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The proposed act will introduce a mandatory screening requirement for foreign investments in certain sectors as well as a voluntary screening process for foreign investments which may pose a threat to national security or public order. In addition to screening such investments, the Danish Business Authority will be able to intervene and set conditions for foreign investments if these constitute a security risk for Denmark. If adopted, the proposal is expected to enter into force on 1 July 2021, but the act will not apply to investments and agreements completed before 1 September 2021. Foreign acquirers considering M&A transactions or other similar arrangements which are expected to close on or after 1 September 2021 should already now consider the potential effects of the proposed act on their transactions. If adopted, it is expected that the Danish Business Authority will issue executive orders in the first half of 2021, which will supplement the bill and provide details and guidance on certain central requirements and concepts.
On 10 March 2021, the Minister of Industry, Business and Financial Affairs introduced a bill in Parliament which proposes a screening mechanism for certain foreign direct investments (the “Proposal”). The Proposal introduces amendments to an earlier draft proposal, which was submitted for consultation. This newsletter is an update to our previous newsletter of 17 December 2020 which described the draft proposal.[1]
The purpose of the Proposal[2] is to ensure that foreign direct investments and special financial agreements do not pose a threat to national security or public order in Denmark. The aim is to secure this through screening of and possibly taking measures against such investments.
The Proposal introduces a mandatory screening mechanism as well as a voluntary screening mechanism, including a possibility for the Danish Business Authority to initiate an investigation into a foreign direct investment covered by the voluntary screening mechanism which has not been notified to the Danish Business Authority for a period of up to 5 years after the investment has been completed.
The Proposal introduces a mandatory screening mechanism for foreign direct investments, if the foreign investor intends to acquire, directly or indirectly, possession of or control over at least 10 pct. of the ownership interests or voting rights or equivalent control by other means of managerial, financial, development or operational matters, in Danish companies within the following sectors (all considered to be sensitive in relation to national security or public order):
When calculating the ownership or voting rights, shares held in other group companies or closely related persons as well as warrants and call options to shares that can be exercised or converted are included. In addition, if the foreign investor’s ownership or voting rights in the Danish company are increased and after the acquisition constitute or exceed a limit of 20 pct., 1/3, 50 pct., 2/3 or 100 pct., respectively, such transaction will also be subject to mandatory screening (if the Danish company operates within any of the sectors outlined above). The provisions of the Proposal also apply to the establishment or formation of new companies within any of the sectors outlined above (however, the Proposal indicates that a minimum threshold may be established later).
The Proposal also introduces mandatory screening if a foreign investor, from outside the EU or EFTA, intends to enter into a special financial agreement with a company domiciled in Denmark and which operates within any of the sensitive sectors set out above. The Proposal exempts foreign investors from EU member states or EFTA countries, and foreign companies domiciled in EU member states or EFTA countries, from the screening mechanism when entering into special financial agreements with companies in Denmark. The exception does not apply if the EU or EFTA company is a subsidiary of or a branch of a company domiciled outside of EU or EFTA. If a foreign national or a foreign company has control over or significant influence over an EU or EFTA company, the excemption is not accplicable. Agreements on joint ventures as well as certain operating, service and supplier agreements can be covered by the screening requirement.
According to the Proposal, the following conditions must be met in order for special financial agreements to become subject to mandatory screening:
If a foreign direct investment is covered by the mandatory screening requirements outlined above, the foreign investor must apply in advance for permission to conclude the transaction. The obligation is on the foreign investor and the Danish target company has no obligation to carry out due diligence or to submit such application to the Danish Business Authority.
However, Danish companies seeking to invest which are either (i) a subsidiary or a branch of a company domiciled outside of Denmark, or (ii) significantly controlled or owned by a a foreign national or a foreign company, which is not domiciled in Denmark, will be subject to the provisions of the Proposal, and will therefore be obliged to conduct due diligence and to submit an application to the Danish Business Authority in advance, if an intended investment is covered by the mandatory screening mechanisms set out in the Proposal.
Within 60 business days from the date of a (complete) application the Danish Business Authority must inform the foreign investor of whether permission to complete the investment is granted. If further investigation steps are needed, the Danish Business Authority may extend the period from 60 to 90 business days.
If a company covered by the mandatory screening mechanism has been granted permission from the Danish Business Authority to carry out an investment and the company subsequently is subject to change of control, the company must apply for a new permission.
Besides the mandatory screening the Proposal introduces a voluntary cross-sectoral screening. A foreign investor, in any sector, can submit an application to the Danish Business Authority of an intended or implemented foreign direct investment if the investment may pose a threat to national security or public order and the foreign investor directly or indirectly acquires possession of or control of 25 pct. or more of the shares of or voting rights in a Danish company.
The cross-sectoral screening mechanism will be voluntary. However, an investment which has not been notified to the Danish Business Authority, and which is considered to pose a threat to national security or public order, can be subject to examination by the Danish Business Authority for a period of up to 5 years from the completion of the investment. If the Danish Business Authority examines the investment and assesses that the investment is a threat to national security or public order, the Danish Business Authority may require that the investment is rolled back. If the acts of the Danish Business Authority amount to expropriation, the foreign investor will receive full compensation.
The voluntary cross-sectoral screening does not cover investors from EU or EFTA member states. The fact that a natural or legal person has established a subsidiary, a branch or permanent establishment in an EU or EFTA member state or in Denmark does not mean that such person is considered to be resident in an EU or EFTA member state or in Denmark, and thereby exempt from the screening requirement. In addition, the cross-sectoral mechanism also includes those cases where the investor is domiciled in an EU or EFTA member state or in Denmark, but where a foreign natural or legal person who is not from an EU or EFTA member state or Denmark controls or has substantial influence on the investor.
If an application has been filed with the Danish Business Authority, there is a waiting period of 60 business days (from the date of a complete application). Unless the Danish Business Authority has received a request for an extension by the investor within such 60 business day waiting period, the application will be regarded as approved.
If the Danish Business Authority has received an application for a foreign direct investment covered by the cross-sectoral screening mechanism, the Danish Business Authority shall no later than 60 business days inform the foreign investor of whether the investment is approved.
In our view, it is likely to be challenging in practice for foreign investors to determine whether specific investments should be submitted to the Danish Business Authority for approval. That will especially be the case until the Danish Business Authority has developed a firm practice on the criteria for review and approval. It is expected that the Danish Business Authority will be able to provide guidance on whether an investment falls within the scope of the rules regarding cross-sectoral screening and whether a specific investment should be notified to the Danish Business Authority. According to the Proposal the Danish Business Authority will publish guidance on the applicability of the cross-sectoral screening.
When assessing whether a foreign direct investment constitutes a threat to national security or public order the following three overall criteria will be taken into account by the Danish Business Authority:
It will be assessed whether the Danish entity may directly or indirectly affect national security or public order in Denmark; whether the disposition in question can influence or be used to undermine national security or public order in Denmark; and whether there is a risk that the foreign investor will seek to use the acquired control or influence to undermine Danish national security or public order. In all cases, the Danish Business Authority will make a specific assessment of all three risk factors.
According to the Proposal all relevant circumstances will be taken into account when assessing whether a foreign direct investment constitutes a threat to national security or public order. The Proposal includes guiding criteria, which can be taken into account when relevant.
As for the Danish target company, the Danish Business Authority when making decisions may take into account whether the Danish company operates or influences critical infrastructure; whether the Danish company processes or has access to classified information or sensitive personal data; the position of the company on the Danish market; whether the Danish company belongs to the defense industry or produces dual-use products, or other critical technology of importance for national security or public order; and whether the Danish company handles or contributes to the supply of critical raw materials, including energy or raw materials, and food safety.
As for the foreign investor, the Danish Business Authority may take into account whether the foreign investor is directly or indirectly controlled by a foreign government, including government agencies of a third country or armed forces, including through ownership or substantial funding; whether the foreign investor is or has been involved in activities affecting security or public order in an EU Member State or in other friendly and allied countries; whether there is a serious risk that the foreign investor participates in or has links to illegal or criminal activities of national security or public order; and whether there are any indications that the foreign investor is deliberately trying to circumvent the screening rules, e.g. through the use of straw man-like company constructions.
As a condition for granting its approval of foreign investments, the Danish Business Authority may require the investor to agree to certain conditions (remedies). If an approval is granted with such conditions, the investor becomes obligated to report yearly on how the conditions have been fulfilled.
The Danish Business Authority will control and monitor foreign direct investments. The control will include verifying the accuracy of the information submitted to the Danish Business Authority in connection with applications for permission to conclude a foreign direct investment, including the level of compliance with the terms of such permission. The control can be carried out both when the Danish Business Authority receives the application for the foreign direct investment but also subsequently as a risk based control.
Pursuant to the Proposal, the Danish Business Authority will have the right to require all information from the foreign investor which is deemed necessary in order for the Danish Business Authority to assess whether the intended investment constitutes a threat to national security or public order. The Danish Business Authority may also require the Danish company to provide information in order to verify, for instance, the information received by the foreign investor. The disclosure requirements may vary, and it is therefore not possible for the Danish Business Authority to set out these in advance. If the investor does not comply with a request to provide information, the Danish Business Authority can require completed investments to be rolled back.
The Proposal also includes rules allowing the Danish Business Authority at any time, against proper identification and without a court order, to access the business premises and means of transport of the Danish company, which the foreign direct investment is aimed at. The targeted Danish company must be notified in advance.[5]
The rules on public access to documents in the Danish Public Administration Act do not apply to cases covered by the Proposal. This means that the public will not be able to access documentation submitted to the Danish Business Authority in connection with applications relating to foreign direct investments.
The decisions of the Danish Business Authority pursuant to the Proposal are final in the sense that they can only be brought before the Danish courts. If an investor fails to comply with an instruction to roll back the investment or fails to comply with a prohibition issued by the Danish Business Authority, the Danish Business Authority may revoke the voting right of the foreign investor in the Danish company.
The Proposal is currently being reviewed by Parliament. It is uncertein whether the Proposal will be adopted in its current form. If adopted, the Proposal is expected to enter into force on 1 July 2021, but however the act will not be appcliable to investments and agreements completed before 1 September 2021.
If the Proposal is adopted, it will have a significant impact on future investments in Danish companies by foreign investors.
Foreign investors seeking to invest in Danish companies must at an early stage factor-in that the investment may need to be approved by the Danish Business Authority prior to the investment being concluded. This also applies even if the intended investment does not concern a company that operates in or is otherwise active within any of the sensitive sectors set out in the Proposal.
Foreign acquirers considering M&A transactions or other similar arrangements which are expected to close on o after 1 September 2021 should already now consider the potential effects of the Proposal on their transactions.
Gorrissen Federspiel monitors the process of the Proposal closely.
Separately, the telecoms industry should note that a proposal for a supplier security act for suppliers in the critical telecommunications infrastructure[6] was introduced in Parliament on 10 March 2021. The aim of the proposal is to protect national security interests when telecommunications providers enter into agreements on deliveries or operation of critical parts of Denmark’s telecommunications infrastructure.
[3] Dual-use items are items that are covered by EU Regulation no. 428/2009 with later amendments.
[4] According to the commentary to the Proposal, the sectors covered by the Proposal will be further determined in separate executive orders.
[5] The Danish Business Authority already has the power to conduct such inspection visits in connection with the Danish Business Authority’s control and supervision of companies that carry out activities covered by the EU dual-use export control rules or by the EU sanctions rules. For more information see link.