Dutch Telecommunication Sector (Undesirable Control) Act in force

Summary

Telecommunication Sector (Undesirable Control) Act

On 1 October 2020, the Telecommunication Sector (Undesirable Control) Act (the "Act") came into force. The Act makes amendments to the Telecommunications Act to protect the Dutch telecom infrastructure. Under the Act, a party that wishes to acquire (a stake in) a company in the Dutch telecom sector must prior to the acquisition notify the Minister of Economic Affairs and Climate (the "Minister") of such intention. The Minister can (conditionally) prohibit the acquisition if it leads to relevant influence over the Dutch telecom sector and compromises Dutch national security or public order.

Screening Economy and National Security Bill

The Screening Economy and National Security Bill (the "Bill") has been published for consultation. Different from the Act, which focuses on the telecom sector, the Bill applies to investments in all vital sectors and sensitive technology in The Netherlands. Under the Bill the Minister can impose conditions or prohibit the investment if it leads to national security risks. Part of the Bill will have retroactive effect as from 2 June 2020. The Bill is yet to be submitted to the House of Representatives (Tweede Kamer) and the Senate (Eerste Kamer).

Regulation 2019/452/EU and the Implementation Act for Regulation 2019/452/EU

On 11 October 2020, Regulation 2019/452/EU will come into force. The regulation provides for the (mandatory) exchange of information regarding the screening of foreign direct investments between EU member states and the European Commission. To implement practical aspects of the regulation in Dutch law, the Implementation Act for Regulation 2019/452/EU (the “Implementation Act”) has been drafted and submitted to the House of Representatives. The Implementation Act is expected to come into force in Q4 2020.

Introduction

The Netherlands has an open economy, that is dependent on global trade including international investment transactions. Government policy has always been positive to foreign investments. The view was that the government should not interfere and leave it to the market. Following the financial crisis in 2009 and the hostile takeover attempt by America Movil of KPN (The Netherlands’ national telecommunications company) in 2012 the said view started to change. Politicians actively criticized and opposed takeover attempts made such as PPG’s bid on AkzoNobel and the Belgian Post Group bid for its Dutch counterpart. The change of view has led to calls for protection of vital sectors and sensitive technology. Due to a changing geopolitical landscape, the European Union also called for more protection of strategic companies in EU member states.

Telecommunication Sector (Undesirable Control) Act

On 1 October 2020, the Telecommunication Sector (Undesirable Control) Act came into force. The Act grants the Minister the power to prohibit acquisitions of or the exercise of predominant control over a Dutch company active in the Dutch telecom sector. By granting the Minister such powers, the Act aims to prevent (potential) disruption of the public order by parties active in the telecom sector.

Scope of the Act

To qualify as a telecom party, the relevant party must be:

• a Dutch legal entity or partnership having its registered office in the Netherlands, a foreign legal entity having its registered office in the Netherlands or a branch office of a foreign legal entity which is permanently established in the Netherlands; and

  • a provider or holder of a controlling interest in a provider of:
  • an electronic communications network or service;
  • a hosting service, internet node, internet certification service or data centre; or
  • any other category of network or service determined by ministerial decree.

Further, a party must acquire or have predominant control over the relevant telecom party within the meaning of the Act. Predominant control qualifies as anyone, alone or acting jointly with others, who:

• is able to exercise, directly or indirectly, at least 30% of the voting rights in the general meeting of shareholders;
• is able to appoint or dismiss the majority of the members of the management board or the supervisory board;
• holds at least one share that provides the holder with special controlling rights, for example a priority share; or
• becomes a fully liable partner in a partnership.

If and when the above criteria are met, the Minister can only exercise its powers granted pursuant to the Act if and when the acquisition or exercise of predominant control leads to relevant influence in the Dutch telecom sector. There is relevant influence within the meaning of the Act, if misuse or deliberate breakdown of the telecom party may lead to:

• an unlawful breach of the confidentiality of communications or the unavailability of internet access or telephone services to certain end users;
• the unavailability or verification of certain services and applications which are provided over the internet;
• a disruption in the availability, reliability or confidentiality of certain products or services which are part of a public service, national security, defence, enforcement of the rule of law or emergency services;
• an unlawful infringement or interruption as referred to in the parts i. or ii. relating to a combination of services and applications referred to in those parts which together exceed a certain threshold value;
• other certain serious risks with regard to the continuity of services by a telecom party or the confidentiality of communications.

Consequences of the Act

If an acquisition of predominant control over a telecom party leads to relevant influence in the Dutch telecom sector, it must be reported to the Minister by the acquirer or the telecom party. The Minister can then decide to prohibit the acquisition. The same applies to predominant control already held by a party, the Minister can prohibit such party from exercising its control. If the Minister wishes to prohibit an acquisition, the Minister will request the acquirer or controlling party to give its opinion and can request such party to take measures to ensure its objections are met. These measures can be formally attached to a prohibition as suspensive conditions. Please note, that the Minister can prohibit the controlling party from exercising its controlling rights, but financial rights attached to the shares of the controlling party shall not be affected under the Act.

Any acquisition or transfer of control that falls within the scope of the prohibition is null and void (nietig). An exemption is made for the acquisition of predominant control of a listed telecom party through the acquisition of shares on a stock exchange, although the Minster can even then still prohibit the acquirer from exercising any predominant control.

Screening Economy and National Security Bill

The Screening Economy and National Security Bill has been published for consultation. Under the Bill investments in vital sectors and sensitive technology must be reported to the Minister. The Bill specifically focusses on mitigating risks to Dutch national security in the event of certain investments and aims to prevent (i) impairment of the continuity of vital processes; (ii) impairment of the integrity and exclusivity of knowledge and information associated with vital processes and high-grade sensitive technology; and (iii) the creation of strategic dependencies (eg on other countries).

Scope of the Bill

The Bill applies to:

• providers of vital processes and vital infrastructure. Due to the essentiality of certain processes, failure or disruption leads to serious disruption and poses a threat to national security; and
• companies that are active in the field of high-grade sensitive technology. The existing multilateral frameworks for the control of exports and transfers of strategic goods (goods with a military or dual-use application) will form the basis for this.

The exact applicability of the Bill will be established in more detail in a ministerial decree.

Consequences of the Bill

If an investment in an entity within the scope of the Bill is envisaged, the investment must be reported to the Minister by either the investor or the target. Should an investment impose any risk for national security, the Minister may take mitigating measures. In carrying out its assessment, the Minister shall take into account the ownership structure and ratios of the investor, the provision of information about the proposed takeover or investment and the investor's track record. The Minster may subject the investment to additional conditions, such as the designation of positions involving confidentiality within the company or the granting of a (patent) license to certain know-how in order to keep the knowledge or technology available for Dutch vital processes. In severe cases when conditions imposed by the Minister under the Bill are breached, an investment can be reversed.

Legislative process

The Bill was published for consultation from 8 September 2020 up to 7 October 2020. The Bill is expected to be submitted to the House of Representatives and the Senate later in 2020 and to become law in 2021. Please note that a part of the Bill will have retroactive effect to 2 June 2020, as a consequence of which the Minister can revert takeovers and investments made on or after 2 June 2020 if the Bill becomes law.

Implementation Act for Regulation 2019/452/EU on the screening of foreign direct investments

Regulation 2019/452/EU on the screening of foreign direct investments will enter into force on 11 October 2020. The Implementation Act has been drafted for the effective application of the regulation into Dutch law.

Consequences of the Implementation Act

Safeguarding the national security and public order has always been the responsibility of individual member states and this does not change under the regulation. The discretion to prohibit or approve a foreign direct investment remains with the relevant member state. The regulation only provides a framework for national screening mechanics.
Furthermore, the regulation creates a cooperation mechanics between member states and the European Commission for the (mandatory) exchange of information relevant for the screening of foreign direct investments into member states. Requests for information or the submission of comments under the cooperation mechanics may only be made to protect security or public order. All requests for information, replies and comments from Member States should also be sent to the Commission.

The Implementation Act only regulates the following elements:

• the establishment of a point of contact, being the Minister of Economic Affairs and Climate;
• the authority to process, collect, and provide information to and by administrative bodies; and
• responsibility for enforcement of non-compliance with the obligation for investors and companies receiving investment to provide certain information to the authorities. The responsible government officials will be provided for by ministerial decree.

Legislative process

The Implementation Act has been submitted to the House of Representatives on 22 June 2020 and is expected to become law in the fourth quarter of 2020.