In summary, the adopted amendments imply an increased number of businesses subject to the screening regime, a lower threshold for triggering notification requirements, a filing obligation for the seller and target companies as well as the acquirer, a standstill obligation, a ban on information sharing during the acquisition process, and a possibility of administrative fines and criminal liability. More on this and the current Norwegian investment control regime below.
The relevant amendments to the Security Act were adopted by a unanimous Norwegian Parliament on 9 June 2023. Although formal rules of procedure require a second vote in the parliament to pass a bill, no further amendments are expected. It remains to be seen when the new rules will enter into force, but likely later this year or 1 January 2024 at the latest.
The current Norwegian investment control regime
The Norwegian investment control regime is enshrined in the Norwegian National Security Act (the Security Act) Chapter 10. Contrary to popular belief, the regime is not a Foreign Direct Investment (FDI) regime as both foreign and (purely) domestic transactions may be caught. The regime empowers Norwegian authorities to screen certain investments in Norwegian companies on grounds of national security. Whether the screening regime is triggered, depends on a two-step process:
Firstly, the filing obligation applies only to transactions where the target company is subject to the Security Act. State, county and municipal bodies are covered by the Security Act, as well as private undertakings which, by individual decision by the relevant ministry, are made subject to the Act either because the company (i) handles classified information; (ii) controls information, information systems, objects or infrastructure which are of vital importance to fundamental national functions; or (iii) is engaged in activities of vital importance for fundamental national functions.
There is no public list or record of companies made subject to the Security Act. Specific sectors such as inter alia defence, transportation, banking and financial services, food and water supply, energy and some health services may be more likely to be engaged in activities of crucial importance for national fundamental functions than other sectors.
Secondly, the filing obligation is only triggered if there is an acquisition of a “qualified ownership interest” in an undertaking subject to the Security Act. A qualified ownership interest is defined as an ownership interest where the acquirer obtains, either directly or indirectly, any of the following: (i) at least one-third of the share capital, participating interests or votes in the target company; (ii) the right to own at least one-third of the share capital or participating interests, or; (iii) otherwise significant influence over the management of the target company.
Shares owned or acquired by the shareholder’s associates have the same status as the shareholder’s own shares. The same applies to participating interests which are owned or taken over by associates of the owner of the participating interests. Acquisitions of assets, on the other hand, are exempt from the scope of the regime.
The relevant ministry or the National Security Authority shall within 60 working days from receiving a filing from the acquirer inform whether the transaction has been approved or referred to the King in Council (the Government) for further consideration. A transaction may only be prohibited if the acquisition entails a not insignificant risk that national security will be threatened.
The need to strenghten the regime
In its proposition to the Norwegian Parliament (bill), the Ministry of Justice emphasized several reasons why the current regulation is outdated. Key reasons being increasingly complex and multifaced threats, unveiled attempts to access sensitive technology and information about Norwegian affairs, increased interest to invest in Norwegian companies from China and Russia, and the war in Ukraine showing the close interlinks between national security and trade. The importance of having similar rules to those in other jurisdictions, for the purpose of maintaining a profitable investment climate in Norway, is also considered.
The so-called Bergen Engines case from 2021 kick-started in many ways the process for amending the legislation, as the case illustrated how difficult it is to map the risk in complex value chains with businesses, suppliers and subcontractors across sectors and national borders. The case concerned the sale of Bergen Engines, an engine manufacturing company owned by Rolls-Royce, to TMH International, a Swiss company partly owned by a company with apparent ties to the Russian Government. Bergen Engines manufactured engines for important military applications, and the Norwegian Government held that the transaction could lead to the transfer of important technology and expertise to Russia, potentially in conflict with Norwegian security interests.
In addition, the physical location of Bergen Engines was strategically important in relation to national security interests and the acquisition could lead to circumvention of the export control regulations. The Government blocked the acquisition on the basis that “there was a not insignificant risk of a threat to national security interests associated with the transaction”. The case, in particular the Government's handling of the case, was criticized and serious deficiencies in the work relating to assessments of national security interests and application of the Security Act were revealed.
Key amendments to the Security Act
An increased number of businesses will be subject to ownership screening and lower thresholds for mandatory filings.
The amendments significantly strengthen the investment control regime by increasing the number of businesses that will or could fall within the scope of the regime.
Firstly, a filing obligation is imposed on acquisitions of suppliers of goods or services in connection with classified procurements holding a valid clearance in accordance with Chapter 9 of the Security Act. Secondly, the new rules state that the relevant authority will be required, and not only empowered, to make undertakings of vital importance to national security interests subject to the Security Act. Thirdly, undertakings of significant importance to national security functions may, at the relevant authority's discretion, be made subject to the screening regime by individual decision. Hence, the amendment entails a wider scope of businesses subject to the regime by law as well as giving the relevant ministry increased flexibility with regards to companies made subject to the regime.
In its proposal, the Ministry of Justice estimates that 250-300 companies are of significant importance to fundamental national functions or national security interests, and therefore may become subject to the screening regime.
Further, the Norwegian investment control regime is strengthened by lowering the threshold for a filing obligation for certain acquisitions. Filing will be required for the acquisition of a direct or indirect ownership interest of at least 10 % of the share capital, participating interest, or votes in companies subject to the regime. Additional filing obligations is triggered by subsequent acquisition of shares which causes ownership interests of 20 %, 1/3, 50 %, 2/3 and 90 % when each of these thresholds are surpassed.
To justify why there is ground for lowering the threshold to 10 %, the Ministry of Justice notes that, depending on the circumstances, an acquisition may be approved on the condition that no further shares in the company are acquired. The EU regulation on foreign direct investment also contains a 10 % screening threshold, bringing the Norwegian regime more in line with similar regimes in many EU member states.
New: Filing obligation on the seller and the target company, as well as the acquirer
Under the current investment control regime, the filing obligation rests on the acquirer only. The adopted rules convey a filing obligation on the seller and the target company, in addition to the acquirer, to ensure that all notifiable acquisitions are review by the relevant authority.
The seller and the target company will only be subject to the filing obligation where the acquisition exceeds the filing thresholds and where the acquirer obtains direct ownership interest (not indirect ownership interest), i.e. where the seller or the target company is able to foresee or identify a notification obligation.
New: Standstill obligation and restrictions on information sharing
The new regime introduces a standstill obligation prohibiting the closing of the acquisition until the approval from the relevant ministry or the Security Authority has been obtained. The current Security Act contains no rule prohibiting the closing of an acquisition and, in principle, a notifiable transaction can therefore be carried out prior to approval, albeit there is a risk of a reversal order if the acquisition is later subject to a prohibition decision.
In addition to a standstill obligation, the adopted amendments include a rule prohibiting sharing of information that can be used for activities threatening Norwegian security interests. This is to avoid that the transaction process itself poses a risk to national security interests. The restriction on information sharing complements the rules on information security already embedded in Chapter Five of the Security Act. The preparatory works mentions information and knowledge concerning technical descriptions, production methods and development, technology and operations as an example of information that may, depending on the circumstances, be used for activities threatening Norwegian security interests. The restriction on information sharing does not apply to publicly known information, and the ministry may also give its consent to share specific information during the acquisition process.
The amendments introduce a legal basis for imposing sanctions in the event of non-compliance with the Security Act’s rules on ownership control. This includes fines for violations of the notification requirement or the standstill obligation, and criminal liability for intentional or negligent violations of the notification requirement.
Implications and further amendment work
The adopted amendments are expected to have significant implication for an increased number of investors which are either present or looking to invest in the Norwegian market, as the investment control regime will become relevant in an increased number of transactions. In addition, non-compliance with the Security Act will in the future also be associated with greater risk due to the increased focus on sanctions and restrictive measures. It is also worth mentioning that, although the amendments are intended to follow the legal development in other countries, investors must keep in mind that there are national differences in investment control/FDI regimes.
As a final note, further amendments to the Security Act should be expected. During the amendment process, the Minister of Justice informed the Parliament that additional amendment work has been initiated, without elaborating further. However, the amendment proposal mentions, among other things, the need for a deeper dive into how influence in other ways than through acquisition, for example through loan financing or other forms of transactions, may be regulated, and how the authorities can identify potential security threats related to real estate transactions.