Foreign direct investments in vital companies are receiving increased attention from the EU and its member states. In the Netherlands, a bill to prevent undesirable control in the telecommunications sector has passed through parliament and is likely to become law soon. The bill adds the Netherlands to a growing list of countries that are introducing screening mechanisms for M&A in vital sectors. Investors considering acquisitions in the Dutch telecoms sector should expect an additional regulatory burden that may affect the transaction timetable and deal certainty.

Towards a wider screening mechanism

By introducing initial screening of M&A matters in the telecoms sector, the bill gives an indication of what a general screening mechanism for other vital sectors may look like. The Dutch government announced in 2019 that a proposal for wider screening of acquisitions in other vital sectors will be submitted to parliament before the end of 2020. Along with the telecoms and energy sectors, other examples of vital sectors include transport infrastructure, and water supply and management.

Scope of application

The bill provides that an acquisition of shares or assets in the Dutch telecoms sector must be notified to the Minister of Economic Affairs at least eight weeks before completion of the deal, if

• the buyer acquires predominant control; and
• this control allows abuse or potential deliberate disruption of the telecoms company or assets acquired.

This regime is not limited to acquisitions of "traditional" telecoms providers, but also extends to internet hubs and data centres (the definition can be extended by ministerial decree). The rules do not distinguish between foreign and national acquirers, and they may apply when an undertaking is acquired that operates internationally but also has telecoms activities in the Netherlands.

Predominant control

There is predominant control when the transaction leads to:

• one party or several parties acting in concert, directly or indirectly holding at least 30 percent of the voting rights at the general shareholders meeting;
• one party or several parties acting in concert, obtaining the right to appoint or dismiss more than half of the managing or supervisory directors;
• one or more shares with special statutory rights related to the control of the company being acquired, regardless of how much power those rights give to the holder (predominant control); or
• the assets in an asset deal becoming a branch of the buyer, provided that these assets offer access to (i) an electronic communication network or related services; or (ii) hosting services or an internet hub or data centre (this definition may be extended by ministerial decree).

This is a different test than the "decisive influence" test under EU and Dutch merger control rules, which is also used for screening acquisitions in the Dutch energy sector.

Abuse or potential deliberate disruption

The transaction allows abuse or potential deliberate disruption if it could lead to:

• breach of confidentiality in internet traffic and/or telephone communications; or
• a telecoms services outage for a large number of users or for the national or military security and intelligence services. This test is to be further specified in a ministerial decree.

Notification process and time lines

The Minister must be notified of an intended acquisition at least eight weeks before completion. If the acquisition takes place through a public offer, the notification must coincide with the public announcement of the offer. The Minister has eight weeks to decide, but the clock stops each time the Minister requests additional information. If the Minister decides that an in-depth review of the transaction is required, an additional six months will be allocated for a decision to be made.

The obligation to notify the transaction to the Minister rests on the buyer. Failure to notify in a timely manner may lead to a fine of up to EUR 900,000. Such a transaction may still be reviewed and eventually prohibited by the Minister. Where a qualifying transaction has been completed without having been notified, the Minister can prohibit the transaction within eight months after learning of it. Parties will then have to reduce the extent of their control below the jurisdictional threshold of predominant control. Pending that reduction, the acquirer may not execute control.

Mandatory notification under the proposed regime does not suspend a transaction, as is common under EU and Dutch merger control rules. Parties could theoretically continue with the intended transaction before the Minister decides on the case, but that has its risks: the Minister could prohibit the transaction afterwards. If the risk is run, and the Minister prohibits the transaction, the parties would have to reduce their control as well. If a transaction is executed after a decision to prohibit it has been taken, the transaction will be null and void.

Material assessment

The Minister will assess whether the public interest is threatened by the intended acquisition; more specifically, to which extent the buyer and its ultimate beneficial owners are states, entities or individuals which give grounds to suspect that they may unduly influence, abuse or disrupt the telecoms company and its network. For example, a foreign state acquiring control of a national telecoms network, could use the network to obtain sensitive information, disrupt the network for political purposes or threaten to do so. The Dutch House of Representatives also considers there to be a risk of disruption if the buyer could jeopardise the telecoms company's business continuity; for example, if a large dividend amount is distributed. The House of Representatives has urged the Minister to take the buyer's track record into account. If the identity of the buyer's owners is insufficiently transparent or the buyer does not sufficiently cooperate with the Minister's investigations in this respect, the acquisition will be assumed to threaten the public interest. If that is the case, the buyer will likely be invited to discuss possible restrictions and/or requirements about the transaction. These could remedy the identified problems and result in the Minister's conditional approval.

Impact on M&A

The bill adds the Netherlands to a growing list of countries introducing screening mechanisms for M&A in vital sectors. Parties considering acquisitions in the telecoms sector in the Netherlands should expect an additional regulatory burden which could affect the transaction timetable. Moreover, investors should expect the Dutch government to introduce a proposal for wider screening in other vital sectors later this year. This being said, the Dutch government has stressed that any such measures do not pose a threat to M&A activity in general, and the Netherlands remains open to investors.