Foreign Direct Investment (FDI) Screening in Finland — What to Keep in Mind in an M&A Transaction?

Authors: Agda Vähä-Piikkiö, Heidi Haanpää, Riikka Kuha, and Oliver Vesterlund

The current FDI screening regime has been in place in Finland since 2012, when the regime was introduced by the Act on the Monitoring of Foreign Corporate Acquisitions in Finland (172/2012, the “Monitoring Act”), and the latest major updates were made in 2020. Ever since, the FDI regime has become an integral part of any M&A transaction which is to be considered and taken into account in the transaction process and documentation.

In this blog post, we will discuss the Finnish FDI screening regime and its relevance as part of an M&A transaction and share some experiences from practice.  

1 Overview of the Finnish FDI Screening Regime

The Finnish screening mechanism allows the Finnish Government to monitor and, if very important national interest so requires, to limit the shift of influence, in other words, a shift of control of 1/10, 1/3 or ½ of the aggregate number of votes conferred by all shares in a company, or a corresponding actual influence, to foreign acquirers in the monitored businesses. The relevant shift of influence may be triggered in a variety of different type of transactions, such as share deals, business/asset deals, mergers, demergers, public tender offers, etc. and in bilateral and auction processes alike.

The starting point for the regime is a positive attitude towards foreign direct investments in Finland with a purpose to enable the authorities to screen and, only in exceptional circumstances, to prohibit an acquisition. This purpose has been well reflected in practice, as no acquisition has yet been formally prohibited as a result of an FDI filing process. By 8 June 2020, according to the preparatory works of the latest major update of the Finnish FDI regime, 66 foreign corporate acquisitions had been confirmed under the current regime (hence since 2012). Thereafter, in a period of less than three years, roughly 50 confirmations of foreign corporate acquisitions or decisions not to screen an acquisition, have been made public — also showing a sharp increase in the average number of cases during the past few years.

The objects of monitoring under the Monitoring Act are certain

• defence sector enterprises (also including enterprises producing or handling dual-use items in Finland),
• security sector enterprises (referring to enterprises producing or supplying to Finnish authorities that are essential in terms of security of society, any products or services that are critical for the statutory duties of such authorities), and
• other entities which are considered critical for the vital functions of the society (so-called other critical enterprises).

When the target is a defence sector enterprise, all non-Finnish acquirers are considered foreign, whereas when the target is a security sector enterprise or a critical enterprise, only acquirers from outside the EU or EFTA are considered foreign. For determining whether an acquirer is foreign, also entities holding at least 10% of the votes or a corresponding actual influence in the acquirer must be taken into account.

2 Relevance of the Finnish FDI Screening in a Transaction Process

When to ask the question on the relevance of FDI screening?

When applicable, the Finnish FDI screening regime can affect the transaction strategy, timeline, and documentation. The relevance of FDI screening should thus be considered in the early stages of a contemplated transaction.

When is FDI filing required?

Mandatory advance filing is required to be made by a foreign acquirer who acquires a defence sector enterprise or a security sector enterprise. The filing is made to the Ministry of Economic Affairs and Employment of Finland (the “Ministry”) and the transaction may not be consummated prior to obtaining the Ministry’s approval (a standstill obligation).

If a foreign acquirer acquires a so-called other critical enterprise, no mandatory filing is required prior to closing. In practice, also with respect to the so-called other critical enterprises, the Ministry’s approval is, however, typically sought prior to closing for deal security as otherwise the Ministry may commence the review process on its own initiative and, in a worst-case scenario, conditions may be imposed on the transaction or the transaction prohibited afterwards.

How to take filing requirement into account in the transaction documentation?

As with merger control filings, an FDI filing is typically taken into account in the transaction agreements as a condition precedent to closing with appropriate cooperation obligations for the parties. Although the obligation to file is on the foreign acquirer, information from and assistance of the seller and the target is needed for the preparation of the filing. Due to the potential consequences of a denial of an approval as well as the possibility that the Ministry may raise interest towards a transaction also by its own initiative, it is usually also in the seller’s interest to ensure that the FDI-related questions have been duly addressed and taken into account in the transaction agreements.

Implications on the transaction timeline

In relation to voluntary notifications concerning the so-called other critical enterprises, the Monitoring Act provides a time limit for the handling of matter, according to which the Ministry must undertake a further examination of the matter within six weeks and submit a proposal on referring the acquisition to the Finnish Government’s plenary session (being the organ that can prohibit an acquisition) within three months of receiving required information, or the acquisition will be considered confirmed.

With respect to a mandatory advance filing of a defence or security sector enterprise acquisition, there are no formal time limits for the handling of an application.

In practice, the processing times of the Ministry have typically varied from two to three months in respect of all categories of target enterprises. The collection of information required for the application may often be time-consuming, and adequate time is thus recommended to be reserved for the preparation of the filing. Consequently, the FDI filing process may have a tangible effect on the transaction timeline and the possibilities to complete the transaction within a short period of time.

What are the sanctions for non-compliance, and what if the approval is denied?

The Monitoring Act sanctions by criminal fines an omission (on purpose or by gross negligence) to make a mandatory advance filing of an acquisition of a defence or security sector enterprise, as well as an omission to give to the Ministry on its request information concerning an acquisition of a so-called critical enterprise, such fines being imposed to the party responsible for such action, referring to responsible individual(s) in the foreign acquirer.

If an approval has not been sought beforehand, but a transaction which had already been completed was denied afterwards (whether in case of a defence or security sector enterprise or other critical enterprise), in a share deal, the foreign acquirer must dispose of its shares in the target to a degree that it will hold less than 1/10 of the votes (or a portion that may have been approved by the Ministry in an earlier approval). In a business or asset transfer, the acquisition contracts are deemed null and void.

3 Assessment of Applicability of the Finnish FDI Screening – Experiences from Practice

The time-bound and case-specific nature of the assessment

In assessing the applicability of the screening regime, the main focus is on (i) the nature of the target’s operations and engagements and (ii) the place of residence or domicile of the acquirer and of the parties exercising control in the acquirer corresponding to at least 10% of the votes conferred by shares.

While the “foreignness” of the acquirer can usually be clearly determined without major issues, it is not always clear whether the target falls within the monitored businesses. The monitored businesses are intentionally broadly defined in the Monitoring Act and as such leave much room for interpretation. The assessment is always time-bound and case-specific, and thus contingent on the prevailing circumstances of society — the importance of which has been recently reflected in the fast-changing security environment due to the Covid-19 pandemic and the war in Ukraine. Although the preparatory works and other governmental guidance provide guidelines for the assessment, the downside is that sometimes uncertainties may be impossible for the parties to resolve themselves. Considering the effect on deal security and the sanctions for omission of mandatory filing, in such cases it is often prudent to involve the Ministry for guidance.

Applying for decision not to screen — formal way of gaining certainty in an uncertain situation

However, to obtain formal certainty in case of doubt on whether the acquisition falls within the scope of the Monitoring Act, the foreign acquirer may apply the Ministry to decide not to screen the acquisition. Although the foreign acquirer still needs to prepare and file a proper application, the handling process is usually slightly less burdensome and faster, and allows the foreign acquirer to receive a formal confirmation giving legal certainty on the matter.

Informal discussions with the Ministry

In case the applicability of the FDI screening cannot be excluded by the parties, engaging in informal discussions with the Ministry can be a fruitful route to gain more clarity and sometimes sufficient certainty on whether the transaction, in the Ministry’s view, involves a relevant shift of influence triggering an FDI screening or a target that is considered a monitored business (for instance, whether the target’s products or services provided to the Finnish Defence Forces are considered important for the Finnish national military defence). However, it should be noted that such views are given in an informal setting if no formal application is filed.

Given the increased volumes of FDI filings during the past years the practice is now more established enabling more open and productive dialogue with the Ministry. We have been involved in dozens of FDI filings and in numerous other discussions with the Ministry, which has enabled us to deepen our understanding on the questions relevant to the assessment of different businesses and industries from the FDI perspective (including defence and dual-use sectors, security sector, energy, other critical infrastructure and other industries critical for the security of supply). With extensive experience of relevant FDI case practice it is possible to assess and advice on the best ways to address FDI aspects in a specific transaction.

To summarise, assessing the relevance of FDI screening at an early stage in the transaction process enables the parties to consider how to best take FDI screening into account in the transaction process considering its possible effects on the deal security and timing for the buyer and the seller alike. Timely and strategic FDI advice from an experienced counsel paves the way for the successful completion of a transaction.

P.S. In case the target group comprises entities or operations outside Finland, FDI screening regimes in other countries may be relevant as well. For instance, many EU Member States have either adopted new FDI screening regimes or amended their existing ones during the past few years. For those interested in the developments in the field of FDI in Sweden, please find our colleagues’ recent blog post here.