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The Danish Business Authority has submitted for consultation a draft act which introduces a screening mechanism for certain foreign direct investments (the “Proposal”). The Proposal introduces a mandatory screening mechanism for all foreign direct investments in Danish companies within certain sectors considered sensitive in relation to national security or public order. A voluntary screening mechanism is also proposed for foreign direct investments across sectors by non-EU/EFTA investors. The Proposal is expected to enter into force on 1 July 2021. If adopted, the Proposal will have a significant impact on future investments by foreign investors in Danish companies as well as on M&A processes and certain other types of arrangements and agreements which give a foreign investor control or significant influence over Danish businesses.
The purpose of the Proposal[1] is to ensure that foreign direct investments do not pose a threat to national security or public order in Denmark. This aim is to secure this through screening of and possibly taking measures against such investments.
The Proposal applies to all Danish companies which are domiciled in Denmark and to foreign direct investments carried out by:
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 and 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 is operating 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 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. According to the commentary to the Proposal, examples of such agreements could be agreements on joint ventures as well as agreements relating to the purchasing of assets and certain operating, service and supplier agreements.
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 mechanisms outlined above, the foreign investor is required to apply in advance for permission to conclude the transaction or enter into the special financial agreement with the Danish Business Authority. 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 a period of 90 days from the date of application the Danish Business Authority shall inform the foreign investor if permission to complete the investment is granted or whether further investigative steps must be initiated.
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 a notification 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 injunction of the Danish Business Authority has the nature of expropriation the foreign investor will received 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 the 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 days. Unless the Danish Business Authority within such 60 day waiting period has notified the investor that further investigations are required, the application will be regarded as approved.
If the Danish Business Authority has initiated the investigation of a foreign direct investment covered by the cross-sectoral screening mechanism, the Danish Business Authority will no later than 60 days after the foreign investor has received notice of such investigation inform the foreign investor of whether the investment is approved.
In our view, it is likely to be challenging for foreign investors to determine in practice whether a specific investment must be notified. 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.
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 national security or public order in Denmark. 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 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 e.g. verify 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.
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.[4]
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. Any violation of the obligations under the Proposal will be punishable by fines, unless a higher penalty is due under other legislation. Legal entities are subject to criminal liability pursuant to the rules in Chapter 5 of the Danish Criminal Code.
The Proposal is currently under consultation (in Danish: høring), so it remains uncertain whether the Proposal will be adopted in its current form. If adopted, the Proposal is expected to enter into force on 1 July 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 after 1 July 2021 should already now consider the potential effects of the Proposal on the deal.
Separately, the telecoms industry should note that a supplier security act for suppliers in the critical telecommunications infrastructure[5] was put forward by the Ministry of Defense on 7 December 2020, which aims to protect national security interests when telecommunications providers enter into agreements on deliveries or operation of critical parts of Denmark’s telecommunications infrastructure.
Gorrissen Federspiel monitors the Proposal as well as the consultation process closely.
[2] Dual-use items are items that are covered by EU Regulation no. 428/2009 with later amendments.
[3] According to the commentary to the Proposal, the sectors covered by the Proposal will be further determined in separate executive orders.
[4] 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.