Navigating Legal Compliance in the Defence Sector: Key Permits and Approvals

1.1 Security Clearance for Sensitive Projects

Obtaining a security clearance for sensitive projects is mandatory for individuals handling classified information in defence-related activities. The Danish Security and Intelligence Service (PET) issues security clearances following a thorough security investigation, which includes background checks to assess potential security risks.

The required clearance level is determined by the classification of the information the individual will handle. As the classification level increases, so too do the security clearance requirements, with the validity period of the clearance varying based on the sensitivity of the information. For example, a clearance for handling TOP SECRET information is valid for up to five years, whereas clearances for SECRET or CONFIDENTIAL information may remain valid for up to ten years.

In the context of transactions, it is essential to consider which employees hold the relevant security clearances. Such individuals may be regarded as “key employees” in transactional terms solely because they possess the necessary security clearance permits. Their clearance grants them access to and authorisation to handle critical classified information, making their roles central to the organisation's operations and compliance with security requirements.

1.2 Security Clearance for Sensitive Projects

Defence contractors and suppliers must obtain specific import licences issued by the Danish National Police when importing defence equipment such as weapons, ammunition, and explosives.

Such permits can only be granted if the company meets certain “fit and proper” conditions set out by the Danish Executive Order on Weapons and Ammunition, etc. (in Danish: “Bekendtgørelse om våben og ammunition mv.”) issued under the Danish Weapons Act (in Danish: “Våbenloven”).

These conditions include: fulfilling the “requirement of decency” (in Danish: “vandelskrav”) pertaining to the responsible person(s) of the company, the company and its employees must have a reasonable knowledge of weapons, the company must be capable of storing weapons in a safe manner, and there must be no information that would make it questionable to approve the application.

1.3 Export of Weapons and/or Components and Software Specifically Designed for Military Use

Exporting weapons, ammunition, military equipment and software specifically designed for military use requires authorisation from the Danish National Police.

There are three types of permits for the export of weapons issued under the Danish Executive Order on Weapons and Ammunition, etc.:

1. General Permit: Authorises the export of military equipment to recipients in EU or EEA countries for a temporary period and specific predefined purposes.
2. Global Permit: Authorises the export of weapons under the Danish Weapons Act to recipients in EU, EEA, or NATO countries, without quantitative restrictions.
   
   
3. Individual Permit: Authorises the export of weapons under the Danish Weapons Act to one specific recipient in EU, EEA, or NATO countries, subject to a specific quantity limit.

The Danish National Police and the Police Administrative Centre (PAC) are responsible for processing these permits, with the Ministry of Foreign Affairs acting as a consultative body in specific cases when Danish companies apply for such permits.

The EU has established a set of common rules for controlling the export of military software and equipment, which include eight criteria to be considered when assessing an arms export application. These criteria reflect fundamental principles of EU law, such as respect for member states’ international obligations, human rights, international humanitarian law, and national security.

1.4 Manufacturing

A manufacturing permit is required for the production of war material (defined as “material solely constructed for military use” according to the Danish War Material Act (in Danish: “krigsmaterielloven”)), as well as firearms, ammunition, gunpowder and explosives and related components. The permit is issued by the Danish Ministry of Justice.

There are no specific statutory requirements for issuing manufacturing permits, i.e. no “fit and proper” conditions, for the production of the above-mentioned products. However, a separate permit may be required if the ownership and/or management structure becomes foreign (see Section 2.1)

1.5 Storage

A storage permit for explosives and firearms, as defined in Section 1 of the Danish Weapons Act, is required and issued by the Danish National Police.

For explosives not classified as ”war material” pursuant to the Danish War Material Act, companies must demonstrate a legitimate professional need for an explosives permit and appoint a responsible individual with the expertise required to comply with storage regulations.

To store firearms, ammunition, silencers etc., companies must meet the conditions set out by the Danish Executive Order on Weapons and Ammunition, etc. including the ”fit and proper” condition (see Section1.2).

2.1 Separate Permit for the Manufacturing of War Material

When certain foreign ownership or management structures are involved, a separate permit is required in addition to the standard manufacturing permit for war material. The Danish Ministry of Justice is the issuing authority for this permit, and approval is contingent on the absence of any foreign policy or security concerns related to the transaction.

The separate permit applies, for example, if the company is based outside Denmark, if it appoints a director or authorised signatory who is not a Danish citizen, or if the Danish-owned portion of the share capital falls below 60%.

Additionally, the separate permit is required if the company intends to take out foreign loans or loans with foreign guarantees. In issuing the permit, the Danish Ministry of Justice assesses whether the foreign lender could gain influence over the company.

It is crucial to identify who must obtain the permit, as this depends on the type of transaction. In the case of a share deal, the company being acquired must hold the permit. In an asset deal, it is the acquiring company that must secure the permit.

2.2 Approvals under the Scope of the Foreign Direct Investment Act

If a company falls within the scope of the Foreign Direct Investment (FDI) screening mechanism, it is mandatory to notify the Danish Business Authority of the transaction or investment for approval. Transactions in the defence sector are generally subject to FDI regulations, as they involve the defence industry or companies producing dual-use products with significance for national security or public order.

A mandatory FDI filing is required for investments in particularly sensitive sectors and activities. This applies to all foreign investors who obtain direct or indirect possession or control of at least 10 percent of the shares or voting rights. The regime also covers “equivalent control by other means” beyond the holding of shares. This includes, for example, control through a shareholder agreement or the power to approve decisions on significant management or financial matters.

The purpose of screening is to address the risks associated with a given foreign investment and other economic activities. Specifically, the focus is on preventing a lack of control over supply chains, monopolies by other countries on socially important functions and services, and risks related to technology and knowledge transfer more broadly. Additionally, there are threats from espionage, sabotage, disruption of critical infra-structure, and other similar risks.

Outright intervention in foreign direct investment or special economic agreements will only occur if these could pose a threat to national security or public order. If this is not the case, the investment will be approved.

A separate license is required from the Minister of Justice under the provisions of the Act on War Material if a foreign national acquires ownership of capital or influence in a company that manufactures military equipment in Denmark. The authorisation will be granted based on an assessment of foreign policy or security policy considerations. The Minister of Justice typically consults with the Ministry of Foreign Affairs, the Danish Defence Intelligence Service, and the Danish Police Intelligence Service. Authorisation is generally granted if these authorities do not raise objections.