New executive orders clarify the scope of the FDI screening rules in Denmark

Three executive orders under the Investment Screening Act have now been promulgated. Below is a summary of the executive orders, which i.a. define "particularly sensitive sectors" in greater detail and introduce certain exemptions from the notification requirement, including in connection with the formation of new companies (greenfield investments) and intra-group investments. The Investment Screening Act and the executive orders together provide the regulatory framework for screening of foreign investments in Denmark.

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The Investment Screening Act

The Investment Screening Act, which came into force on 1 July 2021 with effect for investments made on or after 1 September 2021, provides two investment screening mechanisms.

A mandatory authorisation regime for investments in particularly sensitive sectors and activities. It applies to all foreign investors who gain “direct or indirect possession or control of no less than 10% of the shares or voting rights or similar control by other means”. The authorisation regime also applies in connection with the setting up of new companies in particularly sensitive sectors.
A voluntary cross-sectoral notification regime. This regime applies to non-EU/EFTA investors who gain “possession or control of no less than 25% of the shares or voting rights or similar control by other means” in companies other than those operating in particularly sensitive sectors.

When the Investment Screening Act was passed in May, it was announced that three executive orders and guidance notes would be issued which, together with the Act, are to constitute the basis for application of the Act. In our three previous articles (on particularly sensitive sectors, on the Application Order and on special financial agreements), we have discussed the consultation stage versions of the executive orders, but the final versions have now been promulgated.

The three executive orders will be accompanied by application forms for use in connection with proposed investments.

The Application Order

With the Application Order, more foreign investors will fall within the Act. The Investment Screening Act provides directly that investments in all Danish “businesses” made by foreign “businesses” or foreign nationals will be covered.

The Application Order extends the scope of “foreign investors” to also include “national authorities and government agencies based in non-EU/EFTA countries, including public institutions and sovereign investment funds” and “non-profitmaking associations, non-commercial foundations and similar legal persons in non-EU/EFTA countries”.

It follows from the Investment Screening Act that the mandatory authorisation regime will also apply when new companies are being set up (greenfield investments) in a particularly sensitive sector. The Application Order sets a lower limit for the purpose of determining which greenfield investments fall within the Act. 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, then the investment will not be subject to the Act. Capital injection includes both equity and long-term irredeemable loans. If the new business is a subsidiary of a foreign investor, it will not qualify for exemption. It can further be established that if the limit of DKK 75 million is exceeded, only the excess amount will be notifiable. This was not clear from the consultation version of the Application Order.

The Application Order also introduces a formal pre-screening option. It allows investors to obtain a confirmation by the Danish Business Authority to determine whether the investment relates to “critical technology” or “critical infrastructure”, which are two of the five particularly sensitive sectors and activities (and as such subject to notification), and whether the investment is a greenfield investment and as such exempt as described above.

The Application Order also defines the scope of the five particularly sensitive sectors and activities that are covered by the mandatory authorisation regime. The definition adopted in the final version of the Application Order is the same as in the consultation version which we dealt with in this article. Finally, the Application Order specifies which “special financial agreements” (joint ventures, supply agreements and service and operating agreements) with non-EU/EFTA investors fall within the Act. This final definition of special financial agreements is also in line with the definition proposed in the consultation version of the Application Order which we discussed in a previous article. As an example, special financial agreements with intra-group companies or with newly established companies are not subject to notification.

The Procedural Order

The Procedural Order lays down the specific procedures for filing of applications for authorisation and submission of notifications under the Investment Screening Act. Applications must be filed online in either Danish or English, using the Business Authority’s form which is available on virk.dk.

It is further specified in the Procedural Order which information must be provided in connection with:

pre-screening
applications for authorisation or notification of foreign direct investments
applications for authorisation in relation to new businesses (greenfield investments)
applications for authorisation or notification of special financial agreements

When applying to the Authority for authorisation or notifying the Authority of an investment, information about i.a. the purpose and funding of the investment must be provided.

The Procedural Order also provides guidance on how to calculate if the 10% and 25% thresholds applying under the mandatory authorisation regime and the voluntary cross-sectoral notification regime, respectively, are observed. It is stipulated that all shares held directly or indirectly by the foreign investor himself or over which the foreign investor has influence though its related parties are to be counted in. Related parties is to be understood as related parties within the meaning of the International Accounting Standard IFRS 10.

The Procedural Order also provides a definition of “similar control by other means” than possession of shares, whereby the thresholds are exceeded. It includes, inter alia:

right of disposal of shares or voting rights through shareholders’ agreements
powers to approve management or financial decisions
right to appoint or dismiss management members
purchase of major assets
possession of exercisable purchase options

The Procedural Order also contains important exemptions. Thus, changes within a group which do not increase the group’s total shareholding in a Danish business will be exempt from the Investment Screening Act. Further, the granting of pledges over or security interests in voting rights or assets in a Danish business will not be deemed a foreign investment within the meaning of the Act. Nor will it amount to a foreign investment if the pledgee subsequently takes possession of the pledge for debt enforcement purposes with a view to realisation.

Finally, the Procedural Order contain rules on the auditor opinions to be submitted under the Investment Screening Act. The Business Authority is also given access to propose commitments to remedy the effects of an investment or a special financial agreement that may pose a threat to national security or public order. Such commitments must be given using the Business Authority’s template.

The Confidentiality Order

The Confidentiality Order is intended to regulate the Business Authority’s access to disclose information received for the purpose of enforcing the Investment Screening Act and to spell out the duty of non-disclosure to be observed by the Authority and other recipients of information from the Authority.