Dutch Ministry of Economic Affairs submits draft legislation to act against undesired control in the telecom sector

1. Introduction

The call for this legislation originates from the takeover attempt by América Móvil on KPN in September 2013, which created public awareness about the risks of the increasing dependence by governmental and public services on communication services and telecom infrastructure and the vital role of telecom infrastructure and telecom services in society. Parliament concluded that additional legislation was required to protect the national safety and public order against parties acting on the basis of geopolitical motives in the telecom sector by using its control in the telecom sector as a political instrument.

Currently, the TA provides for various measures to protect the safety and integrity of the Dutch telecom infrastructures and services itself, but – in the view of the government - there are currently insufficient measures to prevent parties that have geopolitical motives to acquire control in the telecom sector. This legislative proposal is intended to fill this gap.

The legislative proposal and the definitions used in it are formulated very broadly and leave quite a window of interpretation. In combination with the transboundary effect of the legislative proposal, this creates significant legal uncertainties. Furthermore, one should bear in mind that this legislative proposal also applies to listed telecom parties, and may thus impact the international trade in listed securities issued by such telecom parties.

In the explanatory notes to the legislative proposal, the State Secretary considers the European law aspects of the proposal, including (the limitation of) the free movement of capital and of services and the freedom of establishment, and the first protocol of the European human rights treaty, but considers the limitation of these rights proportionate and sufficiently qualified. She is also of the view that European competition law does not impede this legislative proposal.

One can think of quite a few arguments contrary to this assessment. And the Council of State (Raad van State) - which has the statutory authority to advice the government on legislative proposals - has even advised government not to submit the legislative proposal to Parliament in its current form. How this will affect the further legislative process and the discussions in Parliament and in the Senate remains to be seen.

One may thus expect that this legislative proposal will cause heated debates both in and outside Parliament and will trigger intensive lobbying.

2. Legislative proposal

2.1 Introduction

The proposal introduces a notification requirement applicable to anyone who has the intention to acquire a controlling interest in a 'telecom party' if such interest results in 'relevant influence' in the telecom sector. The notification must be submitted with the Minister of Economic Affairs and Climate Policy (the "Minister") eight weeks before the 'envisaged execution of this intention'[2]. If the intention regards a public offer on a listed telecom party, the notification must be made no later than at the time of announcement of the public offer.

If the controlling interest may result in a 'threat to the public interest', the Minister shall prohibit the acquiring or holding of such controlling interest.

The Minister shall decide within eight weeks whether he will impose a prohibition, but if further investigation is required, he can extend that period with six months (!). This term will be suspended when the Minister requires more information and asks questions. During the assessment period, there is no standstill obligation, but if the parties proceed with the intended transaction before the Minister has decided on the notification, they will run the risk that the transaction must be rescinded if the Minister considers the acquisition a threat to the public interest and imposes a prohibition.

If the Minister decides not to impose a prohibition, he can still do so if the notification included incorrect or insufficient information; or if the facts or circumstances which the Minister considers to threaten the public interest, only become known to him after he has taken his initial decision (this authority has not been limited in time). Additionally, the Minister may impose such prohibition without a preceding notification, in case the Minister becomes aware of facts or circumstances that in its view may threaten the public interest. He must do so within eight months after he becomes aware of the facts or circumstances which he considers to threaten the public interest.

Failure to notify an intended transaction that is subject to the notification obligation or failure to notify timely may result in a fine of maximum € 900,000. Moreover, such acquisition can still be prohibited. As a prohibition can be imposed both before and after acquiring the controlling interest, it is in the interest of the acquiring party to notify its intention in good time and obtain legal certainty as soon as possible.

2.2 Important definitions

The legislative proposal introduces a number of relevant definitions:

i. Telecom party: defined as a branch or legal entity established in the Netherlands, sole proprietorship or company, being a provider or holder of controlling interest in a supplier of: (a) an electronic communications network or service; (b) a hosting service, Internet node, trust service or data centre; excluding data centres for own use; or (c) a category of networks or services designated by governmental order (Algemene maatregel van bestuur);

ii. Controlling interest exists when the holder or acquirer of that control after the acquisition: (a) alone or together with persons acting in concert, directly or indirectly possesses at least 30% of the votes cast in the general meeting of a legal person; (b) whether or not by virtue of an agreement with others, alone or together with persons acting in concert can appoint or dismiss more than half of the managing directors or of the supervisory directors of a legal entity, even if all voters vote; (c) holds one or more shares with a special statutory right of control; (d) has a branch, being a telecom party; (e) becomes fully liable as a partner towards creditors for the debts of the company acting under its own name, or (f) owns a one-man business (eenmanszaak[3]);

iii. Relevant interest in the telecom sector exists if (possible) abuse or deliberate outage of the telecom party, and any other telecom parties in which the holder or acquirer or the group to which the holder or acquirer belongs holds or acquires controlling interest, may lead to: (a) an unlawful breach of the confidentiality of the communication, or an unlawful interruption of the Internet access service or telephone service of the number of end-users as determined by governmental order; (b) an interruption of the availability or verification of a significant part of the services and applications delivered over the Internet; (c) an interruption of the availability, reliability or confidentiality of a product or service for the purposes of a public duty in the fields of national security, defence, the maintenance of the rule of law, or relief efforts as determined by governmental order; (d) other serious consequences stated by governmental order with regard to the continuity of service provision by a telecom party or confidentiality of communication. Furthermore, even if the control over the targeted telecom party in itself does not lead to any of these consequences in case of abuse or outage, there can still be relevant interest if the acquirer controls other telecom parties and abuse or outage of these parties jointly can have any of the aforementioned consequences.

iv. A threat to the public interest exists if the controlling interest leads to relevant interest in the telecom sector (as defined under iii.), and: (a) the transferee or holder is an unwanted person or a State, entity or person of which it is known or for which there are grounds to suspect that it has an intention to influence a telecom party to allow abuse or deliberate outage; (b) the transferee or holder has close links with or is under the influence of a State, entity or person as referred to under (a), or a person in respect of whom there are grounds to suspect such links or influence; (c) the transferee or holder has a record such that it significantly increases the risk that the consequences referred to in under (a) to (d) of the definition of relevant interest will occur; (d) the identity of the actual holder or transferee cannot be established; or (e) the transferee or holder does not cooperate, or cooperates insufficiently, in the investigation of the conditions under (a) through (d).

As indicated in the introduction, these definitions are formulated very broadly and leave quite a window of interpretation. The State Secretary has indicated that she will provide for objectively measurable criteria to determine if and when acquiring controlling interest results in relevant interest in the telecommunications sector in a governmental order at a later stage.

2.3 Additional measures

In addition to the introduction of the notification requirement and possibility for the Minister to prohibit the intended acquisition or existing holding of a controlling interest in a telecom party, the proposal provides for various related requirements and measures, the most important of which are highlighted below. As follows from the below, many of these requirements and measures impact the telecom party which is the subject of the controlling interest as well as the company intending to acquire a controlling stake in such telecom party.

The proposal provides for the authority by the Minister to initiate an investigation (by the relevant telecom party) in case of facts or circumstances which cause the Minister to know or suspect that a controlling interest exists which may threaten the public interest.

If the Minister imposes a prohibition to acquire or hold a controlling interest in a telecom party, the addressee of such prohibition will be required to reduce or terminate its interest in the telecom party to a level that it no longer holds a controlling interest within a reasonable period to be determined by the Minister. Such person will not be entitled to transfer its interest (or part thereof) to (a) an undesired person (which is also a defined term); (b) a person who is subject to a prohibition to acquire or hold a controlling interest in a telecom party; or a person who has close ties with or who is under the influence of a person referred to under (a) and (b). A transfer of interest in violation of the Minister's prohibition or in violation of the aforementioned statutory prohibition will be null and void (nietig) (unless executed via a stock exchange).

If the addressee of the prohibition does not reduce or terminate its controlling interest in accordance with the Minister's order, the relevant telecom party shall be exclusively and irrevocably authorised and obliged to dispose of the relevant shares in accordance with the order or otherwise reduce its interest on behalf of and for the account of the holder of the controlling interest.

Furthermore, if the Minister imposes a prohibition to hold or acquire a controlling interest in a telecom party, the addressee of such prohibition shall not be entitled to (a) exercise its voting rights or other rights attached to its interest, excluding its entitlement to dividend or distribution of reserves; and (b) exercise the rights attached to its ownership in the a one-man business (eenmanszaak), excluding its entitlement to proceeds of the business. The relevant telecom party shall be required to respond to such suspension (by preventing the relevant party to exercise these rights). Additionally, if the Minister considers such required to ensure the enforcement of such suspension, he can appoint one or more persons who can give orders to the relevant telecom party to (a) ensure the cooperation with the suspension or (b) prevent abuse or disruption of the network or service of the relevant telecom party. The Minister can even decide to replace the relevant telecom party's management by such appointee(s), fully or partly. The relevant telecom party (and its managing directors, directors and employees) shall be required to provide all relevant information to and fully cooperate with such appointee(s). Legal acts in violation with the order of such appointee(s) shall be subject to nullification (vernietigbaar) and such appointee(s) cannot be held liable for damages as a result of his/their orders.

Finally, the proposal stipulates that it shall be prohibited to conclude, extend or renew an agreement with a telecom party without the Minister's consent, if the abuse or deliberate failure of such agreement may lead to the consequences that make a controlling interest qualify as relevant interest, if this agreement results in a third party acquiring lasting control over the network or the services or a part thereof. The Minister shall be required to approve such agreement, unless he considers the agreement a threat to the public interest. The Minister's approval can be made subject to regulations or limitations.

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[1] An earlier draft has been published for consultation. According to the explanatory notes, 14 parties submitted their views on the consultation document.

[2] It is unclear whether this means eight weeks before signing or eight weeks before closing, but the words 'execution of this intention' (uitvoering van dit voornemen) seems to indicate closing.

[3] In the explanatory notes it is stated that this section (f) is intended to cover the situation where a party takes over the business of a telecom party by way of an asset and liability acquisition, but the notes do not explain how this is intended to work