Investment Screening Act introduced in the Danish Parliament

On 10 March 2021, the Danish government introduced a Bill to make it possible to screen foreign investments and financial agreements and to intervene against and set conditions for such investments if they represent a security risk to Denmark. In this news article, you can read about the elements of the proposed Act and its implications.

The proposed Act, which is introduced following a consultation process in December 2020 - January 2021, is scheduled to enter into force on 1 July 2021. However, it will also apply to agreements that were signed before that date, unless they have already been implemented by 1 September 2021. It is therefore important to get a grip on the proposed Act and its implications already now, and this news article will help you.

The proposed Investment Screening Act

The proposed Act is to make it possible to supervise foreign investments in Danish undertakings and, if necessary, prohibit investments or make them subject to conditions.

As was also the case in the consultation version circulated in December, the proposed Act provides for

a mandatory authorisation regime for all foreign investors investing in particularly sensitive sectors
a voluntary cross-sectoral notification regime for non-EU/EFTA investors.

Mandatory sectoral authorisation regime

The mandatory sectoral authorisation regime requires foreign investors intending to acquire a “qualifying holding” in a Danish undertaking which operates in a particularly sensitive sector to apply to the Danish Business Authority for authorisation.

A qualifying holding means “direct or indirect possession or control of no less than 10% of the shares or voting rights or similar control by other means”. Investors seeking to set up new businesses (greenfield investments) must also apply for authorisation if the business will be operating in a particularly sensitive sector.

Finally, non-EU/EFTA investors and investors in the EU/EFTA that are controlled by a non-EU/EFTA owner wishing to enter into a “special financial agreement” (such as joint ventures or service and operating agreements) with a Danish business operating in a particularly sensitive sector must also apply for authorisation.

According to section 6 of the proposed Act, particularly sensitive sectors, which will be defined later in an executive order, include businesses

in the national defence industry
providing IT security services or processing classified information
manufacturing dual-use items (as defined in Article 1(1) of Council Regulation (EC) 428/2009 (as amended)
providing critical technology other than the types mentioned above
in critical infrastructure industries

Authorisation must also be obtained, where an existing ownership interest is increased to exceed 20%, 1/3, 50%, 2/3 or 100%. Further, a new authorisation must be obtained if the ownership structure of the foreign company authorised to make the investment changes. If, for instance, a Chinese subsidiary of a Chinese group has been authorised to acquire 50% of a Danish undertaking in a particularly sensitive sector, and the Chinese subsidiary is later acquired by a Japanese group, then it must apply for a new authorisation in Denmark.

Voluntary cross-sectoral notification regime

The cross-sectoral notification regime provides an opportunity for investors outside the EU/EFTA to notify the Danish Business Authority of investments in a Danish undertaking, whereby they, directly or indirectly, gain “possession or control of no less than 25% of the shares or voting rights”.

Under the proposed Act, non-EU/EFTA investors may also notify “special financial agreements” to the Authority if the investment or agreement is likely to pose a threat to national security or public order in Denmark.

A guide will be prepared to make it easier for investors to determine when to use the voluntary cross-sectoral notification regime if the investment may constitute a threat to national security or public order.

Unlike the mandatory sectoral authorisation regime, the cross-sectoral notification regime does not apply in connection with the setting up of a business (greenfield investments).

Investments falling within the cross-sectoral notification regime will be subject to notification only if they qualify for the mandatory sectoral authorisation regime. By notifying the Authority in any circumstances, the investor is sure to have authorisation, thus eliminating any future doubt as to whether the investment threatens national security or public order.

If no notification is made, the Business Authority may, for a period of up to five years after the date of the investment, decide to undertake a scrutiny to determine if the investment constitutes a threat to national security or public order. If so, the Business Authority may issue an unwinding order.

Read further details on the proposed scope of the Act.

Entry into force and evaluation

It is proposed by the Danish government that the new Act should enter into force on 1 July 2021. The Minister for Industry, Business and Financial Affairs has indicated that businesses should be allowed four weeks from the date of publication in the Danish Law Gazette to adapt to the Act. For the Act to enter into force on 1 July 2021, it will therefore have to be passed by the end of May.

Further, the Act will not apply to investments and special financial agreements implemented before 1 September 2021. It will therefore be possible to enter into agreements after 1 July 2021 that will not be covered by the Act, as long as they are implemented before 1 September. But based on the transitional provisions, it also means that agreements which have been entered into before 1 July 2021 will be subject to the Act if they are not implemented before 1 September.

As was the case with the draft Investment Screening Act, the definition of the particularly sensitive sectors, setting up of new businesses and special financial agreements will be laid down in executive orders. The final scope of the Act will be clear only when these executive orders have been issued.

As noted in our response submitted in the consultation process, it is problematic that business operators will not know the definition of these key concepts – and, with that, the scope of the Act – until the executive orders are issued later this year. It is stated in the consultation memo (published with the proposed Act) however, that the executive orders will be drafted in the first half of 2021 to ensure that they have been issued when the Act enters into force.

It appears from the Bill that the proposed Act will be evaluated in 2023, partly because of its wide scope, partly because of its unknown extent and effects on the investment climate.

Changes made after the consultation process

Special financial agreements (such as joint ventures and service and operating agreements) will not be subject to the proposed Act if the investor is based in an EU/EFTA Member State, although this was proposed in the draft Bill that was circulated for comments in December. If, however, the investor is based in a non-EU/EFTA country, or the investor is based in an EU/EFTA country and is controlled by a non-EU/EFTA owner, then special financial agreements will fall within the proposed Act.

In the proposed Act, the Business Authority now has 60 working days to process applications filed under the mandatory authorisation regime. The time limit may be extended as applicable. If the time limit is exceeded, it has no real impact, however, and will not cause the investment to be considered as automatically authorised. In reality, the time limit is indicative only, which is hardly in keeping with the FDI Regulation (Regulation (EU) 2019/452). We also pointed to this problem in our response.

We also noted that the proposed wide – and in reality unlimited – access for the authorities to withdraw authorisations if the circumstances change gives rise to due process concerns. However, this right of withdrawal has been maintained in the proposed Act, but it is stated in the explanatory notes that it may be exercised only as an exception and not in respect of “undisclosed matters” which existed already when the authorisation was given. Moreover, it appears that a withdrawal will often involve a compulsory purchase and compensation to the investor.

The lack of clarity of the proposed penalty provision in the proposed Act was also mentioned in the consultation process. As a result, the proposed Act does not provide for penalties; instead, it authorises the Business Authority to revoke the foreign investor’s voting right if the investor does not comply with an order issued under the proposed Act.

Furthermore, financial agreements which have been prohibited or which must be discontinued by order are invalid as between the parties.