Finnish Rules on Foreign Investment Screening Amended

Authors: Maisa Cederström, Heidi Haanpää, Linnea Lehtonen

To follow-up on our previous blog post published on 12 May 2020 on the upcoming changes in the field of foreign investment screening both in the EU and on the national level, this post will examine the screening in Finland under the Act on the Monitoring of Foreign Corporate Acquisitions (the “Act”), which was amended as of 11 October 2020. Below, we discuss the key amendments to the Act and their impacts on international cross-border transactions.

In a nutshell, the Finnish screening mechanism allows the Finnish government to monitor and, if very important national interest so requires, to limit the shift of influence to foreign buyers in the screened businesses in connection with acquisitions of at least 10 percent of votes or corresponding influence.[1] The screening is conducted by the Ministry of Economic Affairs and Employment. The Ministry must approve an acquisition unless it may pose a threat to very important national interest. If the acquisition is considered to pose a possible threat to very important national interest, the case must be assigned to the Council of State. The Council of State may prohibit an acquisition only if it is necessary to secure very important national interest. In the Council of State, the assessment of the foreign acquisition may attract further political aspirations.

New Category of Security Industry Enterprises That Require Mandatory Pre-Approval

The amendments to the Act introduce a new category of so-called “security industry enterprises” that are subject to the mandatory advance approval process.

Previously, the screening covered acquisitions of (i) defence industry enterprises (meaning enterprises that produce or supply defence equipment or other products or services important for national military defence, or enterprises that produce dual-use goods or use dual-use technology in Finland), and (ii) enterprises that are considered critical for securing vital functions of the society – the latter category including for instance entities playing an important role in the security of supply or critical infrastructure. As regards defence industry enterprises, the screening covers all non-Finnish buyers and the acquisitions require mandatory advance approval. In relation to enterprises considered critical for securing vital functions of the society, the screening applies to buyers domiciled outside the EU or EFTA, and seeking confirmation for the acquisition is voluntary (although, in practice, voluntary notifications have also been filed in advance of closing the transaction as otherwise the Ministry could evaluate, and in the worst case prohibit, the transaction afterwards).

From now on, acquisitions of security industry enterprises (referring to enterprises that produce or supply critical products or services to central Finnish security authorities) by buyers domiciled outside the EU or EFTA will be subject to the same mandatory advance approval process as defence industry acquisitions. The scope of the relevant products and services, as well as the relevant authorities, are left open to allow the interpretation to take into account the circumstances prevailing at the time of the acquisition, however, the preparatory works of the Act shed some further light on such concepts. The critical products or services to central Finnish security authorities are mentioned to include, for example, personal protection equipment, tailormade software applications, cyber security applications, certification services, cloud services, data center services, and other products and services related to the maintenance of the above-mentioned. The relevant security authorities are mentioned to include the defence forces, the police, the customs, and the border guard, but also other authorities, such as the transport and communications agency.

The introduction of the new category of security industry enterprises means that an increased number of acquisitions will require mandatory pre-approval. Consequently, further emphasis will need to be placed on the review and assessment of the target’s operations, including defence sector connections and commitments with Finnish authorities, in the due diligence review.

Ministry May Impose Remedies

Going forward, the Ministry may, as part of its approval, impose conditions that are necessary to secure very important national interest. Previously, the approval could only be granted or denied. The conditions need to be accepted by the parties to the acquisition.

No exhaustive list of possible conditions is included in the Act or the preparatory works. The remedies may relate, for example, to retaining a registered office, production, services or R&D in Finland, carving out and selling certain activities of the target company to a third party, or excluding certain activities from the transaction.

In some cases, the possibility of a conditional approval may bring flexibility. However, we foresee that the conditions will only be used in exceptional circumstances, and instead of complex remedy packages requiring lengthy negotiations, the conditions will more likely be rather simple.

Ministry May Decide Not to Screen an Acquisition

The amended Act renders it possible for the Ministry to decide not to screen an acquisition if the Ministry considers that the acquisition does not fall under the scope of the screening. In practice, initial discussions on whether a transaction should be filed or not have often taken place with the Ministry prior to the transaction, and usually the Ministry has instructed to file the acquisition so that they can investigate the case. Moreover, even if the Ministry has in the course of these discussions indicated that a filing might not be necessary, such indication has been without commitment, leaving the foreign buyer with the risk of the Ministry opening the investigation afterwards. 

Therefore, it is a welcomed change that foreign buyers may from now on get a formal decision stating that the Act does not apply to the acquisition in question. However, in order to obtain such a decision, the foreign buyer must prepare a proper application providing the Ministry with correct and sufficient information.

As a rule, the approval of the Ministry is sought between signing and closing of a transaction. However, the parties to acquisitions typically wish to minimize the factors that decrease the certainty of closing (deal security) and to keep the period between signing and closing as short as possible. This amendment to the Act could in some transactions offer a tool to obtain the Ministry’s view on the need to make a filing possibly even before signing.

Handling Times to Become Longer and Information Requirements to Become Broader

The EU Screening Regulation establishing a framework for the screening of foreign direct investments into the Union became effective on 11 October 2020. Due to the exchange of information between EU Member States and the Commission under the EU Screening Regulation, the national processing times are expected to become longer. In our experience, the processing times of the Ministry have varied from a few weeks up to a few months. Under the EU Screening Regulation, Member States and the Commission have 35 days to comment. Additionally, given that Member States are required to provide detailed information, such as the source of the funding for the investment and its approximate value, to the Commission and other Member States as a part of the cooperation mechanism, information requirements in the filing process are broadened to some extent.

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As mentioned in our earlier blog post, we provided comments to the draft amendment of the Act, and some of our comments led to clarifications being made in the Act. However, many key concepts of the Act, including the definition of the target companies falling under the screening, remain broad and open to interpretation, calling for careful case-by-case assessment and interpretation. As there is only limited information publicly available on the decisions of the Ministry, our vast experience of the application of the Act plays a significant role when we advise our clients in the screening of foreign acquisitions in Finland.

For any related questions, please contact the foreign investment experts of our Corporate Advisory and M&A team.

[1] In addition, acquisitions of real estate by foreign buyers outside the EU and EEA are subject to a separate permission procedure.