Market overview and developments

Previously the Danish market was primarily serviced by banks, but in recent years the Danish market has seen a vast increase in alternative credit providers in the form of debt funds and direct lenders. Historically, debt funds typically only played a role in the secondary market, in particular if the debt was distressed. However, now they are also taking up roles as arrangers or originators of both medium-sized and large cap deals that they will also underwrite in full. As commercial lending is not subject to a banking licence in Denmark, debt funds are not subject to restrictions on, inter alia, capital adequacy and lending limits, which makes them more flex- ible in leveraged acquisition financing than banks. As a result of this flexibility, the debt funds continue to gain significant market share, despite the fact that pricing is often higher. To some extent, the same is true for direct lenders, especially insurers and pension funds. The direct lenders do, however, tend to do leveraged real estate and infrastructure deals and not acquisi- tion financing.

Although, as mentioned, there has been an influx of debt funds in the Danish market, large cap leveraged deals are still dominated by the major international investment banks. Mid-market leveraged deals and below are dominated by the largest domestic or Nordic banks, with the debt funds finding their way into all types of leveraged deals.

As indicated above, the market is highly developed and competitive on the lender side, providing borrowers and sponsors alike with numerous high-quality lending options. Over the past years, the deals seen in the Nordic market have, generally, been smaller than in the larger markets in continental Europe such as Germany and France. The Nordic market has a history of a well-serviced loan market, which has offered both a competitive bank market and various other alternative sources of funding, such as direct lending from pension funds. However, this may begin to change as, recently, the first unitranche facilities have appeared, which have other- wise been kept out as a result of the well-serviced loan market.

High-yield borrowing is not a real alternative to credit lending in Denmark unlike in other northern European jurisdictions, where there is an active and developed high-yield market. As a consequence, high-yield issues for the purpose of financing acquisitions of Danish targets are primarily done by way of bond issues in Sweden, Norway, England and the United States.

Legal framework

Acquisition financing is largely unregulated in Denmark save for the restrictions on the target company stipulated in the Danish Companies Act.

In practice, the most notable regulation on acquisition financing in Danish law is the prohibi- tions against financial assistance found in the Danish Companies Act, Sections 206 to 212. The prohibitions against financial assistance are two-headed:

  1. a provision against financing a company’s (or its direct or indirect parent company’s) takeover; and
  2. a provision prohibiting the granting of loans to shareholders, directors or companies with a 'deciding influence' over the company.

In relation to (i), a Danish limited liability company may not, directly or indirectly, advance funds, grant loans, guarantees or security for a third party’s acquisition of shares in the company itself, or in its direct or indirect parent company. This does also include (and thus prohibit) debt push-down transactions under certain circumstances. Thus some acquisition financing struc- tures involving the target company may not be viable where the target company is a Danish company. The same is the case if a Danish subsidiary (financially) aids in the takeover of its direct or indirect parent company. In practice the guarantee provided by a Danish company in an acquisition financing structure will include a provision that the guarantee will be limited as to not include financial assistance in violation of the above-mentioned sections.

In relation to (ii), for these purposes 'deciding influence' means the power to control the financial and operational decisions of the company. Deciding influence typically exists where the beneficiary:

  • controls, directly or indirectly, more than half of the voting rights in the company;
  • has the power to control the financial and operational decisions of the company pursuant to the articles of association or any agreement; and/or
  • has the power to appoint the majority of the board of directors.

Although the main rule is that this form of financial assistance is prohibited, there is a notable exception to this rule: if the parent entity of the Danish company is domiciled in Denmark or, if domiciled outside Denmark, within the EU or, to some extent, within the OECD, and that parent entity in respect of incorporation, limitation of liability, management and other central param- eters is similar or substantially similar to a Danish limited liability company, it is exempt from the prohibition against loans to shareholders. Any foreign subsidiary of a controlling Danish parent is also outside the general financial assistance prohibition. Thus Danish limited liability companies are often allowed to provide shareholder loans despite the prohibition against it.

In all cases, financial assistance by a Danish group company is subject to the general restriction in the Danish Companies Act, being that a company may only undertake transac- tions from which the directors believe (on a reasonable basis) that the company derives real and adequate corporate or commercial benefit. Most notably, this provision has been applied by Danish courts in the case of security being provided crossstream.

In the case of loans or advances, if financial assistance is provided in breach of the above-mentioned prohibitions, the action will be considered invalid and the advance or loan must be repaid immediately, including a statutory interest rate, irrespective of whether the recipient acted in good faith. In the case of security or guarantee, financial assistance provided in breach of the above-mentioned prohibitions will still be valid if the beneficiary of the security or guarantee acted in good faith at the time the security or guarantee was granted.

Documentation

Loan documentation

The vast majority of the larger syndicated deals in the Danish market are governed by English law and based on standard agreements, such as Loan Market Association (LMA) standards.

Smaller and more local leveraged finance transactions are primarily governed by Danish law, although occasionally such deals are governed by Swedish or German law. Such loan agree- ments tend to be shorter than those used in common-law jurisdictions and based on standard terms and conditions from the lender, with some room, however, for negotiating the respective covenants.

Intercreditor agreements

Intercreditor agreements are quite common in large and upper mid-market Danish transactions and often include clauses regulating:

  • ranking and subordination of debt and security, typically achieved through contractual subordination;
  • appointment of security agents;
  • the creditor’s right to agree to amendments or to grant waivers to the borrower without the consent of the remaining creditors and parties;
  • indemnities and remedies available in the event of breach;
  • creditors’ disclosure obligations; and
  • the parties’ right to assign or transfer its rights and obligations.

Bank or bond transactions are commonly used in the larger leveraged finance deals, primarily in the form of senior secured high-yield bonds in combination with a super-senior revolving credit facility (RCF). Domestic and international lenders alike are comfortable with dealing with such financing structures. However, as mentioned above, there is an absence of a liquid bond market in Denmark. Thus any high-yield bond issues for the purpose of financing acquisitions of Danish targets are primarily done by way of bond issues in Sweden, Norway, England and the US.

In addition to the lenders, who are the main parties to the intercreditor agreement, in Danish large cap leveraged finance transactions, the intercreditor agreement typically also includes hedging counterparties. Hedging counterparties often appear in the intercreditor agreements as it is customary in Danish large cap leveraged finance transactions to require the borrower to enter into a hedging agreement in respect of a minimum proportion of its term facilities in order to mitigate against upward interest rate fluctuations, adverse exchange rate movements or both. As hedging counterparties will often be able to benefit from the transaction guarantees and security granted by the borrower for amounts that may be owing to them, the lenders will require them to be a party to the intercreditor agreement in its capacity as hedge counterparty, even if it is already party in another capacity.

In most transactions, the position of the hedging liabilities reflects the position adopted by the LMA precedent intercreditor agreement for leveraged acquisition financing where the hedging liabilities rank pari passu with the senior facility liabilities. The reason for this is that in the Danish market, hedging continues to be provided primarily by the senior lenders who expect their hedging liabilities to rank alongside the senior debt.

In cases where the bank role is limited to providing a super-senior RCF, the hedging coun- terparty will typically continue to benefit from the transaction guarantees and security, but the ranking of the hedging liabilities will be a matter of negotiation between any non-bank lenders and the bank RCF provider and not all rank pari passu with the senior facility liabilities; typi- cally, a portion of the hedging liabilities will rank pari passu with the super-senior RCF, while the remainder of the hedging liabilities will rank pari passu with the term debt provided by the non-bank lenders.

Structures

The most prevalent form of acquisition financing used in acquisition finance in Denmark is senior loans, most of which are issued by commercial banks. The typical structure for larger acquisi- tions is several banks and other financial institutions issuing a loan collectively in the form of a club deal. Syndicated loans with commercial banks from several jurisdictions are only seen in very large acquisition financing deals.

While the most common form of leveraged finance in Denmark is senior loans, the growth of alternative debt providers has created more diversity in the acquisition financing landscape. The alternative debt providers will typically provide mezzanine loans to the acquisition financing.

Bridge loans are commonly used in the acquisition financing by private equity funds by way of short-term facilities used to bridge a financing gap until long-term financing can be obtained, which typically occurs a short time after closing of the acquisition, for example, until a capital increase can be executed.

Historically, corporate bond issues have only been used to a limited degree in Denmark, in part owing to the time constraints involved and market conditions. Furthermore, a long-term practice of the Danish FSA entailed a risk that a company wanting to issue bonds would require a banking licence to do so, which is likely to have deterred companies from the financing form. Thus, historically, only larger Danish companies and certain larger banks have issued corporate bonds, and this continues to be the trend in the Danish market.

Whereas corporate bond issues involve a time constraint owing to the obligation to publish a prospectus, private placements, where securities are offered to a limited number of institutional investors, do not have the same limitations. Thus they may be a time-efficient source of financing compared with a corporate bond issue. Private placements are, however, often in direct competi- tion with direct lending on larger transactions and with banks on small transactions, which has limited their incidence in Danish transactions.

Asset-backed lending as opposed to cash flow-based lending is not commonly used in Denmark as a means of acquisition financing. Having said that, this financing structure does appear in respect of asset-heavy businesses (eg, real estate funds) applying a structure that would normally be based on LMA precedents.

Security and guarantees

Typically, the lenders will require that the purchasing company (as obligor under the acquisition financing facility) provide security in the target’s shares and over some of its assets. In Denmark, the most commonly used forms of security include:

  • share pledges;
  • (intra-group) receivables assignments;
  • bank account pledges;
  • insurance receivables assignments;
  • if relevant, fixed charge over real estate or land;
  • to some extent, floating business charge over the business-related assets of the company;
  • occasionally but seldom, fixed charges over inventory, machinery or equipment, including movable assets; and
  • occasionally but seldom, fixed charges over stock in trade or work in progress.

Most of the above forms of security are perfected by notice, whereas the floating business charge, fixed charges over real estate or land and fixed charges over assets require registration with the Danish Registration Court in order to be effective and thus attract a substantial variable stamp duty of 1.5 per cent calculated on the secured amount. Bank account pledges will typi- cally not be perfected in Danish transactions, as perfection of bank account pledges effectively requires that the account is blocked, with any movement requiring consent by the pledgee, which requires extensive administration.

A company may in principle provide upstream, crossstream and downstream guarantees for the financial obligations of group companies; however, this is subject to the above-mentioned rules on financial assistance and the concept of corporate benefit (see below). The same is the case for providing security, especially in the case of upstream security (eg, a Danish target company and its subsidiaries in favour of a parent company).

In relation to corporate benefit, a subsidiary may, for example, receive a corporate benefit when providing a guarantee or security for the obligations of its parent company when the parent company’s facility is used to make intergroup loans to the subsidiary or is otherwise commer- cially beneficial to the subsidiary. However, in some cases it can be difficult to conclude whether a (sufficient) corporate benefit exists as the assessment is subjective in nature. Therefore, the assessment must be based on the facts of the matter and after due and careful consideration by the board on a case-by-case basis. If the board of directors does not believe that the company will derive a corporate benefit from providing security to, for example, the lender, the granting of that security may be regarded as an unlawful transfer of value without consideration and thus as a transaction that is not to the benefit of the company. If, based on this unlawfully provided security, the company suffers a loss, which they are not fully compensated for by the beneficiary, the relevant individuals (including corporate officers) responsible for taking or implementing the decision to provide security may become personally liable to cover the company’s loss.

Enforcement

Certain provision in the Danish Administration of Justice Act set out procedures for enforcing and realising a security. However, in many cases, the contractual provisions of the relevant security document will override these (except for provisions under the Danish Bankruptcy Act – see below).

Usually, the relevant security document will include an enforcement clause that gives the secured party the right to sell, by private or public sale, the assets or in any other way as the secured party in its sole discretion deems fit (including on what terms). This enforcement clause will typically also make it possible for the secured party to purchase the assets for itself. However, whenever a secured party elects to enforce its right to sell or dispose of the assets, it must be aware that it owes a duty of care to the party granting the security and may thus not realise the security in a way unduly adverse to that party.

If the party providing the security objects to the enforcement by a secured party of the secu- rity and its rights under a security document, the enforcement by the secured party must involve the bailiff’s court. The bailiff’s court may refuse the secured party’s request for enforcement if the secured party’s claim is not sufficiently substantiated by the evidence. Moreover, the bailiff’s court may from time to time refer the decision to the ordinary courts. Any such referral is at the sole discretion of the bailiff’s court. Generally, the bailiff’s court will refer the case if, based on the evidence put forward by the secured party, the decision of the case will require extensive preparation or examination by the bailiff’s court, or the claim is not clearly substantiated by the evidence. This may substantially delay the enforcement process as the processing time with the bailiff’s court is shorter than with the ordinary courts.

Denmark does not operate with the concept of receivership and the courts will not acknowl- edge the claim of a party claiming to be appointed as such. Thus there is no right for a secured creditor to appoint a person who will operate or realise the secured assets with a view to repaying the secured debt.

Moving from contractual enforcement to statutory enforcement, provisions in the Danish Bankruptcy Act may override any contractual provision on enforcement agreed between the parties. Under the Danish Bankruptcy Act, a secured party may, in the event of bankruptcy by the creditor, dispose of a charged asset by way of public auction, or, if the asset is a financial instru- ment (as defined in the Danish Capital Markets Act (as defined in MiFID II)) listed on a Danish or foreign stock exchange or other regulated market, through a securities institute. The process of disposing of the assets must be conducted in the form described in the Danish Bankruptcy Act. In the case of bankruptcy an administrator of the estate is appointed by the court. When the assets are disposed of by way of public auction, the administrator or any creditor may – in most circumstances – ask for a postponement of the auction and also for a second auction to be held in order to achieve the best possible sales result for the bankruptcy estate. A secured creditor may also be redeemed by the administrator, if the administrator deems this to be in the interest of the bankruptcy estate.

In addition to the rules governing bankruptcy, there is also a set of regulations concerning financial restructuring and standstill periods, which may give a company time to try and solve its financial difficulties without going into bankruptcy. This may be in the form of a voluntary or a compulsory restructuring. The compulsory restructuring arrangement with creditors is subject to a prior court decision that prevents most seizure and other executive measures. It also restricts the possibility of filing a petition for bankruptcy. It does not, however, prevent enforce- ment against secured assets that are chattels or receivables.

Compulsory restructuring proposals may be set forth by the court-appointed restructuring administrator and will be based on input from the major creditors. They must be presented to all creditors and put up for voting within six months from when a first meeting with all creditors is held. That first meeting must be held shortly after the company has entered into restructuring.

Under compulsory restructuring, claims cannot normally be reduced to less than 10 per cent of their pre-restructuring value. The execution of a compulsory restructuring arrangement requires a 60 per cent majority of the voting creditors (subject to certain de minimis thresholds). Any out-of-court arrangement that may be made with a company’s creditors will only be effective if the creditors voluntarily agree to be involved. No creditor can be forced into an out-of-court restructuring arrangement; this is reserved for the in-court restructuring.

In a bankruptcy, claims against the debtor raised by the creditor may be used by that cred- itor to set-off against a claim that the debtor had against the creditor at the time of the bank- ruptcy. However, this is only possible if the set-off could have been made under the general rules on set-off rights found in Danish law. Accordingly, the set-off rights can be exercised if the counterclaim is between the same parties, also due for payment and if the claims are of the same nature.

Lender liability

The Danish Bankruptcy Act governs the ranking order of claims in the event of bankruptcy. The different classes of claims are paid out by the proceeds obtained from the realisation of assets following the bankruptcy according to their level of priority. The realisation of a security is kept entirely separate from this.

Payment obligations that a debtor must make under an unsecured loan rank pari passu with the claims of all other unsecured creditors, except for certain mandatory obligations made senior by law (eg, employees’ salary claims). Under the Danish Bankruptcy Act, the priority of the different classes of claims can be placed into the following simplified order:

  1. costs incidental to the commencement of the bankruptcy proceedings and to the adminis- tration of the state as well as debt incurred by the estate in the course of its administration;
  2. costs incidental to the creditors’ attempt to reach a solution in respect of the debtor’s finan- cial affairs by means of restructuring, composition or other similar arrangement and other related costs;
  3. all types of claims for wages and other remuneration for work performed in the debtor’s service, including but not limited to, claims for damages for interruption of the employment and claims for holiday allowance, but excluding management compensation and severance payments, etc;
  4. suppliers’ claims for tax and duties paid for products that are liable to duty and that are delivered to the debtor for the purpose of resale;
  5. simple claims, namely any other pari passu claims except for subordinated claims;
  6. subordinated claims, where claims for interest accrued after the date of bankruptcy and claims under lease agreements, claims on regular payments are given first priority among the subordinated claims. Second, claims for fines, default fines, tax claims for incorrect tax returns and other penal instruments and liquidated damages must be paid. Claims according to gratuitous promises and presents are given third priority.

The Danish Bankruptcy Act does also allow for some clawback, if charges and other security are granted within a certain time frame prior to the commencement of the insolvency proceedings. The general clawback period is three months. Thus, if the act of perfection of a security was effected later than three months prior to the reference date (which may be before the date of the actual bankruptcy decree), they may be subject to an objective clawback. The clawback period may be extended to two years or without limitation, if the charge or transaction was granted in favour of a person who is closely connected to the debtor, provided that the company was insol- vent at the time of the execution of the transaction in question, and the participating party was or ought to have been aware of that fact.

An extended clawback period may also apply to payments of debt, if such payments have been effected by unusual means of payment, before the due date of the payment or if the payment was effected in amounts that substantially impaired the solvency of the debtor. Payments of debt that occur after the reference date may also be avoided, unless the rules on the order on equi- table subordination apply.

Another example of the clawback period being without limitation is found with certain trans- actions where the transaction constitutes an undue preference of a creditor over other creditors, the debtor’s property is withheld from serving to satisfy other creditors or the debtor’s debts are increased to the detriment of the other creditors. Those transactions may be voided if the debtor was or became insolvent as a consequence of the transaction and the preferred party knew or ought to have known of the debtor’s insolvency.

Tax

Stamp duty

Generally, the provision of loans or the granting of security is not subject to stamp duty in Denmark. However, transfers of assets and granting of security that need to be registered with the Danish Court (eg, transfer of real property and granting of floating business charges) are subject to a variable stamp duty as well as a fixed fee. A deed of transfer of real estate is subject to a stamp duty of 0.6 per cent of the transfer sum plus a fixed sum of 1,660 kroner, whereas real estate charges are subject to a stamp duty of 1.45 per cent of the secured amount plus a fixed sum of 1,640 kroner. The stamp duty applicable to the registration of other security is 1.5 per cent of the secured amount plus a fixed sum of 1,660 kroner.

Withholding tax

Generally, there is no withholding tax on interest payments and capital gains received by foreign corporate lenders. However, a foreign corporate lender may be subject to Danish withholding tax on interest and capital gains accrued on 'controlled debt' owed by a Danish company.

Debt is 'controlled debt' if it is owed by a Danish debtor company to a foreign corporation that directly or indirectly controls the Danish debtor, is controlled by the Danish debtor or is under common control with the Danish debtor. In this context, 'control' means the direct or indi- rect possession of more than 50 per cent of the share capital or votes.

Controlled debt is subject to withholding tax on interest and capital gains accrued in Denmark; however, an exemption to this main rule is possible if the foreign lender meets the following requirements:

  • the foreign lender is covered by the EU interest and royalty directive or a tax treaty concluded by Denmark and the state of residence;
  • the foreign lender qualifies as the beneficial owner of the accrued interest or capital gains within the meaning of the EU interest and royalty directive or the applicable tax treaty; and
  • the debt arrangement with the Danish debtor company must not fall within the scope of the Danish regime on abusive tax arrangements.

The above-mentioned requirements for exemption of withholding tax are strictly applied by the Danish tax authorities. Thus, in cases with a cross-border loan arrangement involving controlled debt and a Danish company as borrower, the issue of withholding tax should always be consid- ered carefully.

Thin capitalisation

From a corporate law standpoint, there are no thin capitalisation rules other than a general risk of liability for trading in an unwarrantable fashion, which may entail personal liability for the management of the company. However, in tax law the special provisions on thin capitalisa- tion (ie, debt-to-equity ratio based on market value exceeds 4:1 and the total debt is in excess of 10 million kroner) will restrict the right to deduct interest from taxable income if the company is subject to the thin capitalisation rules. Additional limitations on the deductibility of interest payments may apply.

Financing of certain takeovers

Certain financial undertakings

Any natural or legal person wanting or planning to acquire a qualified interest (greater than 10 per cent), directly or indirectly, of the voting rights or share capital in a financial undertaking is subject to prior approval by the Danish FSA. For these purposes, a 'financial undertaking' means, inter alia, banks (credit institutions) and other financial undertakings such as mortgage-credit institutions, investment firms, investment management companies, payment service companies and insurance companies. Approval must also be sought prior to the increase in the holding of a qualified interest that will result in the interest held by the owner exceeding 20, 33 or 50 per cent of the voting rights or the share capital of the financial undertaking.

The assessment by the Danish FSA takes into account the likely influence of the intended acquirer of the financial undertaking, in particular with regard to the sound and prudent manage- ment of the financial undertaking but also with regard to the expected or projected financial soundness of the intended acquisition in addition to a number of criteria. As an example, a take- over of a bank in distress was once denied by the Danish FSA on the grounds that the intended business model was not considered to be sustainable. Nonetheless, in many cases, the most work-intensive requirement of the assessment is the gathering of a certificate of no judgments from the executive officers in the intended acquirer.

If a natural or legal person acquires a qualified interest in a financial undertaking without obtaining prior approval from the Danish FSA, the voting rights associated with the equity investments of the relevant owners may be suspended by the Danish FSA until such approval is obtained.

Targets listed on a stock exchange

If the target company is a company listed on a Danish stock exchange, the acquisition has to take into account the special provisions in the Danish Capital Markets Act and the Executive Order on Takeover Bids. For listed targets, two kinds of bids apply, voluntary and mandatory. In both cases, the bidder is subject to a requirement to publish an announcement of the offer. Additionally, the bidder must draw up and publish an offer document within four weeks, which must be filed with the Danish FSA. The requirements pertaining to the contents of the offer document are set out in the Executive Order on Takeover Bids.

A bidder may become subject to a mandatory bid obligation if the transaction leads to the establishment of a controlling influence. 'Controlling influence' in the case of mandatory bids is defined differently from elsewhere, with controlling influence being deemed to exist when the acquirer holds more than one-third of the voting rights in the listed company unless it can be unequivocally demonstrated that such ownership does not constitute a controlling influence. Additionally, under certain circumstances, an acquirer may also obtain controlling influence by having less than one-third of the voting rights in the listed company, for example, if an acquirer by virtue of an agreement with other shareholders has the right to exercise at least one-third of the voting rights.

Whereas the completion of a mandatory takeover offer is prohibited from being subject to conditions, a voluntary takeover offer can be, and is most often, subject to certain conditions, such as conditions regarding the minimal interest to be acquired and antitrust and other regula- tory approval. A bidder may not, however, condition the completion of the offer upon events that are under the control of the offeror itself.

In the case of a mandatory takeover offer, the consideration may be in the form of shares, cash or a combination thereof, unless the shares offered are not liquid shares admitted to trading on a regulated market. In such cases, a cash consideration must be offered as an alternative. For voluntary takeover offers the consideration offered may be in cash, shares or other contribution in kind, or a combination thereof. Certain information requirements are applicable, however, to considerations that are not made in cash.