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Trends and climate
What is the current state of the M&A market in your jurisdiction?
The M&A market has been significantly affected by the weak price of crude oil and the corresponding weakness of the Norwegian krone since 2015. In 2016 there were only eight new listings on the Oslo Stock Exchange (Oslo Bors), of which three were transfers from Oslo Axess (the secondary market for listings in Oslo, which has less extensive requirements than Oslo Bors). This is less than in 2015 when there were 12 new listings on Oslo Bors. Although the number of transactions rose slightly in 2016 compared with 2015, the total transaction value was slightly lower. Further, in 2016 there were two new listings on Oslo Axess and 11 new listings on the new regulated market (Merkur Market), which aims to have even less extensive requirements than Oslo Axess. In recent years, M&A insurance, which covers the sellers’ representations and warranties, has become an increasingly key trend in M&A transactions.
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?
The substantial drop in crude oil and gas prices since 2015 has reduced the level of investment and forced many businesses to reduce operating costs. Consequently, the unemployment rate has increased in recent years and more or less stabilised in 2016. The most recent predictions expect a slight reduction in unemployment in 2017. Even when taking the low crude oil and gas prices and the unemployment rate into account, it seems that the Norwegian M&A market has stabilised following some turbulent years.
Are any sectors experiencing significant M&A activity?
The industrial and manufacturing sector has experienced the most significant M&A activity in recent years. Over the past decade, the energy sector – in particular oil and gas – has experienced significant M&A activity. However, due to the steep decline in crude oil and gas prices, M&A activity in this sector has reduced in recent years and it is now the third most active sector in terms of M&A activity. The technology, media and telecoms sector is the second most active in this regard.
Are there any proposals for legal reform in your jurisdiction?
Norwegian public and private limited liability companies are (as targets) generally prohibited from providing financial assistance in connection with the acquisition. The Ministry of Trade, Industry and Fishery proposed a further easing of these limitations in February 2016. It is too early to say if the proposition will be adopted by Parliament in its existing form and, if so, when it will happen. However, the ministry has previously indicated that the proposal will be presented to Parliament in May 2017.
The European Union is in the process of drafting a new prospectus regulation, but this is not expected to be completed before 2017 and no implementation date has been confirmed. However, such a regulation would have to be implemented in Norwegian law under the European Economic Area agreement and that process is likely to take time.
What legislation governs M&A in your jurisdiction?
The legislation that governs Norwegian M&A depends on whether the target is listed. The applicable Companies Act and the Competition Act govern private acquisitions for non-listed targets. In addition to the applicable Companies Act and the Competition Act, the rules on takeover bids for listed targets are outlined in Chapter 6 of the Securities Trading Act and Chapter 6 of the Securities Trading Regulations, which implement the EU Takeover Directive (2004/25/EC).
How is the M&A market regulated?
The Securities Trading Act includes regulations for publicly listed companies, such as rules on market manipulation and insider trading.
Guidelines on corporate governance are codified in the Code of Practice for Corporate Governance. The code’s aim is for companies listed on regulated markets in Norway to practice corporate governance which regulates the division of roles between shareholders, the board of directors and executive management more comprehensively than is required by legislation.
There are no specific regulations for non-listed companies other than what is outlined in the legislation above, such as the applicable Companies Act.
Are there specific rules for particular sectors?
There may be concession requirements in certain sectors, such as media and agriculture. Further, Section 6(1) of the Financial Institution Act provides that the acquisition of 10% or more of the ownership of a Norwegian financial institution must be reported to the Financial Supervisory Authority. Such notification must be given before the acquisition takes place.
Types of acquisition
What are the different ways to acquire a company in your jurisdiction?
Several methods can be used when seeking to acquire a publicly listed company, the most common of which are:
- stakebuilding, with a subsequent voluntary or mandatory offer;
- a voluntary or mandatory offer (with or without prior stakebuilding); and
- a statutory merger.
A non-listed company may be acquired through an offer for the company’s shares or assets.
Due diligence requirements
What due diligence is necessary for buyers?
Norwegian law does not require a party to perform due diligence. However, if a seller encourages a purchaser to conduct due diligence and the purchaser refuses to do so, failure to conduct due diligence can limit a claim that the purchaser may have against the seller. Thus, due diligence is common. Depending on the size and complexity of the transaction, the purchaser normally conducts legal, financial, technical and tax due diligence.
What information is available to buyers?
Any document filed with the Norwegian Register of Business Enterprises and the Norwegian Register of Real Properties (eg, articles of association, formation documents, annual accounts, annual reports and titles to real properties) are publicly available.
What information can and cannot be disclosed when dealing with a public company?
Section 3(3) of the Securities Trading Act was amended as part of Norway’s implementation of the EU Market Abuse Directive (2014/596/EC). The directive was originally adopted by the European Commission in 2003. In 2014 a new market abuse regulation was published, which has a broader scope than the Market Abuse Directive as it applies to any financial instrument, either traded or for which a request is made.
Section 3(3) of the Securities Trading Act states that:
“persons possessing inside information may neither directly or indirectly, for own or third party account, subscribe, purchase, sell or exchange financial instruments or incite others to carry out such transactions. The first paragraph applies only to misuse of inside information as mentioned in section 3-2.”
Section 30 of the EU Market Abuse Regulation’s preamble noted that:
“the mere fact of having access to inside information relating to another company and using it in the context of a public takeover bid for the purpose of gaining control of that company or proposing a merger with that company should not be deemed to constitute insider dealing.”
During the preparatory work for the amendment to Section 3(3) of the Securities Trading Act, it was suggested that the word ‘misuse’ should be interpreted in line with the EU Market Abuse Regulation.
A bidder that possesses the above information due to due diligence will normally be placed on an insider list and prohibited from trading on this information (except for the purpose of the placed bid).
How is stakebuilding regulated?
Stakebuilding’ is the process of increasing the number of shares in a publicly listed company, often in order to prepare a bid to take control of that company. When the acquirer reaches certain thresholds, notification must be given via the Oslo Stock Exchange. The thresholds are a shareholding of 5%, 10%,
15%, 20%, 25%, one-third, 50%, two-thirds or 90%. These thresholds are outlined in Chapter 4 of the Securities Trading Act. If, due to stakebuilding the acquirer owns shares representing more than one-third of the voting rights, it must make an offer to buy the remaining shares.
If a shareholder represents more than 90% of the shares and voting rights in a publicly listed company, it must acquire the remaining shares by compulsion. Pursuant to Section 6(22) of the Securities Trading Act, an offeror that acquires more than 90% of the target company’s voting shares after making a voluntary bid may decide to force the transfer of the remaining shares without making a prior mandatory bid, provided that:
- the forced transfer is initiated at the latest four weeks after the acquisition of shares by voluntary bid;
- the price of the remaining shares corresponds at least to the lowest bid price that would have resulted from a mandatory bid; and
- the settlement is guaranteed by a financial institution authorised to provide such guarantees in Norway.
What preliminary agreements are commonly drafted?
The most common types of preliminary agreement include confidentiality agreements, exclusivity agreements and letters of intent.
A confidentiality agreement will normally be entered into before the potential buyer starts a due diligence process. Such an agreement can also be entered into before the start of negotiations for a share or asset purchase agreement. An exclusivity agreement will normally be combined with a letter of intent, which can:
- be general and related to shares or assets being sold, as well as pricing; or
- contain detailed provisions similar to term sheet.
What documents are required?
Norwegian law does not require parties to draw up agreements in writing; however, parties normally always draw up share or asset purchase agreements.
In the case of statutory mergers, the Companies Act requires several corporate documents to be drafted, such as a merger plan and an assessment from the board of directors.
For publicly listed companies, a written offer document must be submitted by the bidder in accordance with Chapter 6 of the Securities Trading Act.
Which side normally prepares the first drafts?
Generally, the purchaser prepares the first draft. Where there is an auction process, the seller normally prepares the first draft.
What are the substantive clauses that comprise an acquisition agreement?
An acquisition agreement will normally include:
- the object of the purchase, which may be shares or assets;
- the purchase price, including any adjustment mechanisms (eg, working capital or cash or debt earn outs) and the method and timing of payment;
- conditions precedent for closing;
- buyer’s and seller’s covenants, including pre-closing covenants for the interim period between signing, closing and post-closing covenants;
- a description of the due diligence to be conducted by the buyer;
- undertakings on how to conduct business from signing to closing;
- non-compete and non-solicitation clauses;
- representations and warranties, mainly made by the seller;
- specific indemnities and indemnification mechanisms for breaches of covenants, representations and warranties; and
- general provisions relating to confidentiality, termination, assignment, costs, governing law, dispute resolution and legal venue.
What provisions are made for deal protection?
The deal protection provisions include an exclusivity agreement for the time needed to negotiate the deal. In public deals, an exclusivity agreement may be more complicated, as it may question whether this will be in the interest of the target. In public deals, pre-acceptance by major shareholders is common when some major shareholders are willing sellers.
What documents are normally executed at signing and closing?
A transaction normally has two steps. The first step is signing, when the asset or share purchase agreement (including any annexes and appendices) is executed.
Subject to the conditions precedent, the second step is closing. At closing, the transfer of the shares or assets will be executed. Signing and closing commonly take place a few months apart.
At closing, a memorandum of closing is commonly executed, along with evidence of the conditions precedent and documents relating to the transferred object. For instance, an updated and executed shareholder register where the purchaser is recorded as a shareholder will normally be executed.
Are there formalities for the execution of documents by foreign companies?
In general, no. Foreign entities are treated as domestic entities. However, it is common practice to provide evidence that the person executing the document is entitled to do so by providing a certificate from the relevant jurisdiction.
Further, in the case of some assets recorded in Norwegian public registers, such as real estate and aircraft, the execution and signature of title deeds and mortgage deeds must be accompanied by an apostille confirmation from a notary public in the relevant jurisdiction.
Are digital signatures binding and enforceable?
Yes. A signature on a digital scanned document is treated the same as a signature on a physical executed copy. Thus, a document will be equally binding and enforceable regardless of whether the document is signed physically or electronically. However, certain assets that are recorded in Norwegian public registers, such as real estate and aircraft, are subject to special provisions that require the transfer of the title to be made in writing. The same applies for an enforceable debt certificate.
Foreign law and ownership
Can agreements provide for a foreign governing law?
There are no barriers to having acquisition agreements governed by foreign law.
What provisions and/or restrictions are there for foreign ownership?
There are no particular provisions or restrictions regarding foreign ownership. Norway is generally supportive of foreign private investments and permits 100% foreign ownership.
Valuation and consideration
How are companies valued?
The most common methods for valuation are income-based or asset-based valuations:
- An income-based (or discounted cash flow) valuation is the net present value of a company’s future income calculated by dividing its net income by an estimated capitalisation rate (or investor’s rate of return).
- An asset-based valuation is the market value of assets minus the market value of liabilities. Revenue is not considered. Accordingly, when a company is profitable, the asset-based approach will generally result in the lowest valuation of the two approaches.
Other considerations commonly factored into the valuation of companies include:
- the financial health and trends of the company’s business;
- the company’s relationship with customers; and
- synergies to be gained by combining companies.
There have been changes in valuation in Norway following the decrease of value in the shipping and offshore sectors, which has made it harder to ascertain market value. For instance, it is evident that a vessel on a long-term charter has a different value than a vessel which is not on hire.
What types of consideration can be offered?
The most usual consideration is a cash payment. A share-for-share swap or a combination of these types of consideration may also be offered.
What issues must be considered when preparing a company for sale?
The seller should assess whether a share or an asset sale is preferable. The decision can be linked to the tax effect or need for third-party approvals. It can also be useful to obtain consent in advance from third parties, where required.
Early on, the seller should prepare an expected timeline for the whole process. The process may take longer when potential buyers need time for competition clearance. It will often be useful to start with a seller’s due diligence process. This process can be expensive and take time, as all relevant documents need be collected in a data room if the buyer has the right to due diligence. The seller’s due diligence is also useful when negotiating the share purchase agreement. The seller can make all required representations and warranties with the qualification “to the best of the sellers’ knowledge”. Finally, seller due diligence is useful if the sale is made through an auction.
What tips would you give when negotiating a deal?
When negotiating a deal, parties are advised to:
- ensure that the seller has all of the advice needed and access to all information on the target required to provide the purchaser with the necessary information and properly present the object to be sold;
- prepare a realistic timeline for the process;
- determine whether negotiations will be held with only one potential buyer or whether a competitive bidding process will be conducted;
- analyse the interests of the buyer and seller;
- identify any deal breakers;
- identify the alternatives for the buyer and seller;
- plan which information will be provided to employees; and
- prepare agreements with the key employees if this is important to the buyer.
Are hostile takeovers permitted and what are the possible strategies for the target?
There is no distinction between hostile or friendly takeovers in Norwegian law. Thus, hostile takeovers are permitted.
Section 14 of the Code of Practice for Corporate Governance states that:
“if an offer is made for a company’s shares, the company’s board of directors should issue a statement making a recommendation as to whether shareholders should or should not accept the offer. The board’s statement on the offer should make it clear whether the views expressed are unanimous, and if this is not the case it should explain the basis on which specific members of the board have excluded themselves from the board’s statement. The board should arrange a valuation from an independent expert. The valuation should include an explanation, and should be made public no later than at the time of the public disclosure of the board’s statement.”
The code of practice aims to regulate the division of roles between shareholders, the board of directors and executive management more extensively than is required by legislation.
The target may choose not to grant the bidder access to information regarding a target company that is not already public. The target may also choose to give one bidder access to undertake due diligence and not grant such access to a hostile bidder. The target company may have provisions in its bylaws to prevent hostile bids (ie, poison pills).
Warranties and indemnities
Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?
The specific representations and warranties provided by a seller depends on the nature of the transaction and are subject to negotiations between the parties. The representations and warranties will also be influenced by whether due diligence has been or will be conducted.
Representations and warranties usually relate to:
- corporate matters, such as the existence and organisation of companies, shares and shareholders’ agreements;
- annual accounts;
- real property and movable assets;
- environmental matters;
- IP rights and computer systems;
- intra-group arrangements;
- changes of control; and
- immaterial adverse changes.
In the case of a separate signing and closing, it is normal for the seller to repeat the representations and warranties given at signing and confirm that they are still true at closing.
Limitations and remedies
Are there limitations on warranties?
It is usual to have disclosure letters relating to the representations and warranties and to prepare these disclosures in connection with setting up the data room for due diligence. Additional limitations include de minimis limitations, baskets for presenting claims and caps on total claims.
There has been a substantial increase in recent years regarding the number of transactions in the Norwegian market in which the buyer or seller seeks to obtain warranty and indemnity insurance to reach an agreement on liability under a sale and purchase agreement.
What are the remedies for a breach of warranty?
If the warranties turn out to be incorrect, the purchaser will generally have the option to:
- receive subsequent performance;
- claim a proportionate reduction of the purchase price;
- terminate the sales agreement (requiring a material breach); or
- claim damages for non-performance.
The purchase agreement will normally limit the remedies for breaches to indemnification.
Are there time limits or restrictions for bringing claims under warranties?
The time limits are negotiable, but normally a time limit of between 12 and 36 months is agreed. A longer warranty period may be required for the representation of taxes. Private equity exits tend to minimise the warranty period. The warranty is a matter of negotiation and if the seller starts with an auction process it can set a standard for a minimum warranty period. Limitation of the warranty period can also be the result of the transaction starting out as an initial public offering, but ending up as a trade sale.
Tax and fees
Considerations and rates
What are the tax considerations (including any applicable rates)?
Tax considerations frequently influence the choice of transaction model. Which rule applies depends on, among other factors, whether the seller is a company or a private individual and where the target and seller are domiciled.
In general, no transfer is imposed tax on the acquisition of a company. The company will retain its tax position after the transaction’s completion. If shareholders are limited companies (and certain other types of entity), the transaction will be tax free. Losses in that association are not tax deductible. Shareholders who are private individuals will in practice be taxed at 29.76% – profit and losses are tax deductible.
Asset acquisitions can prompt a transfer tax and various public fees, depending on the asset acquired. An example is a real estate sale where a 2.5% transfer tax of the market value will be applied and 25% in value added tax may also be applied. The buyer will establish a new tax base equal to the total transaction value, divided by the individual assets acquired. A domestic merger (a share-for-share transaction) will normally be tax free if certain conditions are fulfilled.
Exemptions and mitigation
Are any tax exemptions or reliefs available?
An individual seller or a group of individual sellers that are prepared to maintain the equity within a corporate entity should consider establishing a holding company in order to be the seller of the target company.
What are the common methods used to mitigate tax liability?
Methods to mitigate tax liabilities depend on the specific situation. An acquisition will normally be structured as the acquisition of a corporate entity and not a sale of assets. This also applies to the sale of real estate. If not held by a single purpose entity, ownership may be restructured before completion. The seller will normally carry part of any negative value of the inherent tax liability and depreciation base.
The general anti-tax avoidance rule should be considered closely.
What fees are likely to be involved?
Adviser fees (eg, judicial or financial) should be expected. Share purchases do not entail transfer tax or stamp duty. Transfer tax and various public fees can be applied on asset purchases, depending on the asset. Applications to public agencies prompted by the transaction may involve a generally minor fee.
Management and directors
What are the rules on management buy-outs?
There are no specific rules on management buy-outs. Shareholders are entitled to sell to any other shareholder. However, as members of the board of directors or management, they must act loyally towards the target. In the case of publicly listed companies, management must also take due care of, and act in compliance with, the Securities Trading Act’s inside information rules.
What duties do directors have in relation to M&A?
Directors must act loyally towards and in the best interest of their company. Further, they must ensure that all shareholders are treated equally. In the case of publicly listed companies, management must also take due care of, and act in compliance with, the Securities Trading Act’s inside information rules, including ensuring confidentiality for any information disclosed.
In the case of publicly listed companies, directors must prepare a statement for shareholders in accordance with Section 6(16) of the Securities Trading Act. Further, directors must ensure that the company takes no steps that are not in the ordinary course of business during the period in which the shares are subject to a formal offer, in accordance with Section 6(17) of the act.
Consultation and transfer
How are employees involved in the process?
Under Section 8(1) of the Working Environment Act, companies with 50 employees or more must inform and consult with employee representatives regarding any matters that will affect employees. An M&A transaction would normally be deemed a matter that affects employees and employee representatives would thus normally have to be involved and informed at an early stage. Only in extraordinary cases may the company omit to inform and consult with employee representatives, provided that informing and consulting at that time would clearly damage the undertaking.
In the case of a merger or an acquisition of an undertaking (asset), the transaction will be subject to the EU Transfer of Undertakings (Protection of Employment) Directive (2001/23/EC), which was implemented in Norwegian law through Chapter 16 of the Working Environment Act. These rules also require employee representatives to be consulted with in advance, as well as to provide the employees with information regarding how the transaction will affect employees.
What rules govern the transfer of employees to a buyer?
The EU Transfer of Undertakings (Protection of Employment) Directive (2001/23/EC), which was implemented in Norwegian law through Chapter 16 of the Working Environment Act, applies to the transfer of employees to a buyer. These rules entitle employees to be provided with information and require all employment rights and obligations to be transferred to the purchaser. Further, an employer cannot terminate employees’ employment solely on the basis of a transfer.
What are the rules in relation to company pension rights in the event of an acquisition?
It depends on the wording of each individual employment contract. Where the pension is deemed to be an individual right in accordance with the contract, the right is transferred to the purchaser together with the employee. In cases where the pension right is not deemed to be an individual right, but rather a right to be a part of the employer’s applicable pension scheme, the employer’s pension scheme may be adjusted to the same extent that the seller would have been entitled to.
Other relevant considerations
What legislation governs competition issues relating to M&A?
Norwegian competition law provides for merger control similar to most European jurisdictions. A merger or an acquisition must be notified to the Competition Authority before completion, provided that each party of the target group and the acquirer have a group turnover in Norway exceeding NKR100 million and that the combined turnover exceeds NKR1 billion. The competition authority may prohibit the transaction or impose conditions and limitations if it finds that the transaction would have a negative impact on competition in the relevant Norwegian market.
Are any anti-bribery provisions in force?
Yes. The Criminal Act states that any person offering an undue advantage (ie, active corruption) or accepting such an offer (ie, passive corruption) can be prosecuted for corruption. The law also covers ‘trading in influence’, defined as when two parties conduct corrupt actions to affect a third party, and corruption relating to a party’s position, task or mission abroad. Corruption or complicity in corruption can be punished with up to 10 years’ imprisonment.
What happens if the company being bought is in receivership or bankrupt?
If the target is insolvent and in receivership, the transaction will be influenced by the Bankruptcy Act. In general, only an asset transaction with the bankruptcy estate will be relevant. In relation to the seller, the liquidator will effectively conduct the business and therefore be responsible for the purchase negotiations. The seller will be expected to draw up the first draft agreement, which is unlikely to contain any warranties save for those relating to the ownership of the assets being sold. Generally, all assets sold by a bankruptcy estate are sold “as is, where is, if is” and contain no warranties or representations. Thus, it is strongly advisable to conduct thorough due diligence before purchasing an asset from a bankruptcy estate.