Denmark: FDI Update: First Danish Rejection And Amendments To Come

For the first time, the Danish Minister of Business and Industry 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 first parliamentary hearing of a bill proposing an extension of and important amendments to the Investment Screening Act was completed on 11 May 2023.

The Danish Investment Screening Act (investeringsscreeningsloven) took effect on 1 July 2021 and is intended to prevent foreign investment and special financial agreements from constituting a threat to national security or public order in Denmark. This is to be ensured through screening and possibly other measures guarding against such investments and agreements.

Under this Act, foreign investors are obligated to apply for the Danish Business Authority's authorisation prior to completing a foreign investment or concluding a special financial agreement within a particularly sensitive sector.

The Business Authority will then decide whether to authorise the investment or the particular financial agreement. The Business Authority may also state the terms/remedies subject to which it will authorise the foreign investment or the special financial agreement to be executed.

If the Business Authority finds that the foreign investment or the special financial agreement constitutes a threat to national security or public order, and that the threat cannot be mitigated by agreeing on terms/remedies for the investment or the agreement, the Business Authority will present the application or notification to the Minister of Business and Industry.

The Minister of Business and Industry will then consult on the matter with the Minister for Finance, the Minister of Foreign Affairs, the Minister of Justice, the Minister of Defence and other relevant ministers, and will decide based on this whether authorisation may be granted.

Since the rules were introduced, the Minister of Business and Industry has not - until now - publicly rejected any application for authorisation of a foreign investment or a special financial agreement.

NKT not allowed divestment of NKT Photonics

However, it has now been announced that the Minister of Business has refused to authorise a foreign investment, as the listed Japanese enterprise Hamamatsu Photonics K.K was denied acquisition of NKT's subsidiary NKT Photonics Management Europe S.R.L, a supplier of fiber lasers and photonic-crystal fibre and a known supplier to the defence industry, which is one of the particularly sensitive sectors subject to the Investment Screening Act.

However, this 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 K.K did not obtain the Minister's authorisation under the Investment Screening Act. Also 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 and Industry to find that the divestment of NKT Photonics to the Japanese enterprise would pose a threat to national security or public order are unknown.

Comments by Bech-Bruun

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 carefully must 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.

1. Hearing of bill on extension of the Investment Screening Act.

On 8 March 2023, the Danish government submitted a bill for hearing, proposing a considerable extension of the rules on screening under the Investment Screening Act. Specifically, it was suggested that any contracting party who intends to conclude a public contract concerning critical infrastructure must apply to the Business Authority for permission to conclude the contract.

However, based on critical consultation responses, the government decided to restrict the contemplated extension of the Investment Screening Act 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 process for the case handling, which will see the screening and authorisation procedure divided into two stages. It is our assessment that this structure will contribute positively to shorten the processing times of uncomplicated applications and notifications.

Read Bech-Bruun's review of the original draft bill and our newsletter on the amendments to the bill owing to the critical consultation responses.

On 11 May 2023 the first hearing of the bill was completed in the Parliament, and the government expects that the bill will be adopted and take effect before summer. Applications and notifications pursuant to the Investment Screening Act, received by the Business Authority prior to the amendments taking effect, will still be processed in accordance with the previously applicable rules.

Bech-Bruun continuously follows the hearings of the bill and developments in the area.

Originally published 24 May 2023.

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