Belgium introduced an FDI screening mechanism anticipated to enter into force on July 1, 2023, adding yet another jurisdiction in the EU which has adopted national measures to implement the EU’s FDI Regulation (EU) 2019/452. The new Belgian regime may place additional compliance obligations on companies, and, for some investments, it will entail modifications to initially planned transactions. For companies considering transactions – directly or indirectly – in Belgium, the new regime creates an additional layer of deal conditionality, besides merger control and the EU Foreign Subsidies Regulation (also due to be implemented this year – see our previous blogpost here).
- The FDI screening mechanism will cover key sectors for the Belgian economy; for example, critical infrastructures, essential technologies or raw materials, defense, and energy;
- Notification is mandatory and the investors cannot close the transaction before the foreign investment has been cleared, or they risk incurring hefty fines;
- The preliminary assessment phase can take up to 30 calendar days and where a more in-depth review is required, this can take up to an additional month, but extensions and suspensions are possible.
- The Interfederal Screening Commission (“Screening Commission”) will review the notifications. The competent minister will clear the investment, impose remedies, or prohibit the investment where no remedies can overcome the concerns over Belgian national security, public order or strategic interests.
Adoption of a screening mechanism
On November 30, 2022, Belgium’s federal and federated governments agreed to adopt a cooperation agreement on implementing a screening mechanism of general application for FDI (the “Cooperation Agreement”) (see our previous blogpost here). In doing so, the Belgian governments align with other EU Member States, following encouragement from the European Commission, to implement Regulation (EU) 2019/452, which establishes a framework for the screening of FDI into the EU, including cooperation and information sharing among EU Member States and the Commission. On January 25, 2023, the Economic Commission of the Belgian Chamber of Representatives approved the text, which was formally adopted by the Chamber of Representatives on February 9, 2023 and submitted to the King for ratification (see here).
What is the scope of the screening mechanism?
The Cooperation Agreement applies to FDI that may have an impact on the national security, the public order, or on the strategic interests of the Belgian federated entities. Reviewable investments include transactions made with a view to establishing or maintaining lasting and direct links between the foreign investor and the company registered in Belgium. However, greenfield investments, i.e., investments made by a foreign investor in setting up new and direct economic activities, are outside the scope of the screening regime.
National security and public order concerns can arise in a number of sensitive sectors, examples of which include investments relating to critical infrastructures, critical technologies, the supply of critical inputs, access to sensitive information, and the freedom and pluralism of the media, as will be discussed further below
Strategic interests include the interests of Belgium and its federated entities (Regions and Communities) to: (i) ensure the continuity of vital processes; (ii) prevent certain strategic or sensitive knowledge from falling into foreign hands; and (iii) ensure strategic independence.
When is a notification required?
The FDI filing requirements for investments into existing Belgian companies active in key sectors are mandatory and suspensory, so that the transaction cannot close before the foreign investment is cleared. As in merger control and under the Foreign Subsidies Regulation (see our blogpost here), notification must occur prior to the implementation and following the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest. Parties may also notify a draft agreement, provided that all parties confirm their intention that the final agreement shall not materially deviate from the draft. Parties may also notify a draft when they have publicly announced their intention to make a voluntary or mandatory public offer.
If the investor fails to notify the investment altogether, the fine can amount to up to 30% of the value of the investment. If the investor spontaneously notifies the investment up to twelve months after its implementation, they can be fined up to 10% of the value of the investment.
A transaction must be notified where the investor is “foreign”. This is:
- a natural person whose primary residence is located outside the EU;
- a company established or organized under the legislation of a non-EU country; or
- a company that has its ultimate beneficial owner residing outside the EU.
The screening mechanism covers the following types of investments:
- the investor acquires directly or indirectly 25% or more of the voting rights in target companies established in Belgium with activities:
- in critical infrastructures – both physical and virtual – for energy, transport, water, health, telecommunications, 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;
- in technologies or raw materials essential for security (including health safety), defense and the maintenance of public order, military equipment, dual-use products, as well as technologies of strategic importance such as AI, robotic, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies;
- in critical inputs including for energy, raw materials and food security;
- related to access to sensitive information or personal data, or the possibility to control such data;
- in private security;
- related to media freedom and pluralism; and
- in biotech, provided that the target’s turnover in the preceding financial year exceeded EUR 25 million.
- the investor acquires directly or indirectly 10% or more of the voting rights in target companies established in Belgium with activities linked to defense, energy, cybersecurity, telecommunications, and digital infrastructures, where the target’s turnover in the preceding financial year exceeded EUR 100 million.
The notification must contain various details, including but not limited to, the ownership structure of the foreign investor and the target company (including the ultimate beneficial owner), the approximate value of the investment, activities of both the foreign investor and the target company and the expected closing date of the transaction. If the information provided in a notification is incomplete, an investor can be fined up to 10% of the value of the investment, and up to 30% if the information is incorrect or misleading.
Under the new regime, no filing requirements arise for transactions that have already been signed when the new regime enters into force. The Cooperation Agreement will only apply to agreements concluded on or after July 1, 2023. Alternatively, if the legislative process takes longer, the regime will apply from the first day of the month following the publication date of the last act confirming the Cooperation Agreement in the Belgian Official Gazette, provided that this publication takes place after June 30, 2023. For agreements concluded before its entry into force, the Screening Commission may launch a screening procedure of its own accord if deemed necessary by a Belgian federated entity, up to two years (five years in case of bad faith) after the implementation of the foreign investment.
The Screening Commission can also start ex officio investigations of envisaged direct investments falling under the screening regime if deemed necessary in light of safeguarding, on the one hand, public order and national security and, on the other hand, Belgian strategic interests. The Screening Commission does not have to inform the companies involved thereof, but it can suggest them to notify the investment.
How will the transaction be assessed?
The Screening Commission is a new regulatory body in charge of assessing a transaction and it consists of representatives of Belgium’s federal and federated governments (Flemish Region, the Walloon Region, the Brussels-Capital Region, the Flemish Community, the French Community, the German-speaking Community, the French Community Commission and the Common Community Commission), and a chairman without voting rights. The powers in Belgium are distributed among these entities depending on the sector and the place of establishment, and are bound by the limits of their powers.
The screening procedure can consist of two phases:
- The assessment phase
In the assessment phase, the Screening Commission will review whether the main characteristics of the transaction can potentially impact public order, security, or the strategic interests of Belgium. The Screening Commission may also request other public bodies to adopt an opinion on the matter within 25 calendar days following the start of the assessment phase. Whilst it may not be necessary to seek the opinion of all relevant public bodies, the Screening Commission is obliged to request an opinion from the Intelligence and Security Coordination Committee. The assessment phase can take up to 30 calendar days from the date on which the file is deemed complete by the Screening Commission.
If specific circumstances giving rise to concerns are identified, the Screening Commission will proceed to the screening phase.
- The screening phase
The screening phase is intended to build further on the findings in the assessment phase through additional risk analysis. If the Screening Commission considers that the foreign investment has an impact on national security, public order or the strategic interests of a federated entity, it will serve a draft opinion to the concerned foreign investor and the Belgian target company who may comment within 10 calendar days. A hearing can be organized within a further period of 10 calendar days. This period has a suspensive effect with respect to the time limit mentioned below.
Within 20 calendar days of sending the draft opinion to the foreign investor, the Screening Commission will deliver its opinion to the competent minister(s) of the relevant federated entities. This time limit can be suspended in numerous ways, for instance to negotiate mitigating measures or request additional information. The Security Coordination Committee can also ask for an extension of up to two months in case of particularly complex screenings.
During the screening phase, other public bodies may be requested to communicate their opinion within 15 calendar days. As during the assessment phase, the request for an opinion from the Intelligence and Security Coordination Committee is mandatory.
The Screening Commission may propose measures to mitigate the expected impact of FDI. These measures can include increasing governance and compliance requirements, limiting the flow of information/IP rights from the target to the foreign investor, ensuring that information/IP rights remain available for use in Belgium, or modifying the structure of the proposed transaction (e.g. by prohibiting the participation of subsidiaries, limiting the number of shares that can be transferred or the certification of all shares). The negotiation of these measures stops the clock for the various time limits under the Cooperation Agreement for a renewable period of one month.
Given the division of Belgium in various federated entities, the relevant ministers first notify their decisions within six calendar days to the Screening Commission. The Screening Commission will then combine the various decisions and notify the combined final decision to the foreign investor within two calendar days.
The decision can approve the investment unconditionally, approve the investment subject to remedies, or block the investment. If the decision is conditional and the agreed remedies are not implemented within the deadline, the foreign investor can be fined up to 30% of the value of the investment.
The foreign investor and the Belgian target have 30 calendar days to appeal the decision before the Market Court (Marktenhof / Cour des Marchés). However, such appeal does not suspend the effects of the decision.
There is a degree of uncertainty as there are no examples of the application of the FDI regime yet, and it is difficult to predict how it will affect transactions that fall within its scope. Since a majority or consensus among the members of the Screening Commission is not required in the assessment phase, it remains to be seen how each of the representatives of Belgium’s federal and federated governments will interpret the concepts of national security, public order, and strategic interest. However, the issuance of guidance regarding the interpretation of the Cooperation Agreement is anticipated. Companies currently planning investments in Belgium may wish to seek advice regarding the potential impact of the Cooperation Agreement on their transaction. Covington can assist you in complying with FDI screening mechanisms.