Sweden´s new law on Review of Foreign Direct Investments effective as of December 1, 2023
This law is poised to have a significant impact on the conditions for investing in Swedish companies. The extent of its impact will depend on how the law will be interpreted and applied by courts and authorities. As legal practitioners, we welcome the forthcoming guidance since the law itself leaves room for interpretation.
The following are some highlights to be considered by potential investors in Swedish companies henceforth:
1. The law encompasses investments in entities conducting “protected activities” – what´s that?
– The term “protected activities” is quite broad as per the wording of the law, encompassing security-sensitive operations, critical societal functions, large-scale handling of sensitive personal data, and activities in emerging or strategically protected technologies. Depending on how this term will be defined and applied, many businesses and industries could fall under the category of “protected activities.” The definition of this term will significantly impact the new legislation’s practical implications.
2. The law applies to all investments, also domestic.
– The review system under the new law, regardless of nationality or location. This includes Swedish investments in protected activities, which also must be reported. To minimize the inconvenience for Swedish investors in terms of delays and additional costs, it’s crucial for the review authority to establish procedures for swift approvals of domestic investments with no ties to non-EU countries.
3. Effect on existing agreements for investment rights or obligations.
– It appears that the law applies to investments made after November 30, 2023, irrespective of when the agreements were concluded. This could have significant consequences for existing agreements related to options to to buy or sell shares, follow-on investments, or acquiring shares in protected activities.
4. Investments in non-protected activities that later become protected:
– According to the law’s wording, it’s unclear if the review authority can intervene in an investment made in an entity that did not engage in protected activities at the time of investment but later started such activities. The definition of “protected activities” is still ambiguous, and entities may switch between protected and non-protected activities over time.
5. Are all existing investments exempt from the new legislation?
– It appears that existing holdings in Swedish entities are exempt from the law’s application, even if there’s evidence of an “inappropriate” foreign investor’s involvement. To trigger the review authority’s intervention, some form of direct or indirect ownership change must occur, meeting the law’s threshold values.
6. Revision of decisions in light of new information about foreign investors.
– It might be challenging for the review authority to ascertain the presence of an “inappropriate” foreign investor in many cases. Additionally, circumstances related to a foreign investor may change over time, revealing their unsuitability. It’s unclear how the review authority can retroactively address an investment already approved on paper.
7. Indirect ownership changes in foreign owners.
– The treatment of indirect ownership changes is an intriguing question. Companies engaging in protected activities might have multiple layers of foreign ownership, making it difficult for them to have a complete overview. It remains unclear how Swedish legislation’s sanction structure can be applied outside Sweden’s borders.
8. Potential impact on Shareholder´s Agreement.
– For corporations, the obligation to report arises when a foreign investor’s voting rights in the company exceed specified thresholds. To avoid surpassing these thresholds during capital raises, companies might consider issuing low-voting shares to foreign investors. In unlisted corporations, shareholder agreements often contain provisions granting investors (individually or jointly) influence in the company’s management via veto rights. It would be beneficial to receive guidance on whether such arrangements trigger reporting obligations in themselves.
9. Interpretation of the term “investment” within the scope of the new legislation.
– Concerning corporations, the term “investment” likely primarily refers to the purchase of existing shares and/or subscription to newly issued shares. The law’s preparatory works indicate that an investment can be made in exchange for money or other property (e.g., in-kind contributions). However, the boundary for what constitutes an “investment” remains somewhat vague. For instance, could a buyback of shares from certain owners leading to an investor’s increased ownership be considered an investment? Presumably, the term “investment” should be interpreted relatively broadly to prevent circumvention. Moreover, the law’s exemption for rights issues potentially opens avenues for circumventing its provisions.
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With very few exceptions, Sweden has historically had no restrictions on foreign investments. The new law is a change of this path. However, regulating this area is complex. To encourage investment in Sweden, the legislation needs to provide predictability while also offering flexibility to protect Swedish society from inappropriate ownership. We will have to observe how this new legislation unfolds in practice and what obstacles and opportunities it brings.
