Danish investment protection rules – an important aspect of transactions in Denmark

published on 21 July 2023 | reading time approx. 3 minutes

Recently, Denmark has seen its first case where a foreign company was prohibited from acquiring a Danish company by invoking the Danish Investment Screening Act and thus was prevented from carrying out a transaction. This article provides a brief overview of the current rules and the recently adopted legal amendments.

The Danish Investment Screening Act has been in force since July 2021 and specifies cases in which foreign investors are required to obtain approval or to notify the Danish Business Authority before investing in Danish companies.

The primary objective of the Investment Screening Act is to prevent certain undesirable foreign investors from gaining control or significant influence over important Danish companies and public services.

Requirement to obtain approval

Foreign investors wishing to operate in areas defined as "critical sectors" are required to obtain approval from the Danish Business Authority before investing in a Danish company. The mandatory rules apply to investments aimed at acquiring "control" over a Danish company and concluding a "special business agreement" with a Danish company.

a) CONTROL

Acquisition of control is defined as the acquisition of over 10% of the ownership, voting rights, or "similar control" over the Danish company.

This regulation applies to all non-Danish investors, including investors headquartered within the EU or the OECD area. It also applies to Danish subsidiaries of foreign parent companies.

b) SPECIAL BUSINESS AGREEMENTS

The requirement to obtain approval also applies when foreign companies conclude so-called "special business agreements" with Danish companies. "Special business agreements" include joint ventures, supplier agreements, OEM agreements, etc., to the extent that such agreements result in decisive control or influence in a Danish company.

A foreign entity has decisive control, for example, if it has influence over parts of the Danish company's operations critical to the business or if the supplier is difficult to replace.

The rules on "special business agreements" do not apply to investors based in the EU or OECD area, but EU and OECD subsidiaries of parent companies based in a non-EU or non-OECD country may be affected.

c) “CRITICAL SECTORS”

The requirement to obtain approval only applies to agreements and control over Danish companies operating in "critical sectors". There are no lower limits or thresholds as to when an entity is considered to be affiliated with such "critical sectors".

The Danish Act contains a non-exhaustive and very broad list of critical sectors:

Defence sector
IT security functions and processing of confidential information
Dual-use goods
Critical technology (e.g. robots, AI, 3D printing, energy storage, quantum technology)
Critical infrastructure (e.g. energy sector, health sector)

With the amendment to the Act adopted at the beginning of June, which came into force on 1 July 2023, the approval requirement was extended to include contracts concerning the establishment, co-ownership and operation of the North Sea Energy Island.

The originally planned extension of the approval requirement to cover all contracting parties intending to enter into a public contract regarding critical infrastructure has not been implemented, at least as of now, as voices of criticism were heard.

The amendment also introduced a two-phase application procedure, according to which applications concerning non-critical investments should be processed more quickly. If approval cannot be granted on the basis of the information provided during the first phase, the procedure will enter its second phase, in which the Business Authority will request further information.

Voluntary notification

As mentioned above, the approval requirement only applies to investments in "critical sectors". For all sectors other than those defined as "critical", it is possible – but not required – to notify the Danish Business Authority on a voluntary basis if there is a risk that the investment poses a "threat to national security or public order."

The voluntary notification system allows investors to clarify in advance whether an investment could potentially be considered a threat to national security or public order. If the investment is considered to be a threat, further conditions may be imposed on the investor in relation to the investment, or if this is not possible, the investor may be prohibited from making the investment. If the investment has already been made, the investor may be ordered to liquidate the investment or the contract.

NKT Photonics is an example of a case where the Danish Investment Screening Act was applied. The acquisition of the Danish company (transaction volume of approx. 205 million Euros) by a listed Japanese company could not be carried out because the approval was refused after the transaction (after 11 months of processing the case). In order to carry out transactions in Denmark, it is therefore extremely important to know the Danish Investment Screening Act.