SECURITY TEST INVESTMENTS, MERGERS AND ACQUISITIONS ACT

09/07/2021

 

Keywords: risk assessment, national security test, investments, mergers and acquisitions, sensitive technology, report changes of control.

The bill Security Test Investments, Mergers and Acquisitions Act (Wet veiligheidstoets investeringen, fusies en overnames, hereinafter referred to as “the Vifo Act”) was submitted to the House of Representatives and applies to companies for which there is not yet a sector-specific test and for which changes of control could pose a risk to national security. The Vifo Act lays down rules that can be used to manage risks to national security as a result of certain acquisition activities, such as investments and mergers. These types of procurement activities involving vital providers or companies that have sensitive technology can lead to risks to national security. This mainly concerns the risk of damage to the continuity of vital processes, damage to the integrity and exclusivity of knowledge and information, and the creation of strategic dependencies.

In the Netherlands there are a modest number of sector-specific tests embedded in sectoral frameworks, namely the Electricity Act 1998, the Gas Act and the Telecommunications Act (unwanted control in telecommunications Act). The aim of the Vifo Act is to protect national security by introducing a test for procurement activities that lead to changes in control over vital providers or to changes in control over, or the acquisition or increase of significant influence over, companies that have sensitive technology. In this bill a system for testing changes in control and influence is being set up and a broad test is introduced, which serves as a safety net for changes of control and influence that are not or cannot be properly covered by sector-specific legislation. This safety net also applies to sectors for which it is established that an assessment is necessary, but for which sectoral legislation cannot (yet) be implemented in the short term.

Investments are not the only acquisition activities that can lead to changes in control and influence. Acquisition activities such as investments, mergers, setting up a joint venture, demerger, and in the case of control, the acquisition of (parts of) assets, other legal acts that result in one or more (legal) persons controlling or acquiring significant influence in a target company and acquiring control or significant influence by universal title, fall within the scope of this bill. A target company is a vital provider established in the Netherlands or a company established in the Netherlands that is active in the field of sensitive technology. Companies that control or have significant influence over these companies also fall within the scope of the proposal. The Vifo Act concern acquisition activities from abroad and within the Netherlands. This means that the bill is not only strictly country neutral, but it also effectively prevents circumvention constructions. Investors in vital providers and companies with sensitive technology as well as these companies themselves must report changes of control to the Bureau Toetsing Investmenten (BTI) of the Ministry of Economic Affairs and Climate. The BTI assesses whether there is a risk to national security. In the event of risks, the BTI may attach conditions to the investment and, in extreme cases, prohibit it [i].

On February 10, 2021, the Judiciary Division of the Council of State issued an advice on this bill. The department has recommended to:

• Include the key concepts and simplify the proposal by reducing the use of references.
• To elaborate the main elements of the safety assessment system in the law itself and not elaborated by means of an order in council.
• The bill has substantive overlaps with other acts.The relationship between this bill and these regulations must be clarified, whereby the various reporting obligations must be coordinated in such a way that unnecessary administrative burdens are prevented.
• To weigh carefully the restrictions for investors and companies against national security interests. Measures must be necessary and specific, and not go beyond what is necessary.
• Furthermore, a consideration of how a general preventive notification obligation for a broad category of investments relates to the case law of the Court of Justice of the European Union is lacking.
• In addition, without further specification of the intended purposes of data processing in the context of the legislative proposal, the proposal may not be in accordance with the General Data Protection Regulation.
• This arrangement was not sufficiently known to the parties concerned, and on the basis of the principle of legal certainty and legitimate expectations, incriminating measures cannot, in principle, be given retroactive effect. Whether there are special circumstances to be able to deviate is insufficiently substantiated [ii].

In response to this advice from the Council of State, definitions have been further elaborated and supplemented and the bill has been simplified. The scope of application of vital providers is exclusively regulated at law level and no longer by order in council. The suppliers of vital providers as a category of target companies have been placed outside the scope of the bill. The bill is limited to companies active in the field of sensitive technology. The amended bill provides for supplements to regulations that clarify the priority of sector-specific investment tests and further relationship to those tests. The bill has been further supplemented in order to deal with the provision of information of other legal frameworks. The intended purpose of data processing is also further specified. Finally, the legally established reference date of June 2, 2020 has been moved to September 8, 2020 after internet consultation of the bill[iii].

 

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