New act on foreign direct investments in Sweden
Published on 30th Oct 2023
New legislation to prevent foreign investments harmful to national security will have big impact on M&A
The Swedish Parliament recently adopted a new legislation for foreign direct investment in Swedish companies (the FDI Act). The legislation aims to prevent foreign direct investments that may harm national security, public order or public safety. The legislation will enter into force on 1 December 2023, meaning that the rules will be applicable on all transactions closing on, or after, 1 December 2023.
A majority of EU Member States have introduced similar screening systems to prevent investments that pose a risk from a security perspective.
The legislation will have a big impact on areas such as M&A and venture capital as the FDI screening will become a necessary step when carrying out foreign direct investments in Swedish companies. Investors will be forced to take the notification and review process into account when making future investments.
Who is subject to the legislation?
The rules are applicable to investments in companies conducting "protectable activities" which entails:
- essential services (meaning an activity, service or infrastructure that maintains or ensures societal functions that are necessary for the basic needs, values or security of society);
- security-sensitive activities;
- critical raw materials or of metals or minerals that are strategically important for Sweden's supply;
- large-scale processing of sensitive personal data, or of location data, in or through a product or service;
- war material or the provision of technical support for such war material;
- dual-use items; and
- emerging technologies or other strategically important technologies.
The term "foreign direct investments" has a wide applicability scope, including all investments, regardless of the investor's citizenship or where the company is established.
Swedish investors and investors from other EU countries also need to notify acquisitions to the review authority. An investment carried out by an investor on behalf of someone else can also constitute a foreign direct investment.
The legislation applies to foreign investments in operations considered protectable activities that are conducted by both listed and private limited liability companies, European companies or partnerships, or by economic associations or foundations that have their registered office in Sweden.
How does the notification process work?
Anyone who intends to invest, directly or indirectly, in protectable activities, is obliged to notify the competent reviewing authority before the investment is made, if:
- the investor, someone in the ownership structure or someone on whose behalf the investor is acting, after the investment, directly or indirectly, would come to possess votes that correspond to or exceed a threshold of 10, 20, 30, 50, 65 or 90 per cent of the voting rights;
- the investor would, through the investment, acquire, or form, a company that will carry out protectable activities, and the investor, someone in the ownership structure, or someone on whose behalf the investor is acting, directly or indirectly, would come to hold 10 per cent or more of the voting rights in the legal entity;
- the investor would, through the investment, become a partner in a company which is or will conducted protectable activities, or if the investment is intended to be made in a company in which protectable activities are carried out and the investor already is a partner;
- the investor would, as a result of the investment, establish a foundation that will conduct protectable activities; or
- the investor, a member of the ownership structure or a person on whose behalf the investor is acting, in any way other than mentioned above, would, through the investment, have a direct or indirect influence on the management of a company that conducts or will conduct protectable activities.
A notification is not required for an acquisition of shares related to a new issue with preferential rights in relation to the number of shares the investor owns.
The investor is responsible for notifying the competent reviewing authority before the investment. A target company that carries out protectable activities covered by the FDI Act, and that is the subject of an investment, must inform the investor that the FDI Act applies and that there is a notification obligation.
The competent reviewing authority
The Inspectorate for Strategic Products (Inspektionen för strategiska produkter) (ISP) will become the competent reviewing authority.
It may prohibit a foreign direct investment if it is deemed necessary to protect Swedish security interests. It may also attach conditions to an authorisation of a foreign direct investment. Such conditions may, for example, relate to the investor, the target company's operations or the management and control of the target company. If the investment is made by an investor from Sweden or another country within the EU, conditions cannot be imposed.
In addition, the ISP may, on its own initiative, initiate a review of an investment that has not been notified, regardless of whether the investment is subject to a notification obligation or not, provided that there is reason to believe that the investment may have a detrimental effect on national security, public order or public safety.
The notification and the review process
Within 25 working days after an investor has notified the competent reviewing authority of an investment, or the ISP on its own initiative has initiated a review, it will decide either to leave the notification without action or to initiate a review of the investment. The review must be completed before the transaction takes place.
If the competent reviewing authority decides to review the investment, it shall, within three months of a decision to review it, either prohibit or authorise the investment. This period may be extended up to six months if there are special reasons.
The competent reviewing authority must make an overall assessment in each case of the potential risks that the investment may entail. The nature and scale of the activities of the target company and the circumstances related to the investor should be taken into account.
Factors such as whether the investor is controlled in whole or in part by a non-EU state and whether the investor or someone in its ownership structure has previously been involved in activities that have had a harmful effect or could have had a harmful effect on the security interests of Sweden or another EU country will also be considered. The competent reviewing authority will also consult a number of additional authorities in its review of the investment.
If the competent reviewing authority judges that the investment will have a harmful effect on national security, public order or public safety in Sweden it will decide to prohibit the foreign direct investment. It may also attach conditions to an authorisation if it is deemed necessary to prevent damage. However, only acquisitions with non-EU investors can be prohibited or subject to conditions for authorisation.
The competent reviewing authority may decide to impose a penalty of no less than SEK 25,000 and no more than SEK 100 million on those who fail to comply with the legislation. Such a penalty can be imposed on an investor who fails to notify an investment.
Similarly, a penalty may be imposed on an investor who completes an acquisition before the competent reviewing authority has approved the investment, or left the notification without action, or if an acquisition is carried out in violation of conditions decided by the competent reviewing authority.
An investor and/or target company that has provided false information or failed to provide requested information to the reviewing authority may also be subject to a penalty.
The possibility to appeal
The competent reviewing authority's decision to prohibit an investment, or to attach conditions to an authorisation, may be appealed to the government. The competent reviewing authority's decision on an injunction or penalty fee may be appealed to the Administrative Court in Stockholm.
Osborne Clarke comment
A foreign direct investment in protectable activities must be preceded by a review by the ISP before the investment is made. It is not permitted to proceed with an acquisition before a decision has been taken by the reviewing authority.
The FDI Act will have a major impact on acquisitions in Swedish companies. Parties of transactions that close on 1 December 2023, or later, need to analyse whether the target company's business may be covered by the FDI Act. When investing, the parties need to take the notification and review process into account and consider that the completion of the transaction may take longer than before.
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