law foresees a number of situations in which a detailed investigation is in any case required:

  • when the foreign direct investment is directly or indirectly under control of a foreign government (including a foreign governmental authority or armed forces), including due to the ownership structure or significant financing;
  • when the foreign investor has already been involved in activities that have effects on the security or public order of a Member State;
  • when a significant risks exists that the foreign investor is involved in illegal or criminal activities; or
  • when a regional government requests a detailed investigation.

Which measures can eventually be imposed by the government?

Following the completion of the screening procedure, the Minister for Economic Affairs will have the right to impose the following measures, which must be sufficiently motivated, within 6 months (whereby a failure to respect this deadline will imply that the investment was approved):

  • approve the planned foreign investment without further requirements;
  • impose additional requirements to the planned foreign investment;
  • prohibit the planned foreign investment, provided that this is necessary to protect national security or public order.

A foreign investor can appeal a decision with the Council of State, unless a decision was made based on military interests.

What if an investment is not notified to the governmental authority?

A failure to notify a foreign investment to the screening commission may bring about severe consequences. The screening commission has the right to conduct ex officio investigations (or after being requested so by a regional government or the Minister for Economic Affairs) into investments that potentially should have been notified. If a breach of law is found, the Minister can suspend the voting rights attached to the completed investment or a purchase itself until the procedure is completed. This may cause disruptions to the acquired entity and, if an investment is eventually prohibited, impose significant costs on all parties involved (including the sellers). The Minister for Economic Affairs can also require the investor to transfer the investment to a different approved party and within a certain period of time. Monetary fines of 1.000 to 100.000 EUR can also be imposed.

Impact on M&A and foreign investments

It cannot be negated that the FDI screening mechanism will significantly impact larger investments in Belgium into innovative and critical sectors. The parties to a M&A transaction that falls under the scope of application of the rules will have to calculate the completion of the procedure into the timeline and will have to include this as a condition precedent to completing the deal. This can already be done in the LOI instead of waiting to include this in the SPA. They may also have to contemplate what will happen if the investment is not approved. In fact, one of the first steps to be taken in a planned transaction in Belgium will be whether or not the deal requires prior FDI clearance (as is the case with merger clearance) to avoid that unnecessary transaction costs are made and to provide the purchaser more information to decide whether or not to proceed further. Any cross-border effects, including the involvement of foreign authorities in the process, must also be taken into account.

In competitive auctions foreign investors may risk to fall behind competitors from across the European Union which do not have to go through the procedure and may therefore be more appealing to a seller wanting to move forward efficiently. Such potential burden may have to be compensated by paying a higher purchase price or offering less stringent indemnification mechanisms (e.g., a lower de minimis a higher cap, or shorter time limitations).

Notwithstanding, it will still take some time before the new rules enter into force. The current proposal dates from February 2021 and is still being discussed in Parliament. A few minor amendments were added following an opinion of the Council of State and more amendments seem required following an opinion of the Data Protection Authority in September 2021.

Even when the new law is voted in Parliament, it is likely to only enter into force seven months thereafter. In the meantime, professional parties assisting foreign investors can prepare to implement this procedure in their processes. Also regular foreign investors, such as foreign private equity and venture capital funds, can start preparing the necessary documentation that will have to be provided to the governmental authorities on a standard basis when investing in critical domains in Belgium. The effective use of the screening mechanism will eventually also provide more clarity to foreign investors, for instance with respect to the nature of the measures that can be imposed by the Minister for Economic Affairs to proceed with the approval an investment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.