New Belgian foreign direct investment screening mechanism to enter into force on 1 July 2023.
28/06/23
On 1 July 2023 the Belgian FDI (Foreign Direct Investment) screening mechanism will enter into force.
With the implementation of this mechanism Belgium is following in the footsteps of other countries. For some time now, governments and competition authorities have been broadening their scope on investments / transactions in an attempt to a.o. avoid geopolitical dependencies which could negatively impact the local economy.
Needless to say that this new mechanism will have an important impact on a lot of transactions going forward and can reshape the M&A environment.
Below is a short overview of the scope and effect of the new mechanism.
Scope
The scope of the mechanism is limited to investments made by a foreign direct investor in a number of predefined sectors.
‘Foreign direct investor’:
a private individual whose main residence is outside of the EU;
an undertaking established under the laws of a non-EU country; or
an undertaking which has an ultimate beneficial owner (UBO) whose main residence is outside of the EU.
This means that not only for example Chinese or American investors are in scope but also investors from countries which are geographically closer to us such as the United Kingdom and Switzerland.
‘Foreign direct investment’: 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.
Greenfield investments, i.e. investments made by a foreign investor to set up new economic activities without acquiring existing economic activities, fall outside of the scope of the screening mechanism.
Investment agreements signed on or after 1 July 2023.
Types of investments
acquisition (directly or indirectly) of at least 25% of the voting rights in a Belgian company active in or related to:
critical infrastructures (physical and virtual) for energy, transport, water, health, electronic communication and digital infrastructure, media, data processing or storage, aerospace, defense, electoral and financial infrastructures, and sensitive facilities, as well as land and property critical to the use of such infrastructure;
technologies or raw materials essential for security, defense and the maintenance of public order, military equipment, dual-use products, as well as technologies of strategic importance such as AI, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies and nanotechnologies;
supply of critical inputs including for energy, raw materials and food security;
access to sensitive information or personal data, or the possibility to control such data;
private security;
freedom and pluralism of media; and
technologies of strategic importance in biotech (provided that target’s turnover in the preceding financial year exceeded EUR 25 million).
acquisition (directly or indirectly) of at least 10% of the voting rights in a Belgian company active in defense (including dual use products), energy, cybersecurity, electronic communication or digital infrastructures, provided that target’s turnover in the preceding financial year exceeded EUR 100 million.
An investor who already holds a participation below the aforementioned thresholds but who as a result of an additional investment exceeds the threshold, is also in scope of the mechanism.
Intragroup restructurings
A recently issued proposal for guidelines confirms that the screening mechanism is not only applicable to third party transactions but also in the event of intragroup restructurings if all of the conditions have been fulfilled.
Suspensive effect
The screening mechanism is mandatory and has a suspensive effect, meaning that transactions cannot close before clearance is obtained from the authorities.
Procedure
The procedure consists of (i) the notification (ii) the assessment phase and (iii) the screening phase:
Notification
The notification must be done prior to the implementation of the transaction and following the signing/conclusion of the agreement. Parties may in certain cases also send a notification regarding an agreement which is still in draft.
The notification must contain all of the relevant information (e.g. ownership structure of the foreign investor) and documents on the planned transaction. The secretariat of the screening commission will perform a completeness check.
Assessment phase
The screening commission will make an assessment to decide whether the investment may potentially have an impact on public order, security or the strategic interests of the regions and communities.
If it is considered that there is a potential impact, the screening commission will carry out a thorough screening of the investment during the screening phase.
Screening phase
The screening phase builds further on the findings of the assessment phase. During this phase, a hearing may be organised, additional information may be requested, an extended deadline may be imposed in the event of complex screenings and other bodies may be requested to provide their opinion.
After careful analysis, the screening commission will formulate an opinion for the foreign investor and the Belgian target company.
In the end, one of the following decisions will be taken:
a positive unconditional decision
a negative decision; or
a positive conditional decision (subject to certain mitigating measures, e.g. increased governance)
The exact lead time of the above procedure will depend on the complexity of the file (e.g. need for consultation of foreign governments, need for oral hearings, etc.). The screening commission’s website states that procedures should normally not take more than 2-3 months – this of course remains to be seen in practice.
If a party does not agree with the screening commission’s decision it can lodge an appeal with the Market Court.
Ongoing transactions
As mentioned, only investment agreements signed on or after 1 July 2023 fall in scope. In principle, no notification needs to be done for transactions that have been signed before 1 July 2023 but will only close after 1 July 2023.
The screening commission can however still decide to launch a screening procedure up to two years (or in some cases five years) after the implementation of the investment.
The screening commission can also launch an ex officio investigation of an investment which falls in scope of the screening mechanism if no notification has been done.
Sanctions
Investors that do not comply with the screening procedure (e.g. by providing incomplete data, failing to do a notification or by not implementing mitigation measures) can incur administrative fines of 10% (and in some cases 30%) of the total investment value.
Guidelines
The screening commission recently published guidelines based on questions it received from practitioners, companies and corporate representative organisations. It is expected that going forward, these guidelines will be updated regularly to reflect the practices of the screening commission.
Practical impact on M&A
In the event that a notification needs to be done, this will have an impact on the timing of the transaction and will also have to be taken into account when drafting the transaction documents. The necessary provisions on, for example, timing, long stop date, condition precedent, sharing of information and cooperation obligation, will need to be duly included.
Needless to say that in an auction process, where multiple potential investors are in competition and timing is often very strict, the screening mechanism will surely be a disadvantage for foreign investors.
Key takeaways
Over the next few months there will be a high degree of uncertainty as the screening mechanism is new in Belgium.
The scope covers a wide range of sectors some of which can be interpreted in a very broad way (as we have for example seen in other countries such as Germany).
The notification is mandatory and transactions cannot be closed before clearance has been obtained.
The lead time of the procedure needs to be taken into account in the broader timing of the transaction.
The transaction documents need to include the necessary arrangements.
How can we help?
PwC Legal’s corporate/M&A team can assist you throughout the screening procedure and make sure that all aspects are duly covered in the transaction documents.
As well as being able to offer local knowledge and assistance, PwC Legal can also leverage PwC’s network of FDI specialists and other PwC Legal teams abroad.
If you have any questions, feel free to contact Ive Serneels or Stijn Vanbaelen.
