On 1 December 2023, the Screening of Foreign Direct Investments Act came into force. The new law makes it possible to prohibit foreign direct investments in Swedish companies. The law has been in force for just over six months and it is clear that the law has a very broad scope of application and that many activities are covered by what is defined as protected activity. However, as the law is relatively new, there is still no guiding practice, and there are many uncertainties surrounding its application. In this article, we summarise our experiences from the first months of the FDI Act.

The Foreign Direct Investment Review Act (the “FDI Act”) entered into force on 1 December 2023. The FDI Act allows the government-appointed review authority, the Swedish Inspectorate for Strategic Products (ISP), to review and, if necessary, prohibit foreign direct investments in Swedish so-called protected activity.

Protected activity is a broad term and it is divided into seven categories: 

• essential social services,
• security-sensitive activities,
• critical raw materials and other metals and minerals,
• large-scale processing of sensitive personal data or location data,
• munitions of war,
• dual-use items; and
• emerging technologies and other strategically important technologies.

The scope of the Act is broad and many activities are defined as protected activity, and investments in such activities may thus be subject to the obligation to notify the ISP. The obligation to notify applies regardless of the investor’s nationality or registered office, which means that investors with citizenship or registered office in Sweden and in the rest of the EU may also need to notify investments made in protected activity.

MSB decides what is an essential social services

New since the entry into force of the Act are the Swedish Civil Contingencies Agency’s (“MSB“, sv. Myndigheten för samhällsskydd och beredskap) regulations regarding which activities fall within the category of essential social services. Essential social services are one of the more extensive categories – if not the most extensive category – of protected activity.

As a general rule, for an activity to be classified as essential social service, the activity must either (i) have at least five employees or (ii) have an average annual turnover of at least SEK 5 million (based on the last three financial years) or, if the activity has been in operation for less than three years, an annual turnover of at least SEK 5 million in the previous financial year. MSB identifies a total of 16 different categories of activities as socially important, namely

• extraction of minerals, etc,
• manufacturing,
• supply of electricity, gas, heating, cooling and fuels,
• water supply, wastewater treatment, waste management and sanitation,
• construction, installation and maintenance,
• trade,
• transport and storage,
• hotels and restaurants,
• information and communication,
• finance and insurance,
• property management,
• science and technology,
• renting, property services, travel and other support services,
• education, and
• health and social care.

The notification process: Assessment of protected activity and obligation to notify

The assessment of the obligation to notify is a two-step process: does the target company carry out protected activity and, if so, is the proposed investment subject to the obligation to notify? If the target company does not carry out protected activity, no further examination of whether the investment is covered by the FDI Act is needed. 

If, on the other hand, the target company is engaged in protected activity, it must be determined whether the investment is covered by the rules on notification. A notification must be made, inter alia, when

• the investor will, through the investment, directly or indirectly, hold 10, 20, 30, 50, 65 or 90 per cent of the voting rights in a company (notification must be made for each investment that directly or indirectly results in the voting rights reaching a new threshold), or
• the investor otherwise gains influence, directly or indirectly, over the management of a company.

A notifiable investment must be notified before it is realised. The concept of realisation refers to the moment when an investor actually acquires influence over the target company. The timing of this may vary, but in any event, influence is deemed to have been acquired when some form of transaction has taken place between the parties. Thus, the parties may agree on the investment before the notification is made, but the completion of the investment should then be conditional on the ISP leaving the notification without action or approving the investment. Similarly, it may be possible to subscribe for shares prior to a notification or pending a decision, as long as the shares are not allocated or influence in the company is otherwise transferred to the investor.

However, in order for the ISP to be able to assess the investment, the notification must be made only at such a stage that there are conditions for the ISP to make an assessment of the circumstances surrounding the investment. A notification should therefore only be made when the investor can show that there is an agreement that the investment will be realised in the near future, e.g. through a so-called letter of intent.

After a complete notification, the ISP must decide within 25 working days to either leave the application without action or initiate a review. If the ISP considers that the investment needs to be reviewed, they have three months to issue a final decision (six months for special reasons).

If there is an obligation to notify under the FDI Act, the transaction process must take into account both the time required to prepare the notification and the time required to wait for a decision from the ISP. It is therefore important that the question of obligation to notify is raised early in the process prior to a potential investment. 

Obligation to notify applies unless the specific situation is explicitly exempted in the law

Even if the criteria for an obligation to notify under the Act are met, a notification is not required for the acquisition of shares acquired in a rights issue, as long as the acquisition is made in relation to the number of shares already owned by the investor. An investor who only subscribes for his/her pro rata right in a rights issue is thus not subject to the obligation to notify. If, on the other hand, an investor subscribes for shares in excess of its pro rata right and thereby acquires shares and votes in a company that engages in protected activity that meet or exceed the thresholds, the investor must notify the ISP.

Apart from this explicit exception, the law does not distinguish between different types of investments or transactions. An example is the reorganisation of the ownership of a company. If a transaction gives a legal or natural person a new influence or control over a company that carries out protected activity, it may need to be notified, provided that the investment meets the thresholds in the law. This applies even if the beneficial owner is the same. 

This means, for example, that a transaction from a natural person to a wholly owned holding company may also need to be notified if it reaches the thresholds, as the transaction involves giving the holding company a new influence in the protected activity. Such a transaction does not therefore need to be exempted from the scope of the Act.

If an exemption is not explicitly regulated in the law and it is thus clear what applies, an investigation should always be carried out to determine whether an investment is notifiable or not.

Isn’t it better to notify a transaction just in case?

The law does not provide for the possibility for investors to make a voluntary notification of an investment. In other words, an investor should not notify “just in case” or out of convenience in order to avoid having to decide whether a particular activity is a protected activity or not. If the parties are unsure whether an investment is notifiable, it is recommended to investigate the issue.

Consequences of violations of the FDI Act

The ISP may decide to charge a penalty fee to anyone who has failed to notify a notifiable investment, made an investment before the ISP has made a final decision or made an investment in violation of a prohibition. The penalty fee can be set at a minimum of SEK 25,000 and a maximum of SEK 100,000,000.

Should an investment take place despite the ISP having announced a prohibition, this means that the legal act becomes invalid. The parties are then not obliged to fulfil their obligations. If the investment has already been made when the ISP announces a prohibition, the general rule is that the parties’ contractual performance shall be reinstated, e.g. by returning property or money to the counterparty.

However, a prohibition does not necessarily mean that a contract concluded between the investor and the company that is the subject of the investment becomes invalid in its entirety. Parts of an agreement that have legal effects in other respects, such as a clause regulating what applies between the contracting parties if the ISP were to prohibit the investment, remain valid. 

Similarly, an agreement with a third party need not be invalidated. For example, if the investor has entered into a loan agreement with a bank to finance the investment, the agreement is valid regardless of the ISP’s decision – unless otherwise agreed.

The FDI Act and the path forward

The FDI Act has, and will continue to have, a major impact on many transactions. The law is still new, and many questions remain regarding its application, in particular regarding which activities should be considered protected activity. If there is uncertainty as to whether a transaction is notifiable, it is recommended that an investigation is carried out to avoid invalidating legal acts or incurring high penalties.

If you need help investigating whether a proposed investment is notifiable or help determining whether your company’s business is categorised as protected activity, Moll Wendén Law Firm can assist with this. We can also help you prepare a notification to the ISP when necessary.