Is an investment in a business by an investor form another country for which the foreign investor has control over the company purchased?

There is as yet no general legislation in the Netherlands as concerns foreign investment control. However, given the potentially retroactive application of the proposed new rules as of 8 September 2020, it is advisable already to be aware and to take account of the draft legislation.

Furtermore, the sector specific regulations for the Gas, Electricity and Telecommunications sectors described separately below are already applicable. These regulations are also perceived as FDI-regimes given their aim of protecting the continuity of vital processes in the Netherlands.

Proposed general FDI-regime

The Dutch government first presented a draft 'Economic and National Security Review Act' on 8 September 2020. Following criticism from the Dutch Council of State, the government published a  revised proposal for legislation entitled: 'Security Review Investments, Mergers and Acquisitions Act' (Wet veiligheidstoets investeringen, fusies en overnames). No implementation date is envisaged at this stage. However, the current proposal provides that the Act will apply retroactively from 8 September 2020.

The draft Act covers all mergers, acquisitions and other investments resulting in a change of control or significant influence over companies based in the Netherlands – meaning that actual economic activities are conducted in the Netherlands – which are considered vital to Dutch national security. The Act will apply to all investors, irrespective of their nationality. The aim is to prevent the use of legal structures to circumvent filing obligations.

The concept of "control" follows the definition under EU and Dutch competition law and can include the creation of a joint venture or the acquisition of certain assets of a company.

The concept of significant influence is only relevant in relation to companies active in sensitive technologies. An interest of 10% or more and/or the ability to appoint or dismiss one or more board members are considered significant influence. Further clarification on the concept of significant influence is expected by means of governmental decree.

Vital processes and sensitive technologies

Companies which are vital to Dutch national security are suppliers of vital infrastructure and processes and sensitive technologies:

• Vital processes include operating heating networks, nuclear energy provision, air transport, airport and port management and operations (Schiphol Airport and the Port of Rotterdam in particular), banking, financial market infrastructures, and natural gas operations. Additional vital processes can be identified by governmental decree.
• Sensitive technologies include strategic goods such as dual use and military goods, the export of which is subject to export controls. International frameworks have already established that these goods are relevant to national security. These multilateral frameworks for strategic goods are consolidated in Regulation (EC) No 428/2009 and national implementing measures.

Notification procedure

Parties are required to notify investments meeting the above conditions to the Minister of Economic Affairs and Climate Policy. In practice this means filing with the 'Investment Review Agency' (Bureau Toetsing Investeringen) which assesses the investments on behalf of the Minister. Similar to merger control, the procedure has two phases:

• Phase I starts with the submission of a notification. The Minister then has eight weeks to assess whether the investment could cause a risk to national security. This period can be extended to a maximum of six months. Phase I ends with a notification that no review decision is necessary or that further review is necessary.
• Phase II starts upon submission by the notifying party of a request for a review decision. The Minister then has another eight weeks to assess whether the investment causes a risk to national security. This decision period can also be extended to six months. However, the time used for review in Phase I will be deducted, meaning that the maximum time before a final decision is taken is six months.  

A stop the clock principle applies, meaning that if the Minister asks for additional information the decision period is suspended for the period until the prospective investor provides the required information. Furthermore, the decision period can be extended by an additional three months if sharing the notification with the European Commission and/or other Member States is required in accordance with the EU FDI Regulation (Regulation (EU) 2019/452).

Assessment

The Minister assesses whether the investment poses a risk to national security. National security refers to security interests that are essential for the democratic legal order, security, social stability or other important interests of the Dutch state. The Act explicitly notes the following interests:

• safeguarding the continuity of critical processes;
• maintaining the integrity and exclusivity of knowledge and information of critical or strategic importance to the Netherlands; and
• preventing unwanted strategic dependence of the Netherlands on other countries.

In order to assess the risk of the investment to national security, particular attention is given to the following factors:

• the transparency of the investor's ownership structure and relationships;
• the investor's identity and criminal record;
• whether the investor is directly or indirectly subject to restrictive measures following from national and international law, such as Chapter 7 of the Charter of the United Nations;
• the security situation in the country or region of residence of the investor; and
• the degree of cooperation of the investor in the review procedure.

Further, specific investment related criteria might apply. These might include particular attention to the track record of the investor in the activities concerned, its financial stability and its motives for the investment. The reputation and potential influence of the investor's home state are likely to be of particular importance.

Decision and possible remedies

The Minister can decide to clear the investment unconditionally, impose remedies or even prohibit the investment. The Minister can only impose remedies or prohibit the investment if strictly necessary for the protection of national security. In case remedies are imposed, the Minister can appoint a third party to monitor compliance with those remedies.

The Act provides a non-exhaustive list of possible remedies, which include:

• regulating access to sensitive information;
• appointing security committees or officers which might be required to report to the Minister;
• placing certain sensitive business activities in a separate Dutch entity;
• appointing a separate supervisory board for such a Dutch entity performing sensitive business activities; and
• mandatory certification of all or part of the investor's shares via a foundation.

Additionally, specific possible remedies are identified for sensitive technology companies, including:

• depositing certain technology, a source code, genetic code or knowledge with the Dutch state or a third party; and
• a duty to notify the Minister of any intention to transfer activities to third countries. The Dutch state may then decide to acquire the technology concerned or require licensing on fair, reasonable, and non-discriminatory conditions.

Failure to notify

A standstill obligation applies, as a consequence of which it is prohibited to implement the transaction before the Minister has either notified the investor that no review decision is required or has issued a positive review decision.

Failure to notify the investment or violation of the standstill obligation can have several consequences:

• The investment may be (declared) void. The Minister may also impose an enforcement order to prevent undesirable effects of the investment. If the parties do not abide by the enforcement order, the Minister might even dispose of shares on behalf and for the account of the investor or target company.
• The exercise of the acquired rights can be suspended. This might be the case if the investment is completed contrary to the standstill obligation or if the companies do not adhere to possible remedies.
• Failure to notify or a violation of the standstill obligation can lead to a fine of up to EUR 870,000 or 10% of the turnover of the companies involved in the preceding year.
• The Minister can also order an investor to notify an investment within three months after becoming aware of the fact that the transaction should have been notified or that the notification was incomplete/incorrect.

In the event of a serious risk to national security, the Minister may reassess an investment within six months of becoming aware of a:

• a potential social disruption with economic, social or physical consequences; or
• a direct increased real threat to Dutch sovereignty.

If the merger thresholds of the Dutch competition Act are met, notification to the ACM is also required in addition to the notification to the Minister.

Sector specific regulations

As further detailed below, the Gas, Electricity and Telecommunications sectors are subject to separate notification requirements which are also perceived as FDI-regimes given their aim of protecting the continuity of vital processes in the Netherlands. Even though in principle the requirements apply to all investors, they are of particular relevance to foreign investors.

Dutch law does not contain any definition as regards foreign investors/investments and applies to all investors, irrespective of their nationality. This prevents investors from setting up an artificial legal structure to circumvent filing obligations. However, the nationality or (security situation in) the country or region of residence of an investor can play a role in the substantive assessment of a transaction.

Electricity production

Article 86f of the Electricity Act 1998 requires parties to any transaction involving a production installation with a nominal electric capacity of more than 250 MW (megawatt) or an undertaking that manages such production installation to notify the transaction to the Minister of Economic Affairs and Climate Policy, at least four months before the proposed change of control.

The Minister may prohibit or impose regulations in respect of such a change of control on the grounds of public security or security of supply. Legal acts performed in violation of the notification obligation can be annulled by a court decision.

LNG installations

Article 66e of the Gas Act requires parties to any transaction regarding an LNG (Liquefied Natural Gas) installation or an LNG company to notify the transaction to the Minister of Economic Affairs and Climate Policy, at least four months before the proposed change of control.

The Minister may prohibit or impose regulations in respect of such a change of control on the grounds of public security or security of supply. Legal acts performed in violation of the notification obligation can be annulled by a court decision.

Telecommunications

The Dutch Telecommunications Act provides that acquisitions of "predominant control" leading to relevant influence in the telecommunications sector must be notified to the Minister of Economic Affairs and Climate Policy. Notification is required if one of the requirements for “predominant control” below is fulfilled and one of the listed characteristics of “relevant influence” is present.

Predominant control arises if, after the acquisition, the holder or acquirer of such control:

1. alone or together with persons with which it is in consultation directly or indirectly holds at least 30 percent of the votes in the general meeting of a legal entity;
2. whether or not by agreement with others, alone or together with persons who act in concert, can appoint or dismiss more than half of the directors or supervisory directors of a legal entity;
3. holds one or more shares with a special statutory right regarding control;
4. has a branch office, which is a telecommunications provider;
5. becomes, as a partner, fully liable to creditors for the debts of the company acting under its own name; or
6. owns a sole proprietorship.

Relevant influence in the telecommunications sector exists when abuse or deliberate failure of the telecommunications party, and any other telecommunication party in which the holder or acquirer (or its group) holds or acquires predominant control, could lead to:

1. a wrongful breach of the confidentiality of the communication, or an interruption of the internet access service or telephone service to a certain minimum number of end users in the Netherlands;
2. an interruption in the availability or verification of a significant part of certain services and applications provided over the internet;
3. an interruption of availability, reliability or confidentiality of certain products or services for the purpose of a public task in the fields of national security, defense, the maintenance of the rule of law or assistance;
4. a wrongful breach or interruption as referred to under 1 and 2 regarding a combination of the mentioned services and applications that together exceed certain thresholds; or
5. other serious consequences regarding the continuity of services by a telecommunications party or the confidentiality of communications.

The concept of relevant influence has been elaborated on in the Decree on undesirable control in  telecommunications (Besluit ongewenste zeggenschap telecommunicatie).

Notification must be filed at least eight weeks before the intended implementation date. In case of a public offer for a listed telecommunications party, the notification should be made at the latest simultaneously with the announcement of the public offer. The Minister will decide within eight weeks of receipt of the notification. If further investigation is required, the Minister may extend the term by a further six months. The term is suspended with effect from the day on which the Minister requests additional information until the day on which the requested information is provided.

The Minister may prohibit or impose regulations in respect of an acquisition of predominant control on the grounds that it could lead to a "threat to the public interest". Such a risk is considered to exist if the investor is a persona non grata or (connected to) a state that can reasonably be expected to use its influence to the detriment of the public interest. Investors that are unwilling to cooperate or whose identity cannot be established may also be considered a threat to the public interest.

A transfer of predominant control without prior notification and approval is void, unless it is made through a stock exchange. The Minister may also impose a fine of up to EUR 900,000 in case of late notification or a failure to notify at all.

In all cases, if the merger control thresholds of the Dutch Competition Act are met, notification to the ACM is required in addition to the notification to the Minister.

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