Insights | September 26, 2022

The use of screening mechanisms for foreign investments has increased significantly in Finland

Whilst the overall approach towards foreign investment in Finland is a very positive one, the past few years have seen foreign direct investment (FDI) screening increase significantly in terms of both volume and complexity. Here are some key takeaways as regards the impact of these recent developments.

FDI screening

Finland’s current general FDI regime (the Act on the Monitoring of Foreign Corporate Acquisitions, 172/2012) entered into force in 2012 and has been amended twice since then (in 2014 and 2020). The regime essentially allows the Ministry of Employment and Economy (MEAE) to monitor and (if key national interests so require) propose restrictions on the transfer of influence over key entities to foreign owners. Essentially, acquisitions in the defense sector (including defense equipment and dual-use products) and the security sector always require prior approval. Additionally, Finnish companies considered critical for securing vital functions of society are also subject to (voluntary) FDI screening.

While FDI control mechanisms have already seen a steep increase in importance in recent years, it is easy to see that recent global developments, such as the war in Ukraine, the energy crisis, disruptions in global supply chains and the global pandemic, have further expanded the scope and increased the urgency of the application of the national screening mechanisms. And, while the interpretation of the relevant rules as well as the application of the screening mechanisms are still taking shape, there are already some key takeaways worth noting in the transactional context. It is clear that FDI screening has taken its place on the critical items list and needs to be addressed in detail early on in the lifecycle of any proposed transaction.

• Firstly, the screening process has started to take a very long time and there is little that notifying parties can do about it. In Finland, there is no judicial deadline for the State to grant its FDI approval and this has started to result in completion of transactions being held up due to pending FDI reviews, even in cases where there is no expectation that approval would be withheld. This can partially be explained by the limited resources allocated to the handling of the screening processes and the drastic increase in the annual number of FDI filings, as well as the increased complexity of the screening procedure itself. However, it is equally evident that these developments stem from a more detailed focus on security of supply, safeguarding the availability and production of key technologies, energy, raw materials, and food.
• Secondly, recent events such as the Covid-19 pandemic have clearly shown that the factors that attract a review under the FDI regime may vary depending on the timing of the review. Key industries such as energy, healthcare, and pharmaceuticals, as well as technology-heavy sectors, have been in the focus of FDI screening in Finland in addition to the traditionally prominent defense equipment and security industries. This follows an EU-wide trend. According to the European Commission’s Second Annual FDI report, in 2021 target companies active in the ICT sector accounted for 32% of the FDI notifications submitted within the EU. Moreover, Finland’s current Governmental Decree on the Goals for Security of Supply provides a comprehensive view of security of supply and widely lists business sectors critical for the functioning of society. Particular attention needs to be paid to the often-ambiguous nature of many primarily civilian products and the need to consider them in accordance with the EU and US dual-use product classifications.
• Thirdly, the ability to present comprehensive and exhaustive information regarding the origin of the purchaser and its funding is critical for a successful and timely FDI review.  It has been clear in the recent screening activities by the Finnish State that detailed organizational charts and other information will be a requirement for approval. Additionally, cooperation is ongoing between the EU Member States in this area, and the European Commission has stated that Member States are expected to ensure close cooperation between screening authorities and national financial institutions to better identify transactions which threaten national or EU-wide security. While the screening mechanisms currently focus in particular on foreign direct investments from Russia and Belarus, the security considerations related to FDI screening mechanisms are definitely not limited solely to those countries.

Screening of real estate transactions

As of 1 January 2020, direct acquisitions of real estate assets by foreign purchasers have also been subject to a screening process, which is regulated by the Act on Permission Requirements in Certain Real Estate Acquisitions, 470/2019. Non-EU or EEA entities and citizens as well as EU or EEA entities, in which a non-EU or EEA natural person or entity holds at least 10% of the total voting rights or exercises equivalent actual control, need a permit from the Ministry of Defence in order to acquire a directly-owned real estate asset in mainland Finland.

Additionally, in the legislative package enacting the aforementioned non-EU/EEA permission requirement, the Finnish State has also been granted a pre-emption right to directly acquire real estate assets that are located within a certain distance from areas designated to or otherwise serving the Finnish Defence Forces or the Finnish Border Guard (the Act on the State’s Right of Pre-emption in Certain Areas, 469/2019). In contrast to the FDI screening processes, the decision on whether to exercise the pre-emption right does not depend on the domicile or nationality of the intended purchaser of the real estate asset concerned.

Since 2020, each year the Ministry of Defence has handled hundreds of permit applications, none of which had been rejected as of mid-September 2022. However, according to a report published in December 2021, the Ministry considers the mere existence of the screening rules (particularly those concerning the use of intermediate purchasers) to be of important signaling value and has stated that it has led to the exposure of cases of potentially unacceptable intermediate purchasers (apparently before any permit applications have been submitted by such parties).

To date, the Finnish State has exercised its pre-emption right in two instances: once in Rovaniemi concerning an industrial property located in the immediate vicinity of the airport which also serves as the main operating base of the Lapland Air Command, and once in the Turku archipelago concerning the sale of a holiday resort partially bordering a military base. According to media reports, in both cases the intended purchaser had links to Russia or was of Russian origin. Both decisions by the State to exercise its pre-emption right are now subject to pending appeal procedures before the administrative courts.

Key takeaways for proposed acquisitions of Finnish companies or real estate

Despite the few recent examples of the Finnish State exercising its pre-emption right to acquire strategically situated real estate, no drastic increase in blocking decisions under the FDI regime is expected. It is clear, however, that the careful assessment of FDI approval requirements is something which non-Finnish purchasers in particular will have to factor into their transaction feasibility review, whilst the risk of extended review periods by the FDI authorities is more likely than not.

The future also holds possible legislative changes as the Finnish Government has recently initiated a new legislative project with the purpose of developing the rules concerning the screening process and the State’s pre-emption right.

According to the draft legislative proposal published in June 2022, the proposed amendments would, among other changes, clarify the scope of individuals and entities subject to the screening process, but also add to the responsibilities of a party applying for an acquisition permit. According to the draft proposal, the Ministry of Defence could require applicants for an acquisition permit to provide information about the financing of the contemplated acquisition and the origin of the funds, which would be in line with the principles set out in the Screening Regulation (Regulation (EU) 2019/452). In addition, a reference to “national security” is proposed to be added to the preconditions for granting the permit, meaning that one of the preconditions that must be met to be awarded a permit would be that the acquisition is not considered to threaten national security.

As to the State’s pre-emption right, the proposed changes would simplify the definition of locations that are subject to such right and clarify the order of priority between the Finnish State’s pre-emption right and the relevant city or municipality in which the target asset is located.

Should you have any questions about FDI or related subjects, the experts in our newly established, crossborder FDI & Protective Security practice are happy to assist.