In context

Investment screening in the Dutch telecoms sector as of 1 October 2020

October 14, 2020
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In context

A bill introducing screening of acquisitions (or retention) of predominant control in a telecoms party has come into force In the Netherlands. The Minister of Economic Affairs and Climate Policy will now assess whether a transaction of this kind results in a threat to the public interest, such as abuse or deliberate potential disruption of telecommunication services. The Minister has the power to require guarantees to address the threat or, as a last resort, prohibit the acquisition or retention of control.

 

Under the new law, any investor intending to acquire predominant control of relevant influence in the Dutch telecoms sector will have to notify the Minister. This new notification and screening regime is not limited to “traditional” telecoms providers, but also extends to internet hubs and data centres.

Three-step test

The screening mechanism applies a three-step test. First, predominant control must be acquired. Second, the acquired company or assets must be significant enough to give the controlling investor relevant influence in the Dutch telecoms sector. If these two steps are met, the transaction has to be notified to the Investment Screening Bureau of the Ministry of Economic Affairs. As a third step, the minister will then assess whether the transaction risks threatening the public interest.

 

The screening is a continuous process. It operates not only at the time of the transaction, but also afterwards, since, for example, the ultimate beneficial owner or geopolitical circumstances might change. Such change might cause the Minister to exercise its powers pursuant to this new act.

 

Step 1: 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% of the voting rights at the company’s general meeting;
  • one party, or several parties acting in concert, obtaining the right to appoint or dismiss more than half of the company’s managing or supervisory directors;
  • one or more shares with special statutory rights related to control of the company being acquired, regardless of how much power those rights give to the holder; or
  • the assets in an asset deal becoming a branch of the buyer, provided that these assets offer access to: (i) an electronic communications network or related services; or (ii) hosting services or an internet hub or data centre (this definition may be extended by ministerial decree).

 

This “predominant control” test is different from, and implies a lower threshold than, the “decisive influence” test which is used under EU and Dutch merger control rules and for the screening of acquisitions in the Dutch energy sector.

 

Step 2: relevant influence in the Dutch telecoms sector

The new law stipulates that an acquisition of shares or assets in the Dutch telecoms sector must be notified to the Minister

  • if the buyer acquires predominant control (as set out above); and
  • this may lead to relevant influence in the telecoms sector.

 

A recently published ministerial decree sets out the objective and measurable thresholds that trigger mandatory notification. The thresholds relate to the acquisition of control in the following providers:

  • Telecoms: providing telephone services, internet access services or electronic communications network access to more than 100,000 end users;
  • Internet hubs: providing an internet node that more than 300 autonomous systems are connected to;
  • Data centres: providing data centre services with a power capacity exceeding 50 MW or providing hosting services for more than 400,000 domain names with a .nl-extension;
  • Trust services: providing a qualified trust service, such as electronic signatures, stamps, time stamps, registered electronic delivery services and website authentication certificates.

 

Even if a combination of these services is provided without exceeding the threshold for any of those services individually, the transaction might still be notifiable. In that situation, the threshold values should be prorated and added up. For example, a combination of providing internet access services to 75,000 end users with providing hosting services for more than 300,000 domain names with a .nl-extension, exceeds the combination threshold, even though the individual thresholds are not met. If national, military or national security agencies are customers of the target company for such services, the acquisition of predominant control over that company is notifiable as well, irrespective of whether any of the quantitative thresholds are met.

 

Where a telecoms party does not meet the thresholds at the moment of acquisition, the thresholds might be met over time when the party develops new activities or sees its customer base grow. If so, the investor acquires relevant influence at that later moment, in which case a notification should be submitted.

 

Assessing relevant influence is not limited to the investor’s control in the telecoms party in question, but also includes looking at other telecoms parties where the investor, or its group, acquires or retains predominant control. If the investor or its group already has relevant influence on its own, the transaction does not need to be notified: according to the explanatory note to the recently published decree, if an investor already has relevant influence and the Ministry has seen no reason for intervention, there is also no reason to assess any increase in relevant influence.

 

Notification process and time lines

Once the thresholds of predominant control and relevant influence are met, the Minister must be notified of the 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. 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 threshold for predominant control. Pending that reduction, the acquirer may not exercise control.

 

In contrast with EU and Dutch merger control rules, mandatory notification under the proposed regime does not suspend a transaction. 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 taken, and the Minister prohibits the transaction, the parties would have to reduce their influence such that this no longer qualifies as predominant control. If a transaction is executed after a decision to prohibit it has been taken, the transaction will be null and void.

 

Step 3: assessment of public interest threat

After receiving the notification, the Minister must assess whether there might be a threat to the public interest. This is deemed to be the case if the relevant influence could lead to: (i) breach of confidentiality in internet traffic and/or telephone communications; or (ii) a telecoms services outage for a large number of users or for the national or military security and intelligence agencies.

 

While it is not yet clear how the assessment of this threat will be carried out in practice, the facts that have to be stated in the notification form give some insight into what the assessment will focus on. This specifically concerns the questions relating to the investor and any party acquiring control of the telecoms party through the investor. The notification form requests information about whether they are or were:

  • subject to economic or financial sanctions;
  • responsible for serious crimes, such as war crimes, crimes against humanity, or terrorism;
  • convicted of participation in a criminal organisation, bribery, fraud, money laundering, child labour, or human trafficking.

 

The notifying party must also inform the Minister of the relationship of the investor (and any party acquiring control of the telecoms party through the investor) with a foreign state. That relationship could, for example, allow that state to direct decision-making (either through ownership, domestic law or otherwise) and or compel cooperation with that state (especially with the intelligence agencies).

 

Minister’s screening power after the transaction

The new law confers broad powers on the Minister to prohibit predominant control from being acquired or retained if the Minister finds facts or circumstances indicating a public interest threat. Where a qualifying transaction has been completed without having been notified, the Minister can prohibit the transaction within eight months after becoming aware of the potential public interest threat. Parties will then have to reduce the extent of their control below the predominant control threshold. Pending that reduction, the acquirer may not exercise control. This screening power applies as of 1 October 2020. Transactions in the Dutch telecoms sector implemented before October 2020 that have not been notified can still be screened by the Minister.

 

The same broad powers apply when the Minister receives new information about the investor that leads to the conclusion that the public interest may be threatened, even if such relevant circumstances only arise after the notification to and approval by the Minister. This might be the case, for example, if there is a change in the ultimate beneficial owner, which is considered to imply a threat to the public interest. Changes in geopolitical relations can also mean that a foreign shareholder who was previously considered acceptable, may now pose a threat to the public interest.

 

The parties may offer measures to mitigate the perceived threat and avert a decision prohibiting control. In that case, the Minister can adopt a conditional clearance decision, but will retain the power to reverse it if the parties fail to implement their commitments.

 

Impact on M&A deals and wider FDI controls

A transaction in the telecoms sector has to be notified to the Investment Screening Bureau at the Ministry of Economic Affairs and Climate Change and will be assessed by the Minister. In September 2020, the Dutch government submitted draft legislation on general investment screening for M&A activities in vital sectors or high-value sensitive technology by opening an online consultation. Although not certain, it is expected that notifications under this general investment screening bill will also have to be notified to the Investment Screening Bureau. Consequently, general and sector-specific screening will be assessed by the same bureau; most likely, the sector-specific regime will take precedence over the general screening mechanism. It is clear that the Dutch government is taking the risks posed by the Covid-19-pandemic and by geo-political tensions seriously, given the quick introduction of investment screening in the Dutch telecoms sector and the fast-moving bill on general investment screening.

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