The Vifo Act in practice

In 2021, the High Tech Campus in Eindhoven, known as the 'smartest square metres in the Netherlands', was acquired by a Singaporean sovereign wealth fund. Despite attempts by 'local' companies and the municipality of Eindhoven to keep this Dutch gem in national ownership, the transaction could not be blocked due to the lack of a legal basis.

With the entry into force of the Security Test of Investments, Mergers and Acquisitions Act ("Vifo Act") on 1 June 2023, this legal basis was created after all, making such transactions subject to a legal test since then. In addition, acquisition activities in relation to vital providers and in the field of (highly) sensitive technologies also fall within the scope of the Vifo Act.

The Vifo Act creates uncertainty for parties involved in takeovers and investments. Therefore, after one and a half years of the Vifo Act, it is time to take stock and, based on our experiences in practice, clarify which factors parties should take into account if there is a duty to notify under the Vifo Act.

Background

The Vifo Act introduces a screening mechanism under which certain acquisition activities must be submitted to the Bureau of Investment Testing ("BTI") for approval. This screening mechanism is also known in Europe as Foreign Direct Investment ("FDI") screening. The purpose of the Vifo Act is to protect national security by regulating acquisition activities in corporate campus operators, vital providers and companies active in (highly) sensitive technologies. The Vifo Act covers a wide range of acquisition activities and does not only apply to acquisitions, but also covers investments of a certain size, mergers, demergers, the establishment of joint ventures and the acquisition of assets (components). An important aspect of the Vifo Act is its focus on situations where these investments result in the acquisition of control or significant influence over a target company that de facto does business in the Netherlands and which falls under one of the following categories:

1. Vital providers

   Vital providers fulfil such an important role in Dutch society that their disappearance would have enormous social consequences. This could include providers operating in the field of heat transport, air transport (Schiphol Airport), nuclear energy, port area, gas storage, extractable energy, banking, companies operating as banks and companies involved in the infrastructure of the financial sector.

2. Managers of corporate campuses

   Relative to the category of managers of corporate campuses, one can think, for example, of the managers of the High Tech Campus Eindhoven.

3. Companies active in (highly) sensitive technologies
   Sensitive technologies refer to products whose Dutch exports are subject to controls, including military goods. This category also includes products that are not directly intended for military purposes but could be used for such purposes relatively easily, so-called dual-use products. In addition, the category of highly sensitive technologies currently covers technologies such as quantum technology, semiconductor technology, high assurance products and photonics technology, which are designated as highly sensitive technologies in the Sensitive Technology Scope Decree.
   
   On 19 December, an amendment to the Sensitive Technology Scope Decree was published for consultation. The amendment proposes to add a number of categories as highly sensitive technology. These include nanotechnology, biotechnology, AI systems, nuclear technology for medical use and sensor and navigation technology.

Practical experience with the Vifo Act

Since the Vifo Act came into force, Taylor Wessing has been involved in various notification processes. Based on this experience we summarise some of the most noteworthy aspects with regards to the interpretation and application of the Vifo Act:

1. Approachable: With regard to the Vifo Act, BTI has published a number of manuals that are helpful in determining the scope of the Vifo Act. The BTI manuals cover:
   1. Internal restructurings: This guide highlights when an internal restructuring qualifies as an acquisition activity within the meaning of the Vifo Act.
   2. Being active on: This guide addresses the question of when a company is actually active in (highly) sensitive technology.
   3. Assets: The manual discusses when the acquisition or acquisition of one or more assets qualifies as acquisition activity within the meaning of the Vifo Act (section 2(e)).

   Although these clarifications have proved very helpful, practice shows that there are still many unanswered questions. In case there is any doubt as to whether a particular acquisition activity falls within the scope of the Vifo Act, parties can contact BTI. For example, it can be difficult to assess if the transfer of assets qualifies as a change of control of a target. In the context of a bankruptcy, a trustee may potentially overlook this, while there may well be a notification requirement under the Vifo Act to the extent that one or more assets are transferred. Even after BTI has imposed an order for action, consultations can be held with BTI to the extent there are ambiguities or questions.

2. Notification requirement: Both the acquirer (buying party) and the target company(ies) (target) are required to notify a transaction to BTI in advance and await approval before the acquisition activity may be completed. In practice we see a trend where the target company(ies) prepare the notification as often or almost as often as acquiring parties. Often because they have more knowledge of the activities they are engaged in, for example, in the field of sensitive technologies. This is different from submitting a notification to the Authority Consumer & Market ("ACM") on the basis of merger control rules. In such cases, it is usually the buyer who drafts and files the notification.
3. Long(er) lead times: Parties involved in an acquisition activity that is notifiable under the Vifo Act should expect long(er) transaction processing times. Indeed, there are examples of BTI taking almost a year to complete its investigation into a transaction.
4. Transaction documentation: The parties should take into account additional provisions in transaction documentation, including:
   1. Conditions Precedent: A careful description of the conditions precedent is required, including an FDI Clearance Condition;
   2. Long Stop Date: Increasing attention should be paid to the Long Stop Date, as a reporting process to BTI can significantly increase transaction processing times (see point II.).
5. Requesting detailed information: Even in the context of prima facie “simple” transactions, BTI may see cause to request detailed information from parties.
6. Anonymity: Notifications under the Vifo Act, unlike notifications under merger control, are not filed publicly. BTI does not publish its decisions nor does it make an announcement when parties submit a notification to BTI. As a result, it is often unclear to reporting parties which factors BTI considers particularly relevant and which they can take into account when submitting a notification. In addition, the unpredictability of a notification process with BTI is also a cause for delay when a formal notification to the ACM under merger control is also necessary. Indeed, such a notification causes the transaction to be publicly disclosed in the Government Gazette and on the ACM website. Although it is possible to have pre-notification discussions with the ACM, parties are reluctant because in many cases - logically – the parties first want to wait for the outcome of the BTI process. When the outcome of the BTI process is acceptable to the reporting parties, they pursue the ACM notification process (and the associated costs). This is especially true if a transaction with an increased risk profile is involved, as in those cases parties prefer to have as little publicity as possible.
7. Reduced transparency: Since BTI uses input from government bodies, such as COMMIT, the Ministry of Justice, the Ministry of Defence and security services (AIVD / MIVD) in its decision-making, the reporting process is not always transparent. This makes it difficult for parties to assess what considerations are relevant for BTI in its security assessment. This reduced transparency is also reflected in BTI's decision-making process, as passages in the decision-making process are often omitted due to the presence of confidential information. This makes it difficult for parties to determine on the basis of which information measures are imposed. Parties involved in a notification process often have no interest or time for lengthy (administrative) court proceedings and would like to complete the transaction as soon as possible.
8. Western vs non-Western investment: Although the Vifo Act does not focus on any specific country, it is no secret that the law was introduced mainly to be able to stop China from gaining influence in Dutch companies. A (former) member of parliament stated that:
   
   "Now we can finally prevent China from getting all kinds of access to knowledge and technology that we do not want to lose and that Beijing can abuse."

The BTI Annual Report 203 shows that BTI received 46 Act Vifo notifications in 2023, with the vast majority of investors coming from Europe.[1] Moreover, the overview shows that no investors are from Asia or Africa. Thus, the purpose of the Vifo Act seems to be achieved. At the same time, it should be noted that the Vifo Act applies to both Dutch and non-Dutch investors. In doing so, BTI does not only seem to deal strictly with investments from non-Western countries, but also applies strict policies towards investments from Western countries. In our view, this is due to specific sectors that are receiving more attention from the Dutch government due to increasing geopolitical tensions around the world. Since BTI uses inputs from various government bodies in its decision-making (see section VII.), (geo)political considerations play a significant role in the assessment of Wet Vifo notifications.