On 10 March 2021, a bill on screening of certain foreign direct investments in Denmark has been proposed to the Danish Parliament. The purpose of the bill is to ensure that foreign direct investments in Danish companies do not constitute a risk for national security or public order.
The objective of the act will be achieved by making foreign direct investments in certain sensitive business sectors subject to approval by the Danish Business Authority ("DBA") before closing of a transaction combined with a voluntary notification scheme for other businesses. The bill is expected to be adopted and to enter into force on 1 July 2021. It is our assessment that the new rules will impact future transactions, in particular within the IT sector and the energy sector.
The new rules apply to all foreign direct investments in companies domiciled in Denmark, including Danish companies under incorporation. The foreign investors covered by the rules are:
- Foreign citizens (except for citizens of EU member states or EFTA countries in certain cases)
- Companies not domiciled in Denmark regardless of whether the company has a permanent establishment in Denmark (however, not companies domiciled in EU or EFTA countries in certain cases)
- Companies domiciled in Denmark, which are either a subsidiary or a branch of a company not domiciled in Denmark
- Companies domiciled in Denmark, otherwise controlled or significantly influenced by foreign citizens or companies not domiciled in Denmark.
Citizens of EU member states and EFTA countries and companies domiciled in EU or EFTA countries, which are not controlled or significantly influenced by citizens or companies outside of the EU or EFTA, are not covered by the voluntary notification scheme and certain parts of the mandatory approval scheme.
MANDATORY APPROVAL SCHEME
The bill proposes a mandatory approval scheme for foreign investors' investments in Danish companies operating within the following sensitive business sectors:
- IT security functions or processing of classified information
- Production of dual-use products
- Other critical technology
- Critical infrastructure.
Under the scheme, an acquisition of at least 10% of the shares or the voting rights of a Danish entity within such sectors is subject to approval by the DBA. The same applies if the foreign investor subsequently increases its ownership up to or beyond thresholds of (i) 20%, (ii) 1/3, (iii) 50%, (iv) 2/3 or (v) 100%. Permission is also required if the foreign investor obtains control over the Danish entity by other means of managerial, financial, development or operational nature, or by concluding certain special financial agreements with the Danish entity, for example a joint venture agreement or an asset purchase agreement, or special operating, service and supplier agreements.
VOLUNTARY NOTIFICATION SCHEME
The bill proposes a voluntary notification scheme where investors outside the EU/EFTA can notify their contemplated acquisitions of minimum 25% of the shares or voting rights or similar control, as described above, of Danish entities not operating within sensitive sectors.
As the bill authorizes the DBA for up to 5 years from the closing date to call in foreign direct investments giving rise to concerns about whether the investments constitute a threat to national security or public order, foreign investors should consider to use the voluntary notification scheme or at least consult the DBA for advice to ensure that their investments will not be subject to a postclosing scrutiny by the DBA and a potential claim for the reversal of the transaction.
CRITERIA OF DBA'S DECISION MAKING
In the DBA's assessment of whether a foreign direct investment in a Danish company constitutes a threat to national security or public order, all relevant circumstances must be taken into consideration.
Firstly, the DBA will consider the Danish entity's position in the Danish market, taking into consideration whether the Danish entity (i) operates within or has an impact on critical infrastructure and/or the defense industry, (ii) processes classified or sensitive personal data, (iii) produces dual-use products or other critical technology of importance for national security and public order, or (iv) handles or contributes to the supply of critical raw materials.
Secondly, the position of the foreign investor must be assessed, including whether the foreign investor (i) is directly or indirectly controlled by a government, (ii) has been involved in activities affecting the security or public order in any EU member state or in any friendly or allied countries, (iii) is likely to engage in or has a relation to illegal or criminal activities of importance for national security or public order, or (iv) willfully attempts to circumvent the screening rules.
If the DBA concludes that the foreign direct investment or a special financial agreement constitutes a threat to national security of public order, the DBA will submit the contemplated investment to the Ministry of Industry, Business and Financial Affairs which in certain cases will open negotiations with the Ministry of Finance, the Ministry of Foreign Affairs, the Ministry of Justice, the Ministry of Defence or any relevant department. Based on these negotiations, the Ministry of Industry, Business and Financial Affairs will either issue a rejection or an approval of the foreign direct investment or in the event of a transaction, which has not been notified, but is deemed to constitute a risk to national security or public order, serve an enforcement notice to reverse the foreign direct investment.
The DBA may in certain cases open negotiations and agree with the foreign investor on certain conditions to be undertaken by the investor, which mitigate national security or public order concerns the DBA would otherwise have in respect of the investment. The foreign investor must in such cases comply with the conditions throughout its owner-ship period and annually submit a statement to the DBA on how the conditions have been complied with.
If the foreign investor is subject to change of control prior to the contemplated investment but after approval from the DBA under the mandatory approval scheme, a new application must be submitted to the DBA.
EXPECTED PROCESSING TIME
The DBA must no later than 60 business days after receipt of a complete application inform the foreign investor whether the contemplated investment or special financial agreement can be approved, or whether further investigation must be initiated. If further investigation is required under the mandatory approval scheme, the DBA may postpone the processing time up to a total of 90 business days.
Under the voluntary notification scheme, the DBA must within 60 business days either approve or submit the contemplated investment to the Ministry of Industry, Business and Financial Affairs for further scrutiny as described above. A lack of a decision by the DBA will be deemed to be an approval to carry out the investment or enter into the special financial agreement.
SANCTIONS OF NON-COMPLIANCE
If a foreign investor has not applied to the DBA for permission to carry out a foreign direct investment or to enter into a special financial agreement with a Danish company, the Minister for Industry, Business and Financial Affairs and the DBA may serve an enforcement notice to the foreign investor to liquidate the investment or the special financial agreement. If the foreign investor does not comply with the enforcement notice, the DBA may revoke the voting rights attached to the ownership in the Danish company and expropriate any ownership rights of the foreign investor.
EXPECTED INFLUENCE ON MERGERS AND ACQUISITIONS
As the DBA's investigation of an investment may result in either a rejection of the investment or if the investment has been completed, an order to liquidate the investment, we recommend that foreign investors seeking to acquire all or parts of Danish companies, include an investment screening as a part of the M&A process at an early stage if there are any concerns as to whether or not the investment might constitute a risk to national security or public order. This could create a significant workload with the DBA and it remains to be seen, how the DBA will deal with such workload.
It should be stressed that all notifications will be treated in strict confidence by the DBA and any other public authority to whom the notification has been passed and will not be made public.