The Swedish Screening of Foreign Direct Investments Act

Introduction

 

The Swedish Act on the Screening of Foreign Direct Investments (Sw. lag (2023:560) om granskning av utländska direktinvesteringar) (the “FDI Act”) entered into force on 1 December 2023. Closing in on the first anniversary of the FDI Act, Dr. iur. Magnus Schmauch et al., here briefly describe the FDI Act, its impact and some outstanding issues that have become apparent during the first year.

 

1. Background and Legal Framework

Before 1992, foreign acquisitions of real estate and natural resources in Sweden were subject to government restrictions and controls for a long time through the Act on Certain Restrictions on the Right to Acquire Real Property etc. (Sw. lagen (1916:156) om vissa inskränkningar i rätten att förvärva fast egendom m.m.), which aimed to preserve Sweden's natural resources in domestic possession and to safeguard Sweden's right to autonomy in the economic sphere.[1] The 1916 act was repealed in 1992 in connection with Sweden becoming a party to the EEA Agreement before becoming a member of the European Union (at that time, the European Community) in 1995. The repeal was justified with reference to the freedom of establishment and free movement of capital in EEA and EU law. Consequently, Sweden did not have a tool for acquisition control for security purposes in force from 1992 until the adoption of the FDI Act, which came into force on 1 December 2023.

 

In 2019, EU Regulation 2019/452 established a framework affirming Member States’ right to impose national screening systems for foreign direct investments (“FDI”) and setting our minimum requirements for such national legislation. Following the regulation's entry into force, most Member States, including Sweden, have chosen to adopt screening systems for FDIs.

 

2. Scope

The FDI Act imposes a duty to notify all investments into Swedish protection-worthy activities (Sw. skyddvärda verksamheter) to the Swedish Inspectorate of Strategic Products (Sw. Inspektionen för strategiska produkter) (“ISP”). The primary purpose of the FDI Act is to implement a screening system to prevent FDIs that may harm Sweden’s security interests by allowing another state to gain access to sensitive information or exert pressure on or otherwise influence Sweden’s decision-making processes.[2] FDIs are defined as investments made by or on behalf of an entity established or controlled by an entity outside of the European Union.[3] If necessary, such investments may be prohibited or subject to conditions by ISP to prevent a harmful impact on Sweden’s security, public order, or public security.[4] Investments between parties within the European Union cannot be prohibited or subject to conditions. Still, they shall nonetheless be notified if any activity of the target company falls within the scope of the protected activities.

 

The screening system’s scope is vast, covering, inter alia, investments in companies that conduct security-sensitive activities under the Protective Security Act (2018:585) (Sw. säkerhetsskyddslagen (2018:585)), process substantial amounts of personal data, extract, use, or manufacture strategic materials, manufacture or trade in dual-use technology or new technologies, or conduct vital functions in society.

 

Strategic materials and new technologies are defined in the Ordinance on Screening of Foreign Direct Investments (Sw. förordningen (2023:624) om granskning av utländska direktinvesteringar), whereas dual-use technology follows the definition in Regulation (EU) 2021/821 and Data refers to personal data according to GDPR.

 

An area of activities of high practical relevance concerns vital functions in society. Vital functions in society include a wide range of activities, services and infrastructure that maintain or ensure societal functions that are vital for society’s basic needs, values and security, which are further described in the FDI Act and in the Swedish Civil Contingencies Agency’s regulations MSBFS 2024:9 (Sw. MSBFS 2024:9 föreskrifter om vilka samhällsviktiga verksamheter som omfattas av lagen (2023:560) om granskning av utländska direktinvesteringar).

 

An excellent example of the broad scope of the screening system is the category of vital functions in society in property management (Chapter 12 of MSBFS 2024:9), which covers leasing, management or operation of owned or leased properties, premises, or facilities where the following are accommodated:

1. arrest, detention, investigation or prosecution activities, courts, prison or detention centre;
2. customs clearance or customs control;
3. emergency services;
4. data centre, data hall, data servers or server hall;
5. airport terminal, railway station, transhipment and terminal, harbour, port terminal; quay or port depot;
6. innovation or technology park;
7. laboratory;
8. a public water system under the Public Water Services Act (Sw. lagen (2006:412) om allmänna vattentjänster);
9. alarm or control centre;
10. university or university college;
11. hospital or highly specialised care;
12. ground station for satellites or spacecraft;
13. satellite or spacecraft launch site;
14. security or surveillance activities with a licence or authorisation by the County Administrative Board;
15. activities under the War Materials Act (Sw. lagen (1992:1300) om krigsmateriel); or
16. other premises, properties or facilities
    • for defence purposes;
    • where security-sensitive activities are conducted; or
    • which are protected objects.

 

The screening system covers activities conducted in Sweden by a limited company, trading partnership, European company, or economic association or foundation with its registered office in Sweden, as well as activities conducted in Sweden by a sole trader undertaking or unincorporated partnership.

 

The notification requirement applies to non-EU investors as well as Swedish and EU investors. It is activated for investments exceeding the following thresholds: 10, 20, 30, 50, 65 and 90 percent of the votes in a company.[5] Any natural or legal person who intends to invest directly or indirectly in and thereby influence a business classified as protection-worthy under the FDI Act must notify the ISP before the investment. The company subject to an investment requiring notification must inform the investing party that it falls under the notification requirement.[6]

 

The FDI notification shall be made and, if so required, any approval shall be granted before an investment within the scope of the FDI Act is made. In practice, this means that a notification should be made after signing but before closing an investment.

 

3. Screening Process

Following a notification, ISP shall assess the nature and scale of the activities of the investee party and the circumstances surrounding the investing party to conclude whether the investment may be harmful to the public order or safety of Sweden. The screening process is divided into two parts, of which the first must conclude within 25 business days of receiving the notification. If the investment is approved, the ISP will decide not to take further action. If the ISP instead identifies any concerns, it may initiate the second, formal screening phase, which can take up to three months (which may be extended for up to three additional months). The second phase results in the investment either being approved, approved subject to certain conditions or prohibited.[7]

 

Further, ISP has the right to initiate a review on its initiative of an investment in a protection-worthy activity that is not subject to the notification requirement under the FDI Act if there is reason to assume that the investment may have a harmful impact on Sweden´s security, public order or public security.[8]

 

4. Prohibition, conditions, invalidity and sanctions

As mentioned, investments involving only third countries can be prohibited or subject to certain conditions. If an investment is made despite ISP having ruled that it is prohibited, any action with legal consequences forming part of the investment or that aim to implement the investment becomes legally invalid.[9]

 

It should further be noted that ISP may impose administrative fines of up to SEK 100,000,000 if investments are made despite being prohibited or not in compliance with conditions set out by ISP, or upon failure to notify ISP. This implies that EU-investors may also be subject to such administrative fines since they are covered by the notification obligation.[10]

 

5. Impact and Outstanding Issues

Since the FDI Act came into force on 1 December 2023, ISP has received around 1,000 notifications, of which a large majority, about 80 percent, resulted in no action. During this period, ISP has (i) initiated a screening procedure in 21 cases, (ii) authorised 8 investments after screening, and (iii) authorised 5 investments subject to conditions after screening. No investments have yet been prohibited. Several notification cases are still pending. However, a few areas of particular interest may be worth pointing out.

 

Firstly, for funds, the notification obligation falls on the manager. Since many Swedish funds are located and managed outside of Sweden while being active in the Swedish M&A market, the notification obligation will directly affect many regulated foreign entities. According to the preparatory works, it is the manager of the fund who is solely responsible for the notification for Swedish funds, both undertakings for collective investment in transferable securities (“UCITS”) and alternative investment funds (“AIFs”). However, it remains to be seen to what degree investors in UCITS and AIFs are exempted from the scope of the FDI Act when it comes to the potential prohibition or condition on an investment. The preparatory works for the FDI Act state that while an investment made by a fund company or an alternative investment fund manager generally cannot be said to increase an individual unit-holder’s share of the voting rights in the investee company, it cannot be excluded that an investment made by a foreign fund or by a fund manager under the law of another country may result in an individual unit-holder acquiring, through the investment, an increased influence in the company in which the investment is made.[11] Therefore, in the future, we may well see an example of a fund investment being subject to conditions or a prohibition by ISP if the authority finds that it threatens Sweden’s national security.

 

Secondly, the FDI Act indirectly affects funding of investments, in addition to investments themselves. In certain loan arrangements, the creditors have a right to warrants in the company. An outstanding issue is how to view such right to exercise the warrants and receive a possible future ownership of the company and at what exact moment such arrangements shall be notified to ISP. One possible interpretation is that even if the creditor in the future does not exercise the warrants, it is still required to file for screening with ISP before signing the loan agreement to avoid sanctions or risk that the contract is declared legally invalid. Creditors may opt for this approach as it serves as a precautionary measure.

 

Third, although the FDI Act does not cover real estate, it tremendously impacts transactions in the Swedish real estate market. Due to tax reasons, many properties are packaged in limited liability companies. Therefore, real estate transactions often mean that a limited liability company with the property as an asset is sold rather than the property itself. Since the notification obligation covers investments in companies that manage real estate with sensitive activities mentioned above, several real estate deals fall under the scope of the notification obligation. Moreover, a government inquiry is looking into further restrictions on selling real property. This report is expected in December this year.

 

It is difficult to determine whether the FDI Act is effective in identifying FDIs as a threat, because of the short amount of time it has been in force. The application of the act will, in time, bring more clarity on certain unresolved issues and show the impact on foreign investments in Sweden.

 

Be that as it may, based on the ISP’s numbers presented above, illustrating that the ISP has not yet prohibited any investment and that a large majority of cases have passed without screening, there is no cause to be alarmed that this fairly novel framework may have a negative impact on foreign investments in Swedish business as a whole. All parties related to an investment subject to the notification obligation under the FDI Act should, however, be aware of its existence, the broad scope of the notification obligation, and the rules governing ISP’s activities in this area to fulfil their obligations and be able to assert their rights under the FDI Act.

 

About the book:

The book provides a comprehensive commentary on the new Swedish act on the screening of foreign direct investments (lagen [2023:360] om granskning av utländska direktinvesteringar). It also provides a short commentary on the Swedish security act (säkerhetsskyddslagen [2018:585]) as well as short glimpses on merger control and security and public order, such as the EEA Agreement, the EU merger regime and the WTO. The book targets practitioners, such as lawyers and other professionals who work within this new field.

Order the book: https://shop.nj.se/products/lagen-om-granskning-av-utlandska-direktinvesteringar

 

[1] Prop. 1998/99:126, Utländska förvärv av fritidsfastigheter i Sverige, p. 10, with further reference to prop. 1916:137, Kungl. Maj:ts Nåd. Proposition Nr 137, p. 126. All references are kept in Swedish.

[2] Prop. 2022/23:116, Ett granskningssystem för utländska direktinvesteringar till skydd för svenska säkerhetsintressen, p. 19.

[3] Lagen (2023:560) om granskning av utländska direktinvesteringar, 4 §.

[4] Lagen (2023:560) om granskning av utländska direktinvesteringar, 20–21 §§.

[5] Lagen (2023:560) om granskning av utländska direktinvesteringar, 2–3 §§ and 7 §.

[6] Lagen (2023:560) om granskning av utländska direktinvesteringar, 11 §.

[7] Lagen (2023:560) om granskning av utländska direktinvesteringar, 14-21 §§.

[8] Lagen (2023:560) om granskning av utländska direktinvesteringar, 13 §.

[9] Lagen (2023:560) om granskning av utländska direktinvesteringar, 23 §.

[10] Lagen (2023:560) om granskning av utländska direktinvesteringar, 31–32 §§.

[11] Prop. 2022/23:116, p. 70 f.