In recent years there has been a proliferation of Foreign Direct Investments (‘FDI’) regimes worldwide and naturally also within Europe. In March 2019, The EU even went so far to enact the EU Screening Regulation (Regulation (EU) 2019/452) which provides for a cooperation mechanism for screening FDI in EU Member States.
The EU FDI Screening Regulation sets out minimum requirements for Member States’ FDI screening mechanisms and creates a framework for the European Commission (EC) and national authorities to share information and views, without imposing the obligation on Member states to establish such a national screening mechanism. The European Commission, however, strongly encourages Member states to adopt, adapt, and implement national screening mechanisms.
It is in this context that Belgium is engaging itself in line with these evolutions.
In June 2022, the Belgian federal and regional governments agreed on a text for a cooperation agreement introducing a new FDI screening regime, targeting FDI in sectors of importance for security, public order and the strategic interests of the regions and communities. The idea is to prevent non-EU investors from acquiring control, ownership or management of critical infrastructure of the country.
The new regime is expected to enter into force on 1 January 2023 and will only apply to investments that have not yet closed at the time the rules enter into force. This would make Belgium the 19th EU member state to insert a screening mechanism for foreign investments.
The regime will apply to investments in Belgian entities by foreign investors from outside the European Union, where those investments could have an impact on national security, public order, or the strategic interests of the Belgian federated entities. But in order to know how and when these rules apply, an examination of the concrete definitions is required.
A “foreign investor” is defined as: any natural person having its main residence outside the European Union, any undertaking constituted outside the EU or any undertaking who has an ultimate beneficial owner’s (UBO) main residence is outside the EU.
A “foreign direct investment” is defined as: an investment of any kind by a foreign investor with the aim of establishing or maintaining lasting and direct links between the foreign investor and the (Belgian) enterprise in which the investment is made.
But does this mean that every transaction falls into the scope of the new proposed screening mechanism? No. A transaction will only be subject to the screening if:
So how will this be supervised and enforced? A one-stop-shop mechanism will be introduced, with an Inter-Federal Screening Committee (« ISC ») in charge of assessing future FDI notifications.
Investments falling under the scope of the new screening mechanism will have to go through a new three stage procedure, unless the ISC notifies the foreign investor that no screening is needed. Until all the three stages have been completed the investment deal is precluded from being closed.
Foreign investors looking to acquire control in a Belgian company falling within the scope of the mechanism must pre-notify the ISC before the performance of the contract, the public announcement of the offer to purchase or exchange, or the acquisition of a controlling share.
In the assessment phase, the ISC will review whether the main characteristics of the foreign investor or the change of control over the target company pursuant to the proposed foreign direct investment can have a potential impact on public order, security or strategic interests of the relevant regions or communities. This phase ends with the decision that the transaction can go through or that the transaction requires further investigation (thus needing to proceed to phase II).
In the final phase the ISC can decide to (1) authorize the transaction (possibly with conditions) (2) authorize the transaction or (3) to request additional information.
An appeal can be lodged against a negative ISC decision with the Market Court in Brussels.
Investors may face administrative fines of between 10 to up to 30 % of the total deal value if they fail to notify a reportable investment or provide incorrect or misleading information. The ISC can start investigations into completed deals up to two years after the acquisition’s implementation, which may lead to the deal being overturned or exposed to remedies.
The proposed screening mechanism will impact the M&A markets, making the transaction process longer and more complicated. We deem it important that clearance from the ISC to be contractually stipulated as a condition precedent to closing the deal.
Whenever we look for inspiration for the practice in other countries within the EU, we can already draw some conclusions. Figures from the European Commission show that:
“Out of the cases formally screened in 2021, and for which Member States have reported a decision, the majority (73%) were authorized without conditions, which means that the transaction was approved without any additional action required from the investor.
However, 23% of the decisions involved an approval with conditions or mitigating measures. In these cases, national screening authorities have negotiated certain actions, assurances, and commitments from the investors before approving the planned foreign direct investment.
Finally, national authorities ultimately blocked transactions in only 1% of all decided cases, while for a further 3% the transaction was withdrawn by the parties. (Second annual Report on the screening of foreign direct investments into the Union” – COM(2022) 433 final) »
In conclusion: a sizeable proportion of transactions will not be blocked after screening.
Given there is no established practice on how the screening and possible mitigation measures will play out, there will be uncertainty about the agreements for several years.
Any questions? We will be happy to help.