Foreign direct investment reviews 2021: Denmark

In July 2021, a new act on screening of foreign direct investment (FDI) in Denmark, the "Investment Screening Act," entered into force. Even prior to the Act, Denmark occurred on the European Commission's list of screening mechanisms notified by EU Member States because of two sector- specific FDI screening regulations: the Act on War Material and the Act on the Continental Shelf and Certain Pipelines Installations on Territorial Waters, providing certain authorization requirements for foreign investors.

The Investment Screening Act thus puts Denmark on the list of countries with a general cross-sectoral FDI screening regime.

The Investment Screening Act effectively applies to transactions closed, or agreements implemented on September 1, 2021, and going forward. In addition, the Investment Screening Act is supplemented by three executive orders issued by the Ministry of Industry, Business and Financial Affairs, which provide clarifications on the scope of application and further definitions of the concept of particularly sensitive sectors and activities, application procedure and on confidentiality.

The Investment Screening Act aims to prevent foreign direct investments and certain special economic agreements from posing a threat to national security or public order in Denmark (including Greenland and the Faroe Islands) through screening and possible interventions. "National security" relates to matters involving threats to national security such as actions that threaten international relations or military interests. "Public order" concerns relate to the maintenance of a democratic, independent and secure society. The screening mechanism provides for two alternative screening procedures: a sector-specific mandatory notification and a voluntary notification for all other sectors.

Nevertheless, as a small country, Denmark is reliant on foreign trade and foreign investments. Denmark will therefore continue to welcome foreign investments, although some will need to undergo prior authorization.

The FDI regime is supervised and enforced by the Danish Business Authority (DBA) which has been granted wide investigation and decision powers.

WHO FILES

The DBA provides for template application and notification forms that will be submitted electronically to the DBA by the investor. The information requested by the DBA centers around the nature of the investment or the agreement, the investor's ownership and the target company's business.

As in a merger notification, a number of documents must be submitted, including transaction documents and contracts, and pre- and post-closing organizational charts.

TYPES OF DEALS REVIEWED

The Investment Screening Act applies to foreign direct investments and special financial agreements leading to control or significant influence over a company domiciled in Denmark.

Foreign direct investments: A foreign direct investment is defined as the acquisition of control or significant influence of a company domiciled in Denmark by direct or indirect control over shares or voting rights, or similar control by other means such as the purchase of assets and long-term loans. The concept also includes the establishment of a new company in Denmark.

Special financial agreements: A special financial agreement involves a joint venture agreement, a supplier agreement or an operating or service agreement for buildings, facilities, installations or systems that leads to the investor gaining control of, or significant influence over, the company or the entity. Agreements entered into on the basis of a standard agreement approved by the DBA or concerning only one single supply are exempted from the application of the Investment Screening Act.

Mandatory notification:

Mandatory notification for particularly sensitive sectors and activities: A prerequisite for the triggering of an obligation of a mandatory notification is that the investment or the agreement involves a target company active in certain particularly sensitive sectors or activities listed in Section 6 of the Investment Screening Act.

According to Section 6, particularly sensitive sectors include defense (for example, entities developing or producing weapons, ammunition or other technology for military use on the EU Common Military List or providing services to the Danish Defence), IT security or the processing of classified information, the production of dual-use products, critical technology (for example, AI and machine learning, industrial robot and drone technology, semiconductors, cyber protection, space technology, industrial technology for energy and healthcare and nanotechnology) and critical infrastructure. Critical infrastructure has a particularly broad scope comprising a number of activities within energy, ICT, transport, civil defense, healthcare, food and water supply, waste and wastewater disposal, financial institutions and solutions, meteorology and crisis management.

The Ministry for Industry, Business and Financial Affairs has issued an executive order where it provides further details on which activities and agreements should fall within the scope of the sensitive sectors listed in the Investment Screening Act.

Mandatory notifications for foreign direct investments in particularly sensitive sectors and activities: A mandatory notification is triggered if the investment concerns a particularly sensitive sector or activity and leads to a control of at least 10 percent of the shareholding or voting rights or equivalent control by other means, and the investor is an EU-based or non-EU-based company or citizen, or a Danish company controlled by such EU or non-EU company or citizen, or a non-EU national authority or government agency.

Mandatory notifications for special financial agreements in particularly sensitive sectors and activities: A special financial agreement falls under the mandatory notification if the agreement concerns a particularly sensitive sector or activity and the investing party is a non-EU based company or citizen, or a Danish company controlled by such non-EU company or citizen, or a non-EU national authority or government agency.

A special financial agreement will not fall under the mandatory screening procedure, if it involves an EU- based company or citizen.

Voluntary notification:

Voluntary notifications for foreign direct investments that may pose a threat to national security or public order: All foreign investments involving a foreign investor may be voluntary notified if the investment leads to a control of at least 25 percent of the shareholding or voting rights or equivalent controls by other means and if the investment may pose a threat to national security or public order, and if the investor is a non-EU based company or entity.

In practice, it may be challenging for investors to assess whether an investment may pose a threat to national security. It is therefore advised to enter into pre-notification contacts with the DBA, which can provide general guidance on specific investments that clearly fall outside the rules on notification. Generally, the DBA will consider whether a foreign investor is directly or indirectly controlled by a foreign government, foreign state bodies or foreign armed forces through ownership or significant funding.

It should be noted that even completed investments can be voluntarily notified to the DBA. However, the DBA has the power to launch a formal investigation for up to 5 years after completion if it believes that the investment can pose a threat to national security or public order.

Voluntary notifications for special financial agreements that may pose a threat to national security or public order: A voluntary notification is triggered if the agreement concerns a non-sensitive sector or activity and the investing party is a non-EU-based company or citizen, or a Danish company controlled by such non-EU company or citizen, or a non-EU national authority or government agency. A special financial agreement will not fall under voluntary screening procedure if it involves an EU-based company or citizen.

Completed agreements can be voluntarily notified to the DBA. However, the DBA has the power to launch a formal investigation for up to five years after completion if it believes that the investment can pose a threat to national security or public order.

SCOPE OF THE REVIEW AND SANCTIONS

The scope of the DBA's review is limited to assessing whether the investment can be authorized with or without remedies. If the DBA judges that an investment should be blocked, it must refer the case to the Minister for Industry, Business and Financial Affairs, who may issue a prohibition against the implementation of a foreign investment or a special agreement.

Failure to comply with the mandatory notification requirement will lead to the investment being illegal. The DBA has the power to open cases ex officio to investigate whether an investment has been completed without authorization. The DBA may order the investor to submit a formal notification or order the investment to be stopped. Failure to comply with such order may lead to voting rights in the Danish target being revoked.

If an investment falls under the voluntary notification scheme, the DBA cannot order the investor to file a formal notification. However, the DBA can launch a formal investigation if the investment could pose a threat to national security or public order up to five years from completion of the investment and can eventually block the investment. According to guidance published by the DBA, it can make official that it has opened an investigation into whether a foreign investment has been made in violation of the screening rules as well as the outcome of the investigation.

REVIEW PROCESS TIMELINE

The DBA has 60 business days from the receipt of a notification to issue a decision. For mandatory notifications, the DBA may prolong the review by 30 business days to a total of 90 business days.

HOW INVESTORS CAN PROTECT THEMSELVES

Although the regulatory framework, together with guidance from the Danish Business Authority, provides for material clarity about the application and scope of the screening mechanism, the Danish FDI regime remains broad in scope and will require a careful assessment in each deal. The broad definition of particularly sensitive sectors and activities will require a careful assessment of the target's Danish operations and potential risks in a notification procedure. Further, since an acquisition of just 10 percent of a target company active in a sensitive sector triggers a mandatory notification, the Danish FDI screening will affect not only acquisitions of a controlling stake but also acquisitions of non-controlling minority interests by, for example, venture capitalists.

Given that the scope of the Danish FDI regime has similar features to other EU FDI regimes, experience from handling FDI reviews in other jurisdictions will be valuable.

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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