Proposal for strengthened rules on control with acqusitions

The Bill introduces amendments which will significantly affect foreign investments in Norwegian companies. Most notably, the following four amendments should be noted and taken into account by any investor looking to invest in Norwegian companies regulated by the Security Act, or, conversely, by shareholders in companies currently regulated by the Security Act: Firstly, the scope of the ownership control provisions will be widened, so as to encompass more transactions than today. Secondly, the Bill introduces several new notification thresholds, which entails that the direct or indirect acquisition of up to 10%, 20%, 33%, 50% and 90% ownership will trigger an obligation to notify FDI authorities. Thirdly, transactions subject to the ownership control provisions in the Security Act may no longer be implemented before the transaction has received the necessary approval by FDI authorities. Lastly, the obligation to notify FDI authorities of a contemplated regulated transaction now applies both to the seller and the target company.

The proposed Bill is expected to be considered by the Norwegian Parliament shortly after Easter. If approved, we expect the amendments to enter into force shortly thereafter.

In this newsletter, we provide an overview of the most important amendments that are proposed.

Today, the Security Act's provisions on ownership control only apply to companies with business operations that are subject to the Security Act and which processes security-classified information or possesses information, information systems, objects, infrastructure or conduct activities that are "of vital importance to fundamental national functions".

It is , however, proposed in the Bill that the rules on ownership control are amended so as to also apply to businesses that are of decisive importance for "national security interests", businesses that are of "significant importance" to fundamental national functions or security interests, and suppliers of security-graded acquisitions that hold supplier clearance. This represents a notable extension of the scope of the ownership control rules in the Security Act.

The legislative reasoning behind this extension of the scope of the Security Act is that the national risk assessment has evolved since the enactment of the Security Act. National security interests now dictate that more risk factors, such as risks related to new forms of technology, infrastructure and services, are taken into account in addition to those which have hitherto been encompassed by the Security Act. The proposed amendments will give the authorities a legal basis for accessing information about acquisitions and ownership relationships over time in industries that are significant to national security functions or interests, as well as a basis for assessing whether economic activities in and related to these industries may have an impact on a business that is of decisive importance for national security interests.

Companies that carry out research and development activities within emerging technologies, such as artificial intelligence or advanced surveillance technology, are highlighted as examples of companies that can be subject to ownership control. In the assessment of whether the ownership control mechanisms in the Security Act shall be applied in a certain transaction, it may be relevant to consider if the target company is already subject to regulations that provide an overview of the ownership of businesses in the applicable sector.

It is specified in the Bill that in spite of the fact that the primary purpose of the Security Act is the safeguarding of national security interests, this consideration must still be balanced against, among other things, international trade considerations and foreign policy matters. This is ensured through the processing of cases in the screening network with representatives from most of the Norwegian Government Ministries. The screening network collects information from relevant Norwegian agencies and foreign authorities as a basis for balancing the various interests. Security interests have particular importance in relation to acquirers from countries with which Norway or our allies do not have a security policy cooperation.

The obligation to file a notification of an acquisition under the current Security Act is triggered by the direct or indirect acquisition of at least one third of the share capital, shares or votes in the target company, an option to become the owner of such a shareholding, or the obtaining of significant influence over the management of the company in another way, typically by means of a shareholder agreement.

It is proposed in the Bill that this threshold is lowered to 10%. The new notification thresholds are aligned with the thresholds proposed in Sweden and correspond to a greater extent with the thresholds in Finland, Denmark and EU's foreign direct investment regulation.

The legislative reasoning behind the new filing threshold the fact that an ownership stake of 10% can, according to the reasoning given in the Bill, grant the acquirer significant influence on the management of a company, for example by influencing the election of the board members or by setting owner expectations. The Bill further emphasises that, generally, the acquiring party can obtain more influence over a company through specific regulation in the articles of association or through shareholders' agreements than that which its ownership stake alone would indicate. By way of example, such additional influence can be obtained through the inclusion of provisions on voting rights or the election of board members, which in turn may entail control over the company's operations or allocation of resources.

It is further proposed that the increase of an existing ownership stake up to certain set thresholds shall give rise to new filing obligations This entails that an existing owners of a regulated company is obliged to notify FDI authorities if its current shareholding is increased so as to exceed "at least 20 per cent, one third, 50 per cent, two thirds or 90 per cent". This gives the authorities the opportunity to follow developments in ownership in regulated companies over time.

It is further proposed that related parties' shareholdings shall be added together when calculating whether the filing thresholds have been exceeded, corresponding to § 2-5 of the Securities Trading Act. This means, among other things, that ownership stakes held by companies in the same group as the acquirer or others with whom the acquirer has binding shareholder cooperation must be taken into account when assessing whether an acquisition is encompassed by the Security Act.

In addition to the above mentioned set thresholds, the existing provision that notification is triggered if the acquirer obtains significant influence over the management of the business in other ways (such as by way of shareholders' agreements) is to remain unaltered and apply as an additional safeguard.

The Bill proposes to expand the filing obligation to also include the seller and the target company. The purpose of this change is to make the reporting obligation rules more effective.

As it may in some cases be difficult for a seller or a target company to identify the acquirer's ultimate beneficial owner or to ascertain what the acquirer actually owns, the seller and the target company is only to be subject to a separate obligation to notify FDI authorities when the subject of the transaction is the transfer of an ownership interest directly in the regulated target company.

Whilst the current Security Act only grants FDI authorities the authority to oblige the parties to a regulated transaction to reverse the transaction, the Bill now introduces a proposed prohibition on completing the transfer of ownership interests in a regulated entity in a regulated transaction before the transaction has been cleared. This entails that the formal transfer of the shares or other ownership interests as regulated by the Security Act (closing) cannot take place before the authorities have completed their assessment of the case and the transaction has been formally approved or upon the expiry of the 60 days' deadline for blocking the transaction without objections from the authorities.

In order to strengthen the protection of national security interests until it is clarified that the transaction can be completed, it is proposed to prohibit the parties from sharing information in the process that could be used for security-threatening activities without the consent of the authorities.

The ban applies to all acquisitions of ownership stake in all businesses that are subject to the ownership control rules in the Security Act, regardless of whether the specific acquisition meets the filing threshold.

To strengthen the enforcement of the filing obligation rules, it is proposed that the security authorities may impose fines for non-compliance with the filing obligation.

Violation of a decision to deny an acquisitions or a decision allow the transaction on terms can be punished with fines or imprisonment of up to 1 year, if there is a risk of damage to national security interests.

In a White Paper to the Norwegian Parliament from late 2022, regarding national control and digital resilience to safeguard national security, the authorities announced a number of amendments to the Security Act. Several additional amendments, including amendments to provisions not related to the regulation of ownership control, must therefore be expected in the near future in order to, among other things, coordinate the Norwegian regulations with legal developments in the EU and allied countries.