Corporate raiders at the gate: Screening of investments in Dutch companies by non-EU parties
The European Screening Regulation allows Member States to screen investments in national companies by parties from outside the EU. The grounds for this are very broad.
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The Corona crisis has major consequences for companies. One of those consequences is that their business value may decrease. For listed companies, this means that their market value decreases, and consequently the value of the shares in these companies. For non-listed companies, this means that on the one hand that they cannot collect debts, and on the other hand that they cannot meet their own financial obligations, which also reduces the value of the shares. A listed company may then be confronted with a public takeover bid, as the acquirer can purchase the shares for a (much) lower amount than before the Corona crisis. An unlisted company may run into such serious difficulties that shareholders feel compelled to sell their shares to an acquirer who is willing to take over the company at a price that is (much) lower than before the Corona crisis. In these cases, both the listed company and the unlisted company change ‘ownership’. The question is whether such a change of ownership is desirable in all cases, especially when it concerns so-called ‘essential’ companies.
At the European level, Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investment into the Union was published on 21 March 2019. This screening regulation gives the Member States of the European Union the possibility (not an obligation) to establish mechanisms for the screening of foreign direct investments, for reasons of security or public order in their territory. The Regulation concerns investments made by parties established outside the European Union. Screening of foreign direct investments also plays a role in the Netherlands, as on 4 March 2019 the government submitted a Bill on unwanted telecommunications control to Parliament. This Bill (only) involves the screening of foreign direct investments in a sub-area, namely the telecommunications sector, and therefore does not (yet) allow the Netherlands to screen all foreign direct investments. In any case, it is arguable that the Netherlands should go further than this, because there is much to be said for legislation that is broader. In the Corona crisis, Dutch companies may become the target of an undesirable takeover much more easily than before.
The following comments should be considered when developing schemes on screening foreign direct investments:
- Under European law, there is a difference between the right of establishment and the free movement of capital. The right of establishment includes the right to take over a company in a Member State by a party that is located in another Member State, to the effect that the acquirer obtains decisive control over the acquired company (in general: the acquisition of more than 50% of the shares). The free movement of capital includes both the right to take an interest in a company in a Member State by a party that is located in another Member State, and the right to take an interest in a company in a Member State by a party that is located outside the European Union, to the effect that the acquirer is able to participate in the control of the company (in general: the acquisition of 10%-50% of the shares).
- The Netherlands cannot subject investments made by acquiring parties that are located within the European Union to screening. Those parties are protected by both the right of establishment and the free movement of capital.
- The Netherlands can subject investments made by acquiring parties that are located outside the European Union to screening. When it concerns the acquisition of 10%-50% of the shares in a Dutch company, the screening falls within the scope of the Regulation. The reasons for prohibiting such an investment must then be security or public policy grounds under the Screening Regulation. But when it comes to acquiring more than 50% of the shares in a Dutch company, a special feature arises. Foreign parties are protected only by the free movement of capital, but cannot rely on the right of establishment. It would therefore appear that, aside from provisions in a multilateral investment treaty, such investments can be made subject to screening. The consequence of this is that prohibiting such an investment is also possible for reasons other than safety or public order. In that context, more politically motivated arguments could therefore also come into play.
The conclusion, therefore, is that the Dutch legislature has ample opportunities to prohibit acquisitions of Dutch listed and unlisted companies by parties that are established outside the European Union. But then the Netherlands must first recognise the need to do so.