A new law on a system for screening foreign direct investments (the “FDI Act”) entered into force in Sweden on 1 December 2023. According to the Government, the aim of the new Act is to provide a sufficient basis for preventing certain foreign investors from carrying out strategic acquisitions of companies whose activities are important for Sweden’s security. All acquisitions in what are referred to as “activities worthy of protection” must be reported to the Inspectorate of Strategic Products (“ISP”), which then carries out a kind of preliminary assessment as to whether a review in accordance with the FDI Act is necessary. If an inspection is initiated, it is expected to cause significant delays in the performance of a transaction. The legislation poses particular challenges for the financial sector.
In times of uncertainty in the surrounding environment and generally greater focus on national security, it is natural that legislation like the FDI Act should be considered necessary. In many cases, the new screening system will play a role with regard to investments that can justifiably be considered to be harmful to activities of a sensitive nature for Sweden. However, according to the design of the FDI Act, investors with no connection whatsoever to another country are also subject to a duty to report investments in activities worthy of protection that exceed certain limits or otherwise entail an influence on the management of a company that carries out such activities. There are no pre-established exceptions or limits to this duty to report.
The financial sector is in many ways characterised by special conditions. Companies in the sector are subject to extensive regulation as a result of the public interest in having a financial market that functions effectively. For example, the acquisition of a financial company is subject to an ownership assessment by the Swedish Financial Supervisory Authority even without taking the FDI Act into consideration. It is likely that these assessments are intended to be carried out in parallel in the future if a financial company is considered to be carrying out activities worthy of protection.[1]
Another aspect is the application of the FDI Act to the financial companies’ own activities, which largely consist of making investments in order to manage their customers’ savings. A particular problem arises for companies carrying out operations involving life insurance, occupational pensions and fund management, which can reach the limits defined in the FDI Act through their investments. It is therefore also noteworthy that the preparatory materials do not deal with the impact of the Act on financial companies and nor were any of the financial companies’ trade associations given the opportunity to participate as referral bodies during the preparatory work. Since the entry into force of the Act, both Insurance Sweden and the Swedish Investment Fund Association have submitted letters to the ISP and the Government aimed at highlighting the problems to which the legislation has given rise and requesting a review of the scope of applicability of the FDI Act.
As far as the insurance companies (which in this context also include occupational pension companies) are concerned, there is an obvious problem in relation to what is referred to as portfolio bonds. A portfolio bond means that it is the policyholder, within the framework of the insurance terms and conditions, that chooses which securities the premiums are to be invested in, but it is the insurance company that owns the securities in question in the custody account (and is recorded as such in the share register). The fact that multiple policyholders choose to invest their premiums in securities issued by the same company will mean that the insurance company’s ownership of the securities of that particular company will accumulate. In the case of shares, the insurance company’s shareholding in companies consequently accumulates as its policyholders choose to invest their premiums in those companies. As a result, even a relatively small investment by a policyholder may mean that an insurance company’s share of the shareholding in an activity worthy of protection exceeds the limits. The insurance companies also have no control over what investments are made by the policyholder in the way that would be required in order to manage the duty to report in the FDI Act and if such a control or stopping mechanism were introduced in order not to reach the relevant limits, there is an immediate risk that investment in Swedish companies, and thereby their competitiveness, would be impaired.
A similar problem also arises in the case of investments by fund managers. Fund managers are required to act in the unit holders’ interests in order to generate the best possible returns on invested capital. However, the delay resulting from a report to the ISP entails a risk of exchange rate fluctuations, which in turn may mean that an investment in the intended instrument is no longer in the unit holders’ interests at all. Ensuring compliance with the FDI Act thus entails a risk of coming into conflict with the respective operational legislation in the fund area. One further problem exists for funds whose fund rules contain commitments to track a particular index, for example. Because an index can change in real time, a fund manager needs to be able to carry out transactions that reflect any adjustments in the index. Similarly, the manager needs to adjust the fund’s investments as a result of inflows and outflows from the fund. Obstacles to that flexibility in a manager’s activities would in practice make it impossible for fund managers to comply with their own fund rules.
Indirect holdings must also be taken into consideration when calculating the relevant thresholds for the duty to report to take effect. One consequence of this is that financial companies that form part of a group with other financial companies risk needing to combine the holdings at the disposal of the group as a whole. Combining holdings in this way would in many cases result in the relevant limits being exceeded without the individual companies’ knowledge. There is also a risk that coordinating investments between group companies in some way will be prohibited under the Market Abuse Regulation. However, the application of the duty to report in relation to financial group companies is somewhat unclear, which is highlighted by the Swedish Investment Fund Association in their request to the Government. In their request, they argue that holdings within a group should not be regarded as the indirect holdings referred to in the FDI Act because the voting rights are exercised independently of one another.
In addition to the practical problems that arise, it is also unclear whether the inclusion of financial companies in the scope of applicability of the legislation really fulfils the purpose of the legislation. A Regulation on a framework for foreign direct investment was adopted within the EU as early as in 2019.[2] It is clear from the recitals to the Regulation that it is certainly intended to cover a “wide range of investments”, but nevertheless does not cover portfolio investments, which financial companies may be regarded as engaging in to a large extent. Neither insurance companies nor fund managers exercise any significant influence and the purpose of the investments is only to generate returns for the underlying policyholders and unit holders. Mutual funds are even prevented from acquiring shares with voting rights that allow them to exercise significant influence in the portfolio company. In the case of insurance companies, it is not even the person who decides on the investment who exercises the voting rights in portfolio bonds.
It is difficult to grasp the considerations that have led to financial companies being subject to the duty to report requirement in the FDI Act in the way they are. In particular, that difficulty is due to the fact that the legislator has failed to reflect on the matter in the preparatory materials and nor have the relevant trade associations been given the opportunity to express their opinions during the preparatory stage. In view of the problems and uncertainties that have inevitably arisen, it may be noted that a review of the scope of applicability of the legislation is already being called for.
[1] See the Financial Supervisory Authority’s consultation response to SOU 2021:87, FI ref. no. 21-30878.
[2] Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union.
