The Norwegian government implements unprecedented FDI measures to intervene in planned property transaction in the Arctic

On July 1 2024, the Norwegian government announced that it was using its authority under section 2-5 of the Norwegian Security Act (the "Security Act") to prevent the potential sale of the Søre Fagerfjord property in Svalbard by its current owners (the "Decision"). The Decision, made by the King in Council, effectively prohibits any negotiations or purchases related to the property or the owning company without explicit consent from the Ministry of Trade, Industry, and Fisheries. The Decision can be read in full here (only in Norwegian). It should be noted, however, that some of the assessments that form the basis of the decision are classified and not available to the public.

The Decision offers valuable insights into how national security risks are assessed by Norwegian authorities; thus, providing guidance on how planned or ongoing transactions may be perceived with regards to national security interests against the backdrop of today's serious threat landscape.

Søre Fagerfjord and national security

Svalbard is a Norwegian archipelago of unique geopolitical importance due to its strategic location in the Arctic region. The archipelago is governed by the Svalbard Treaty, which grants Norway sovereignty while allowing other signatory countries to conduct scientific research and economic activities in the area. Russia maintains a longstanding presence at Svalbard through a mining settlement and a research station.

The Arctic has gained increased geopolitical significance in recent years due to escalating tensions with Russia, and China's growing interest in the region. Positioned between mainland Norway and the North Pole, Svalbard plays a significant role in shaping the regional dynamics, particularly in terms of security politics. Aside from its strategic location, Svalbard holds importance due to its natural resources, including minerals and fossil fuels. Consequently, Svalbard is one of the most security-sensitive areas in this part of the world.

The Søre Fagerfjord property measures approximately 60 square kilometers (23 square miles) and has for over a century been owned by Aktieselskabet Kulspids, a holding company incorporated in Norway. The property is regulated as a national park. It is undeveloped and does not have any infrastructure. Any developments of the property are prohibited by law.

According to the Decision, the owners of the property had expressed their intention to sell the property to actors from countries with which Norway lacks security cooperation. The owners were also asking for a price that far exceeded professional estimations of its value. The government assessed that actors willing to pay the steep price may exploit the property to challenge Norwegian legislation and regulations in Svalbard, potentially interrupting the stability in the area and jeopardizing national security interests.

Section 2-5 of the Security Act - known as the "Safety Valve"

The Norwegian government has the authority, under section 2-5 of the Security Act, to intervene in activities that "may present a not insignificant risk of a threat to national security interests." This provision applies to acquisitions irrespective of whether they trigger filing obligations under the provisions on ownership control in Chapter 10 of the Security Act. There is no time limit on the intervention under section 2-5, and it applies to any activity that may present a threat to security, hereunder all planned and ongoing activities, including, but not limited to, planned acquisitions, transactions, property sales, and negotiations. As a consequence, the government has wide powers to intervene in any activity that it deems may pose a threat to national security interests.

It is very rare for the government to exercise this authority, and consequently there is limited publicly available guidance on the scope of review in such cases. Nevertheless, there are two other cases where the government has exercised its authority under section 2-5 of the Security Act in recent times:

• In March 2023, the government approved the acquisition of a minority stake in Global Connect, a fiber company, by an Abu Dhabi-based fund (Mubadala) under conditions. These conditions included protecting sensitive information, controlling future transactions, and imposing restrictions on share resales.

• In March 2021, the government prohibited the sale of Bergen Engines to TMH International, a company with ties to the Russian government. Bergen Engines is supplier to civil and military sectors, and owner of a strategically positioned property in the port of Bergen.

The government's assessment

If a case may warrant the use of section 2-5, the responsible ministry will request assessments of national security risks from relevant government entities. In this case, the Decision is based on a comprehensive assessment conducted by the ministry of trade and fisheries (the Ministry) in collaboration with other relevant ministries, departments, and agencies, including the National Intelligence Service (Etterretningstjenesten/NIS), the Police Security Service (PST), and the National Security Authority (NSM).

The Decision takes various factors into account. It emphasizes current owners' previous statements, as referred to above, statements made by their representatives in national and international media and their advertising of the property. In the view of the government, the property's status as a national park, with strict exploitation restrictions, was not adequately disclosed on the company's website or sales advertisements. Instead, the property was presented as a unique opportunity of significant environmental, geopolitical, scientific and strategic importance.

The ministry also questioned the suggested sale price of 300 million euros proposed by the owners. The ministry believed that such a price could only be justified if the buyer intended to exploit the property in a manner incompatible with its national park status. Notably, the government itself made a bid of 20 million NOK (approximately 1.75 million euros) for the property in 2019. Interestingly, on the same day the Decision was made by the King in Council, the government placed a new bid on the property at the same price as it previously offered in 2019.

The Decision was further supported by the assessments from NIS, PST, and NSM, which highlighted the significant risk to national security interests associated with selling the company to prospective purchasers from countries without security cooperation with Norway. NIS and PST emphasized that such actors have shown interest in the Arctic areas, and that they utilize property acquisitions as strategic tools to undermine national security. The government further argued that if such actors were to acquire ownership of the Søre Fagerfjord property with the intention of challenging Norwegian authority in Svalbard, it could impact freedom of political action, defense, security, preparedness and international relations.

The government's decision

Based on these assessments, the government made a decision under section 2-5 of the Security Act, requiring that negotiations or sales of Søre Fagerfjord property can only proceed with The Ministry's explicit consent. This requirement also applies to negotiations or sales of ownership interests in Aktieselskabet Kulspids or other companies indirectly linked to Søre Fagerfjord, resulting in the acquirer holding a direct or indirect ownership stake of at least 10 percent of the share capital or voting rights in the company. The government furthermore imposed an obligation of continuous disclosure of all bids received for direct or indirect ownership interests in the company and the property.

The Decision also states that the government considered the option of using its authority under section 2-5 of the Security Act to take over the property with compensation. However, it concluded that for the time being, implementing a decision that requires notification and consent for negotiations and sales would be an adequate measure to mitigate risks. Nevertheless, the government remains open to making a decision to assume ownership of the property with compensation if circumstances warrant it. According to the Decision, this would occur if the property owners' actions indicate non-compliance with the Decision, attempts to circumvent its purpose, or entering into agreements that violate the Decision.

The Decision also provides guidance on future assessments of consent for negotiations and potential sales. Factors such as whether the property is being acquired by a buyer with ties to countries with which Norway does not have security cooperation, whether the transfer is structured in a way that conceals the real buyers, or whether the purchase price is disproportionately high and indicates an intention to exploit the property in violation of existing regulations will be relevant to the assessment.

Key takeaways

The government's Decision to utilize section 2-5 of the Security Act marks an unprecedented measure to safeguard national security interests when it comes to property sales. The Decision underscores the government's wide authority under section 2-5 of the Security Act. It also provides valuable guidance on how security risks are assessed.

Key takeaways:

• In a transaction, it is advisable for sellers and buyers alike to carefully consider whether national security concerns may arise in relation to the transaction. This applies to ownership stakes in properties in Norway, as illustrated by the case at hand; however, there are also numerous other sectors and activities that may be considered relevant to national security interests. An early assessment of whether any of these apply is advisable.
• Heightened caution is advised in cases where potential acquirers may have ties to countries which do not have a security cooperation with Norway (e.g. non-NATO countries).
• If national security is implicated, the outcome is not necessarily a complete prohibition of the activity in question. However, a consent process, possibly on specific conditions, can significantly prolong or derail the transaction process. Dialogue with relevant government entities may, in some cases, be advisable to facilitate a smoother process.
• Several concerns in the Søre Fagerfjord case stemmed from public statements made by the property owners and its representatives. The Decision, therefore, highlights the need for stakeholders to pay attention to how acquisitions and sales are communicated in the media.