New Danish rules on investment screening enter into force

The new investment screening rules

On 4 May 2021, the Danish Parliament passed the first Danish Act on screening of certain foreign direct investments, etc in Denmark (the "Investment Screening Act"). 

The Act provides that, in future, a large number of investments in and agreements with Danish entities and companies made by "foreign investors", including both foreign companies and citizens and Danish companies and entities subject to foreign control or influence, will require prior authorisation from the Danish Business Authority (the "DBA") or the Danish Minister for Industry, Business and Financial Affairs. The Act further provides that other investments in and agreements with Danish companies may, for up to five years from their completion, be investigated by the DBA or the Danish Minister for Industry, Business and Financial Affairs, and may potentially be ordered to be divested. Read Plesner's previous Insight on the Investment Screening Act here.

The Act is supplemented by three ministerial orders, among these primarily the Application Order and the Procedural Order, providing specific rules on the scope of the Act and the procedure for applications for authorisation for or notification of foreign investments. 

The Act and the related ministerial orders enter into force on 1 July 2021 but will only apply to investments and agreements completed on 1 September 2021 or later.  However, the DBA suggests that applications for authorisation for or notification of foreign investments and special economic agreements may be filed already from 1 July 2021, provided that they will be completed on 1 September 2021 or later. On 1 July 2021, the DBA published forms and guidance to be used in connection with applications - including applications for pre-screening - and notifications. See the DBA's news about the rules on investment screening here (in Danish).

The Application Order

The Application Order provides specific rules on the scope of the Investment Screening Act. On certain points, the Order includes a delimitation of the scope of the Act and, on certain points, an extension of it compared to the actual Act.

The scope of application is delimited by the following provisions:

• A "lower threshold" is introduced for the formation of new companies (greenfield investments) to the effect that "capital injections" which do not exceed DKK 75 million are exempt from investment screening during the three first financial years following the formation of a new company, unless such a newly formed company is the subsidiary of a foreign investor. Capital injection means the addition of both equity and long-term non-callable loans. The same applies to economic agreements concluded with newly formed companies. If the capital injection or the agreement exceeds a value of DKK 75 million over the three-year period, an application should be made for authorisation of the part of the injection or the agreement exceeding that amount. Investments already completed or agreements below the lower threshold remain unaffected.
  
   
• It is specified what is meant by each of the five "particularly sensitive sectors" which are subject to compulsory application for authorisation prior to the completion of the foreign investment if the foreign investor acquires at least 10% of the shares or the voting rights (or similar control by other means). The Order specifically includes a listing of relevant "critical technology" and "critical infrastructure". It is pointed out that only companies and entities that are "required in order to maintain or restore" one or several of certain functions critical to society listed in the order are deemed to be critical infrastructure within the meaning of the Act.
  
   
• As for joint venture agreements entered into with Danish companies, it is pointed out that joint venture agreements are merely deemed to be "special economic agreements" if they relate to research and development activities and the foreign investor acquires control with or significant influence over the Danish company or entity through the agreement. The meaning of relevant "control over or significant influence" is also specified. 
  
   
• As for supplier agreements and operation and service agreements, three alternative criteria are introduced for deeming such agreements to imply "control or significant influence" and thus make them subject to investment screening, ie (i) the agreement was entered into for a period longer than 24 months or is non-terminable for a period longer than 12 months, (ii) the agreement entails a right to decide/control/unsupervised access to the Danish company or entity, or (iii) the foreign contracting party can only be replaced subject to a significant risk to the continued operation of the company or to the completion of business-critical development activities.
  
   
• It is further pointed out that joint venture agreements, supplier agreements and operation or and service agreements entered into in accordance with generally applied standard agreements do not constitute special economic agreements, and are thus not subject to the Act.
  
   
• Finally, joint venture agreements, supplier agreements and operation and service agreements entered into between associated companies are not subject to the Act either. 

The scope of application is expanded by the following provisions:

• In terms of foreign investors, it is stipulated that the Act includes investments and agreements made or entered into by (i) national authorities and state bodies outside the EU/EFTA, including public institutions and state-owned  investments funds, and (ii) voluntary organisations, private foundations and similar legal entities outside the EU/EFTA.
  
   
• In terms of Danish companies, it is stipulated that the Act also includes (i) joint venture agreements entered into with Danish public and private research institutions in the particularly sensitive sectors and (ii) investments in and agreements with Danish public authorities and institutions within critical infrastructure.

Finally, the Application Order lays down, as something new, that in future it will be possible to request that the DBA carry out pre-screening of a contemplated investment or special economic agreement. 

Pre-screening implies that a foreign investor - or a Danish company on behalf of such an investor - may request that the DBA assess whether a contemplated investment or agreement concerns "critical technology" or "critical infrastructure". Following this, the DBA may provide confirmation that the investment or the special economic agreement does not concern one of these sectors or, if the DBA finds that additional information is needed, demand an actual application for authorisation of the contemplated investment or agreement. 

Access to pre-screening thus merely comprises questions as to whether a contemplated investment or agreement falls within the Act because it involves a Danish company or entity having activities within "critical technology" or "critical infrastructure". However, it is noted that it is implied in the legislative material for the Investment Screening Act that the DBA may also be contacted for the purpose of guidance on other questions. The DBA suggests establishment of a digital mailbox to which more general questions about the rules may be directed.

The Procedural Order

The Investment Screening Act includes specific rules on procedures in connection with the application for authorisation or notification of foreign investments. 

In addition, the Procedural Order includes the rules regulating the process for investment screening. They are in particular the following:

• Applications for authorisation to complete an investment or a special economic agreement, requests for pre-screenings and notifications of investments or special economic agreements must be filed by using the DBA's forms and submitted digitally to the DBA by using the self-service solution at www.virk.dk. The DBA published the forms and related guidance when the rules came into force on 1 July 2021.
  
   
• In connection with an application or notification, information must be provided about both (i) the  investment agreement, (ii) the foreign investor, and (iii) the Danish company or entity. The information to be provided in the various applications etc is specified in the Procedural Order.
  
   
• The DBA may request that the foreign investor provide all supplementary information that is necessary to assess whether a contemplated investment or special economic agreement may constitute a threat to national security or public order. Likewise, the DBA may procure information from the Danish company or entity for the purpose of verifying the foreign investor's information, or for the purpose of obtaining additional information.
  
   
• The DBA may request that the supplementary information is accompanied by a declaration on the correctness of such information provided by an auditor approved under the Danish Audit Act.
  
   
• The DBA may propose that a foreign investor provides an undertaking on conditions to prevent any threats against national security or public order linked to the investment. For this purpose, the DBA will prepare a template for undertakings on compliance with specific conditions for foreign direct investment or special economic agreements.

The Procedural Order also includes a number of essential rules contributing to specify the scope of the Investment Screening Act. This involves:

• An exception is introduced with respect to certain intercompany investments. Changes in holdings or the size of or control over shares or voting rights or similar control by other means in a Danish company or entity that take place within a group will not be subject to investment screening if such changes do not entail an increase of shares, voting rights or similar control over other funds in excess of the thresholds of the Investment Screening Act.
  
   
• It is pointed out that neither the establishment nor the realisation of charges on shares, voting rights or assets as security for a loan or other commitments constitute a foreign direct investment.
  
   
• It is described how to calculate a "qualified shareholding". As a consequence, the calculation is also, in addition to shares belonging directly  to the foreign investor, to make allowance for shares belonging indirectly to the foreign investor, or which the foreign investor exercises influence over through a related party. The percentage of the foreign investor's or related person's shares and voting rights is calculated based on the percentage for each company in the ownership chain.
  
   
• A definition is introduced of the types of "similar control by other means" which may be compared with the acquisition of shares or voting rights and thus trigger investment screening. It comprises the right of disposal of voting rights by virtue of agreements, powers to make or approve certain decisions, the right to appoint or remove members of a management body and acquisition of or control over all or a considerable proportion of the assets of a Danish company or entity.

Plesner's comments

The Investment Screening Act provides that, in future, a large number of foreign investments and special economic agreements in particularly sensitive sectors will be subject to prior authorisation. In all other sectors, investments and  agreements may, for up to five years from completion, be investigated by the authorities, and may potentially be ordered to be divested. 

Accordingly, in future, Danish companies and other entities must consider whether the DBA must or should be notified prior to the completion of a relevant investment or the conclusion of a special economic agreement. Danish companies and entities should also be aware that they are deemed to be foreign investors if they are subject to control or significant influence by a foreign party, for instance a parent company. The rules propose several complex assessments to be made prior to any relevant investment or agreement.

Even if the Application Order and the Procedural Order have contributed to define the new investment screening rules, the rules are still subject to several ambiguities. They will probably only be clarified concurrently with the enforcement of the rules in practice and with the DBA getting sufficient experience as a result to issue guidance etc.

The remaining uncertainties relate to for instance the definitions of the particularly sensitive sectors. Matters of dispute are expected to arise in terms of what the particularly sensitive sectors "IT security functions or processing of classified information" and "critical infrastructure" cover, including when a company is deemed to be "necessary to maintain or restore" an essential function.

Moreover, there is still doubt about how to apply the rules to indirect investments. The Investment Screening Act and the Procedural Order both seem to imply that also indirect investments in Danish companies and entities may be subject to investment screening but the procedure in connection with such investments is not clear from neither the Act nor the ministerial orders.

Even if the Investment Screening Act and the ministerial orders come into force on 1 July 2021, they will only apply to investments and agreements completed on 1 September 2021 or later.  However, the DBA has advised that it will be able to receive and process applications and notifications, including requests for pre-screening, already from 1 July. It means that Danish companies and entities can already now benefit from informing themselves about and adapting to the new rules. Also, the transition period until 1 September may be used to ensure that any investment targets and strategies comply with the new rules. The period can also be used to address any questions of doubt by contacting the DBA.

Plesner will be following developments in this area.

Read the Application Order [in Danish]

Read the Procedural Order [in Danish]

Read the Confidentiality Order [in Danish]