The Belgian federal government and the governments of the federated entities reached a cooperation agreement on a screening regime for foreign direct investments (FDI). The new regime aims to protect Belgium’s national security, public order, and strategic interests. To that end, transactions in a wide range of sectors will be subject to mandatory and suspensory notification to a new body, the Interfederal Screening Commission (ISC). The new regime, which is expected to enter into force on January 1, 2023, will have a significant impact on deal certainty and timing for investors from outside the EU investing in Belgium.
The proposed cooperation agreement (“the proposal”), which still has to be approved by the various Belgian parliaments, creates a mechanism to coordinate the exercise of the competences of the federal State and the federated entities in the area of FDI screening. It defines uniform notification thresholds and sets up the ISC as a one-stop-shop for all notifications of investments exceeding those thresholds.
The proposed Belgian screening mechanism aims at safeguarding national security, public order, and strategic interests. The latter constitutes a generic category that covers the interests of the Belgian federated entities, in their area of competence, to ensure the continuity of vital processes, prevent certain strategic or sensitive knowledge from falling into foreign hands and ensure strategic independence.
Under the 2019 EU FDI Screening Regulation (Regulation 2019/452), which is fully applicable since October 11, 2020, EU Member States are not obliged to implement an FDI screening regime. However, if they do so, they have to comply with certain minimum requirements and coordinate their action with the European Commission and other Member States. The European Commission strongly encourages all Member States to adopt a fully-fledged FDI screening regime, and Belgium is one of only a handful of EU countries that has not yet done so (together with Bulgaria, Croatia, Cyprus, Estonia, Greece, Ireland, Luxembourg and Sweden – although several of these countries are also planning or in the process of adopting a mechanism). Many jurisdictions outside the EU, including the U.S. and the U.K., have equivalent regimes.
Which transactions are caught?
The new regime will apply to investments in Belgian entities by foreign investors from outside the EU, where those investments could have an impact on national security, public order, or the strategic interests of the Belgian federated entities.
Foreign investors are defined as follows:
- Every natural person having their main residence outside of the EU;
- Every undertaking incorporated or otherwise organized under the laws of a third country (i.e., a non-EU country); or
- Every undertaking of which one of the ultimate beneficial owners (UBO) has its main residence outside of the EU.
Especially the third criterion considerably widens the group of investors potentially caught by the regime, because it means that an investment by a Belgian or EU-based undertaking could also fall within the scope of the regime if a UBO of that undertaking is based outside of the EU.
The proposal provides for a double set of jurisdictional thresholds:
First, the regime will apply to all transactions where a foreign investor directly or indirectly acquires 25% or more of the voting rights in a Belgian entity with activities that involve:
- Critical infrastructures including energy, transport, water, health, electronic communications and digital infrastructure, media, data processing or storage, aerospace, defense, electoral or financial infrastructures and sensitive installations, whether or not part of an existing undertaking, as well as land and real estate crucial for the use of such infrastructures;
- Technologies or raw materials that are of essential importance for public safety (including health safety), defense or law enforcement, military equipment, dual-use products, technologies of strategic importance and related IP rights (such as artificial intelligence, robotics, semi-conductors, cyber security, aerospace, defense, energy storage, quantum and nuclear technologies);
- The supply of critical inputs, including energy or raw materials as well as food security;
- Access to sensitive information including personal data or the ability to control such information;
- The private security sector;
- The freedom and pluralism of the media;
- Technologies of strategic interest in the biotech sector.
The text of the proposal suggests that these transactions are caught irrespective of the size or turnover of the target undertaking, except for transactions in the biotech sector, which are only caught provided that the turnover of the target in the financial year preceding the acquisition of 25% or more of the voting rights exceeded €25 million.
Second, the regime will also apply to all transactions where a foreign investor directly or indirectly acquires 10% or more of the voting rights in a Belgian entity with activities that involve defense (including dual-use products), energy, cyber security, electronic communications and digital infrastructure, provided that the turnover of the target in the previous financial year exceeded €100 million.
Transactions meeting either of these thresholds have to be notified to the ISC. However, the proposal also empowers the ISC to open ex officio investigations into transactions below the thresholds where this is deemed necessary for the protection of national security, public order, or strategic interests.
Investments aiming at exercising a direct economic activity by a foreign investor (so-called ‘greenfield investments’) are not caught by the regime.
Transactions meeting the thresholds have to be notified prior to their implementation to the ISC, a body composed of nine members: three representatives of the federal government (Ministry of Finance, Ministry of Home Affairs and Ministry of Foreign Affairs), three representatives of the Regions (the Flemish Region, the Walloon Region and the Brussels-Capital-Region) and three representatives of the Communities (the Flemish Community, the French-speaking Community and the Germany-speaking community). The secretariat of the ISC is entrusted to the (federal) Ministry of Economic Affairs. The ISC is not a body with powers of its own, but rather a platform coordinating the various review processes between the members of the ISC, each within its own area of competence.
The notification is mandatory and suspensory, i.e., the foreign investor has to refrain from implementing the transaction for the duration of the review procedure. The notification should be made on the basis of signed transaction documents, but the proposal also allows for a notification on the basis of draft transaction documents provided that the parties declare that they have the intention to conclude an agreement that does not materially differ from the notified draft.
The review process resembles a merger control procedure and consists of three phases: (i) a preliminary (or “pre-notification”) phase; (ii) an assessment procedure (“phase I”) and (iii) a screening procedure (“phase II”).
The secretariat of the ISC will review the notification file and determine if it is complete. It may ask the foreign investor or any other relevant person to provide additional information. The preliminary phase thus serves a similar purpose as the “pre-notification” phase in merger control investigations and is not subject to any statutory timetable.
Once the secretariat has all the documents needed to conduct the investigation, it will communicate the file to the members of the ISC. Moreover, in accordance with the cooperation mechanism laid down in Article 6 of the EU FDI Screening Regulation, the secretariat will notify the other Member States and the European Commission of the FDI. The other Member States can then submit comments and the Commission can issue an opinion on the FDI within 35 calendar days (potentially extended to 40 days for an opinion of the Commission following comments from Member States). The competent Belgian authorities (acting under the umbrella of the ISC) have to give due consideration to such comments and/or opinion, although the final decision remains theirs.
Assessment procedure (Phase I)
In a first phase, the competent ISC members will assess whether the notified transaction could have an impact on national security, public order, or strategic interests as defined above.
Phase I concludes by means of a decision to authorize the transaction or a decision to open the screening procedure. If at least one of the members of the ISC raises concerns, a screening procedure (i.e., an in-depth review) will be opened.
The decision concluding the assessment phase must be delivered within 40 days of receipt of the complete file by the secretariat of the ISC (although requests for additional information may “stop the clock”). The decision concluding phase I cannot be appealed. If no decision is taken within the statutory deadline, a screening procedure can no longer be opened (unless the information provided in the notification was incomplete or misleading) and the transaction can go ahead.
Screening procedure (Phase II)
The second phase consists of an in-depth review that builds upon the results of the assessment procedure and must involve a concrete risk assessment by each of the competent ISC members individually.
Within 14 days (potentially extended to one month in complex cases) of the decision to open phase II, the competent ISC members submit an advice to the federal, regional or community minister they represent. If the advice is negative, a draft advice is first communicated to the notifying parties, to give them the opportunity to submit comments. In this case, the timetable is suspended for ten days (plus a further ten days if the parties also request to be heard). The ISC can propose corrective measures to enable a positive decision. In this case, the timetable is suspended for one month to create room for negotiations, with the possibility of further one-month extensions while negotiations last. The negotiations are concluded when the parties make a binding commitment to comply with the agreed corrective measures.
The competent ISC members then submit their final advices to their respective ministers, who take a preliminary decision and communicate it to the ISC secretariat. The secretariat combines the preliminary decisions of the various ministers into a single decision. A negative preliminary decision by one competent minister only can lead to a final negative single decision. However, if several federated entities (Regions and/or Communities) are competent for the same file, they can only block a transaction by consensus, without prejudice to the power of the competent federal minister acting within the scope of his/her competences to veto the transaction.
If no decision is adopted within the statutory timetable (taking into account any extensions), the transaction is deemed to have been approved and can go ahead.
The final decision can be appealed before the Market Court, a division of the Brussels Court of Appeal. Only negative decisions (i.e., blocking an investment) can be appealed and only the foreign investor and the Belgian target have standing to do so. The appeal does not suspend the decision, but the Market Court can be requested to order the suspension. If the Market Court annuls the decision, the case is remanded to the ISC.
Fines and ex officio review
Foreign investors who fail to notify a reportable investment, provide incorrect or misleading information, or implement the investment prior to clearance face administrative fines of up to 30% of the value of the investment. A lack of cooperation with the investigation may be punished with fines of up to 10% of the investment.
As already mentioned, the ISC may carry out an ex officio review of non-reportable investments that may affect national security, public order, or strategic interests. In case of non-compliance with the notification obligation (“gun jumping”), the ISC may also open an ex officio investigation up to two years after the implementation of the reportable transaction (extended to five years if the parties acted in bad faith).
Implications for deal certainty and timing
The standstill obligation during the review process, the lack of statutory timetable for the preliminary phase and the many possibilities to extend the timetables for the “assessment” and “screening” phases, may significantly delay the implementation of deals. In addition, some deals may be subject to both FDI screening and merger control procedures, adding significant complexity. Furthermore, due to the lack of general turnover thresholds the new FDI screening regime may apply to deals involving small Belgian companies (including start-ups). Accordingly, appropriate conditionality, risk allocation provisions and long-stop dates should be included in the documentation of deals that may be caught by the new regime.
Moreover, the possibility for the ISC to open ex officio investigations into already completed deals up to five years after closing, with the risk that the parties may be forced to unwind such deals, creates significant deal uncertainty.
The proposal still has to be approved by the federal parliament and the parliaments of the federated entities. According to the official press release, the cooperation agreement is expected to enter into force on January 1, 2023.
For further information, please contact:
Karel Bourgeois, Partner, Crowell & Moring