Kromann Reumert submits consultation response on draft Investment Screening Act

Investment Screening Act

On 9 December 2020, the Danish Business Authority (DBA) submitted a draft Investment Screening Act for consultation. The bill is expected to be presented in February 2021. The draft bill proposes a mandatory approval requirement for foreign investments if the investor gains control of more than 10 per cent of a Danish enterprise active in a particularly sensitive sector, coupled with a cross-sectorial voluntary notification option in cases where a foreign investor gains control of more than 25 per cent of a Danish enterprise. The DBA will also be allowed to call unnotified investments comprised by the Act in for screening for up to five years after they are made.   We have previously described the details of the draft bill.  

Kromann Reumert’s response

In drafting the bill, the Ministry of Economic and Business Affairs has had a difficult job balancing national security concerns with a good business environment. In our review of the draft bill, we have identified 17 points where we believe it can be improved to enhance fair treatment of foreign investors and assuring that their investments are respected, ultimately thereby ensuring Denmark’s continued ability to attract foreign investments. Of those 17 points, the following are especially noteworthy:

Scope

The draft envisages an extensive use of executive orders, also on provisions governing the scope of the Act. This is unfortunate: Foreign investors need to know for certain when the Act will and will not apply. Uncertainty about this may cause foreign investors to refrain from investing, and there is also the risk that the DBA will be unnecessarily burdened by notifications of investments that the legislature never intended to be notified in the first place. Therefore, it should be clarified which businesses will be comprised by the “particularly sensitive sectors” that are subject to the mandatory approval scheme, including what exactly is to be understood by the term "critical infrastructure". Similarly, the “special economic agreements”, which in the same way as acquisitions of qualified shares of 10 per cent and 25 per cent may be comprised by the Act, should be clarified in greater detail.
  

Thresholds

The draft sets the thresholds for the mandatory approval and the voluntary reporting regimes at 10 per cent and 25 per cent, respectively, of the shares or voting rights in the Danish enterprise. These are very low thresholds, seeing as possession of 10 per cent or 25 per cent of the shares or votes in Danish companies normally is not enough to acquire control or influence over a Danish business. Moreover, the thresholds are combined with the provision that “similar control by other means over managerial, financial, development or operating matters” is also comprised by the Act. We have pointed out that this element calls for more detailed explanation or clarification since, as explained, acquisition of 10 or 25 per cent of the shares or votes does not amount to control. We have therefore recommended that the thresholds be raised and that the meaning of “similar control” be clarified. 

Procedure/time limits

The draft bill gives the DBA 90 business days – approx. 4.5 months – to decide if an investment subject to the mandatory approval requirement may be cleared or if further examinations are required. The draft sets no consequences for any failure by the DBA to make that decision within those 90 business days. This is in contrast to the voluntary reporting regime, under which the DBA is allowed 60 business days to make its decision, and if no decision is communicated within that time, the investment is considered approved. Also, the draft sets no deadline for any further examinations required, nor is there a time limit on the Ministry’s processing of cases presented to it by the DBA. This is unfortunate and also appears to be contrary to the FDI Regulation’s minimum requirements for Member States’ FDI regimes. We have therefore recommended that the time limits be reduced; that a time limit be set for the Ministry’s processing of cases; and that the time limits in both the mandatory and the voluntary filing regimes be given effect by stipulating that any failure to decide on the investment within the relevant time limit is to be considered an approval. 

Loan agreements

Under the draft bill, long-term loans may constitute “similar control by other means”. It could greatly impact Danish businesses’ funding possibilities and thereby ultimately dampen the appetite for investments in Denmark if the Act does not allow foreign lenders, temporarily, to enforce the security they may have, e.g. liens or charges. We have therefore recommended the introduction of an exemption and/or dispensation scheme under which lenders will be allowed, under specific conditions and for a temporary period, to take possession of the charged assets without triggering the reporting requirement.

Sanctions/dawn raids

Under the draft bill, violations will be punishable by a fine. Fining is not limited to cases of gross negligence or intent. As such, ordinary negligence will also be punishable by fining. This is problematic inasmuch as the draft bill leaves a number of questions and “gaps” to be subsequently answered and filled by later executive orders, and because the assessments to be made under the Act are, in the words of the explanatory notes for the draft bill, “difficult”. We have recommended, therefore, that non-compliance by ordinary negligence not be punishable, especially where legal advice has been sought. Moreover, according to the draft bill, the DBA will be authorised to conduct dawn raids without a court order. It says in the draft that this authority will be used only “in case of serious threats to national security and public policy and if the necessary information cannot be obtained by other means”, but at the same time it says that all inspections will be notified beforehand and that the authority to conduct them must not be used where a criminal offence is suspected. There seems to be a dichotomy here: If all inspections are notified, then there would seem to be no need for conducting dawn raids without a court order. It is also difficult to imagine the DBA conducting an inspection out of concern for national security without suspicion of a criminal offence.

Charges and fees

It follows from the draft that the DBA can lay down rules governing charges and fees, and the explanatory notes suggest that the “average long-term costs of processing investment applications” should be covered by fees charged to the notifying investors. It is very important that the amount of such a fee is not excessive, thereby diminishing Denmark’s standing as an attractive investment destination. We have recommended, therefore, that the fee be a very minimal proportion of the amount invested or of the turnover of the investment object rather than, say, the investor’s turnover, since the latter would have a particularly dissuasive effect on capital-rich investors.

If you are interested in reading our full consultancy response (only available in Danish), or if you have any questions for the draft bill, please do not hesitate to contact us.