New Danish rules on investment screening enter into force

The new investment screening rules

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

The Act provides that a broad range of investments in, and agreements with, Danish entities and companies carried out by a "foreign investor" – including foreign companies and nationals as well as Danish companies and entities under foreign control or influence – will now require prior approval from the DBA or the 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 after completion, be subject to investigation by the DBA or the Minister and may potentially be unwound. 

See Plesner’s earlier article on the Investment Screening Act.

The Act is supplemented by three executive orders, most notably the "Application Executive Order" and the "Procedural Executive Order", which contain more detailed provisions on the scope of the Act and the procedures for applying for approval or notifying foreign investments.

The Act and the executive orders enter into force on 1 July 2021 but apply only to investments and agreements completed on or after 1 September 2021. However, the DBA has indicated that applications for approval or notification of foreign investments and special financial agreements may be submitted from1 July 2021, if they are expected to be completed on or after 1 September 2021. 

On 1 July 2021, the DBA also published forms and guidance to be used for applications – including applications for pre-screening – as well as for notifications.

Application Executive Order

The Application Executive Order contains detailed provisions on the scope of the Investment Screening Act. In some respects, it narrows the scope of the Act and, while in others it expends it.

The scope is narrowed through the following provisions:

• A de minimis threshold has been introduced for the establishment of new companies (so-called "greenfield investments"). This exempts "capital injection" not exceeding DKK 75 million within the first three financial years after the establishment of a new company from investment screening, unless the newly established company is a subsidiary of a foreign investor. 
• "Capital injection" refers to both equity contributions and long-term, non-cancellable loan financing. The same exemption applies to special financial agreements concluded with newly established companies.
• If the capital injection or agreement exceeds DKK 75 million during the three-year period, approval must be obtained for the amount exceeding this threshold. Investments or agreements already made and falling below the de minimis threshold remain unaffected.
• A detailed description is provided of the five "particularly sensitive sectors", within which prior mandatory approval is required for a foreign investment where the foreign investor acquires at least 10% of the ownership interests or voting rights (or equivalent control by other means).
• The Executive Order particularly lists relevant "critical technologies" and "critical infrastructure". Only companies and entities considered "necessary to maintain or restore" one or more of the socially important functions listed in the Executive Order are considered critical infrastructure.
• For joint venture agreements entered into with Danish companies, it is clarified that such agreements only qualify as special financial agreements if they concern research and development activities and result in the foreign investor obtaining control of, or significant influence over, the Danish company or entity. The Executive Order also provides further clarification of what constitutes relevant "control or significant influence".
• With respect to supplier and operation/service agreements, three cumulative criteria are introduced to determine whether such agreements confer "control or significant influence", thereby triggering investment screening: (i) the agreement is entered into for a period longer than 24 months or is non-terminable for more than 12 months, (ii) the agreement contains decision-making authority/control/unmonitored access to the Danish company or entity, or (iii) the foreign supplier can only be replaced by another supplier at significant risk to the company's continued operation or the implementation of business-critical development project.
• It is further clarified that joint ventures, supplier agreements, and operation/service agreements entered into in accordance with commonly used standard agreements do not constitute special financial agreements and are therefore not subject to the Act.
• Finally, it is clarified that such agreements between affiliated group companies are also exempt from the Act.

The scope is expanded through the following provisions:

• Regarding foreign investors, the Act is extended to cover investments and agreements made by (i) national authorities and government bodies outside the EU/EFTA, including public institutions and state-owned investment funds, and (ii) non-profit associations, non-profit-making funds, and similar legal entities outside the EU/EFTA.
• Regarding Danish companies, the Act is extended to cover (i) joint venture agreements with Danish public and private non-profit research institutions within the particularly sensitive sectors and (ii) investments in, and agreements with, Danish public authorities and institutions within critical infrastructure.

The Application Executive Order finally introduces the possibility of requesting a so-called "pre-screening" of a contemplated investment or special financial agreement by the DBA.

A pre-screening allows a foreign investor – or a Danish company on its behalf – to request an assessment by the DBA of whether a contemplated investment or agreement involves "critical technologies" or "critical infrastructure". The DBA may subsequently confirm that the investment or special financial agreement does not relate to these sectors, or, if the DBA determines that further information is required, request the submission of an application for approval of the investment or agreement.

Pre-screening relates only to the question of whether a contemplated investment or agreement falls within the scope of the Act due to involvement of a Danish company or entity engaged in "critical technologies" or "critical infrastructure". It should be noted, however, that the legislative history of the Investment Screening Act assumes that the DBA may also be contacted for guidance on other matters. The DBA further expects to establish a digital mailbox to which more general inquiries may be directed.

Procedural Executive Order

The Investment Screening Act contains detailed provisions on the procedures for applying for approval of, or notifying, foreign investments.

The Procedural Executive Order further regulates the investment screening process. This includes the following:

• Applications for approval of an investment or special financial agreement, requests for pre-screening, and notifications of investments or special financial agreements must be submitted using forms developed by the DBA and filed digitally via the self-service platform at www.virk.dk. The DBA published the forms and accompanying guidance on 1 July 2021.
• Applications and notifications must include information on (i) the investment/agreement, (ii) the foreign investor, and (iii) the Danish company or entity. The Procedural Executive Order lists in more detail the information required in each case.
• The DBA may require the foreign investor to submit any additional information necessary to assess whether a contemplated investment or special financial agreement may pose a threat to national security or public order. The DBA may also request information from the Danish company or entity to verify the foreign investor’s information or obtain further details.
• The DBA may require that additional information is accompanied by a declaration on the accuracy of the information from an auditor approved under the Danish Act on Approved Auditors and Audit Firms.
• The DBA may propose that a foreign investor undertake commitments to mitigate any potential threats to national security or public order posed by the investment. For this purpose, the DBA will prepare a template for commitments concerning compliance with specific conditions relating to a foreign direct investment or special financial agreement.

The Procedural Executive Order also contains several important provisions that clarify the scope of the Investment Screening Act:

• An exemption is introduced for certain intra-group transactions. Changes in the ownership or size of, or control over, ownership interests, voting rights, or equivalent control by other means in a Danish company or entity occurring within a corporate group will not be subject to investment screening, provided such changes do not result in exceeding the thresholds laid down in the Investment Screening Act.
• It is clarified that neither the establishment nor the realisation of pledges over ownership interests, voting rights, or assets as collateral for loans or other obligations constitutes a foreign direct investment.
• The method of calculating a "qualified holding" is specified. The calculation must include not only ownership interests directly held by the foreign investor but also indirect holdings or those controlled through a closely related person. The percentage of ownership interests and voting rights held by the foreign investor or a closely related person is calculated based on the percentage held at each level in the ownership chain.
• A definition is introduced for the types of "equivalent control by other means" that are considered equivalent to acquiring ownership interests or voting rights and thus trigger an investment screening. These include the right to exercise voting rights pursuant to agreements, the authority to make or approve certain decisions, the right to appoint or remove members of a management body, and the acquisition of or control over all or a significant part of the assets of a Danish company or entity.

Plesner’s remarks

The Investment Screening Act provides that a wide range of foreign investments and special financial agreements within particularly sensitive sectors will now require prior approval. In all other sectors, investments and agreements may, for up to five years after completion, be subject to review by the authorities and potentially be unwound.

Danish companies and other entities will need to consider whether a mandatory application or a voluntary notification should be submitted to the DBA before completing a relevant investment or entering into a special financial agreement. Likewise, Danish companies and entities should be aware that they are considered foreign investors if they are under foreign control or significant influence, e.g., from a parent company. The rules require a number of complex assessments to be carried out before the execution of any relevant investment or agreement.

Although the Application Executive Order and the Procedural Executive Order have helped clarify the new investment screening rules, several uncertainties remain. These will likely be resolved once the rules are enforced in practice and the DBA has gained sufficient experience to issue further guidance.

The remaining uncertainties relate, inter alia, to the definitions of the particularly sensitive sectors. For example, questions may arise regarding the interpretation of "IT security functions or processing of classified information" and "critical infrastructure", including when a company is considered "necessary to maintain or restore" a socially important function.

Uncertainty also remains regarding the application of the rules to indirect investments. Both the Investment Screening Act and the Procedural Executive Order appear to assume that indirect investments in Danish companies and entities may be subject to investment screening, but the procedures for such investments are not clearly set out in either the Act or the Executive Orders.

Although the Investment Screening Act and Executive Orders enter into force on 1 July 2021, they apply only to investments and agreements completed on or after 1 September 2021. The DBA has stated, however, that it will be able to receive and process applications and notifications, including pre-screening requests, from 1 July. 

This means that Danish companies and entities may already benefit from familiarising themselves with the new rules. The transition period up to 1 September may be usefully spent ensuring that any investment targets and strategies comply with the new rules. It also provides an opportunity to clarify any questions by contacting the DBA.

Plesner is continuously monitoring developments in this area.

Read the Application Order (in Danish)

Read the Procedural Order (in Danish)

Read the Confidentiality Order (in Danish)