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Lindsey Clare
Senior Counsel
Corporate Law
Foreign investors involved in M&A deals in Belgium in certain sectors need to comply with the foreign direct investment screening mechanism.
As of 1 July 2023 Belgium’s foreign direct investment (FDI) screening mechanism has entered into force. The screening mechanism is important for all M&A deals occurring in Belgium whereby foreign investors invest in Belgian entities involved in certain sectors. Transactions which fall under the scope of FDI are required to notify the Belgian Interfederal Screening Commission (ISC) prior to closing.
Transactions under the scope of FDI
Foreign investor – the screening mechanism is only applicable when a foreign investor is involved. Under the Belgian screening mechanism a foreign investor is understood as:
This entails that investments by EU citizens or EU entities do not fall within the scope of the Belgian FDI regime, unless they have their main residence or UBO outside the EU.
It is important to note that the differentiating criterion is EU and not European Economic Area (EEA). This entails that investors from EFTA member states, such as Iceland, Liechtenstein, Norway and Switzerland are also considered to be foreign.
Transactions & Sectors – the Belgian FDI regime is applicable to transactions whereby the investment of the foreign investor reaches the following thresholds:
I. the direct or indirect acquisition of 25% or more of the voting rights in a Belgian company or association who is active in the following exhaustive list of sensitive sectors:
II. the direct or indirect acquisition of 10% or more of the voting rights in a Belgian company or association whose activities relate to the sectors of defence, including products for dual-use, energy, cyber security electronic communication or digital infrastructures, and whose annual turnover in the financial year prior to the acquisition exceeded 100 million EUR.
III. Regardless of the acquired voting rights, the transaction is subject to review if the foreign investor acquires control over a Belgian entity (control entails the ability to exercise decisive influence over strategic decisions) which is active in one of the above (under I. and II.) mentioned sensitive sectors.
In practice – when asking the question whether or not the Belgian FDI screening mechanism is applicable the following must be taken into account:
I. The screening mechanism is triggered when the 25% of 10% thresholds are (in)directly reached. E.g. a transaction is subject to screening when the foreign investor – who already owns 24% of the voting rights – acquires an additional 1%.
Screening process
When – The notification must be filed after the signing, but before the closing of the transaction. The filing of a draft-agreement is possible if the parties declare that the signed agreement will not significantly differ from the filed draft-agreement in all relevant aspects. The transaction documentation will thus need to set out in detail the timeline in terms of signing/closing, clauses on the FDI procedure and mutual cooperation between parties in this regard, condition(s) precedent, etc.
Phases – the screening process is divided in the following phases:
Ex officio investigations – The ISC may initiate a screening process on its own initiative if no notification was submitted. The ISC can initiate such an investigation up to two years after the acquisition (five years in the event of bad faith).
Appeal – The foreign investor can lodge an appeal with the Market Court against the final decision of the ISC or the imposed fines.
Sanctions
Investors who do not comply with the Belgian screening mechanism may incur administrative fines up to 10% (e.g. when incomplete information was provided) or 30% (e.g. when no notification was filed) of the investment value.
In case no notification was filed structural adjustments and remedial measures might be imposed up to two years after the acquisition. In case of indications of bad faith, this period is extended to five years. An example of such a structural adjustment is the obligation to conduct a divestment.
It is important to note that the obligation the file the complete and accurate notification lies with the foreign investor. Therefore, the burden of the potential sanctions lies with said foreign investor despite the fact the target (or the sellers) must provide the majority of the necessary information. As a consequence, it is important to include the necessary provisions in the transaction documents to mitigate the foreign investors risk in case of negligence of the target or sellers in this regard.
Timeline
After 1 July 2023 – the Belgian FDI screening mechanism is relevant for all acquisitions signed on or after 1 July 2023 that fall within its scope.
Before 1 July 2023 – however, acquisitions signed before 1 July 2023 can still become subject to the above mentioned ex officio investigations up to 2 years after the acquisition (or five years in the event of bad faith). Such investigation cannot annul the transaction, but might impose corrective measures.
Note that transaction documents signed before 1 July 2023 but substantially amended on or after 1 July 2023 result in the transaction falling in scope. Purely formal amendments or the correction of material errors will not lead to a notification duty.
Conclusion
The Belgian FDI screening mechanism will be a key focus point for a significant number of M&A deals in Belgium. During the negotiations and the transaction process parties will have to take into account the notification and the screening’s possible consequences. To name a few, the FDI screening will have consequences for the timeline (e.g. long stop date, split between signing and closing), risk allocation, the conditions precedents and (potential) signing to closing covenants. In addition the gathering of the required information and a smooth communication procedure with the ISC will be of the utmost importance.
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Lindsey Clare
Senior Counsel
Corporate Law