The Swedish FDI Act provides for the screening, and if necessary, prohibition of foreign direct investments into protected activities. The Act requires pre-notification of an investment, prescribes a prohibition for completion of an investment before approval as well as fines for failure to notify a notifiable investment. In this article, we will first introduce the new legislation and thereafter our experiences with the legislation 3.5 months, at the time of writing, into its applicability, as well as describe the practical implications it has had on transactions on the Swedish market.  

Background

Sweden is one of the few European Union member states that has not previously had a legal possibility to intervene against or review foreign direct investments that have or could have an effect on Swedish national security interests. For completeness, Sweden abolished such national legislation before becoming a member of the European Union. Although Sweden was late in adopting an FDI legislation, it could be considered that Sweden eventually caught up with other national regimes and went a step further when the Act was adopted. As of 11 March, the authority has received 300 notifications, approved 188 investments without further actions and initiated 8 Phase II reviews of investments. No investments have (yet) been subject to approval or prohibition following a Phase II review. The number of notifications received so far exceeds the total number of notifications some countries receive on an annual basis.  

Investments caught by the Swedish FDI Act

The Swedish FDI Act requires prior notification for all direct and indirect investments made into protected activities by all types of investors. As compared with many other FDI regimes, Sweden also requires notification of investment made by Swedish and EU investors.  

Which types of investments are caught by the Swedish FDI Act?

All direct and indirect investments into business activities, whether incorporated or not, that carry out protected activities require notification under the Swedish FDI Act. Investments into limited liability companies, limited and general partnerships and trusts with seat in Sweden are caught by the Swedish FDI Act. However, the Act also targets investments by way of starting new business ventures (greenfield investments), internal restructurings and the gain of influence through e.g. a shareholders’ agreement into an existing business also requires prior notification. Please note that if the main target company is e.g. a German company with a subsidiary in Sweden, a notification requirement could arise depending on the business activities of the Swedish subsidiary.  

Which investments are subject to screening?

Investments into legal entities or assets that carry out protected activities which will give the investor a certain level of influence are subject to screening. Investments into limited liability companies and economic associations resulting in the investor holding at least 10 per cent of the voting rights must be notified. Investments can be made directly by a natural person, but also indirectly through e.g. a legal entity that is owned by an individual investor or co-owned by several investors. As such, an investment into a US company that holds at least 10 percent of the voting rights in a Swedish limited liability company that carries out protected activities will be caught by the Swedish FDI Act. In relation to limited liability companies, a notification is required each time any of the following thresholds for voting rights is intended to be met or exceeded: 10%, 20%, 30%, 50%, 65% and 90%. A notification is also required if the investor were to become a board member. Influence over protected activities could also be gained by other means, such as through a shareholders’ agreement, e.g. by receiving certain veto rights or if a shareholder is granted the right to exercise the voting rights belonging to another shareholder.  

What constitutes ‘protected activities’?

‘Protected activities’ is the umbrella term for seven different types of activities covered by the Act.

• Essential services – services and infrastructure that maintain(s) or assure(s) societal functions that are vital to society’s basic needs, values or safety. The activities that constitute essential services have been more closely defined in a regulation issued by the Swedish Civil Contingencies Agency. Besides classic activities such as infrastructure construction, wholesale of food stuffs, healthcare, electric and pharmaceutical supply, some less obvious activities such as property management of data centers and labs, provision of ready meals for public sector, courier services, parcel delivery and transport of foods are also covered.
• Security-sensitive activities – activities covered by the Swedish Protective Security Act.
• Activities that prospect for, extract, enrich or sell raw materials that are critical to the EU, or other metals and minerals that are critical to Sweden – raw materials critical for the EU are listed by the EU and the Swedish critical metals and minerals are listed in an Ordinance.

• Activities whose principal purpose is the processing of sensitive personal data or location data – activities in large-scale processing of sensitive personal data, as defined in article 9(1) GDPR, or location data processed in an electronic communications network.

• Activities related to emerging technologies and other strategic protected technologies – activities within technologies relating to e.g. electronics, AI, navigation systems etc.

• Activities that manufacture, develop, conduct research into or supply dual-use products or supply technical assistance for such products – covers dual-use products listed in the annex to the Dual Use Items Regulation (2021/821).

• Activities that manufacture, develop, conduct research into or supply military equipment or supply technical support for military equipment – military equipment and technical assistance as referred to in the Swedish Military Equipment Act.

Businesses that carry out protected activities also have a duty to inform any investor that the Act is applicable on the business’ operations and that any investment must be notified.  

Which investors much notify an investment?

All investors, regardless of their origin, must notify investments made into a business that carries out protected activities and that will give the investor a certain level of influence. No investor type is therefore excluded from the scope of the FDI Act, as such investors from Sweden, other EU countries as well as investors from third countries must notify their investments to the review authority. If the investor is a natural person, and only holds a Swedish or other union citizenship, that is making the investment either directly or indirectly through a legal entity, there is a presumption in the legislative preparatory works that the investment should be approved without further action. This is also valid if it is a legal entity that makes the investment that is directly or indirectly owned by one or more natural persons with either a Swedish or Union citizenship.  

Standstill obligation and procedure

An investment must be notified to the Inspectorate of Strategic Products (the “ISP”) which is the designated supervisory authority. If a notifiable investment is not notified, the ISP also has the possibility to produce its own notification in order to review a particular investment. However, the ISP also has the power to ex officio review investments that are not notifiable under the Act. Such an ex officio investigation can only be initiated if the authority has reason to believe that the investment could harm Swedish national security interests. The ISP has 25 business days (Phase I), from the submission of a complete notification, to decide to either approve an investment or to initiate a review of the investment. If a review is initiated (Phase II), the ISP has three calendar months to make a decision whether to approve the investment unconditionally, subject to conditions or prohibit the investment. The review period can also be prolonged by an additional three months due to special circumstances. The lapse of the case handling time in both Phase I and Phase II does not signify that an investment is automatically approved, a formal approval decision from the authority is necessary in order to carry out the investment. As such, an investment is subject to a standstill obligation during the review period until a final decision is adopted. During its assessment, the ISP will make an overall assessment of the investment taking into consideration the activity’s actual protective value as well as circumstances related to the potential investor. As regards the circumstances related to the potential investor, the ISP will mainly consider the following circumstances:

• Whether the investor is directly or indirectly, in whole or in part, controlled by the government of another country through its ownership structure or substantial financing or in some other way.
• If the investor has previously been involved in activities that have or could have adversely affected Sweden’s security or public order or security in Sweden.
• If there are other circumstances surrounding the investor that could pose a risk to Sweden’s security or public order or security in Sweden.

Such ‘other circumstances’ relate to e.g. previous illegal activities relevant to the risks associated with the investment in question, if the actor could obtain an overly dominant position within a certain sector, previous economic sanctions as well as the degree of antagonism in the country that the investor has links to may also be relevant to consider. During the review, the ISP has the right to request information and documents from the parties to the investment but also has the right to make visits to the premises of the parties in order to gather information. A prohibition can only be issued in relation to a (true) foreign direct investment, i.e. a third-country investor, if it is necessary to prevent a harmful impact on Swedish national security interests.  

Sanctions

The Swedish FDI Act allows the ISP to issue fines in cases of e.g. failure to notify a notifiable investment as well as if an investment is carried out before an approval has been issued. Fines can also be issued in cases of providing wrongful or misleading information to the ISP. The fines may range between SEK 25,000 and SEK 100 million. If an investment has been prohibited, any legal action that constitutes a part of the investment will be null and void under civil law. However, this will not affect the entire agreement pertaining to the investment, instead some of the clauses in the agreement will survive, e.g. those that regulate the parties’ actions in case of a prohibition the loan agreements etc. It should also be noted that whilst the ISP has two years from the wrongful event to issue fines, there is no time bar for the review of an investment. As such, if a notifiable investment was carried out in January 2024, without prior notification and approval. The ISP then has until January 2026 to issue a statement to the investor with the intention to impose a fine and allow the investor to comment. After such time, ISP cannot issue fines. As such, if ISP detects the investment in March 2026, it may not issue fines but still has the power to review the investment and ultimately prohibit the investment.  

Lessons learned and practical implications of the Swedish FDI Act

The entry into force of the Swedish FDI Act has had a notable impact on transactions that directly or indirectly involve Swedish businesses. Besides the additional regulatory requirement introduced by the Swedish FDI Act in relation to regulatory approval as well as the adaptation of the transaction documents to include conditions precedents to closing by such approvals, many target companies must first start by making a due diligence whether or not it carries out protected activities within the meaning of the Act. This is sometimes a straightforward task, but in our experience, it may be the most unlikely and non-core activity that results in the business operation falling within the scope of the Swedish FDI Act. This is due to the duty to inform that is placed upon the target company. It should however be noted that this duty to inform is not subject to administrative fines if not fulfilled, instead it will be regulated between the parties. In our experience, this is done by way or a warranty in the agreement whereby the seller warrants that the Swedish FDI Act is not applicable to the business operations of the target company or assets.  

The number of notifications and ISP’s case handling

75 percent of all notifications submitted to ISP for review relates to ‘essential services’, which is equivalent to approx. 210 notifications the first three months (280 notifications had been received by 4 March 2024). It is then interesting to note that the Swedish Civil Contingencies Agency, when detailing the regulation what constitutes essential services in relation to the FDI Act, considered that about 1 000 companies would be targeted by the Regulation and that it would lead to approx. 350 notifications a year. At the current rate of notifications, although there may be some additional ones due to transactions that could not be closed by 30 November 2023, the actual number will be closer to 800 notifications relating to investments into businesses that carry out essential services. However, it is also likely that internal restructuring, the starting of new businesses or changes to shareholders’ agreements have not been taken into consideration when the Agency made its assumptions. The ISP has also estimated that it will receive about 1,200 notifications during the first year of the legislation. ISP has been the contact authority for FDI consultations within the EU screening mechanism prior to the entry into force of the Swedish FDI Act. Otherwise, the primary task of the ISP has previously been within export control of military equipment and dual-use items. It has been a very small authority with a small staff. However, during the next couple of years, the authority is set to treble in staff numbers, mainly to be able to handle the notification under the FDI Act with a targeted number of dedicated staff of 30 FTEs. This can be compared with the Swedish Competition Authority which has approx. 15 dedicated case handlers for merger notifications and they receive about 60-90 notifications a year. The Competition Authority also uses resources from other units within the authority when needed. The obvious shortage of case handlers has, so far, had an effect on the case handling of the authority. In our experience, the ISP uses the mechanism of complete notification to be able to moderate when the clock for review starts. We have seen cases where ISP has questioned if there are not any other shareholders that should be accounted for in the notification or whether or not there are not any other documents that should be submitted with the notification. Once informing the authority that all relevant information has been accounted for in the notification, ISP then decides that from the date of such answer, the clock will start. This, despite no new or additional information having been submitted. We hope that this is just due to the shortage of staff in the early days.  

Transactions impacted by the Swedish FDI Act

Due to the broad scope of the Swedish FDI Act, most types of transactions are within scope of the notification obligation. We therefore will have a closer look at different types of transactions and whether or not they are within scope of the FDI Act. In all the examples below, we presume that the relevant transaction relates to a target company that is active within protected activities.  

Internal restructuring

Internal restructurings are caught by the FDI Act as both direct and indirect investments are within scope of the FDI Act, and, as the ISP has noted, there is no exemption in the Act for such transactions. Therefore, due to the changes in the direct and indirect ownership structure, a notification of the internal restructuring is mandated. It should be noted that many question whether or not e.g. a merger between two companies could amount to an investment within the meaning of the FDI Act. However, the only manner in which to test that theory in court would be following a decision by the authority to issue a fine.  

New establishments

The establishment of a company that will carry out protected activities must be notified prior to the start of the company. This is also relevant for joint ventures that are established for the purpose of carrying out a specific project. Our view is that the acquisition of an off-the-shelf company to set up a purchasing structure in order to e.g. acquire a specific target company would not amount to an notifiable establishment as the company is will not carry out protected activities. The notification obligation rather arises as a condition to acquire the target company.  

Shareholders’ agreements

Rights granted through a shareholders’ agreement could amount to a notifiable influence in a target company. Relevant aspects to consider are e.g. rules on decision-making in the articles of association, veto rights, being able to use another shareholder’s votes, a seat at the board as well as if a relative of the investor gains a seat at the board.  

Share or asset transfers

The acquisition of shares in a target company or the assets that constitutes a business activity are the most straightforward types of transactions within the scope of the Swedish FDI Act. In relation to these types of transactions, it will be important to include provisions in the SPA or ATA pertaining to the FDI aspects. In case the sellers have informed that the target company does not carry out protected activities, it is common to include a warranty to that effect in the agreements. When a notification is required, conditions precedents as well as break-up clauses are relevant to include.  

Trading over the stock market and other regulated markets

Trading on regulated markets (e.g. the stock exchange or MTF platforms) are not exempted from notification obligations and an approval must be received before any of the thresholds can be met/exceeded in terms of holding. There is no exemption allowing a person to first acquire the shares and thereafter notify the investment on condition that the voting rights are not used until after approval (a solution which is available under competition rules).  

Public offers

Public offers must be notified to the authority, and an approval must be granted before the bid can be declared unconditional. It is important to consider the case handling time for the FDI approval when determining the length of the acceptance period. It is normal that the notification is submitted at the time of making the bid public.  

Share issues

There are three main types of share issues: (i) share issue with preferential rights, (ii) a guaranteed share issue with preferential rights and (iii) directed new share issue. In relation to share issues with preferential rights, there is an exemption available from the notification requirement in relation to the acquisition of the pro rata share. This exemption applies regardless of whether a threshold is met or exceeded due to other shareholders deciding not to subscribe to their pro rata share. The reason being that an existing shareholder should always be allowed to protect its ownership share. As regards a guaranteed share issue with preferential rights, the existing shareholders subscribing to their pro rata share will be exempted. However, to the extent that the guarantee will be used, a notification and clearance is needed to allow the guarantor to meet or exceed any of the thresholds. It is therefore advised that the guarantor submits a notification at the time of making the share issue public. Lastly, for a directed new share issue a notification requirement will arise if the new shareholder is set to hold more than 10 percent of the voting rights. In a scenario where the directed new share issue is made in order for the company to quickly receive funds. It could be advised to first issue 9.99 percent of the voting rights and then award the remaining per cent following an approval by the ISP.  

Conclusion

The entry into force of the Swedish FDI Act has had an impact on transactions and investments that directly or indirectly involve Swedish entities. Being late to the game to introduce a screening mechanism, Sweden has opted for the broad regime which captures a large number of transactions, some more obvious and foreseeable than others. However, as the trend in Europe is to broaden the screening mechanisms, our understanding is that soon many of the other European countries will have FDI regimes which are more similar to the Swedish system. Comparing with some other countries, we do believe it is beneficial that the Swedish rules are very detailed allowing for some legal certainty as to the scope of the FDI regime.   Fredrik Lindblom   Sanna Frånlund