Key transactional issuesi Company structures
Business activity in Sweden can be conducted by individuals through an individual enterprise or by several individuals as a partnership. However, the liability for these types of business activities comes with a personal liability for the individuals involved and, therefore, most business activity in Sweden is conducted through limited liability companies by way of a public limited liability company, or a private limited liability company, where the shareholders' liability is limited to the amount invested in the company.
The limited liability company is also the company form that most often constitutes a target in a Swedish M&A transaction in the Swedish market.
The establishment of a public limited liability company requires a minimum capital of 500,000 kronor, which must be paid in cash. A public limited company must have a board of directors consisting of at least three board members. One of the members must be appointed chair. A managing director must also be appointed.
The establishment of a private limited liability company, on the other hand, requires a minimum capital of 25,000 kronor, thereby making it a more used corporate vehicle for entrepreneurs and start-ups because of the lower share capital requirement. A private limited liability company may have a board of directors with one or more members and a managing director.ii Deal structures
The deal structure in M&A transactions in Sweden is typically made up of a share purchase or an asset purchase, whereas the share purchase is the most common deal type in the Swedish technology M&A market.
The volume of M&A transactions regarding listed companies is somewhat low. Insofar as a listed company is to be acquired, obligatory capital market rules apply (e.g., local marketplace rules, takeover rules and EU capital markets regulations).
The involvement and roles of advisers in M&A transactions on the Swedish market largely depend on the size and nature of the transaction and the characteristics of the target. Larger transactions often engage a diversified set of advisers, including investment bankers, who usually lead the process and coordinate the work of the advisers responsible for respective subject matters (e.g., legal, tax, financial and environment). On the other hand, in smaller transactions legal advisers are at times the only advisers who coordinate the process.iii Acquisition agreement terms
The most important documents governing a Swedish technology transaction are:
- letter of intent – a short-term sheet document in which the parties agree to the main terms of the proposed transaction, including but not limited to purchase price, purchase price regulation, specific assets or post-closing covenants, as non-competition clauses;
- share purchase agreement – in the case of an acquisition of all shares;
- business transfer agreement – in the case of an acquisition of assets;
- investment agreement – in the case of injection of new capital into target; and
- shareholders' agreement – in the case of partial acquisition or investment of shares.
The key provisions in a typical share purchase agreement and business transfer agreement in a Swedish private M&A transaction customarily have the following features.Purchase price
Price is usually the foremost issue for both parties in a corporate acquisition. In addition to agreeing the headline amount that will be paid for the target shares or business assets, the parties will also need to consider and document in the acquisition agreement a number of related issues, including the following:
- how the price will be satisfied and the form of consideration payable;
- whether the price will be a fixed sum or subject to a price adjustment mechanism;
- when the price will be paid including, in particular, whether payment is to be made in full at completion of the transaction or, if it will be deferred to a later time; and
- if the price will not be paid in full at completion, whether:
- the seller requires any security for the buyer's payment obligations; and
- the buyer expects to be able to set-off any warranty or indemnity claims against the deferred element of the consideration.
The main two types of consideration payable in respect of a corporate acquisition are:
- cash consideration: this is the most common and most straightforward form of consideration, where the buyer usually pays a fixed cash sum to the seller in full on completion of the transaction; and
- non-cash consideration: the most common forms of non-cash consideration are:
- the allotment and issue of shares in the capital of the buyer to the seller; and
- the issue of buyer loan notes to the seller.
In most M&A transactions, the purchase price is typically determined in relation to a target's most recent financial statements. Purchase price adjustments generally shield a purchaser from changes in the value of the target between the date the target was valued and the transaction closing. In this respect, the purchaser and seller must agree on a valuation method and have adopted accounting policies that are similar or that can be reconciled. Purchase price will be in either cash or shares (or a split of these two assets). In the majority of cases, consideration is 100 per cent cash.Representations, warranties and specific indemnities
Representations and warranties are given by both parties to disclose material information to each other. The scope of representations and warranties largely depends on the character and negotiation position of the parties. While representations and warranties typically cover the whole range of the target's business activity, the level of their thoroughness differs depending on the transaction and is often higher in the case of strategic sellers as compared to private equity (PE) sellers. In transactions involving PE firms (either on the sell side or the buy side) we see an increasing applicability of warranty and indemnity insurance; however, these types of insurances are still fairly new to the Swedish M&A market.Conditions precedent
Conditions precedent, or closing conditions, are stipulations agreed by the parties that must be satisfied, or waived, before the acquisition may close. Conditions precedent must be drafted with care. They are typically specific to a transaction and the needs and circumstances of the parties. Conditions precedent typically found in share purchase agreements (SPAs), among others, are:
- approvals: both parties shall have received all relevant regulatory and other governmental approvals in relation to the transaction from any place with jurisdiction over the subject matter of the SPA;
- delivery of documents: each party shall have delivered executed copies of all ancillary documents; and
- payment: the purchaser shall have delivered the purchase price to the seller (or escrowee).
Other typical closing conditions involve approval from key customer and suppliers if contractual arrangements contain change of control provisions and new service contracts with the executive managers of target. The buyer may seek to resolve material findings in the legal due diligence by conditioning closing on the remedy of these findings.Indemnification
Indemnification clauses address liability for losses incurred because of misrepresentations and breach of warranties, covenants and other agreements. The indemnification clause can be drafted as an exclusive remedy or a non-exclusive remedy to assert such claims. Typical indemnification obligations of a seller are, among others, to indemnify the purchaser from breaches of representations and warranties made by the seller and breaches of covenants or other obligations of the seller.Post-closing covenants
Post-closing covenants apply after a transaction closes and are tailored to the needs of the parties and are contextual. They may, among other things:
- ensure the purchaser cooperates with the seller to maintain certain tax and business records (in case of tax or other regulatory audits);
- ensure the purchaser maintains directors' and officers' insurance for outgoing directors and officers of the target company;
- prevent the seller from competing with the target company; and
- prevent the seller from soliciting employees of the target company.
The financing of M&A transactions varies due the type of purchaser. The Swedish Companies Act includes provision hindering the target in participating in self-financing of purchasing its own shares (with certain exceptions), entailing that the purchaser must finance its acquisition by either equity or utilisation of new or existing financing facilities.v Tax and accounting
Holders of shares not resident in Sweden are normally not subject to Swedish taxation on any gains realised on the sale of shares, irrespective of the ownership period, subject to certain anti-avoidance rules seeking to prevent that taxable dividend payments are converted to tax exempt capital gains. If an investor holds the shares in connection with a trade or business conducted from a permanent establishment in Sweden, gains on shares may be included in the taxable income of such activities.
Further, there are participation exemption rules that apply to investments made by corporate shareholders, which constitute a very favourable holding regime. A tax exemption applies for Swedish corporations (limited liability companies) and European equivalents on capital gains on, and dividends from, shares 'held for business purposes'. Shares in Swedish corporations and participations in partnerships, as well as in foreign companies, can qualify as shares held for business purposes.
Unlisted shares are in principle always regarded as held for business purposes. Listed shares are regarded held for business purposes if the shareholding company holds at least 10 per cent of the voting rights or, in certain situations, if the shares are held in the course of the business. Also, listed shares must be held for a minimum period of one year.
There is, however, an exception from the capital gains tax exemption, which applies on a disposal of shares in a 'shell company'. A shell company is a company or partnership where the fair market value of liquid assets, such as of cash, shares and other marketable instruments (other than shares held for business purposes), and similar assets, exceeds 50 per cent of the consideration paid for the shares. The sale of a shell company results in punitive taxation where the entire consideration, and not just the gain, is taxed. However, the tax can be completely avoided by filing a special tax return for shell companies, which must be done within 60 days of signing or closing.vi Cross-border issues
Sweden has a very liberal attitude towards foreign investment. Foreign investors are generally treated equally as Swedish investors and are in broad terms able to invest in the same sectors and companies as domestic investors.