On 16 February 2017, the Department of Economic Affairs published for consultation a draft legislative proposal amending the Dutch Telecom Act to prevent undesirable acquisition or exercise of control over Dutch telecom service providers (the "Proposal"). This Corporate Alert provides a brief overview of the Proposal. Stakeholders can submit their comments until 30 March 2017.
There has been an increasing interest towards protecting vital economic sectors in the Netherlands due to a number of high profile (attempted) takeovers of Dutch companies. Recent examples include the attempted takeover of KPN by América Movil, the acquisition of cyber security company Fox-IT by NCC, the attempted takeover of Post.NL by BPost, the attempted takeover of Unilever by Heinz Kraft and, most recently, the attempted takeover of AkzoNobel by PPG.
This Proposal is the result of public demand for protection of the Dutch telecom infrastructure following the attempted takeover of KPN by América Movil in 2013. In addition to the telecom sector, the Ministry of Economic Affairs is investigating foreign investments in postal services. The Ministry of Safety and Justice is also investigating access to and influence on vital sectors of industry, including energy and water supply, of foreign investors. The results of the investigation of the Ministry of Safety and Justice are expected to be published in June 2017.
2. Prohibition against acquiring or exercising control
The proposal grants the Minister of Economic Affairs (the "Minister") the authority to prohibit the acquisition or exercise of control (overwegende zeggenschap) over legal entities and partnerships active in the Dutch telecom sector (a "Telecom Party") if:
- this control leads to relevant influence in the Dutch telecom sector; and
- as a consequence, Dutch national security or public order is compromised.
3. Definition of Telecom Party Telecom Parties are defined broadly. According to the Proposal, they include:
- any Dutch legal entity or partnership which has its registered office in the Netherlands;
- any foreign legal entity which has its registered office in the Netherlands; and
- any branch office of a foreign legal entity which is permanently established in the Netherlands (duurzaam aanwezig);
which, as a service provider or otherwise, directly or indirectly, can exercise decisive influence over:
- a telecom network or telecom service;
- a webhosting service, internet exchange point, internet certification service or data center; or
- any other category of network or service determined by governmental decree.
The explanatory notes to the Proposal clarify that the Proposal applies not only to telecom service providers themselves (providing telecom services in their own name and for their own account) but also to their parent companies and others exercising decisive influence over the operation of the telecom network or service, for example network owners and independent network or service administrators, if their registered office is in the Netherlands.
4. Definition of control and information on ownership and control
According to the Proposal, control exists, for example, if anyone, alone or acting in concert with others:
- is able to exercise, directly or indirectly, at least 30% of the voting rights in the general meeting of shareholders;
- is able to appoint or dismiss the majority of the members of the management board or the supervisory board;
- holds at least one share that provides the owner with special controlling rights, for example a priority share; or
- becomes a fully liable partner in a partnership.
As regards the possibility of exercising at least 30% of the voting rights, it should be noted that voting rights are sometimes attributed to a legal entity or individual who is not the legal owner of the shares. For example, according to Dutch law, a legal entity or individual is deemed to control the voting rights which he can exercise as usufructuary or pledgee of shares. Also, a legal entity or individual is deemed to control the voting rights which he may exercise as holder of depositary receipts of shares (certificaten), or according to a voting agreement or similar arrangement with another shareholder. These attributed voting rights also have to be taken into account when calculating whether the 30% threshold has been met.
The draft legislative proposal contains little information on how the Department of Economic Affairs intends to monitor relevant changes in ownership or control over Telecom Parties. It only briefly refers to existing public registers of the Dutch Authority on Consumers and Markets (Autoriteit Consument & Markt), which is responsible for safeguarding compliance of market participants with Dutch competition and telecommunications laws, and the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten), which is responsible for safeguarding the adequate functioning of Dutch financial markets. Certain public notifications on proposed mergers and acquisitions and changes in shareholdings and share capital structure of listed companies must be filed in these registers.
5. Relevant influence in the Dutch telecom sector
According to the Proposal, "relevant influence" exists if abuse or intentional disruption of one or more Telecom Parties could lead to:
- unlawful breach of confidentiality of personal data or communication, or prolonged unavailability of internet access or telephone services to a certain number of end users; 
- long-lasting disruption of availability or verification of a considerable amount of the services and applications that are made accessible through the internet;
- considerable disruption of availability or unreliability of telecom services provided to "vital providers" within Dutch society as defined in the draft bill on assessment and reporting of cyber-security which, in short, includes government institutions and private suppliers of products and services;
- considerable disruption of availability or unreliability of telecom services provided to the General Intelligence and Security Service (AIVD) or the Military Intelligence and Security Service (MIVD), or provided within the public service remit including national defence, maintenance of law and order, medical aid and civil assistance;
- release of, or unauthorized access to, classified governmental information or information on surveillance of telecommunication by government institutions; or
- any other circumstances determined by governmental decree.
6. Legal consequences
The legal consequences of the prohibition against acquiring control must be distinguished from the prohibition against exercising control in an existing situation.
If control is acquired or transferred after a prohibition is imposed, the acquisition or transfer of control is invalid in its entirety. For example, if shares are acquired after a prohibition is imposed, no transfer of ownership of any shares will take place. Invalidity of the transaction extends to all shares and not just the acquisition of shares which exceeds the 30% threshold. An important exception to this rule is the acquisition of shares in listed Telecom Parties through transactions on a regulated stock exchange. Transactions executed on a regulated stock exchange remain valid, but the purchaser will be prohibited from exercising its voting rights and will be ordered to reduce its interest as set out below.
If the shares are acquired before a prohibition is imposed, the acquirer or owner will retain ownership of the shares. However, the acquirer or owner will be prohibited from exercising the voting rights or other control rights attached to its shares. This prohibition extends to its entire shareholdings and not just to the shares exceeding the 30% threshold. The prohibition does not affect financial rights attached to the shares, for example dividend payments or distributions from reserves of the company. In addition, the acquirer or owner will be ordered by the Minister to reduce or divest its interest until it no longer has control over the Telecom Party. The Proposal includes various measures to enforce compliance with this order, such as forced sale of shares.
Even if the parent company of a Telecom Party has its registered office outside the Netherlands, it can be affected by the Proposal as it has control over its subsidiary. The explanatory notes to the Proposal explicitly state that if there is a change in ownership of the foreign parent company, this constitutes a change of control over the Telecom Party as well. The Minister can prohibit the foreign parent company from exercising control over the Telecom Party and can even order it to reduce or divest its interest in a Telecom Party if the new owner of the foreign parent company may cause a threat to Dutch national security or public order (see paragraph 7 below). Until such reduction or divestment has taken place, the Minister can prohibit the foreign parent company from exercising its shareholders rights or rights attached to its participation or membership that enable it to control the Telecom Party.
7. Dutch national security or public order compromised
According to the Proposal, Dutch national security or public order may be compromised if one or more of the following circumstances occur:
- insufficient transparency of ownership or control rights regarding the acquirer or owner;
- insufficient transparency regarding the influence that a third party might have on the exercise of shareholders or control rights by the acquirer or owner;
- the acquirer or owner does not have a good track record regarding security of telecommunication, reliability of telecommunication services, or compliance with applicable laws and regulations;
- the acquirer or owner has a close relationship with any legal entity or individual subject to economic, financial or other sanctions imposed by the UN, the EU or the Dutch State; 
- the security situation or political stability in the country of residence or registration of the acquirer or owner, or in other countries in the region, is uncertain or bad;
- the acquirer or owner is a state, legal entity or individual who is known to act or is suspected of acting with the intention of influencing a relevant party in the Dutch telecom sector or to cause disruption as mentioned in paragraph 5, or the acquirer or owner is under control of such state, legal entity or individual;
- insufficient availability of information or it is not possible to verify available information on the acquirer or owner; or
- any other circumstances determined by governmental decree.
8. Concluding remarks
Although this legislative proposal has yet to be finalized and adopted by Parliament, mergers and acquisitions in the Dutch telecom sector will become subject to increased scrutiny in the near future. We expect that during this consultation, stakeholders will raise issues in reaction to the Proposal, for example the scope in the Proposal for discretionary execution by the Minister. It is not difficult to imagine that in practice the current wording of the Proposal might result in uncertainty regarding the applicability of the Minister's authority to prohibit certain transactions, which might hinder or delay mergers and acquisitions in the telecom sector. According to the Department of Economic Affairs, it is expected that the final Proposal will be assessed by the Council of State in the second quarter of 2017, after which it can be submitted to Parliament.