New Danish Act on Screening of Foreign Direct Investments
Published 10 May 2021
The new act on control of foreign direct investments (the “Act”) was adopted on 4 May 2021 and introduces a new framework for government screening of foreign investments and certain types of agreements with Danish companies.
Encompassed target investments and activities
The Act divides the encompassed investments and activities into two different categories based on the activities of the Danish target company:
“Particularly Sensitive Sectors and Activities” are companies operating within the defense sector, it-safety functions or handling of classified information, manufacturing of dual-use products, other critical technology and critical infrastructure. These sectors will be further outlined in an executive order.
“Investments and activities that is a threat to national security or public order” pertains to investments and activities which may impact to territorial integrity, the survival of the public, or the ability to uphold an independent, democratic and safe society.
The Act comprises solely investments in, and special economic agreements with, companies resident in Denmark.
Types of Investment structures and activities
The Act covers different types of agreements:
“Foreign Direct Investments” where the acquirer obtains, directly or indirectly, a relevant interest (see below) whether through control over shares or votes, asset sales or long-term loans, and whether over the target company as a whole or business critical areas of the target company. Incorporation of new companies in Denmark within “particularly sensitive sectors and activities” are also covered if similar control or influence is achieved.
“Special Economic Agreements” which encompasses joint ventures as well as operating-, supplier and service agreements, if these agreements cause a foreign investor to gain a controlling interest over a Danish target company or business critical areas of the target company.
Mandatory approval and voluntary filing
The Act introduces two different approval systems, depending on whether the target company of the investment or special economic agreement concerns a Particularly Sensitive Sector or Activity or not.
For Particularly Sensitive Sectors and Activities, the Act introduces a mandatory requirement for prior approval by application to the Danish Business Authority. The requirement is applicable for both Foreign Direct Investments and for Special Economic Agreements. For Foreign Direct Investments, the mandatory approval is required if the acquirer, directly or indirectly, obtains ownership or control of at least 10 percent of the shares or voting rights of the target company or similar rights through other means.
For Foreign Direct Investments and Special Economic Agreements falling outside Particularly Sensitive Sectors and Activities, but which may pose a threat to national security or public order, the Act introduces a voluntary filing scheme. Foreign Direct Investments are comprised by the scheme if the acquirer, directly or indirectly, obtains ownership or control of at least 25 percent of the shares or voting rights of the target company or similar rights through other means.
Special Economic Agreements are not subject to specified thresholds and will therefore be subject to either mandatory application or voluntary filing, however, the definition of special economic agreement requires that such an agreement affords the contract party a controlling influence in the Danish company, either over the business as a whole or over business critical areas of the business.
Foreign Direct Investment and Special Economic Agreements comprised by the option to file, but which have not been filed voluntarily, may be made subject to an investigation at the authority’s own initiative for a period of five years after the completion of the investment or special economic agreement. In case the filing is approved by the authorities, the approval will only be recallable in case of changed circumstances causing serious threats towards national security or public order.
A mandatory application or voluntary filing will generally be processed within 60 days of a complete application, which may be extended. As part of the application procedure, the foreign investor may provide undertakings to alleviate concerns with respect to the investment or special economic agreement.
Applicability to and differentiation between foreign investors
Investors are divided into three main groups under the rules: 1) Danish citizens and companies 2) EU/EEA citizens and companies and 3) Non-EU/EEA citizens and companies.
As a starting point, Danish citizens and companies, acting as investors, will not be comprised by any of the requirements of the Act, where EU/EEA citizens and companies will be comprised by the mandatory approval requirements for direct investments within particularly sensitive sectors and activities, but not the requirements for approval of special economic agreements concerning particularly sensitive sectors and activities or the voluntary filing scheme. Non-EU/EEA citizens and companies will be comprised by all requirements of the Act.
If a Danish company, as an investor, is controlled by EU/EEA citizens and companies, it will be treated as if it was an EU/EEA company, and similarly, if a Danish company as an investor is controlled by non-EU/EEA citizens or companies, it will be treated as if it was a non-EU/EEA company. EU/EEA companies controlled by non-EU/EEA citizens or companies will be treated as if it was a non-EU/EEA company.
The proposed system will have an impact on both M&A transactions and venture investments.
We expect new processes to be introduced early in potential M&A transactions and venture investments to establish (i) if the proposed transaction falls within the scope of the Act and, if so, (ii) if the proposed transaction is governed by the mandatory or voluntary filing process (and in the latter event if a voluntary filing should be made) and (iii) how the filing process shall be handled as part of the signing and closing mechanism of the proposed transaction.
The Act will enter into force on 1 July 2021 and will be in effect for all Foreign Direct Investments and Special Economic Agreements which are not completed before 1 September 2021.
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