Application Order on new Investment Screening Act circulated for consultation

The Danish Business Authority will be issuing a number of executive orders on the application of the Investment Screening Act, and now the consultation process has started for the most fundamental order, the "Application Order". Below, we look into some of the proposed rules, in particular the questions which entities will be covered and which exceptions will apply in relation to greenfield investments.

On 4 May 2021, the Danish Parliament passed the Investment Screening Act, which introduces two systems for screening of foreign investments in Denmark. Read more about the Act in this news article. It was expected back then that the Business Authority would issue an executive order defining the scope of the Investment Screening Act. And the Application Order has as its very purpose to define the specific scope of the two screening mechanisms.

Which entities fall within the scope of the Investment Screening Act?

Based on the wording of the Investment Screening Act, it applies to investments and special financial agreements entered into with "enterprises resident in Denmark". The legislature has deliberately used broad terms to encompass all Danish businesses regardless of corporate form. It is proposed in the Application Order that the scope of the new Act should be extended to include not only businesses, but also other Danish entities.

In section 3 it is proposed that certain Danish "public and private non-profitmaking research institutions" should also be included, but only if they are parties to joint ventures "relating to the defence industry, IT security, critical technology, or critical infrastructure". It is further proposed in section 3 that "Public authorities and critical infrastructure institutions" should be included in the scope of the Investment Screening Act.

In the case of foreign investors, the Investment Screening Act stipulates that all foreign nationals and all foreign "enterprises" fall within the Act and will therefore have to apply for permission before making certain investments in Denmark. Further details are given in section 2 of the Application Order, stating that "National authorities and governmental agencies in non-EU/EFTA countries, including public institutions and State-owned investment funds" investing in Danish companies or entering into special financial agreements with companies operating in a particularly sensitive sector will be subject to the Act. It is further proposed to include "non-profitmaking associations, non-commercial foundations and similar legal persons in non-EU/EFTA countries" which invest in or enter into financial agreements with Danish companies operating in particularly sensitive sectors.

It is worth noting that such entities must be based outside the EU/EFTA in order to be covered by the Investment Screening Act. By way of example, the Norwegian Statens Pensjonsfond (also known as the Oil Fund) will still not fall within the scope of the Act.

Greenfield investments

As noted by respondents in the consultation process, it would be a radical step to include all businesses being set up in particularly sensitive sectors. Also, it is more difficult to perform the screening and assess if the setting up of a new business can pose a threat to Danish national security or public order than if the foreign investment is made in an existing Danish business.

Against this background, it is proposed in the Application Order to exclude business formations in particularly sensitive sectors from the mandatory sectoral authorisation regime if "the foreign investor’s capital injection into the new business does not exceed DKK 75 million in aggregate during a period of up to three financial years from the date of formation, and if the new business is not a subsidiary of a foreign investor."

It is still uncertain how this criterion will be applied in practice. Clearly, an investor whose initial capital injection exceeds DKK 75 million will be subject to the Act and will have to undergo screening.

It is not clear, however, what the consequence will be for an investor who makes 3 annual injections of DKK 30 million each. When the third capital injection is made, the threshold of DKK 75 million will be exceeded, and the investor will therefore have to apply for authorisation under the sectoral authorisation regime. If the Business Authority rejects the investment, the last DKK 30 million cannot be injected, whereas the DKK 60 million already contributed must be upheld, since these injections are not subject to the authorisation regime.

If the screening is intended to cover the whole investment retrospectively, it will have the unfortunate effect of making it a de facto retrospective screening instead of a prior screening in the case of greenfield investments in the region of DKK 75 million.

Nor is it clear what the consequence will be if the newly established business becomes a subsidiary of the foreign investor during the first three years, and whether the investor must then apply for authorisation in respect of capital injections already made.

It is proposed directly in the Application Order that the so-called special financial agreements with newly established businesses are to be excluded from the Investment Screening Act, which will then apply to greenfield investments only where a new business is actually set up to operate in a particularly sensitive sector.

Pre-screening option

It was proposed in the preparatory works to the Investment Screening Act that investors should have an opportunity to obtain an advisory opinion from the Business Authority indicating whether the contemplated investment would fall within the Act.

This pre-screening right will not be available in relation to all questions of application, however. The Business Authority will only have to indicate whether the proposed investment is covered because the business operates in “critical technology” or “critical infrastructure”, or whether the contemplated new business is exempted as a greenfield investment as described above.

Following the pre-screening process, the Business Authority may either confirm that the contemplated investment or business formation (greenfield investment) is exempt from the Investment Screening Act or demand an actual screening, making the investment subject to prior authorisation. It is envisaged in the preparatory works to the Act that the Business Authority should also be available to answer other questions, for instance whether a proposed investment is notifiable under the voluntary regime.

Consultation period

In addition to the Application Order, a draft "order on procedures, etc. in connection with application for authorisation for or notification of certain foreign direct investments or special financial agreements in Denmark" (the Procedural Order) and a draft "order on disclosure of confidential information on certain foreign direct investments, etc. in Denmark to other authorities" (the Confidentiality Order) have also been sent for consultation.

The deadline for commenting on the three draft orders is 15 June 2021.