The First Court (Interim Reliefs) Decision on the Dutch FDI Screening Regime: Setting the Boundaries
By Najibullah Zamani, Radboud University
Introduction
In recent years, mostly due to geopolitical developments, the perception of FDI by states has changed fundamentally. FDI is used increasingly as a tool to pursue geopolitical and security interests rather than as an objective in itself. As a consequence of this geo-politicization and securitization of FDI, more and more countries are adjusting their existing FDI screening mechanisms and adopting new policies in order to protect their national interests. The EU joined the ranks of these countries by adopting Regulation 2019/452 in March 2019. After evaluating its functioning and effectiveness, the Commission published a legislative proposal in January 2024, recommending amendments to Regulation 2019/452. Moreover, almost all EU Member States have adopted screening mechanisms. In other words, there is no lack of legislation. There is, however, a lack of judicial rulings interpreting and applying the relevant legislation.
The Court of Justice of the European Union had the opportunity to shed light on several aspects of Regulation 2019/452 in the Xella judgement, only to end it with an anti-climax (for Dutch readers). Similarly, the first Court decision on the Austrian FDI screening regime appeared to be “rather atypical […] making a bad precedent’’. On the 25th of April 2024, the District Court of Rotterdam handed down the first judgement on the Dutch Act on Security Screening of Investments, Mergers and Acquisitions (‘Vifo Act’), which concerns an interim relief in summary proceedings. Analysing the judgement of the District Court of Rotterdam is worthwhile; not only because it is the first (published) judgement with regard to the Dutch FDI screening mechanism, but also because it allows assessment of the judicial review of the FDI screening enforcement in the Netherlands, and more specifically the broad retro-active ‘call-in’ powers granted to the Dutch Minister of Economic Affairs and Climate Change (Minister).
Facts of the case
As stated above, the case revolves around the broad retro-active ‘call-in’ powers of the Minister. On the basis of Article 58(1) Vifo Act, the Minister can order the undertakings concerned to submit a notification of an acquisition activity if he has a suspicion, based on reasonable grounds, that the acquisition activity, which took place prior to the entry into force of the Vifo Act but after September 8 2020, could pose a risk to national security. The Minister can then assess whether the acquisition activity indeed poses risks to national security. It is important to note that the Minister can order the submission of notification only within eight months after the entry into force of the Vifo Act.
Applicant is a company specialising in micro-optical products, such as lenses, lasers, optical coatings and chip-based optical systems. On the basis of public information, the Minister came to know that on or around the 2nd of April 2021, an acquisition transaction concerning the applicant took place. According to the Minister, there were indications that this transaction could potentially adversely affect national security. Moreover, the Minister was of the opinion that the applicant did not provide sufficient clarity about the transaction. Accordingly, the transaction was classified by the Minister as an acquisition activity under the Vifo Act. On the basis of Article 58(1) Vifo Act, he ordered the applicant to submit a notification of the transaction as referred to in Article 11(1) Vifo Act.
The applicant disagreed with the Minister by challenging the order to submit a notification of the acquisition activity on two grounds. First of all, the applicant argued that preparing a notification involves costs, which in retrospect may be unnecessary if no notification is required. Moreover, notifying the acquisition activity allows the Minister to possibly impose severe and far-reaching measures, against which the applicant has to defend himself separately. According to the applicant, such measures are problematic because it cannot be established at the time of the order to submit a notification, whether the Minister was right in ordering the submission of the notification in the first place. Accordingly, the order to submit a notification would disproportionally harm the interests of the applicant. Secondly, the applicant submitted that the transaction could not be qualified as an acquisition activity since there was neither an acquisition of control nor an acquisition or increase of significant influence. Finally, the applicant argued that the Minister reversed the burden of proof. As stated above, the Minister classified the transaction as an acquisition activity under the Vifo Act despite the fact that he did not have sufficient information to decide whether or not the transaction could be qualified as an acquisition activity in the first place. The applicant submitted that the Minister’s decision to qualify the transaction as an acquisition activity, and therefore subsequently order the submission of a notification, was based on the reasonable suspension ground mentioned in Article 58(1) Vifo Act. According to the applicant, the reasonable suspension ground of Article 58(1) Vifo Act should relate exclusively to the risk that an acquisition activity poses to national security.
Ruling of the District Court
The District Court rejected the first argument of the applicant by ruling that filing a notification, even though it might be burdensome and undesirable, has no irreversible consequences for the applicant. Therefore, the order to submit a notification in itself is not problematic. This holds even more according to the District Court since the applicant can file a claim for damages if it is established afterwards that the notification was wrongfully ordered by the Minister. The claim for damages can also remove the basis for the review of, and subsequently imposition of measures on the applicant by the Minister.
The second argument of the applicant, which was more factual in nature, was accepted by the District Court. On the basis of the information submitted by the applicant and the explanation given thereon, the District Court concluded that the transaction, in this case, could not be qualified as an acquisition activity within the meaning of the Vifo Act because no voting rights or other rights giving control were attached to the 66% shares that were acquired in April 2021. The transaction did therefore not affect the (indirect) control over the company. Because no voting or other control rights were transferred, the transaction could not be qualified as an acquisition activity.
Finally, the District Court also agreed with the applicant regarding the scope of the reasonable suspicion ground in Article 58(1) Vifo Act. According to the Court, ‘reasonable suspicion’ in Article 58(1) Vifo Act is related exclusively to the question of whether a transaction, which can be qualified as an acquisition activity, potentially poses risks to national security. Conversely, reasonable suspension does not relate to the question of whether a transaction can be qualified as an acquisition activity, and therefore whether the transaction falls within the scope of the Vifo Act. The correct procedure is that first it must be established whether a transaction can be qualified as an acquisition activity. If that is the case, then the Minister can order the submission of notification. Since the Minister was not sure whether the transaction could be quantified as an acquisition activity, he was obliged to request the necessary information rather than assuming that the transaction would probably fall within the scope of the Vifo Act. Therefore, the District Court ruled that the Minister had no jurisdiction to order the submission of a notification of the transaction.
Relevance and importance of the judgment
How interesting, relevant or important is this judgement? With regard to the interestingness, one can argue that everything is interesting for the first time. The judgement does also meet, albeit to a certain extent, the standards of relevance and importance. Even though the applicant did not say it with many words, the first argument in essence implies that the competent authorities of the Members States must engage in some sort of balancing act wherein the interest of reviewing a particular transaction must be weighed against the interests of the undertakings being party to the transaction. Because it is a balancing act, the argument by definition also implies that it is possible that the interests of the undertakings being party to a transaction can outweigh the interests of the Member State in reviewing the transaction. Such an argument is obviously flawed, because, as the District Court rightfully pointed out, undertakings do have the means to seek recourse against the decisions taken by the Minister. Ad ultima, undertakings can file claims for damages and thus be compensated if it turns out that the decisions of the Minister were wrong. More importantly and again as the District Court pointed out, it is unimaginable that an order to submit a notification of a transaction and even the review of a transaction could lead to irreversible consequences. In contrast, if a particular transaction is not notified and therefore also not reviewed, irreversible consequences for national security could materialize.
The judgement is also relevant and important because the District Court made it clear that the reasonable suspicion of Article 58(1) Vifo Act exclusively relates to the question of whether a transaction, which could be qualified as an acquisition activity within the meaning of the Vifo Act, poses risks to national security. This in turn provides clear guidance to the Minister with regard to the correct order of things. The Minister must first of all make sure that a transaction could be qualified as an acquisition activity. If that is the case, then he can order the submission of a notification if he has reasonable suspicion that the transaction poses risks to national security. If the transaction on the other hand cannot be qualified as an acquisition activity, then obviously the Minister cannot order the submission of notification under the Vifo Act even if he has reasonable suspension that the transaction at hand poses risks to national security. In such a case, the transaction simply does not fall within the scope of the Vifo Act. The foregoing also means that the Minister is not allowed to ‘forward’ the assessment of whether the transaction can be qualified as an acquisition activity.
Concluding thoughts
‘To be, or not to be: that is the question’, the famous opening line of William Shakespeare’s play ‘Hamlet’, has inspired many throughout the centuries. Prince Hamlet used this phrase in his monologue wherein he reflected on the nature of existence and various alternatives as a means to escape the difficulties, pains and struggles of life. Nowadays, the phrase, or a variation of it, is often used to describe a difficult choice or dilemma. In the ambit of FDI screening, the appropriate variation would be ‘to screen or not to screen, that is not the question anymore’. Indeed, the attitude of states towards FDI has changed fundamentally. As a consequence of this change, the question nowadays is not anymore to screen or not to screen, but rather how and what to screen. More specifically, this means that states may screen the transactions which fall within the scope of their national legislation without being obliged to engage in any sort of quasi-proportionality assessment. At the same time, states must ensure that their competent authorities act within the strict boundaries of their legal frameworks without overstepping their powers.
