The Wet veiligheidstoets investeringen, fusies en overnames (Investment Screening Bill – the ISB) was adopted on 17 May 2022 and is expected to enter into force in early 2023. It will have retroactive effect. This means that, when the ISB takes effect, transactions that fall within its scope since 8 September 2020 may still be reviewed by the Bureau Toetsing Investeringen (Investment Screening Agency – BTI) under the ISB.
Companies operating in the field of highly sensitive technology are already required to report to the BTI any acquisition of 10% of the votes at the general meeting in that company. A new report must furthermore (each time) be filed on the acquisition of 20% and 25% of the votes at that general meeting. In this blog we explain the functioning of the ISB, talk you through the current developments and look ahead to accompanying legislation.
FDI and background
In the Netherlands, the ISB offers protection in three areas: (i) the continuity of vital processes; (ii) the preservation of the integrity and exclusivity of knowledge; and (iii) information of critical or strategic importance. The ISB stems from the European Screening Regulation. That Regulation serves to protect the strategic interests of the European Union (EU), while ensuring that the EU internal market remains accessible for foreign direct investments. The European Screening Regulation is also referred to as the Foreign Direct Investment Regulation (FDI). More background information can be found in this blog.
Scope of the ISB
The ISB concerns investments in, or the acquisition of, companies established in the Netherlands that are considered vital providers, acquisitions of companies that operate in the field of (highly) sensitive technology, and acquisitions of managers of certain business parks.
- Vital providers are companies that operate in the fields of heat transport, nuclear energy, air transport, port, banking, infrastructure for the financial market, recoverable energy and gas storage.
- Sensitive technologies are products whose Dutch export is subject to controls. We note that, in practice, these are primarily products that are on the export control list in Regulation (EU) 2021/821.
The Minister of Economic Affairs and Climate Change (the Minister) may designate additional categories in the form of an Order in Council for both vital providers and sensitive technologies. This allows the Minister to quickly respond to new technological developments by expanding the scope of the ISB by means of an Order in Council.
Vital providers and sensitive technology reporting requirement
Activities that lead to a change of control within the meaning of Articles 26 et seq. of the Mededingingswet (Competition Act) at vital providers or companies that operate in the field of sensitive technology must be reported to the BTI beforehand. This is comparable to the obligation to report mergers, acquisitions and joint ventures to the Netherlands Authority for Consumers and Markets (ACM). The Explanatory Memorandum to the ISB furthermore states that an investor acquires control over a vital provider or a company that operates in the field of sensitive technology if that investor is able, on the basis of factual or legal circumstances, to exercise decisive control over the target company’s operations. That assessment is made not only on the basis of the size of a shareholding. The Explanatory Memorandum to the ISB lists a number of manners in which control may be acquired: special shares, convertible loans and venture debt, or long-term buyer agreements.
Obligation to report significant influence in the case of highly sensitive technology
The ISB provides for an obligation to report the acquisition of significant influence in companies operating in the field of highly sensitive technology. Significant influence may be acquired in a company in the field of highly sensitive technology in various ways:
- if 10%, 20% and 25% of the votes can be cast at that company’s general meeting;
- if an investor is able to nominate or appoint a director of that company or to remove him or her from office; or
- if shareholders agree that a shareholder of that company may acquire a 10%, 20% or 25% shareholding.
This means that the proposed acquisition of 10%, 20% and 25% of the voting rights must each time be reported to the BTI. Acquisition of control within the meaning of Article 27 of the Competition Act therefore need not have taken place (yet) before a report must be filed under the ISB in the case of a company that operates in the field of highly sensitive technology.
Standstill obligation and gun jumping
As in the case of ACM merger control, the ISB prohibits the acquisition activity in the case of a reportable transaction until:
- the BTI has completed its assessment of the report; or
- the investment test has been completed and a positive screening decision has been taken.
The penalty for a breach of this “standstill obligation” (closing before the aforesaid approval is obtained) may amount to 10% of the (annual) turnover of the company concerned.
Screening by BTI and time limits under the ISB
On receiving a report, the BTI assesses whether the acquisition (or the acquisition of control or significant influence) poses a threat to Dutch national security. Aspects that play a role in this regard include the security situation in the acquirer's country and the acquirer's financial stability. The reputation and any actual or alleged criminal offences of an acquirer also form part of the assessment. The BTI assesses the report within eight weeks of receipt. If a further investigation is required, that period may be extended by six months. The law furthermore states that if the investment falls within the scope of the Screening Regulation – which merely means that a foreign direct investment is involved – the investigation period may be extended by a further three months.
The BTI’s assessment of the report has one of two outcomes:
- the Minister may announce that no further investment test and screening decision is required, in which case the acquisition activity may go ahead; or
- the Minister requires an investment test and a screening decision in light of possible risks to national security.
If the relevant turnover thresholds are met, the BTI process runs parallel to a merger notification to ACM. This is because the merger notification relates specifically to the competitive impact of the acquisition. The BTI’s screening under the ISB does not relate to that impact. As part of the screening under the ISB, ACM may, however, be requested to provide information that it has collected in the context of its merger control activities.
Screening decision and sanctions under the ISB
After the BTI's screening, the Minister decides whether a further investment test and a screening decision are required. In practice, a screening decision means the granting of a permit for the acquisition activity. A screening decision may entail further instructions for the parties that must be followed before the transaction may go ahead, as in the case of a permit for a concentration issued by ACM. Violation of these instructions is subject to a fine of up to 10% of the offender’s turnover. On the other hand, the Minister may also prohibit the transaction. In as far as an acquisition activity has already been performed but is not permitted, it is 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 offender’s turnover.
Screening due to retroactive effect
If a transaction takes place between 8 September 2020 and the date of entry into force of the ISB, it need not be reported. It is possible, however, that the BTI will nevertheless investigate the transaction that has already taken place. It may do so up to eight months after the ISB enters into force (which, as things stand, will be at least until the summer of 2023). This post-closing screening under the ISB follows the same steps as the regular screening explained above. The Minister may decide that no further investment test and screening decision are required. If a screening decision is required, it may be accompanied by further regulations. If those regulations are not observed, the transaction may be annulled. If the Minister decides to prohibit the transaction on the ground of the screening, the transaction is void, despite the fact that the ISB had not yet entered into force. This is due to the possibility of retroactively screening transactions that took place between 8 September 2020 and the date of entry into force of the ISB, even if no reporting requirement applied during that period.
Legal uncertainty and contact with BTI
The legal uncertainty resulting from the above may be addressed by establishing (informal) contact with BTI. If parties wish to know whether their transaction is subject to a reporting requirement, they can try to present the proposed transaction to the BTI (anonymously). The BTI can then make a preliminary assessment. The BTI has informed us that it is likely to need a maximum period of eight weeks to make this assessment. The BTI may also think alongside parties, for instance as to whether a product is classified as sensitive technology under the ISB. This contact may be particularly valuable if parties are uncertain as to whether a reporting requirement applies under the ISB.
Entry into force of the ISB
The BTI informed us that the ISB is likely to enter into force in early 2023. The Besluit technische regels (Technical Rules Decree) and the Besluit sensitieve technologie (Sensitive Technology Decree) must first be adopted. The following two draft decrees were published for consultation on 18 July 2022:
- the draft Technical Rules Decree. This decree sets out further rules on technical aspects that are required for the implementation of the ISB; and
- the draft Sensitive Technology Decree. This decree concerns the scope of the ISB in which the Minister designates a series of technologies as highly sensitive. These include quantum technology, photonics technology, semiconductor technology and high assurance technology. If the Sensitive Technology Decree is adopted, a low-threshold reporting requirement will therefore apply in these sectors.
Further legislation on defence, food supply, drinking water and healthcare
The ISB is not the only current development: new legislation is expected regarding a sectoral investment test in the defence industry. That legislation is closely related to the ISB and is expected to have similar control mechanisms. The EU Member States, the European Commission and the European Parliament have furthermore reached agreement on a new Critical Entities Resilience Directive. In that Directive additional sectors are designated as vital, including food supply, drinking water, financial market infrastructure, digital infrastructure, waste water, public services, banking, space services and healthcare. After a vote in the European Parliament, the Directive should be enacted in national legislation by early 2024. It cannot be ruled out that the Minister will be inspired by this development before that time and will designate one or more of these sectors as sectors subject to a reporting requirement under the ISB by means of an Order in Council.