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Last month, the second annual report on the screening of FDI into the European Union was published by the European Commission.

The report is based on Regulation (EU) 2019/542 adopted by the EU in October 2020 to establish a framework in which the Commission and Member States can coordinate their actions on foreign investments.

This second annual report shows that the use of the FDI screening mechanism has expanded in 2021. The first results of the FDI screening mechanisms in the EU are positive: while FDI screening may of course lead to additional filings, the majority of the FDI filings were cleared quickly. 

Commission report on FDI screening in the EU
The Commission report largely covers legislative developments, trends, and figures for FDI into the EU. Also, it covers FDI filings in the Member States and filings from the Member States to the Commission. Based on the report, approximately 86% of the FDI transactions notified by the Member States were assessed by the Commission very swiftly, i.e., within just 15 calendar days and were closed in Phase 1. Only 11% of the notified cases closed in Phase 2 and less than 3% of cases resulted in a Commission opinion. While most cases were assessed rapidly in Phase 1, there are significant differences in how long it takes cases to reach Phase 2 due to the time it takes Member States to respond to a Commission request for more information, as they frequently rely on the investor for the requested information. 

Furthermore, the ICT sector was the top most targeted sector by FDI screening followed closely by manufacturing. The majority of investments came from the US, the UK, China, Cayman Islands and Canada. Compared to the previous annual report, in 2021, there has been an increase in number of formally screened cases; however, a large number of filings were deemed ineligible. 

The number of Member States having an FDI screening mechanism in place is ever increasing. By the second quarter of 2022, 25 Member States either have an existing FDI Screening mechanism or are in the process of incorporating one. The Netherlands is expected to join early 2023.

FDI in the Netherlands
On 17 May 2022, the Dutch first chamber of Parliament adopted the draft act proposing a general investment screening mechanism for the Netherlands (Wet veiligheidstoets investeringen, fusies en overnames (Vifo or FDI Act). The new FDI Act extends the existing investment screening mechanisms that are already in place for the Dutch telecommunication and energy sectors. These sector screening regimes will continue to apply and will be complemented by the screening mechanism of the FDI Act. The FDI Act has not yet entered into force. That will require an implementation decision.

When entering into force, the Vifo Act will have retro-active effect as of 8 September 2020. If a transaction takes place after 8 September and the entry into force of the FDI Act, the Minister for Economic Affairs and Climate may order the undertakings concerned to report the transaction, but only if there are "reasonable grounds" to believe that the transaction could pose a risk to national security. The Minister may exercise this option up to eight months after the FDI Act enters into force.

In our previous article, we elaborated on the scope of the draft FDI Act being applicable to largely two categories: (i) companies involved in vital activities like Schiphol Airport, Rotterdam Port Authority, and banks etc.; and (ii) companies active in the field of sensitive technology being military and dual-use products. With respect to the latter category, the draft FDI Act stipulates that the scope of sensitive technology will be further defined by means of an administrative order. Also, other categories of business activities (e.g. agriculture) may be added to the list of vital processes or sensitive technologies by means of an administrative order.

Administrative Order on the scope of sensitive technologies
The draft administrative order defining the scope of sensitive technology was published for consultation in July. The consultation was closed on 22 August 2022. The order broadens and narrows the scope of goods qualifying as sensitive technology. It exempts some goods that have an abundant availability like certain ceramic and graphite materials etc. from the Dual-use Regulation 2021/821 and adds technologies like quantum technology, Photonic technology, Semiconductor technology and high assurance products as sensitive technologies within the scope of FDI Act. 

Even though the draft FDI Act will have a retroactive effect as of 8th September 2020, such retroactive effect however, does not apply to new categories of vital companies or sensitive technologies added by the draft administrative order. 

What's next?
As indicated above, the draft FDI Act has been adopted by the Dutch Parliament and is expected to come into force early 2023. The Ministry for Defense and the Ministry for Economic Affairs and Climate Policy are also currently drafting a bill for an investment screening procedure for transactions relating to the defense industry. The aim is to publish a draft version of this bill in late 2022 /early 2023 for consultation. 

It is evident that national security and geopolitical strategic considerations are increasingly relevant to proposed investments in the Netherlands. It remains to be seen if a desired balance can be reached between attracting investment inflows and protecting legitimate national interests. We believe it is crucial for investors to anticipate the FDI Act and its retroactive implications. Furthermore, developments should be closely monitored as more categories or industries may be included within the scope on a later stage.

Thank you to Chehak Khajuria for her contribution to this blog.

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