Background

On 13 September 2023, the Swedish Parliament passed a bill on a national system for the screening of foreign direct investments, the FDI Act.

The FDI Act establishes a national mechanism for the screening of foreign direct investments that may have a detrimental effect on Sweden's national security, public order or public safety, with such investments potentially being subject to conditional approval or prohibition. The Inspectorate of Strategic Products (ISP) is the appointed supervisory authority in Sweden, which is also the contact point under the EU framework Regulation (2019/452) on FDI.

The FDI Act enters into force on 1 December 2023 and will apply on foreign investments that close on and after this date, regardless of when the agreement to invest was initiated. From this date, all foreign direct investments into Sweden falling under the FDI Act will be subject to a mandatory notification obligation and subsequent approval (or a decision to close the case without further action) as a condition for the closing of the investment.

The purpose and scope of the Act

The purpose of the FDI Act is to have the possibility to prevent foreign direct investments that may have a detrimental effect on Sweden's security, public order or public safety. Foreign direct investment is defined in the FDI Act as an investment made by:

• An individual or entity with a nationality or registered office outside the EU
• An entity directly or indirectly owned or controlled by a state outside the EU; or by an entity established outside the EU; or an individual with a nationality outside the EU.

Notification requirement

Even though the FDI Act targets investors with connections to a third country, the notification obligation applies regardless of the nationality or the establishment of the investor, meaning that, also Swedish and EU investors are covered. The underlying reasoning for this is to prevent circumvention of the screening system, i.e., it has been considered that it would otherwise be too easy to circumvent the requirements and third country investors may use Swedish or EU companies as a front to gain control over businesses that require protection.

Although the obligation to notify includes both Swedish and EU investors, only investments from third country investors may be prohibited.

Thresholds

Thresholds for investment vary based on the type of entity being considered for investment. For limited liability companies (Sw. aktiebolag), the FDI Act will apply to investments resulting in the investor acquiring (directly or indirectly) voting rights resulting in an ownership of 10, 20, 30, 50, 65 or 90 percent, which means that each time such threshold is met, a notification is needed. Exemptions apply to certain forms of issuance of new shares to existing shareholders.

Another triggering factor is if the acquisition results in influence over the management of target company eligible for protection through other means, which will require fact specific assessment.

Covered business operations

There is no possibility to obtain an advanced notice by ISP and no possibility to get a decision on whether the business falls within the scope of the Act, this is to be made through a self-assessment. To help guide the businesses in this assessment, the FDI Act outlines the following activities and sectors to be covered by the Act.

• Essential services – services or infrastructure that maintain or assure societal functions that are vital to the society's basic needs, values or safety.
• Security-sensitive activities – businesses and activities covered by the Security Protection Act (2018:585), i.e., activities of importance to Sweden's security such as the protection of water supply, electricity and heating plants, IT-facilities, healthcare, transport infrastructure and surveillance of important buildings.
• Military equipment – businesses manufacturing, developing, or supplying, military equipment and technical assistance as defined in the Military Equipment Act (1992:1300). This includes products listed in Annex A to the Swedish Government's Military Equipment Regulation (1992:1303).
• Dual-use items – businesses manufacturing, developing, or supplying dual-use items as defined in Regulation (EU) 2021/821 setting up an EU regime for the control of exports, brokering, technical assistance, transit and transfer of dual-use items.
• Critical raw materials, metals and minerals – investments made in entities that prospect, extract, enrich or sell critical raw materials, metals or minerals that are of strategical importance to Sweden. Further guidance is expected by ISP.
• Location data or sensitive personal data – personal data as defined in Article 9(1) of the GDPR. Location data as defined in the Electronic Communication Act (2022:482). The activities must have as their "principal purpose" to process sensitive personal data or location data.
• Emerging technologies and other strategic protected technologies – Research or the supply of products or methods relating to emerging technologies or other strategic technologies eligible for protection, or activities capable of manufacturing or developing such products or methods. A draft list by the ISP is under public consultation.

Notification procedure – outcomes, sanctions and legal remedies

Notification procedure

If it is established that the investment falls within the scope of the FDI Act, the mandatory notification obligation is triggered. It is the responsibility of the investor to notify ISP before the investment is completed. An information obligation is likewise established for the target company, with exemptions for listed companies, where it must inform the investor that the FDI Act applies to the target company's business operation and that the investment is subject to notification requirements therein.

Notwithstanding the above, even if the notification requirement is not triggered, the ISP may on its own initiative initiate a review of an investment if there is a reason to believe that the investment may harm national security, public order or public safety of Sweden. This could be the case when several investors with links to non-EU countries make a separate investment each which, when viewed individually, would not trigger a notification.

As to the practical aspects, we are expecting a notification form to be filled out by the investor requiring detailed disclosures, such as, information on the ownership structure of the investor and of the target company, the approximate value of the investment, services and business operations of the investor and of the target and, it may even include request to disclose the funding of the investment and its source.

Review process

The FDI Act introduces a process that comprises two review phases.

• In the first phase, once the screening authority has received a complete notification, it must decide within 25 working days to take no further action or to initiate a review process.
• In the second phase, after the decision to initiate a review has been made, a decision must be reached within three months, with the possibility of extending it to six months under certain exceptional circumstances.

When deciding to initiate a review of a transaction under the three-month review period, the supervisory authority will take into account the nature of the target company's activities (e.g., the sensitivity of the activities in relation to the investment as a whole and the activities' importance to Sweden) and factors surrounding the investor (e.g., if the investor is controlled by a government of a third country or if the investor has been involved in activities which may be harmful to Sweden's security). We expect a small number of cases to be subject to the extended six-month review period (e.g., if there are obvious ties to some third countries that need thorough screening or if the supervisory authority has requested assistance from other relevant authorities in Sweden or the EU or if the parties themselves have submitted additional information warranting an extended review period).

Approval (or a decision to close the case without further action) is required before an investment is completed. Consequently, there is a so-called standstill period for the transaction during its examination by the authority.

Outcomes and legal remedies

The review of the investment can result in:

1. Closing the case without further action
2. Approval
3. Conditional approval
4. Prohibition

The two latter scenarios (iii) and (iv) occur when ISP has established that the investment may affect the national security, public order or public security in Sweden. An approval with conditions means that the investment can be approved subject to certain conditions relating to the activities, management and control of the target company, or the circumstances concerning the investor. A prohibition has the effect that the investment is null and void. For investments made on the regulated market, there is an obligation to divest the shares instead.

Administrative fines amounting to at least SEK 25,000 and at the most SEK 100,000,000 can be imposed pursuant to violation of the FDI Act. Only the investor can be held liable for failure to notify or close the transaction prior to obtaining clearance. On the other hand, the target company may be held liable if the company has provided incorrect information when fulfilling its obligation to provide information or has not fulfilled its obligation to provide the information.

Final reflections

Relation to the Protective Security Act

The FDI Act is one of many layers in an already complex regulatory environment concerning foreign direct investments. The FDI Act will apply in parallel to the Protective Security Act (2018:585) which protects information and activities of importance to Sweden's national security against threats like espionage, sabotage and terrorism. Target companies that conduct security-sensitive activities, as covered by the Protective Security Act, will consequently also be subject to the FDI Act and, therefore, the same transaction will in such case trigger filing obligations under both acts. In contrast to the FDI Act, the Protective Security Act requires the seller to conduct a security protection and suitability assessment, before consulting with the supervisory authority to close the transaction. Unlike the FDI Act, the Protective Security Act does not have a fixed timeline for the clearance process. There is also a risk that the outcome of the filings may be different as the purpose of these control systems differ, especially considering the filings are reviewed and processed independently by distinct authorities.

Key takeaways

The FDI Act is broad in scope and will undoubtedly affect a large number of transactions with a Swedish nexus, however, we expect a majority of transactions caught by the regime to be cleared within the 25-day review period.

Considering this current transaction landscape, investors and target companies are advised to diligently prepare their projects for the forthcoming entry into force of the FDI Act. There are essentially three questions that need to be addressed to determine if an investment triggers notification:

1. Is it an investment with a Swedish nexus?
2. Does the investment exceed the thresholds?
3. Is the target company's business operation within the scope of the FDI Act?

We expect to get further guidance on the full application and practical measures in relation to the FDI Act as it comes into force. While the above summary does not catch all the nuances of the upcoming regime, we hope it provides a better understanding in terms of if and how it might have an impact on contemplated transactions after 1 December 2023 and helps prepare for any further considerations.