On 1 July 2024, the Dutch government published a legislative proposal specifically aimed at ensuring national security in the defense sector, through the so-called Defense Resilience and Safety Related Sector Act (Wet weerbaarheid defensie en veiligheid gerelateerde industrie, the “Proposed Act“).
Importantly, the Proposed Act – which needs to be seen in the broader context of current geopolitical tensions and Dutch and European policy priorities to safeguard strategic autonomy and prevent undue influence from undesired (foreign) actors – also foresees in the introduction of a new sector specific investment screening regime for certain undertakings active in the Dutch defense sector.
The proposed regime will apply in addition to the already existing Dutch sector-specific regimes (for the energy and telecom sectors) and the “broad” investment screening regime under the Wet veiligheidstoets investeringen, fusies en overnames (the “Vifo Act“). As with other sector-specific regimes, the regime under the Proposed Act takes precedence over the broad regime (for example, if a target undertaking carries out activities that are relevant under both regimes).
Summary of scope
Under the Proposed Act, a qualifying acquisition activity will be subject to a prior mandatory notification obligation if this relates to a target undertaking that qualifies as any of the following:
- Military goods or transport supplier:
- Any undertaking that is active in the Netherlands in the area of military goods, as listed in the Common Military List of the European Union (“EU Common Military List“); or
- Any undertaking that has concluded an ongoing agreement (with a total validity of at least three years) with the State of the Netherlands to make available on-demand, short-notice transport capacity that is suitable for immediate deployment by the armed forces.
- Significant defense supplier:
- Any undertaking designated by the Minister of Defense as being of general economic importance for having a decisive significance for the operational relevance or the security of deployment of the armed forces or for performance of statutory tasks by the Military Intelligence and Security Service (MIVD); or
- Any undertaking designated by the Minister of Defense as holding strategic stocks of goods for implementation of the strategic stocking plan of the Dutch government.
Military goods or transport suppliers
Since “significant defense suppliers” will only cover those undertakings that are designated by the Minister as such, for most transactions, the key consideration under the Proposed Act is whether the target undertaking qualifies as a “military goods or transport supplier”. Apart from undertakings that provide relevant transport capacity, the relevant definition in the Proposed Act requires to this end that an undertaking is “active in the Netherlands” in the area of “military goods”.
Although the Proposed Act refers to “military goods”, we understand that this definition also extends to (intangible) software and technology as listed in the EU Common Military List, despite not being physical “goods” in the strict sense (e.g. for export controls or customs purposes). Furthermore, in addition to final products, the EU Common Military List also includes certain semi-finished products, components and accessories that are, as such, controlled. Therefore, also target undertakings that are active in the broader supply chain may be caught by this definition.
Explanatory notes to the Proposed Act clarify that being “active in the Netherlands” in particular includes the following activities: (i) performing research in the Netherlands in the relation to military goods; (ii) development or production of military goods in the Netherlands; and (iii) carrying out in the Netherlands specialized activities with regard to military goods that were already put on the market. The latter category includes a potential broad scope of activities, including operation, installation, maintenance (checking), repair, overhaul or refurbishing of military goods. However, it is noted that these are limited to those activities that are specialized in nature; i.e. requiring specific skills and knowledge with regard to the military goods to properly perform the activities. Overall, given the apparent broad scope of relevant activities, this may therefore require careful consideration in practice for undertakings that also perform certain activities in relation to military goods.
Helpfully, the notes further clarify that a Netherlands-based subsidiary or branch of a foreign undertaking that is only engaged in the trade of military goods is not considered to be active in the area of military goods within the meaning of the Proposed Act. Similarly, Netherlands-based entities that merely act as holding companies are not considered to be active in the area of military goods in the Netherlands for the purpose of the Proposed Act, even if their foreign subsidiaries engage in qualifying activities outside of the Netherlands. Also considering the ambiguities in this respect under the broad regime of the Vifo Act (where the legislator did not provide similar clarifications in legislative history and guidance from the authorities is still limited), this is a helpful clarification and, in our view, could typically also be informative for the analysis under the Vifo Act.
Qualifying acquisition activities
The Proposed Act defines which “acquisition activities” in relation to qualifying target undertakings trigger a notification obligation.
In general, a notification obligation will apply to transactions that result either in (a) the acquisition of control (as meant under EU/Dutch merger controls) or (b) the acquisition or increase of significant influence (significante invloed) through a non-controlling stake, as low as from a threshold of 10 percent of the votes or the ability to appoint at least one director in the target undertaking.
Both concepts already exist under the Vifo Act but it is noteworthy that, unlike under the Vifo Act, this threshold applies to qualifying acquisition activities in relation to all target undertakings within the scope of the Proposed Act (whereas significant influence under the Vifo Act only applies to the subset of highly sensitive technology).
Key takeaways
In addition to undertakings that are currently already caught by the other existing Dutch investment screening regimes, the Proposed Act will further expand the scope of undertakings that will be subject to investment screening jurisdiction in the Netherlands. For the Proposed Act alone, the legislator expects that approximately 17 percent of the undertakings active in the defense-related industry in the Netherlands (175 companies) will fall within the scope of the Proposed Act. Prospective investors should thus carefully review and determine on a case-by-case basis whether a mandatory notification would be required in respect of their transactions under one or more of the relevant regimes.
The public consultation period for the Proposed Act is currently pending, and ends on 31 August 2024. Although it remains to be seen what will follow from this consultation and how the Proposed Act will subsequently pass through the parliamentary process, our expectation is that large parts of the Proposed Act will eventually be implemented (also given the long-term desire and intention to implement this sector-specific regime) and may thus become a reality for investments in the broader Dutch defense sector soon.
Feel free to reach out if you would like to discuss how this may impact your company or any current, future or proposed transactions.
