The Dutch government has taken the extraordinary step of announcing that any investments in vital sectors affecting national security will be subject to a notification and screening mechanism that is yet to be introduced. Once the bill enters into force, the screening mechanism would work retroactively and affect investments in vital sectors made after 2 June 2020. The Dutch government has taken this step to prevent predatory takeovers of vital Dutch companies, especially during the Covid-19 crisis. It follows the European Commission's recent call for greater protection of Europe’s vital sectors.

Protection against hostile FDI

The current economic conditions – against the backdrop of Covid-19 – may increase the risk of companies facing hostile takeovers or investments by non-EU investors. These acquisitions could lead to national security risks if they target companies active in vital sectors. The Commission has already expressed its concerns about this and has urged member states to either increase protection through foreign direct investments (FDI) screening mechanisms, or even to nationalise companies as a last resort.

Towards an FDI screening mechanism in the Netherlands

In the Netherlands, there is currently no general legal framework that regulates acquisitions and investments by foreign investors to protect public interest, public order or national security. There are some sectorial screening mechanisms, including in the financial, transport, and electricity and gas sectors. Telecoms was added only last month when parliament passed a bill to prevent undesirable control in that sector; the bill is expected to enter into force shortly.

The EU FDI Screening Regulation provides for a cooperation mechanism and minimum harmonisation within the EU, which must be in place by 11 October 2020. A Dutch bill implementing this regulation went through a consultation process in early 2020, but will not include any investment notification and screening mechanism.

The Dutch government announced in late 2019 that it was preparing a separate bill on the screening of takeovers and/or investments in vital sectors (including transport infrastructure, and water supply and management) or high-value sensitive technology affecting national security.

Retroactive screening of current transactions

The Dutch government has informed parliament that it intends to set 2 June 2020 as the formal reference date in the bill. This means that, once this bill enters into force, acquisitions and investments made in vital sectors or high-value sensitive technology on or after this date, could be reviewed retroactively if there is reason to do so based on national security.

Retroactive screening limited to national security threats

The government has indicated that the scope of the retroactive screening will apply to transactions relating to the following companies and/or assets:

• Providers active in vital processes and vital infrastructure, which are so essential to Dutch society that failure or disruption leads to serious social unrest and poses a threat to national security. The Dutch national security coordinator has published a list of what is considered vital at this moment. Examples of vital sectors mainly relate to infrastructure and networks including energy, transport infrastructure, and water supply and management. The Covid-19 crisis has, however, proven that besides network sectors, other sectors, such as healthcare, pharma, and food production and distribution could also be considered vital sectors. More generally, increased EU-wide awareness about negative aspects of globalisation and recent calls for greater protection of national champions, may influence sectors and companies which are considered vital. We therefore anticipate that the exact scope of sectors to be considered vital under the proposed bill will become the subject of political debate.
• Companies active in high-value sensitive technology. These concern goods and services which are already subject to export controls, including, for example, manufacturers of strategic goods (with a military or dual-use application) and related services.

The Minister of Economic Affairs and Climate will assess whether (a) continuity of vital processes could be jeopardised by the transaction; (b) integrity and exclusivity of know-how and information related to vital processes and high-value technology could be jeopardised; or (c) the transaction could lead to dependency on a third country resulting in undue pressure on the Netherlands. In carrying out the assessment, the minister will take into account a number of assessment criteria, such as the investor's ownership structure and relationships, the provision of information on the proposed acquisition or investment, and the investor's track record. The government has indicated that the assessment criteria in the proposed screening process will be very similar to those included in the recent bill on undesirable control in the telecommunications sector, due to enter into force shortly.

The screening mechanism will empower the minister to impose mitigating measures if it is concluded that the transactions threaten national security. For example, the buyer or investor could be required to meet additional conditions, such as positions requiring confidentiality being designated within the company or certain know-how or patents being licensed to keep the knowledge or technology available for Dutch vital processes. As a last resort, the bill will likely give the minister authority to decide that the transaction must be reversed.

Expected impact on Dutch investments

The Dutch screening system is expected to have similarities with established 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 also subject to change in view of the current geo-political environment and the Covid-19 crisis. For example, in Germany only direct foreign investments that fall within the scope of application of the "sector-specific" regime (mainly the defence sector) are currently subject to a stand-still obligation. Germany is contemplating extending the scope of this obligation to all notifiable transactions. Moreover, these transactions will be scrutinised more closely for any "likely adverse impact" on public order, safety or security.

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. This being said, there have been a number of high profile M&A transactions which have been blocked on national security grounds, including Broadcom's bid to takeover Qualcomm in the United States and, more recently, the announcement by the German government that it would block a potential bid by a US company for CureVac, a German company working on a coronavirus cure.

As such, the Dutch government's announcement puts investors on notice. If investors are considering M&A activities in vital sectors or 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, and even more so after 2 June.