The Dutch Strategy for Attracting Foreign Investments and Protecting National Security
The Netherlands is at a pivotal moment where it must strike a delicate balance between the influx of foreign investments and the imperative to protect its national security. For a long time, Dutch governments have resisted the introduction of a general screening mechanism on national security grounds, concerned it could hinder the country's open investment climate. Instead, they have relied on sector-specific mechanisms, including those in the gas, electricity, and, more recently, telecommunication sectors. However, as global investment trends shift, the Netherlands has additionally developed a comprehensive framework for screening investments in its critical infrastructures and sensitive technologies – the National Security Screening Act (2023).
National Security Threats
The Netherlands has a strong position in specific niche markets for the high-tech sector, including semiconductors, quantum technology, and photonics, whose global supply chains are closely intertwined with the United States and China. Unsurprisingly, the largest foreign direct investment (FDI) in the Netherlands has occurred in the high-tech sector from China and is (indirectly) related to Royal Philips. The National Security Strategy (2019) has identified eleven predominant national security risks and threats to the Netherlands based on two criteria: "the impact that the threat/risk would have on one or more national security interests;" and "the likelihood of the threat/risk actually occurring, as determined by its development in the medium term." Such threats include, among others, the disruption of critical national infrastructure, cybersecurity threats, and threats from State-sponsored actors. Notably, the Dutch government recognizes that dealing with national security threats requires it to develop consistent and technically up-to-date criteria for evaluating potential risks affecting critical infrastructure and boosting structural and adaptive risk management within all critical sectors.
The Scope of Investment Screening
The National Security Screening Act has a limited scope of application. It applies only to investments into the companies that either qualify as a "vital supplier" or a "manager of a high-tech campus" or are active in the field of "sensitive technology" (i.e., companies that are considered vital to Dutch national security).
- "Vital suppliers" include, for example, gas storage providers, vital providers in the field of extractable energy, heating network operators, and nuclear energy providers. Other undertakings can be designated as vital by the governmental decree. As elaborated after the criticism of the Dutch Council of State, any such expansion of the scope of the targeted undertakings must subsequently be regulated by law to ensure the involvement of the Parliament.
- A "manager of a high-tech campus" refers to "the company that manages a site on which companies are active and where public-private cooperation takes place in technologies that have economic and strategic importance to the Netherlands." It could potentially include investments in high-tech startups that develop and exploit technology. The addition of managers of high-tech campuses to the list was made due to the concerns after the acquisition of a High-tech Campus in Eindhoven by the Government of Singapore Investment Corporation.
- "Sensitive technologies" include, among others, dual-use items and military goods subject to export controls on the European Union (EU) level. Investment screening of the targets active in the field of sensitive technologies aims to complement the purpose and objective of export controls by preventing an undesired acquirer from gaining control over a target that offers such sensitive goods. The scope of "sensitive technologies" within the meaning of the National Security Screening Act can be further amended in the governmental decree that can be adopted only after informing the Parliament. For example, the current Governmental Decree extended the investment screening to new areas of technologies that are not subject to existing export controls, such as semiconductors, quantum mechanics, and photonics. The government may designate additional technologies as sensitive only if they are of essential importance for the functioning of the armed forces or intelligence agencies, if the availability of these technologies within the Netherlands or its allies is essential in order to avoid unacceptable risks, or if the technology is characterized by a broad scope of application within different critical processes that can affect national security.
Notably, the National Security Screening Act and sectoral legislation in the Netherlands do not discriminate between sensitive investments from within the Netherlands, other EU Member States, or third countries (non-Member States). The scope of such a general screening regime is primarily driven by the particularities of the target (i.e., acquired company) rather than by the investor's identity: the Dutch regime applies to all investments regardless of the investor's nationality.
Even though the mechanism does not differentiate between the ownership status of an investor, in order to assess the risk FDI might pose to national security, particular attention shall be given to the security situation in the country or region of residence of the investor. The National Security Screening Act prescribes certain criteria when the security situation in the country or region can contribute to a high risk of the proposed acquisition. A third state ownership or control or purely political and economic differences between the Dutch government and the government of a home State should not, in principle, affect the decision of the authorities to allow a foreign transaction. Further, the security situation in the country or region in itself is not considered proof of a plausible threat to national security to the Netherlands. It is only one of the factors that the Dutch authorities must consider together with the others while assessing whether a foreign acquisition is likely to affect national security.
National Security Test
The National Security Screening Act understands "national security" fairly broadly to include national security but also public security in the meaning of EU law. Such a definition of national security excludes purely economic interests of the Netherlands as a ground for investment screening. The national security test further considers various factors that primarily focus on the reputation and behavior of investors and their home country. Some of these criteria generally apply to all companies subject to screening, while the others are designed to evaluate specific risks: the cybersecurity risks and risks of acquiring the technology that can be deployed in a harmful way for the Netherlands in case of screening a company whose operation involves sensitive technology, or the competence and interest of an investor to run the processes the continuity of which is vital for the Dutch economy in case of screening of a vital supplier. The focus, thus, is on establishing a high level of trust in an investor. If and where a sufficient level of trust is absent, the acquisition requires further verification and might be subjected to certain mitigation measures, such as additional regulation of access to sensitive information. The prohibition of an investment is understood as a measure of last resort. Yet, it can be argued that it is not always clear upfront under which circumstances the level of risk to national security shall be considered acceptable and under which circumstances the transaction should be subject to mitigation measures rather than be prohibited.
Retroactive Review
In some instances, the transactions closed after 8 September 2020, but before the National Security Screening Act came into force (1 June 2023), could be subjected to retroactive review on national security grounds. Such a review was introduced after the outbreak of COVID-19, which exposed the risks of reliance on foreign markets for various crucial products and raised concerns that important assets could now be acquired at depressed prices. The Dutch government wanted to prevent such "opportunistic takeovers" where it was in the interests of Dutch national security.
In one of the first cases presented to a Dutch court concerning the retroactive authority of the Dutch Minister of Economic Affairs and Climate, the court ruled that while the Dutch authorities have significant discretion to demand an FDI filing for substantive review of a suspicious transaction, they must adhere strictly to the limits set by the new legal framework.
Outlook
The questions remain on how the Dutch regime will be further implemented in practice. For example, investors in the energy and technology sectors in the Netherlands might raise questions about the applicability of certain thresholds and national security factors to particular acquisitions. The first year since the enactment of the National Security Screening Act underscores the need for investors to approach the Dutch investment framework seriously and collaborate with the Dutch authorities. However, it also confirms that the Dutch regime remains limited in scope. As of now, there have been no publicly disclosed decisions to prohibit investments based on the National Security Screening Act. Initial observations suggest that the Dutch authorities seem to concentrate their scrutiny on investments from Chinese investors.
Balancing economic and security interests is a complex task for any government, requiring continuous adjustment to the evolving global landscape and domestic needs. Given the recent geo-political developments and the upcoming revision of the EU Investment Screening Regulation, the Dutch regime is expected to expand further to include new technologies and essential processes. Therefore, ensuring effective investment screening remains a perpetual endeavor for the Netherlands to sustain its competitiveness as an attractive destination for foreign investments while safeguarding national security interests when deemed necessary.
[i] This blog post provides an overview of several key points discussed in the article by Olga Hrynkiv and Saskia Lavrijssen 'Foreign Investments and Energy Transition in the Netherlands: Balancing Economic and Security Interests' (2024) 42(1) Journal of Law and Commerce 1.
