Belgium's FDI screening mechanism nears entry into force
Belgium’s FDI screening mechanism nears entry into force
On 1 July 2023, Belgium’s screening mechanism targeting foreign direct investments will enter into force. The regime is aimed at safeguarding Belgium’s security, public order and strategic interests and will affect investments in Belgian entities that lead to foreign ownership. Here we look at the key takeaways from this new review mechanism.
The Belgian screening mechanism entering into force on 1 July 2023 is inspired by Regulation (EU) 2019/452 of 19 March 2019 establishing a framework for screening foreign direct investments in the European Union (the FDI Regulation). To date, almost all EU Member States have introduced a foreign direct investment (FDI) screening mechanism into their national law.
The underlying rationale for this screening mechanism is to reduce Belgium’s dependency on certain goods from other non-EU countries and to “re-shore” them to Belgium. The idea is to reduce the excess circulation of foreign investment capital into financially distressed companies that can be more easily acquired, which are at times involved in strategic sectors or whose activities relate to national security.
The broader macro-economic tendencies are clear. There’s a significant increase in foreign investments by fast-growing economies such as China and India, offshore investors, and companies in the hands of foreign governments. There’s a general increase in foreign ownership. The screening mechanism will channel these economic developments into a framework that enables thorough review.
The Interfederal Screening Commission1 (ISC) is the public entity responsible for reviewing FDIs into Belgium. It will become effective on 1 July 2023. Its powers are set out in the cooperation agreement between the various Belgian governments (the Cooperation Agreement).
Design of the regime
For investments captured by the Belgian regime, a foreign investor must notify the ISC and the process suspends closing. The regime applies to any acquisition of control, the direct or indirect acquisition of a certain percentage of the voting rights in undertakings or entities incorporated in Belgium already defined as such (ie including investments into a non-Belgian target with a Belgian subsidiary).
Only FDIs that will affect Belgian security, public order or the strategic interests of the regions and communities face potential scrutiny. An FDI is a broadly defined term. It captures any type of investment made by a foreign investor that creates or is intended to create direct and lasting links with another undertaking. This includes investments leading to effective participation in the management or control of that undertaking.
Unlike some other EU Member States’ regimes, the Belgian regime will only screen investments made by investors not from the EU. The regime will apply to investments made by:
- natural persons with a main residence outside the EU;
- undertakings incorporated outside the EU; and
- undertakings of which the ultimate beneficial owner has its main residence outside the EU.
Several undertakings that are part of a consortium will be regarded as one single foreign investor.
Investments made by a foreign investor in setting up new and direct economic activities (ie greenfield investments) in Belgium, while not taking over any existing economic activities, are not covered by the regime.
The regime will allow the ISC to block foreign investments into Belgium when it puts at risk:
- the continuity of key processes in certain sensitive sectors, which would constitute a threat to national security, strategic interests and the quality of life of the Belgian population as a result of serious societal disturbances;
- the integrity or exclusivity of the knowledge, technologies and information associated with these pivotal processes; or
- making Belgium strategically dependent.
The screening mechanism does not cover all investments. Every direct or indirect acquisition of 25% or more of the voting rights in a Belgian undertaking or entity is reportable, without there being a fixed deal size or turnover threshold for these investments (with one exception) and whose activities relate to:
- critical infrastructure, both physical and virtual, for energy, transport, water, health, electronic communication and digital infrastructure, media, data processing or storage, aerospace, defence, election or financial infrastructure and sensitive facilities, whether or not part of an existing business, and the land and real estate crucial for such infrastructure;
- technologies and resources of essential importance to public (health) safety, defence and public security, military equipment subject to the Common Military List of the European Union2 and national control, dual-use items and technologies of strategic importance (including related IP rights) regarding artificial intelligence, semiconductors, robotics, cybersecurity, aerospace, defence, energy storage and quantum and nuclear technologies and nano technologies;
- supply of vital inputs such as energy and raw materials and avoiding food shortages;
- access to or control of strategically sensitive information and personal data;
- private security sector;
- freedom and pluralism of the media; or
- the biotech sector, if the target undertaking had turnover of at least EUR 25 million in the financial year before the investment.
The regime also covers direct and indirect acquisitions of 10% or more of the voting rights in Belgian undertakings and entities that are active in the energy, defence (cf. dual-use items), cybersecurity, digital infrastructure or electronic communication sectors that had realised a turnover of at least EUR 100 million in the financial year before the acquisition of 10% of the voting rights.
Irrespective of the voting rights thresholds, in principle any acquisition of control (ie the ability to exercise decisive influence over an undertaking’s activities) over a Belgian undertaking or entity whose activities relate to the sectors mentioned above fall within the Belgian regime’s ambit. The acquisition of control does not necessarily always overlap with the voting rights thresholds, eg in case of certain veto rights assigned to a minority stake or in case of asset deals.
Investments falling within the scope of the regime must be notified to the ISC. The ISC is represented by all three Belgian governments (the federal, regional and community levels) and organisationally and administratively sits within the Belgian Ministry of Economic Affairs. A member of the ISC is only competent when there’s (i) a territorial nexus (registered office, economic activity, presence of certain infrastructure) and (ii) a potential impact on their substantive competencies.
The notification involves submitting transaction documents to the ISC. The documents can be in signed or even draft form if the parties explicitly declare that the draft agreement will not significantly differ from the one they intend to conclude. Although there’s no specific notification form available at present and the ISC can issue additional requests for information, the notification should include the following information on the planned transaction:
- ownership structure of both the foreign investor and the target company (eg identity, participation in the capital and the ultimate beneficial owner of the foreign investor);
- approximate value of the investment, including the underlying valuation methods and elements used;
- products, services and business activities of the foreign investor (at group level) and the target company, specifying in which EU and third countries these activities take place;
- how the investment is financed and the origin of the financing; and
- the expected closing date.
The review process can involve two or even three phases, after a pre-notification phase, during which the ISC secretariat can submit requests for information to the parties involved in the transaction and to third parties. There’s no statutory time limit for the pre-notification phase. It lasts until the notification is deemed complete and ready to be formally filed.
Phase 1 – Assessment
Phase 1 is the assessment phase where the foreign investment is preliminarily examined and which lasts 30 calendar days. A general review of the investment will be conducted by the competent members of the ISC, verifying whether the main characteristics of the foreign investor, the change of control over the target company, or the resulting significant changes in the ownership structure pursuant to the proposed foreign direct investment can have a potential impact on public order, security or strategic interests in Belgium.
If no concerns are identified, the ISC will close the assessment and issue a positive decision whereby the transaction is approved.
Whenever the ISC asks for additional information, the 30-day period is put on hold. If the 30-day period is exceeded without the ISC making a decision, the foreign investment is deemed to be approved.
Phase 2 - Screening
If one of the members of the ISC identifies concrete concerns or risks for public order, security or strategic interests (eg based on entities controlled by foreign governments, past involvement in risky activities or the serious risk that the foreign investor is involved in criminal or otherwise illegal activities), the ISC will proceed to the actual screening of the foreign investment (Phase 2). The screening phase involves an in-depth and additional risk analysis and results in an advice to the respective ministers of the competent government bodies.
The secretariat of the ISC informs the foreign investor and the Belgian undertaking concerned that they can inspect the file at the secretariat and obtain an electronic copy. The foreign investor and the Belgian undertaking concerned have ten calendar days from the day the copy is made available to submit their written comments. This period suspends the period of 20 calendar days in which the ISC must advise the relevant minister, commencing after the decision to open a screening procedure was notified to the notifying party(ies). This period can be extended up to several months, in case of written comments, oral hearings, mitigating measures, a significant complexity of the file, or if the ISC, the European Commission or other Member States ask for additional information.
Once the relevant ministers receive the ISC’s advice, they have six calendar days to decide and notify their decision to the ISC. Within two calendar days after receiving the decisions, the ISC will combine them (if multiple federal bodies are competent) and notify the foreign investor of the decision.
If the foreign investment falls within the jurisdiction of more than one of the federal bodies, decisions to prohibit the foreign investment must be unanimous, though the federal minister has a veto right to prohibit the foreign investment if it falls within its powers and competencies.
If no decision is made within these time limits, the transaction is deemed to be tacitly approved.
Ex officio investigation
At the request of a competent member of the ISC, a procedure will be initiated ex officio if a foreign investor wants to acquire a direct or indirect stake in a Belgian company through an FDI. The companies concerned or their representatives are notified of an investigation only if the ISC secretariat indicates that the companies should make a formal notification.
In the event of non-compliance with the notification requirement, the ISC, at the request of at least one of its competent members, will initiate a procedure ex officio. Where an ex officio procedure is initiated, structural adjustments and remedial measures may be imposed on the parties at the end of this procedure for up to two years after the acquisition of non-notified control. In case of indications of bad faith, this period is extended to five years, even before the entry into force of the Cooperation Agreement (ie before 1 July 2023).
Range of procedural outcomes
Following a screening procedure, the ISC can issue a positive decision granting clearance for the FDI to go ahead.
To alleviate any concerns identified by the ISC, foreign investors can offer different types of remedies, both behavioural and structural. Foreign investors may be exposed to various governance and compliance requirements such as codes of conduct or safety protocols and information and IP transfer barriers. If no remedies can alleviate the concerns of possible negative effects on public order, national security or strategic interests, the ISC can block the foreign investment.
Moreover, foreign investors should be aware that fines up to 30% of the investment value can be imposed for:
- failure to notify;
- prematurely implementing the foreign investment; and
- providing incorrect or misleading information or for non-compliance with imposed remedies.
Fines of up to 10% of the investment value can be imposed:
- for providing no or incomplete information;
- for providing information late; or
- if spontaneous notice is given of a non-notified foreign investment within 12 months after its implementation.
The natural person or undertaking can formally oppose the ISC’s fine.
Finally, a report is prepared containing only non-confidential elements of the screening procedure. This report is part of the annual report that Belgium must send to the European Commission as required by the FDI Regulation. It includes information on the investment, corrective measures mandated, or negative decisions adopted, if applicable.
The Belgian FDI screening mechanism is part of a growing trend among EU Member States to protect vital processes and strategic interests against foreign ownership.
Regarding the Belgian regime in particular, significant deal uncertainty is on the horizon since no relevant examples of application yet exist and it is unforeseeable how the regime will affect transactions in scope. It is however certain that the Belgian FDI notification process and stand-still obligation will stretch the M&A timeline and impact the associated transactional documents notably on closing conditions.
Foreign investors and Belgian targets active in the prioritised sensitive sectors and industries should be wary of the regime’s impact on their transactions and should accommodate these concerns accordingly.
In addition, access to the EU, and more specifically, Belgium, is hampered and complexified for candidate investors located outside the EU. Indeed, EU investors are not subject to the Belgian FDI regime, putting the former at a competitive disadvantage and potentially making them refrain from investing altogether given the uncertainty of FDI authorisation.
Get in touch if you have any questions or if we can otherwise assist you in relation to the Belgian FDI regime.
1 Interfederale Screeningscommissie/Comité de Filtrage Interfédéral.
2 Adopted by the Council on 17 February 2020 (equipment covered by Council Common Position 2008/944/CFSP defining common rules governing the control of exports of military technology and equipment) (the Common Military List).