Norwegian Government stops the sale of Bergen Engines

Background

Bergen Engines is an engine manufacturer located in western Norway, owned by Rolls Royce. The company produces primarily gas and diesel engines for ships and land-based power production. Bergen Engines’ business has a 166 years long history and clients range from civil and industrial to military customers from several different countries.

In February 2020, Rolls Royce announced its intention to sell Bergen Engines, as it no longer fit the product profile of Rolls Royce Power Systems.

On 15 December 2020, the Ministry of Foreign Affairs was, in an email from Rolls Royce informed about the intended sale to TMH International – an international industrial company which operates in a number of countries. Rolls Royce informed inter alia that among the owners of TMH International were two persons on the so-called “US Oligarch list”, meaning they have been designated by the U.S. Department of the Treasury’s Office of Foreign Assets Control.

On 1 February 2021, Bergen Engines announced the sale to Swiss based TMH International, and on 9 March 2021, the sale was suspended in light of a pending investigation due to security concerns. This meant that all forms of due diligence between the parties involved also came to a halt.

Stopping the sale

On 23 March 2021 the Norwegian Minister of Justice, Monica Mæland, announced during session in parliament that the sale would be stopped by The King in Council in accordance with the National Security Act § 2-5.

While many of the considerations were undisclosed due to their classified nature, the key public reasons for stopping the sale were as follows:

• Russia would gain access to engine technology that would strengthen their military capabilities, in direct conflict with the security interests of Norway and its allies.
• The sale would allow Russia access to technology it would otherwise have difficulties with attaining due to strict sanctions regimes implemented in 2014;
• The purchase of Bergen Engines can be considered an attempt to subvert export control regulations or other measures taken towards Russia to gain access to knowledge and technology of “great military strategic importance”;
• Bergen Engines’ location is strategically important and provides access to Bergen from the coast. This was considered a security risk.

Regarding the National Security Act

The main rules on the Norwegian investment screening regime are set out in the National Security Act chapter 10.

According to the National Security Act § 10-1 all transactions that meet both of the following two criteria must be notified to the Norwegian Authorities under the investment screening regime

1. The target company is subject to the National Security Act by an administrative decision,
2. The purchaser will as a result of the transaction gain substantial influence over the target company.

The notification obligation applies to all investors – Norwegian, EU and non-EU based alike.

The Council of State has the power to block transactions that can represent a “not insignificant risk” that national security interests are threatened. Relevant arguments in that regard could be the level of strategic importance of the target company, and the level of security cooperation between Norway and the country in which the purchaser is based. The main counterweights to national security grounds are maintaining an open investment environment and upholding Norwegian companies’ access to capital.

In addition to these rules the National Security Act § 2-5 grants the King in Council the authority to implement measures in order to prevent ongoing or planned actions that can pose a not insignificant threat to national security interests.

This means inter alia – and the Bergen Engines cases shows – that potentially all transactions, including those not subject to the “regular” screening regime in Chapter 10, could be stopped.

Current situation

The application of the National Security Act § 2-5 in the Bergen Engines case shows that the Norwegian Government is willing to assess transactions and execute its power under the National Security Act.

The discretionary nature of § 2-5 leaves a somewhat uncertain legal situation regarding investments in Norway. When assessing the risk of Government interference, only checking if the transaction is subject to the foreign direct investment screening regime is not sufficient. A broader approach is necessary, and additional aspects, such as export control and international sanctions must be taken into consideration.

In this unclear legal landscape, a clearer set of rules regarding investment screening, would benefit both investors and the Government.