The National Security Act

On 11 October 2021 the Ministry of Justice and Public Security and the Ministry of Defense published their joint consultative paper on changes to the Norwegian National Security Act, including several proposed changes to chapter 10 regarding ownership control. The proposal follows a general trend in the European Union to bolster national security interests after the implementation of regulation 2019/452 on foreign investments screening. We have taken a look at the suggested changes, which in our opinion make sense overall. However, we hope that some of the details are considered a bit further before implementation.

1. Introduction

On 11 October 2021 the Ministry of Justice and Public Security and the Ministry of Defense (the Ministries) published their joint consultative paper on changes to the Norwegian National Security Act (the Security Act). Several changes to the current Security Act are proposed to chapter 10 regarding ownership control, in order to secure better control with foreign investments in Norwegian undertakings that may cause a threat to national security interests. The proposal follows a general trend in the European Union to bolster national security interests after the implementation of regulation 2019/452 on foreign investments screening.

Foreign direct investment is of great importance to economic growth, by creating jobs and bringing in capital, technologies, innovation and expertise. However, as noted by the Ministries, some countries use economic measures, such as direct investments, to obtain influence and get access to sensitive information, technology and resources of strategic importance. In order to reduce the security risk represented by such detrimental investments in Norwegian corporations, the Ministries now propose to broaden the scope of the Security Act chapter 10.

The Bergen Engines case is an example showing that the current regime is too narrow. Even though the transaction was not subject to the current screening regime, the Norwegian Government stopped the sale of the engine factory to Russian-owned TMH International due to national security concerns.[1] The case showed that a clearer set of rules would be beneficial for parties in such transactions, as well as for the Government. We have taken a look at the suggested changes, which in our opinion make sense overall. However, we hope that some of the details are considered a bit further before implementation.

2. The proposed changes

The main changes that are proposed by the Ministries are as follows:

  • Undertakings of material importance to fundamental national functions may be subject to chapter 10 (compared to today’s regime, where it is a requirement that it is of vital importance to fundamental national functions; see below)
  • The notification obligation is also introduced for acquisitions of qualified ownership interests in suppliers with facility security clearance
  • In addition to the buyer of a business, the seller and the target are also subject to the notification obligation (however sufficient that one of them notifies)
  • The threshold for the notification obligation is lowered from 1/3 of the shares/interests or votes in an undertaking to 10%
  • An implementation ban will apply when a notification of acquisition is sent to the relevant ministry or the National Security Authority (NSA)
  • Criminal liability for breaches of the Security Act §§ 2-5, 10-1 and 10-3

3. Purchase of businesses of material importance

According to the Security Act § 10-1, a party that wants to purchase a qualified ownership interest in a business which is subject to the Security Act, cf. § 1-3, needs to notify the responsible ministry or the NSA of the acquisition. The notification obligation today regards acquisitions of (qualified) interests in businesses that either a) handle classified information, b) control information, information systems, objects or infrastructure which are of vital importance to fundamental national functions or c) engage in activities which are of vital importance to fundamental national functions.

As a result of the proposed changes, the responsible ministry can decide that undertakings of material importance to fundamental national functions shall be subject to the ownership control rules in chapter 10. The result of a decision to apply chapter 10 is that certain transactions concerning the undertaking would be subject to a notification obligation and also to the proposed automatic implementation ban (see section 6 below). The transaction may also be stopped pursuant to § 10-3 if it may present a not insignificant risk of a threat to national security interests. The threshold for stopping transactions pursuant to § 10-3 is not proposed altered.

Today, approximately 250-300 businesses are considered to be of material importance to fundamental national functions. However, it is up to the ministries to resolve which of those businesses will be subject to the ownership control rules in chapter 10.

Further, it is proposed to include a new second paragraph to § 10-1. According to the proposal, a company that wishes to sell or purchase a qualified ownership interest in a supplier with facility security clearance, which is subject to the Security Act in accordance with §§ 1-2 or 9-3, shall notify the NSA of the potential acquisition. This change will further broaden the scope of § 10-1, as it will introduce a notification obligation also for potential sellers and buyers of companies in the supply chain.

4. The threshold for the notification obligation

The notification obligation consists of an obligation to report acquisitions of qualified ownership interests in undertakings subject to chapter 10, cf. §§ 1-2 and 1-3. The current regulation defines a qualified ownership interest as an acquisition that provides the acquirer, directly or indirectly, a) 1/3[2] of the shares, interests or votes in the undertaking, b) the right to own such ownership interest or c) significant influence over the management of the undertaking otherwise.

In the consultative paper it is proposed to lower the threshold for a qualified ownership interest from 1/3 to 10%. The proposed threshold is in accordance with new regulations made in countries such as Finland and Denmark. Other countries, such as Germany, has a 10% threshold for critical sectors but otherwise 25%[3].

The former threshold of 1/3 was criticized during the original hearing of the Security Act, and we agree with the Ministries’ current arguments that a 10%-threshold can provide valuable information and that some difficult assessments of whether the acquirer will gain “significant influence”, according to litra c) may be avoided. It is however in our view difficult to see how someone can exert any form of “significant influence” in a Norwegian company with only a 10% ownership stake, as argued by the Ministries. Voting restrictions are exceedingly rare in Norwegian companies as is election of board members according to the ownership stake. It is also in our view highly doubtful whether a threshold of 10% (rather than a 25% threshold, for instance) would actually deter any acquirer from circumventing the ownership control threshold, as argued by the Ministries.

Moreover, additional notification thresholds when the acquirer passes 1/3, 50%, 2/3 and 100% are proposed, meaning that if an acquisition leads to the acquirer exceeding any of those thresholds, the transaction will have to be notified pursuant to chapter 10. The proposal argues that this will ensure that the responsible ministry will receive more reports and have a better view of strategic acquisitions. This may be so, but it is hard to understand, given that the main purpose of the notification is to ensure that the government can stop or condition certain acquisitions, that the government would allow an acquisition of an ownership interest of 50%, which for all practical purposes provides the owner with full operational control of a Norwegian company, but not 2/3 or 100%. Thus a 50% threshold should be sufficient to ensure ownership control and the goals of the Security Act.

5. Obligation to notify and deadline

Currently only the acquirer of the relevant target that is subject to notification under chapter 10 has an obligation to notify the transaction. The Ministries propose, however, that the notification obligation is extended to include the seller, and also, but only if they are familiar with the transaction, the board and manager of the business[4].

It must be assumed that only a seller of a qualified ownership interest has an obligation to file in cases where the acquirer exceeds the relevant threshold by acquiring from several sellers, although the Ministries have not commented on this situation in the consultation paper. It is however sufficient that one of the relevant parties notifies, although whether that is sufficient where more than one seller sells a qualified ownership interest is not clear (naturally, if the notification contains information on the whole transaction it should absolve the sellers from the obligation to notify).

However, given that the Ministries also propose that breaches of the notification obligation to be subject to criminal prosecution, and that the deadline for the notification is unclear (see below), naturally the relevant parties need to agree between them who should take responsibility but each of them needs to ensure the notification is filed within the relevant deadline as the responsibility is individual. Given the proposed implementation ban and the criminal liability, it is rather hard to understand why the notification obligation rests with multiple parties, and in particular the undertaking, which might not be directly involved in the negotiations between the seller and acquirer. In addition, the obligation for the undertaking involves a knowledge qualifier, which seems an unnecessary technical complication.

The Ministries also propose to “clarify” that the notification must be sent “in advance”. Given that the acquisition is subject to an implementation ban (see below), it seems unnecessary to implement a rule that says that a notification must be sent “in advance” (the current rules says that a person who “wishes to acquire a qualified ownership interest … shall notify the ministry accordingly”), as it is self-evident that a notification must be sent in advance of completion[5]. However, the Ministries states in the consultation paper that the obligation to notify “in advance” means that the obligation to notify arises when the seller has reached agreement with a potential acquirer to continue negotiations[6]. How this should be interpreted in practice is highly unclear, for instance when a seller negotiates with multiple potential acquirers (who might not know about the other acquirers). And when does one reach the stage where one has agreed to continue negotiations? The proposed “clarification” raises more questions than it solves, and should in our opinion be reconsidered. If the Ministries are adamant that there should be a deadline, the practical alternative is either when a legally binding agreement on the acquisition has been reached (which then needs to be combined with a ban on information sharing, see below in section 6) or prior to an exchange of confidential information (which again may be too early stage). Finally, we note that “in advance” is not part of the wording in the proposed § 10-1 second paragraph regarding suppliers. We assume this is not intentional.

6. Automatic implementation ban

Another important aspect of the notification obligation under chapter 10, is the proposed addition of an automatic implementation ban of the acquisition that is subject to notification. The ban is in effect from the time the notification is sent until the relevant ministry has notified the notifying party that the transaction has been approved or that the matter will be considered by the King in Council pursuant to § 10-3[7].

The implementation ban imposes the parties not to share information which is not publicly known during the period of the implementation ban. The point is to safeguard information if there is a real national security concern. However, firstly there is no restriction under the Security Act that prevents the sharing of non-public information prior to the notification having been sent. Presumably the Ministries assume that no such information will be shared prior to the time the obligation to notify arises (see above), but there is no specific rule against such sharing of information. Secondly, there is a ban on sharing all non-public information, whether this raises any national security concerns or not. Naturally, this may impede the integration planning and preparation for completion of the transaction (there would be in many cases a lot of information that is non-public but irrelevant for national security concerns). The reasoning behind the implementation ban is similar to the reason for the implementation ban for transactions subject to notification to competition authorities (which primary reason is to prevent “gun-jumping”). In our view it would be a benefit if the Ministries could consider a similar anti-gun jumping procedure tailored to meet the specific concerns under the Security Act rather than the relatively impractical system that is proposed in the consultation paper. For instance, it could prohibit the sharing of non-public information relevant for the Security Act in relation to transactions that might be subject to notification and also simply introduce an implementation ban until the transaction was approved.

Having said that, the responsible ministry (or the NSA) can make full or partial exceptions from the implementation ban, including information sharing. The assessment depends on whether the transaction process in itself constitutes or may lead to a risk. It remains to be seen, however, whether this makes a practical difference given that the consideration phase (and the implementation ban) is 60 working days (subject to extensions triggered by information requests) from receipt of the notification.

7. Voluntary notification

Last, the Ministries discuss in the consultation paper to introduce a voluntary notification arrangement without proposing any specific changes in this regard. The Ministries state that such a voluntary notification arrangement would need to be limited to the cases where it is a risk for national security interests directly or indirectly being threatened and that a qualified threshold for notification should apply, for example 25%.

In our opinion, such a system with voluntary notification would be beneficial to clarify whether or not potential acquisitions would be considered to imply a threat to national security. We have noted, including from the Bergen Engines case, that such a voluntary notification system would have been useful.

8. Consequences for future transactions and acquisitions

To summarize, we see that the suggested changes to the Security Act will lead to a higher number of transactions being subject to the obligation to notify to the authorities, as the scope of chapter 10 is broadened and the threshold for the obligation to notify potential acquisitions is lowered. The consultation paper however raises several questions, and many of the topics it discusses should be subject to a closer consideration, such as:

  • Which businesses that actually would be subject to the Security Act, which still is unclear
  • The 10% threshold
  • The obligation to notify being introduced also for the seller and target of a transaction, which may lead to confusion as to who will notify in the specific case, and also seems impractical for the undertaking
  • The timing of the notification, which should be better specified than the point when the parties has reached an agreement “to continue negotiations”
  • The practicalities of the implementation ban
  • A voluntary notification arrangement, which probably could be beneficial

It remains to be seen how the proposed changes are received by the consultative bodies, but hopefully some of the proposed changes will be reconsidered before they are introduced.

 

[1] Further information on the Bergen Engines case may be found in our newsletter here: https://bahr.no/newsletter/norwegian-government-stops-the-sale-of-bergen-engines.
[2] 1/3 being the threshold for so-called “negative control” in Norwegian limited companies.
[3] France, which is mentioned by the ministry, applies a 25% threshold. It was temporarily lowered to 10% for listed entities during 2020.
[4] The proposed amended language in § 10-1 only includes «the manager” (Nw. leder) of the undertaking, although the consultation paper explicitly mentions the board and the general manager (Nw. daglig leder). Given that breaches are subject to criminal prosecution, this should be clarified.
[5] This would be similar to the system implemented under the Norwegian Competition Act (and other competition rules in the EEA).
[6] Our translation.
[7] I.e. to consider whether the transaction presents a not insignificant risk of a threat to national security interests The wording of the proposal implies that the transaction may be completed if it is being considered by the King in Council pursuant to § 10-3, but obviously there is then a risk that the transaction will be stopped.
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