How has Sweden’s new FDI regime affected investments in the life science sector?

It has now been almost a year since the Swedish Foreign Direct Investment Act (2023:560) (“the FDI Act”) entered into force on 1 December 2023. The FDI Act states inter alia that investments in companies engaged in “protection worthy activities” must be notified to and approved by the Swedish Inspectorate for Strategic Products (“ISP”). Activities conducted by entities in the life science sector to a great extent fall within the scope of the FDI Act. This means that the FDI Act has a major impact on investments and entities in the sector that are deemed to be engaged in protection worthy activities.

Purpose of the FDI Act
The main purpose of the FDI Act is to protect Sweden’s security and Swedish security issues. At the same time, foreign direct investments are important to Sweden’s economy and competitiveness. As a result, the ISP is mandated only to limit, and possibly prohibit, a foreign direct investment if necessary to prevent harmful impact on Sweden’s security, public order or public safety”. Prior to implementation of the FDI Act, Sweden was one of the last EU Member States not to have a comprehensive national system in place for screening foreign direct investments. Implementation of the FDI Act is thus Sweden’s equivalent of a system for such screening.

Applicability of the regulatory framework
The FDI Act applies to direct and indirect investments into businesses that engage in protection worthy activities (as defined in the Act and implementing regulations). Where an investor wants to make an investment of a certain magnitude (see further below) in a business engaged in protection worthy activities, the investment must be preceded by a mandatory and suspensory notification to the ISP. The notification obligation applies irrespective of whether the investor is a natural person or a legal entity, and irrespective of the investor’s origin. It therefore also applies to investments that exclusively involve Swedish legal entities and/or natural persons.

In addition, it has no bearing on the application of the FDI Act whether such protection worthy activities are conducted by a limited liability company (Sw. aktiebolag), a European company (Sw. europabolag), a trading partnership (Sw. handelsbolag), a simple partnership (Sw. enkla bolag), an economic association (Sw. ekonomisk förening), a foundation (Sw. stiftelse) or a sole trader (Sw. enskild näringsverksamhet), provided that the entity concerned has its registered office in Sweden. The FDI Act applies both to listed and unlisted companies and intra-group investments are not per se exempt from the notification obligation.

In order for the obligation to notify an investment to the ISP to be triggered, the investment must be made in an entity engaged in protection worthy activities within the meaning of the FDI Act, and must result in:

• the investor, any member of its ownership structure, or any person on whose behalf the investor is acting, achieving an influence equivalent to or exceeding 10, 20, 30, 50, 65 or 90 per cent of the votes in a limited liability company, a European company or an economic association;
• the investor becoming a partner in a trading partnership or simple partnership or an additional investment in a trading partnership in which the investor is already a partner;
• the investor, any member of its ownership structure or any person on whose behalf the investor is acting, in any other way, being granted the possibility to exert a direct or indirect influence on the management of the relevant target entity; or
• the investor, in any other way, taking over all or any part of the protection worthy activities (for example, by way of an acquisition of the assets of the entity concerned).

In addition to the above, the notification requirement also applies where the investment is made in an entity that is not currently engaged in protection worthy activities but which will, in the future, engage in such activities. The notification requirement further applies where the investment results in the creation of a new entity that will be conducting protection worthy activities (“greenfield investments”).

Prior to any investment, investors must therefore assess whether the activities to be conducted by the entity going forward may constitute protection worthy activities and, if so, the notification requirement must be fulfilled prior to the investment being consummated and/or the new entity being created.

Protection worthy activities
As mentioned above, a requirement for the obligation to notify an investment to be triggered is that the target entity is, or will be, engaged in protection worthy activities within the meaning of the FDI Act. The FDI Act lists the following activities as protection worthy activities:

• Essential services (Sw. samhällsviktig verksamhet);
• Security-sensitive activities (Sw. säkerhetskänslig verksamhet);
• Activities involving critical raw materials or metals or minerals of strategic importance (Sw. kritiska råvaror eller andra kritiska insatsvaror);
• Activities involving large-scale processing of sensitive personal data or location data (Sw. känsliga personuppgifter eller lokaliseringsuppgifter);
• Activities relating to military equipment and dual-use items (Sw. krigsmateriel och produkter med dubbla användningsområden); and
• Activities relating to emerging technologies and other strategic protected technologies (Sw. framväxande teknologier och annan strategiskt skyddsvärd teknologi).

The first point “essential services”, is particularly relevant to entities in the life science sector. The term is defined as activities, services or infrastructure that maintain or ensure functions that are essential in terms of the basic needs, values or security of society in Sweden. The Swedish Civil Contingencies Agency (“MSB“) has been given the authority to further specify what is to be deemed “essential services” within the meaning of the FDI Act, and has to this end adopted implementing regulations (MSBFS 2024:9). On a general level, MSB has stated that a wide sweep of business activities, involving manufacturing, the practice of science and technology and the provision of health care, social care and social services, are considered essential services in Sweden.

The following list of activities with ties to the medical sector gives an insight into the far-reaching scope of the implementing regulations, but it is not exhaustive:

• Manufacture of personal protective equipment for the medical and emergency services (Chapter 3, Section 2 of MSBFS 2024:9);
• Manufacture of medical devices (Chapter 3, Section 2 of MSBFS 2024:9);
• Manufacture of medicinal products and veterinary medicinal products (Chapter 3, Section 9 MSBFS 2024:9);
• Manufacture of active substances intended for medicinal products and veterinary medicinal products (Chapter 3, Section 10 of MSBFS 2024:9);
• Import, wholesale, retail or sale of medicinal products or veterinary medicinal products (Chapter 7, Section 9 of MSBFS 2024:9);
• Import or distribution of active substances intended for medicinal products or veterinary medicinal products (Chapter 7, Section 10 of MSBFS 2024:9);
• Import of or trade in medical devices (Chapter 7, Section 11 of MSBFS 2024:9);
• Biotechnological research or development in several areas (Chapter 13, Section 2 of MSBFS 2024:9);
• Businesses within the scope of the Swedish Health and Medical Services Act (Sw. Hälso- och sjukvårdslagen) and involving, for example, medicinal laboratory activities.

The notification process
Any investment in a target entity that is or will be engaged in protection worthy activities, must, provided that the investment fulfils the requirements set forth in the FDI Act, be notified by the investor to the ISP. Such notification shall be made prior to the execution of the investment and the investment may not be executed unless the ISP i) clears the transaction in Phase 1 (i.e., within 25 business days from submission of a complete notification) or ii) in Phase 2 (i.e., within 3 – 6 months). Be aware that the fact that the window of time in either of the phases has closed does not automatically clear a transaction. Parties are only permitted to close a transaction upon receiving a decision by the ISP that they may do so.

Phase 2 screening may only take place if the ISP finds that there is reason to assume that the investment concerns a foreign direct investment (i.e., there is a foreign element) that may have a harmful impact on Sweden’s security, public order or public safety (i.e., there is a risk element). In the event that the ISP initiates a Phase 2 screening of the investment, the ISP is mandated to prohibit or authorise the investment subject to commitments if necessary to protect Sweden’s security interests.

The ISP is only mandated to restrict or prohibit an investment if it is foreign in nature (i.e., if there is a foreign investor), and, as noted above, may only do so where a restriction or prohibition is necessary to prevent a harmful impact on Sweden’s security, public order or public safety.

While the obligation to notify an investment to the ISP lies with the investor, the target entity is, under the FDI Act, obligated to inform the investor of the fact that its activities are considered protection worthy activities and that the investor is thus obligated to notify an investment to the ISP.[1] It is worth mentioning that no requirement is placed on targeted entities to assist with compilation of the information required for a complete notification.

In the event of non-compliance
If an investor or, in certain circumstances, a target entity is in violation of the FDI Act, the ISP is entitled to impose sanctions of up to SEK 100 million (approx. EUR 8.6 million). Violations may, for example, relate to an investor’s failure to notify a notifiable investment or to execute such an investment without the ISP’s mandatory and suspensory approval. Sanctions may also be imposed on both parties for failing to meet the ISP’s information requests.

If an investment is executed despite having been prohibited by the ISP, or if the investment is executed in violation of any commitments imposed by the ISP, then the ISP may retroactively resolve to declare the investment invalid. In such circumstances, any legal act that forms part of the prohibited investment becomes null and void under civil law. This means, for example, that a share purchase agreement regarding the acquisition of shares in a target entity within the scope of the FDI Act cannot be enforced. Given the complex and far-reaching legal and financial consequences that such developments might have, it is of fundamental importance that investors correctly assess notification requirements and, in the event of notifications of commitments or ultimately prohibitions, comply with the ISP’s decision.

Key statistics
Since the FDI Act entered into force on 1 December 2023, the ISP has been notified of 1,050 investments as per 11 November 2024. Of these, the ISP has not taken any action on 870 cases in Phase 1. In 22 cases, the ISP has initiated Phase 2 screening, of which 10 were authorised without, and 5 authorised subject to, conditions. 7 cases are still pending. To date, no investment has been prohibited after Phase 2 screening.

Conclusions
The scope of applicability of the FDI Act is wide-ranging, and many entities in the life science sector are at risk of falling under the umbrella term “essential services”. As a result, investors with an interest in the life science sector must take timing and cost factors into consideration when considering investing in these entities. As is apparent from the key statistics above, a majority of these investments may be expected to be approved within 25 business days and the notification will merely have been a formal requirement. However, the risk of Phase 2 being initiated is not zero, meaning that the possible risks of such developments need to be taken into account in the early phases of an investment and, if relevant, costs to be allocated accordingly.

In order to avoid breaching the FDI Act, entities operating within the sector, as well as investors considering investing in such entities, must continuously keep themselves informed of the regulatory landscape, including with regard to amendments to the FDI Act in general, and in particular the MSB’s implementing regulations – given their importance to the life science sector.

Setterwalls Advokatbyrå is closely monitoring developments in the field and will be happy to support you in your next transaction.

[1] Note: The obligation to inform does not apply when the investment is made on a regulated market (as defined in Chapter 1 Section 4 b of the Swedish Securities Market Act) or on a corresponding market outside the EEA or on an MTF platform (as defined in the section of law referenced above).