New regulation on foreign direct investment and its impact on transactions in the Swedish real estate sector
On 1 December 2023, a new regulation entered into force regarding foreign direct investments in Swedish companies (the “FDI Act”). The FDI Act imposes a notification obligation for investments in Swedish companies and assets that carry out so-called “protected activities”. The FDI Act also enables the supervisory authority to prohibit and impose conditions for investments that is considered have a harmful impact on Swedish security interests or public order. The main purpose of the FDI Act is to control foreign direct investments, but investors from Sweden and other EU Member States must also notify investments. Since 2019, there are regulations in place regarding the transfer of security-sensitive activities. The enactment of the FDI Act means that additional regulation applies to investments in Swedish companies and assets whose activities are worthy of protection. The broad scope of the FDI Act will affect acquisitions and investments in Swedish companies and assets, including real estate companies. In the article, we explain how the new FDI Act affects Swedish real estate transactions and how it correlates to the Security Protection Act.
Review of foreign direct investments
The FDI Act applies to all investments in Swedish companies and assets engaged in protected activities (Sw. skyddsvärd verksamhet). An obligation to notify an investment applies, among other things, to direct or indirect investments in companies (and assets) engaged in protected activities, whereby the investor holds votes corresponding to a share of 10, 20, 30, 50, 65 or 90%. The notification obligation also applies if the investor otherwise acquires a direct or indirect influence in the management of the target company. The Inspectorate for Strategic Products (the “ISP”) is the responsible supervisory authority. Companies engaged in protected activities also have an obligation to inform the investor that the FDI Act is applicable to the company’s activities.
The obligation to notify investments to the ISP applies to investors from third countries, other EU Member States and Sweden. For the purpose of the FDI Act, all non EU investors are considered as foreign direct investments, i.e. investments from Norwegian investors are thus considered as a foreign direct investment. However, an investor from Sweden or the EU acquiring companies/assets engaged in protected activities will, as a presumption, be approvedby the ISP; but a notification to the ISP must still be made.
The authority has 25 working days from the receipt of a complete notification to decide whether the notification should be approved or whether a review of the investment should be initiated. A notifiable investment cannot be completed without an approval decision from the ISP, which means that there is a stand-still obligation until an approval decision has been issued. If a review is initiated, the authority must take a decision within three months, which can be extended to six months under special circumstances.
Where an investment has been made in breach of a prohibition, any legal action that forms part of the investment will be null and void. However, this nullity will not extend to the entire contractual arrangement between the investor and the seller as, for example, loan agreements etc. are not intended to be affected by a prohibition decision. However, legal actions taken both before and after the decision are affected. If an investment is made without notification or in breach of a decision, the ISP may also impose administrative fines. A fine may also be imposed if the conditions of a decision are not complied with or if the parties provide misleading or inaccurate information about the investment. The administrative fines range between SEK 25,000 and a maximum of SEK 100 million.
Protected activities, in particular essential services and security-sensitive activities
According to the FDI Act, protected activities include e.g. essential services (Sw. Samhällsviktig verksamhet) and security-sensitive activities (Sw. Säkerhetskänslig verksamhet). An essential service refers to “an activity, service or infrastructure that maintains or secures societal functions that are necessary for the basic needs, values or security of society“. The term essential services thus refers to, e.g., infrastructure for energy, transport, healthcare and communications. The Swedish Civil Contingencies Agency (“MSB”) is responsible for providing directions regarding what type of essential services are covered by the law. MSB published its regulation detailing what constitutes essential services within the meaning of the FDI Act on 1 December (MSBFS 2023:4).
Security-sensitive activities refer to activities covered by the Protective Security Act. A company subject to the Protective Security Act is therefore automatically also subject to the FDI Act. The Protective Security Act has been in force since 2019 meaning that companies have an obligation to notify the relevant supervisory authority (which varies depending on the sector in which the company operates) that they are engaged in security-sensitive activities. Security-sensitive activities refer to activities that are of importance to Sweden’s security or that are covered by an international commitment on security protection. Examples of such activities include important civil infrastructure such as airports, energy plants and information systems for electronic communication. Operators conducting security-sensitive activities can be found in both the military and civilian sectors, if the activities are of fundamental importance to Sweden. There is an obligation under the Protective Security Act to make a suitability assessment of the intended transfer to the relevant buyer and to consult with the relevant supervisory authority on the intended transfer of any part of the security-sensitive activity.
There is some overlap in the definition of essential services and security-sensitive activities. According to the preparatory work of the law, security-sensitive activities have been included in the definition of protected activities to ensure that all security-sensitive activities are covered by the FDI law.
Impact on investments in real estate companies
MSB’s Regulation detailing the scope of “essential services” covered by the FDI Act includes a list of activities in property management. According to the Regulation, the leasing, management and operation of owned or leased premises or properties where the following activities are carried out are regarded as essential services:
– arrest, custody, investigation or prosecution activities, judicial activities, institutions or detention centres,
– customs clearance or customs control,
– emergency services,
– data centre, data halls, data servers or server halls,
– airport terminals, railway stations, transhipments or intermodal terminals, ports, port terminals, quays, or depots,
– innovation and technology parks,
– laboratories,
– alarm or control centres,
– universities or colleges,
– university hospitals or highly specialised care centres,
– ground stations for satellites and spacecrafts,
– launch sites for satellites and spacecrafts,
– security or surveillance activities with a permit or authorisation from the county administrative board, or
– activities according to the War Material Act, or other premises, properties or facilities for defence purposes, where security-sensitive activities are carried out or which are objects of protection.
Bomb shelters in civilian buildings such as apartment buildings and garages are not included in MSB’s definition of essential services. Bomb shelters are only covered to the extent that they are located in premises, properties or facilities for defence purposes, such as regiments and defence authority buildings.
The Regulation implies that a property-owning company that leases its property to a company that conducts, for example, port operations will be subject to notification under the FDI Act. This will also affect transactions where the property-owning company has tenants that are covered by the FDI Act and the Protective Security Act.
As a general rule, there is no notification obligation under the FDI Act for the transfer of real property or the transfer of a property-owning company (not conducting any other activities) unless the real property itself can be considered essential to society or if the property owner manages a property or has a tenant that carries out security-sensitive activities.
A transfer of real property may also be covered by the Protective Security Act. If an operation is classified as a security-sensitive activity, it may be notifiable under both the Protective Security Act and the FDI Act. A tenant who conducts security-sensitive activities also needs to enter into a security protection agreement with the landlord under the Protective Security Act if the landlord gains access to the security-sensitive activities. The agreement must regulate which security protection measures are necessary to ensure that the security requirements under the Protective Security Act are met and a right to revise the agreement if necessary due to changed circumstances. If the counterparty does not comply with the security protection agreement, the operator must take the necessary measures to meet the security protection requirements. According to the preparatory work this is why a business contract usually is conditional upon compliance with the security protection agreement. I.e., it could mean a right for the tenant to terminate a lease in the event of a transfer of the property that the tenant has not approved.
In the case of an investment in a business operating protected activities where the business and the property are placed in different companies, the notification obligation will also arise for the property-owning company if it is part of the operating company’s group. It is therefore not possible to avoid the rules on the notification obligation when transferring a property-owning company by placing the property and business in different companies when purchasing a business operations within protective activities.
The FDI Act will undoubtedly affect real estate transactions in the future and it must be important to consider in order to avoid possible invalidity of the transaction and administrative fines.
