The past few months have seen a further flurry of countries introducing new FDI regimes or strengthening existing ones, including Canada, Sweden, the Netherlands and the Slovak Republic.
Denmark has also followed this trend – and last week updated its own legislation with effect from 1 July 2023. The Danish Investment Screening Act (DISA) has been in force since 1 July 2021 and applies to foreign direct investments in Danish businesses which are active in certain particularly sensitive sectors and activities.
In essence, the amendment has two parts: the introduction of a two-phase procedure for approving foreign investments, and an expansion of the scope of the DISA to cover agreements related to the contemplated Danish Energy Island in the North Sea.
A new two-phase procedure
Under the current rules, the Danish Business Authority (DBA) has 60 working days to decide whether to approve an investment, or to forward the application to the Minister for Industry, Business and Financial Affairs for further consideration. This period can be extended to 90 working days in certain circumstances.
From 1 July, the procedure for FDI approval will be divided into two phases – in line with what is seen in other countries and in merger control cases. Phase 1 begins once the DBA declares the foreign investor’s application for approval complete and it must be concluded within 45 calendar days. So, in non-complex cases the DBA will give its approval within 45 calendar days.
If the DBA cannot approve the transaction within the prescribed deadline for Phase 1 – but sees a need for further investigation – it will initiate Phase 2 proceedings. It may demand further information from the investor, and Phase 2 will not start until the DBA has declared that all the requested information has been submitted (an approach similar to e.g. Germany). Phase 2 must be concluded within 125 calendar days from when the in-depth investigation was initiated. A Phase 2 screening may result in (i) approval; (ii) a decision to negotiate terms with the foreign investor; or (iii) the application being submitted to the Minister for a final decision.
Agreements related to the Danish Energy Island in the North Sea
The Danish Energy Island is a high-profile infrastructure project by the Danish Government to build a new island in the North Sea as a hub for future wind farms and other renewable energy projects. The tender procedure for the Energy Island is expected to start within the next few months.
Once the amendment is in force, companies will need to file an application with – and obtain prior approval from – the DBA before entering into a contract with the contracting authority if the contract relates to the construction, joint ownership or operation of the Energy Island. Further, the Minister may decide that all participants in tenders concerning such contracts must also obtain approval from the DBA.
This obligation applies to all entities, regardless of where the ultimate owner is based/domiciled, and as such applies even to entities which are ultimately controlled by a Danish citizen or Danish entity.
In the context of the approval procedure, the DBA may also request information on sub-contractors that are expected to be employed in relation to the completion of the contract. As a result, the DBA can perform a screening of sub-contractors if these are known at the time of application. Where a sub-contractor is not known at that time, the DBA’s approval can be made conditional upon later approval of the subcontractor.
First Danish prohibition
While the Danish regime is still comparatively new, it has already shown that it may well be a stumbling block in M&A transactions. Last month, for the first time, the Danish Minister blocked a foreign investment in a Danish company although that investment had been approved by regulators in Germany, the UK, and the US.
Hamamatsu Photonics K.K., a Japanese corporation listed on Tokyo Stock Exchange, was denied approval for its acquisition of NKT Photonics A/S, a subsidiary of Danish industrial corporation NKT A/S. Both companies are active in fields related to optical sensors, optical components, and lasers.
The Minister’s rationale for rejecting the investment has not been published, and both the Minister and the DBA have refused to shed additional light on the decision, citing national security concerns.
The decision has stirred up controversy in the Danish business community. The Danish business media have also expressed criticism, in relation both to the lack of transparency in the decision-making process, and to the length of the administrative process (the deal was signed in the summer of 2022).
Also, seen in a broader context, it is a rather surprising decision relating to an Asian investor with no obvious ties to China. While the business area in which NKT Photonics operates is generally a more sensitive business area and may trigger some level of scrutiny in other countries, to date Japanese investors have generally not been viewed critically by most Western foreign investment regulators.
For further information, please contact:
Neil Hoolihan, Partner, Linklaters
neil.hoolihan@linklaters.com
