The Netherlands: revised bill on national security screening regime published

• Netherlands

• Competition, EU and Trade - Foreign investment regimes

19-08-2021

In December 2020 we reported about the ENSRA, recently a revised version of the ENSRA was sent to Parliament: the Investment Screening Act bill (Wet Veiligheidstoets Investeringen, Fusies en Overnames, the “ISA”). Like the ENSRA the ISA sets out a legal framework for the mandatory screening of investments in companies active in critical processes and companies active in the field of sensitive technologies in the Netherlands. Another important similarity to the ENSRA is that the ISA will have retroactive effect, which means that the screening regime is already relevant for transactions even though it has not entered into force yet.

Criticism Council of State

The main reason for the introduction of the ISA was extensive criticism by the Dutch Council of State (Raad van State) on the ENSRA. In its report the Council of State acknowledged the necessity of an investment screening mechanism to protect national security interests. However, the Council of State emphasised that such a screening mechanism must comply with the principles of legality, due care, legal certainty and proportionality and that the ENSRA fails to do so. The Council of State identified the following (main) shortcomings in connection with the ENSRA: (i) a thorough analysis of the various specific risks that the proposal aims to address and which measures are considered adequate for which risks is lacking, (ii) legal uncertainty for investors and target companies, among others, because of the retroactive effects and the fact that important details of the proposal would be laid down in subordinate legislation, (iii) possible conflicts with European Union and international law and (iv) the aforementioned shortcomings lead to the risk that the Netherlands will be regarded as a less attractive jurisdiction for investments.

The new proposal

The ISA has been introduced as a reaction to the criticism of the Council of State and feedback received during the public consultation of the ENSRA. Below we will discuss the changes made and the general framework of the ISA.

The ISA aims to mitigate risks to national security as a result of investment activities by laying down rules for an investment screening regime. The proposal explicitly states which national security risks the ISA aims to prevent. These risks concern (i) the emergence of undesired strategic dependencies, (ii) damage to the continuity of critical processes or (iii) damage to the integrity and exclusivity of knowledge and information.

Change of control and significant influence

Mergers, demergers, acquisitions, creations of (full function) joint ventures and other investments in companies active in critical processes and/or sensitive technologies are caught when they lead to a change of control within the meaning of Dutch and EU competition law. With respect to companies in the field of sensitive technologies, investments leading to significant influence or an increase of significant influence in such companies are also caught by the ISA.

According to the ISA significant influence is obtained or increased if (i) an investor has 10% or more of the voting rights in a target company, without acquiring control over the target entity or (ii) in certain situations in which a company can influence the dismissal or nomination of one or more members of the management board of the target company as a result of contractual arrangements. On the basis of the ISA it is also possible that further clarifications with regard to the concept of significant influence are introduced in the form of subordinate legislation. Such subordinate legislation can apply to only a certain group of target companies active in the field of sensitive technology.

From a geographic perspective the ISA applies to investments in target companies which are established in the Netherlands. The ISA’s explanatory memorandum clarifies that when assessing the geographical scope, it is important to take into account the actual economic activities and not only the official seat of incorporation of the target company. The location in which the actual activities of the target company take place and the place where important management decisions are taken are therefore decisive.

Sensitive technologies and critical processes

The definition of sensitive technologies remains the same under the ISA as it was under the ENSRA. This means that “sensitive technologies” entails goods with a military or dual-use application. The ISA does however provide more clarity on the definition of critical processes. The following categories are qualified as critical processes in the ISA:

• heat supply;
• nuclear energy;
• air transport (e.g. certain airports and certain airlines);
• entities responsible for maritime transport and safety in harbours;
• certain banks;
• certain financial trading venues;
• central counter parties clearing (CCP’s);
• payment processing service providers;
• central securities depositories;
• extraction of natural gas; and
• storage of natural gas.

Although the ISA does provide for the possibility to amend this list by means of the adoption of subordinate legislation, the definition of critical processes in the ISA offers more legal certainty than it did under the ENSRA, since the categories listed above are exhaustive. In addition, the ISA and its explanatory memorandum offer a detailed description for each of the categories of critical processes, which makes it easier to determine whether a transaction falls within the scope of the ISA.

Review by the Minister

If it has been established that a transaction falls within the scope of the ISA, it must be notified with the Minister of Economic Affairs and Climate Policy (the “Minister”). Approval must be obtained before the transaction is completed. Once the notification has been submitted, the Minister has an eight week period, which can be extended to six months, to conclude its initial review. The outcome of this initial review is either that (i) no further investigation is necessary or (ii) that an in-depth review must be conducted. In the latter case the investor must request the Minister for such an in-depth review. The in-depth review can take another eight weeks and can also be extended to a maximum of six months with the caveat that the complete procedure (i.e. initial review and in-depth review) may not take more than six months in total, excluding time consumed by the parties to the transaction in relation to the answering of additional questions by the Minister.

If an investor is established outside of the European Union the above period can be extended with three months, since the Minister is required to notify the European Commission and other EU Member States of the transaction pursuant to the EU Investment Screening Regulation.

Substantive Assessment

The Minister will, among others, focus on the following points in its review of the transaction:

• (transparency of) the ownership structure of the investor;
• track record of the investor;
• whether there are (national or international) sanctions imposed against the investor or if the investor has committed any crimes;
• the stability and security situation in the country in which the investor is established;
• in deviation of the ENSRA the ISA specifies a number of additional points that will be taken into account in the Minister’s review depending on the activities of the target company.

Possible consequences of the review by the Minister

Similar to the ENSRA the ISA lists the remedies that the Minister can impose if it finds that a transaction poses a threat to the national security. A difference with the ENSRA is that the ISA now specifically lists a number of remedies that can only be applied to investments in companies active in the field of sensitive technologies. Similar to the ENSRA, transactions can also be entirely prohibited. This is however a last resort and this measure will only be applied under exceptional circumstances.

If parties fail to notify a transaction that falls within the scope of the ISA, the Minister can impose and administrative fine or an enforcement order. In addition the Minister can require the parties to the transaction to notify the transaction within a period of three months. In such case the rights of control which have been acquired as a consequence of the transaction will be suspended. Other conditions apply to non-notified transactions completed by means of a security settlement system and for transactions which do not entail the transfer of shares.

Retroactive effect

Pursuant to the ENSRA, in-scope transactions completed on 2 June 2020 or later could be subjected to ex-post screening. Under the ISA, this date has been postponed to 8 September 2020. This means that if and when the ISA enters into force, in-scope investments which took place as of 8 September 2020, could be reviewed ex-post by the Minister and as a result thereof could be subjected to remedies or under extreme circumstances could even be blocked. Even though the ISA has not entered into effect, we therefore advise investors to assess whether a transaction may fall within scope of the ISA.