New legislation on foreign direct investment screening in Sweden applies from 1 December 2023 – main features and challenges
The new Foreign Direct Investment Screening Act (Sw: lag (2023:560) om granskning av utländska direktinvesteringar) applies in Sweden from 1 December 2023. The act covers a broad range of businesses and investments and thus needs to be taken into account before executing transactions relating to Swedish businesses.
What are the main features of the new legislation?
The FDI Act requires a specific screening procedure to be carried out prior to investments in certain protected activities (below Protected Activities). Given the wording of the act, Protected Activities is a rather broad concept which includes, inter alia, essential services (e.g. energy, financial services, healthcare, information and communication, food supply and transportation), security-sensitive activities and emerging technologies and other strategic protected technologies.
Under the FDI Act, a screening procedure needs to be carried out if the investor (directly or indirectly through related parties) obtains an influence that corresponds to or exceeds any of the thresholds of 10, 20, 30, 50, 65 or 90 per cent of the votes in a company carrying out Protected Activities. A screening procedure also needs to be carried out if the investment results in the investor having a direct or indirect influence over the management of the company through other means (articles of association, shareholders’ agreements, etc). The filing obligation applies to both foreign and Swedish investors. Screening authority will be the Inspectorate for Strategic Products (ISP).
Within 25 working days of the notification, ISP must decide either to leave the notification without action or to initiate an in-depth review of the investment. If an in-depth review is initiated, the authority must either approve or prohibit the investment within six months of notification. ISP may also make the approval subject to certain conditions.
Only investments that qualify as “foreign direct investment” can be subject to prohibitions or conditions. In short, the definition requires that an investor involved, directly or indirectly, is based outside the EU. Investments without linkage to countries outside the EU (e.g. investments made by a Swedish legal entity owned by persons with Swedish citizenship, without any reason to assume that the investor is acting on behalf of a third party) will be left without action.
An investment made in violation of a prohibition by ISP is to be considered null and void. The authority is also entitled to impose penalties of up to SEK 100 million for non-compliance.
What challenges does the new legislation pose?
We perceive that the new legislation comes with a number of challenges. In this context, we would particularly like to emphasise the following issues:
- Difficulties in assessing whether or not the business in question is subject to the FDI Act
In terms of the wording of the FDI Act, the concept of Protected Activities is very broad. It includes, inter alia, security-sensitive activities, essential services, large-scale processing of sensitive personal data and activities in emerging technologies and other strategic protected technologies. The guidance that have been provided so far from the legislator regarding the interpretation of the concept of Protected Activities leaves many open questions. Unless further guidance is provided, it can be assumed that a large number of transactions will be notified to the screening authority to be on the safe side. In this context, it may also be mentioned that the FDI Act does not provide for the possibility of obtaining an advance ruling from the screening authority.
- Domestic transactions and intra-group transactions
The screening system under the new FDI Act is applicable regardless of the investor’s nationality or domicile, i.e. Swedish investments in Protected Activities are also covered and must be filed. Even transactions as part of intra-group restructurings are covered by the wording of the legislation. In order to minimise the inconvenience that the notification obligation entails for Swedish and EU investors in the form of delays and additional costs, it will be important that the screening authority implements procedures to quickly deliver decisions regarding transactions without links to countries outside the EU.
- Effects on existing agreements including the right or obligation to make investments
According to its wording, the FDI Act applies to investments completed after 30 November 2023, regardless of when the investment was agreed. This may render that existing agreements including the right and/or obligation to make investments in Protected Activities will be subject to the new screening regime and may not be allowed to be executed as intended (e.g. call options in shareholder agreements)
- Existing investments are protected from the new legislation
As we interpret the FDI Act, all existing holdings in Swedish companies are protected from the application of the act, even if, e.g., it is obvious that there is an unsuitable foreign investor in the background. Accordingly, it would require that a direct or indirect change in ownership covered by the thresholds of the act takes place in order for ISP to be able to intervene in relation to existing investments.
- Application in relation to ownership changes in foreign owners
An interesting question is how the regime of the FDI Act will be enforced in relation to indirect changes in ownership in foreign entities. For example, it is conceivable that a company engaged in Protected Activities has several layers of foreign owners. To start with, it may be difficult for the company to have a full overview of its indirect owners, e.g. with foreign fund structures as owners. The next question is how a change of ownership in such an existing foreign owner will be addressed by ISP. As we interpret the systematics of the legislation, a such change in ownership shall be notified to ISP, but it is not entirely clear what sanctions that ISP will be able to enforce outside Sweden’s borders.
In summary, despite its potential weaknesses, the FDI Act serves a worthy purpose. However, it is a difficult area to regulate and there has to be predictability in the legislation in order to not inhibit the market and the desire to invest in Sweden. At the same time, there is a need for flexibility in the regulatory framework that allows Sweden to be protected from inappropriate owners. It now remains to be seen how the new legislation will play out in practice and what obstacles and opportunities it will entail. In either case, investors that are looking at businesses with Swedish presence must take the FDI Act into account.