The notification obligation regarding the screening of acquisitions of Finnish corporate entities by foreign investors has become a regulatory aspect to be increasingly taken into account in the context of M&A involving Finnish corporate targets and business entities. The number of notifications made to the Ministry of Economic Affairs and Employment of Finland (the “Ministry”) has increased significantly in recent years. In 2022, a screening notification was submitted in closer to a fifth of all corporate acquisitions made (a total of 211 corporate acquisitions, with 34 notifications). Of these, some 25 cases were reviewed on substance, while the remaining acquisitions were considered not to have been within the scope of the Finnish screening legislation. In principle, the foreign direct investment (“FDI”) notification process is typically less burdensome than merger control proceedings before the Finnish Competition and Consumer Authority for instance. However, the lack of a prescribed timeline for the processing of notifications of acquisitions in the defence and security industry sectors under the Finnish Act on the Screening of Corporate Acquisitions (172/2020, the “Screening Act”) creates uncertainty for the notifying party.
Which acquisitions must be notified under the Screening Act?
The Finnish FDI regime is two-fold. For acquisitions in the defence and security industry, a mandatory, pre-closing approval must be sought from the Ministry if 10 per cent or more of a Finnish company’s voting rights are acquired by a foreign investor. As regards corporate acquisitions in the Finnish defence and security industry, the screening covers defence industry enterprises that produce or supply defence equipment or other products or services important for military national defence, companies that produce or supply products or services to the Finnish authorities (such as the Police of Finland, the Finnish Customs, the Finnish National Emergency Supply Agency, and the Finnish Border Guard), which are critical for public security, and companies which produce dual-use items. As regards acquisitions of Finnish defence industry or security industry enterprises, a “foreign investor” is any legal or natural person that is not domiciled or resident in Finland.
In addition to acquisitions in the defence and security industry, it is also possible under the Screening Act to voluntarily notify acquisitions of Finnish companies which, based on their industry, business operations or commitments, are considered critical for securing vital societal functions. The Ministry also has the power to request a notification of such an acquisition within three months after becoming aware of the specific acquisition in case no notification has been submitted. For acquisitions other than in the defence and security industry, a “foreign investor” is any legal or natural person that is not resident or domiciled within the European Union or in any of the EFTA Member States.
The industries that should be considered critical to securing the vital societal functions vary depending on prevailing societal circumstances. For instance, during the height of COVID-19 pandemic, foreign investments involving medical supplies and equipment were of specific interest, while the energy crisis following the Russian invasion of Ukraine has brought the assessment of foreign investments into (renewable) energy to the fore. Similarly, given the recent initiatives by the European Union regarding critical raw materials corporate acquisitions in related fields may also attract increased interest from the Screening Authority.
It is noteworthy that irrespective of the sector involved, the foreign investor is defined by the (ultimate) investor’s place of residence, and not, for instance, by nationality. It may be questioned whether this is the most appropriate way of defining the acquisitions subject to the notifying obligation and if this may allow for the circumvention of the notifying obligation in some cases. Curiously, the screening of acquisitions of Finnish real estate, which are governed by a separate legislation and requires a mandatory notification prior to transfer of title to the Finnish Ministry of Defence, is clearly based on the nationality of the acquiror in case of natural persons.
Definition of “corporate acquisition”
For the purposes of the Screening Act, a corporate acquisition is one where at least 10 per cent, at least one-third or at least 50 % of voting rights are acquired by a foreign investor. Only acquisitions over a pre-existing Finnish corporate entity fall within the scope of the Screening Act. Consequently, an investment into the incorporation of a new Finnish legal entity does not trigger the application of the Screening Act and its notification obligations, even when undertaken by a “foreign investor”. Companies already established and the future operations of which are only in the development stage, such as wind farms in the development stage, raise their own special issues.
The notification process is slightly different for defence and security sectors compared to other sectors. There is no prescribed timeline for the processing of notifications in the defence and security sectors, which, as mentioned above, creates uncertainty for the notifying party, as the Ministry is generally reluctant to provide estimates of the timetable. In practice, it is difficult for the Ministry to provide such estimates, as it acts as a coordinating authority between other state departments and agencies, from which an opinion is required in order to assess whether the corporate acquisition could endanger a key national interest. The timetable is therefore also dependent on authorities other than the Ministry. On average, notification processes have taken six to ten weeks.
For the voluntary notifications in other sectors, the process may take from six weeks up to three months from the moment the Ministry has received complete information. A voluntary notification may be submitted either before or after the implementation of the transaction. As mentioned above, the Ministry may request a notification of such “any other sector” acquisition within three months after becoming aware of the specific acquisition.
If the Ministry considers that a notified acquisition does not fall within the scope of the Screening Act, it will endeavour to issue a decision of non-applicability in a shorter timeframe than the average time taken to process a notification. In principle, it is possible to decide whether an acquisition falls within the scope of the Screening Act only once a complete notification has been submitted to the Ministry and the Ministry has conducted the required inter-department and inter-agency consultation.
If an acquisition is not approved, the foreign investor shall reduce its shareholding so that the remaining voting rights are less than 10 per cent of the total voting rights in the company. To date, all foreign acquisitions notified to the Ministry under the Screening Act have been approved in Finland. This testifies to the positive attitude that Finland has in principle to foreign direct investment, in particular amidst the present aspirations to further the green transition.