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Trends and climate
What is the current state of the M&A market in your jurisdiction?
During the course of 2015, the Danish private M&A market experienced an increase in the amount of deals compared to previous years, both in size and number. This activity is mainly driven by an increase in international transactions, including the sale of Danish companies to foreign buyers and foreign acquisitions completed by Danish buyers.
Generally, in 2015 the M&A market was characterised by more tailored deals with one buyer than auctions with more potential buyers.
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?
The Danish M&A market is continuously supported by low interest rates and the strong cash position of both industrial and financial buyers.
Are any sectors experiencing significant M&A activity?
The technological and industrial sectors in particular are experiencing significant M&A activity, with more than 110 registered transactions out of a total of 327 during 2015.
Are there any proposals for legal reform in your jurisdiction?
What legislation governs M&A in your jurisdiction?
Generally, M&A transactions are governed by EU legislation, national legislation and national case law.
The primary national legislation is:
- the Contracts Act;
- the Sale of Goods Act;
- the Companies Act;
- the Act on the Transfer of Undertakings; and
- the Competition Act concerning merger control.
In addition, the following regulations should be observed when dealing with publicly listed companies:
- the Securities Trading Act;
- the Takeover Act; and
- the Nasdaq Copenhagen Rules for Issuers.
How is the M&A market regulated?
Except for publicly listed companies and the Act on the Transfer of Undertakings regarding employees’ rights in connection with M&A, the M&A market is not specifically regulated, although the above-mentioned national laws contain mandatory rules from which the parties cannot deviate.
Are there specific rules for particular sectors?
The financial sector is subject to additional regulations regarding approvals, but no other sector-specific rules apply with regard to M&A.
Types of acquisition
What are the different ways to acquire a company in your jurisdiction?
Usually, a non-listed company is acquired through a voluntary private offer on the shares of the company (share deal) or the company’s business (asset deal).
A listed company is usually acquired through stakebuilding, combined with a voluntary or mandatory public tender offer.
Less commonly, acquisitions are conducted through a statutory merger.
Due diligence requirements
What due diligence is necessary for buyers?
Depending on the type of transaction (asset deal or share deal), the buyer usually conducts legal, financial, technical or tax due diligence, including various question and answer sessions with the target’s management.
Danish law has no mandatory rule requiring due diligence; however, the possibility to file a claim against the seller may be limited in some cases if the buyer chooses not to conduct due diligence otherwise encouraged by the seller.
What information is available to buyers?
The Danish Company Register contains publicly available information, such as annual reports, articles of association and information on companies’ management.
Listed companies must disclose internal knowledge that may be considered price sensitive. Any information beyond that must be obtained from the target or seller.
What information can and cannot be disclosed when dealing with a public company?
The disclosure must comply with the Securities Trading Act, which provides that disclosure can be made only if it is considered appropriate and in the shareholders’ interest. Further, disclosures are usually conditional on completing a non-disclosure and non-trading agreement, since the target would otherwise have to share the disclosed information with the public as well. Persons granted access to price-sensitive information through due diligence will be placed on the companies’ insider list and will thereby be prohibited from trading (except with other insiders and in connection with a public tender offer).
When submitting a public tender offer, the board of directors will often choose to publish a disclosure notice immediately where the inside information disclosed to the bidder during due diligence is revealed to the public.
How is stakebuilding regulated?
If a person acting alone or with others actively acquires shares in a listed company which carry sufficient voting rights to obtain control of the company (directly or indirectly), this person must submit a mandatory public offer to the remaining shareholders.
A person is considered to have control of a listed company when, directly or indirectly, it owns shares carrying one-third or more of the voting rights, unless it is evident that this shareholding does not give the shareholder control of the company.
Voting rights are calculated through unconditional call options and warrants, as well as the shares of the target and its subsidiaries.
Further, a shareholder that does not own shares carrying one-third of the voting rights will be considered to have control of a company when it:
- controls one-third of the voting rights through agreements with other shareholders;
- controls the company's operational and financial matters under the company's articles or through other agreements; or
- has the capacity to appoint or remove the majority of the board of directors.
A mandatory offer is not triggered if the acquisition is a result of a voluntary public tender offer, where the bidder obtains at least 50% of the voting rights.
Further, the Danish Financial Supervisory Authority may choose to exempt from the obligation to submit a mandatory offer under extraordinary circumstances – for example, if a takeover is executed through an increase of capital in a company in distress.
In addition to the rules regarding mandatory public offers, persons that possess more than 5%, 10%, 15%, 20%, 25%, 33.3%, 50%, 66.6% or 90% of the share capital or voting rights must notify the Danish Financial Supervisory Authority and the stock market (by notification to the target) as soon as possible after passing one of the mentioned thresholds.
What preliminary agreements are commonly drafted?
Customary preliminary agreements are non-disclosure agreements, non-solicitation agreements and exclusivity agreements. The parties often also choose to negotiate a letter of intent or a term sheet before entering into sales and purchase agreement negotiations.
What documents are required?
A share or asset purchase and sale agreement with relevant appendices is required.
In case of a takeover of a listed company, the bidder must submit an offer document to the target’s shareholders.
Which side normally prepares the first drafts?
This varies on a case-by-case basis and no general rules apply.
What are the substantive clauses that comprise an acquisition agreement?
An acquisition agreement would normally include the following clauses:
- provisions regulating and specifying the transfer of shares and assets;
- provisions regulating the purchase price (including regulating mechanisms and earn outs);
- provisions regulating the closing of the transfer (including conditions precedent for closing);
- provisions describing the due diligence conducted by the buyer;
- provisions stating the representations and warranties of the buyer and the seller, respectively;
- provisions regulating certain undertakings or covenants of the parties, such as how to conduct business from signing to closing;
- provisions regulating the buyer’s right to indemnification in case of breach of the agreement, including any limitations in this regard; and
- miscellaneous provisions (eg, choice of law, venue, confidentiality and costs).
What provisions are made for deal protection?
In private deals, the buyer and seller will often enter into an exclusivity agreement for a certain period, where the seller is prohibited from entering into negotiations with a third party.
Exclusivity agreements are not possible in public deals, where the target has a large number of shareholders. Instead, before submitting a voluntary public bid, bidders often enter into an agreement with one or more large shareholders pursuant to which the shareholders irrevocably undertake to accept the bid if and when submitted. Normally, the shareholders will be entitled to accept a higher offer, unless the original buyer matches the new and better offer within an agreed timeframe.
What documents are normally executed at signing and closing?
In addition to the asset or share sale and purchase agreement, documents relating to changes to or the continued employment of management or auditors as well as financing (depending on the deal structure) are usually executed. In some cases, an executed letter of approval from the board of the buyer or the seller is presented.
A closing memorandum is often, but not necessarily, drafted to sum up the contemplated actions at closing.
Are there formalities for the execution of documents by foreign companies?
No, except for the normal provisions in the articles of association of the buyer and seller regarding the power of signature, which should be observed.
Are digital signatures binding and enforceable?
Foreign law and ownership
Can agreements provide for a foreign governing law?
Yes, agreements can provide for a foreign governing law. However, mandatory rules protecting third parties (eg, employees and tax authorities) cannot be contracted out of.
What provisions and/or restrictions are there for foreign ownership?
No provisions or restrictions exist in relation to foreign ownership, although customary know-your-client regulations apply, which may affect the ability of banks and legal advisers to assist with the transaction.
Valuation and consideration
How are companies valued?
In general, companies are valued in accordance with customarily recognised methods of valuation (eg, discounted cash flow models, earnings before interest, taxes, depreciation and amortisation model and multiple models).
What types of consideration can be offered?
Cash, shares or a combination of the two can be offered. Certain mandatory rules apply to public tender offers on listed companies.
What issues must be considered when preparing a company for sale?
The following issues must be considered:
- tax structure;
- merger control;
- change of control clauses in key contracts; and
- due diligence preparation.
What tips would you give when negotiating a deal?
This depends on the deal structure and target, but potential sellers or buyers should generally not take early documents (eg, a letter of intent or a head of terms) lightly. It is difficult to renegotiate, so be diligent when preparing a letter of intent or a term sheet.
In addition, it is recommended to stay patient.
Are hostile takeovers permitted and what are the possible strategies for the target?
Hostile (contested) takeovers are permitted but unusual. These bids often suffer because in most hostile takeovers a contested bidder will not have been allowed to perform customary due diligence.
Denmark has implemented the EU Directive on Takeovers of Listed Companies, which entails that the general meeting may impose restrictions on the board of directors before establishing anti-takeover defences. The rule has little effect in practice, as the most common anti-takeover defence in Denmark is the adoption of share classes with different voting rights in the articles. Thus, the restrictions will rarely be adopted. Foundations that own the share majority control numerous large cap listed companies in Denmark.
In addition, the mandatory rules on public offers for listed companies entail that the target’s board of directors must prepare a statement to the shareholders. The statement includes the board’s recommendation to the shareholders and its opinion regarding the consequences on the stakeholders from a broad perspective, particularly regarding the consequences for employees and the bidder’s strategy for the target.
In case of a hostile takeover, the shareholder recommendation will most likely be negative.
A more aggressive but uncommon defence that the board of directors or shareholders may choose is the issuance of new shares or the use of poison pills, such as change of control clauses in material contracts.
Warranties and indemnities
Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?
Depending on the deal structure, the buyer will normally prepare the first draft of the representations and warranties catalogue based on due diligence.
As the issues covered by the representations and warranties are often the same (tax, employees, real estate and intellectual property), negotiations often revolve around time limits, de minimis requirements and basket and cap limits.
Moreover, there are often negotiations surrounding whether the seller or buyer will be liable for potential losses which should have been detected during due diligence but were not.
Limitations and remedies
Are there limitations on warranties?
The parties will normally negotiate de minimis requirements and basket and cap limits in order to limit the number of (small sized) claims raised by the buyer.
What are the remedies for a breach of warranty?
As a default, the remedies for a breach of a warranty are indemnification, termination (requires a material breach) or proportionate reduction of the purchase price. The purchase agreement usually will limit the remedy for breaches to indemnification.
In addition, it has become increasingly common for sellers to take out insurance against claims related to breaches of warranty.
Are there time limits or restrictions for bringing claims under warranties?
The statute of limitation is normally three years. In some cases (eg, in relation to tax claims), the statue is extended (in the tax example, to five years).
Normally, the purchase agreement will contain a limitation period of 12 to 24 months, except for tax claims and other claims, where public institutions are entitled to raise claims at a later date.
Tax and fees
Considerations and rates
What are the tax considerations (including any applicable rates)?
There is no Danish tax on the sale of shares when the seller is a company.
The personal tax rate on shares is 28% or 42%, depending on the size of the share profit.
In asset deals, the profit received by the seller will be taxed at 22% (standard company tax). The buyer will be able to make depreciations on the purchased assets and goodwill in accordance with the Act on Depreciation and Amortisation.
Exemptions and mitigation
Are any tax exemptions or reliefs available?
No; however, the seller can postpone taxes by setting up a holding structure.
What are the common methods used to mitigate tax liability?
Normally, the seller will set up a holding structure before the sale, which enables it to sell the target’s shares tax free. The seller will generally be taxed if and when the personal owners take out the profit as dividends from the holding company.
What fees are likely to be involved?
A buyer should expect to pay fees to lawyers, auditors, investment bankers and other advisers. Except for real estate deals and deals subject to merger control, the buyer does not normally need to pay fees to public authorities.
Management and directors
What are the rules on management buy-outs?
No specific rules for management buy-outs apply.
What duties do directors have in relation to M&A?
The directors should stay loyal to the sellers, but must first and foremost tend to the interest of the company and its business.
The board of directors must prepare a statement to the shareholders under the Danish takeover rules.
Consultation and transfer
How are employees involved in the process?
Companies with more than 35 employees must inform their employee representatives about any matter which may have a material effect on employees. Normally, this obligation would include informing them of an M&A deal. However, the company may choose not to inform its employee representatives if this would severely damage or effect the company or its business. Despite this regulation, in practice, the target’s employees often have limited involvement.
Similar rules may apply under labour agreements covering the target’s employees. If a public offer on a listed company is announced, the employer must inform its employee representatives or its employees directly of the announcement.
Employees can make a statement similar to the statement made by the target's board regarding the consequences of a takeover.
What rules govern the transfer of employees to a buyer?
EU regulations apply, which entail that all rights and obligations attached to the employees are transferred along with the employees.
What are the rules in relation to company pension rights in the event of an acquisition?
Pension rights are personal and transferred with the employee.
Other relevant considerations
What legislation governs competition issues relating to M&A?
In addition to the EU competition regulations, the Danish Competition Law applies.
The Competition Law operates with significantly lower merger control thresholds than the EU regulation. As such, filing for approval from the Danish Competition Council may be necessary even in small-cap transactions.
Are any anti-bribery provisions in force?
Denmark does not have anti-bribery provisions as extensive as those in the United Kingdom or the United States. Anti-bribery is very rarely an issue in Denmark.
What happens if the company being bought is in receivership or bankrupt?
The company or its shares would never be purchased in this context; instead, this should be set out an asset deal with the receivership.