Bill published regarding foreign direct investment screening for Dutch companies active in critical sectors to have retrospective effect

• Netherlands

• Competition, EU and Trade - Foreign investment regimes
• Equity Capital Markets
• Mergers and acquisitions
• Private equity

02-12-2020

Introduction

The Dutch Government recently published a draft bill with regard to a foreign direct investment screening regime for Dutch undertakings active in vital sectors (the Economy and National Security Screening Act, Wet toetsing economie en nationale veiligheid, “ENSRA”). Interested parties have been able to react on the draft bill. However, it is not expected that the definitive bill will be presented to the Dutch house of representatives (Tweede Kamer) until 2021 and it is expected that the ENSRA will enter into force in July 2021 at the earliest. 

While the ENSRA is not expected to enter into force before July 2021, it is already important to note that based on the current draft bill the ENSRA will have retrospective effect to June 2020. This was also communicated by the Minister of Economic Affairs and Climate (“Minister”) in earlier parliamentary briefings. According to the explanatory memorandum of the ENSRA, the ENSRA is aimed at the protection of six security interests: territorial security, physical security, economic security, ecological security, social and political stability and international legal order. The ENSRA will supplement sector specific investment screening legislation already adopted in the Netherlands, for example with regard to telecommunications. 

In this briefing we set out and consider the key aspects of the proposed ENSRA, and the impact that this will have on transactions involving Dutch entities.

Mandatory notification for in-scope transactions

A change in control of a target undertaking incorporated in the Netherlands, which is either (i) involved in an activity that is essential for the continuity and resilience of vital processes or (ii) is active in the field of sensitive technology, must be notified under the ENSRA. The definition ‘control’ in the ENSRA is the same as under Dutch/EU competition law, which means that ‘control’ is defined as the ability to exercise decisive influence on the activities of an undertaking on the basis of factual or legal circumstances.

This means that acquisitions of minority shareholdings, in principle, do not fall in scope of the ENSRA. However, the ENSRA provides for the option for the Dutch Government to designate specific categories of companies by means of subordinate legislation. For these categories a lower threshold with regard to the change of control test can apply. If such legislation is adopted this means that acquisitions of minority shareholdings in certain categories of undertakings can result in a notification obligation. If an obligation to notify is established, the relevant transaction must be notified with the Minister (Bureau of Investment Screening). 

Risks

It is intended that the ENSRA will prevent the following risks:

• damage to the continuity of critical processes;
• damage to the integrity and exclusivity of knowledge and information associated with critical processes and sensitive high-end technology; and
• the emergence of strategic dependencies (i.e. acquisitions or investments that could lead to the Netherlands being pressured at any time by a third country (politically), which could undermine the democratic legal order or disrupt a critical process).

The material scope of the prospective ENSRA is as follows:

• acquisitions or investments regarding companies which provide critical processes and critical infrastructure, what this will entail is not yet entirely clear since this will be determined in separate subordinate legislation; and
• acquisitions or investments concerning businesses which are active in the field of high-end sensitive technology. The existing multilateral framework for export control regarding export and transfer of strategic goods (goods with a military or dual-use application) form the basis for this category.

Critical processes

While it is not certain how ‘critical processes’ will be defined, the National Coordinator for Security and Counterterrorism has declared certain processes ‘critical’. Among others, these critical processes/critical infrastructure include:

• national and local distribution and transport of electricity and natural gas;
• production of natural gas and oil supply;
• internet, internet access and data services;
• SMS, voice services and determination of time and location by means of GNSS;
• drinking water and water management;
• air traffic control and ship traffic control;
• transport of goods and persons via the main railroad network and transport via the main road network;
• large-scale production, processing and/or storage of (petro) chemical substances;
• storage, production and processing of nuclear material;
• point-of-sale payments transactions and cashless payment transactions;
• securities trading and high-quality payment transactions between banks;
• emergency services communication, deployment of police services;
• central database for persons and organizations and infrastructure and interconnectivity of the central database for persons and organizations;
• electronic messaging and provision of information to citizens and identification and authentication of citizens and organizations;
• deployment of military forces.

It is expected that the definition of critical processes, which will be published in subordinate legislation will be very similar to the list above.

Effects of the review pursuant to the ENSRA

Pursuant to the ENSRA, the Minister has the power to impose conditions with regard to a contemplated transaction. As a last resort the Minister also has the power to block a transaction in its entirety. A transaction may not be completed without the prior consent by the Minister.  

With regard to the investigation by the Minister, the relevant undertakings will be asked to submit relevant details of the transaction. Subsequently the relevant documents will be investigated by the Minister, which, under normal circumstances, will render its decision within eight weeks. This term can be extended with a maximum of six months. If an undertaking fails to notify an in-scope transaction this can lead, among others, to ex-post review of the transaction and administrative fines.

Retrospective effect

While the final bill has not yet been published – let alone that the actual act has passed Parliament and has entered into force – the Minister has announced that future act (when and if adopted) will have retrospective effect to 2 June 2020. This means that when the ENSRA enters into force, acquisitions and investments which took place as of 2 June 2020, could be reviewed ex-post by the Dutch State and as a result thereof could be subjected to conditions or under extreme circumstances could even be blocked.

Conclusion

If and when the ENSRA will pass Parliament and will enter into force, this will have a significant impact on transactions involving enterprises active in critical sectors. All transactions involving a change of control in an entity incorporated in the Netherlands active in a critical sectors will have to be notified with the Minister and without the prior approval of the Minister the transaction may not be completed. An investigation pursuant to the ENSRA will normally take eight weeks,but can take up to eight months, thereby impacting the timetable of a transaction significantly. In addition, it is very important to note that transactions which have been completed after 2 June 2020 and which are in scope of the ENSRA, can be reviewed ex-post when and if the ENSRA will be formally adopted in its current form.