Marking a New Investment Era in Sweden: Enter the Swedish FDI Regime
By Pouya Ghotbi, Wistrand Advokatbyrå
Background
In 1916, the Swedish government introduced a piece of legislation restricting the right of foreigners to invest in Sweden. During the 1970s and early 1980s, the legislation was further tightened, making it difficult for foreigners to acquire businesses in Sweden without government scrutiny. The Act was abolished 1991, embarking on an open economy policy with free trade and investments, further enhanced by Sweden’s membership of the EU in 1995 and a boom in international investment agreements. After decades of free trade and investments, the tide is now beginning to turn as Sweden (once again) on 1 December 2023 introduced a Foreign Direct Investment (FDI) Screening Act.
Sweden’s decision to establish an FDI Screening Act can be attributed to the influence of the European Union (EU). The European Commission (EC), has been emphasising the importance of implementing FDI screening regimes across the EU. The rationale behind this is that if not all Member States implement such regimes, a hostile investor could still gain access to the EU market through such Member States since the EU has a single market structure. Sweden, being one of the last countries in the EU to introduce such a regime, has certainly felt the heat of this.
While the EU’s efforts to encourage Member States to adopt FDI screening regimes are noteworthy, there may be more to the story. Sweden’s turnaround from its long-standing neutrality since the Napoleonic Wars, evident by its NATO application, may also be a contributing factor. This may in particular explain the emphasis, in the preparatory work of the FDI Screening Act, on investors from certain countries such as Russia, China and Iran.
The purpose of this blog post is to provide a brief overview of the Swedish FDI Screening Act and to offer some critical reflections.
Mandatory filing obligation
Investments resulting in influence in sensitive activities must be notified to the Inspectorate of Strategic Products (ISP) prior to the investment being carried out. The underlying policy has been to err on the side of scrutinising too many investments rather than too few. Thus, the regime casts a wide net with the intention of swiftly filtering out trouble-free investments, while taking a closer look at investments that could be potentially harmful to Sweden.
The identity of the investor will not influence the assessment of whether an investment is notifiable. Even Swedish investors are required to notify investments which result in influence in sensitive activities. The (legal) form of companies in which investments may be notifiable are limited liability companies, European companies, cooperative associations, partnerships and foundations, provided that the seat of the company is domiciled in Sweden (a de jure requirement). Investments in unincorporated partnerships and sole traders may also be notifiable, but this presupposes that the business is (de facto) conducted in Sweden (a requirement that does not apply to the aforementioned types of companies). To prevent circumvention, transfer of assets is also covered.
Whether the requirement of influence is met will depend on the legal form of the target company. For instance, in the case of limited liability companies, European companies and cooperative associations the influence requirement is met if the investment results (directly or indirectly) in the control of 10 % of the voting rights. The notification obligation is re-triggered each time the thresholds of 20 %, 30 %, 50 %, 65 % and 90 % of the voting rights are reached. The requirement of influence may also be met in the case of greenfield investments. Irrespective of the corporate form, influence may be considered through other (non-specified) means such as agreements with the target company or its owners where decision-making power is conferred to the investor.
The target company must also conduct a sensitive activity for an investment to be notifiable. This notion encompasses several concepts, such as essential services, critical raw materials and emerging technologies. These concepts have been defined in wide encompassing implementing regulations, covering the usual suspects, such as critical infrastructure, extraction of (some) rare earth metals and manufacturing of advanced technology.
What is a bit surprising is that the Swedish FDI Screening Act will exclude media companies from its scope, despite concerns raised by respondents during the consultation on the FDI Screening Act. Media companies are generally defined as entities offering general news services. This exclusion applies even if a media company engages in activities covered by the FDI Screening Act, as long as its primary purpose revolves around media-related activities.
No local effect test
The Swedish FDI Screening Act captures asset transfers, as explained above. What is somewhat unclear is whether the asset must be attributable to an activity in Sweden or be located in Sweden. It can be argued that the seat of the company selling the assets should be decisive. Otherwise, it may be questioned what justifies some sort of presence requirement in the case of asset transfers, but not when the investment is made in the legal entity (such as a limited liability company) owning the assets. However, the converse could also be argued. In the absence of a clear answer to the question, it may seem reasonable to at least require that the assets be to some extent attributable to activities in Sweden or located in Sweden. Furthermore, in the case of sole traders, the activity must be conducted in Sweden for a notification requirement to be triggered. Sole traders, in turn, can only be acquired through asset transfers, thereby establishing a criterion where the assets must relate to activities within Sweden to trigger a notification requirement. This principle may extend to asset transfers in general, underscoring the importance of determining whether the business associated with the asset transfer operates in Sweden or whether the assets are physically located there. Nonetheless, the legal situation remains ambiguous.
How does the screening procedure work?
The forthcoming regime sets out a two-phase screening procedure, much like the rest of the FDI screening regimes in the EU. In phase I, ISP will have 25 working days to either leave the notification without action or initiate a review of the investment (i.e. phase II). During phase II, ISP will have 3 months (counted from the date of initiating the phase II probe) to either prohibit or approve the investment. Approvals may be subject to conditions. ISP will have a considerable discretion in deciding on such conditions, but an important constraint in this context is the (general) requirement of proportionality. Another constraint is that these conditions can only be imposed on the investor; they cannot be imposed on the target company since it is not a participant in the review process. Imposing conditions on the target company would essentially presuppose that the investor has influence over it, which is contrary to the Act’s provisions stipulating that influence over a sensitive activity is only permitted if ISP has either left a review without action or approved the investment.
Screening non-notifiable investments – a call-in mechanism?
Even if an investment doesn’t require notification as a consequence of not resulting in influence over a sensitive activity, it can still be scrutinised by ISP. The preparatory work foresees that this mechanism could be used when several (separate) investors with risky ties to third countries cooperate by each investor making an investment which, on its own, may not give rise to an influence which must be notified, but which, when considered together, poses a risk. From a practical point of view, establishing whether the target company is engaged in sensitive activities will thus hold a lot of importance as it serves as the only (absolute) guarantee that the investment will escape scrutiny. From a more legal perspective, the unpredictability caused by this call-in mechanism may potentially open the door to investment arbitration challenges. However, as Kilian Wagner points out, investors may face an uphill battle in bringing such claims.
When can investments be prohibited or conditioned?
Only foreign direct investments may be prohibited or approved subject to conditions. The underlying principle is to prohibit or condition investments only from persons or companies with a link to non-EU countries (e.g. a legal entity domiciled in a non-EU state). The exclusion of investors from the EU may be justified in light of the Xella judgment (C-106/22, discussed in previous blog posts by Bálint Kovács and Slexia Crivoi). In this case, the European Court of Justice (ECJ) ruled that Hungary’s FDI rules couldn’t, due to the freedom of establishment, be used to block an investment by an EU company in a company extracting construction material on grounds of national interest concerns. What may complicate matters is that the Swedish FDI regime can also prohibit investments by companies or individuals indirectly controlled by non-European states. In the Xella judgment, the investor was in fact controlled by a non-EU company (Bermuda in this case), yet this did not deter the ECJ from holding that the freedom of establishment applied. It is difficult to draw any firm conclusions as to whether the Swedish regime may be incompatible with the freedom of establishment in this respect. However, it would not be entirely surprising if a future prohibition against an EU company, controlled by a non-EU entity, would be challenged in light of the ECJ’s judgement in Xella.
The possibility of prohibiting or conditioning investments is linked to the protection of “Sweden’s security or public policy or public security”. This means that an investment may only be prohibited or conditioned on one of these grounds, although future screening procedures may be quite opaque, as is the case in other EU countries, making it difficult in practice to determine the exact grounds for a prohibition or condition.
The term “public policy or public security” is intended to align with the corresponding concepts found in the Treaty on the Functioning of the European Union (TFEU), in particular Article 52.1 and 65.1(b) regarding justified restrictions respectively on the freedom of establishment and the freedom of capital movement. This seems to be a sensible approach following the ECJ’s judgment in Xella. Public policy, in turn, refers to the fundamental interests of a society, while public security concerns the protection of a Member State’s institutions, its essential public services and the survival of its citizens.
The concept of “Swedish security” essentially falls under the EU’s notion of “national security” according to the preparatory work. Matters pertaining to “national security” are, in turn, within the exclusive purview of Member States, as outlined in Article 4.2 of the Treaty on the European Union (TEU). In brief, the concept of Sweden’s security can be said to refer to the country’s sovereignty, independence and permanence.
Summary and conclusions
The forthcoming Swedish FDI Screening Act is a sign that Sweden is moving away from an open economy and towards a safety-oriented economic policy. The Act has been drafted with a “better safe than sorry” policy, capturing investments in a wide range of activities and, in most circumstances, not requiring the target company to have an actual presence in Sweden. There is even a call-in mechanism in case the notification requirement does not apply to a potentially harmful investment in a sensitive activity.
However, the legislation may face challenges. Under the Act, ISP may prohibit or make an approval subject to conditions if the EU company or person making the investment is indirectly controlled by a non-European state. It is not impossible that the Xella will throw a spanner in the works in this regard. The call-in mechanism may also be challenged in light of bilateral investment treaties, although this seems less likely.
Finally, it should be said that everything goes in cycles. Eventually the 1916s Act restricting foreign investment came to an end as geopolitical tensions eased, giving birth to a flourishing investment climate. History may repeat itself, but for now, FDI screening is here to stay.
