FDI Update: First Danish Rejection and Amendments to Come

For the first time, the Danish Minister of Business has relied on the rules set out in the Investment Screening Act to refuse foreign investment, as the Minister did not allow NKT’s divestment of NKT Photonics to a Japanese enterprise. Further, the second parliamentary hearing of a bill proposing an extension of, and important amendments to, the Investment Screening Act, was completed on 30 May 2023.

The Danish Investment Screening Act (DISA) took effect on 1 July 2021, and is intended to prevent foreign investments and special financial agreements from constituting a threat to national security or public order in Denmark.

DISA applies to investments and special financial agreements, directly or indirectly, made or entered into by non-Danish nationals or non-Danish entities (the “Foreign Investor”) into companies domiciled in Denmark within a particularly sensitive sector provided certain thresholds are met.

Since DISA’s introduction, the Minister of Business has not – until May 2023 – rejected any foreign investments or special financial agreements.

Investments are to be understood in a broad sense and include the acquisition of voting rights and capital, but also asset deals and greenfield investments.

Special financial agreements include certain joint ventures, certain asset purchases, as well as certain operating, supply and service agreements.

DISA sets a threshold of 10% of ownership or voting rights for the mandatory authorisation scheme and a threshold of 25% for the voluntary notification scheme. The thresholds also apply to equivalent control by other means which confer significant influence over management, financial, development or operational matters that can thus be considered to constitute control or significant influence, including the granting of long-term loans.

DISA does not (apart from special regulation on greenfield investments) contain any monetary thresholds and therefore even the smallest investment may be comprised.

The authorisation requirement applies if the Danish company is active within particularly sensitive sectors. If this is not the case, it must be considered whether the investment/agreement should instead be notified under the voluntary notification scheme.

The particularly sensitive sectors and activities are broadly defined to the following:

If an investment/agreement is completed prior to authorisation, the DBA has five years after the completion date to start an investigation of whether the investment/agreement would have been subject to authorisation under DISA.

If the DBA assesses that a completed investment/agreement was a threat to national security or public order, the DBA may publish the name and information on the Foreign Investor. Further, the DBA will have the authority to cancel the Foreign Investor’s voting rights in the Danish company and/or demand unwinding of the investment/agreement and, finally, the Danish state can, in extraordinary circumstances, expropriate the company.

It has been announced that the Minister of Business has refused to authorise a foreign investment, as the listed Japanese enterprise Hamamatsu Photonics KK was denied acquisition of NKT’s subsidiary NKT Photonics Management Europe SRL, a supplier of fibre lasers and photonic-crystal fibre and a known supplier to the defence industry.

However, this rejection decision was not made public by the Minister of Business but by NKT, who in their company announcement No 13 on 2 May 2023, announced that Hamamatsu Photonics KK did not obtain the Minister's authorisation under DISA. According to the company announcement, authorisations otherwise required had been obtained from the authorities in Germany, the UK and the US.

Obviously, the specific elements that caused the Minister of Business to find that the divestment of NKT Photonics to the Japanese enterprise would pose a threat to national security or public order, are unknown.

As far as we know, this is the first FDI rejection in Denmark. It illustrates the Danish authorities’ tightened control with foreign investment within particularly sensitive Danish sectors. Consequently, investors must carefully consider potential restrictions on foreign investments at an early stage in the transaction when pursuing investment opportunities involving Danish entities. Similarly, sellers of Danish entities should perform a risk assessment of the potential buyers before concluding any binding agreement.

On 8 March 2023, the Danish Government submitted a bill for hearing, proposing a considerable extension of the rules under DISA. The bill suggested that any contracting party who intends to conclude a public contract concerning critical infrastructure must apply for pre-authorisation.

However, based on critical hearing responses, the Government decided to restrict the contemplated extension of DISA when the bill was introduced on 3 May 2023. The requirement for prior screening was extended only to apply to contracts concerning Energiø Nordsøen (a so-called energy island in the North Sea).

However, the introduced bill still includes the original proposal for introduction of new case handling process, which will divide the screening and authorisation procedure into two stages. It is our assessment that this structure will contribute positively to shorten the processing times of uncomplicated applications/notifications.

On 30 May 2023, the second Parliament hearing of the bill was completed and is expected to enter into force on 1 July 2023. Applications/notifications pursuant to DISA, received by the DBA prior to 1 July, will still be processed in accordance with the previously applicable rules.

Our team of experts assists Danish and foreign clients in establishing a successful strategy to navigate the FDI rules. Since the Danish FDI regime entered into force, our FDI team has submitted numerous filings with the DBA, in respect of which all investments have been cleared. Our FDI team has a good and direct relationship with the case handlers at the DBA’s FDI office and will, on 14 June 2023, co-host an event on the latest developments of the Danish FDI rules with the DBA. We are also actively participating in parliamentary hearings on political proposals for amendments to the rules. In addition, our team has been interviewed by the Danish media to comment on the FDI rules and the latest developments.