Defence procurements at Norwegian yards – new rules on ownership control

On 5 April 2024 the Norwegian Government presented its new long term defence plan for the period from 2025 to 2036. All parliamentary parties have approved the plan which is due to be formally adopted by Parliament in June 2024 and which will lead to defence spendings of more than 1600 billion Norwegian kroner over the coming 12-year period. A large proportion of the money has been allocated to the Norwegian Navy, which will get at least five new frigates, additional submarines, and a new fleet of “standardised class vessels” consisting of up to ten larger and eighteen smaller vessels. Contractors, including shipyards and suppliers, that intend to participate in defence procurement projects must comply with the Norwegian Security Act, including the rules relating to ownership control, often referred to as Foreign Direct Investments (“FDI”) rules. 

Current legislation

The rules on ownership control are primarily found in Chapter 10 of the Security Act. Several amendments to these rules were passed by the Norwegian Parliament in 2022 and 2023, however, some of the new rules have not yet entered into force. 

Pursuant to the Security Act as currently in force, the rules on ownership in Chapter 10 only applies where the authorities have issued an individual decision (“enkeltvedtak”) that an undertaking shall be wholly or partially subject to the Act. The fact that a contractor enters into a defence procurement contract therefore does not mean that it automatically becomes subject to the rules on ownership control in Chapter 10. In our experience, such individual decisions have rarely been issued. Consequently, the rules on ownership control in Chapter 10 today apply to relatively few undertakings. 

Wider scope of application

Once the new rules enter into force, the number of undertakings subject to the rules on ownership control in Chapter 10 will significantly increase.

Amongst other, the rules in Chapter 10 will apply automatically to all contractors holding a Facility Security Clearance (“FSC”) pursuant to the Security Act Section 9-3. A FSC is required for all contractors that are granted access to information classified as “Confidential” or above. Key contractors in defence procurement will likely be required to hold a FSC, and consequently many contractors in the future must also comply with the rules on ownership control. 

In addition to expanding the scope of Chapter 10 to FSC-holders, the changes to the Security Act Section 1-3, which have been in force since 1 July 2023, have given the authorities a wider authority to make individual decisions on the application of Chapter 10, also with respect to contractors which are not required to hold a FSC. 

Practical implications 

Undertakings that become subject to the rules in Chapter 10 will have to issue notifications and will become subject to a FDI-screening process.

Today, the rules apply if a ­“qualified ownership interest” is acquired, for example where the acquirer directly or indirectly obtains “at least one-third of the share capital, participating interests or votes in the undertaking”. However, when the changes proposed in 2023 enter into force, the rules in Chapter 10 will become stricter and get a wider application. Some of the key changes once the new rules enter into force are: 

• An acquisition of at least 10 percent of the share capital, interests or votes will trigger the notification and FDI-screening process. The provisions will also apply if existing owners increase their share capital, interests or votes (within certain thresholds). As a consequence a significantly higher number of mergers and acquisitions will be subject to these rules in the future. 
• Both the seller and the target company will have to issue notifications in certain cases. Under the current rules, the buyer has the obligation to notify the authorities, however, after the new changes enter into force, the seller and the target company will also need to be more involved in the FDI-process. 
• It will not be possible to close mergers and acquisitions before the FDI-screening process has been completed. In other words, a “standstill obligation” will apply. Under the current rules, there is no standstill obligation. The consequence of this is that conditions precedent will have to be included in the transaction documents in order to cater for the FDI-process. 
• The authorities will be able to impose penalties in the event of breach of notification obligations. If the authorities have rejected a merger or an acquisition, or only have accepted it on certain conditions, undertakings involved will also be subject to potential criminal liability in the event of intentional or negligent breach.