Defence sector investments and acquisitions – key facts about the Finnish FDI regulation

1. Foreign corporate acquisitions are screened in 24 EU Member States, but the scope of screening and application thresholds vary by country. Transactions in the defence sector are strongly linked to national security and geopolitical interests, and in addition to foreign investments, in some countries FDI regulation also covers intra-group and domestic transactions.
2. Foreign investments in the Finnish defence sector may require prior approval by the Ministry of Economic Affairs and Employment, and minority investments (at least a 10% stake or a corresponding influence) are also subject to screening. Failure to file an application or a delay in doing so may lead to fines or even the cancellation of the transaction.
3. The effective execution of a transaction requires careful planning and assessment of the FDI process to ensure that the planned transaction proceeds smoothly with minimal risks. This will be further emphasised with the upcoming regulatory changes. In Finland, there is no statutory time limit for the FDI process for defence industry companies, which means that the process may have a significant impact on the transaction’s completion schedule.

EU and NATO countries are ramping up their defence budgets amidst geopolitical uncertainty, and the defence industry is experiencing strong growth. Investments in defence sector companies are on the rise, and at the same time, investments in defence and security-related companies are under increasing scrutiny across Europe. The discussions around data centre projects are a good example of politicians’ interest in foreign players: on the one hand, Finland welcomes foreign investments, but on the other, foreign-policy and geopolitical risks are assessed more carefully.

The Finnish defence industry and cybersecurity know-how as well as Finland’s central location as a NATO country may increase interest in defence sector investments in Finland and boost the number of foreign investors. Correspondingly, Finnish companies in the defence sector may seek growth through expanding internationally, for example through acquisitions and joint ventures.

Finland and other EU countries actively screen foreign investments in order to ensure national defence and security. Finland has a long history of screening acquisitions in the defence sector, and the current Act on the Screening of Foreign Corporate Acquisitions (the FDI Act) has been in force since 2012. It was amended in 2020 as a result of the EU Foreign Direct Investment (FDI) Screening Regulation ((EU) 2019/452), and further amendments are expected in the coming years.

FDI screening in the defence sector in Finland

When it comes to acquisitions and investments, it is good to keep in mind that foreign investments in certain defence sector companies are subject to screening under the FDI Act. Transactions that fall under the scope of the FDI Act require prior approval from the Ministry of Economic Affairs and Employment (MEAE). In other sectors, such as the security sector, only investments from outside the EU/EFTA are subject to screening under the FDI Act.

Traditional defence sector companies that serve military national defence can be attractive investment targets, as can companies specialised in dual-use technologies that offer solutions for both the civilian and military sectors. Solutions related to AI, cybersecurity, satellite communications and security of energy supply may attract an increasing amount of foreign investments in the future, and correspondingly, the screening of these sectors is tightening. This reflects the expansion of the security concept from traditional defence to technology and security of supply.

FDI regulation and its impact on foreign investors and Finnish defence companies planning to expand internationally

When planning investments or acquisitions in the defence sector, it is important to keep in mind that EU countries have varying approaches to companies that have relevance in national defence and national security. FDI regulation can therefore affect the growth of companies such as technology-intensive businesses even within the single internal market if the authorities take a strict stance on foreign investments. At the same time, foreign capital injections and consolidation could stimulate technological development and enable significant business growth, thereby ensuring EU security. Balancing these interests plays a key part in FDI processes as well.

24 EU countries currently screen foreign corporate acquisitions, but they approach the matter with great variation – there are big differences even between the Nordic countries. For example, in some countries, the screening is focused on transactions by foreign investors in the defence industry, while in others it also includes transactions between domestic companies or within the same group.

Finland has a positive attitude towards foreign investments, but the investor’s domicile and owners also play a role in the assessment, especially in the defence sector. The MEAE has the power to prohibit the implementation of an investment if it is necessary due to a key national interest, and the power to impose conditions on the implementation. Other Nordic authorities have similar powers, and such conditions have been imposed in a number of cases. The latest example is a Chinese operator’s project, which was prohibited in Sweden after a lengthy investigation. As a result of the authority decision, the operator cannot go ahead with the planned battery anode material production site.

Minority investments and the ownership structure of a listed company may also trigger the need for an FDI process

With respect to investors, it should be noted that even a minority investment by a foreign investor may require an FDI process. In many EU countries, Finland included, the acquisition of as little as a 10% stake or a corresponding actual influence (e.g. board seats or veto rights under the shareholders’ agreement) in a defence sector company requires authority approval. This means that private equity investments, including minority investments, may be subject to screening.

Companies focusing on defence technology or dual-use products in particular should take FDI requirements into account at an early stage in the negotiations and carefully assess the need for an FDI process in advance. This applies both to situations in which a Finnish defence sector company is raising capital (including minority investments) from abroad and expanding to other countries through acquisitions. Failure to file a notification or a delay in doing so can lead to significant consequences, including fines – not only in Finland, but also in other jurisdictions. It is also important to note that the authorities can intervene in the transaction afterwards and, in the worst-case scenario, order the transaction to be cancelled.

Foreign acquisition screening may delay investments

It is characteristic of the Finnish FDI process with respect to investments in the defence sector that there is no statutory time limit for the FDI process. This may cause delays to the implementation of the investment. In 2024, the average handling time was 58 days.

This means that when the investor or buyer is a foreign entity, investments in the Finnish defence industry can be delayed due to the FDI process. For growth companies in particular, the possible extension of the process can be a critical bottleneck, as the need for financing is often acute and the growth expectations are linked to available capital. Therefore, it is important for growth companies as well to assess their business operations and potential investors from an FDI perspective early on and plan their next steps accordingly.

Upcoming changes in the coming years

In Finland, a reform of the FDI Act is being prepared with the goal of expanding screening. Earlier this year, the MEAE published an assessment memorandum with 15 development areas to be reviewed nationally and in light of the updates to the EU FDI Screening Regulation. The list of potential amendments includes the following:

• Expanding foreign acquisition screening to include critical technologies (AI, semiconductors, quantum technologies etc.) and greenfield investments in critical infrastructure in particular.
• Extending mandatory screening beyond defence sector transactions to transactions in critical infrastructure, such as energy, transport and cybersecurity.
• Reviewing the current filing thresholds (acquisition of at least 10%, 33.3% or 50% of a company) to potentially introduce additional thresholds.

It would be ideal if, when preparing the amendments to the FDI Act, the legislators would also set a clear time limit for the length of the FDI process. This would clarify the completion timeline of foreign investments and provide predictability for both foreign investors and the companies involved in the transactions.

The upcoming changes to the Finnish FDI Act and the update to the EU FDI Screening Regulation show that the regulatory framework is constantly evolving, and being up to date is more important than ever before. It is also worth noting that the European Commission has recommended that EU countries should preliminarily screen outbound investments into non-EU countries with respect to strategically important and high-risk technologies (AI, semiconductors and quantum technologies). The goal of this preliminary screening is to determine whether the exit of such technologies from the EU should be regulated and screened more closely in case it could jeopardise the security of the EU. This could happen, for example, if the technology falls into the wrong hands in the event the technology would be used in countries where the boundaries between civil and military activities are blurred and the technology or know-how could be used in military activities. This screening could also have an effect on acquisitions and joint ventures of Finnish companies abroad.

Careful preparation is crucial, and geopolitical impacts require extensive expertise

Defence sector transactions require much more than just typical assessment of the business of the company. They are increasingly linked to national security, technological dependency and strategic interests. While it may be difficult to predict how things will develop, it is clear that defence sector transactions will require increasingly diverse expertise and careful preparation. The upcoming regulatory changes could complicate investments, especially from non-EU investors.