Some Reflections on the Investment Control Regime in Sweden: Unnecessary Obstacles to Legitimate Financing?

The Swedish Act on Screening of Foreign Direct Investments (the “FDI Act”) entered into force on 1 December 2023. The FDI Act is the first of its kind in Sweden, at least in the modern legislative landscape. (Pouya Ghotbi 2023 has given an overview, not only of the FDI Act in itself, but also the historical context of foreign investment control in Sweden).  

Whilst more may be said about the FDI Act from a legal-technical and constitutional perspective, this article offers our reflections on certain practical implications of the FDI Act, specifically whether this legislation imposes unnecessary and unbidden obstacles to the financing of Swedish business. 

 

The FDI Act in brief 

The purpose of the FDI Act is to prevent harmful foreign investments in Swedish businesses operating within certain strategically important fields of activities, so-called ‘protected-interest operations’. Such operations may be purely commercial or conducted by non-profit operators. 

As may be expected, protected-interest operations include activities relating to munitions, military equipment, and so-called dual-use products, as well as activities that are generally of significance to Sweden’s security. But protected-interest operations also include a spectrum of activities that are important for general societal functions, as well as mining operations, research dealing with “emerging technology” and processing of sensitive personal or location data. 

The FDI Act requires investors to notify and obtain clearance from the competent screening authority (the Inspectorate of Strategic Products, the “ISP”), before completing their investment  in a protected-interest operation. This includes investments by way of asset or share transfers  as well as participation in share issues. The notification obligation applies for investments corresponding to or exceeding an ownership share of 10 per cent in the target as well as whenever an ownership share reaches each of 20, 30, 50, 60 or 90 per cent in the target. Investments which lead to an influence in the target by other means than mere ownership, e.g., the right to appoint board members or management pursuant to a shareholders’ agreement, must also be notified and approved before they may be completed.  

In spite of its title and purported aims, the FDI Act does not distinguish between national, EU, or third-country investors. It is the target’s business activities as such which solely trigger the obligation to notify the transaction. In fact, also transfers of protected-interest operations within the same group of companies, in spite of consistent and continued ultimate ownership, will trigger the FDI Act. 

The first phase of the ISP’s review extends over a maximum of 25 working days. Should the ISP consider the investment to be potentially harmful, or if the ownership structure of the investor is unclear, the ISP may decide to initiate a further screening process of a maximum of 3 months (6 months in special cases).  

As of October 2024, 939 investment notifications have been submitted to the ISP, out of which 21 have been made subject to the extended screening process (according to statistics published on ISP’s website). 

In summary, the notification obligation under the FDI Act is very broad, not only in the direct sense of the number of businesses which are deemed as protected-interest operations, but also in view of that the FDI Act – in the context of the obligation to notify investments – does not exempt domestic or EU investors. 

 

The FDI Act in practice  

The FDI Act has now, as of the end of October 2024, been in force for 11 months. Over the course of these months, we have, as legal practitioners, noted a number of practical implications of the FDI Act, some of which seem (unnecessarily) harmful to the Swedish capital market in that, while not clearly contributing to the purported aims and benefits of the FDI Act, they nonetheless add to the cost for investing in Sweden. These include, allegedly unreasonably, extensive obligations to provide information, unnecessary targeting of EU and other “non-controversial” investors, and certain legal unclarities in connection with share issues. 

 

Extensive information requirements 

An investment notification under the FDI Act requires the potential investor to provide the ISP with extensive data on the investor as well as on any investor group companies and any direct or indirect owners of the investor. Naturally, it is also required to provide information regarding the target as well as the investment as such.  

Once the notification has been submitted, the ISP may require yet further information, in its sole discretion. Should an investor fail to with any such request, it risks injunctions accompanied with substantial penalty fees. 

The information may be submitted in English, however that the designated notification form is in Swedish and guidance on what information to include is also only published in Swedish. This makes it difficult for foreign investors to submit the notification on their own. In practice, it requires non-Swedish investors to retain a local Swedish counsel for preparing and submitting the notification, which entails incremental costs for the investment. We believe this may in effect impact on the attractiveness of an investment in Sweden for smaller investors (especially individuals). 

 

Each and every investor 

In spite of its aim to prevent (harmful) third-country (i.e., non-EU) influence, the FDI Act does not exempt domestic or EU investors from the notification obligation. As stated, even intra-group transfers of protected-interest operations – or direct or indirect owners of such operations – need to be notified to the ISP.  

Since the entry into force of the FDI Act, it is our experience that the great majority of submissions to the ISP effectively concerns transfers exclusively involving Swedish or EU parties. This means in practice that the bulk of the ISP’s FDI-related workload actually focuses on investments which by definition should be (and indeed are) cleared under the FDI Act. Apart from expending time and resources at the ISP, these – arguably unnecessary – notifications and subsequent reviews delay legitimate investments in Swedish companies, as well as make them more costly and complex, assumingly to the detriment to funding of business in Sweden. 

 

Issues of new shares – certain legal uncertainties 

As stated above, participation in a share issue in a company conducting protected-interest operations will require a notification to the ISP, should the resulting ownership share reach one of the above-stated trigger levels.  

Now, as described, an ISP notification must be made (and clearance be obtained) before the investment is completed. However, for share issues, it is not clear at which point in time the FDI Act deems the investment to be completed.  

Under the Swedish Companies Act (Sw. aktiebolagslag (2005:551)), a share issue is resolved on by the shareholders’ meeting in the company, which resolution is then followed by the investors’ subscription to the new shares. This, in turn, is followed by the company board’s allotment of the shares to the investors, the entry of the new shares into the share ledger of the company, and finally the registration of the share issue by the Companies Registration Office. 

Arguably, any one of the aforementioned action points could be defined as the “completion” of the investment. However, whilst the ISP in their correspondence with us has held that investment completion takes place when the new shares are ‘at the investor’s disposal’ (i.e., once the shares have been allotted), the preparatory works for the FDI Act indicate that completion takes place at subscription (which is also consistent with the general concept of a binding and irrevocable legal obligation: an unconditional subscription to shares being a legally binding undertaking by the investor to ultimately pay for and receive the same). 

In other words, there seems to be an inconsistency in how the legislator and the ISP, respectively, interpret the point in time when an investment notification shall be made. This inconsistency proves to be particularly unfortunate when – as is often the case – the final allocation of new shares cannot be determined until the expiry of the subscription period: if one sees subscription as completion of the investment, an investor may realize – too late for an investment notification – that, due to the actions and non-actions of other investors, it unexpectedly has obtained a shareholding which triggers the FDI Act.1 

In our experience, investors perceive the unclarities described above as an additional complexity in assessing costs, timing, and certainty when making investments in Swedish companies. And from the target’s point of view, this delays and obstructs its access to legitimate and required funding. 

 

Time to revise the FDI Act?  

Foreign investments into Sweden have increased continuously over the last decade: the most significant contributors (2022 figures, statistics for 2023 yet to be published) being Luxemburg, Great Britain, the Netherlands, Norway, Germany, the USA, and Finland.  

In 2022, investments from the said countries represented more than 3/4 of all foreign investments made into Sweden (Statistics Sweden, 12 December 2023) and there are no indications that this pre-dominance has changed significantly since then. Given the close political and economic bonds between Sweden and these dominating investor countries, whose investments are highly unlikely to be disqualified under the FDI Act, it is, already from a statistical point of view, likely that the ISP has little or no interest in the great majority of investment notifications submitted to it.  

The Swedish regime for investment screening may be one of the broader and stricter in the EU. However, the issue of (too) extensive notification requirements is not only a Swedish predicament. Recognizing some issues in the underlying Regulation 2019/452, establishing a common framework for screening of foreign direct investments into the European Union, (among other, the extensive number of “unnecessary” investment notifications being processed by authorities across Europe, as well as other efficiency issues), the European Commission has indicated that it will be subject to review (cf. Proposal for a Regulation on the Screening of Foreign Investments in the Union and repealing Regulation 2019/452, 2024/0017(COD)). Although the current draft does not suggest a harmonization regarding the scope of notifiable investments, we hope that the work of the EU Commission will lead to the establishment of a unified regulatory framework, for the Union, or at least some form of harmonization of regimes if the Commission opts to retain the current separate national screening systems (cf. the Swedish Government’s Memo (2023/24:FPM40) on the complications of the EU proposal).  

One should note that the European Commission has so far been supportive of separate national investment control regimes (cf. e.g., the preamble to Regulation 2019/452, as well as the Commission’s press release on 24 January 2024 on new initiatives to strengthen economic security). And, so far, as many as 22 EU member states have adopted their own control systems. In this context, however, it should however also be noted that the Court of Justice of the European Union (CJEU) has questioned the screening from the perspective of EU law. In particular, it has found a screening procedure under the Hungarian regime to be non-compliant with the overriding freedom of establishment (cf. C-106/22, Xella Magyarország). 

In summary, the FDI Act has added costs and complexity to investing in Sweden, something which, in the long run, is likely to deter foreign investors and possibly also have Swedish business favor domestic funding as opposed to foreign capital. It is clear that the great majority of investment notifications submitted to the Swedish screening authority are irrelevant for screening purposes and could be exempted from the notification obligation altogether. Delays and increased costs for investments affect smaller investors in particular, and obstructs the Swedish investment landscape. There are valid reasons to welcome the European Commission’s review of the broader EU investment screening framework, hopefully prompting harmonization and simplification.