Dealing with European competition law transactional risks in acquisitions by US funds has recently become more complex. First, the instruments to control transactions have been multiplied by three. Besides the traditional merger control regime, a foreign subsidies (FSR) control system at the EU level and a foreign direct investment (FDI) screening regime at the Member State level have been developed. Secondly, there are multiple combinations of parallel procedures such as one EU or several national merger control procedures (with the possibility for the parties to refer the transaction to the EU Commission), one EU FSR procedure and/or several national FDI screening procedures (with no possibility for the parties to refer the transaction to the EU Commission). Thirdly, the scope of the traditional merger control regime has been widened in cases where there is no notification obligation. On the one hand, as could be seen in the Illumina/Grail case, Member States can refer a transaction to the EU Commission while the parties were not under any obligation to notify this transaction at the EU or Member State level. On the other hand, as could also be seen in the Towercast and Proximus/EDPNet cases, third parties can request before a national court or a national competition authority to prohibit a transaction because it would lead to an abuse of dominant position in case the acquirer already holds a dominant position on the market where the target is active.
How To Navigate “EU Competition Law Transactional Risks”? A Few Points of Attention for Investment Funds with Respect to the Belgian FDI Screening Regime
In this article, we will give a few points of attention for investment funds with respect the FDI screening regime of Belgium, which requires a notification (and the corresponding application of a “standstill” obligation) in case of a direct investment in a company established in Belgium or in an undertaking carrying out an economic activity in Belgium by a foreign investor which “may affect security or public order in Belgium or the strategic interests of the (Belgian) federated entities”.
Under the Belgian FDI screening regime, besides the acquisition of control over an undertaking exercising an economic activity in Belgium (which can simply encompass assets generating a turnover from Belgium), minority acquisitions of at least 10% or 25% of the voting rights of a target company established in Belgium are qualified as a “direct investment” and, therefore, fall within its scope of application.
A first consequence is that internal restructuring can also fall within the scope of the Belgian FDI screening regime. For example, a foreign (US) investor (i) already “controls” a company established in Belgium through a French subsidiary holding 100% of its shares and (ii) decides that the French subsidiary should sell 30% of such Belgian company to its Irish subsidiary. Such a transaction is not only an internal restructuring but it is also an acquisition of 25% of the voting rights of a company established in Belgium falling within the scope of the Belgian FDI screening regime (which needs to be notified if it has a potential effect on security or public order in Belgium or on the strategic interests of the Belgian federated entities).
A second consequence is that there is not complete alignment with the traditional concept of control, in which it is the investment company which usually controls the different funds it sets up, and investors typically participate as limited partners and normally do not exercise control, either individually or collectively, over the portfolio companies in which the funds invest. Therefore, to qualify as a “foreign investor,” the place of the primary residence of both the investor (which can qualify as the ultimate beneficiary owner) and the management company making the direct investment can be relevant.
A third consequence of the application of two different thresholds of voting rights is that under the threshold of 10% of voting rights, an additional “turnover” threshold is applicable (i.e., the target acquired needs to generate a turnover of EUR 100 million), while under the threshold of 25% of voting rights, no “turnover” threshold is applicable (see, however, the exception below for the biotechnology sector).
The Belgian FDI screening regime is based on the list of sectors set out under Article 4(1) of EU Regulation 2019/452 establishing a framework for the screening of foreign direct investments into the Union in order to determine if a foreign direct investment “may affect security or public order in Belgium or the strategic interests of the (Belgian) federated entities”.
However, the long list of sectors covered by the Belgian FDI screening regime is slightly different from the list of the set out under Article 4(1) of EU regulation 2019/452. On the one hand, the initial EU list has been widened by adding the “private security” sector. On the other hand, the initial EU list has been narrowed. First, this list is only relevant for acquisitions of at least 25% of a target company established in Belgium. For acquisitions of at least 10% of voting rights, only a list of “unspecified” traditional sectors such as defense, energy (including dual use products), communications and cybersecurity, is applicable. Second, the condition that the activity of the target must concern “technologies and raw materials which are essential” has been added to the list of sectors of “critical technologies and dual use items” set out under Article 4(1)(b) of EU Regulation 2019/452, i.e.: “artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies.” In other words, in the case of an acquisition of at least 25% of voting rights of a Belgian target company, it is not sufficient that the activity of the target concerns critical technologies such as artificial intelligence or robotics, it must also concern “technologies and raw materials which are essential” for such critical technologies. Third, a turnover threshold of EUR 25 million has been exceptionally added for the acquisition of at least 25% of voting rights of a Belgian target company active in the biotechnology sector.
It is important to note that, in Belgium, the sector of software does not directly fall within the scope of the FDI screening regime. However, if a Belgian target is selling a software which is used, for example, to optimize the process of critical infrastructures (such as high voltage grids, health care institutions or drinking water distribution networks) or the functioning of critical technologies, the investment made by a fund in such a target may have to be notified under the Belgian FDI screening regime.