The European Regulation establishing a framework for the screening of foreign direct investments (the “Screening Regulation”) entered into force on 11 October 2020. The Screening Regulation aims to protect the European Union’s strategic interests while keeping the internal market accessible for foreign direct investment.
In the Netherlands, the Investments, Mergers and Takeovers Security Test Bill was almost unanimously adopted in the Lower House on 19 April 2022 and the Upper House adopted the legislative proposal on 17 May 2022 as a formality. When this Act shall enter into force has yet to be determined by Royal Decree, but in light of the broad political support for the bill, it is likely to be enacted in the beginning of 2023. Although the Vifo Act has not yet entered into force, vigilance is already required in pending investment projects, since the Vifo Act allows the Minister of Economic Affairs and Climate Policy (the “Minister”) to assess acquisition activities that have taken place since 8 September 2020 for risks to national security from the moment the Vifo Act enters into force.
This blog addresses the purpose, scope and assessment framework of the Vifo Act. It also explains the consequences for the M&A practice.
Purpose and Scope of the Vifo Act
The purpose of the Vifo Act is to protect three aspects of Dutch national security, namely:
- the preservation of the continuity of vital processes;
- the preservation of the integrity and exclusivity of knowledge and information of critical or strategic importance to the Netherlands; and
- the prevention of undesirable strategic dependence of the Netherlands on other countries.
To this end, the Vifo Act regulates acquisition activities regarding vital providers and companies based in the Netherlands that operate in the field of sensitive technology and high-tech campuses. Vital providers play such an important role in and for Dutch society that their disappearance could have far-reaching social consequences. Article 7 of the Vifo Act defines them as companies that operate in the field of heat transport, nuclear energy, air transport, management of business campuses, port areas, banking, infrastructure for the financial market, recoverable energy or gas storage. Sensitive technologies include products whose Dutch export is subject to controls (such as certain chemical substances) and military goods. For both vital providers and sensitive technologies, the Minister may designate additional categories by means of an Order in Council. This makes it possible for the Minister to respond relatively quickly to new technological developments by expanding the scope of the Vifo Act.
Notification requirement and investment test under the Vifo Act
The Vifo Act provides for (i) a notification requirement and (ii) an investment test for acquisition activities in vital providers, companies that operate in the field of sensitive technology and high-tech campuses. Acquisition activities within the meaning of the Vifo Act are activities that lead to a change of control within the meaning of Articles 26 et seq. of the Competition Act, such as a merger, the establishment of a joint venture, the division of a company, or the purchase of essential assets.
Specifically with regard to companies that operate in the field of very sensitive technology, the acquisition or increase of “significant” influence is already subject to a notification requirement. The Vifo Act provides that the proposed acquisition of 10% to 25% of the voting rights in a company in the Netherlands that possesses very sensitive technology must be notified to the Investment Assessment Agency (“BTI”), a division of the Ministry of Economic Affairs and Climate Policy (the “Ministry”). Companies in the Netherlands that possess very sensitive technology therefore need not acquire control within the meaning of Article 27 of the Competition Act for a notification requirement to apply to them under the Vifo Act.
If a notification requirement applies under the Vifo Act, it rests on both the acquiring company and the target company or companies. As in the case of the merger control by ACM (the Netherlands Authority for Consumers and Markets), the acquisition activity is prohibited until the assessment of the notification is completed or (if necessary) until the investment test is completed and a positive assessment decision has been taken. The penalty for breaching this standstill obligation may amount to 10% of the (annual) turnover of the company concerned.
The notification under the Vifo Act must be made to the BTI. The BTI was set up in the past for certain investment tests in the electricity, gas and telecommunications sectors. The assessment of acquisition activities regarding vital providers and sensitive technologies will therefore be an additional task of the BTI. The legislature has given priority to the existing regulatory provisions of the Electricity Act 1998, the Gas Act and the Telecommunications Act. As soon as an investment test from one of these acts applies to an acquisition activity, the Vifo Act does not apply.
Test by BTI and time limits under the Vifo Act
Under the Vifo Act, an assessment is made of whether Dutch national security is at risk. More specifically, the consequences of an acquisition for the continued existence of the democratic legal order, compelling state interests and social stability are assessed. Aspects that play a role in that regard include the security situation in the acquiring company’s country and the acquiring company’s financial stability. Its reputation and any alleged or actual criminal offences also form part of the assessment under the Vifo Act. The BTI assesses the notification under the Vifo Act within eight weeks of its receipt, with a possible extension of six months and an additional three months. If BTI requests the reporting parties to provide additional information, this period is suspended until that information is received. If the Minister does not announce within the statutory time limit set that an assessment decision is required, the activity is permitted by operation of law. Here too, there are parallels with the merger control by ACM. More and more aspects need to be taken into account nowadays when mergers and acquisitions are reviewed.
BTI’s assessment of the notification may have two outcomes. The Minister may announce that no further investment test and assessment decision are required, in which case the acquisition activity may simply be carried out. No national security risk is then involved. The other possibility is that the Minister requires an investment test and assessment decision in light of possible risks to national security.
Assessment decision and sanctions under the Vifo Act
In practice, an assessment decision involves granting a licence for the acquisition activity. As in the case of a licence for a merger granted by ACM, regulations may be attached to the Minister’s assessment decision. The following requirements and regulations, for instance, may be attached to the assessment decision under the Vifo Act in order to prevent security risks or in any event to keep them within acceptable limits:
- the observance of non-statutory security and use regulations relating to sensitive information;
- the appointment of a security committee or security officer to protect sensitive information;
- the prohibition of certain operations forming part of a transaction (structural remedies); and
- the licensing of intellectual property rights on fair, reasonable and non-discriminatory (FRAND) terms.
Violation of the requirements of an assessment decision is subject to a fine of up to 10% of the violator’s turnover.
If the risks to national security cannot be sufficiently mitigated by regulations, the acquisition activity may be prohibited under the Vifo Act. To the extent that an acquisition activity has already been carried out but is unauthorised, it is null and void. Unauthorised acquisition activities relating to listed companies are voidable. Failure to undo an unauthorised acquisition activity is subject to a fine of up to 10% of the violator’s turnover.
Vigilance already required
Although the Vifo Act is expected to enter into force in the beginning of 2023, it should be taken into account now already. The Vifo Act allows the Minister to assess acquisitions that have taken place since 8 September 2020 for risks to national security up to eight months after the Vifo Act enters into force. Investments made after 8 September 2020 may therefore still be assessed under the Vifo Act. This fact, in combination with the Minister’s power to designate additional categories of vital providers and sensitive technologies by means of an Order in Council, gives rise to significant (legal) uncertainty in transactions in a geopolitical climate that is highly susceptible to change. Only acquisition activities relating to companies that possess technologies that the Minister designates as sensitive by means of an Order in Council after the Vifo Act takes effect cannot be assesses retroactively under the Vifo Act. Acquisition activities relating to vital providers that are designated as such by the Minister by means of an Order in Council after the Vifo Act takes effect therefore may, however, be assessed retroactively under the Vifo Act. In light of this legal uncertainty, it is advisable to informally submit to the BTI current investments that are or may be subject to the Vifo Act.Follow Maverick Advocaten on Twitter and LinkedIn