Navigating Belgium's Blackbox: the FDI Screening Mechanism 15 months in

Belgium’s Foreign Direct Investment (FDI) screening regime, which entered into force on 1 July 2023, is aimed at safeguarding national security and strategic interests of Belgium and its federated entities. Now that the regime has been in force for just over 15 months, and following the publication of the first Annual Report on Screening of Foreign Direct Investment, it is appropriate to take stock of the lessons learnt. 

In the first 12 months of the regime, 68 investments were notified, representing a total investment of EUR 2.1 billion in Belgium, EUR 1.8 billion of which was already authorised. Following Europe-wide trends, the vast majority of investments in Belgium originate in the U.S. and the UK, which respectively represent 43.4% and 29% of the deals notified. So far, no deals have been blocked. 

The regime’s early implementation has revealed a somewhat opaque process, leaving investors and legal experts with numerous questions about its practical application. At the same time, lead times are relatively short, and the competent authorities have shown a real effort to act expeditiously, which can minimise the impact of the screening on the timeline of the deal. 

Overall, the Belgian FDI screening regime appears relatively soft in comparison with other EU member states, such as Austria, Denmark, France, Germany, Italy or Spain, which collectively account for approx. 90% of all FDI notifications in the EU.[1]

This post provides an overview of Belgium’s FDI screening process, its scope, and the challenges it currently faces.

Brief reminder of the Belgian FDI regime

Under the Belgian FDI regime, certain foreign investments require prior approval from the Interfederal Screening Commission before they can be put into effect (so-called “closing”).

Who is it aimed at? Belgium's FDI regime applies exclusively to non-EU investors, distinguishing it from other EU Member States like France and the Netherlands, where intra-EU investments may also be subject to screening. Importantly, the Belgian FDI regime also targets investments made by investors located in an EFTA Member State.

The Belgian regime targets physical persons with their primary residence outside the EU, undertakings with their registered office or main activities outside the EU and undertakings whose ultimate beneficial owner (UBO) resides outside the EU. As a result, also investments made by companies located within the EU are caught, to the extent they are controlled by an entity located outside the EU.

Importantly, an investment may need to be notified even if it does not result in a new UBO. In fact, such internal restructurings represented approx. 13% of all transactions notified in the first 12 months. 

Which sectors does the regime target? The Belgian FDI regime focuses on sectors in which foreign investments are deemed to be capable of affecting national security, public order, or strategic interests. It includes sectors such as: 

• Critical infrastructure
• Technologies of strategic importance to safety, defence, public security, military equipment, dual-use goods, technologies
• Supply of critical inputs (incl. energy, raw materials and food security)
• Activities that allow access to sensitive information
• Private security
• Media (including news outlets, broadcasting services, newspapers)
• Defence
• Biotech.

Which investments are covered? The screening mechanism covers all investments that result in a direct or indirect acquisition of: (i) control over the Belgian entity; or (ii) 10% or 25% of voting rights in a Belgian target. 

The concept of control is defined by reference to the rules on merger control and includes both joint and sole control. The alignment with merger control rules allows at least for some parallelism between the two regulatory approval regimes.

Regarding voting rights, the applicability of the 10% or 25% threshold depends on the relevant sector. In addition, in the biotech and defence sectors, investments will only trigger a notification requirement if the Belgian target’s turnover exceeds EUR 25 million or EUR 100 million, respectively. For many transactions, it is not always easy to identify the relevant threshold as the categories listed in the Belgian legislation overlap to some extent. In such cases, the lower threshold applies.

Greenfield investments are not currently subject to prior notification. Asset deals, however, may be caught to the extent they result in a change of control, as may internal restructurings.

What is the risk? Transactions that fall within the scope of the regime must be approved before they are allowed to be implemented (the so-called “standstill” obligation). A standstill obligation prohibits parties from completing the transaction until cleared by the competent authority. Breaches can result in fines of up to 30% of the investment value.

What is the procedure and how long does it take? The ISC Secretariat first conducts a preliminary review of the notification documentation and can request parties to add any missing information. There is no formal time limit for this preliminary phase, but the first 12 months’ experience shows that the ISC Secretariat’s review typically only takes about a week, with 6 days on average.

Once the ISC Secretariat confirms that the notification is complete, it shares the documents with the competent members of the ISC and the Coordination Committee Intelligence and Security.[2] The ISC then has 30 days to review the transaction and either approve it or open a more detailed screening procedure. The 30-day time-limit can, in some circumstances, be suspended, extended or restarted (“interrupted”). Based on the experience of the first 12 months, the average processing time from notification to the ISC Members’ decision in this so-called “verification procedure” is only 31 days. 

A screening procedure, if initiated, involves a deeper assessment of risks to public order or national security. This procedure takes at least 28 days but is often extended, e.g. due to oral hearings, remedies, comments from the European Commission, request for additional information etc. At the end of this process, the ISC may approve the transaction, impose conditions, or block it. In the first 12 months, the ISC initiated the screening procedure five times, one of which was concluded within 52 days from notification. Generally speaking, ISC Members therefore do not use the entire time which is allotted to them to adopt a decision. 

For further information on the Belgian FDI regime, we refer to our previous article on this topic as well as the summary document of the requirements.

Thoughts and lessons learnt 15 months in

Strategic or not? All FDI regimes inherently possess a level of opacity. This is understandable as the standards against which screening authorities are evaluated pertain directly to the fundamental aspects of safety, public order, and the strategic interests of the relevant Member State. It is self-evident that a Member State would prefer not to reveal these interests, as such disclosure in itself could already have negative consequences.

The opacity in Belgium is, however, increased by the country’s complex, multi-layered governance structure. As the name suggests, the “Interfederal Screening Commission” is composed of 12 members each representing one of Belgium’s nine federal, regional, and community governments or commissions.[3] This broad representation ensures that all levels of government are involved in foreign investment screening, protecting their respective interests.

While the Annual Report provides some guidance as to the ISC Member’s competence, notifying parties have no certainty in that regard. A Member's competence is determined by a territorial link to the investment, typically based on the location of the headquarters or place of establishment of the Belgian target company, but other factors may also apply. Therefore, it is not always evident which authorities will participate in the decision-making process. As all governance levels within the Belgian federated structure have their own concerns and focuses, notifying parties are, to some degree, navigating blindly when developing a narrative to alleviate concerns in their notification documentation. This issue is aggravated by the fact that each competent ISC Member conducts its screening responsibilities largely independently. 

The ISC is, however, aware that the regime lacks clarity and transparency and has indicated it plans to keep looking for suitable solutions. This attitude is highly commendable.

Little interaction with the authorities possible, but an approachable and responsive Secretariat. The ISC Secretariat is at the heart of the Belgian FDI regime and functions as a central coordinator for the different members and the notifying parties. Because the ISC Secretariat is not in the driver’s seat when it comes to the decision-making process, it is very difficult for this entity to develop a practice as an interlocutor for anything that goes beyond pure procedure. For example, prenotification discussions, which are common in other regulatory approval regimes, like merger control, are unlikely to become practice. 

That said, the one-stop shop system, where notifying parties only need to notify once, is commendable as it prevents duplication (or rather, nonuplication) of notifications to the different competent governments in Belgium. Notwithstanding this, based on our experience, the ISC Secretariat is also notably responsive. It endeavours to provide guidance where possible, even though this usually boils down to "notify in case of doubt".

Impact on contractual documentation. Much like merger control processes, the Belgian FDI regime warrants a certain level of hedging in transaction documentation:

• First, parties should undertake a thorough assessment to ascertain whether the Belgian FDI regime applies;
• If considered applicable, contracts should include a condition precedent that regulatory approval should be obtained before closing;
• It is also recommended to include a provision to require non-notifying parties to cooperate with the process and provide the necessary information within a reasonable timeframe;
• Typically, parties also include long-stop dates, but these should be sufficiently far in the future to accommodate for any clearance delays; and
• Finally, but importantly, provisions for remediation options and the implications of potential refusal by the ISC should be included.

Parties should, however, keep the lack of transparency of the regime in mind when defining the level of contractual risk they wish to engage. For example, because decisions are not published and even parties are not given insight into the considerations of the ISC, it is not always possible to anticipate what remedies could be needed to assuage the authorities’ concerns. This is different from merger control, where an extensive catalogue of decisions, judgments and guidelines as well as economic assessment allows parties to form a preliminary view of the remedies that may be required to gain approval. Parties may therefore want to keep certain leeway to walk away from the investment in case the required remedies become unacceptable from a commercial standpoint.

If you need more information or further guidance in this area, please contact Paul Hermant, Baptist Vleeshouwers and Claire De Neve.

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[1] Higher levels of investment in some of those countries may naturally also have played a role in the figures.

[2] The Coordination Committee Intelligence and Security consists of the heads of the authorities and services involved in intelligence and security policy like the Federal Policy, the National Crisis Centre and the State Security Service.

[3] The Federal State, the Flemish Region, the Walloon Region, the Brussels Capitol Region, the Flemish Community, the French Community, the Germanophone Community, the French Community Commission and the Joint Community Commission.