Update Dutch FDI-screening (Vifo Act)
In our Competition Newsflash of 2 June 2023 we discussed the coming into force of the Act on security screening of investments, mergers and acquisitions (“Vifo Act”) on 1 June 2023. As a result of the Vifo Act, many transactions that previously escaped ex ante merger control are brought within the scope of a new, sometimes intensive, administrative process. Almost a year after the coming into force, the practice around the Vifo Act shows that there is much room for varying interpretations and uncertainty about the obligation to notify. In this Newsflash, we outline a number of insights drawn from publications by the Investment Screening Bureau (“BTI”) and our own practical experience set out in thirteen questions and answers.*
*The following information is not intended as legal advice. If you want to be certain of whether a transaction must be notified, please contact one of our lawyers.
Overview
Notification obligation
1. What is a target company established in the Netherlands?
3. What constitutes acquisition of control?
Process and timeline
7. How does the BTI apply the statutory time limits of the Vifo Act in practice?
8. How does the BTI gather information during the process?
Substantive risk analysis
9. Which countries may raise concerns about risks to national security for the BTI?
10. How does the BTI determine whether an intended transaction poses a risk to national security?
Remedies
11. At what times are parties allowed to provide input on the BTI’s investigation and offer remedies?
12. How does the BTI relate to the Minister of Economic Affairs & Climate?
13. What legal actions can parties take before, during and after the procedure at the BTI?
1. What is a target company established in the Netherlands?
To determine whether a company is established in the Netherlands, the focus is placed on the factual connection with the Netherlands rather than the formal, statutory reality. The location where the company conducts economic activities is decisive. In its guidance ‘being active in’ (only in Dutch), the BTI clarifies that the relevant production, research, and/or development activities must be carried out in the Netherlands to fall within the scope of the Vifo Act.
A Dutch sales office of a foreign-based company active in the field of sensitive technology will therefore generally not qualify as a target company within the meaning of the Vifo Act. This is different if the sales office has the capability and necessary legal rights to make improvements, adjustments or modifications to the relevant technology. In that case, it can no longer be considered a pure sales office. Additionally, a holding company located in the Netherlands which solely holds the shares in a subsidiary located abroad which engages in the relevant production, research, and/or development activities will also not qualify as a target company within the meaning of the Vifo Act.
2. Under what circumstances are chain partners in the up- and downstream market independently active in the field of sensitive or highly sensitive technology?
After the coming into force of the Vifo Act, there was some confusion about when an undertaking can be considered to be ‘active in’ the field of (highly) sensitive technology. In response, the BTI published the guidance ‘being active in’ (only in Dutch). In principle, companies that produce a semi-finished product that does not independently qualify as sensitive technology are not considered active in the field of sensitive technology. Likewise, chain partners in the up- and downstream market, such as suppliers, end-users, and wholesalers, are generally not considered active in the field of sensitive technology themselves.
According to the BTI, this is different when a company plays a role in the production process of technologies designated as highly sensitive in Annex 2 to the Decision on the scope of sensitive technology (only in Dutch): quantum technology, photonics technology, semiconductor technology, and High Assurance products. Given the broad description of these technologies, companies that provide products, machinery, know-how or services specifically tailored to the production process of these technologies fall (independently) within the scope of the Vifo Act.
By way of illustration: company X manufactures machinery for company Y, which develops semiconductor technology. Due to the need for precision and coordination of all steps in company Y’s production process, company X will be closely involved in company Y’s production process. In this case, the BTI considers that company X itself is also (independently) active in the field of semiconductor technology, and there is an obligation to notify an acquisition of or investment in company X to the BTI.
Lastly, end-users of High Assurance products can also be considered (independently) active in the field of highly sensitive technology. High Assurance products are software and/or hardware information security products aimed at information protection according to the highest international security standards. Some end-users of High Assurance products may further customise the product to fit their own business processes or feed the product with relevant data, resulting in a unique product. Such end-users are in principle also (independently) active in the field of highly sensitive technology. Therefore, there is also an obligation to notify an acquisition activity related to such end-users.
3. What constitutes acquisition of control?
For the concept of ‘control’, reference is made to the concept of ‘control’ as defined in Article 26 of the Dutch Competition Act (“DCA”): the ability to exercise decisive influence over the activities of an undertaking on the basis of factual or legal circumstances. However, there is a difference between the concept of ‘concentration’ in competition law and ‘acquisition activity’ in the Vifo Act. Unlike in competition law (Article 27 DCA), the Vifo Act does not require a change of control on a lasting basis. In its guidance on ‘internal restructuring’ (only in Dutch), the BTI for example explains that a temporary transfer of shares in a target company to a trust company, custodian or notary as part of a restructuring process generally qualifies as an acquisition activity under the Vifo Act.
4. How does acting through a consortium or a shareholder’s agreement relate to the notion of ‘acquiring or increasing significant influence’?
Article 4 Vifo Act includes thresholds for the acquisition or increase of significant influence in a target company active in the field of (highly) sensitive technology. Decisive for determining that influence is the number of votes in the general meeting of shareholders that the acquirer can cast. If a company can (or can have) cast at least 10%, 20% or 25% of the votes in the general meeting of a target company, this qualifies as significant influence. These are successive thresholds, meaning that exceeding any of the thresholds increases the significant influence of an acquirer and therefore must be notified to the BTI.
By way of illustration: if company X holds 15% of the voting rights in company Y and increases its share in the company to 21% during a new investment round, it exceeds the 20% threshold. This means that it increases its significant influence in company Y, even though it already had significant influence in company Y prior to the new investment. This increase in significant influence in company Y by company X is notifiable to the BTI if company Y qualifies as a target company within the meaning of the Vifo Act.
The joint action of multiple shareholders in a target company can also result in significant influence. When determining the percentage of votes in the general meeting of a target company that an acquirer will have after an acquisition activity, the votes of collaborating parties are added together. This way, a shareholder who individually does not exceed a certain threshold can still engage in a notifiable acquisition activity by acquiring or increasing significant influence through the consortium.
By way of illustration: shareholders X, Y and Z hold 2%, 7% and 10% of the shares in company A respectively. Shareholders X, Y and Z are part of a consortium based on a cooperation agreement. Together, they hold 19% of the shares in company A. If shareholder X increases its share from 2% to 5%, it does not exceed the thresholds of Article 4 Vifo Act. However, the consortium does exceed the threshold, because the consortium’s share increases from 19% to 22% due to the acquisition activity of shareholder X. If company A is active in the field of sensitive technology within the meaning of the Vifo Act, there is an obligation to notify the increase of X’s share from 2% to 5% to the BTI.
Just like the acquisition of control, it is not required for the acquisition or increase of significant influence to be on a lasting basis. Even a temporary acquisition or increase of significant influence is subject to a notification obligation under the Vifo Act.
5. In which case does exerting influence on the composition of the board also lead to significant influence?
In addition to exceeding the 10%, 20% and 25% threshold, the capability to influence the appointment and/or dismissal of one or more directors can also lead to significant influence. Considering the broad wording of Article 4(1)(d) Vifo Act, there does not need to be a direct power of appointment/dismissal. The (collective) power to promote the appointment/dismissal of certain individuals can also trigger a notification obligation. Significant influence pertains to the influence that can be exerted on the strategy, specific investments, and further development of the target company, which can also be achieved (indirectly) by having a say in the composition of the board.
While generic merger control also takes into account the appointment of non-executive directors or supervisory board members, the BTI recently informally indicated that, in its view, obtaining the right to appoint a non-executive director does not constitute significant influence. It is important, however, that the duties and powers actually reflect on a non-executive role. The name/title of the individual is not decisive. Hence, according to informal communication from the BTI, only the ability to influence the appointment and/or dismissal of executive directors would trigger a notification obligation.
6. What about temporary shifts in equity interests in the context of multiple investment rounds and/or restructuring processes?
Temporary shifts in equity interests in a company active in the field of (highly) sensitive technology must also be closely monitored. In practice, this can cause problems when raising capital in multiple financing rounds and complicated restructuring processes.
Start-ups and scale-ups are often seeking capital to expand, depending on the stage of development of the company. If this occurs in multiple (sometimes closely spaced) rounds, the equity interests within the company can shift multiple times. The BTI holds that the thresholds of Article 4 Vifo Act must be strictly adhered to, and that temporarily exceeding the thresholds is also subject to notification.
This also means that if shareholders drop below a certain threshold during multiple financing rounds that do not follow each other closely and then rise above the threshold again, the increase in shares must in principle be notified (again). However, the BTI has informally indicated that when a shareholder’s interest temporarily decreases and then increases again because shares are issued in multiple closely following rounds, the subsequent increase above one of the thresholds does not need to be notified. However, it is required that the temporariness and short duration are already predetermined, for example, because specific (contractual) commitments have already been made upfront.
By way of illustration: company A intends to attract new financing from both new and existing investors and has already concluded all necessary agreements in that regard. Because the existing investors need slightly more time to finalise their financing, their shares will be issued a few days later (closing 2) than the shares for the new investors (closing 1). As a result, the interest of shareholder X dilutes from 12% to 9% at the time of ‘closing 1’. However, a few days later, his interest increases again to 12%. Strictly speaking, this exceeds a threshold. However, in this case, the BTI seems to take the position that this does not need to be notified.
The strict application by the BTI of the thresholds of Article 4 Vifo Act can also lead to some complications in restructuring processes. The BTI explains in its guidance on ‘internal restructuring’ (only in Dutch) that interests can shift (whether temporarily or not) during a restructuring process, which may require notification to the BTI. This is the case, for example, when, as part of a restructuring process, the target company is temporarily placed under the administration of a trust company. The shifting of interest to another investment fund controlled by the same managers can also trigger a notification obligation, as there may be different investors participating in the other fund. The entry of new minority shareholders who acquire significant influence over the target company during a restructuring process also constitutes a notifiable acquisition activity.
7. How does the BTI apply the statutory time limits of the Vifo Act in practice?
After receiving a notification, the Minister of Economic Affairs and Climate (“Minister”)/BTI has eight weeks to decide whether a review decision is required (the “notification phase”). This eight-week period can be extended by up to six months if the BTI needs more time to conduct further investigation. This period can be extended by an additional three months if the FDI Screening Regulation applies (in the case of direct investments by foreign (i.e., non-European) natural or legal persons). In that case, the BTI requires extra time to inform the relevant EU Member States and the European Commission (“Commission”).
If the Minister decides that a review decision is required and one of the parties subject to notification has submitted an application for a review decision, the Minister has eight weeks to adopt a review decision (the “review decision phase”). This period can also be extended by up to six months, minus the extension the BTI has used in the notification phase. Just as in the notification phase, the ‘clock stops running’ if the BTI has additional questions for the parties, from the moment of asking those questions until the moment the BTI receives a response from the parties. Overall, the process at the BTI from the initial notification to a review decision can easily take almost a year.
It is noteworthy that the BTI can use (significant) deadline extensions already in the notification phase. Even if the process ends with the Minister’s decision that no review decision is required, the process at the BTI can (in the most extreme case) still last almost a year. For the M&A-practice, this can lead to more deal uncertainty as acquirers may include unconditional approval by the BTI as a resolutory condition for the agreement. On the other hand, the selling parties may increasingly demand a breakup fee or another form of compensation in case the BTI does not (unconditionally) approve an acquisition activity.
To reduce the processing time at the BTI, parties are advised to explain clearly and comprehensively the relevant technology to the BTI, as well as the economic and non-economic motives behind that intended acquisition activity, as early as possible in the process. This can help prevent the BTI from requiring extensive time in the notification phas
8. How does the BTI gather information during the process?
First, the BTI obtains information through the notification submitted by the parties. This form is included in Annex 1 to the Regulation on security screening of investments, mergers and acquisitions (only in Dutch).
After parties have notified the intended acquisition activity to the BTI, the BTI may want to ask clarifying questions to the parties. This can be done either orally or in writing. If the BTI sends a written information request to the parties, the statutory decision-making period stops to run until the questions are answered. The questions posed by the BTI to the parties can provide an indication of the focus of the BTI’s investigation and potential risks perceived by the BTI. In addition to written questions, the BTI may also schedule a (physical) meeting with the parties. For example, they may suggest to meet at the location of the Dutch target company to gain more insight into the products or services involved.
Additionally, the BTI collects information through chain partners and government institutions to gain a better understanding of the target company, the acquirer, and the relevant technology. The notifying parties are not given insight into the input from third parties, as this often involves confidential information.
Finally, the FDI Screening Regulation provides for a mechanism for the exchange of information between the BTI, the Commission and other national authorities (Article 6(1) FDI Screening Regulation). The BTI informs the Commission and other EU Member States of all transactions concerning an FDI. EU Member States can share information with or submit comments to the BTI if they believe the transaction may have implications for their national security or public order. The Commission may also provide advice to the BTI if it believes the transaction may have implications for the security of more than one EU Member State. The Commission shares this advice with other EU Member States. Finally, authorities from other Member States and the Commission can request additional information from the BTI. If the BTI does not have this information itself, this request for information may be redirected to the parties. The statutory decision-making period stops until parties have answered the questions.
The additional three-month extension period if the acquisition activity falls within the scope of the FDI Screening Regulation is intended to give the BTI time to go through the abovementioned procedures without losing time to investigate the transaction itself.
9. Which countries may raise concerns about risks to national security for the BTI?
Prior to the enactment of the Vifo Act, the impression was given that the Act was primarily aimed at countries such as China, Russia and Iran. In this context, both the Dutch legislator and the BTI referred to the report ‘Threat Assessment State Actors 2’ (only in Dutch, “DSA-report”) drawn up by Dutch intelligence agencies AIVD, MIVD and NCTV. The DSA-report highlights, in particular, Russian entities taking preparatory actions for disrupting and sabotaging Dutch infrastructure, Dutch dependence on Russian oil and gas, Iranian methods of acquiring Dutch technology, and China’s threat to Dutch intelligence security.
However, in practice, it turns out that other countries, including Western countries like the United States, can also raise concerns in the view of the BTI for Dutch national security. It is also possible that an acquisition activity by an acquirer with its registered office in another EU Member State or even the Netherlands could lead to risks according to the BTI. This will depend, amongst other things, on who the Ultimate Beneficial Owner (“UBO”) is and the nature of the acquisition activity.
In short, there appears to be no safe harbour under the Vifo Act for acquirers from specific countries. The Vifo Act only provides an exception if the acquirer is the Dutch State, a local government, or another pubic body under Dutch law.
10. How does the BTI determine whether an intended transaction poses a risk to national security?
An intended acquisition activity poses a risk to national security if it:
- disrupts the continuity of vital processes;
- affects the integrity and exclusivity of knowledge and information containing critical or strategic information for the Netherlands; or
- creates an unwanted strategic dependence of the Netherlands on other countries.
Articles 19, 20 and 21 of the Vifo Act contain additional factors that the BTI takes into account when assessing whether an acquisition activity could pose a risk to national security. These factors include transparency of ownership structures and relations, criminal history, export policy and the security situation of the acquirer’s county. It should be noted that these are merely factors that can be considered when assessing risks to national security. Practice learns that these factors are by no means exhaustive and the BTI is flexible in its approach.
Ultimately, the BTI conducts a risk analysis. There is no clear standard of proof for this risk analysis, meaning there is no specific level of probability required for the risks to materialise. According to the wording of Article 12 Vifo Act, the Minister requires a review decision if an acquisition activity could pose a risk to national security. Generally, it can be assumed that the risk analysis is relative: the actual occurrence of the risk may not need to be highly probable if the consequences would be very serious. In the review decision phase, the standard of proof seems to be higher: according to Articles 23 and 24 Vifo Act, the Minister can impose certain requirements or conditions on an acquisition activity if it poses risks to national security.
11. At what times are parties allowed to provide input on the BTI’s investigation and offer remedies?
At the end of the notification phase, the BTI issues a positive or negative advice to the Minister. A negative advice means that the BTI advises the Minister that a review decision is required for the acquisition activity, because the acquisition activity could pose risks to national security.
If the BTI intends to issue a negative advice, it first presents parties with a draft advice, outlining the national security risks it has identified. Parties are given the opportunity to respond to the draft advice by submitting their views. To avoid a review decision, parties can mitigate the identified risks. For example, the BTI might have misrepresented the relevant technology or made unjustified assumptions about its relevance for the Dutch national security. Parties can also address the concerns of the BTI by making certain informal commitments that compensate for the identified risks. For example, parties can ensure the continued availability of the products or services involved by making certain changes to the structure of the transaction. The BTI can adjust its advice to the Minister accordingly.
If the parties’ views do not adequately address the identified concerns, the BTI will advise the Minister to decide that a review decision is necessary. In general, this advice is followed by the Minister.
12. How does the BTI relate to the Minister of Economic Affairs & Climate?
The BTI only considers potential risks to national security arising from a proposed acquisition activity. Subsequently, it advises the Minister on the course of action to take. Ultimately, it is the Minister who conducts a risk analysis as well as a broader political assessment to determine, first, whether to require a review decision for an intended transaction and, second, whether to (unconditionally) approve or disapprove the intended transaction.
Because the Minister takes a broader perspective than just the security risks associated with a proposed acquisition activity, it can also consider other political and economic arguments. Therefore, the fact that the BTI has identified risks to national security does not necessarily mean that an intended transaction will be prohibited or subject to conditions.
13. What legal actions can parties take before, during and after the procedure at the BTI?
Interested parties have recourse to administrative legal review according to the procedures of the General Administrate Law Act (“Awb”). This means that interested parties can file an objection and file an appeal against decisions of the Minister, and in the context of those proceedings, also request the court for preliminary relief to suspend a decision. If the Minister’s decision is found to be unlawful, partes can request compensation for damages.
In a recent ruling (only in Dutch) by the Rotterdam District Court, a party (the “applicant”) successfully requested a preliminary relief to suspend a decision of the Minister. The Minister had required parties to report an acquisition activity carried out in April 2021 on the basis of Article 58 Vifo Act, because the Minister suspected that the acquisition activity could pose a risk to national security. The applicant first lodged an objection and then an appeal against this decision. According to the applicant, there was no acquisition of control (and thus no acquisition activity within the meaning of the Vifo Act) because no voting rights were transferred in the transaction. The District Court found that the voting rights indeed remained with the same party. Since the competence of the BTI laid down in Article 58 Vifo Act to call in prior acquisitions applies only to acquisition activities, the District Court grants suspension of the contested decision until a decision is made on appeal in the main proceedings.
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Bas Braeken (Partner) | Jade Versteeg (Senior Attorney) | Lara Elzas (Attorney) | Timo Hieselaar (Attorney) | Demi van den Berg (Attorney) | Coen Vermeij (Lawyer) | Joost van Belois (Paralegal)