In Short
The Development: On 1 June 2023, the Security Screening of Investment, Mergers and Acquisitions Act (Wet Veiligheidstoets investeringen, fusies en overnames) ("the FDI Act") entered into force, introducing a mandatory notification requirement relating to investments in target undertakings in a broad range of sectors.
The Result: The FDI Act introduces a notification obligation, with a standstill requirement, and a screening mechanism for defined acquisition activities with respect to target undertakings active in designated vital sectors and sensitive technologies, or that operate business campuses, in the Netherlands. Of note, the FDI Act has retroactive effect on qualified transactions that were concluded after 8 September, 2020. The Minister of Economic Affairs and Climate ("the Minister") has the competence to order transactions to be retroactively reviewed for eight months from 1 June 2023.
Looking Ahead: The FDI Act will have a broad impact on acquisitions in the Netherlands. It will require careful assessment of whether a transaction falls within its scope. It will also impact timing, which, given the lack of established practice of handling filings by the government, will currently be difficult to anticipate.
Comprehensive Screening Mechanism in the Netherlands
Until the entry into force of the FDI Act, the Netherlands only had limited sectoral screening mechanisms applying to the electricity, gas, defense, and telecommunications sectors. As a result of the COVID-19 pandemic, which made certain markets vulnerable to undesirable takeovers and investments, the Dutch government saw the time fit for a comprehensive screening mechanism. The FDI Act aims to further protect national interests by introducing a screening mechanism for transactions that have the potential to harm "national security." The sectoral regimes remain in place, and take precedence in case of overlap with the FDI Act.
Investments Captured by the FDI Act
Acquisition Activities
The FDI Act applies to the following investment activities:
- Investments in a target company by an acquirer that lead to a change of control (control as defined in article 26 of the Dutch Competition Act);
- Mergers of two independent companies into a target company;
- Formation of a full function joint venture;
- Split-off of a company if: (i) the company being split is a target company; and (ii) the split-off involves an acquisition of control in a company that qualifies as a target company after the split;
- Acquiring part of the assets of a target company, if those assets are essential to its ability to operate as a target company;
- Other legal acts that lead to one or more (legal) persons acquiring control in a target company; and
- Certain forms of acquiring property under universal title.
Unlike FDI screening mechanisms in some other EU member states, the FDI Act is "country-neutral," capturing Acquisition Activities from non-EU investors, but also from those within the EU and even within the Netherlands.
For certain highly sensitive technologies, the FDI Act applies to the acquisition or increase of "significant influence"in a target company. "Significant influence" is a lower threshold requirement andcovers, amongst other things, shareholders that acquire or increase their share to 10%, 20%, or 25% of the votes in the target company.
Sectors Covered by the FDI Act
The FDI Act applies to undertakings established in, or with activities in, the Netherlands that qualify as one of the following categories:
I. Vital Suppliers
The FDI Act contains a list of sectors that qualify as vital. Currently, the list includes certain defined vital companies in the nuclear energy, gas and extractable energy, transportation (Schiphol and the Port of Rotterdam), heat transport network, and banking and financial sectors. The list can be expanded to include other sectors by governmental decree.
II. Operators of a High-Tech (Business) Campus
An Operator of a High-Tech (Business) Campus is defined as a company that manages an area or site on which a collection of companies are active and public-private cooperation takes place related to technologies and applications that are of economic and strategic importance to the Netherlands.
III. Active in High-End Sensitive Technology
Companies active in military goods and goods that classify as dual-use in the meaning of Regulation (EU) 2021/821 ("the Dual-Use Regulation") qualify as active in high-end sensitive technology. A governmental decree entered into force on 1 June 2023. It excludes certain dual-use goods from the scope of the FDI Act and adds four categories of sensitive technology: quantum technology, photonics technology, semiconductor technology and high assurance products. The same governmental decree also designated specific dual-use codes as highly sensitive goods.
Notification Obligation and Review Procedure
Notification obligation
Any intention to undertake Acquisition Activities that are in scope of the FDI Act must be notified to the Investment Screening Bureau (Bureau Toetsing Investeringen, "the BTI"). The notification procedure, including the applicable notification form, have been published in a separate ministerial order. Both the target company and the acquirer are subject to an obligation to notify. However, the acquirer cannot be held responsible for failing to comply with the notification obligation if it could not have reasonably known that a notification was required due to a duty of confidentiality on the part of the target company. In those cases, the target company would be the party responsible for making the notification.
Standstill obligation
The FDI Act introduces a standstill obligation. This means that Acquisition Activities may not be completed until the Minister has either issued a decision to the parties that: (i) no detailed review is required; or (ii) the transaction is (conditionally) approved.
Once the notification is filed, the Minister has eight weeks to decide whether a detailed review is required (Phase 1). If the Minister decides that a detailed review is required, the Minister has another eight weeks to complete the detailed review (Phase 2). Both Phase 1 and Phase 2 can be extended up to six months. However, any of the six months extension time used for Phase 1 will be deducted from the Phase 2 extension time. An additional three months can be added if the Acquisition Activities fall within the scope of Regulation (EU) 2019/452 ("the EU FDI Regulation"). The review periods will be suspended if additional information has been requested (a so-called 'stop-the-clock').
Review procedure
After the Minister receives a notification, an assessment is made on whether a substantive review is required. In principle, and as included in the FDI Act, a substantive review is only required if the Minister finds that the Acquisition Activities have the potential to pose a risk to national security. The FDI Act includes a list of factors that can be taken into account as part of the substantive review.
If the Minister concludes that the Acquisition Activities pose a risk to national security, the Minister can decide to impose certain conditions on the Acquisition Activities. These can range from an obligation on the acquirer and target company to implement a security and integrity policy, to the exclusion of certain assets or subsidiaries of the target company from the transaction. If the Minister concludes that the national security risk cannot be adequately addressed by imposing conditions, the Minister can decide to prohibit the Acquisition Activities altogether.
Retroactive Effect of the FDI Act
The FDI Act has retroactive effect on qualified transactions that were completed after 8 September 2020. Qualified transactions that were completed after 8 September 2020 and 1 June 2023 can be reviewed and involved parties can be ordered, by the Minister, to still notify the transaction.
The FDI Act's retroactive effect is limited in three ways. First, there is no active reporting obligation on the parties involved. Only if the Minister suspects, based on reasonable grounds, that the Acquisition Activity carried out could pose a threat to national security, can he order parties to report the transaction for further scrutiny. Second, the notification order can only be given up to eight months after the FDI Act has entered into force. Third, Acquisition Activities in the context of Operators of a High-Tech (Business) Campus and in the context of High-End Sensitive Technology that have been designated as such by governmental decree, are excluded from the FDI Act's retroactive effect.
Consequences of Non-Compliance With the FDI Act
There are various consequences attached to non-compliance with a notification obligation. These range from the imposition of an order to still report the Acquisition Activities, to the imposition of an administrative or criminal fine of up to 10% of the annual turnover of the party that was obliged to notify the Minister. Furthermore, a transaction that is carried out despite the Minister's decision to prohibit the transaction, is void.
The FDI Act can be accessed in Dutch here.
Three Key Takeaways
- The FDI Act will have significant impact on investments in the Netherlands: The FDI Act significantly broadens the sectoral screening regimes and is expected to have a serious impact on transactions involving the Netherlands. The reporting requirement applies to investments relating to a broad range of sectors and activities, and the FDI Act imposes a standstill obligation. Any investment involving companies in the Netherlands, or with activities in the Netherlands, should therefore be carefully reviewed to avoid fines of up to 10% of the company's annual turnover, or a mandatory reversal of the transaction.
- Retroactive effect: The FDI Act applies retroactively to qualified transactions that were concluded after 8 September 2020. Transactions falling within this period can be reviewed, and the parties involved may be directed by the Minister to retroactively notify the transaction.
- Be prepared: Consider the potential application of the FDI Act (or any of the Dutch sectoral regimes) early on in any deal process to avoid surprises, and to mitigate the impact on the transaction time schedule as much as possible.
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.
