As the 1st of December is rapidly approaching, we draw closer to the enforcement date of the Swedish legislation regulating Foreign Direct Investments (FDI) in Sweden. This post outlines the forthcoming law and serves as an update given the most recent, but also the yet-to-come, awaited updates clarifying its scope.
Timeline of recent happenings
On the 13th of September, 2023, the Swedish Parliament approved the then-impending law. The law, "Lag (2023:560) om granskning av utländska direktinvesteringar", was then published in the SFS (the Swedish Statute Book) the 28th of September. This law is further referred to as "the FDI-Act" or the "Act". Since then, further developments have occurred.
On the 2nd of November, the Swedish Government officially appointed ISP (the Inspectorate of Strategic Products) as the authority on the screening mechanism the Act provides. When executing the purpose of being the screening authority, ISP shall review the notifications of investments to be made and, in some cases, already conducted investments in accordance with the FDI-Act. Yesterday, the 23rd of November, ISP published updated guidelines concerning the requirements of such notifications. Although these are not the main focus of this post, these, together with the information requested in the notification, can be concluded as rather extensive.
Besides the appointment of ISP, MSB (the Swedish Civil Contingencies Agency) was chosen as the authority responsible for publishing a regulation in order to clarify which activities shall be considered Vital Societal Functions Activities. The aforementioned authorities were appointed through the Regulation (2023:624), issued by the Government and further referred to as the "Government Regulation". The Government Regulation did not only contribute to these now mentioned updates. It also made clear which materials, metals and minerals are included in the scope of the FDI-Act, as well as which emerging technologies and other strategically protected technologies are covered by the law.
Today, the 24th of November, only a few days remain until the FDI-Act enters into force. Even so, MSB has yet to issue its clarifying regulation outlining which activities should be considered as Vital Societal Functions Activities and thus, subject to the Act. The authority presented a proposal earlier this fall, further referred to the "Regulation of MSB". In recent contacts with MSB, the finalized clarifying regulation can be expected any day next week. Given the extent of the FDI-Act and the fact that it enters into force Friday next week, it seems as if this regulation clarifying certain aspects of its scope, can quite literally, be expected at the very last minute.
The FDI-Act, in short
The primary objective of the FDI-Act is to establish a national screening mechanism for Foreign Direct Investments, enabling authorized authorities to either prohibit or impose conditions on transactions that may pose a threat to Sweden's national security, public order, or public safety in Sweden.
Business activities in which investments may endanger the national security, public order, or public safety in Sweden have been labelled as Activity Worthy of Protection, which also constitutes the protective scope of the Act. Activity Worthy of Protection can further be divided into seven subcategories, these are as follows:
- Vital Societal Functions Activities (Sw. samhällsviktig verksamhet), encompass activities that secure society's fundamental needs, values, and security. This definition aligns with an earlier definition made by MSB, which, as mentioned, shall issue further clarification.
- Security-Sensitive Activities (Sw. säkerhetskänslig verksamhet), meaning activities governed by the Swedish Security Protection Act. This includes activities of importance to the protection of Sweden's security or activities protected according to an international security commitment.
- Exploration, extraction, enrichment or sale of Critical Raw Materials, Metals, or Minerals (Sw. prospektering, utvinning anrikning eller försäljning av kritiska råvaror, metaller eller mineraler), as specified in the Government Regulation Appendix no. 1. These consists of: Aluminium/bauxite, Antimony, Arsenic, Barite, Beryllium, Borates, Dolomite, Ferrosilicon, Fluorspar, Phosphate minerals, Phosphorus, Phosphorite, Feldspar, Gallium, Germanium, Hafnium, Helium, Indium, Iron, Limestone, Silicon metal, Cobalt, Coking coal, Copper, Chromium, Lithium, Light Rare Earth Elements (LREE), Magnesium, Manganese, Molybdenum, Natural graphite, Nickel, Niobium, Platinum, Group Metals (PGM), Scandium, Strontium, Tantalum, Tin, Titanium, Heavy Rare Earth Elements (HREE), Vanadium, Bismuth, and Tungsten.
- Sensitive Data of Location and Personal Data (Sw. känsliga lokaliseringsuppgifter och personuppgifter), the latter refers to data management in accordance with Article 9(1) of the GDPR and the former to data processed in a public mobile electronic communications network indicating the geographical position of an end user's terminal equipment, or data in a public fixed electronic communications network indicating the physical address of the network termination point.
- War Materials (Sw. krigsmateriel), encompass and include the production, development, and research of equipment according to the Swedish Act (1992:1300) of Military Equipment.
- Dual-use Products (Sw. produkter med dubbla användningsområden), meaning items listed in Annex I, Regulation (EU) 2021/821, or the supply of technical support for such items.
- Emerging Technologies and other Strategically Protected Technologies (Sw. framväxande teknologier eller annan strategiskt skyddsvärd teknologi), as specified in the Government Regulation Appendix no. 2 A and B. This appendix is quite specific, and it thoroughly lists technologies and affiliated definitions.
When the FDI-Act applies
If an intended investment concerns an Activity Worthy of Protection, the FDI-Act applies, and the ownership of the investor must be thoroughly examined. If the investor is a natural person, the ownerships of his or her family members and other closely associated persons must likewise be analyzed. This is due to the Act, when applicable, imposing a notification requirement when investments lead to an investor holding 10, 20, 30, 50, 65 or 90 percent or more of the voting rights of a company, or other influence or control. The Act also applies regardless of whether the target company directly or indirectly conducts activity categorized as Activity Worthy of Protection.
Every time a threshold, as mentioned above, is exceeded due to an intended investment, ISP shall be notified in accordance with the Act. It should be noted that the notification requirement also applies to investments resulting in an investor holding more than 10 percent of the voting rights in companies not performing such activity at present if the purpose of the investment is for the acquired company to perform said activity henceforth. As such, the FDI-Act imposes requirements on all investors to comply with the Act. The obligation to submit a notification rests with the investor, even though the target company, according to the Act, is required to inform an investor that it may be subject to the Act.
The screening made by ISP
ISP, as the designated screening authority, will assess all notified transactions subject to the legislation. The authority will determine whether the investment process can proceed, if it should be subject to certain implementation conditions that the investor must fulfill for the investment to be approved, or if it shall be prohibited entirely. Implementation conditions will be decided on a case-by-case basis. They may, for instance, concern certain activities that the target company must undertake, the governance and management of the target company, or other circumstances relating to the investor. An investment subject to notification obligation under the FDI-Act may only be completed if (i) the investment notification has been left without action or remarks by ISP or (ii) the investment has been approved by ISP during an examination.
Additionally, ISP has been allowed to initiate reviews of transactions not initially notified, if they believe such reviews are essential to safeguard Swedish national security, public order, or public safety in Sweden. ISP may also decide to initiate a review of an investment in a company conducting activity worthy of protection that is not subject to notification obligation under the FDI-Act, thus ex officio, if there is reason to believe that the investment may have a harmful impact on Sweden's national security, public order, or public safety in Sweden.
Once ISP declares a notifying filing of an investment complete, the authority has 25 days to decide whether to approve the transaction or to conduct further review, which can be extended to a maximum of six months in exceptional cases. Generally, the assessment is expected to take no more than three months and is carried out on a case-by-case basis. It should be noted that a lawfully given timeframe between an investor's notification submission and ISP's confirmation of completeness, has not been stated in the Act. As a result, this period is at risk of being either short or, for worse, very long, which might prolong the investment process.
Failing to comply with the FDI-Act
When the legislation enters into force, investors failing to adhere to the Act after the 1st of December 2023 may be subject to penalties of up to 100 million SEK. However, there is an appeals process that can be used. ISP's decision to prohibit an investment can be appealed to the Stockholm Administrative Court, and decisions to impose transaction conditions can be appealed directly to the Swedish Government.
It should be noted that foreign direct investments are highly important in various aspects and for the Swedish economy. The importance aside, such investments also come with risks, such as antagonistic states gaining access to valuable technology or information or gaining control over activities of importance to national security interests. Even if the Act aims to limit the ability to, through acquisitions and investments, take control of companies and use them disadvantageously towards Sweden, it is of the utmost importance that it also targets this aim and not all future potential investments. In this aspect, the FDI-Act has raised concerns about its potential impact on the Swedish M&A market, even more so the procedural aspects of how the Act is supposed to be applied before transactions are finalized, or how to fully be compliant with the Act. The FDI-Act will undoubtedly have a substantial impact on companies in terms of compliance and added legal costs for the investor. All FDI transactions, including mergers, acquisitions, and other investments such as Green Field Investments or Asset Acquisitions in Swedish companies, must be considered as potential subjects of the Act. Consequently, the importance of ensuring an efficient and predictable review process cannot be stressed enough, including the need for clear regulations specifying the scope of the FDI-Act. On this note, some things might be said about the Regulation of MSB in its current state.
Some notes on the Regulation of MSB
MSB has been designated to clarify the subcategory Vital Societal Functions Activities and has, in accordance thereof, presented a suggestion to a clarifying regulation. This Regulation is not finalized and should not be considered applicable law; therefore, changes can be expected to be made. Nevertheless, the regulation can, in its current state, contribute to an understanding of what Activities might be considered as Vital Societal Functions Activities when the FDI-Act enters into force. In short, the following notes may be worth bearing in mind.
First, as Section 1 of the Regulation outlines, the activities it lists are to be considered as Vital Societal Functions Activities. In the context of Vital Societal Functions Activities, this aims at such activities of companies that report a yearly turnover of at least 5 million SEK unless stated otherwise. Consequently, numerous companies will be covered if this limit value is to be kept.
Second, it is not entirely clear whether the Vital Societal Functions Activities enumerated in the Regulation will or is supposed to constitute an exhaustive list of Activities of Vital Societal Functions, or if it merely aims to categorically designate activities that always shall be qualified as such. Based on the Act's purpose, the preparatory work, and MSB's earlier definition of such activity, including an indication of it not being possible to exhaustive list Activities of Vital Societal Functions in general, it is reasonable to construe that the finalized Regulation of MSB will not constitute an exhaustive list. However, due to the complexity of the FDI-Act and its broad spectrum, the clarifying regulation may presumably encompass an exhaustive list of activities that consistently shall be regarded as socially significant.
Third, following the Regulation's first section, it further consists of 15 sections. Each section states activities in various sectors, e.g. electricity supply, health services and social services, as Activities of Vital Societal Functions. The inclusion of these named sectors is probably unsurprising. It may, however, be somewhat unanticipated that the sector of mineral extraction is included. Both mining and quarrying of different minerals, together with supporting services, are included herein. Supporting services refer to traditional exploration prospecting methods, drainage and pumping services, and test drilling, which deserve further attention. If these are to be included in the finalized Regulation, the two subcategories to Activity Worthy of Protection; Vital Societal Functions Activity, and Exploration, extraction, enrichment or sale of Critical Raw Materials, Metals, or Minerals, will somewhat intersect and complement each other. Due to that supporting services might also be subjected to the FDI-Act, this implies a broader spectrum of investments that will be affected by the Act.
The FDI-Act will undoubtedly have a substantial impact on the M&A climate and the need for legal advisory in this field will as a result increase. As discussed, many transactions must be considered potential subjects of the FDI-Act. We are closely monitoring the developments in this field of legislation and will continue to provide insights on the forthcoming Act. We are at your service, let us know if you have any inquiries!
Written by Clara Löfgren & Andreas Börjesson