Various geopolitical drivers have contributed to the proliferation of investment screening regimes that are based on national security concerns. Existing screening regimes have been expanded to include additional target activities. The EU has also been nudging member states to establish similar investment screening regimes or intensify the use of established ones. The vast majority of member states already have some form of foreign direct investment (FDI) control in place. The Netherlands, too, has adopted ministerial decrees necessary to implement its own investment screening system. This could affect the investment climate of the Netherlands, which has been historically known for its liberal disposition towards FDI. Investors contemplating acquisitions, or potential sellers, of designated vital providers or of companies active in sensitive technologies should anticipate uncertainty and a potential impact on transaction timelines due to an additional notification process.
Investment screening under the Vifo Act
The Wet Veiligheidstoets investeringen, fusies en overnames (Vifo) Act was adopted last year by the Dutch parliament to empower the government to scrutinise and, if necessary, block investment activities that pose risks to national security. After some legislative trepidation, the Vifo Act finally entered into force on 1 June 2023 following the publication of two ministerial decrees: the Sensitive Technology Decree, and the Decree on Technical Aspects (related to implementation of the Vifo Act). The form for notifying a transaction under the Vifo Act has also been published.
The investment screening regime established under the Vifo Act concerns vital sectors, sensitive technologies and operators of business campuses. The Vifo Act is "country neutral", applying equally to both Dutch and non-Dutch/non-EU investors. Strictly speaking, the new law would set up a national security regime – not a foreign direct investment regime. The Vifo Act applies retroactively to investments made after 8 September 2020 in vital sectors and certain sensitive technologies. However, retroactive screening will not apply to investments in new categories of sensitive technologies as designated by the Sensitive Technology Decree or to the category of investments in operators of business campuses that was included in the Vifo Act only during the legislative process.
Covered target undertakings
Investment screening under the Vifo Act is more tailored and conscious of legal certainty compared to screening regimes in most other EU member states or even the UK. The Vifo Act is based only on national security considerations relevant to the maintenance of democratic order, state interests and social stability; more specifically, those that relate to ensuring the uninterrupted functioning of vital processes, safeguarding the exclusivity of knowledge relating to sensitive technologies/vital processes and averting the creation of undesirable strategic dependencies. Accordingly, the Vifo Act establishes a screening procedure only for investments targeting vital providers, companies active in sensitive technologies, and operators of business campuses.
A company that operates, manages or makes available a service whose continuity is vital to Dutch society is considered a vital provider, such as key financial markets infrastructure providers like significant banks and trading platforms, main transport hubs (Schiphol Airport and the Port of Rotterdam), heat network or gas storage operators, or extractable energy or nuclear power companies. The outage of such vital providers can cause disruptions with potentially large-scale negative consequences to Dutch society. A vital designation does not necessarily extend to the entire supply chain, and companies that are suppliers of vital providers are not themselves considered vital, though a case-by-case assessment is always warranted.
Notably, the Vifo Act empowers the Minister of Economic Affairs and Climate Policy (Minister) to designate additional categories of vital providers depending on potential future developments. For example, some efforts are already underway to identify vital sectors in agri-food (such as an EU Directive to strengthen the resilience of critical entities). The government has also explained its reinforced approach to protecting vital infrastructure, including plans for further legislation.
Sensitive technology companies
The Vifo Act applies to a target undertaking "active" in the field of sensitive technology and this category aims to maintain Dutch technological sovereignty. Determining if an undertaking is active in sensitive technologies could be challenging as the term "active" has a wide connotation and may cover several companies operating in the field of sensitive technology, possibly at different levels of the supply chain. Military goods and dual-use items that fall under the EU Dual-Use Regulation 2021/821 are considered sensitive technology (see our previous article). By ministerial decree, some of these goods or items may be excluded or, conversely, some other technologies may also be designated as sensitive. For example, the Sensitive Technology Decree already excludes from the Vifo Act certain dual-use goods related to graphite, ceramic materials and structural composites for filament-winding machines.
Highly sensitive technology companies
The Sensitive Technology Decree further designates quantum technology, photonic technology, semiconductor technology and high-assurance products as "highly" sensitive. If an undertaking is active in these highly sensitive technologies, a lower threshold than control will trigger a notification obligation. The relevant threshold for highly sensitive technologies is the acquisition or increase of "significant influence": the possibility of the acquiring party to exercise at least 10% of the votes at the general meeting. Start-ups in highly sensitive technologies, especially relatively nascent ones like quantum or photonic technology, are vying for funding. Whether Vifo screening creates hurdles undermining their competitiveness remains to be seen. The Advisory Division of the Dutch Council of State has expressed the importance of systematically and continuously monitoring the classification of technologies as sensitive/highly sensitive, and we can expect repeated revisions in the future.
Operators of business campuses
Following an amendment passed by the lower house of parliament, the Vifo Act also covers investments in operators/managers of business campuses. The Vifo Act defines operators of business campuses as undertakings that manage a property on which a collection of companies operate and where public and private actors collaborate on technology and applications that are of economic and strategic importance to the Netherlands. The immediate trigger behind the amendment was the sale of High Tech Campus Eindhoven to a Singaporean state-owned company that escaped investment screening. Research has been conducted on how to best implement the amendment to include operators of business campuses that have economic and strategic importance. Future ministerial guidance on delineating relevant business campuses is nonetheless desirable.
Covered acquisition activities
The Vifo Act covers investment activities that, in essence, result in acquisitions of control in a target undertaking "established in the Netherlands" and involved in vital processes or sensitive technologies, or in the operation of business campuses. Such investment activities include acquisitions, mergers, fully functional joint ventures, demergers and asset transfers. These are also listed in the Vifo Act. The Vifo Act further provides a residual category meant to catch investments structured in a way that they do not fall under one of the listed investment activities but that, de facto, still result in the acquisition of control. For example, where an executed lease agreement provides the lessee control over assets and resources without transferring ownership rights or shares.
The meaning of the terms "control" and "undertaking" are borrowed from EU competition law. "Control" implies the ability to exercise decisive influence, either based on shareholding or on a de facto basis. "Undertaking" is any entity involved in economic activities and may encompass various legal persons or just a branch without a legal personality that only has assets and employees in the Netherlands. An undertaking is "established in the Netherlands" if it is de facto conducted and economically active in the Netherlands. To determine whether an undertaking is "established in the Netherlands", the location of the activities and actual management is decisive, regardless of the legal form of the undertaking and whether it is incorporated in the Netherlands.
In addition to the acquisition of control, if an undertaking is active in the field of sensitive technologies, it may be sufficient if "significant influence" is acquired or increased, which is a lower threshold than control. Different levels of significant influence can apply to different categories of sensitive technologies as specified by ministerial decrees. The Sensitive Technology Decree stipulates that currently, the lower threshold of "significant influence" only applies in relation to certain technologies classified by the Decree as "highly" sensitive. Significant influence can exist if 10%, 20% or 25% of voting rights can be exercised or if there is a right to appoint or dismiss one or more board members. An increase in significant influence from 10% to 20%, or from 20% to 25% in voting rights will trigger subsequent notification, meaning that the notification process can be recurring in the event of a staggered acquisition of voting rights.
The Vifo Act also covers the acquisition of a target undertaking that is not active in vital processes or in sensitive technology in the Netherlands, but which has control or significant influence over a Netherlands-based undertaking that is a vital provider or active in sensitive technologies. Future guidance on whether internal reorganisations will also trigger filing obligations would be useful.
Specific rules apply to acquisition activities involving listed companies, such as a specific identification procedure. When there is ambiguity about the ownership structure of a listed company as acquirer or target company, the acquirer or target company may be required to investigate the identity of a holder of control or significant influence, and the links it has with third parties. Parties in the custody chain will have to cooperate with this investigation. Existing Dutch law on shareholder identification (the Securities Book-Entry Transfer Act) will continue to apply, with certain adjustments. To safeguard legal certainty and the definitive nature of the course of trade, the Vifo Act provides for special rules to undo investments made in listed companies after a prohibition has been given.
The Vifo Act establishes a mandatory, suspensory investment screening regime. Notifications under the Vifo Act have to be made to the Bureau Toetsing Investeringen (BTI), which is part of the Ministry of Economic Affairs and Climate Policy. If the envisaged investment falls within the screening regime's scope, a notification would have to be made by either the acquirer or the target company. Although formally, the obligation to notify rests on both the acquirer and the target, the acquirer might in practice take responsibility for notifications. Even if the acquirer seems to be the most appropriate party to handle the notification, the target undertaking could in some cases be bound to observe non-disclosure obligations and would thus be the only appropriate entity to assess whether the transaction falls within the Vifo screening regime.
The Vifo Act can affect recently concluded or currently ongoing transactions, as it applies retroactively to investments made after 8 September 2020 in vital providers, and in sensitive technologies, except those designated by the Sensitive Technology Decree. However, parties are not required to notify investments made before 1 June 2023 as it is the Minister that needs to request a notification if the Minster has a reasonable suspicion that the investment in question poses risks to national security. A retroactive notification can be requested up to eight months after the Vifo Act enters into force; that is, until 1 February 2024. The Minister has clarified that it will apply retroactive screening with restraint so that intervention in completed investment activities is proportionate, though at least a handful of transactions are expected to be called in retroactively. One of those retroactive screenings will relate to the acquisition of Nowi, a Dutch chip company, by Nexperia. Other companies, too, are shortlisted for retroactive screening and may expect requests for information for deals that happened post-September 2020.
The Vifo Act imposes a standstill obligation, and a notifiable transaction can only be executed after the Minister approves the transaction. A waiver can be granted if there is a public interest at stake with a risk of economic, physical or social harm or financial instability if the transaction is not quickly implemented. For example, where the insolvency of a target undertaking is imminent.
In relation to non-notified transactions or notified transactions that have been implemented before approval, the Minister can initiate ex officio review proceedings and levy significant fines up to 10% of the relevant undertaking's turnover.
The Minister has to decide if an in-depth review is needed within eight weeks of notification (Phase 1). That period can be extended by up to six months where, for example, additional information is required. If an in-depth review is necessary, the Minister has another eight weeks (Phase 2). The Phase 2 period can also be extended by six months, but any Phase 1 extension period is deducted from this Phase 2 extension. An extension by another three months is possible if an investor is established outside the EU and the investment falls under the EU FDI screening Regulation. This permits investment screening authorities from other member states and the European Commission to intervene in a case, as provided for by that Regulation. Importantly, if the Minister requests additional information from the notifying parties, the statutory review period is suspended under a stop-the-clock provision. Such requests for information are expected to be extensive and broad, especially since the evaluation criteria for national security risks have not been fully crystallised.
Assessment and possible outcomes
The Minister is required to assess whether the investment poses a risk to national security. The Vifo Act lists several factors that will be taken into account, including transparency of the ownership structure, sanctions, the geopolitical situation of the acquiring party's country or region of origin, reasons for providing false or misleading information, and the acquirer's track record in operating businesses in the same sector.
The notification form also includes multiple questions concerning various aspects relevant for assessing national security risks, including questions relating to existing sanctions, the commission of offences, foreign state ownership, political exposure, past bankruptcies or moratorium proceedings, privacy violations, worldwide acquisition activities in the last 5 years, etc.
Based on the national security risk assessment, the Minister shall decide whether to allow the investment (either unconditionally or with commitments; for example, additional security requirements or the appointing of a security officer). If the national security risks cannot be remedied, the Minister will prohibit the transaction.
In exceptional circumstances, the Minister can reassess a concluded transaction, even after having previously issued a positive decision. A reassessment can only be conducted if there is a threat of a serious national security risk in the form of either a potential social disruption with economic, social or physical consequences, or a direct, increased and real threat to Dutch sovereignty. A reassessment can be ordered by the Minister no later than six months after becoming aware of the risk.
Sector-specific regimes take precedence
If a sector-specific screening regime with a focus on national security applies simultaneously with the Vifo Act, a separate notification under the Vifo Act is not required. This is the case even if the notification thresholds of a sector screening regime are not met by a particular transaction that is otherwise covered by that regime. Sector-specific screening regimes are already in place for telecoms (see our previous article), electricity and gas. Other mandatory notification regimes that do not concern national security – for example, regimes observed by the Dutch Central Bank, Healthcare Authority or Authority for Consumers and Markets – do not release the parties from notifying the transaction in parallel under the Vifo Act.
A separate bill is being prepared for the defence industry, but no further details are known. The bill will introduce a national security screening regime that will apply to essential companies in the supply chain of the vital process of "defence deployment". For now, the Vifo Act will apply if the target undertaking is active in military or dual-use goods.
If a vital provider is publicly owned and there is a privatisation ban in the relevant sector, the provider of the vital process is not covered by the Vifo Act to the extent that the privatisation ban extends to it. This includes, for example, vital providers for the national transmission and distribution of electricity, regional distribution of gas, drinking water supply, etc.
Expected impact on Dutch investments
The screening mechanism of the Vifo Act will have a significant impact on Dutch investments. For each investment, it will be necessary to assess, through appropriate due diligence, if that investment falls within the scope of the Vifo screening mechanism. This also applies to other jurisdictions, where similar investment screening mechanisms have been or are being introduced. Parties to Dutch investments can expect an additional administrative burden and an impact on their transaction timetables where investments fall within the scope of this screening mechanism. If investors are considering M&A activities in vital sectors or activities involving sensitive technology, they should expect closer scrutiny and anticipate longer transaction timelines due to an additional notification process. A good understanding of the activities of the buyer and the target company is therefore essential. At the same time, companies and advisers considering a sales process involving potentially vital sectors or sensitive technology should take into account national security concerns posed by certain bidders. The Vifo screening mechanism is expected to follow a holistic approach – looking beyond one single investment and considering, for example, the parties' track record. As always with M&A, adequate and timely preparation is crucial.
In addition to Dutch or EU merger control, M&A in the Netherlands may potentially have to overcome another layer of investment screening, although this one is based on national security. At the pan-EU level, similar investment screening regimes may need to be tackled as well. The second EU FDI report indicates that 28% of cases notified under the EU screening regulation constitute multi-jurisdictional FDI transactions. The European Commission is further considering whether a targeted screening instrument is needed even for strategic outbound investments. Transactions fuelled by foreign subsidies also face the separate prospect of screening under the forthcoming investment screening mechanism of the EU Foreign Subsidy Regulation (see our previous article and keep an eye out for our next publication before the regulation becomes applicable on 12 July 2023). Repurposed Article 22 EU Merger Regulation guidance (see our previous article) furthermore empowers the Commission to review transactions that do not meet EU or member state thresholds. The European Court of Justice has also confirmed that such below-threshold transactions by dominant undertakings can also be reviewed under the rules on abuse of dominance. Belgium has already initiated its first investigation on this basis. As such, dealmakers must contend with an increasingly crowded regulatory landscape and navigate a variety of regimes, laws and jurisdictions.