Background

In recent years, there has been an increasing focus on foreign direct investments – abbreviated "FDI" – potentially constituting a threat to national security and public order. The issue has received increased political attention due to the COVID-19 crisis which has made many companies vulnerable to takeovers by foreign companies.

In October 2020, an EU regulation came into force, which lays down certain minimum requirements for national rules on FDI screening, and in March 2020, the European Commission issued guidance on the application of FDI screening during health crises and financial instability (read more here).

In Denmark, there are currently only a few sector-specific FDI screening mechanisms, including in the Danish Act on War Materials and in the Danish Act concerning the Continental Shelf.

On 10 March 2021, the Danish Government introduced a bill for a new general act on FDI screening (read the bill (in Danish) here). 

General comments

The act introduces a mandatory authorisation scheme for investments, etc. in Danish companies within particularly sensitive sectors and activities, as well as a voluntary notification scheme for investments, etc. in all other sectors.

The act will not only cover investments in the form of acquisitions of shares and/or voting rights, but also so-called “similar control by other means", including acquisitions of assets and long-term loans, as well as so-called “special economic agreements", including joint ventures as well as supplier agreements, operating agreements and service agreements.

In the following, we provide an overview of the types of investors, etc. and the types of investments, etc. for which the new rules are relevant, as well as the most important elements of the two schemes. However, we note that some of the central concepts will only be determined/further defined later in a number of ministerial orders, and that some questions of interpretation are only expected to be clarified through the application of the rules in practice. 

Types of investors, etc. covered

The rules primarily apply to investments etc. made by companies domiciled outside the Kingdom of Denmark (Denmark, Greenland and the Faroe Islands) ("foreign companies") and natural persons, who are not Danish citizens ("foreign citizens").

However, the rules also apply to companies, which are domiciled in the Kingdom of Denmark, but which are subsidiaries or branches of foreign companies, or which are otherwise subject to control or decisive influence by foreign companies or foreign citizens ("foreign-controlled Danish companies").

Some of the rules only apply to companies and citizens from countries outside the EU and EFTA (Iceland, Liechtenstein, Norway and Switzerland) (and Danish companies controlled by such foreign companies or citizens), but the mandatory authorisation scheme in relation to investments also applies to companies and citizens from other EU and EFTA countries (as well as Danish companies controlled by such foreign companies or citizens).

As a consequence of the types of investments, etc. that are covered by the rules, they may, inter alia, be relevant to (i) industrial buyers of companies or assets, (ii) professional investors, including private equity funds, pension providers, venture investors and other types of funds, (iii) lenders and other debt investors, including banks, other financial undertakings, debt funds and alternative finance providers, and (iv) suppliers of goods or services, including manufacturers of raw materials or components for the production of high-tech products and suppliers of IT infrastructure.

In addition to the companies and natural persons that may going forward be required to apply for authorisation for or voluntarily notify investments, etc., the rules will also be relevant to sellers of (the whole or parts of) Danish companies, who may encounter obstacles in relation to selling to certain buyers, and to purely Danish companies, which may encounter obstacles in relation to, e.g., receiving venture investments from certain investors, using certain suppliers or entering into joint ventures with certain partners.

Furthermore, the rules may impact Danish companies' ability to obtain international debt financing. This applies in particular to long-term loans that entail similar control by other means. All types of debt financing can, however, potentially be covered to the extent that customary security is provided in the form of a charge over the shares of the Danish company. A creditor's ability to transfer debt may also give rise to questions as to the need for renewed authorisation or voluntary notification. 

Types of investments, etc. covered

The rules will apply to foreign direct investments in the form of (i) possession of or control over shares, (ii) possession of or control over voting rights, and (iii) so-called “similar control by other means" which covers, inter alia, acquisitions of assets and long-term loans.

It is a requirement that the investment entails decisive influence on decisions about managerial, financial, development or operational matters in a relevant company or in business-critical areas within a relevant company. Depending on which of the two schemes is involved, this is, however, considered to be fulfilled in case of the acquisition of only 10% or 25%, respectively, of the shares or voting rights in the company.

Loans and other types of debt financing, as well as the provision of collateral/security, are generally not covered by the new rules, but may be covered based on a specific assessment as to whether the debt financing provides the creditor with such extensive influence that it entails control. This applies in particular to long-term loans if they are non-callable and subject to conditions which entail influence on the management of the company, etc. In addition, enforcement of security over the company's shares can entail a direct acquisition of control.

The rules cover not only investments made directly in Danish companies, but also indirect investments, including the acquisition of or granting of long-term loans to foreign companies that have wholly-owned subsidiaries or branches in Denmark. The rules possibly also cover, e.g., the acquisition of at least 10%/25% of the shares or voting rights in foreign companies that have wholly-owned Danish subsidiaries or branches, and/or the acquisition of foreign companies that possess or have control over at least 10%/25% of the shares or voting rights in Danish companies.

The rules also apply to the formation of new companies in Denmark by foreign companies (or foreign-controlled Danish companies) ("greenfield investments").

Furthermore, the rules cover so-called "special economic agreements", which include joint ventures as well as supplier agreements, operating agreements and service agreements.

It is, similarly, a requirement that such agreements entail decisive influence over the Danish company. According to the explanatory notes to the bill, this can, e.g., be fulfilled in relation to supplier agreements, operating agreements and service agreements if they are long-running, non-terminable agreements and the supplier only can be replaced by another supplier with difficulty, or if the agreement enables the supplier to physically or electronically disrupt the operations or business-critical parts of the operations, at the Danish company.

The mandatory authorisation scheme for particularly sensitive sectors

The bill introduces a mandatory authorisation scheme for relevant investments etc. in Danish companies in a number of sectors, which are deemed to be particularly sensitive.

This includes the following: 

• Companies in the defence sector, including companies which develop or produce weapons or other technology for military use or provide services, which are important to the Danish Defence.
• Companies within IT security functions or the processing of classified information, including companies which develop, produce or maintain products with IT security functions or provide services that are used to process classified information.
• Companies that produce so-called dual-use products, which can be used for both civil and military purposes.
• Companies within other critical technology, which has a similar critical potential to weapons and dual-use products, including within robotics, 3D printing, aerospace, energy storage, and quantum and nuclear technologies.
• Companies within critical infrastructure, which supports functions essential to society, including within energy (gas, electricity, oil, water), information and communications technology, transport, preparedness and protection of civilians, health, social conditions, drinking water and food, waste water and refuse collection, finance and economy, and education and research.

This authorisation scheme entails that investments etc. in such Danish companies may not be completed without prior authorisation. This applies irrespective of whether the companies involved assess that the investment etc. cannot constitute a threat to national security or public order.

The time at which an investment etc. is considered to be completed depends on a specific assessment of the nature of the investment or agreement in question. According to the explanatory notes to the bill, in case of an acquisition of shares, the time of notification and/or registration in the files of the Danish Business Authority is decisive.  However, in practice it must be expected that the completion of "closing" will be conditional on the relevant approval being obtained. As for special economic agreements, the time of the conclusion of the agreement in question is decisive.

In relation to special economic agreements, the requirement for authorisation only applies to foreign companies and citizens from countries outside the EU and EFTA (as well as Danish companies controlled by such foreign companies or citizens), whereas in relation to investments it also applies to foreign companies and citizens from other EU and EFTA countries (as well as Danish companies controlled by such foreign companies or citizens).

The requirement for authorisation applies to the acquisition of at least 10% of the shares or voting rights (or similar control by other means). In addition, a new authorisation must be applied for in the case of an increase of the share to 20%, 1/3, 50%, 2/3 and 100%.

The voluntary notification scheme for all other sectors

For all other sectors than those that are particularly sensitive, there will, going forward, be a possibility for voluntary notification of investments etc. if there is a risk that the investment may constitute a threat to national security or public order.

With regards to investments, however, this only applies to the acquisition of at least 25% of the shares or voting rights (or similar control by other means). Furthermore, both in relation to investments and special economic agreements, the scheme only applies to foreign companies and citizens from countries outside the EU and EFTA (as well as Danish companies controlled by such foreign companies or citizens).

For such investments etc., it will be possible for the Danish Business Authority for a period of up to 5 years after the completion of the investment etc. to initiate an investigation as to whether the investment etc. may constitute a threat to national security or public order. If this is found to be the case, the Danish Minister for Industry, Business and Financial Affairs may order the investment etc. to be divested.

The purpose of the voluntary notification scheme is, thus, to give the companies the opportunity to clarify in advance whether an investment etc. is considered to pose a threat to national security or public order, and thereby avoid the risk of a potential later divestment order.

The authorities’ review of applications/notifications

Under both schemes, the application/notification is to be filed with the Danish Business Authority.

Following this, the Danish Business Authority as a starting point has 60 working days to assess the investment etc., but the deadline under the mandatory authorisation scheme may, under certain circumstances, be extended to 90 working days.

If the Danish Business Authority assesses that the investment etc. may constitute a threat to national security or public order, the foreign company can undertake to comply with specific agreed-upon conditions in order to alleviate the Authority's concerns. If this is not possible, the Danish Business Authority will submit the matter to the Danish Minister for Industry, Business and Financial Affairs for further consideration.

The Danish Minister for Industry, Business and Financial Affairs may – following negotiations with the Minister for Finance, the Minister of Foreign Affairs, the Minister of Justice, the Minister of Defence and other relevant ministers – either authorise/approve the investment etc. without conditions, lay down conditions for its completion, or refuse/prohibit the investment etc. If the matter concerns an investment etc. covered by the voluntary notification scheme, which has already been completed, the minister may also order the investment to be divested. No deadlines apply to the Danish Minister for Industry, Business and Financial Affairs' review of the matter.

If an investment etc. covered by the mandatory authorisation scheme has been completed without authorisation, or if the foreign company breaches conditions agreed on or laid down with respect to the investment etc., the Danish Business Authority may order the investment to be divested. If the divestment order is not complied with, the authority may revoke the foreign company's voting rights in the Danish company.

However, foreign companies cannot be penalised for infringing the rules. 

Entry into force and next steps

The bill is currently being reviewed by the Danish Parliament and is expected to be passed on 4 May 2021 (read more (in Danish) here).

According to the bill, the act will enter into force on 1 July 2021. However, the rules will only apply to investments and special economic agreements completed on 1 September 2021 or later.

The Danish Business Authority is currently working together with a number of trade organisations on drafting the ministerial orders, which are to determine/further define a number of central concepts in the bill. This includes a further definition of the particularly sensitive sectors and the special economic agreements, which are covered by the mandatory authorisation scheme. Plesner contributes to this work through the Association of Danish Law Firms.

The ministerial orders are expected to be submitted for public consultation at the end of May and subsequently published in their final form on 1 July 2021. 

Practical considerations

M&A transactions
It is our expectation that the new rules will entail increased complexity in M&A transaction processes. This applies, inter alia, during the planning phase, where it will have to be assessed whether a potential M&A transaction will require authorisation, or whether it will be relevant to make a voluntary notification. In addition, the rules may also result in longer periods between signing and closing in the affected transactions, because the transfer cannot be completed before an authorisation or an approval is obtained. This may potentially also lead to new considerations in relation to transactions, e.g. if certain bidders in an auction process must be expected to require authorisation, while this is not the case for others. Especially during the first period following the entry into force of the rules, all stakeholders (parties, authorities and advisers) will have to contribute to establishing a practice as to how M&A processes affected by the new rules are organised in the most expedient manner.

Venture investments
Given that the rules on authorisation will also apply to acquisitions of only 10% of the shares or voting rights (or similar control by other means), it will also be relevant to assess the new rules in relation to venture investments. Here, companies seeking investments will have to take into account in their planning that venture investments in the affected sectors can no longer be completed as quickly as previously. In addition, companies planning frequent investment rounds with the same investors should consider ensuring that the investors in question will have an opportunity to increase their ownership interest in connection with a subsequent investment round when the first application for authorisation or (if relevant) voluntary notification is made.

Loans and other debt financing
In relation to loans and other debt financing, it is assumed in the bill that the scope of the new rules is to be further defined at a later stage based on experience from the administration of the rules in practice. For both lenders and borrowers, it may be essential to clarify whether new financing will entail a requirement for authorisation or a need for voluntary notification considering the legal and commercial risks, e.g., for the lender whose access to enforcement of share security might be conditional on prior authorisation, or for the borrower who might be met with a claim for early repayment of the loan due to a divestment order on the lender. In certain transactions, it might be necessary to address the new rules in the underlying financing documentation, which we are already beginning to see examples of in international financing based on similar FDI screening mechanisms in other European jurisdictions.