The Dutch government recently took the extraordinary step of announcing that any investments in vital sectors affecting national security will be subject to a notification and screening mechanism that has yet to be introduced. A draft FDI screening bill has now been published for consultation and, once the envisaged legislation enters into force, the screening mechanism will apply retroactively to investments made after 2 June 2020. In related news, an act to prevent undesirable control in the telecommunications sector came into force on 1 October 2020. Both developments provide some insight about what a future FDI screening mechanism might look like. We explain the potential implications in this article.

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With these legislative developments, the Netherlands joins a growing number of countries introducing screening mechanisms for M&A in vital sectors. Once the draft bill containing the FDI screening mechanism enters into force, prohibitions are expected to be exceptional given the limited "risk to national security" grounds. Above all, parties can expect an additional administrative burden and a possible impact on transaction timetables for investments within the scope of the screening mechanism. Even so, the Dutch government has stressed that these measures do not pose a threat to M&A activity in general, and that the Netherlands remains open to investors.

Which investments are covered?

Under the draft bill, investments in Dutch companies that are fundamentally important for the continuity and resilience of vital processes or are active in the field of sensitive technologies, must be notified to the Minister of Economic Affairs and Climate Policy if the investment leads to an acquisition or a change of control. The term "control" is directly linked to the Dutch Competition Act and means the ability to exercise decisive influence, either on the basis of shareholding, or on a de facto basis. The draft bill creates a possibility of lowering the threshold of control by a separate ministerial decree. This would, under special circumstances, cause minority shareholdings or preference shares to be regarded as leading to significant influence. Such a separate ministerial decree must specify those processes designated as "vital". It must also include all processes that are so essential to Dutch society, that their failure or disruption would lead to serious social unrest and pose a threat to national security. The ministerial decree is likely to be in alignment with the Dutch national security coordinator's list of vital processes. Some sectors on this list include the energy and transport infrastructure, water supply and management, and network sectors. The Covid-19 crisis has, however, demonstrated that other sectors, such as healthcare, pharma, and food production and distribution, could also be considered vital sectors. Also included are investments in companies with "sensitive technology". This entails goods and services that are subject to export control, including the manufacturing of goods with a military or dual-use application. The draft bill is set to have retroactive effect and will affect investments made as of 2 June 2020 (see our previous article). However, parties will only need to notify the Ministry retroactively if ordered to do so in relation to national security risks. The bill's explanatory memorandum stresses that retroactive screening will be done using a cautious approach.

Who should notify?

The draft bill applies equally to Dutch and non-Dutch investors. If the envisaged investment falls within the scope of the screening mechanism, a notification must be made by either the target company or the acquirer (with the draft bill assuming that the notification is made jointly or by mutual consultation). There is no need for notification if another more specific national screening mechanism already applies (for example, pursuant to the recently adopted legislation aimed at preventing undesirable control in the telecommunications sector). Notification obligation violations are subject to serious sanctions, including the suspension of voting, information and other rights, and fines of up to 10% of the target company's turnover.

Timing

Any transaction that has as its intent to acquire control or significant influence should be notified. The transaction can only be executed after the approval of the transaction (a standstill obligation). In line with the screening mechanism in the recent telecoms sector legislation, the Minister has to decide on the notification within eight weeks (phase 1). That period can be extended by up to six months for cases requiring an in-depth review of the activity (phase 2). If the Minister requests additional information, the statutory period stops.

Assessment and possible decisions

After receiving a notification, the Minister assesses whether the investment poses a national security risk. The draft bill lists several factors weighed in this assessment, such as the transparency of the ownership structure, ongoing sanctions against the acquiring party, the geopolitical situation of the acquiring party's country of origin, and its track record in operating businesses in the same sector. Based on the assessment, the Minister decides on whether the investment is allowed (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 decide within the eight-week or the extended period, the activity is automatically permitted. In exceptional circumstances, the Minister can reassess a transaction even after a positive decision. This can only be done 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. Before reaching a final decision after the reassessment, the Minister has to acquire prior authorisation from a court, which will assess whether there is a serious national security risk.

Expected impact on Dutch investments

The Dutch screening system is expected to share some similarities with existing screening practices, such as those used in the US by the Committee on Foreign Investments in the US (CFIUS) and in Germany (although the screening mechanisms in these jurisdictions are currently subject to change in view of the current geo-political environment and the Covid-19 crisis). The experience of these jurisdictions shows that while FDI screening places an additional administrative burden on foreign acquirers, in most cases, it does not impact the transaction perimeter. If investors are considering M&A activities in vital sectors or in high-value sensitive technology, they should expect closer scrutiny, especially during the Covid-19 crisis. At the same time, companies and advisers considering a sales process related to potentially vital sectors should take into account potential FDI concerns posed by certain bidders. As always with M&A, preparation is everything.