For almost a year now, parties to M&A transactions have had to take into account not only competition law, but also the regime of the Wet veiligheidstoets investeringen, fusies en overnames (Investment, Mergers and Acquisitions Security Screening Act – the Vifo Act). The Vifo Act provides that acquisitions of and investments in critical and sensitive sectors must be submitted to the Bureau Toetsing en Investeringen (Bureau for Verification of Investments – BTI) for approval since 1 June 2023. In English, this form of investment screening is also known as Foreign Direct Investment (FDI) screening.
From the start, the new legislation has given rise to uncertainty about the manner in which the BTI applies the rules. It was unclear, for instance, whether suppliers and customers of parties operating in the field of sensitive technology also fell within the scope of the Vifo Act. Parties furthermore wondered what steps they could take to keep the notification process as short as possible and what factors might cause complications in the notification process.
Some of these ambiguities have crystallised in practice, particularly thanks to the BTI, which has published several manuals and an FAQ document to give market participants more guidance.
At the same time, we find that there are still many questions in the M&A community about the scope of application of the Vifo Act, among other things: when must or needn’t a transaction be notified? In this blog, we reflect on our first practical experiences after one year of the Vifo Act and identify some future developments that transaction lawyers should take into account.
How will the Vifo Act affect M&A transactions?
In short, the purpose of the Vifo Act is to protect Dutch national security by making investments in vital providers and companies that operate in sensitive technology subject to prior screening by the government.
To ensure that the screening does not come too late, both the acquiring company and the target must notify the BTI of a transaction beforehand and await its approval before completing the acquisition: a standstill obligation, in other words, as in the case of ACM.
The Vifo Act applies to mergers, acquisitions and demergers. It is aligned with the concept of ‘change of control’ as used in competition law. In short, this means that, as a result of the transaction, the acquiring company must be able to exercise decisive control over a company’s activities (e.g. through a majority at the AGM or veto rights on strategic aspects).
If the target operates in the field of ‘highly sensitive technology’, the rules are even stricter and a transaction must also be notified if the acquiring company acquires significant control over the target. That is the case already if the acquiring company acquires 10% of the voting rights – see also our earlier blog on this subject.
In practice, we see that parties to a transaction are not always aware that a notification under the Vifo Act is also required when only some of a target’s assets are acquired, provided that these are essential for the target to function as a vital provider or company in the field of sensitive or highly sensitive technology (see Article 2(e) of the Vifo Act); more on this below.
Unlike screening under the competition rules – the notification to ACM or the European Commission – no turnover threshold applies under the Vifo Act. The nationality of the acquiring party also makes no difference to the application of the Vifo Act. The acquisition, for instance, of a Dutch target with a turnover of €1 by a Dutch acquirer may therefore be notifiable.
Initial experiences with BTI
Particularly in the first months, it became apparent that the BTI did not shy away from taking ample time to conduct its investigation. That can significantly impact the deal timeline. The greater the risk to national security, the more investigation the BTI will want to conduct, the longer the process will take and the more uncertain the outcome will be.
In principle, the BTI’s ‘phase 1 assessment’ of a transaction takes up to eight weeks. That is already four weeks longer than at ACM. Moreover, this period may be suspended – in which case the clock is stopped – if the BTI raises questions or requires further information. The parties involved may then have to provide very detailed information, relating, for instance, to the acquiring company’s ownership structure or the transactions it has completed in the past five years.
The practice described above can make the assessment process unpredictable. The BTI may request detailed information even in the case of transactions that do not have an obviously elevated risk profile in terms of the activities involved or the investor’s profile. The fact that the BTI does not publish its decisions furthermore makes it difficult to assess what processes are going on behind the scenes and what factors the BTI considers relevant. A complicating factor is that the BTI is dependent (to a greater or lesser extent) in making its assessment on input from other government bodies, such as other ministries and the security services (the AIVD (General Intelligence and Security Service) and the MIVD (Military Intelligence and Security Service). This makes the process less transparent in terms of both content and expeditiousness.
Below, we address four concrete practical experiences after the first year of the Vifo Act.
1. Sellers are well advised to critically screen potential acquirers
As stated above, the BTI does not shy away from taking its time to assess transactions. Therefore, when deal certainty and timing are essential, sellers are well advised to screen potential acquirers, as far as possible, for any sensitivities under the Vifo Act. Depending on the target’s activities, relevant aspects regarding the prospective acquirer include:
- the security situation in the country of establishment;
- the identity of the UBOs;
- influence of foreign states on the acquiring company;
- any criminal offences and sanctions violations by the acquiring company;
- global acquisition activity in the past five years; and
- the reasons for the transaction.
If any risks under the Vifo Act arise in relation to a potential acquirer, depending on the seriousness of those risks, the presence of alternative potential acquirers, the commercial dynamics of the negotiations, and the time-sensitivity of the transaction, this may be a reason to drop that acquirer.
2. Internal restructurings may also be notifiable
The BTI takes the position that internal restructurings may also trigger a notification requirement. This is the case if the restructuring entails a change of control or the acquisition of significant control by a new or existing shareholder. In principle, no notification requirement applies if the UBO remains the same.
In this regard, it is important to note that also temporary management (short-term or long-term) by a trust office, custodian, civil-law notary or other party of the shares in a target company, as part of a restructuring process, whereby, for instance, the jurisdiction changes, constitutes a notifiable acquisition according to the BTI.
The transfer of an interest in a target between two investment funds controlled by the same party may also be notifiable. The reasons for this is that other capital providers may participate in the acquiring fund, as a result of which the transfer may constitute an acquisition activity under the Vifo Act. It is therefore advisable, also in the case of seemingly entirely internal transfers, to check each time whether the Vifo Act may apply.
3. The acquisition of assets may also be subject to the notification requirement
As stated above, the Vifo Act applies not only to the acquisition of a shareholding, but also to the acquisition of assets. This includes, for instance, the acquisition of business units, personnel, machinery or intellectual property, for instance in a transfer of assets and liabilities, or an outsourcing agreement.
Not all assets falls within the scope of the Vifo Act. The decisive question is whether the assets concerned are necessary for the target to function as a vital provider or as a separate enterprise in the field of sensitive technology. A case in point are intellectual property rights and licences needed for the operation of the relevant business units, essential personnel, or certain machinery and equipment used in the operation of a business unit. In practice, the BTI thereby considers, among other things, the uniqueness of the assets involved.
4. A target is easily deemed to ‘be active in’ the field of highly sensitive technology
Many companies are not themselves active in the production or supply of highly sensitive technology, but do conduct business with such companies. They are active, for instance, as suppliers or buyers. It can be difficult to determine whether the Vifo Act applies when such a supply chain partner is acquired. The BTI takes the position that, in principle, suppliers whose own products or services are not sensitive are not deemed to be active in the field of sensitive technology. In principle, a company that is active in brokering or in the import or export of sensitive products will also not fall under the Act.
However, the BTI applies a broader application framework to highly sensitive technology, such as semiconductors and photonics. A company that supplies or provides products, machinery, know-how or services that are, in terms of their purpose, function or technical characteristics, specifically tailored to research into or the development, production, processing or exploitation of highly sensitive technologies is itself also deemed to be active in the field of such technology. According to the BTI, such parties therefore also fall within the scope of the Vifo Act.
In short, if the target is part of the chain of highly sensitive technology – for instance as a supplier to a manufacturer of semiconductors or lithography machines – it is advisable to carefully check each time whether the Vifo Act applies.
In practice, we find that the BTI is generally willing to exchange views with parties at an early stage as to whether a target falls within the scope of the Vifo Act. To this end, parties should therefore request what is known as an informal view, explaining the target’s activities and its role within the chain. It is of course important that the parties provide the BTI with accurate and complete information in doing so.
FDI developments at EU level
The European Commission published a proposal on 24 January 2024 to revise the current European FDI framework, imposing new requirements on Member States. The initiative is part of a broader package of measures to strengthen the EU’s strategic and economic security “at a time of growing geopolitical tensions and profound technological shifts”.
Whereas the current FDI Regulation gives EU Member States a large degree of freedom and flexibility to set up their national FDI regimes, the proposed regulation requires Member States without an FDI regime to introduce one, and all regimes within the EU will furthermore have to meet certain minimum requirements. This should ensure that the FDI playing field within the EU is harmonised to some extent. Investors should therefore expect an increase in the number of countries in which an FDI notification will be required.
Unlike the current FDI Regulation, the European Commission’s proposal contains a minimum list of sectors and industries that should be subject to national FDI screening, such as:
- critical technologies, including advanced semiconductor technologies, AI technologies, biotechnologies and advanced materials, manufacturing and recycling technologies;
- pharmaceuticals, if they are considered innovative or critical for human use. Factors such as the therapeutic indication, the availability of suitable alternatives, and the vulnerability of the supply chain are relevant here; and
- critical entities and activities within the EU financial system, such as payment systems and institutions, operators of a multilateral or organised trading facility, and other large institutions, among others.
It is not yet clear if or when the European Commission’s proposal will take effect. In light of the EU legislative process, this will not be until 2026 at the earliest. Market participants are well advised to closely monitor these developments and to prepare for changes that may affect the investment climate within the EU.
FDI developments at a national level
In the Netherlands, a broadening of the scope of the Vifo Act is expected in the foreseeable future. A motion was passed in the Lower House on 6 February 2024 that aims to classify companies in the Dutch vegetable and seed processing sector as vital and strategic companies. This would mean that the BTI must also be notified of investments in these sectors.
The movers of the motion argue that these companies are vital to food production. Also, applying the Vifo Act to this sector would allegedly prevent knowledge accumulated in the Netherlands from ending up in the wrong hands or in wrong countries, leaving too little knowledge in the Netherlands. It is currently unclear how and when the (caretaker) government will implement the motion.
More information on the Vifo Act and FDI-related questions can be found at the wetvifo.nl information portal.
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