Sarah Beeston, Pim Jansen, and Leonie van der Laag (Van Doorne N.V.) authored this publication

On May 17, 2022, the Dutch Parliament adopted the Act on Security Screening of Investments, Mergers and Acquisitions (in Dutch: "Wet veiligheidstoets investeringen, fusies en overnames") (the Vifo Act). The Vifo Act is expected to come into force in the first quarter of 2023. It applies equally to Dutch and non-Dutch investors and introduces a mandatory and suspensory national security regime which, once it enters into force, will apply to all qualifying investments made after September 8, 2020. The screening mechanism will apply to investments in undertakings active in vital processes and sensitive technology and to "high-tech campuses." Qualifying investments must be notified to the Investment Review Agency (Bureau Toetsing Investeringen or BTI) which will conduct the assessment on behalf of the Minister of Economic Affairs and Climate Policy (the Minister). The Vifo Act does not apply if the sector-specific screening regulations in the energy, telecoms or defense sector apply.

Recent updates

• The Vifo Act was adopted on May 17, 2022
• On July 18, the Minister issued two governmental decrees based on the Vifo Act: The Sensitive Technology Decree and the Security Review Decree on Investments, Mergers and Acquisitions (Besluit veiligheidstoets investeringen, fusies en overnames)
• A legislative proposal for the Energy Act is currently before the Council of State (Raad van State) for its advisory opinion. This draft act amends the notification requirement for investments in the energy sector
• A legislative proposal investment test for the defense industry is under preparation. This proposal introduces a new sector-specific investment review mechanism for the defense sector

Who files

Under the Vifo Act, either the acquirer or the target should make the notification. If the target is bound by a non-disclosure agreement, the target of the undertaking will have to do this.

Furthermore, the Vifo Act introduces a standstill obligation whereby parties must obtain approval prior to completion of the transaction. The Vifo Act also provides that a mandatory public offer will not be honored until the Minister has communicated that a review decision has been taken or that it is not required.

The Minister may, at the request of the notifying party, grant exemption from the standstill obligation. The exemption can only be granted if it is in the public interest and there is a risk of economic, physical or social damage to society or negative consequences for financial stability if the exemption is not granted.

Similar to the Vifo Act, the Electricity Act 1998 and the Gas Act 2000 (for the energy sector) prescribe that notification should take place by either the acquirer or the target company. By contrast, the Telecommunications Act 1998 prescribes that the acquiring party should make a notification. Finally, pursuant to the General Security Requirements Defence Contracts 2019 (in Dutch: Algemene Beveiligingseisen Defensie Opdrachten 2019), an undertaking that has an order from the Ministry of Defence must notify changes of control to the director of the Military Intelligence and Security Service (Militaire Inlichtingen- en Veiligheidsdienst).

The sector-specific regulations for the energy, telecoms and defense sectors do not contain a standstill obligation.

Types of deals reviewed

The Vifo Act covers undertakings that are "vital providers," operators of high-tech campuses, or active in sensitive technologies, including dual-use products and military goods.

"Vital providers" include operators of heating networks, Schiphol Airport, the Port of Rotterdam, providers of nuclear energy, air transport, banks and other players in the financial market, renewable energy providers and natural gas operators. These sectors are not covered in their entirety by the Vifo Act. The Act applies to specific functions that are considered vital to a sector, such as the financial market infrastructure.

Sensitive technologies include strategic goods such as dual-use and military goods, where such goods are subject to export control (based on European regulations). Additional regulations which, at the time of writing are in draft form, further specify which technologies are sensitive. Annex 1 to the draft Sensitive Technology Decree (Besluit toepassingsbereik sensitieve technologie) exempts several goods on the EU export control lists from the Vifo Act. By contrast, Annex 2 of the decree expands the list of technologies classified as sensitive to include quantum technology, photonics and semiconductor technology.

In addition, this draft decree further clarifies the provision in the Vifo Act relating to the acquisition of significant influence in a company operating in the field of sensitive technologies. Such acquisition triggers a notification requirement. According to the Explanatory Memorandum, this lower threshold (of significant influence instead of control) is included because companies that develop and operate sensitive technology have a greater need for venture capital. Particularly for innovative startups, scale-ups and mid-cap companies, this capital requirement means that risk-bearing capital is raised from funders in various financing rounds. Such financing often does not involve the acquisition of control, because the tranches each investor provides are limited in nature due to the risk diversification policy of these investors. For these purposes, significant influence means 10 percent, 20 percent and 25 percent of the voting rights, or the ability to appoint or dismiss one or more directors. Notification will be required each time one of these thresholds is met. For other acquisitions, notification will be required where there is a change of control, assessed in the same way as under the EU Merger Regulation.

The Vifo Act also covers the acquisition of a target company which itself 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 does have such activities.

The review mechanisms for investments in the energy sector are currently included in the Electricity Act 1998 (Elektriciteitswet 1998) and the Gas Act 2020 (Gaswet). Both are due to be replaced by the draft Energy Act (Energiewet), which includes a slightly different test. Based on the current regulatory regime, transactions involving LNG installations and electricity generating facilities with a capacity of more than 250 megawatts must be notified to the Minister. Transactions involving the acquisition of control in undertakings that operate such facilities or installations also require notification. The new Energy Act will lower the threshold by requiring notification of a change in control in relation to an electricity generating facility with a total rated capacity of more than 100 megawatts or a company operating one or more generating plants with a total rated capacity of more than 100 megawatts.

The Telecommunication Sector (Undesirable Control) Act (Wet ongewenste zeggenschap telecommunicatie), which came into force on October 1, 2020, has introduced a screening mechanism in the Telecommunication Act (Telecommunicatiewet). Pursuant to this act, investments in telecommunication companies that have a relevant impact on the Dutch telecoms sector must be notified. The decree on undesirable control in telecommunications specifies when an undertaking has such relevant impact.

Finally, in the defense sector, changes of control falling within the scope of the General Security Requirements for Defence Contracts 2019 (Algemene Beveiligingseisen voor Defensieopdrachten 2019) are subject to a notification requirement. In addition, investments in undertakings that provide telecom services to the General Intelligence and Security Service, the Ministry of Defence, the Military Intelligence and Security Service, the National Coordinator for Counterterrorism and Security or the National Police are notifiable under the Telecommunications Act.

Scope of the review

Following a notification under the Vifo Act, an assessment is made as to whether the investment, merger or acquisition poses a risk to national security. National security refers to security interests that are essential to the democratic legal order, security or other important interests of the Dutch state or social stability. The Vifo 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
• Preventing unwanted strategic dependence of the Netherlands on other countries

To assess the potential risk that an investment may pose to national security, particular attention is given to the following factors:

• The transparency of the investor's ownership structure and relationships
• Whether the investor is directly or indirectly subject to restrictive measures on the basis of national or 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
• The investor's criminal record
• The degree of cooperation of the investor in the review procedure
• The nature of any incorrectly submitted information and the motives behind it

For acquisitions involving vital providers, the financial stability and track record of the acquirer are also included in the assessment. Acquisitions involving sensitive technologies involve an additional assessment of the acquirer's track record and motives for the acquisition.

The notification requirement in the Electricity Act and the Gas Act, and the draft Energy Act aims to screen investments for risks to public safety and security of supply. The assessment of notifiable investments in the energy sector considers the financial reliability of the investor, its governance and management and its transparency. The investor's track record in safety and technical expertise is also relevant. The draft Energy Act provides that the factors relevant for an assessment under the Vifo Act will apply mutatis mutandis.

Transactions in the telecoms sector that may lead to a threat to public interest may be prohibited or made subject to conditions by the Minister. The Telecommunications Act provides a list of potential threats to the public interest.

Review process timeline

The review procedure under the Vifo Act consists of two phases. The first phase starts with the notification. After notification, the Minister has eight weeks to assess whether the investment could potentially cause a risk to national security. This period can be extended to a maximum of six months. The first phase ends with a notification that no review decision is necessary or that further review is necessary. The failure of the Minister to make a timely decision is deemed to be a decision that no further review is necessary.

The second phase starts upon submission by the notifying party of a request for a review decision. The Minister then has another eight weeks to decide whether the investment gives rise to a risk to national security. This decision period can also be extended up to six months. However, the time used for review in the first phase will be deducted, meaning that the maximum time for both phases before a final decision is given will be six months.

A "stop the clock principle" applies during the review procedure, meaning that if the Minister requests additional information, the decision period is suspended until the required information has been provided. The decision period can also be extended by an additional three months if the Member State is required to share the notification with the European Commission and/or other Member States in accordance with the EU FDI Regulation.

If another, sector-specific national security screening mechanism already applies, no separate notification must be made under the Vifo Act, even if the thresholds of the specific regimes are not met. Other notification regimes that do not concern national security—for example, regimes requiring notification to the Dutch central bank, healthcare authority or competition authority—do not release the parties from the obligation to notify the transaction under the general national security screening regime.

Notifications based on the Electricity Act or the Gas Act must be submitted no later than four months prior to the intended change in control. Contrary to the Vifo Act, there is no standstill obligation.

If the Telecommunications Act requires notification, it must be made no later than eight weeks before the change in control. The Minister must decide within eight weeks of receiving the notification. If further examination is needed, then this period can be extended by six months. The period can be further extended by three months if the cooperation framework from the European FDI screening regulation applies. If the Minister requests additional information from parties, the clock is stopped. No standstill obligation applies.

How foreign investors can protect themselves

Investors (both foreign and Dutch) should make timely notifications to the Minister if required under the Vifo Act or sector-specific regulations. Although the Vifo Act has not yet entered into force and therefore notification is not yet required nor possible, it has retroactive effect from September 8, 2020. Thus, the rules in the Vifo Act also apply to transactions taking place before the act comes into force. The Vifo Act contains a standstill obligation. Investors must therefore wait for the Minister's approval before proceeding to complete the transaction. Although sector-specific regulations do not contain a standstill obligation, completing a transaction before approval has risks. Indeed, if the Minister prohibits the transaction or attaches conditions to the transaction, the investment may have to be partially or fully reversed.

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