Introduction: The rise of FDI monitoring in the European Union and Belgium
Although Belgium is a relatively small country, it maintains the sixth position in the ranking of European countries for foreign direct investments (FDI) (2022). 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. The current geopolitical climate raises questions about national security and resilience, leading to concerns about national autonomy and self-sufficiency with foreign investments.
The European Union ("EU") has set forth the key principles for member states to create their FDI monitoring systems in order to streamline operations throughout the EU and to promote cooperation among member states in screening foreign investments. On 30 November 2022, the Belgian Federal and Regional Governments reached an agreement on a draft cooperation agreement for a FDI screening mechanism (the "Cooperation Agreement").
Central to the screening of FDI in Belgium is the Interfederal Screening Committee ("ISC"), a body set up specifically for this purpose designed in coherence with the constitutional division of power. The ISC will be comprised of representatives from the federal and regional authorities. Transactions that fall within the scope of the screening mechanism will have to go through the complexity of Belgian state governance, wherein potentially each federal and regional government will have its say and conduct its separate review.
The Belgian rules are a standalone mechanism. The fact that (part of) an investment must not be notified in another EU Member State does not mean that it must not be notified in Belgium.
The final Belgian screening mechanism (the "FDIScreeningMechanism") is will become effective as of 1 July 2023. The Belgian M&A landscape is as of then poised to enter a new era.
We have prepared a number of frequently asked questions about the new FDI Screening Mechanism which you may have when you want to invest in Belgium. Its operation and interpretations will constantly evolve based on practice, so that the below answers are only given based on the legal texts that are publicly available and a first document provided by the Federal Public Service for Economy.
Frequently asked questions on the new FDI Screening Mechanism
1. When is an investment considered to be 'foreign'?
The FDI Screening Mechanism distinguishes three types of foreign investors:
- Each natural person having his or her main residence outside the EU;
- Each undertaking having its registered seat outside the EU and/or incorporated under the law of a non-EU state; and
- Each undertaking whose ultimate beneficial owner(s) (UBO) (as identified under Belgian law) has his or her residence outside the EU.
This means that investors from the EU will not be targeted by the FDI Screening Mechanism. However, it may apply for instance to a UK, US or Chinese company, or a Belgian company which has at least one UBO with residence outside the EU. Also EEA countries (such as Liechtenstein, Iceland, Norway and Switzerland) fall within the scope of the FDI Screening Mechanism.
The types of investors within the scope of application include public authorities, government agencies, public enterprises and private companies and institutions.
If multiple foreign investors that are not linked to each other invest in the same target company, a separate procedure per investor must be followed (thus with separate notifications).
2. What types of investments fall under the FDI Screening Mechanism?
Every type of investment by a foreign investor aimed at establishing or maintaining lasting direct relationships with the target company in a certain sector, including through the effective participation in the management or control of the company (e.g., through ownership of shares or by acquiring voting rights).
While this definition seems very broad, only (i) foreign investments in (ii) Belgian companies operating in sensitive industries that may affect security and public order, or those that may affect the strategic interests of the communities and regions, (iii) that seek to gain control over a Belgium undertaking or fall above a certain threshold, will fall within the scope of the FDI Screening Mechanism (respectively 10% or 25% of the voting rights in the target company, (iv) depending on the sector of the target company) (See Questions 3 and 4).
Also an increase of shareholding falls under the new rules (e.g., where a foreign investor already owns 20% of the target company (without prior notification) and now obtains 5% or more (which leads to an obligation to notify the investment)).
All types of companies, from startups to large groups operating in sensitive industries, may fall within the scope of the FDI Screening Mechanism.
3. Does an investment where no shares are acquired fall under the FDI Screening Mechanism?
Yes. While the acquisition of control in the Belgian target company usually occurs through the acquisition of shares (for which the FDI Screening Mechanism sets certain thresholds), other scenarios are also possible. Acquisitions of a (EU or non-EU) parent company or another affiliate holding shares in the Belgian company may have to be screened, constituting indirect foreign investments. If the company owns more than one Belgian affiliate, only one notification for the entire investment must be made instead of a notification per affiliate.
The same may apply to mergers and splits, and other transactions through with a foreign investor establishes control (e.g., by having the right to appoint and dismiss a majority of the board members, in case of veto rights assigned to a minority stake, in case of asset deals, etc.). It seems logical that a capital increase in an existing company through which the foreign investor obtains a percentage of shares above the applicable threshold equally falls under the FDI Screening Mechanism.
Investments aimed at setting up new economic activities in Belgium by a foreign investor (e.g., greenfield investments), without taking over existing economic activities in the process, do not fall within the scope of the FDI Screening Mechanism. Such investments, unlike investments in existing businesses that may already occupy a certain position within the economic system, cannot pose an immediate threat to national security, public order or strategic interests according to the legislators.
4. Which sectors fall under the FDI Screening Mechanism?
The foreign investment must meet one of the following two criteria to be screened:
- The transaction results in the direct or indirect acquisition
of 25% or more of the voting rights of an entity or undertaking
established in Belgium, whose activities relate to:
- critical infrastructure (g., utilities, transport, health, electronic communications, media, data processing, financial);
- technologies and raw materials essential for safety, defense and public security, military equipment, dual-use goods and technologies of strategic importance (g., AI, robots, semiconductors, cybersecurity, quantum and nano technologies);
- private security;
- freedom and pluralism of the media;
- supply for critical inputs, such as energy or raw materials;
- access to sensitive information and personal data, or the possibility to control such data; or
- technologies of strategic interest in the biotech sector, on the condition that the turnover of the Belgian target exceeded 25 million euros during the previous financial year.
- The transaction results in the direct or indirect acquisition
of 10% or more of the voting rights of an entity or undertaking
established in Belgium with a turnover that exceeded 100 million
euros during the previous financial year, whose activities relate
- dual-use goods;
- electronic communications; or
- digital infrastructures.
If a company exercises activities in sectors which fall under both thresholds, the 10% threshold will apply for the entire investment.
5. Does the procedure also apply to listed entities?
Yes, the acquisition of listed stock may also fall within the scope of the FDI Screening Mechanism and therefore be notifiable no later than at the time of acquisition. Separate rules of financial law are likely to apply to such investment.
With the exception of financial rights (e.g., dividends), all rights attached to this acquisition (e.g., voting rights) shall be suspended by operation of law until a decision on the investment is taken.
6. What are the typical steps involved in the process?
The FDI Screening Mechanism has two to three phases:
- Notification phase: The parties involved in the investment must submit transaction documents to the ISC secretariat for review. If information is missing, the ISC will notify the parties. The notification must include certain required information on the investment (See Question 13).
- Assessment phase: The ISC members will review the file on a preliminary basis and determine if there is a risk to public order, security, or strategic interests. If no risks are identified, the parties can proceed with the closing of the transaction. If no answer is provided by the ISC to the notifying parties within 30 days following their notification of a complete file, the investment is deemed to have been approved and a screening procedure can no longer take place.
- Screening phase: If any risks are identified, the ISC members will further analyze the transaction and draft an advice to each government involved. It should at least include a specific risk analysis. The duration of this phase varies based on the complexity of the transaction and the number of governments involved.
7. How does the screening phase work?
If any risks to public order, security or strategic interests have been found during the assessment phase, the ISC members will conduct a more thorough review in the screening phase. The screening procedure results in an opinions from the ISC members to the competent ministers and college members.
If one of the competent members of the ISC considers that the foreign direct investment has potential implications for public order, national security or strategic interests, it must notify the other ISC members and prepare a draft opinion that is shared with the foreign investor and the target companies involved. The parties to the investment can then consult the file (save for secret information). These parties must then issue their comments on the draft opinion within 30 days. The ISC will then organize a hearing within 10 days during which all parties are invited and are heard.
Within 20 days following the decision to open a screening procedure all ISC members must provide an advice to their respective governments. It is also possible that additional information must be requested from other member states or the European Commission, which may impact the timing of the procedure.
Each competent member of the ISC drafts its own final opinion on the investment, which may be positive or negative. The positive opinion may include a report containing the investor's agreement to the so-called mitigating measures. These measures are proposed to offset the potential impact on public order and national security, on the one hand, or on strategic interests, on the other. ISC members and interested parties may negotiate these measures and conclude a binding agreement on the agreed terms (See Question 17).
The competent ministers and college members, based on the opinions of the competent members of the ISC for which they are responsible, each take a preliminary decision on the possible admissibility of the notified investment.
The ministers and college members notify their preliminary decisions to the ISC Secretariat. The ISC Secretariat then processes these preliminary decisions into a combined final decision.
This final decision can result in:
- an approval of the foreign investment;
- an approval of the foreign investment if the foreign investor agrees to be bound by certain mitigating measures, as negotiated with the authorities; or
- a refusal of the foreign investment if its impact is non-remediable and at least one of the competent authorities has given a negative advice regarding the approval of the foreign investment.
The time periods in the procedure are usually suspended when certain actions take place (e.g., a request for information from other member states or the organization of a hearing). A complex foreign investment can also result in a prolonged period of 2 months instead of 20 days for the ISC members to provide an advice to their respective governments.
8. How may the new FDI Screening Mechanism impact an investment?
The final decision of the competent authorities may lead to the approval of the FDI, possibly accompanied by a binding agreement of the investor with mitigating measures (See Question 17), or to the non-admission of the investment.
An investment will not be admitted if a non-remediable impact has been identified following the concrete opinions of the ISC members and at least one competent authority has taken a negative preliminary decision to this effect, leading to a blocking of the FDI.
The FDI Screening Mechanism also significantly impacts deal timing and procedure when a foreign investment potentially can fall under its scope. It may be difficult for the parties to foresee whether or not the investment will move from the assessment phase to the screening phase. While the timing of the assessment phase is rather strict, the application of a screening phase may result in a timing that is difficult to predict.
9. Which authorities are competent to conduct the screening procedure?
The ISC consists of representatives of the Federal State, the Flemish Region, the Walloon Region, the Brussels-Capital Region, the Flemish Community, the French-speaking Community, the German-speaking Community, the French Community Commission, and the Common Community Commission. The ISC is chaired by a representative of the Federal Public Service for Economy, where the secretariat of the ISC is also located. The secretariat plays a coordinating role throughout the procedure.
The Constitution of Belgium establishes the country as a parliamentary democracy with a federal structure, divided into three regions (Flanders, Wallonia, and Brussels) and three communities (French-, Flemish-, and German-speaking).
The powers of the communities and regions on the one hand and the federal government on the other are well defined. This means that each government can regulate autonomously within its areas of competence and there is no hierarchy between federal laws and regional decrees. Broadly speaking, the regions dispose of economic matters (e.g., economy, employment, foreign trade, etc.) and the communities dispose of personal matters (e.g., culture, education, health policy, etc.).
Parties to a foreign investment that has to undergo the FDI Screening Mechanism will therefore likely have to cope with the complexities of the Belgian State and the division of powers across regional governments.
10. Which party must file a notification to the authorities regarding the investment?
It is the foreign investor conducting an investment that falls within the scope of application of the FDI Screening Mechanism that must notify the ISC Secretariat on its own initiative, by itself or through a legal entity established and authorized in the EU, after the signing and before the implementation of the agreement, the publication of the offer to purchase or exchange, or the acquisition of a controlling interest.
The notification may be submitted by letter, electronic mail or in person.
Alternatively, a draft agreement can be submitted by both the foreign investor and the target companies (or their shareholders).
11. When must a foreign investment be notified?
In principle after the signing of a transaction document and before its implementation (or closing). The question may be whether or not a (signed) (even non-binding) LOI could for example qualify as a transaction document that can be presented for review. Alternatively, a draft agreement that has not yet been signed can be submitted for review.
12. Can the authorities start a screening procedure themselves?
Yes, the ISC may initiate a screening of an unnotified foreign direct investment on its own initiative at the request of one of its members.
The decision to open such investigation is notified to the parties concerned by suggesting to them to file a notification to formally initiate a review procedure. In case of acquired control without notification and/or without cooperation, a review procedure may still be initiated.
13. Which information must be provided regarding an investment?
The notification provided by the foreign investor when filing the notification must include:
- the ownership structure of the foreign investor and of the undertaking in which the FDI is planned or completed, including information on the identity of the investor, the capital participation and the ultimate beneficial owner;
- the approximate value of the FDI as well as the methodology applied to calculate this value;
- the products, services and business activities of, on the one hand, the foreign investor and its controlling entities, including the entities controlled by the latter, and, on the other hand, those of the undertaking in which the FDI is planned or completed;
- the EU Member States and third countries in which, on the one hand, the foreign investor and its controlling entities, including the entities controlled by the latter, and, on the other hand, those of the undertaking in which FDI is planned or completed, carry out relevant business activities;
- the financing of the investment and its origin; and
- the date or planned date of completion of the investment.
The ISC members can request any other information that is necessary from the parties, which must be provided by them without undue delay.
The failure to include certain information at the time of filing the notification can lead to delays in the procedure, as the initial deadlines can be suspended when the notification file is incomplete. The filing of incorrect or misleading information can be sanctioned.
14. How long can the screening phase typically take?
The FDI Screening Procedure consists of two major stages: the Assessment Phase and the Screening Phase. While the first phase may take up to 30 days, the second phase can take significantly longer (easily 2-3 months if no remedies are required nor any prolongations), depending on the complexity of the foreign investment. It is also possible that a notification has to be made to the European Commission in the event that a FDI is likely to affect other EU Member States too, which may lead to additional procedures. The ISC may have to obtain advice from a security council too.
15. How is disclosed information kept confidential?
The ISC will only request personal data and business information that is strictly necessary to screen the FDI. It will disclose this information only to a limited number of parties involved in the process and the information shall only be kept for the time necessary to exercise an appeal against the final decision or, where an appeal is lodged, until a final judgment is rendered.
Any person acting in the application or implementation of the screening mechanism is subject to security clearances and, outside the exercise of his duties, is bound to the utmost secrecy regarding all matters of which he has knowledge because of the execution of his mission.
The EU and national legislation on the protection of trade secrets also applies throughout the process. The Cooperation Agreement also includes the necessary safeguards for the processing of personal data of the parties involved.
16. Which factors does the FDI Screening Mechanism consider when evaluating foreign investments in Belgium?
The ISC members will in general take the following risks into account when assessing the impact of a foreign investment on national security, public order and strategic interests:
- the impact on the continuity of certain vital processes that, when interrupted or deactivated, could cause significant public harm and a threat to the nation security, strategic interests and quality of life of the Belgian population;
- the impact on the knowledge and information that is connected to these vital processes, as well as the required sensitive technologies; and
- the development of strategic dependencies.
Both the Assessment Phase and the Screening Phase will be conducted based on different elements that are taken into account by the respective ISC members and governments.
The chance that a foreign investment will be sent for further screening during the Assessment Phase will be higher when:
- the foreign investor is directly or indirectly owned by a foreign government;
- the foreign investor has already been part of activities that have consequences for the national security or public order of EU Member States or other third countries; or
- a significant risks exists that the foreign investor is involved in illegal or criminal activities.
The sector in which the foreign investment is made, the type of the investment and its value may of course also impact the review.
The elements that are most likely to be taken into account by the competent authorities will become more clear in the near future when certain precedents are set.
17. Which mitigating measures can eventually be imposed by the authorities?
In order to reach a positive advice of the ISC for the competent authorities to approve a foreign investment, mitigating measures can be proposed to limit the risk of the investment to a level that is acceptable for all authorities involved.
These measures are negotiated with the foreign investor and the target company, and must be agreed in a binding agreement that is entered into under the condition precedent of final approval of the investment by the competent authorities.
The competent members of the ISC may propose, by way of example, the following measures:
- appointing one or more security-cleared contact person(s) or compliance officer(s) responsible for handling sensitive information or data related to intellectual property;
- requiring one or more directors to obtain security clearance;
- installing a liaison officer or "security council" within the company that can regulate access or transfer of information, reporting breaches to the competent authorities;
- establishing an additional code of conduct in the context of providing or exchanging sensitive information to ensure public order, national security and strategic interests;
- imposing that certain technology, source code and/or know-how be deposited with a third party in Belgium and be made (temporarily) available in the event of acute risks to certain vital processes or security interests;
- ensuring that certain operations are only located in Belgium;
- licensing certain know-how protected by patents or other intellectual property rights to the State or certain companies to keep knowledge or technology available to Belgian vital companies or processes;
- establishing security protocols for and/or notifying the authorities of company visits by non-EU residents in sensitive sectors within the enterprise;
- imposing periodic reporting of security aspects within the vital processes in the company;
- prohibiting that certain parts of the target company or its affiliates are acquired as part of the foreign investment;
- imposing a new notification with subsequent investigation as stipulated in this cooperation agreement if there is a change of control or the original foreign investment is increased by more than 50% of the voting rights;
- limiting the equity in the proposed investment;
- certificating all shares; and/or
- requiring guarantees for the continuity of certain processes and/or supply of services and goods for a certain period of time with prior notice and consultation if the company should decide to discontinue certain activities affecting national security, public order and strategic interests.
The proposed mitigating measures must be proportionate in view of the aim of reducing the risk to national security, public order, or strategic interests to such an extent that the investment can be deemed admissible.
18. How likely is it that a foreign investment will be approved under the new FDI Screening Mechanism?
This is difficult to foresee, but certain statistics on an EU level may give an indication. In 2021, 13 EU Member States submitted 414 notifications under the cooperation mechanism of the EU FDI Regulation. Most of these notifications, over 85%, came from Austria, France, Germany, Italy, and Spain. The industries with the most notifications were Information and Communication Technology and Manufacturing. The main source countries of the ultimate investors were the USA, UK, China, Cayman Islands, and Canada, which were consistent with overall investment trends. Of the reported investments, 73% were approved without restrictions, and 23% of the decided cases involved mitigating measures. Only 1% of the investments were blocked, while the others were withdrawn by the parties themselves. On a European level, the approval of FDIs remains therefore on a high level. It is to be seen if Belgium will be more strict or will also only treat the procedure as administrative security.
19. Can the measures imposed by the authorities be appealed in court?
A decision concerning the inadmissibility of a foreign direct investment may be appealed to the Market Court. This appeal does not suspend the contested decision.
If the Market Court annuls a decision in whole or in part, the case is sent back to the ISC where the foreign investment is re-examined through a new screening procedure.
20. What may happen if an investment is not notified to the authorities?
The foreign investor can be sanctioned with an administrative fine of maximum 10% of the investment value that should have been notified but is not spontaneously notified within 12 months following its completion, or if the ISC launches an ex officio investigation within the same term. In the absence of a notification after this term, the administrative fine can amount to up to 30% of the investment value.
Within the framework of an ex officio procedure, the ISC can impose changes to the structure of an investment or other remediation measures up to 2 years after the completion of the investment. In the event of bad faith, this term is prolonged to 5 years.
21. Are there any other sanctions?
Yes, an administrative fine of up to 10% of the investment value can be imposed for:
- not providing information or incomplete information when notifying an investment or being requested to provide additional information; or
- a failure to provide additionally requested information within the term set by the ISC.
An administrative fine of up to 30% of the investment value can be imposed for:
- providing incomplete, twisted or misleading information at the time of notification or following a request for additional information;
- ignoring a decision not to complete an investment; or
- not implementing the agreed remediation measures within the foreseen term.
22. Will the new FDI Screening Mechanism impact ongoing investments?
Any ongoing investments that are to be signed after 1 July 2023, and may fall under the scope of application of the FDI Screening Mechanism, will have to be notified. According to the Federal Public Service for Economy, deals signed before this date but with a closing after this date must not be notified. However, under certain (unspecified) conditions such deals could still be screened ex officio.
23. How can a foreign investor protect itself from potential risks derived from an investment and ensure that the transaction proceeds smoothly?
One of the first steps to be taken in a planned transaction in Belgium by a foreign investor will be to assess 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.
If a business decision is taken to proceed with the investment, the necessary information to be filed with the notification of the investment should be collected sufficiently in advance to ensure a smooth notification process. The foreign investor must be prepared to address any requests for additional information and to participate in a hearing if necessary. An assessment of potential mitigating measures can be prepared, so that the investor is prepared for negotiations with the competent authorities hereon if they arise. A team consisting of both legal and operational advisors should be created to prepare the notification and potential screening process.
It is recommended to discuss the potential application of the FDI Screening Mechanism with the target company (or its sellers) as soon as possible, as the information to be provided to the ISC will have to come from both sides and will therefore require the cooperation of both parties (which should be translated into clauses regarding cooperation obligations).
24. How will the FDI Screening Mechanism impact timing in a deal?
It is clear that the required application of FDI clearance may significantly impact the deal timeline, especially if a Screening Phase is applied.
While an investment should by default be notified by the foreign investor following the signing of the transaction documents, there is a possibility to notify a draft agreement whose relevant terms will not significantly differ from the final agreed form of the agreement. Both parties to a transaction that must be notified for FDI clearance will have to take a strategic decision on the time of filing of the notification to the ISC.
It is currently unclear if a signed (even non-binding LOI) could be sufficient to present for screening to the ISC. Given that its terms may still materially deviate in a more detailed agreement, it is quite likely that this would not be the case. If the LOI would be further detailed in a transaction document, the latter would perhaps again have to be submitted to the ISC, raising costs for all parties involved and impacting timing.
Practice will show whether or not the ISC will also adopt an informal procedure to indicate if a foreign investment would be acceptable. However, due to the involvement of various governments, even an informal procedure does not seem easy to implement.
Certain substantial deals may be subject to both FDI and merger clearance (and the foreign subsidies regulation). Despite having a two-step process, these procedures are not coordinated, making the process more complicated. The potential impact of both procedures will have to be contemplated by the parties involved.
25. How does the FDI Screening Mechanism impact M&A transactions in general?
Early on in the transaction, the parties will have to verify whether or not the FDI Screening Mechanism will apply to the contemplated transaction. Certain preliminary procedural agreements hereon can be agreed in the LOI (e.g., FDI clearance as condition precedent). If this issue is not addressed in the preliminary phase, it will in any case have to be a standard review during the due diligence phase, similar to the review of the potential application of merger clearance.
As this is a new procedure without precedents for the next few months, it will be difficult for the parties to foresee its outcome. It is possible that a notification leads to a negotiation on mitigating measures that may alter the deal structure entirely. This may lead to additional transaction costs. As a strict reading of the procedure does not allow to present mere proposals of deal structures to the ISC, but requires at least an almost final draft agreement between the parties, it cannot be excluded that the parties will have to complete redraft the transaction documents once again after possibly long negotiations.
Certain mitigating measures may impact both parties to a transaction. For instance, a measure limiting the sale of certain parts of an undertaking or affiliate will not only prevent the foreign investor from conducting part of the investment, but also the seller from obtaining the planned consideration. The seller will have to look for other buyers for such affiliate, or integrate the unsold affiliate in its remaining organization.
In competitive auctions foreign investors may risk falling 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 higher de minimis or a lower cap).
26. How to prepare the transaction documents in light of the FDI Screening Mechanism?
Similar to merger clearance, the parties involved in an investment that must be notified for FDI clearance must foresee the necessary wording in their transaction documents to cover the practical aspects thereof and its risk.
This may result in the need to include clauses on: (i) risk allocation; (ii) conditions precedent;(iii) cooperation obligations; and/or (iv) a long-stop date.
Risk allocation clauses outline the responsibilities of each party involved in the investment with regards to the potential outcomes of the foreign direct investment screening process. For example, the clause may state that if the investment is not approved, the buyer will be responsible for any costs incurred during the screening process.
While the procedure itself is free of charge, parties may have to determine who bears the burden of the costs for all advisory costs to complete the procedure.
Cooperation obligation clauses determine the responsibilities of each party involved in the investment with regards to the cooperation required during the application of the FDI Screening Mechanism. For example, such clauses may state that both parties must provide all necessary information to the relevant authorities and cooperate fully with the screening process.
Long-stop date clauses set a deadline for the completion of the investment. In the context of foreign direct investment screening, the long-stop date clause may specify a deadline for the completion of the screening process. If the process is not completed by the specified date, either party may choose to terminate the investment agreement.
Condition precedent clauses will be used to prevent an agreement from entering into force in the event that an investment is refused as a result of the FDI Screening Mechanism.
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.