New legislation on screening of foreign direct investments in Denmark
Following a 20-year period where key words have been globalisation and investment freedom, the pendulum now swings in another direction. Until 1 July 2021, cross-border acquisitions and investments in Denmark were broadly speaking only limited by rules on merger control except for certain specific sectors. This is about to change.
On 1 July 2021, the Investment Screening Act came into force in Denmark. In some cases, the Act, which derives from an EU directive, imposes a duty on foreign investors to apply for authorisation from the Danish Business Authority, before a foreign investor may invest in or enter into agreements with Danish companies.
If an investment or an agreement poses a threat to national security or public order, the Danish Minister for Industry, Business and Financial Affairs may refuse an application for authorisation, thereby preventing the completion of an investment or an agreement. This may seem a very narrow scope of application, however, the practical application of the Act gives rise to a number of questions and may cause uncertainty when dealing with cross-border transactions and investments in Denmark.
The object of this newsletter is to provide you with an overview of the most significant consequences that follow from the new provisions of the Investment Screening Act.
1. Scope of application
The Investment Screening Act came into force on 1 July 2021, and the Act applies to investments or agreements implemented on 1 September 2021 or later.
In general, the Investment Screening Act will imply that in future, numerous investments in and agreements with Danish companies made by foreign investors, or Danish companies subject to foreign control, will require prior authorisation from the Danish Business Authority or the Danish Minister for Industry, Business and Financial Affairs.
The Act provides for two different screening schemes: (1) A mandatory sector-specific authorisation requirement for investments in or agreements with Danish companies belonging to particularly sensitive sectors, and (2) a voluntary notification option for investments in or agreements with Danish companies not belonging to particularly sensitive sectors.
2. Foreign investors can be Danish companies
The Investment Screening Act applies to foreign investors. Foreign investors not only comprise foreign nationals and companies that are not domiciled in Denmark, but also e.g. (i) a Danish company if the company is a subsidiary or a branch of a company, which is not domiciled in Denmark, or (ii) a Danish company if a foreign company, which is not domiciled in Denmark, holds control of or has significant influence in the Danish company. Control or significant influence is achieved by acquiring at least 25 % of the shareholding or voting rights in an entity.
The wide approach of the Act to foreign investors means that it is not sufficient to only consider whether the company making the investment or entering into an agreement with a Danish company is also a Danish company. On the contrary, you have to assess the entire ownership structure of the Danish company (and thereby also that of the foreign investor), since the Investment Screening Act will apply if the ultimate beneficial owners of the Danish company are not domiciled in Denmark. Depending on the circumstances, such assessments may be quite complex.
Thus, if e.g. a Danish company acquires another Danish company under a complete “Danish” transaction, the Investment Screening Act may still apply, if e.g. the Danish buyer is owned 25% by a foreign, ultimate beneficial owner – even though such ultimate beneficial owner is an entity or person domiciled within the EU.
3. The mandatory sector-specific authorisation requirement
A foreign investor intending – directly or indirectly – to acquire at least 10% of the shareholding or voting rights in a Danish company belonging to a particularly sensitive sector, must apply with the Danish Business Authority for authorisation before making the investment. The duty of notification also applies if the foreign investor achieves corresponding control by other means, e.g. through agreement-based control, according to which the foreign investor has a right to appoint members of the board of directors, or the foreign investor must approve certain decisions.
Please note that a foreign investor also comprises investors within the EU/EFTA countries, but that stricter rules apply to a foreign investor who is a national of a country outside EU/EFTA or a company domiciled outside the EU/EFTA countries.
Companies belonging to particularly sensitive sectors are very broadly defined in the Investment Screening Act and comprises many different sectors and activities. The following are e.g. comprised:
- Companies in the defence sector
- Companies in the field of IT security functions or the processing of classified information
- Companies producing so-called dual-use items
- Companies within critical technology other than under the above 1-3
- Companies within critical infrastructure.
A more specified clarification of the particularly sensitive sectors is available from an executive order published by the Danish Ministry of Industry, Business and Financial Affairs. The executive order contains a delimitation of the particularly sensitive sectors in which several areas are stated; as examples (of many others) is mentioned: 3D-printing for the manufacture of components for industrial use, advanced industrial robot or drone technology, biotechnology in synthetic biology, news coverage, post and courier service, purchase, storage, distribution and supply of protective equipment, wastewater management and treatment – and many more.
Depending on how the sectors are precisely delimitated, many Danish companies potentially belong to one or several of the above sectors.
Unfortunately, the Investment Screening Act and any executive orders thereto do not contain much guidance in that respect, which is rather unfortunate for both foreign and Danish companies as it creates uncertainty about the extent to which a particular investment or agreement is comprised by the Investment Screening Act and any duty of notification. Thus, it will be exciting to see how the Danish authorities will enforce the regulations in practise, thereby delimitating the particularly sensitive sectors against the non-particularly sectors in which there is no duty of notification.
If a foreign investor subsequently acquires additional shares in a Danish company, this may trigger another duty of notification. The duty of notification will be triggered again if the foreign investor’s shareholding following the acquisition constitutes or exceeds a limit of 20%, 33,33%, 50%, 66,67% or 100%, respectively.
Not only the acquisition of shares is comprised by the mandatory sector-specific authorisation requirement, in certain cases, however, so are the establishment of new companies in Denmark (so-called greenfield investments) and the execution of so-called “special financial agreements” in companies belonging to particularly sensitive sectors.
Establishment of new companies in Denmark is included in the Act to ensure that the Act is not circumvented, e.g. by a foreign investor establishing a new company within a particularly sensitive sector as an alternative to acquiring shares.
It is worth noting that the Investment Screening Act also applies to so-called “special financial agreements”, and thereby apparently customary, commercial agreements between businesses may be covered by the Act. “Special financial agreements” are e.g.
- Joint venture agreements on research and development
- Supplier agreements on raw materials, products, plant or semi-finished products and components, including software
- Operating or service agreements on the operation or maintenance of buildings, plants, installations or systems.
The duty to notify a “special financial agreement” is triggered if the foreign investor is a national of a country outside of EU/EFTA or a company outside the EU/EFTA countries and the foreign investor achieves control of or significant influence in the Danish company with which the agreement is entered into. The assessment as to whether the foreign investor achieves control of or significant influence over the Danish company depends on the agreement in question. Hence, various criteria will be taken into account depending on whether the agreement is a joint venture agreement, a supplier agreement, or an operating or service agreement.
4. The voluntary notification option
The voluntary notification option provides for foreign investors to notify investments in or agreements with Danish companies who do not belong to particularly sensitive sectors, but where it is assessed that the investment or the agreement may pose a threat against national security or public order.
The voluntary notification option only applies to foreign investors outside the EU/EFTA countries, and as regards investments in Danish companies it is a condition for notification that the foreign investor – directly or indirectly – acquires at least 25% of the shareholding or voting rights in a Danish company or by other means obtains corresponding control.
If an investment is not notified to the Danish Business Authority, the Authority may for a period of up to 5 years from implementing the investment decide to initiate an investigation of the investment, if it is assessed that such investment may pose a threat to national security or public order. Thus, companies are encouraged to consider carefully whether notification should be made to the Danish Business Authority, although they are not obliged to do so, since otherwise there may be a risk that the Authority at its own initiative begins an investigation. At worst, the investigation may result in that the foreign investor would have to divest its investment.
5. Enforcement of the Investment Screening Act
An application for authorisation to an investment or the entering into of an agreement must be submitted to the Danish Business Authority. Generally, the Danish Business Authority will grant an authorisation within 60 working days from receipt of the application, provided the investment or the agreement does not pose a threat to national security or public order. The authority to prohibit an investment or the entering into of an agreement due to an investment or an agreement posing a threat to national security or public order, lies with the Danish Minister for Industry, Business and Financial Affairs.
The granting of an authorisation may be conditional upon the foreign investor commit to comply with specific terms, e.g. limiting the investor’s shareholding or limiting the investor’s participation in the management of the Danish companies. Commitments are relevant if in the absence of such commitments, there would be a risk of the investment or agreement posing a threat to national security or public order.
If an investment or an agreement has been implemented without authorisation, the Danish Business Authority may order that authorisation must be applied for, or at worst order that the investment be divested within a specific date. If divestment is not complied with, the authorities may nullify the voting rights of the foreign investor’s shares or initiate acquisition of private land by compulsion to the extent necessary.
The Investment Screening Act provides for the option of requesting the Danish Business Authority in advance to assess whether a potential foreign investment or agreement affects critical technology or critical infrastructure (so-called pre-screening). In the event of such pre-screening, it is, however, important to note that the Danish Business Authority does not take into account whether the investment or the agreement affects any of the other particularly sensitive sectors like for e.g. defence, IT security or dual-use. Therefore, eventually, businesses and their advisors must assess themselves whether an investment or an agreement would affect the particularly sensitive sectors that are not comprised by the pre-screening assessment of the Danish Business Authority. Furthermore, there is no specific deadline for a pre-screening by the Danish Business Authority.
6. Particularly about M&A
In connection with M&A transactions involving Danish and foreign companies, the businesses and their advisors must pay particular attention to whether the transaction in question falls within the scope of the Investment Screening Act. If e.g. the transaction falls within the scope of the mandatory sector-specific authorisation requirement, it would – among others – be relevant to assess the time aspect of any authorisation process and any risk of the required authorisation not being granted. The latter should also form part of seller’s assessment of the potential buyer’s suitability as the “right” buyer and seller’s need for deal certainty. And such assessment should of course be made at a very early stage of the process.