Upcoming Danish rules on FDI screening
Background
In recent years, there has been growing concern that foreign direct investments ("FDI") may pose risks to national security and public order. This issue has attracted heightened political attention as a result of the Covid-19 crisis, which left many companies vulnerable to foreign takeovers.
In October 2020, an EU Regulation entered into force, setting minimum requirements for national FDI screening mechanisms. In March 2020, the European Commission also issued guidance on the application of FDI screening during periods of health crises and economic instability.
At present, Denmark only has limited sector-specific FDI screening mechanisms, notably under the War Material Act and the Continental Shelf Act.
On 10 March 2021, the Government proposed a new general FDI Screening Act (see the Danish bill here).
General remarks
The Act introduces both a mandatory approval regime for investments, etc. in Danish companies operating within particularly sensitive sectors and activities, and a voluntary notification regime for investments, etc. in all other sectors.
The Act will cover not only investments involving the acquisition of ownership interests and/or voting rights, but also "equivalent control by other means". This includes asset purchases, long-term loans, and "special financial agreements", such as joint ventures as well as supplier, operations, and service agreements.
The following provides an overview of the types of investors and investments, etc. to which the new rules apply, together with the main elements of the two screening regimes. However, certain key terms will be defined and clarified in forthcoming executive orders, and several interpretative issues are expected to be resolved through the practical application of the rules.
Covered types of investors, etc.
The rules primarily apply to investments, etc. made by companies domiciled outside the Kingdom of Denmark (comprising Denmark, Greenland, and the Faroe Islands) ("foreign companies") as well as by natural persons who are not Danish citizens ("foreign nationals").
The rules also apply to companies domiciled within the Kingdom of Denmark that are subsidiaries or branches of foreign companies, or that are otherwise under the control or significant influence of foreign companies or foreign nationals ("foreign-controlled Danish companies").
Some of the rules apply only to companies and nationals from non-EU and non-EFTA countries (i.e. Iceland, Liechtenstein, Norway, and Switzerland), as well as to Danish companies controlled by such entities. However, the mandatory approval regime also applies to investments made by companies and nationals from other EU and EFTA countries (as well as Danish companies controlled by such entities).
Given the types of covered investments, the rules may be relevant for, among others: (i) industrial acquirers of companies or assets, (ii) professional investors, including private equity funds, pension funds, venture investors and other types of funds, (iii) lenders and other debt investors, including banks, financial institutions, debt funds and alternative lenders, and (iv) suppliers of goods or services, including producers of raw materials or components for high-tech products and suppliers of IT infrastructure.
The rules will also be relevant to sellers of Danish businesses (or parts thereof), who may face restrictions on selling to certain buyers, as well as to wholly Danish companies that may encounter challenges in, for example, obtaining venture capital from certain investors, using particular suppliers, or entering into joint ventures with specific partners.
Moreover, the rules may affect Danish companies’ access to international debt financing. This particularly applies to long-term loans that result in equivalent control by other means. In general, however, any form of debt financing may fall within the scope of the rules if security is granted in the form of pledges over equity interests in the Danish company. In addition, a creditor’s right to transfer debt may trigger a requirement for new approval or voluntary notification.
Covered types of investments, etc.
The rules will apply to foreign direct investments in the form of (i) ownership of, or control over, equity interests, (ii) ownership of, or control over, voting rights, and (iii) "equivalent control by other means", including asset purchases and long-term loans.
The investment must result in decisive influence on management, financial, development, or operational matters in the relevant business or in business-critical areas. Depending on the applicable regime, this requirement may be met through the acquisition of just 10% or 25% of the ownership interests or voting rights in the company.
Loans, other forms of financing, and pledges or security are generally not covered by the new rules unless they result in such extensive influence that they amount to control. This is particularly relevant for long-term, non-callable loans that include governance rights. In addition, the enforcement of security over ownership interests may constitute a direct acquisition of control.
The rules apply not only to direct investments in Danish companies but also to indirect investments, including loans to, or acquisition of, foreign companies with wholly-owned subsidiaries or branches in Denmark. The rules may also apply to, for example, the acquisition of 10% or 25% or more of the ownership interests or voting rights in foreign companies that own Danish subsidiaries or branches, or to the acquisition of foreign companies that exercise control over such ownership in Danish companies.
The rules also apply to the establishment of new companies in Denmark by foreign companies (or by foreign-controlled Danish companies) ("greenfield investments").
Furthermore, the rules apply to "special financial agreements", including joint ventures and supplier, operations, and service agreements. For such agreements, it is required that they confer decisive influence over the Danish company. According to the legislative comments, this may be the case for long-term, non-callable supplier, operations, and service agreements where the supplier is not easily replaceable, or where the agreement enables the supplier to interfere, physically or electronically, with the operation or business-critical functions of the Danish company.
The mandatory approval regime for particularly sensitive sectors
The bill introduces a mandatory approval regime for relevant investments, etc. in Danish companies operating in sectors considered particularly sensitive.
This includes the following:
- Companies in the defence sector, including those developing or producing weapons, ammunition or other military technologies, or providing services important to Danish defence.
- Companies involved in IT security functions or processing classified information, including those developing, producing or maintaining products with IT security functions or providing services used for handling classified data.
- Companies producing so-called dual-use products, which may be used for both civilian and military purposes.
- Companies operating in other critical technologies such as artificial intelligence, robotics, 3D printing, aerospace, energy storage, quantum and nuclear technologies.
- Companies in critical infrastructure that supports socially important functions, including within energy (gas, electricity, oil, water), ICT, transport, contingency planning and civil defence, healthcare, social affairs, drinking water and food, wastewater and waste disposal, finance and economy, and education and research.
The mandatory approval regime means that such investments cannot be completed without prior approval, even if the parties have assessed themselves that the investment does not pose a threat to national security or public order.
When an investment is deemed to be completed depends on the nature of the transaction. For share acquisitions, the relevant point in time is the notification to, and/or registration with, the Danish Business Authority’s registers. In practice, however, completion of the "closing" is expected to be conditional upon obtaining the relevant approval. For special financial agreements, the decisive point in time is the date of signing.
The approval requirement for special financial agreements applies only to foreign companies and nationals from outside the EU and EFTA (and to Danish companies controlled by such parties). For investments, however, the requirement also extends to companies and nationals from other EU and EFTA countries (as well as to Danish companies under their control).
Approval is required for acquisitions of at least 10% of the ownership interests or voting rights (or equivalent control by other means). Renewed approval is required upon reaching thresholds of 20%, 1/3, 50%, 2/3, and 100%.
The voluntary notification regime for all other sectors
For all sectors other than those regarded as particularly sensitive, there is an option for voluntary notification of investments, etc. where there is a risk that the investment may pose a threat to national security or public order.
However, this applies only to acquisitions of at least 25% of the ownership interests or voting rights (or equivalent control by other means). In addition, the voluntary notification regime, both in relation to investments and special financial agreements, applies only to foreign companies and nationals from non-EU and non-EFTA countries (as well as to Danish companies controlled by such parties).
For such investments, the Danish Business Authority may, within five years after the transaction is completed, initiate an investigation to assess whether the investment poses a threat to national security or public order. If it is found to do so, the Minister for Industry, Business and Financial Affairs may order the investment to be unwound.
The purpose of the voluntary notification regime is to enable companies to clarify in advance whether an investment, etc. is considered to pose a threat to national security or public order, thereby avoiding the risk of a subsequent divestment order.
Authorities’ handling of applications and notifications
Under both screening regimes, the application and notification must be submitted to the Danish Business Authority.
The Danish Business Authority generally has 60 business days to assess the investment, etc. Under the mandatory approval regime, the deadline may be extended to 90 business days in certain cases.
If the Danish Business Authority assesses that the investment, etc. may pose a threat to national security or public order, the foreign investor may offer to comply with specified conditions to address the Danish Business Authority’s concerns. If no agreement is reached, the case is referred to the Ministry of Industry, Business and Financial Affairs.
Following consultation with the Minister for Finance, Minister for Foreign Affairs, the Minister for Justice, the Minister of Defence, and other relevant ministers, the Minister may either approve the investment, etc. unconditionally, impose conditions, or prohibit it altogether. If the investment falls under the voluntary notification regime and has already been completed, the Minister may also order it to be unwound. There are no statutory deadlines for the Minister’s review of the case.
If an investment covered by the mandatory approval regime is carried out without prior approval, or if a foreign investor breaches agreed or imposed conditions, the Danish Business Authority may order the investment to be unwound. If such an order is not complied with, the Danish Business Authority may suspend the investor’s voting rights in the Danish company.
However, foreign investors cannot be subjected to criminal sanctions for breaches of the rules.
Entry into force and next steps
The bill is currently being debated in the Danish Parliament and is expected to be adopted on 4 May 2021 (read more here).
According to the bill, the Act will enter into force on 1 July 2021. However, the rules will apply only to investments and special financial agreements carried out on or after 1 September 2021.
The Danish Business Authority is currently working with various industry organisations to draft the executive orders that will define and further delimit several key terms in the bill. This includes providing a more detailed definition of the particularly sensitive sectors and the special financial agreements covered by the mandatory approval regime.
The executive orders are expected to be published for public consultation at the end of May and subsequently finalised on 1 July 2021.
Practical considerations
M&A transactions
We expect the new rules to add complexity to M&A transactions. This will affect the planning phase, where it will be necessary to assess whether a potential M&A transaction requires mandatory approval or whether a voluntary notification is appropriate.
The rules may also result in extended periods between signing and closing in affected transactions, as completion cannot take place until the necessary approval or clearance has been obtained. In auction processes, this may give rise to new strategic considerations, for example where some bidders are subject to approval requirements while others are not.
In particular, during the initial period following the enactment of the regulations, all parties involved (participants, authorities, and advisors) will need to establish best practices for structuring M&A processes under the new regime.
Venture investments
Since the mandatory approval regime apply to acquisitions of just 10% of the ownership interests or voting rights (or equivalent control by other means), the rules will also be relevant for venture investments. Companies seeking such investments will need to recognise that venture funding in affected sectors may no longer be completed as quickly as before.
Ain addition, companies planning frequent investment rounds with the same investors must ensure, when applying for approval or (where relevant) submitting a voluntary notification, that those investors will be able to increase their ownership in subsequent rounds.
Loans and other debt financing
Regarding loans and other debt financing, the bill provides that the scope of the new rules will be further defined based on practical experience. For both lenders and borrowers, it is crucial to clarify whether new financing requires approval or voluntary notification, given the associated legal and commercial risks.
For example, a lender's ability to enforce security may be conditional upon approval. Similarly, a borrower may face demands for early repayment of the loan if the lender is ordered to divest the investment. In some transactions, it may become necessary to address the new rules expressly in the underlying finance documentation – a development already seen in international finance transactions under similar FDI screening regimes in other European jurisdictions.