A bill was recently submitted to parliament establishing a national security screening regime where target undertakings active in the Netherlands in vital processes or sensitive technology, are being acquired. In 2020, the Dutch government indicated its intention for the screening mechanism to apply retroactively. Under the current bill, the regime would apply to qualifying investments made after 8 September 2020.

With this bill, the Netherlands joins a growing number of countries introducing M&A screening mechanisms. Once the proposed Dutch mechanism enters into force, bans are expected to be rare, given the limited "risk to national security" grounds. But parties can expect an additional administrative burden and a potential impact on their transaction timetables where investments fall within the scope of the screening mechanism. Even so, the Dutch government has stressed that the measures do not pose a threat to M&A activity in general, and that the Netherlands remains open to investors.

Activities covered

Sector-specific screening regimes are already in place for telecoms (see our previous article), electricity and gas. The bill introduces a screening mechanism for investments in undertakings active in vital processes or sensitive technology. The bill lists three sectors it considers vital: energy, banking, and certain activities at Amsterdam airport and the port of Rotterdam. These sectors are not covered in their entirety by the bill – it would apply to specific functions that are considered vital to a sector, such as the financial market infrastructure. The bill allows the Minister of Economic Affairs and Climate to expand the scope of vital infrastructure providers in the case of an emergency.

Military goods and dual-use items which fall under EU export control regulation 428/2009 are considered sensitive technology, although some may be excluded from that category by ministerial order. That regulation will soon be replaced by the new EU Dual-Use Regulation 2021/821 (see our previous article on that recast), and the bill will probably follow suit. Other technologies may be designated as sensitive, provided they:

• may be essential for the functioning of defence, investigative, intelligence and security services in the exercise of their tasks;

• are essential to prevent unacceptable risks to the availability of certain essential products or facilities that contribute to the national security interests of the Netherlands or of its allies, such as NATO partners; or

• are characterised by a broad scope of application within different vital processes or within processes affecting national security – such as quantum technology.

Drafts of these possible orders have yet to be published.

Investments covered

The bill covers acquisitions of control in an undertaking established in the Netherlands and active in vital processes or sensitive technology as described above. The terms "control" and "undertaking" need to be understood as defined and developed in EU competition law. "Control" means the ability to exercise decisive influence, either on the basis of shareholding, or on a de facto basis. "Undertaking" is an economic entity which exploits economic activities, and this may encompass various legal persons or just a branch without a legal personality that only has assets and employees in the Netherlands. An undertaking is "established in the Netherlands" when the activities or the actual management takes place in the Netherlands; formalities like the place of incorporation are not decisive.

With regard to the Netherlands-based undertakings active in sensitive technology (military goods and dual-use items), the bill authorises the Minister to appoint specific categories of sensitive technology for which a lower threshold than control will trigger the mandatory screening regime. It concerns the acquisition of or increase in "significant influence". The bill defines "significant influence" as the acquiring party's possibility of exercising at least 10%, 20% or 25% of the votes at the general meeting. The ministerial order will specify which of the three lower thresholds applies to the specific categories of sensitive technology. A draft order describing these categories has yet to be published .

The bill also covers the acquisition of a target company which itself is not active in vital processes or in sensitive technology in the Netherlands, but which has control or significant influence over a Netherlands-based undertaking which is active in that way.

Retroactive effect

The bill is set to have retroactive effect and will affect investments made after 8 September 2020. However, parties will only need to notify the Ministry retroactively if ordered to do so in view of national security risks. The Minister can exercise this right up to eight months after the bill becomes law. The bill's explanatory memorandum stresses that the Ministry will take a cautious approach on retroactive screening.

Who should notify

The bill applies equally to Dutch and non-Dutch investors. Strictly speaking, the new law would therefore be a national security regime, not only a foreign direct investment (FDI) regime. If the envisaged investment falls within the screening regime's scope, a notification would have to be made by either the acquirer or the target company. While in the majority of cases the acquirer would seem to be the most appropriate party to handle the notification, in specific cases, the target undertaking would be bound to observe non-disclosure obligations and would be the only appropriate entity to assess whether the transaction falls within the national security screening regime. In that case, the target undertaking would need to make the notification.

Sector-specific regimes have priority

If another, more specific national security screening mechanism already applies - such as the screening regimes in the telecoms, gas and electricity sector – no separate notification has to be made under the general national security screening regime. If the notification thresholds of that sector-specific regime are not met, no notification is needed under the general regime either. Other notification regimes that do not concern national security – for example, regimes observed by the Dutch central bank, healthcare authority or competition authority – do not release the parties from notifying the transaction under the general national security screening regime.

A separate bill is being prepared for the defence industry, but no further details are known yet. This bill will introduce a national security screening regime which will apply to essential companies in the supply chain of the vital process of "defence deployment". For the time being, the general national security screening regime will apply when the undertaking is active in military or dual-use goods.

Timing

Once the new regime enters into force, a notifiable transaction can only be executed after the Minister approves the transaction (a standstill obligation). The Minister has to decide within eight weeks of notification (phase 1). That period can be extended by up to six months where, for example, information from third countries is required. If an in-depth review is necessary, the Minister has another eight weeks (phase 2). The phase 2 period can also be extended by six months, but the phase 1 period is deducted from that six-month extension. An extension by another three months is possible if an investor is established outside the EU and the investment falls under the EU FDI screening regulation. This permits investment screening authorities from other member states and the European Commission to intervene in a case, as provided for by that regulation. Importantly, if the Minister requests additional information from the notifying parties, the statutory review period is suspended.

Assessment and possible decisions

After receiving a notification, the Minister assesses whether the investment poses a national security risk. The bill lists several factors that will be taken into account. These include the transparency of the ownership structure; ongoing sanctions against the acquiring party; the geopolitical situation of the acquiring party's country or region of origin; and its track record in operating businesses in the same sector. Based on the assessment, the Minister decides on whether to allow the investment (either unconditionally or with the condition that certain mitigating measures be met, such as additional security requirements or the appointment of a security officer). If the national security risks cannot be remedied through mitigating measures, the Minister will prohibit the transaction. If the Minister does not take a decision within the eight-week or extended period, the transaction is automatically permitted.

In exceptional circumstances, the Minister can reassess a transaction, even after a positive decision. But only if there is a serious national security risk in the form of either a potential social disruption with economic, social or physical consequences, or a direct, increased and real threat to Dutch sovereignty. The Minister must make that reassessment no later than six months after becoming aware of that risk. The Minister does not need the prior authorisation from a court before reaching a final decision after the reassessment - a striking departure from an earlier, publicly consulted, draft of the bill.

Harsh criticism by the Council of State

Each bill in the Netherlands goes through the Council of State for advice. The advice on this bill contains harsh criticism on four points. First, the Council reproached the government for not having thoroughly analysed the problem the bill seeks to address. Second, the Council stated that the bill lacked clarity, which can cause problems when implementing the regime, for the notifying parties and the regulator alike. Third, the Council considered the regime to be vulnerable under international and EU law. Finally, the Council criticised the proposed retroactive effect which was previously envisaged for 2 June 2020 and has now been set at 8 September 2020, the day when the draft of the bill was publicly consulted.

To address the issues raised by the Council of State, the government has made several amendments to the bill. Whether members of parliament will be satisfied with these amendments remains to be seen.

Expected impact on Dutch investments

If investors are considering M&A activities in vital sectors or activities involving sensitive technology, they should expect closer scrutiny – notably during the Covid-19 crisis, but also beyond – and anticipate longer transaction timelines due to an additional notification process. At the same time, companies and advisers considering a sales process involving potentially vital sectors should take into account national security concerns posed by certain bidders. As always with M&A, preparation is everything.