Belgium’s foreign direct investment (FDI) screening regime is set to enter into force on 1 July 2023. This move makes Belgium one of the last EU member states to adopt legislation designed to protect its national security, public order, and strategic interests from the impact of FDI. This forms part of a wider EU trend towards greater scrutiny of foreign investment and trade.
Legal framework: Cooperation Agreement and Interfederal Screening Commission
The Belgian FDI screening regime's launch has taken longer than expected due to the complexity of the Belgian federal structure. With relevant competence divided between the Regions and Communities and the Federal State, the regime's implementation required a cooperation agreement (the Cooperation Agreement). This arrangement facilitated the formation of the Interfederal Screening Commission (ISC), a new body composed of representatives from different levels of government.
Assessing the scope: Q&A with the ISC
Questions about the FDI screening mechanism's scope remain, although a FAQ document released on 31 May 2023 provides some clarity. Additionally, the ISC’s secretariat is actively addressing individual requests for further information from market participants.
Who is subject to Belgian FDI screening
The new FDI process requires foreign investors who invest in Belgian entities falling under the Belgian FDI regime to file to the ISC. Generally, EU companies are not deemed "foreign investors" unless they have an ultimate beneficial owner (UBO) outside the EU. However, investors from EFTA States are classified as "foreign investors."
Which types of transactions are excluded from Belgian FDI screening
Intra-group restructurings are not exempted. This means that transfers of shares in a Belgian entity from an EU company to another EU member state company, both having the same non-EU UBO, may need to be considered. A foreign investor is only required to file an FDI if they acquire control or a significant percentage of voting rights.
The screening mechanism applies to branches, but we understand that it excludes asset deals, potentially leaving a gap in the framework.
Key sectors for Belgian FDI screening
FDIs that result in control acquisitions or ownership of 25% or more voting rights in Belgian companies involved in certain sectors must be reported. These sectors include vital infrastructure, essential security resources, critical inputs, access to sensitive information, the private security sector, media freedom and plurality, and strategic technologies in the biotechnology sector.
Companies with access to sensitive information and personal data or the ability to control such information are also covered. As this may affect a lot of different sectors, it will be essential to obtain a clear view on the ISC members’ interpretation soon.
A lower threshold of 10% of voting rights applies to companies involved in defense sectors, energy, cybersecurity, electronic communication, digital infrastructures, and having a turnover exceeding EUR 100 million. The FAQ clarified that the sectors list is exhaustive. The impact of the reference to access to sensitive information and personal data is still uncertain as most companies have access to such information.
Ex officio powers: the ISC’s discretion to review transactions
Members of the ISC hold significant ex officio powers to review transactions that have not been formally notified. While they lack the authority to reverse finalized transactions, they do maintain the ability to mandate structural adjustments and implement corrective measures. This power extends up to two years post-acquisition, or even five years in instances of demonstrable bad faith. These potential modifications encompass a wide range of alterations and should be interpreted in their broadest context.
Transactions signed before 1 July 2023 do not need a Belgian FDI filing, but the ISC can initiate an ex officio procedure up to two years after a non-notified acquisition of control or five years in the case of bad faith. It is unclear how often this procedure will be used for transactions prior to 1 July 2023, but it is believed it will be reserved for extreme situations only.
The ISC cannot reverse a closed transaction, but it can impose structural adjustments and corrective measures up to two years after the acquisition, or five years in the case of bad faith. Fines of up to 10% of the transaction value can be imposed for non-compliance, or 30% in cases of bad faith, but these will not be imposed for transactions signed before 1 July 2023.
Uncertainty remains as to whether deals signed before 1 July 2023 will require a new filing if substantial changes are made to the Share Purchase Agreement (SPA) after that date.
Recommendations for transactions, deal structuring and documentation
The Belgian FDI screening procedure is still new and the functioning of the ISC remains untested. Nevertheless, already today M&A practitioners must take into account various different and complex FDI screening regimes when planning and executing global M&A transactions. The initial filings with the ISC in Belgium will set precedents for future cases, but it is yet to be assessed what the impact will be on the speed, efficiency and process of M&A transactions.
A few practical considerations:
- Parties are encouraged to conduct thorough due diligence prior to engaging in a transaction, particularly regarding the technologies involved, the presence of dual use items, or contracts with public entities that could trigger FDI screening.
- Parties may need to simultaneously notify a deal under merger control rules, FDI screening, and soon, foreign subsidies. Different regulatory procedures may affect transactional timelines and dynamics, possibly also influencing parties’ general appetite for a deal. As the FDI screening regimes generally offer more (political) discretion for governments to intervene, deal (un)certainty will have to be carefully managed and factored into overall deal risk.
- Transactional documents for FDIs falling under one or more FDI screening regimes will need to include clauses regarding split signing and closing (i.e. conditionality), notifications, sharing of information and mutual cooperation, risk allocation (especially if behavioral requirements or obligations can or may be expected), timing and long stop dates, etc.
- The assessment on whether a deal is likely to fall under the Belgian FDI screening regime will have to take into account the regional differences in Belgium, especially when it comes to the analysis of the “strategic interests” (which in itself is already a rather vague concept that may lead to deal uncertainty).
- Where local FDI regimes include an ex officio reviewing mechanism with the possibility to impose behavioral requirements after the closing of the transaction, transactional documents may in certain cases need to include risk allocation provisions in this regard.
On 20 June 2023 the EU Commission released its Economic Security Strategy which includes further plans to enhance the EU framework for foreign direct investment screening and even EU outbound investment screening. The regulatory framework for inbound/outbound investments will thus likely become subject to even tougher restrictions in a near future.