Competition Newsflash: Dutch legislation on FDI-screening (Vifo Act) enters into force
On 1 June 2023, the Act on security screening of investments, mergers and acquisitions (in Dutch: Wet Veiligheidstoets investeringen, fusies en overnames, “Vifo Act”) entered into force. The Vifo Act aims to manage risks to national security arising from acquisitions and mergers (“investment activities”).
Under the Vifo Act, investment activities in companies providing certain designated critical activities (“vital providers”), managers of business campuses and in companies that provide sensitive technology must be notified to the Bureau for Verification of Investments (in Dutch: Bureau Toetsing Investeringen, “BTI”), part of the Ministry of Economic Affairs and Climate, for a safety check of risks to national security and related interests. This new obligation to notify certain investment activities exists in addition to the obligation to notify concentration to the European Commission, the Netherlands Authority for Consumers and Markets (“ACM”), or other national competition authorities.
The Ministry recently announced that the first (retroactive) investigation of the BTI will revolve around the previous acquisition of chip company Nowi by Nexperia (owned by the Chinese Wingtech Technology).
In this newsletter, we answer the twelve most important questions regarding the Vifo Act.
- When should a notification be made?
- What is meant by vital providers and managers of business campuses?
- What is meant by sensitive technologies?
- What does the BTI substantively test?
- What can the BTI decide?
- How does the Vifo Act relate to the (European) FDI screening regulation and to (national) sector-specific legal security tests?
- Who does the reporting obligation apply to?
- What are the deadlines for taking a decision?
- What does a notification cost?
- Does the Vifo Act contain a standstill obligation?
- What happens if no notification is filed or if incorrect or incomplete information is provided?
- Does the notification requirement and investment test also apply to acquisition activities that took place before the Vifo Act enters into force?
1. When should a notification be made?
There is an obligation to notify to the BTI in respect of investment activities in vital providers, managers of business campuses and in companies active in sensitive technologies.
Investment activities are defined as:
- acquiring control (within the meaning of merger control) in a target company;
- a merger between companies;
- establishing a full function joint venture; or
- acquiring essential assets (these are assets that are essential to the operations of the vital provider).
In addition, the Vifo Act applies when acquiring or increasing significant influence over companies operating in the field of highly sensitive technology. The Decree in the Scope of Application of Sensitive Technology determines which sensitive technologies are designated as ‘highly sensitive’. Significant influence already exists if the intervening party can cast 10% of the votes of the general meeting in a target company. Then another notification must be made if the voting rights of the interrelated parties increase to 20% and to 25% of the votes. Significant influence also exists if the target company is obliged to appoint or dismiss one or more directors on the recommendation of a third party.
The notification will be investigated by the BTI. In case of doubt about the applicability of the Vifo Act, parties may also informally consult with the BTI.
2. What is meant by vital providers and managers of business campuses?
Vital providers are:
- Heat suppliers;
- Nuclear power companies;
- Certain companies engaged in exploration, transportation and/or storage of natural gas;
- Ground handling service providers;
- Schiphol Airport;
- The Port of Rotterdam
- Banks with a registered office in the Netherlands; and
- Certain financial market infrastructure providers such as trading platforms.
The minister can also designate other categories of vital providers by decree. The minister has not (yet) done so.
Managers of business campuses are enterprises that manage a site where a multiple companies operate that publicly-privately collaborate on technologies and applications that are of economic and strategic importance to the Netherlands. This includes, for example, the High Tech Campus Eindhoven and the TU Delft Campus.
3. What is meant by sensitive technologies?
Sensitive technologies are:
- Dual-use items. These are items suitable for both civil and military use, such as certain software requiring an export authorisation under Regulation 2021/821 for the control of exports, transfer, brokering, technical assistance, transit and transfer of dual-use items; and/or
- Military goods included in the EU Common Military List.
The minister can also designate other technologies as sensitive technology by order in council. The Decree in the Scope of Application of Sensitive Technology designates quantum technology, photonics technology, semiconductor technology and High Assurance information security products also as sensitive technology.
4. What does the BTI substantively test?
The BTI assesses whether the investment activity poses a risk to national security in that:
- it disrupts the continuity of vital processes;
- it affects the integrity and exclusivity of knowledge and information containing critical or strategic information for the Netherlands; or
- it creates an unwanted strategic dependence of the Netherlands on other countries.
The Vifo Act aims, among other things, to prevent that, by acquiring (indirect) control/influence through business operations, the vital process is compromised, state-sensitive information gets into the hands of foreign/private parties or that the Netherlands is put in a blackmailing position. In addition, the Vifo Act should ensure that other countries or players (for the benefit of their own military, economic or geopolitical position) do not acquire high-quality Dutch knowledge or sensitive technology, which are of strategic significance for the Netherlands. This includes looking at the motives of the intertwined party, the country of origin, financial stability, and any criminal past of the acquirer.
The BTI’s investigation focuses not only on the acquirer, but also on the ownership structure and relationships of other parties in the acquirer, such as large equity stakes, affiliated equity stakes of various friendly parties, special control rights, the composition of management and supervisory boards and related appointment rights. Importantly, relevant state or non-state actors who may exert undesirable influence on the acquirer are brought to the surface.
5. What can the BTI decide?
The BTI conducts a risk analysis and may conclude the following:
- No risk to national security. If there is no risk to national security, the BTI decides that no review decision is required.
- Risk to national security. If the analysis shows that an activity may lead to risks to national security, a review decision is required. For this purpose, an application should be submitted to the BTI. If the review decision shows that there are risks to national security, the BTI (on behalf of the Minister) is authorised to take “mitigating measures” or, in extreme cases, an acquisition activity may be banned. Thus, unlike remedies in merger control, mitigating measures are not offered by the undertakings concerned. The BTI can subsequently take the following decisions:
- Mitigating measures. The Vifo Act contains an exhaustive list of requirements and regulations that can be attached to the transaction. For example, there may be requirements regarding sensitive information, the appointment of a security officer. The BTI may also stipulate that vital processes must be placed in a Dutch subsidiary. With regard to sensitive technologies, the limitative list of possible requirements and regulations consists, for example, of the requirement that certain technology or codes be deposited with the Dutch State or a third party in the Netherlands.
- Total ban on acquisition activity. Banning an acquisition activity outright is a measure of last resort, according to the Explanatory Memorandum to the Vifo Act. Only if mitigating measures are not deemed sufficient, a ban is considered in the extreme.
Interested parties may object or appeal against the review decision to impose requirements or regulations on an acquisition activity or impose a ban. The review decision will not be made public.
6. How does the Vifo Act relate to the (European) FDI screening regulation and to (national) sector-specific legal security tests?
The Vifo Act stems from the European Regulation establishing a framework for the screening of foreign investments in the Union concerning foreign subsidies that distort the internal market (“FDI Screening Regulation”). The FDI Screening Regulation does not contain an EU-wide harmonised FDI screening mechanism. It only contains procedural rules included for screening of direct investment of companies from non-European countries in the European Union. Among other things, the FDI screening regulation sets obligations regarding information exchange between member states. For example, it requires member states screening a direct investment to actively share information with the European Commission and other member states. The European Commission and member states can then respond in turn. It also allows the European Commission to give member states non-binding opinions.
The FDI Screening Regulation is implemented in the Netherlands by the Foreign Direct Investment Screening Regulation Implementation Act (“Implementation Act”). In response to the FDI screening regulation, the State decided to legislate the protection of national security in the case of foreign investments with the Vifo Act. In addition to non-European investments, the Vifo Act also covers European investments made in the Netherlands. Under the FDI screening regulation, the BTI is obliged to inform the regulators of other EU member states if it has been notified of a non-European investment. This is subject to national regulations. So there is no one-stop shop arrangement as is the case with the Merger Control, for example.
The Vifo Act does not apply if the transaction falls under a national sector-specific security test such as the applicable obligations under the Telecommunications Undesirable Control Act, the Electricity Act, the Gas Act and the General Security Requirements Defence Contracts 2019.
7. Who does the reporting obligation apply to?
The reporting obligation applies to the target company and to the acquirer. This is because they both have relevant information for the assessment of the reportable activity. The Vifo Act assumes that the target enterprise and the acquirer of the activity make the notification jointly or in mutual consultation. The acquirer is exempted from the duty to notify if it cannot know that the intended activity is subject to a duty to notify due to a duty of confidentiality on the part of the target company. In that case, the target company must still make a notification.
8. What are the deadlines for taking a decision?
If a review decision is required, an application must first be made. The BTI then has eight weeks to issue a decision. This period can be extended by up to six months, reduced by the time used for the earlier part of the investigation. Thus, the total extension can never exceed six months.
The above deadlines may be suspended if the BTI requests for additional information. The BTI may extend the deadline by another three months if the cooperation framework of the FDI Screening Regulation applies.
9. What does a notification cost?
There is no charge for the notification.
10. Does the Vifo Act contain a standstill obligation?
The Vifo Act has a standstill obligation. This means that an investment activity may only be carried out after a review decision has been taken or the BTI has decided a review decision is not necessary. The investment activity must therefore in any case be suspended until an initial risk analysis has been made or an assessment decision has been taken.
11. What happens if there is no notification submitted or if incorrect or incomplete information is provided?
If the investment activity is wrongfully not notified, the target company and/or acquirer can be fined € 900,000 or 10% of the turnover of the relevant company. Also, violation of the reporting obligation results in immediate suspension of acquired shareholder rights such as exercising voting rights and access to information.
If the BTI finds that incorrect or incomplete information has been provided in the notification, it may, within three months of this coming to light, order the reporting company to make another notification within a reasonable time. An administrative fine of 10% of the turnover of the company concerned may also be imposed. Under certain circumstances, providing false information may also qualify as the criminal offence of forgery. Also, violation of the reporting obligation results in immediate suspension of acquired shareholder rights such as exercising voting rights and access to information.
In addition, the Vifo Act offers the possibility of imposing an order under penalty to induce the offender to still report.
If the BTI finds that incorrect or incomplete information has been provided in the notification, it may, within three months of this coming to light, order the reporting company to make another notification within a reasonable time. An administrative fine of 10% of the turnover of the company concerned may also be imposed. Under certain circumstances, providing false information may also qualify as the criminal offence of forgery.
12. Does the notification requirement and investment test also apply to investment activities that took place before the Vifo Act enters into force?
Yes, the Vifo Act has, subject to some (minimal) exceptions, retroactive effect. This means that for high-risk acquisition activities carried out after 8 September 2020, but before the Vifo Act came into force, the BTI can decide up to eight months after its entry into force that the acquisition activity must still be notified. We have for example already seen this for the announced investigation of the the acquisition of Nowi by Nexperia. The foregoing does not apply to investment activities with respect to managers of business campuses.