On 13 September 2023, the Parliament approved the Government’s proposal for a new law to allow for the review of and, if necessary, intervene against a foreign direct investment in companies that are active within protected activities.
Sweden is one of few countries in the EU that lacks a regulation with the possibility for the state to take action against, influence or simply review foreign direct investments in companies whose activities or technology are essential for Swedish security or public order. On 16 May 2023, the Government submitted a legislative bill to the Parliament with a proposal for a new law and on 13 September 2023 the Parliament approved the bill. The Inspectorate for Strategic Products (“ISP”) is expected to be appointed as supervisory authority.
The act will enter into force as soon as on 1 December 2023. A notification obligation, a standstill obligation as well as fines in case of a failure to file are proposed.
What is the scope of the legislation?
The law would apply to all investments in companies or assets that carry out protected activities (Sw. skyddsvärd verksamhet), regardless of their legal form. The legislation will apply to investments in e.g. limited liability companies (Sw. aktiebolag), partnerships (Sw. handelsbolag), unincorporated businesses (Sw. enkla bolag), sole trader undertakings (Sw. enskild näringsverksamhet), economic associations (Sw. ekonisk förening), foundations and trusts (Sw. stiftelser) domiciled in Sweden.
Which investments may be reviewed?
All investments in companies/assets that carry out protected activities that gives the investor a certain degree of influence shall be notified to the supervisory authority.
Companies that carry out protected activities also have a duty to inform an investor that the FDI Act is applicable to its operations.
With regard to investments in limited liability companies and economic associations, investments resulting in the investor commanding 10 per cent or more of the votes must be notified before the investment is carried out. The investment can be made directly by an individual but also indirectly through a legal person that is owned solely by the investor or together with others.
What encompass “protected activities”?
According to the Inquiry, protected activities encompass the following activities:
Essential services covers a large number of activities such as healthcare, financial services, education, information and communication services etc. Further guidance on the scope of essential services will be provided by the supervisory authority.
Which investors must notify?
In short, all investments that made into protected activities that will give the investor enough influence. No investor is excluded and as such investors from third countries, investors from another EU Member State and investors from Sweden must all notify investments to the supervisory authority.
If the investor is a natural person with only a Swedish citizenship, the notification should be dismissed without further action, i.e. approved. This will also apply if the legal entity making the investment is ultimately owned or controlled only by a natural person with only a Swedish citizenship. The same will apply if the natural person or legal person is an EU citizen.
Standstill obligation and process
An investment shall be notified to ISP by the investor. If an investor does not notify, ISP may make its own notification that it can review. ISP may also open an investigation into an investment in protected activity even though such investment must not be notified according to the Swedish FDI Act. However, such ex officio investigation may only be initiated if the authority has reason to suspect that the investment in question could harm Swedish security interests.
A notifiable investment may not be finalised without a clearance decision from the authority, which means that a stand-still obligation is imposed during the investigation.
The authority has 25 working days, from the submission of a complete notification, to decide whether to not take any further action (clearance) or to initiate a review of the investment. If a review is initiated, the authority must make a decision within three months, which may be prolonged to six months subject to special circumstances. When reviewing the investment, the authority will consider the nature and scope of the activities concerned and circumstances surrounding the investor.
During the review, it will be considered whether the investor is controlled by a state outside the EU, if the investor or any person/entity in its ownership structure has previously been part of operations/activities that has had or may have had a harmful impact on both Swedish and EU Member States’ security interests. Other circumstances that signify that the investment could harm Swedish security interests are also taken into consideration.
During the review, the authority may request the parties to provide more information and documents as well as visit the premises.
If it is necessary to prevent harm to Sweden’s security or to protect public order in Sweden, the authority may prohibit a foreign direct investment. It is also possible for the authority to clear an investment subject to conditions.
Sanctions in case on non-compliance?
If an investment has been prohibited any legal action that form part of the investment or has the purpose to carry out the investment will become null and void. This sanction will not necessarily be imposed on the entire agreement between the investor and the seller, e.g. break-up clauses, loan agreements etc. will not be affected. However, legal actions taken both before as well as after the decision will be impacted.
If an investment is completed without submitting a notification or contrary to a decision, the authority can impose an administrative fine. An administrative fine can also be imposed if conditions in a decision is not respected or if the parties provide misleading or false information about the investor or the object of the investment. The administrative fee shall be no less than SEK 25,000 and no more than SEK 100 million.
Impact on M&A transactions?
The new rules require more work to be done in advance in case of a potential foreign direct investment in a Swedish company that conducts protective activities. As stated above, it is the company that is being invested in, i.e. the target company, that must inform the investor that the company carries out protected activities and that the Swedish FDI Act is applicable on its operations and that the investor may have to notify its investment to the supervisory authority.
The investor is then responsible to prepare and submit the notification and the investment may not be made until it is cleared by the authority.
In cases of notifiable transactions, the transactional documents must include a condition about approval from the authority. The parties must also consider how the costs associated with the work required to follow the rules, any conditions imposed and even a prohibition, shall be handled and divided between the parties. Moreover, the parties should also draw up a joint action plan in the event that an investment is not approved and must be discontinued.
Closing a transaction before the authority has cleared it is a violation of the stand-still obligation and will be subject to administrative fines. This signifies that the parties must adhere to the rules and consider the impact at all stages of the process, from the start of the process.