The era of FDI screenings kicks off in Belgium

1. The road towards the Belgian FDI screening mechanism

For a long time, foreign direct investments have been, and are still being, considered an important driver for economic growth in Europe and Belgium. Geopolitical evolutions have, however, raised some apprehension regarding the impact that such investments can have on national security, public order and strategic interests.

To address this rising concern of the Member States and to establish a common framework for FDI screenings in the European Union (EU), the EU FDI Regulation was adopted in March 2019. Through the EU FDI Regulation, the EU established a cooperation regime between Member States and the European Commission (Commission) to enable information sharing and set minimum requirements for national FDI screening mechanisms. However, unlike for mergers, the EU did not set up an EU screening regime.

In this context, Belgium approved a screening mechanism for certain foreign direct investments in Belgium that will enter into force on 1 July 2023. The mechanism is designed to safeguard Belgium's critical infrastructure and protect sectors crucial to Belgium's public order, national security and strategic interests.

In preparation thereof, the ISC has published a first set of draft Guidelines. However, the ISC still leaves many questions unanswered, resulting in continued uncertainties.

For transactions that were signed before 1 July 2023 and were hence not notifiable, the ISC may initiate an ex officio procedure up to two years following the non-notified transaction or up to a maximum of five years in the case of indications of bad faith, if any of the competent members of the ISC considers this procedure necessary to safeguard public or national order, national security or strategic interests.

2. Scope

Transactions that meet the following cumulative conditions will have to be notified to the ISC under the new Belgian FDI screening mechanism:

(i) an investment is made by a non-EU investor;

(ii) the target of the investment is an undertaking or entity based in Belgium with existing economic activities;

(iii) the investment entails the acquisition of either control, or 10% or 25% (depending on the sector and potential turnover) of the voting rights of the target; and,

(iv) the activities of the target relate to specific sectors.

(i) Foreign investor

A “foreign investor” is defined as

(a) Any natural person with primary residence outside of the EU.

(b) Any undertaking from a third country, being an undertaking incorporated or otherwise organised under the laws of a non-EU Member State whereby the registered office of the undertaking or its principal activity is located in a State outside the EU.

(c) Any undertaking where one of the ultimate beneficiaries (UBO) has its primary residence outside of the EU. 

This includes governments or government controlled entities from outside the EU. 

It follows from the above that “true” EU investors do not qualify as foreign investors. However, in light of the above definition, an EU incorporated company, will nevertheless qualify as a foreign investor as soon as one of the (parent undertaking’s) UBOs has its primary residence in a non-EU Member State (e.g. China, US, Switzerland or the United Kingdom).

(ii) Target based in Belgium with existing activities

(Direct or indirect) foreign direct investments are considered to be investments in undertakings and entities based in Belgium. Currently, no criteria are included in the FDI screening mechanism or the draft Guidelines to determine whether an undertaking is based in Belgium. Is it sufficient to have a registered office or principal activity in Belgium?  In addition, the term "entity" is not defined. Does it include branches and offices (N.B. the answer is affirmative according to the Commission)? If the target merely has assets in Belgium, are these assets considered to be a Belgian “entity”?

Excluded from the scope of the FDI screening mechanism are investments aimed at setting up new economic activities without taking over existing economic activities.

(iii) Acquisition of control or of 10% or 25% of voting rights

To be notifiable, the foreign direct investment must consist of the acquisition of (i) control, (ii) 25% of the voting rights, or (iii) 10% of the voting rights. 

The 25% and 10% thresholds refer to the cumulative acquisition of voting rights. For example, the 25% threshold is met when a foreign investor already owns 20% of the voting rights and acquires an additional 5%. There is still ambiguity regarding the calculation of the acquisition of voting rights in the Belgian target, e.g., does an acquisition of 25% of the voting rights in a parent undertaking outside Belgium automatically imply an acquisition of 25% in its Belgian subsidiaries? And, what if after the notification of a first acquisition that falls within the 10% threshold, an additional 10% is acquired?

The structure of the investment is irrelevant (e.g., direct / indirect, share purchase / asset purchase). Surprisingly, the ISC confirmed in its draft Guidelines that purely internal restructurings within a group also fall within the scope of the FDI screening mechanism (even though internal restructurings should not be caught according to the Commission).

(iv) Sectoral scope

To be in scope, the activities of the target must concern one of the following sectors listed in the FDI screening mechanism:

(a) Investments >10%

• Defence (including dual-use items);
• Energy;
• Cyber security;
• Electronic communication;
• Digital infrastructure.

In addition, the target must have an annual turnover of more than EUR 100 million in the financial year preceding the acquisition of at least 10% of the voting rights. It is, however, unclear whether this turnover refers to worldwide or Belgian turnover.

(b) Investments >25% 

• Vital infrastructure, both physical and virtual, for energy, transport, water, health, electronic communications and digital infrastructures, media, data processing or storage, aerospace, defence, electoral or financial infrastructure and sensitive facilities, as well as the land and real estate crucial for the use of such infrastructure.
• Technologies and raw materials that are essential for (i) (health) security, (ii) national defence or maintenance of public order, (iii) military equipment, (iv) dual-use items, and (v) technologies of strategic importance (and related intellectual property) such as artificial intelligence, robotics, semiconductors, cyber security, aerospace, defence, energy storage, quantum and nuclear technologies.
• The supply of critical inputs such as energy, raw materials and food.
• Access to sensitive information and personal data, and the possibility to control such information.
• The sector of private security.
• Freedom and plurality of the media.
• Technologies that are of strategic importance in the biotechnology sector, provided that the target’s turnover in the financial year preceding the acquisition of at least 25% of the voting rights exceeded EUR 25 million.

In the absence of precedents and clear guidelines, there is considerable uncertainty regarding the sectoral scope, leaving only a handful of investments for which parties can determine with certainty whether or not they fall within the scope of the FDI screening mechanism. 

Consequently, and given the ISC's ability to launch ex officio investigations into unnotified investments and the possibility of a fine (see infra, point 6), parties will (should) often opt for the conservative approach and notify when in doubt or at least attempt to have preliminary contacts with the ISC.   

3. Interfederal Screening Commission

The foreign investor must notify in-scope investments to the newly created ISC. The ISC is composed of nine representatives from both the Federal government and the governments of the various Regions and Communities. A representative of the FPS Economy, i.e., Anne Bonnet, has been appointed as president of the ISC.

Each competent ISC member will conduct its own investigation and will separately assess a notification from the perspective of the government that the member represents. This structure is likely to have a significant impact on the duration of the screening process.

4. Procedure

There are three phases to the screening process: (i) the notification phase, (ii) the assessment phase and (potentially) (iii) the screening phase.

(i) Notification phase

In-scope investments must be notified between signing and before closing.1 Draft agreements may also be notified, provided that the parties explicitly declare that they intend to enter into an agreement that does not differ significantly on all relevant points from such draft.

Unlike for Belgian merger control notifications, no filing fees are due.

Neither the FDI screening mechanism nor the draft Guidelines contain a form or a specific format for the notification. The legislator merely offers an overview of the information the foreign investor must provide to the ISC. The information to be provided includes, inter alia, the ownership structure of the foreign investor and the target, the approximate value of the foreign investment, the business activities of the foreign investor (group) and the target, and the financing of the investment, including its origin. The ISC can also request additional information it deems necessary to complete the notification.  This means that with additional questions, the ISC can delay the start of the filing. This is similar to the Belgian merger control procedure. Electronic notifications will be possible.

Once the notification is complete, the ISC’s Secretariat officially confirms this to the foreign investor and the assessment phase starts. The notification phase itself is not subject to any time limits.

The ISC further sends the complete notification file to the competent members of the ISC for assessment. A member of the ISC is competent to review the file if it is geographically concerned by the envisaged investment and if the investment has a potential impact on its substantive competencies.

(ii) Assessment phase

The assessment phase has a foreseen term of 30 calendar days from the receipt of a complete notification. Extensions are possible, however. Requests for information from the ISC, for example, stop the clock until the notifying parties have provided the requested information.

If no risk is identified by (one of) the competent member(s) or in case of failure to take a decision within the aforementioned term, the contemplated foreign investment is (considered to be) approved and can be implemented.

If, on the contrary, (one of) the competent member(s) has concrete indications that the proposed investment can pose a risk for the national security, public order or the strategic interests of the Regions or Communities, the ISC will initiate the screening phase of the process. It is not specified what kind of indications it concerns. The decision to initiate the screening phase cannot be appealed.

(iii) Screening phase

The screening phase involves a more concrete risk assessment of the contemplated investment.  

The competent members should each, within a term of twenty days after opening of the screening phase, provide an advice to the minister that they represent.

If the draft of the advice of one of the competent members appears to be negative, the other competent members will be informed, and the draft of the advice will be communicated to the foreign investor and the Belgian target. The latter will both have the opportunity to consult the file kept by the ISC and to submit comments in writing within a term of ten days after consulting the file. After having received the written comments, the ISC may, within a term of ten days, either ex officio or at the request of the foreign investor or the Belgian target undertaking, organise a hearing.

Corrective measures (e.g., modifications to the structure of the proposed transaction, increased governance and compliance requirements, agreeing on a code of conduct for the exchange of sensitive information, etc.) can be proposed. The negotiations regarding the corrective measures will suspend the aforementioned twenty days term for one month, with the possibility of further one-month extensions and this for as long as the negotiations last.

If one of the competent ministers has issued a negative preliminary decision, the final decision regarding the prospective foreign direct investment will be negative as well. In the absence of a final decision within the aforementioned terms, the foreign investment will be deemed allowed.

For the screening phase, no fixed term is foreseen. 

Considering the lack of a clear calendar for the screening phase as well as the various possibilities to extend the terms fixed in the legal framework, it is currently impossible to estimate the duration of an FDI screening. 

5. Appeal

The final decision taken in light of the screening phase can be appealed by the parties before the Market Court in Brussels. The appeal does not suspend the contested decision. If the Market Court annuls the decision, the case will be sent back to the ISC. So far, it is unclear whether third parties too can appeal against the final decision, and if so, whether they can do so before the Market Court.

6. Standstill obligation and failure to notify

The parties must suspend the implementation of the foreign investment until they have received formal ISC approval or until the ISC has confirmed that it will not initiate a screening phase. Contrary to merger filings, no request for derogation of the suspension is provided.

Failure to comply with this standstill obligation can result in an administrative fine of up to 30% of the value of the investment for the foreign investor. The ISC can also impose the same administrative fine on the foreign investor if the parties fail to notify in-scope investments. In the latter case, the ISC also has the power to launch an ex officio investigation (see supra, point 2).

7. Conclusion & outlook

With the new Belgian FDI screening mechanism, the dynamics of the Belgian M&A market will inevitably change. Companies now have to consider this new screening mechanism in addition to existing regulations on merger control, foreign subsidies and other statutory reporting obligations. This will ultimately lead to higher costs and possible delays, which will have to be taken into account in M&A negotiations. To avoid these costs and delays, EU investors may become more preferred in comparison to third-country investors. Conversely, Belgium-related investments may become less interesting for third-country investors.

The above is further reinforced by the prevailing uncertainties about the scope of the notification thresholds and the ultimate duration of the screening process. Among other things, there is considerable uncertainty regarding the sectoral scope, leaving only a handful of investments for which parties can determine with certainty whether or not they fall within the scope of the FDI screening regime.  It is also unclear what criteria should be considered to determine whether a company is based in Belgium. Another scope ambiguity concerns the calculation of the acquisition of voting rights in the Belgian target: does an acquisition of 25% of the voting rights in a parent undertaking outside Belgium automatically imply an acquisition of 25% in its Belgian subsidiaries?

Many other questions present themselves. For instance, will the ISC organise an accelerated procedure for companies whose future existence depends on notifiable investments? Lengthy procedures can lead to bankruptcy of the target before the ISC approval has been granted. This is especially important for start-ups.

Even though the ISC has already issued its first draft Guidelines, the ISC will need to provide more detailed guidelines and answers to many other questions as soon as possible – especially since ISC precedents are not expected to provide more clarity and legal certainty, because most information is expected to be classified in the ISC’s decisions. Appeals before the Market Court are possible but will not solve many open issues in the short term.

This article was published in the Competition Newsletter of July 2023. Other articles in this newsletter:

• Solace for companies seeking guidance on sustainability agreements
• The Foreign Subsidies Regulation – beware and get your data ready!
• Ready, set, go! The Dutch national security screening FDI regime takes off

 

• 1The same notification obligation applies for investments via a public offer to acquire or exchange shares, the acquisition of a controlling stake and the acquisition of shares on the stock exchange that fall within the scope of the FDI screening mechanism. In the latter case, the notification must be made at the latest at the time of the acquisition of the shares.