Inspired by other countries and in line with the rise of protectionist policies globally, the Dutch government intends to introduce stricter public interest and foreign investment screening mechanisms. 

These developments form part of a broader trend at the EU level, as well as in other EU member states where governments are opting for stricter investment review policies to protect national interests associated with certain local businesses.

In this blog post, we will touch upon three recent legislative developments and discuss implications for investors: 

  1. the introduction of a public interest screening mechanism applicable to the telecommunications sector; 
  2. further reforms introducing a broader national security screening mechanism for non-EU investors; and 
  3. the implementation of the EU foreign direct investment (FDI) regulation.

The current regulatory framework

The Netherlands has for decades advocated the importance of free trade and its open market economy. The few public interest review mechanisms currently in place are only applicable to changes of control of financial institutions, healthcare providers and energy generation facilities, and apply equally to both domestic and foreign investors. The Netherlands currently does not have any FDI review policies in place.

Additional measures were long considered undesired and unnecessary, particularly as a large proportion of critical infrastructure in the Netherlands (such as airports, railways, ports and energy-transmission networks) is state-owned.

The telecommunications sector

The attempted acquisition of the incumbent telecommunications provider KPN by América Móvil in 2013 led to a draft bill introducing a public interest review mechanism specific to the telecommunications sector.

Under the proposal, all acquisitions of 'predominant control' of a 'telecommunications party' resulting in a 'relevant influence in the telecommunications sector' would be subject to a mandatory pre-closing notification to the Minister of Economic Affairs ('the Minister'). The Minister has eight weeks to decide whether the acquisition should be prohibited (subject to an in-depth review resulting in an extended decision period). The notification requirement applies to both domestic and foreign investors.

Examples of 'predominant control' are:

  • the acquisition of at least 30 per cent of the voting rights (solely or jointly);
  • the ability to appoint or dismiss at least half of the executive and/or non-executive board members; and/or
  • the ability to exercise control as a result of special reserved matter(s).

Note that 'telecommunications party' is broadly defined and not only captures all undertakings with predominant control of an electronic communications network or service, but also includes hosting services, internet exchange points, trust services and data centres (excluding data centres used exclusively or predominantly for own use).

There is a 'relevant influence in the telecommunications sector' if abuse or the intentional failure of the telecommunications party could have a negative impact on the quality, quantity, confidentiality and continuity of the telecommunications network or services.

The Minister will have the power to prohibit transactions that pose a threat to the public interest, for example where:

  • the acquirer is, or has links with, an undesired person, state, or entity in relation to whom there are grounds or reasonable concern for suspecting that it intends to influence a telecommunications party to enable abuse or intentional outage;
  • the acquirer has such a record or reputation that the risk that a negative impact on the quality, quantity, continuity and confidentiality of telecommunications services will occur will be considerably increased; and/or
  • the identity of the acquirer cannot be determined, or the notifying party refuses to disclose information requested.

The substantive test was criticised by members of the industry, arguing that it was too vague and would result in legal uncertainty. The Minister has since clarified that only the larger investments would be captured by the regime and only investors that give rise to concrete suspicions would be scrutinised.

The draft bill was passed by Parliament (Second Chamber) on 8 May 2020 and is subject to approval from the Senate (First Chamber). We expect the rules to enter into effect later this year.

Introduction of a broader national security screening mechanism

In the 2017 coalition agreement, the government announced that it would introduce 'specific protection' for 'vital sectors' by means of a 'careful analysis of national security risks'. 

In November 2019, the Minister clarified that, in 2020, a draft bill for consultation would be presented introducing a broader national security screening that is relevant from a national security perspective. 

Although the details of the legislative proposal have not yet been made public, the Minister has indicated that it will be based on the following principles:

  • The screening mechanism foresees in a mandatory pre-closing notification requirement and will only capture transactions that pose a threat to national security. The substantive review is to be based on a risk assessment.
  • The scheme will capture acquisitions of and investments in critical infrastructure, such as energy transmission networks, water supply, cargo handling, transport and nuclear waste. In addition, the system will capture investments in technology relating to national security, which will be based on multilateral export control regimes for dual-use goods and strategic goods.
  • The scope of the screening mechanism can be narrowed or expanded in case of changes in the worldwide geopolitical situation or economic developments.
  • The effects on the national investment climate should be kept minimal, ie limited uncertainty for investors, a limited scope of application, low administrative burden and limited delay. To all investors, it must be clear what transactions are captured and on what criteria the risk assessment is based.

It has not yet been made public whether the system will apply to all investors or to non-EU investors only. Several members of Parliament have, however, called for a system that would apply to non-EU investors only.

Implementation of the EU FDI regulation

As described in an earlier blog, in March 2019, the European Council adopted the EU FDI regulation, which provides for an enabling framework for member states to review FDI on grounds of security and public policy and to increase co-operation among member states, and between member states and the European Commission. This framework regulation entered into force in May 2019 and will fully apply as of October 2020.

The EU FDI regulation broadly consists of two pillars:

  1. A framework of rules to which member states who choose to have their own domestic FDI screening regime must adhere.
  2. A mechanism for co-operation between member states and the Commission, whereby the Commission and member states may request certain information from a member state where an FDI is taking place. Other member states may then provide comments, while the Commission can issue an opinion. The member state in question must give due consideration to the comments/opinion.

While all member states are required to comply with the co-operation mechanism, there is no obligation for a member state to introduce an FDI screening regime.

The Dutch proposal for implementing the EU FDI regulation takes a minimalist approach and does not include any additional screening mechanisms. The EU FDI regulation will affect non-EU parties seeking to invest in the EU, in particular but not exclusively state-owned enterprises or investors with links to foreign governments. This includes UK investors that, after the end of the Brexit transition period, will be categorised as foreign investors. 

The implementing proposal establishes:

  • the legal basis for processing, collecting and providing information;
  • the legal basis for imposing sanctions in case of non-compliance with the duty to provide investors; and
  • the appointment of the Minister as contact point.

However, as mentioned, the implementation of the EU FDI regulation is expected to be followed up by the introduction of a more comprehensive foreign investment control screening mechanism as outlined above.

Implications for investors

It is clear that the Dutch government has adopted a more critical stance towards certain types of foreign investments and that it wants to have the tools to be able to protect national security and public interests. 

Although the Dutch proposal is somewhat late, this development is in line with other countries and follows the European Commission’s call to impose stricter measures and follows suit of other EU member states. 

While the practical implications remain to be seen, it will be particularly interesting to see whether these place non-EU investors at a significant disadvantage as compared to EU investors who may be exempt from notification requirements.