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The Norwegian government considers blocking the acquisition of Bergen Engines AS on national security grounds

Friday, March 12, 2021

On March 9th the Norwegian National Security Authority (NSA) notified Rollys-Royce that it is considering to block the sale of its Norwegian subsidiary Bergen Engines AS to the TMH Group on national security grounds. Based on publicly available information and media coverage, the NSAs concerns relate to the Russian ownership links of the TMH Group

According to public reports, Bergen Engines specialises in the production and maintenance of maritime propulsion systems and its engines are used by Norwegian coast-guard vessels, as well as the navies of other NATO members, including the USA. It is also reported that the company’s engines are installed on the FS Marjata, the Norwegian Navy’s Electronic Intelligence Collection Vessel. The potential acquirer, TMH Group, is a leading rail and rolling-stock producer with ties to United Shipbuilding Corporation (USC), Russia’s largest producer of naval and combatant ships.

In Norway, the jurisdiction to review foreign investments on national security grounds is vested in the Security Act. Undertakings that handle classified information, control or engage in activities of vital importance to national functions, can be made subject to reporting requirements under the Act and, if so, must be explicitly notified by decision (cf. Section 1-3). Where a third party wishes to acquire a “qualified interest” in an undertaking subject to the Act, a notification must be submitted to the National Security Authority (cf. Section 10-1). In turn, if the acquisition presents a “not insignificant” risk of a threat to national security interest, the government can either block the transaction or authorise it subject to commitments (cf. Section 10-3).

However, Bergen Engines is not subject to the Security Act’s reporting obligations and accordingly the contemplated acquisition did not need to be notified to the NSA. As such, the government could not intervene against the acquisition under Section 10-3.

Nonetheless, the Act also contains a broad power allowing the government to adopt “necessary decisions” to prevent activities which present a national security risk cf. (Section 2-5). This is the legal basis the government is relying on in its contemplated block of the Bergen Engines acquisition

There is no precedent on the application of this provision but there is some guidance in the preparatory works. First and foremost, the term “activities” is to be interpreted broadly and the provision allows the government, amongst others, to block transactions. Yet this broad power must be reserved for cases which by their very nature are “serious and special” and the provision is set out to be a safety valve for exception circumstances. Furthermore, an application of Section 2-5 must be limited to what is “necessary”, implying that the government cannot adopt more burdensome decisions than what is strictly required.

Barriers to Foreign Direct Investment – an increasingly relevant part of global transactions

In a broader scope, the case illustrates the growing concern in Norway and other western countries related to the threats that can be posed by foreign investments. Although Foreign Direct Investment (FDIs) are an ordinary part of today’s economy, concerns can in particular arise when the acquirer would gain control and insight over a critical or classified functions or information. The case has sparked a debate on whether the current Norwegian legal regime is robust enough to guard against these types of threats with the opposition raising concerns about the absence of governmental control. On March 23, the Minister of Justice will present the case for the Norwegian parliament.

The debate and regulation of FDI is a hot policy topic in numerous countries and is under a state of flux. For instance, in neighbouring Sweden, a revised Swedish Protective Security Act entered into force on January 1st, 2021 which aims to strengthen the governmental control of certain foreign acquisitions of security-sensitive businesses. There has also been EU initiatives on this matter, including the adoption of Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the Union.

Should the government ultimatley block the acuqistion of Bergen Engines, it would represent a first. However, it would likely not signal the start in vetting FDIs under the powers of Section 2-5. Rather, it might spur discussions about adopting of a more comprehensive FDI control regime.

Article from regjeringen.no
Article from E24