News & Views

New Swedish Foreign Investment Screening Regime

25 November 2021

Introduction

On 1 November 2021, a Swedish government inquiry proposed to introduce a new comprehensive foreign direct investments (FDI) regime designed to screen and control foreign acquisitions of undertakings domiciled in Sweden whose activities or technology are deemed essential for national security or public order. The new regime is proposed to enter into force on 1 January 2023. In this article, we summarise the key elements of the proposed regime.

Wide scope of application and low filing thresholds

In contrast to the rather narrow scope of the current Security Protection Act (in Swedish: säkerhetsskyddslagen) which requires notification and approval of any transfer of operations vital to national security, the new FDI regime will have a much wider scope of application and apply to investments in undertakings, regardless of legal form, engaged in any of the following activities:

  • Services essential to society’s basic needs, values or safety (in Swedish: samhällsviktig verksamhet).
  • Security-sensitive activities (as defined by the Security Protection Act).
  • Activities that prospect for, extract, enrich or sell raw materials that are critical to the EU, or other metals and minerals that are critical to Sweden.
  • Activities whose principal purpose is the processing of sensitive personal data or location data.
  • Activities related to emerging technologies and other strategic protected technologies.
  • Activities that manufacture, develop, conduct research into or supply dual-use products or supply technical assistance for such products.
  • Activities that manufacture, develop, conduct research into or supply military equipment or supply technical support for military equipment.

The new FDI regime will require an investor, regardless of nationality, to notify an acquisition of influence over undertakings engaged in any of the above-mentioned activities to the Inspectorate of Strategic Products (ISP). The filing threshold will be met if an investor solely or jointly acquires more than 10% of the votes in the target undertaking. Once a 10% shareholding is acquired and approved, every subsequent add-on acquisition, regardless of its size, must be notified and approved. In addition to the 10% threshold, influence may be established on a de facto-basis through other means than a shareholding.

Procedure – mandatory notification and standstill obligation

The procedure of the proposed FDI regime bears resemblance to the EU’s and Sweden’s ex-ante competition law merger control procedures. The investor must submit a mandatory notification and obtain approval from ISP before the acquisition is implemented (so called standstill obligation).

Within 25 working days from notification (Phase I), ISP must either approve the acquisition or open an in-depth review (Phase II), which may last three calendar months (extendable to six months). Before the end of Phase II, ISP must either approve or prohibit the investment if found necessary with regard to national security or public order. An approval can be made conditional on commitments from the investor.

Quite surprisingly, acquisitions of shares in publicly traded companies are not proposed to be exempted from the requirement to notify before the acquisition is made. In light of the nature of such acquisitions, and the fact that post-acquisition notification of publicly traded companies is an integral part of competition law procedure, we believe this matter ought to be revisited by the legislator during the continued legislative process.

A failure to comply with the notification requirements will not prevent ISP from prohibiting an investment after completion of the transaction. A prohibition will invalidate any contractual arrangements between the investor and the seller on which the transaction is based, except for acquisitions made over a stock exchange, in which case the investor may be ordered to sell shares which the investor already dispose of.

Although a failure to notify will not be subject to criminal sanctions, ISP may issue administrative fines of up to EUR 5 million. A decision to prohibit any investment may be appealed to the Swedish Government whereas a fine may be appealed to the Administrative Court in Stockholm.

Implications for the M&A process

With the introduction of the new FDI regime, parties to a transaction with sufficient links to Sweden will have to consider the applicability of three different merger control procedures: review under (i) competition law, (ii) the new FDI regime, and, more seldom, (iii) the Security Protection Act.

Although the scope of application of the proposed regime is more specific than the related Security Protection Act, the scope of application is not yet fully clear, and a more precise definition of essential services covered by the regime will be set out in administrative provisions by the Swedish Civil Contingencies Agency (MSB). It remains to be seen whether these provisions will provide any useful guidance or whether uncertainties as to the scope of applicability will remain. Moreover, it remains to be seen whether ISP will be willing to engage in informal pre-notification contacts to help clear out potential uncertainties before a notification starts the clock of the statutory deadlines.

All these factors could have potential implications for an M&A process, with regard to, among other things, deal-feasibility, timelines, negotiation of risk-allocation and other terms of the deal.

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