On December 5, 2018, the Flemish Parliament approved a proposal of Flemish Decree (the Decree) providing for a veto right for the Flemish Government in case of foreign investment in certain strategic sectors in Flanders. Certain key features of the new screening procedure are set out below. As Belgium is traditionally an open economy with little to no restrictions on foreign investments into Belgium, such a screening procedure and the corresponding veto right are a novelty in the Belgian legal landscape. However, screening procedures for foreign investment are gaining traction across EU member states’ national legislation and an EU wide initiative has also been tabled. A few observations in this respect are included at the end of this client alert.

Newly adopted measures  

The Decree sets out that legal actions (rechtshandelingen) involving certain public or semi-public entities resulting in foreign persons acquiring control (zeggenschap of beslissingsmacht) over such instances can be declared null and void or inapplicable by the Flemish Government if such acquisition poses a threat to the strategic interests of the Flemish Community or Flemish Region.  

Entities in scope  

The scope of application of the Decree extends to transactions involving the Flemish Government and any local government on the Flemish territory. In addition, also certain other entities may be subject to the screening procedure to the extent these have legal personality, have been established specifically for catering to one or more needs of general interest, and either (x) such entity is financed[1] for more than half of their financing needs by an entity in the scope of the Decree, (y) an entity in the scope of the Decree has more than half of the votes at the governing body of such entity, or (z) such entity is supervised by an entity in the scope of the Decree.  We note that this scope of application shows a number of similarities compared to the concept of ‘contracting authority’ used under federal public procurement law.  

Transactions in scope  

A screening procedure can be be triggered if an entity as described above performs a legal action resulting in  (x) a foreign legal or natural person acquiring control over such entity, and (y) a threat to the strategic interests of the Flemish Community or Flemish Region.  

A “legal action” (rechtshandeling) is a broad concept covering a.o. the acquisition of shares in the entity[2] but also, for instance, the entering into of certain commercial contracts or financing arrangements between the entity and a foreign person. The legal action should result in the foreign party acquiring control (zeggenschap of beslissingsmacht) over the entity. It remains unclear whether the concept of control referred to in the Decree is aligned to the general concept of control (controle) as set out in the Belgian Companies Code.[3]  

The Decree gives some further context as to what would constitute a threat to the strategic interest of the Flemish Community or Flemish Region. This would be the case if the continuity of vital processes would be endangered, if there would be a risk that certain strategic or sensitive information could fall in foreign hands or if the strategic independence of the Flemish Community or Flemish Region would be jeopardized.  

In any case, the relationship between entities in scope of the Decree and foreign third parties will need to be closely monitored to check whether any of its legal actions could trigger an export review by the Flemish Government.  

Potential ex post screening by the Flemish Government  

If an entity within the scope of the Decree performs a legal action resulting in control over the entity by a foreign person, the Flemish Government can elect (at its discretion and on an individual basis) to screen the legal action. The screening should not be seen as an ex ante procedure to be complied with prior to the relevant transaction becoming effective. Rather, the Flemish Parliament has opted to grant the Flemish Government the right to look into such transactions after they have occurred.

The Flemish Government may request the advice of Belgium’s Federal Service for National Security on a particular transaction (or the Federal Service for National Security may provide its advice to the Flemish Government on its own account).  

If the Flemish Government establishes that there is indeed a threat to the strategic interests of the Flemish Community or Flemish Region, the Minister-President will initiate discussions with the foreign party and the relevant entity. The purpose of these discussions is to agree on certain mitigating measures which may for instance include amendments to the structure of the transaction or certain compensatory payments.   

Only if no mutual agreement can be reached and as a final remedy, the Flemish Government can (but is not obliged to) issue a decree declaring the legal action null and void[4] or inapplicable[5].  

Observations  

Policy change compared to the existing Belgian legal landscape….  

In view of its limited geographical size, Belgium is traditionally seen and marketed as an open economy, highly dependent on export and foreign investment. In view thereof, the current Belgian legal landscape can be described as permissive to foreign investment into Belgium. Other than certain specific regulated industries and a notification requirement for acquisitions of more than one third of the shares of companies carrying on a business in Belgium and with a net worth of at least EUR 2.5 million (for which there are no sanctions for non-compliance), there are no notification or screening requirements for foreign investment in place.  

The Decree is the legislative response to an attempted transaction in 2016 involving the acquisition by China State Grid of a minority stake in Eandis, a Belgian company managing a substantial part of Flanders’ electricity and natural gas distribution grids. Whereas a deal was signed with China State Grid, a public and widely mediatised debate erupted between the signing and the completion of the transaction on whether it was appropriate or desirable to allow crucial assets in the Flemish energy sector to be (in part) acquired by foreign (state-owned) entities. Further fuelling the debate was a leaked advice of the Federal Service for National Security identifying certain strategic concerns inherent to the deal with China State Grid.  

Although the deal ultimately did not close, the Decree is the reflection of a new policy inspired by the experiences in the China State Grid transaction. The Flemish Government intends to pay more attention to safeguarding assets of strategic importance for Flanders and will now have the ability to formally intervene where Flemish interests are at stake.  

To date, no plans for similar legislation have been revealed at the federal Belgian level, or in any other of Belgium's regions.  

… but in sync with EU wide initiatives and national initiatives of certain other EU member states  

As a result of a high number of acquisitions in 2016 of EU strategic assets by non-EU investors, which were often state-backed and often from countries that maintain strict barriers to foreign investments (such as foreign ownership caps or mandatory joint venturing), the French, German and Italian Governments have proposed to the European Commission to create a Union wide screening mechanism of its own. The European Commission has reflected on this request and expressed its initial views and proposals on this. The legislative process is still ongoing.  

On a national level, the same EU member states urging the European Commission to adopt a union-wide screening procedure, have already implemented stricter procedures over the past few years. It is worth noting, however, that other EU member states have taken a diametrically opposed position.  

The Decree is in line with the efforts being done within the European Union and by some of the member states thereof.