News Update Competition
6 July 2021
On 2 July 2021, the long-awaited Investment Screening Bill (Wet Veiligheidstoets investeringen, fusies en overnames (Wet Vifo), the "ISB") (previously known as the "ENSB" – see our 16 October 2020 News Update) has been published. The ISB, like the ENSB, introduces an ex-ante screening mechanism for investments in companies involved in vital processes or working with sensitive technologies in the Netherlands.
Criticism on previous versionThe Dutch Council of State (Raad van State) has criticised the ENSB extensively. It mainly criticised a) impairment of legal certainty through the retroactive effects, b) no thorough analysis of specific FDI risks and why FDI screening would be a useful solution, c) threats to the open Dutch investment climate, d) use of unclear definitions which would be filled in by Ministerial Decrees, creating additional legal uncertainty as well as e) possible incompatibilities with EU and international law.
ISBThe ISB and its Explanatory Memorandum were revamped as a reaction to the Dutch Council of State's criticism. We discuss the ISB's main characteristics and highlight the most important changes below.
The goal of the ISB is to review acquisitions that put Dutch national security at risk. The ISB has clarified and expanded the definition of national security, which has been brought in line with Article 4(2) of the Treaty of the European Union:
- continuity of critical processes,
- maintaining the integrity and exclusivity of knowledge and information of critical or strategic importance for the Netherlands, and
- preventing unwanted strategic dependence of the Netherlands on other countries.
The ISB now explicitly states that its aim is to prevent unwanted strategic dependence of the Netherlands, whereas previously it was only mentioned in the ENSB's Explanatory Memorandum.
Clarified scopeThe ISB catches all mergers and demergers, acquisitions, and other investments, whether by foreign or domestic investors, that result in (a) a change of control over a relevant company, (b) the acquisition of a relevant company or (c) an increase in a significant influence over a relevant company.
Relevant companies are target companies that are established in the Netherlands. The Explanatory Memorandum to the ISB now clarifies and expands the scope of the targets that the ISB captures. It stipulates that the place of establishment should not be interpreted as a formal, statutory requirement, but that this criterion aims to only capture entities that conduct actual economic activities in the Netherlands. The place of establishment should be based on geographical location of the activities and management, irrespective of its legal form.
Control and significant influence
The ISB defines control in line with the concept of control used in EU and Dutch competition law. The ISB further slightly clarifies what comprises significant influence, and that significant influence is only relevant to companies active with sensitive technologies. Significant influence is of no importance to companies active with vital processes. Further clarifications on the concept of significant influence are expected in governmental decrees, but acquisitions of 10%, 20%, or 25% of the shares, the appointment or dismissal of one or more board members and shares that exceed the aforementioned thresholds are all defined as significant influence.
Vital processes and critical technologies
The ISB also clarifies the concepts of vital processes and critical technologies:
- Vital processes: Art. 6 ISB explains what functions and processes are considered vital, and the Explanatory Memorandum specifically mentions what companies are relevant, namely heating network operators, nuclear power companies, KLM, Schiphol Airport (including all activities related to air traffic management), the Rotterdam Port Authority, banks, financial market infrastructure, and companies active with natural gas exploration, transport and storage. Additional vital processes can be added, but any addition must be confirmed by a formal law. Notable candidates for addition are companies active with road and rail transport infrastructure; and
- Critical technologies: the ISB sticks to the existing definition to the effect that only military and dual-use technologies are caught. Other technologies can be added by Ministerial Decree, but the Explanatory Memorandum states that this cannot happen lightly.
ProcedureThe procedure for notifications to the Dutch Investment Review Agency (Bureau Toetsing Investeringen, "BTI") has a two-phase system:
- Phase I starts to run at the submission of a notification by the investor. The decision period is eight weeks but can be extended to six months. Phase I ends with an announcement by the BTI, either that no review is necessary or – in case the investment may pose risk to national security – that an evaluation decision is required.
- Phase II starts to run when the investor submits a request for an evaluation decision. The decision period in Phase II is another eight weeks and can likewise be extended up to six months, but the time used by the BTI in Phase I will be detracted from Phase II, to the effect that the total decision time cannot be more than 6 months. However, the six-month period will be suspended if the BTI requests the investor for additional information under the infamous stop the clock principle.
- In addition, another three months may be added to the six-month period if the filing must be shared with the European Commission and other Member States under the EU FDI Regulation.
Material assessmentIn line with the previous version, the ISB will consider the following main criteria when evaluating whether an investment poses a risk to national security:
- the investor's ownership structure;
- the degree of transparency regarding the investor's identity;
- whether the investor has committed crimes;
- restrictions under national and international law; and
- the security situation in the acquirer's country or region of residence.
Other assessment criteria are specific to the investment, such as the exploitation track record in case of the acquisition of vital infrastructure, and the track record of the acquirer on information security in case of an investment in sensitive technology.
Companies are expected to cooperate with the authorities and provide sufficient information to enable the BTI to carry out its assessment. The degree to which the investor cooperates with the authorities will be a factor in the assessment.
RemediesFollowing the BTI's assessment, the investment may be cleared either unconditionally or subject to remedies. The ISB describes in detail which remedies the BTI can require. The Minister may appoint a third party to monitor compliance with any remedies. An investment will only be prohibited as a last resort when remedies do not resolve the identified national security risks.
Possible remedies include regulating access to sensitive information, appointing employees in key positions according to security or integrity policies, appointing a security officer or committee with the authority to block access and report back to the Minister, bundling the sensitive activities in a Dutch entity, offering certain services and goods with limitations, appointing a separate supervisory board for the Dutch entity, maximising the amount of shares that may be acquired or the obligation to certify the shares.
The ISB also provides specific remedies in the case of the acquisition of sensitive technology. Those include the obligation to deposit certain technology, source code, genetical code, or knowledge with a third party or the Dutch state as well as the duty to notify the Minister before activities are transferred to third countries – after which the Dutch state may decide to acquire the technology or require licensing on fair, reasonable and non-discriminatory conditions.
Closing without BTI approvalIf a transaction, captured by the regime, is closed without notifying the BTI, the BTI may (a) impose an administrative enforcement order, or (b) impose an administrative fine and (c) within three months after it became aware that a transaction was not notified, require the parties to notify the transaction. If the BTI requires notification, the already closed transaction must be suspended. This implies that all rights of control are automatically invalid. The BTI will then conduct its reguIar review.
This does not apply to investments that were made through a securities settlement system or to cases where the investor obtained control or influence through other means than the acquisition of shares. In those instances, the BTI can require the investor or even the target to take the necessary measures to prevent or undo the unwanted effects of the activity within a reasonable period. For all practical purposes, this means that a notifiable investment would not automatically be void in cases where no filing was made. There would be a three-month period within which the BTI could require a filing. If the BTI would do so, such obligation would lead to a standstill period which could result in a declaration of nullity only after the BTI's formal decision.
To avoid a long period of uncertainty, one should ensure that the transaction is published copiously so that the BTI is aware of the transaction and the three-month period starts immediately.
Other changes and comments
- The ISB provides detailed instructions in the case of a public takeover: a bid cannot be honoured until the BTI has approved the takeover. This is more far-reaching than the provisions under Dutch and EU competition law, where one can honour a public bid as long as no control is exercised over the acquired shares until approval is obtained from the relevant competition authorities.
- The Minister will clarify by Ministerial Decree which information must be included in the notification. In light of the Explanatory Memorandum, detailed information will be required in any case regarding: the identity of the investors and ultimate beneficial owners, the control structure and value of the investment, the origin of financial resources, the business activities of the investor and the target, and criminal records.
Practical consequencesUntil now, companies were advised to keep the date of 2 June 2020 in mind when investing in sensitive technologies or processes that are vital to the Dutch economy; this has now been moved to 8 September 2020 (the "Reference date"). The move to a later date is due to the Dutch Council of State's criticism. All investments can be scrutinised by the BTI from that Reference date onwards.
We encourage potential investors considering investing in the Netherlands to verify – in addition to the general merger control notification analysis – whether a transaction should be notified to the BTI.