On March 31st, 2023, the government proposed significant amendments to the Security Act. Stricter requirements concerning notification of transactions could have wide-ranging implications for foreign investments in the Norwegian market.
Norway has recently seen increasingly stricter regulation of foreign direct investments in companies, infrastructure and property deemed to be of importance to national security interests. The proposed amendments to the Security Act reflect this trend. Foreign investors present - or looking to invest - in the Norwegian market should be aware of these changes.
The changes proposed in the Bill include an extension of the subjects covered, a lower ownership threshold, an implementation ban on transactions, a notification obligation for both the buyer and the seller and sanctions for violations.
More companies made subject to the Security Act
The legal entities regulated by the Security Act are public bodies as well as private undertakings that have been made subject to the Act through official decisions by the relevant department (see Article 1-3 of the Act).
Such decisions shall be made for entities that handle classified information, control information, information systems, objects or infrastructure that are of vital importance for fundamental national functions, or engage in activities that are of "vital importance" to national security functions.
The new regulation extends the relevant Departments jurisdiction so that they may subject enterprises of "material importance" to national security interest to the regulation, typically enterprises supplying other businesses of "vital importance" to fundamental national functions. According to the Bill this expansion could potentially include 250-300 enterprises.
Lower threshold for the duty to notify
An investment in a Norwegian entity subjected to the Security Act could trigger a duty to notify. The ownership threshold for a duty to report is proposed to be lowered from one-third to 10% of the shares and votes in such a Norwegian entity, either directly or indirectly through other ownership.
The amendment also introduces a duty of notification when ownership stake reaches certain percentages (20%, 33,3%, 50%, 66,66% and/or 90%), making it a continuous duty rather than a one-off obligation. In addition, the Bill introduces an obligation to report for both the buyer and the seller.
New restriction on sharing of information during a transaction
Amendments are also proposed regarding a ban on sharing information that can be used for security-threatening activities, such a ban will have implications for any M&A process where the shares for sale surpass the ownership threshold and concern a company subject to the act.
If so, information including technical descriptions, customer lists, vulnerabilities to values managed by the enterprise and so on, must be pre-approved by the authorities before sharing in a due diligence process.
New sanctions for failure to comply
There is currently no formal prohibition regarding the implementation of an acquisition before the authorities have processed the notification. This is not to say that implementation without approval is without consequences as such implementation may lead to a reversal of the transaction to the detriment of all parties involved.
Therefore, waiting until the authorities have processed the notification for transactions in scope of the act is – due to the risk of reversal – already considered best practice. In the new regulation a ban on conducting a transaction before the authorities have processed the notification is to be implemented. Meaning that the formal transfer of shares cannot take place until the authorities have finished processing the report.
The failure to notify of the transaction is subject to an infringement fee, and the processing time from dispatch of such notification is 60 days. In this period of time the transfer of shares cannot be formally completed, and a premature completion of transaction may be subject to reversal.
The Bill is expected to be adopted shortly and while the date of entry into force is yet to be set, the implementation of the changes could be expected as soon as in a few months. Therefore, foreign investors in the Norwegian market who hold assets that could be within the scope of the Security Act should take steps to ensure compliance with the new regulations.
We suggest mapping out which investments in Norwegian enterprises represent ownership stakes above the 10% (or more) threshold and determining whether any of these companies are subject to the expanded scope of the Act.
If any portfolio companies are found to be subject to the Act, foreign investors should assess the potential impact of the new regulations on their existing or future investments. This may include identifying any current or potential risks to national security interests
It is also important to ensure that all necessary notifications are filed in a timely and accurate manner to avoid any infringement fees or other penalties.
It is also worth noting that this development is not in any exact parallel to the development in other countries, and as such awareness of the differences in regulation in the different countries - where investments are made - is paramount.
Link to download the Bill
Prop. 95 L (2022–2023) - regjeringen.no
Link to the Security Act