The Dutch government has unveiled a new law designed to bolster and regulate the defence and security industry in the Netherlands. The proposed Defence and Security-Related Industry Resilience Act (Defence Resilience Act) is directed at companies active in these industries and contains a number of provisions aimed at improving Dutch armed forces operations. Structured around three major pillars, the act introduces a new sector-specific foreign direct investment (FDI) screening mechanism, lays out a framework for certifying Dutch companies to compete for foreign defence contracts, and draws up measures to enhance the Dutch defence industry's production, innovation and international competitiveness in general. Companies active in defence and security-related sectors can expect changes in M&A processes, new opportunities for international contracts, and a stronger regulatory framework that aligns with EU, US and Canadian standards. This could lead to increased economic activity coupled with more regulatory hurdles and government supervision.

A new sectoral FDI screening test

The Netherlands is enhancing its Foreign Direct Investment (FDI) screening framework with a new sectoral test focused on the defence industry. This builds on the existing Vifo Act, which applies to critical infrastructure and sensitive technology (see our previous article here), and aligns with the EU FDI Screening Regulation (see our previous article here). Under the proposal, the Bureau of Investment Screening (Bureau Toetsing Investeringen, BTI) is tasked with screening certain investments in the defence sector to prevent threats to national security. This new mandate will replace notifications required under the general regime but will not apply if existing sectoral regimes are engaged.

Investment activities and sectors covered

The new screening procedure targets two types of companies:

1. Military equipment or transportation suppliers: companies that provide goods classified as military technology or equipment by the EU, or those with contracts to provide transportation capacity for the Dutch military for at least three years;
2. Essential military suppliers: companies designated by the Dutch Minister of Defence as entrusted with a service of general economic interest (SGEI) or mandated to stock products under market regulations.

Not all investments are subject to screening. Notification is required for transactions that establish control or significant influence, including acquisitions of shares, mergers, demergers, joint ventures and asset transfers. Control is generally assumed if an investor holds a majority of voting rights, while significant influence involves holding 10%, 20% or 25% of voting rights or having the ability to appoint or dismiss directors. An increase in significant influence from 10% to 20%, or from 20% to 25% in voting rights will trigger subsequent notification, meaning that the notification process can be recurring in the event of a staggered acquisition of voting rights. The screening covers indirect acquisitions, too, and applies regardless of the investor's nationality. Notifications are not required if the investor is a Dutch governmental body.

The BTI can require publicly listed companies to identify the persons ultimately holding control or significant influence over them, irrespective of existence of a notifiable transaction. Publicly listed companies can protect themselves from hostile takeovers by issuing preferred shares with call options to a foundation (stichting). If a company faces a hostile takeover attempt, the foundation will exercise its call options, gaining sufficient influence over the publicly listed company to prevent the take-over. A foundation protecting a publicly listed company's interests is not required to notify the acquisition of significant influence to the BTI and is not subject to the standstill obligation.

Procedure

The new procedure follows a framework similar to the Vifo Act. Upon receiving a completed notification form, the BTI has eight weeks to approve the transaction (Phase 1). If additional assessment is needed, Phase II is triggered, extending the procedure by another eight weeks. Transactions cannot proceed until approved by the BTI (standstill obligation). Phase 2 decisions require the Minister of Defence's agreement and can result in transactions being approved, conditionally approved or prohibited. While the Defence Resilience Act provides discretional power to the minister, the principle of proportionality ought to limit prohibition decisions to only those cases where the risks to national security cannot be sufficiently addressed through commitments.

Assessment and enforcement

The BTI’s substantive assessment closely mirrors that of the Vifo Act and involves factors like an investor's ownership structure, criminal history, and whether they are subject to sanctions. Additional defence-specific factors, such as the investor's existing contracts and ability to participate in NATO and EU defence cooperation programmes, will also be taken into account. The BTI may reassess decisions retroactively in exceptional cases involving significant impacts on social, economic or security conditions.

Enforcement powers are extensive, allowing the BTI to request information from transaction parties, third parties and government bodies. Violations of the notification or standstill obligations can lead to retroactive call-ins or ex officio investigations, with potential fines of up to 10% of the undertaking’s turnover, and orders to unwind transactions or to refrain from exercising shareholder rights.

This proposed FDI screening test highlights the importance of safeguarding defence companies from ownership changes that could compromise military capabilities, by either exposing sensitive information or creating strategic dependencies.

Government-issued certificates to compete abroad

In a bid to ensure quicker production and supply of military equipment, the Defence Resilience Act introduces "suitability certificates" for Dutch defence companies. Current critical suppliers who already have authorisation certifying they meet the general security requirements for Dutch contracts (ABDO authorisation) have an advantage in tenders for new contracts. In order to level the playing field, companies who want to bid for key contracts can apply for a certificate so they are “whitelisted” beforehand. These certificates can be requested by companies, knowledge and research institutions and higher education institutions registered with the Dutch Trade Register. This initiative seeks to boost the international standing of the Dutch defence sector and to maintain its status as a key supplier both at home and abroad. However, it is unclear whether the initiative will succeed in levelling the playing field abroad. While foreign governments may be amenable to taking Dutch-issued certificates into consideration, it is likely that they would ultimately conduct their own trustworthiness screening given the sensitive nature of the sector.

Application procedure

Dutch companies seeking foreign defence or security contracts can apply for suitability certificates. Foreign entities classified as holding defence or security interests (behoeftestellers) looking to contract with Dutch defence companies may request a certificate from the Dutch government, prompting notification to the company and allowing it to apply. The Minister of Defence handles applications involving classified information, while the Minister of Economic Affairs manages all other requests. Upon receipt, the responsible minister has eight weeks to make a decision (Phase 1). If further assessment is needed, Phase II takes up to six months, with a stop-the-clock mechanism for additional information requests. Decisions may be to grant or deny the certificate, but no conditions or remedies can be imposed.

Substantive assessment

The assessment process mirrors the Vifo Act with factors such as: transparency of ownership structure; regional stability of the country of residence or administration; ties to third countries with questionable export-control policies or poor track records of participation in international organisations; and a company's cooperation during the investigation. Additional factors will be considered if a sensitive technology is involved, such as indications that the company is seeking to access sensitive technologies for purposes other than mere commercial exploitation or a track record of exercising strategic dominance over sensitive technology for non-commercial reasons. If classified information is involved, the minister will use the assessment factors that would apply if the minister was intending to share classified information with the company. The Defence Resilience Act contains a large number of possible assessment grounds. For each application, the minister will select a subset of grounds that are suitable to enable the company to compete for the desired contracts. The guiding principle is to make the assessment as light as possible so that Dutch companies are not held to unnecessarily high standards compared to competitors from other countries.

The certificate reflects the company’s status at the time of issuance. Companies must notify the responsible minister of any significant changes. The responsible minister can also reassess a company's suitability to hold a certificate ex-officio if: (i) the company fails to notify a significant change; (ii) the minister obtains information that indicates a reassessment is required; or (iii) the company misrepresented facts in its initial request. Certificates can be revoked, but companies will be given a chance to submit their views.

Supervision and enforcement

The responsible minister has some enforcement powers. Providing inaccurate or incomplete information can trigger reassessment, revocation of the certificate, or an administrative fine not exceeding EUR 1,030,000 or 10% of the company's annual turnover, whichever is higher. Additionally, the minister can inform third-party contracting entities of the enforcement decision, potentially impacting the company's future business relationships.

Market regulation and government management of defence supply chain

The Defence Resilience Act identifies the armed forces as essential for achieving the Dutch government's security strategy for 2023 – 2029. It puts in place four measures to safeguard the operational relevance and deployment security of the armed forces.

SGEI designations

Under the new rules, certain companies which are deemed crucial for the operational relevance or deployment of the armed forces or the Dutch Military Intelligence and Security Service (MIVD), can be designated as entrusted with a service of general economic interest (SGEI designation). An SGEI is broadly defined as any service provided by a company in the normal course of business which is imposed by the government for reasons of public interest. Such service may include producing and offering certain goods on the market or, as is the case in the Netherlands, the performance of the universal postal service.

There are two paths to an SGEI designation:

1. Military goods and dual-use items: Companies dealing in military or dual-use items, whether for military or civilian use, may be designated by joint decision of the Minister of Defence and the Minister of Economic Affairs based on reports of the Dutch Defence Technological & Industrial Base (NLDTIB).
2. Essential goods: Companies supplying goods essential for the armed forces' operational relevance or deployment security may be designated if the government cannot handle the supply or if the company can manage it more effectively or efficiently. Essential goods are identified in the strategic supply plan drawn up periodically by the Minister of Economic Affairs. A company is likely to be more efficient or effective than the government if, for example, it keeps stocks anyway and designation would simply require it to adjust the level of its stocks. Designated companies may be required to diversify their supply chains.

The proposed bill outlines six types of requirements on SGEI-designated companies: developing new technologies or production methods; supplying technology and knowledge; sharing developed technology, production methods or production and research facilities with third parties on reasonable market terms; maintaining production methods and facilities for weapons systems or parts of these; providing maintenance and modernisation services; and fulfilling orders from the Minister of Defence in priority to other orders accepted by the company, for a market-based fee.

Silent administrators

SGEI-designated companies must maintain separate accounts for designated activities. Companies may seek reimbursement for costs incurred and, if necessary, request a profit margin. If a designated company faces significant failure, the Defence Resilience Act permits the appointment of a silent administrator to manage, restructure or wind up the company.

Stockpiling designation

In addition to SGEI designations, the Defence Resilience Act proposes using "stockpiling designations", allowing the Minister of Economic Affairs, in consultation with the Minister of Defence, to mandate companies to stock products or semi-finished goods they already use or produce. This measure is similar to the Dutch Petroleum Products Stockholding Act and aims to ensure availability of critical supplies. The group of companies in scope for a stockpiling designation does not completely overlap with the group of companies facing an SGEI designation. A company will only be subject to a stockpiling designation if it is already active in the market for the products destined to be stockpiled and can stockpile more efficiently or effectively than the government. Designated companies will be asked to implement security measures to protect stockpiled goods.

Targeted orders to improve supply chains

In order to strengthen defence supply chains, the Defence Resilience Act allows the government to impose additional requirements on companies under a stockpiling or SGEI designation. A designated company may face an administrative decision instructing it to diversify or strengthen its supply chain, reduce dependence on a specific supplier, adjust the logistics of the supply chain, or promote the substitution of semi-finished products and raw materials. A designated company may also be required, in the context of a particular product, to contract at least two different suppliers in different geographical regions for the same products, semi-finished products or raw materials.

Implications and next steps

The proposed legislation marks a significant shift in how the Dutch government supports and secures its defence and security industry. The proposed act has potentially far-reaching implications, particularly for designated companies. The proposal also has long-lasting implications. The statutory duration is ten years for SGEI designations and five years for stockpiling designations. The number of companies facing designation is likely to be limited. For companies, this new framework offers both challenges and opportunities. The sectoral investment test could impact mergers and acquisitions in the industry, while the issue of suitability certificates may open doors for Dutch companies to compete for new international contracts.

The bill is subject to a public consultation period, which runs until 1 September. Companies are encouraged to stay engaged during the public consultation and consider providing feedback to ensure their interests are considered. Following the public consultation, the Council of Ministers will review the bill, the Council of State will advise on it, and the lower and upper houses of parliament will eventually debate it. Staying informed about these developments will be crucial for adapting to the evolving regulatory landscape and leveraging new opportunities in the defence sector.