On February 16, 2017, the Ministry of Economic Affairs published its consultation document of the Act on unwanted control in telecommunication entities. This articles provides a brief overview of the proposal act and an explanation on its most important features.
The background of the consultation proposal act is colored by takeover attempts of Mexican América Movíl of the Dutch telecom operator KPN in 2013. The proposal features a new chapter 14a in the Netherlands Telecommunications Act, and has a much broader scope than the major telecom carriers only: It covers the telecom sector in its broadest sense, and the proposed rules affect both listed and private companies.
In short, the proposed legislation aims to prohibit the existence of ‘control’ in a ‘telecommunications party’ that leads to a relevant influence in the telecommunications sector in the hands of a party that is not, or not exclusively, acting from legitimate business interests, but (also) from geopolitical or criminal motives.
The proposal gives a broad definition of the key term ‘telecommunications party’. It includes legal entities with presence in Netherlands, whether incorporated under Netherlands law or other foreign law, and any type of unincorporated contractual partnerships.
Moreover, the scope of the definition is not limited to providers of publicly available electronic communications networks or publicly available electronic communications services. Also non-public networks and services are covered by the term, as well as hosting services, internet exchanges and data centers. Not only the service providers themselves, but also the parties that have ‘actual control’ over these networks are considered ‘telecommunications party’ that fall under the provisions of the act, provided they are located in the Netherlands.
The proposal Act provides for special authority for the Minister of Economic Affairs to decide upon a prohibition of control by the affected party in the relevant telecommunications party if the public order and national security is or could be negatively affected. Geopolitical motives and protection of the integrity of the infrastructure for communication are key aspects taken into account. The prohibition is also made public and published in the Government Gazette.
Core of the proposal Act is the possible prohibition for a specific party to have or acquire ‘control’, which includes – in short – the ability to directly or indirectly, alone or jointly, cast 30% or more of the votes in the general meeting, or the ability to appoint or dismiss more than half of directors or supervisory directors, or the holding of a priority (‘golden’) share.
Only Netherlands-based operations can be a ‘telecommunications party’ within the meaning of the act. If the parent company of the telecommunications party is located abroad and the subsidiary is Netherlands-based, the act applies to the subsidiary only. This geographical limitation does not mean, however, that a possible change of control in the foreign parent company would not fall within the scope of the act. The parent company is assumed to have control in the (Dutch) telecommunications party. Hence, if the parent is the subject to change of control, the (indirect ability to) control in the Dutch subsidiary coincidentally changes. The explanatory notes to the proposal specifically indicate that in such case, if the new owner of the parent company constitutes a threat to national security or public order, the Minister can decide to impose a prohibition of control in this telecommunications party and the order for the parent to dispose of the Dutch subsidiary (the telecommunications party) within a reasonable period of time.
National security or public order
The act includes a set of provisions stipulating the facts and circumstances that the Minister must take into account when assessing threats to public order or national security and imposing a prohibition of control. The proposal Act also makes it possible to put an end to an existing control by noting a relevant telecommunications party. However, this is only possible if the facts and circumstances in respect of which the Minister of Economic Affairs establishes that the national security or public order may be endangered occur or become known to the Minister of Economic Affairs after the acquisition of the controlling stake by the relevant party.
The circumstances that can lead to a prohibition can be broadly defined. They include the (threat of) privacy sensitive data breach, long-term interruption of internet access or telephony, certain vital internet services, the availability or reliability of any product or service of a ‘vital’ telecom provider categories as specified in the act to in the law data processing and hailing cyber security, intelligence services, defense tasks, emergency services and any other circumstances as may be determined by the Minister from time to time.
Legal effect of prohibition
The legal effects of a prohibition on getting control must be distinguished from the effects of a prohibition on holding control that has already been acquired. If the prohibition is imposed before the control is acquired the acquisition would be void under Dutch law. If the prohibition is imposed at the time the dominant control has already been obtained, the relevant holder of control is prohibited by the Minister to exercise shareholder rights as shareholder, member or partner in the company (not only on the rights above the limit of 30%, but all voting rights collectively) with the exception of the right to dividend and reserves. The holder of control must in addition within a reasonable period of time set by the Minister reduce or terminate its controlling interest in the affected telecommunications party so that it no longer has ‘control’.
About some technical aspects of the proposal is a lot to say. And a number of aspects raise questions from legal and business commercial perspectives. for example one can wonder whether the Minister with sufficient resources to find out who acquires or has acquired significant influence in the indirect atmosphere, especially if the underlying interests are held abroad. For listed companies, the already existing substantial interest register will help. But many telecom operations in the Netherlands are in privately owned. It is premature, but it is likely that the Central register of shareholders (CAHR) and UBO registry (as proposed in separate legislative proposals) will also be an important source of information. But the proposal act also provides for the mandatory research and disclosure of shareholder information by the affected telecommunications party to the Minister in the event of a suspicion that endanger national security or public order.
Although the content of the final legislation is certainly not cast in stone yet, it is clear that the telecom sector in Netherlands will be affected by restrictions and legislation that will draw special attention in M&A situations. In particular, foreign telecom parties or investors in the Dutch telecom sector are expected to seek thorough guidance and understanding of the possible legal consequences of the act and the commercial risks involved.
Should you have questions about the subject matters of this contribution, please contact Rogier Dahmen, firstname.lastname@example.org