Ready, set, go! The Dutch national security screening FDI regime takes off

NL Law
EU Law

The Dutch Investments, Mergers and Acquisitions Security Screening Act (Wet veiligheidstoets investeringen, fusies en overnames Vifo Act) entered into force on 1 June 2023. The Vifo Act introduces a mandatory and suspensory Foreign Direct Investment (FDI) screening regime for investments, mergers and acquisitions in certain sensitive sectors that might pose a threat to national security. The Vifo Act may have significant consequences for transactions and their timelines and certainty, making it essential to consider the applicability of the Vifo Act to a transaction involving activities in the Netherlands. This article provides an overview of the new FDI screening regime.

The Vifo Act entered into force on 1 June. The Vifo Act introduces a mandatory and suspensory FDI screening regime for investments, mergers and acquisitions in certain sensitive sectors that might pose a threat to national security. The Vifo Act covers investment activities by both EU (including Dutch) and non-EU investors. The existing sector-specific FDI regimes in the gas, electricity and telecommunications sectors will continue to apply and take precedence over the Vifo Act.

The Investment Screening Bureau (Bureau Toetsing InvesteringenBTI), a division of the Ministry of Economic Affairs and Climate Policy, will receive and assess notifications under the Vifo Act (and the sector-specific FDI regimes).

In addition to the Act itself, two separate decrees have been published. The Decree on sensitive technology and the Decree on the technical aspects of the Vifo Act (on procedural aspects) set out more details regarding the regime.

1. Scope of activities of the target company and NL nexus

 The Vifo Act applies to target companies that (i) are considered vital providers; (ii) are active in sensitive technology or highly sensitive technology; or (iii) operate business campuses within the meaning of the Act. Additional sectors may be designated as in-scope by separate decree.

Vital providers

The vital providers specified in the Vifo Act are certain companies in the following sectors that are considered vital to Dutch society:

  • heat transport – companies active in the field of heat transport, including the interconnected pipelines, associated installations and other auxiliary equipment for the transport of heat, which is important for the regional supply of heat from the heat source to the connected customers;
  • nuclear power – companies that hold a licence under the Nuclear Energy Act or that are subject to the Nuclear Energy Act Secrecy Decree or the Decree of 24 September 1971/no. 671/524;
  • air transport – companies at Amsterdam Schiphol Airport that (i) are active as operators; (ii) hold an operating permit; (iii) occupy at least one third of the annually available slots; or (iv) provide ground handling services;
  • port area – companies that are a ‘Harbour Master’ (i.e. companies that are mandated for nautical safety in the Port of Rotterdam);
  • banking – companies that operate as a bank;
  • financial market infrastructure – companies active as trading platform operators, central counterparties, clearing institutions, clearing houses, settlement firms or central institutions;
  • extractable energy – companies active as suppliers of extractable energy that hold a Groningen field production permit or that have been designated under the Gas Act; and
  • gas storage – companies active in the field of gas storage that hold a permit under the Mining Act or Gas Act.

Sensitive technology

Sensitive technology includes dual-use technologies that are subject to export control under EU Regulation 2021/821 and military goods included in the EU Common Military List.

The separate decree on sensitive technology excludes certain dual-use technologies from applicability of the Vifo Act.

That decree furthermore distinguishes between sensitive and highly sensitive technology.

Highly sensitive technology is listed in the separate order and consists of a number of dual-use technologies that are subject to export control, as well as one specific code included in the EU Common Military List. Semiconductor technology, quantum technology, photonic technology and high assurance products are also included as highly sensitive technology. Highly sensitive technologies are subject to a lower investment threshold (see below).

Being ‘active in’ sensitive or highly sensitive technology leaves room for interpretation, as contacts with the BTI confirm. It is to be hoped that the BTI will soon issue further guidance (as promised) on this point and other aspects of the law that are still unclear.

Operators of business campuses

Operators of business campuses are defined as companies that manage a property where a collection of companies operate and where public-private cooperation takes place on technologies and applications that are of economic and strategic importance to the Netherlands. This category was added to the mix after the acquisition by a Singaporean state-owned company of a high-tech campus in Eindhoven.

Local nexus

For the Vifo Act to apply, the target company must be established in the Netherlands. In fulfilling this condition, the focus is not on the company’s registered office under its articles of association, but rather on its actual place of business. Decisive is whether the target company has its place of business in the Netherlands or is effectively managed from the Netherlands. For example, a foreign company that has management, locations and activities in the Netherlands may satisfy this condition, whereas a pure holding company will not be deemed to have its registered office in the Netherlands.

Practice has shown that the BTI tends to establish a local nexus sooner than one would expect, so companies should beware of this.

2. What kinds of investment activities?

The Vifo Act applies to investment activities that result in an acquisition of control in the (Dutch and EU) competition law sense over vital providers, companies active in sensitive technology, or operators of business campuses. A lower threshold applies to target companies active in highly sensitive technology. A notification may be required if the investment activity results in the acquisition or increase of significant influence in a target company. Significant influence exists if the acquirer will have 10%, 20% or 25% of the voting rights (attached to the shares or based on a shareholders’ agreement, for example) at the target’s general meeting or obtains the right to appoint or remove from office one or more of the target’s board members.

Relevant investment activities include mergers, acquisitions, demergers, joint ventures and transfers of assets, but may also be any other type of investment activities that leads to a change of control or to the acquisition or increase of significant influence in a target company (which includes, for example, the conversion of convertible loans).

3. Notification process and timing

Both the acquirer and the target (although in practice the acquirer will often be expected to take charge of the notification) have a duty to notify notifiable investment activities to the BTI. No filing fees are required.

The Ministry of Economic Affairs and Climate Policy published the information that should be submitted in the filing. This includes a detailed overview of the organizational structure of the acquirer and information on the ultimate beneficial owner, as well as information on the target company and its activities in the Netherlands. In the section on national security, the parties must provide information on criminal offences, sanctions and political links.

A standstill obligation applies, meaning that the investment activity cannot close until approval has been obtained. The assessment of the BTI may take between several weeks and several months.

The first assessment (Phase 1) of the BTI (a so-called risk assessment) may take up to eight weeks, with questions from the BTI ‘stopping the clock’. This risk assessment may be extended by six months, and by an additional three months if the EU FDI cooperation mechanism is activated. If the outcome of this risk assessment is that the investment activity may give rise to national security risks, the BTI will inform the notifying parties and invite them to submit a request for a screening decision and proceed to a Phase 2 investigation. If the BTI concludes in Phase 1 that the investment activity does not give rise to any national security risks, the BTI will not require an in-depth review and will approve the investment activity. If the BTI receives a request for a screening decision, it will conduct an in-depth review, which may again take up to eight weeks, with questions from the BTI ‘stopping the clock’. Also this review period may be extended by six months, minus the extra time taken in the first assessment (and another three months if the EU FDI cooperation mechanism is triggered). If the Minister fails to issue a decision within the timeframe set, the investment activity is deemed to have been approved.

Failure to notify an investment activity, closing before approval, or the provision of incorrect or misleading information may result in the imposition of a fine (of up to €900,000 or 10% of the target or acquirer’s worldwide turnover).

4. The assessment and the decision

When reviewing an investment activity, the BTI (and formally the Minister) will assess whether the investment activity may pose a threat to national security. The Vifo Act defines the notion of national security as follows: public safety or the essential interests of state security as referred to in certain EU treaties that aim to protect the interests that are essential in the Netherlands for the continuity of the democratic legal order, security, or other significant state interests, or for the maintenance of social stability, insofar as they relate to the intersection of economy and security. These interests are specifically identified as:

  • ensuring the uninterrupted functioning of vital processes;
  • safeguarding the integrity and exclusive access to knowledge and information that hold critical or strategic value for the Netherlands; and
  • preventing the undesirable scenario of the Netherlands becoming strategically dependent on other nations.

There are a number of factors that the Minister may take into account when making the assessment, such as the transparency of ownership structure, the criminal past of ultimate beneficial owners, connections with politics, the geopolitical situation of the country in which the acquirer is located, and sanctions imposed on the companies or the country in which the acquirer is located.

Once the BTI has completed the assessment, the Minister may formally approve, prohibit or approve the investment activities with commitments (for which the Vifo Act includes a non-exhaustive list of examples).

Decisions are subject to appeal.

5. Retroactive effect

The regime also applies to investment activities that are considered vital providers or are active in sensitive technology that took place between 8 September 2020 and 1 June 2023. The Minister of Economic Affairs and Climate Policy may call in these investment activities and require a notification until 8 months after the entry into force, i.e. until 1 February 2024. The Minister must actively request parties to notify investment activities that fall within the scope of the regime; the parties themselves therefore do not need to contact the BTI proactively.

The retrospective regime does not apply to companies active in high assurance technology, semiconductor technology, photonic technology and quantum technology, and companies that operate a business campus.

The Minister will call in investment activities only if it is believed on reasonable grounds that an investment might pose a risk to national security. The Minister is expected to exercise restraint in exercising these powers and the BTI has said to be looking at only a handful of investment activities at the moment (one of which is likely to be the acquisition of Nowi by Nexperia, which is ultimately Chinese-owned).

This article was published in the Competition Newsletter of July 2023. Other articles in this newsletter: