The recent publication of a proposal of the British government to have more say over deals in its military and technology sector (i), the passages in the Coalition Agreement between the Dutch coalition parties on 'vital companies' and 'digital competition' (ii) and the proposed framework for screening of foreign direct investments of the European Commission (iii) demonstrates that the protection of vital companies remains a hot topic throughout the European Union. This article provides further insight into these recent developments regarding the protection of vital companies.
In September we informed you about the mission of the European Commission to protect 'vital' technology against foreign takeovers following the proposal that was announced by European Commissioner Margrethe Vestager. In the same publication we wrote that the Dutch government seems equally concerned about the protection of companies that it considers of vital importance to the Dutch society, so called 'vital companies' and has published a draft bill that would allow the Dutch Minister of Economic Affairs to prevent an acquisition of a telecommunication party that threatens national security or public order. Following these legislative proposals we published an article in which we explored if and how ring-fencing certain vital processes could allow a company in the telecomsector to avoid merger and takeover supervision.
Proposal British government to protect vital companies from foreign takeovers
Given the status of the Brexit negotiations, it may seem as if there is little the UK and the European Commission can agree on. However, when it comes to protecting 'vital companies' they appear to be on the same page. On 17 October 2017 the British government published a consultation proposal based on a green paper which sets out the approach the government proposes to take in ensuring that investments and takeovers do not raise national security concerns. This was quickly followed by the UK government's proposal to amend the turnover threshold and share of supply tests within the Enterprise Act 2002.
This would allow the government to examine and potentially intervene in mergers that currently fall outside the threshold in (i) the dual use and military use sector and (ii) parts of the advanced technology sector. As a consequence investments from certain countries in companies in the military sector and companies involved in the design of computer chips and quantum technology will be looked at more closely. The second part of the green paper addresses the long term reforms that are required to ensure that investments and takeovers will not give rise to national security concerns. The proposal comes at a challenging time given the Brexit negotiations on the one hand and the attempts of the UK on the other hand to appear to be open for business and to attract foreign investments and negotiate trade agreements.
The coalition agreement between the Dutch coalition parties on 'vital companies' and 'digital competition'
On 10 October 2017, after an impressive 208 day negotiation period, the Dutch coalition parties presented their Coalition Agreement. The fact that the protection of vital companies is still a hot topic for our new Dutch government is evidenced by the Coalition Agreement titled 'Trust in the future' which sets out the policy plans of the new Dutch government. According to the Coalition Agreement, vital sectors will be provided with specific protection meaning that certain companies operating within vital sectors may only be acquired or taken over with active approval and, if needed, subject to further conditions. Furthermore the government will investigate whether agricultural lands and certain regional infrastructural works should be added to the existing list of vital sectors.
The passage on vital sectors concludes with the statement that 'if and when necessary, additional measures will be taken'. It is unclear to which measures this statement refers. The Coalition Agreement furthermore states that the Dutch competition authority, the Autoriteit Consument en Markt will be asked to form a special taskforce for the monitoring of digital competition. The team will be entrusted with gaining and developing knowledge of digital innovations and digital markets to be able to stand up more effectively and more goal-orientated against abuse of market power by dominant companies active within the internet economy. As the Coalition Agreement is more of a political agreement rather than a legally binding agreement the question arises how these plans will be followed up. Nonetheless, it is safe to say that the protection of vital companies will remain on the agenda of the Dutch government.
The EC framework for screening of foreign direct investments
On 14 September 2017 the European Commission published a draft regulation that provides a framework for the screening of foreign direct investments that could potentially impact national security or public order. This could be an acquisition of a company that operates in a critical infrastructure sector, such as: energy, communication or data storage or an acquisition of a company that owns or develops vital technology, such as artificial intelligence, semi-conductors, cybersecurity etc.
The framework– which takes the form of a regulation with direct effect -- addresses three specific topics:
1. Screening of foreign direct investments by member states on the grounds of security or public order;
2. Cooperation between Member States and the Commission in the event a specific foreign investment in one Member States could potentially impact the security or public order in another member state; and
3. Screening by the European Commission in the event a foreign investment in a member states affects a project or program of Union interest.
A remarkable feature of the proposed Regulation is that it grants the European Commission the authority to voice its opinion on a proposed investment. Although, the opinion is non-binding we believe it will weigh heavily on the minds of politicians and will most likely not tip the scale in the (foreign) investor's favor. Our opinion is supported by the wording of the Regulation: "the Member States where the foreign direct investment is planned or has been completed shall take utmost account of the Commission's opinion."
The recent publications of the British and Dutch government and the European Commission underline that the current political sentiment in Europe remains unchanged and that Europe is focused on barring unwanted foreign investments from entering vital (tech) companies. Nonetheless, a proven solution for shareholders planning to sell their (tech) company might be withinreach. Ring-fencing can help companies avoid unwanted interference from government authorities and increase the likeliness of a successful transaction. Read the full story on ring-fencing here in our article on how to ring-fence your way out of merger and takeover supervision in the telecom sector.