Rolf Johan Ringdal September 17 2003 Discretion in Ownership Limitation for Financial Institutions Advokatfirmaet BAHR AS | Corporate Finance/M&A - Norway Rolf Johan Ringdal Corporate Finance/M&A Background Existing Legislation Purpose of Amendments New System Revocation of Consent and Penalties for Violation BackgroundThe Financial Institutions Act 1988 forbids any person or company to hold more than 10% of the shares or voting rights in a Norwegian financial institution. On June 30 2003 Parliament passed an act that will replace the 10% absolute limit with a more discretionary system. The amendment may make Norwegian financial institutions more attractive targets for investments and company takeovers. It is uncertain when the amendments will enter into force. Following the repeal of the previous Business Acquisition Act on July 1 2002, there are no longer any general notification requirements for acquisitions of shares in Norwegian companies other than the disclosure obligations under the Securities Trading Act. However, an acquisition of shares may be subject to sector-specific ownership limits, notification and/or concession requirements such as the ownership restrictions in the Financial Institutions Act 1998.Existing LegislationThe Financial Institutions Act 1998 restricts any person or company from holding more than 10% of the shares in a Norwegian financial institution. There are certain exceptions to this general rule, of which the most important is one which permits a financial institution to own 100% of another financial institution. This exception allows for the creation of a group of financial institutions with a holding company as the ultimate parent and with insurance companies, banks and other financial institutions as the operative subsidiaries within the group. Purpose of AmendmentsThe amendments passed by Parliament on June 30 2003 will replace the existing ownership limitation rules with a discretionary system which is more in line with the current EU/European Economic Area (EEA) directives for the banking and insurance industry. According to the Ministry of Finance, the current ownership limitation is too categorical and often goes further than necessary to ensure the independence of financial institutions. The rules have been in force for about 15 years and during that period material changes have occurred, both nationally and internationally, in relation to the regulatory framework and operation of financial institutions. These factors, combined with the fact that the surveillance authority of the European Free Trade Association has questioned whether the 10% rule is in compliance with the EEA rules on free movement of capital, have made amendment of the ownership regulation desirable. New SystemThe amendments stipulate that an acquisition of a qualified ownership in a Norwegian financial institution may only take place subject to consent from the government. The term 'qualified ownership' is defined as an ownership interest which represents 10% or more of the share capital or voting rights in a financial institution, or which by other means allows the owner to exercise a substantial influence on the management of the institution and its business. Further, consent is required when a qualified ownership reaches or exceeds 20%, 25%, 33% or 50% of the share capital or voting rights in the financial institution, or by any other acquisition which gives the owner 'decisive influence', as defined in the relevant corporate legislation. The amendments also require a shareholder who wishes to dispose of a qualified ownership or reduce such ownership below one of these thresholds to notify the Banking, Insurance and Securities Commission.The amendments contain specific rules on how a shareholder's total ownership interest must be assessed, including the consolidation of ownership interests and voting rights held by certain related persons and companies. The amendments set out the relevant criteria to be considered by the government in determining whether to grant consent. The general requirement is that the shareholder must be considered suitable to exercise such influence that the contemplated acquisition will give over the financial institution. If the contemplated acquisition will give the acquirer 25% or more of the shares or voting rights in the institution, the government shall refuse consent, unless it is convinced that the purchaser is suitable to exercise the influence allowed by the ownership. The government must also be convinced that the acquisition will not have any undesirable effects on the operation of the capital and credit markets. The government may set conditions for the approval. In determining whether to grant consent, the legislation sets out that the government must take into consideration the following: whether the purchaser is suitable as owner based upon (i) its previous conduct in business activities, (ii) its accessible financial resources, and (iii) the need for prudent business management; whether the purchaser will be able to use its influence in the financial institution to achieve benefits for its own or related activities, or indirectly exercise influence on other business activities; whether the acquisition accords with the objective of having a financial market based upon competition between independent institutions, or whether the ownership may reduce the independence of the institution in relation to other commercial interests; and whether the acquisition will create an ownership situation in the institution that makes it more difficult to supervise the institution effectively. The government may also take other relevant factors into consideration. In addition, the government may adopt specific regulations with further guidelines for exercising its discretionary authority.Revocation of Consent and Penalties for ViolationThe government may revoke its consent if it has reason to believe that a shareholder has conducted itself in such a manner that the circumstances on which consent was based are no longer present. If consent is revoked, the government may order the shareholder to reduce its shareholding in the financial institution within a certain period. Ownership in a financial institution which is acquired in violation of the legislation described must be disposed of immediately. The government may impose fines on a shareholder that does not comply with an order to reduce or dispose of its ownership. For further information on this topic please contact Joachim Bjerke or Rolf Johan Ringdal at Bugge, Arentz-Hansen & Rasmussen by telephone (+47 22 83 02 70) or by fax (+47 22 83 07 95) or by email ([email protected] or [email protected]).