The Netherlands to introduce additional foreign investment review regimes

Against a backdrop of increasingly protective foreign investment measures globally, the Dutch government plans to introduce additional public interest and foreign direct investment (FDI) screening mechanisms. This development forms 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.

In this blog post, we will discuss the key aspects and implications for investors of the Netherlands’ revised general FDI review regime, which is expected to enter into effect in 2021 but may also impact transactions taking effect after 2 June 2020.

Current regulatory framework

The Netherlands has for decades advocated the importance of free trade and its open market economy. According to an OECD study, the country was in 2019 the third-largest FDI recipient (behind the US and China) and source (behind Japan and the US) of OECD member states.

The few public interest review mechanisms currently in place are only applicable to investments in financial institutions, healthcare providers and energy generation facilities (electricity and liquefied natural gas).

Since 1 October 2020, investments in specific telecommunications providers have been subject to a mandatory pre-closing notification to the Minister of Economic Affairs ('the Minister'). These mechanisms apply equally to domestic and foreign investors. For more information, see our earlier blog.

In addition, the Minister recently announced that a legislative proposal is being developed introducing an investment screening policy specifically for the defence industry. The draft legislative proposal will be open for consultation in Q1 2021 and further details on the scope, substantive review and introduction date have not yet been communicated.

General FDI regime

Earlier this year, the Minister presented a draft bill that foresees a general FDI regime to complement the sector-specific investment screening regimes outlined above and aims to ensure the protection of national security. The general FDI regime will capture all transactions that satisfy the mandatory notification requirements, regardless of the nationality of the acquirer.

Although the exact scope of the general FDI regime will be set out in future delegated acts, there are a number of sectors and activities that would in any event be captured:

• Vital processes that, if disrupted, affected or removed, would result in serious ‘social disruption’ in the Netherlands, such as energy supply and distribution, (air)port cargo handling, (nuclear) waste disposal services and public transport.
• Sensitive technology, which primarily refers to military and dual-use goods (ie goods that can be used for both civil and military use) that are essential for the functioning of the defence, police, intelligence and security services of the Netherlands.

The scope of the screening mechanism can be narrowed or expanded in light of geopolitical changes or economic developments.

The general FDI regime will cover not only changes of control (within the meaning of the EU Merger Regulation) but also the 'acquisition or expansion of significant influence in one or more undertakings'. This gives the Ministry the power to also review acquisitions of minority shareholdings and asset deals. Note that there are no monetary or market-share (notification) thresholds.

The substantive review is to be based on a national security risk assessment. The draft bill provides that several factors will be subject to the review, such as:

• the identity and nationality of the acquirer(s);
• the transparency of the ownership structure;
• the financial situation and track record of the acquirer; and/or
• connections with foreign states or persons subject to EU and/or international sanctions.

The statutory review period is eight weeks, which can be extended to six months in case of an in-depth review. Requests for additional information will 'stop the clock'.

If the Minister finds sufficiently concrete indications that the transaction poses a risk to national security, they may impose remedies or block the transaction. The European Commission and other EU member states may comment on the transaction under the EU FDI Regulation, which became fully applicable on 11 October 2020. For more information, see our briefing.

The draft bill is not expected to come into force until Q1-Q2 2021 at the earliest, depending on the duration of the parliamentary process. However, investors currently involved in deals that may raise national security concerns are advised to evaluate the implications of this new regime on deal certainty and timing.

Although expected to be used rarely, the Minister will be able to retrospectively call in transactions that:

• complete between 2 June 2020 and the date the general FDI regime begins;
• give rise to national security concerns; and
• have not been subject to a public interest intervention under the current sector-specific regimes.

If called in, transactions will have to be notified and will be subject to substantive review. In addition, deals that have not completed by the time the new FDI regime comes into force and satisfy the mandatory notification requirements will need to be notified and cleared before closing.

Implications for investors

• Deal timeline: if a deal subject to the mandatory regime has not closed before the general FDI regime has entered into effect, closing will not be permitted until clearance is received. Without such clearance, the deal will be legally void. Investors must therefore self-assess whether deals may fall under the mandatory regime and build this process into any deal timetable. Note that the notification requirement will apply to both EU and non-EU investors. However, as mentioned above, the nationality of the acquirer and any government links can be taken into account as part of the substantive review process.
• Deal documents: investors currently negotiating deals that may not complete prior to the new regime coming into force should ensure that they include appropriate conditionality, risk-allocation measures and long-stop dates for a potential notification and review period.
• Sanctions for failure to notify include fines of up to 10 per cent of worldwide turnover or €870,000 (whichever is greater).

Investors are advised to understand the scope of the final regime in order to anticipate the likely impact on any live and future transactions.