Liability and enforcementTerritorial scope of regulations
What is the territorial scope of the laws and regulations governing listed, cleared and uncleared equity derivatives transactions?
Determining the territorial scope of the laws and regulations governing listed, cleared and uncleared equity derivatives transactions requires a detailed assessment of the relevant facts and is influenced by factors such as:
- who the parties are;
- where they are resident;
- what products or services are offered;
- the overall connection to Norway; and
- the context in which the assessment is to be made.
The STA, with relevant regulations, provides the basic and generally applicable framework for derivatives transactions. As a starting point, the STA applies to ‘activities in Norway’. In addition to this, certain rules, such as insider trading rules, apply to financial instruments listed on a Norwegian regulated market or if admission to listing has been applied for, and to derivatives where the value of the derivative fluctuates based on the value of the listed financial instrument.
If none of the parties to an equity derivative transaction is resident in Norway, and the only connection to Norway is that the issuer of the shares is a Norwegian resident company, the majority of the provisions of the STA will not apply. If one of the parties to the derivative contract is resident in Norway it will often lead to the STA being applicable. This will apply even more so where the party offering the investment service is resident in Norway.
The STA further sets out which of its provisions apply to foreign branches of securities firms offering investment services in Norway and to securities firms offering such services into Norway on a cross-border basis.Registration and authorisation requirements
What registration or authorisation requirements apply to market participants that deal or invest in equity derivatives, and what are the implications of registration?
As mentioned in question 4, equity derivatives are offered by banks and securities firms (dealers) to appropriate customers. Such dealers need to obtain authorisation from, and be approved by, the FSA, unless legally exempted from obtaining such authorisation by provisions in the STA. If the derivative contract in question is a standardised derivative listed on the Oslo Stock Exchange (see question 21), dealers must, in addition to the aforementioned, fulfil certain requirements in the Derivatives Rules when applying for registration as a member of the Oslo Stock Exchange marketplace for standardised derivatives.
Equity derivatives in the form of independent subscription rights are required to be registered in the issuer’s register of subscription rights in the VPS (provided that the company is a public limited company or its shares are registered in the VPS). In addition, the subscription rights are required to be registered at the account the holder of the subscription rights has at the VPS (see also question 6). Registration in the VPS has certain legal implications including, for example, that the holder of the registered right obtains legal protection against a colliding right registered at a later point in time and against a right not registered at the VPS.Reporting requirements
What reporting requirements apply to market participants that deal or invest in equity derivatives?
There are many reporting requirements applicable to market participants that deal or invest in equity derivatives. Pursuant to the STA, dealers shall make available to the public information about their business, their business risks and their subordinated capital pursuant to applicable regulations. Further, market participants conducting or arranging transactions in equity derivatives on a professional basis shall report to the FSA without delay if there is reason to suspect that a transaction might constitute insider trading or market manipulation. In addition, market participants that deal or invest in equity derivatives need to adhere to reporting requirements such as mandatory notifications and disclosure of acquisitions of large shareholdings, as stated in the STA and briefly described in question 14.
If a particular market participant who deals or invests in equity derivatives is an employee of an investment firm or its tied agents, a management company for securities funds, a financial institution, a pensions fund or another entity as stated in the STA, such employee will be required to report his or her own account trading to the particular undertaking pursuant to internal procedures and arrangements.
It is notable that EMIR, for example, contains requirements for the reporting of derivative transactions to transactions registers by the parties. This is different from the reporting requirements under MiFID II, where the reporting requirement lies with dealers that carry out transactions in listed securities.Legal issues
What legal issues arise in the design and issuance of structured products linked to an unaffiliated third party’s shares or to a basket or index of third-party shares? What additional disclosure and other legal issues arise if the structured product is linked to a proprietary index?
Issuance of structured products has decreased significantly over recent years in Norway. If such products are issued to the retail market, the disclosure requirements and the handling of potential conflicts of interest are very strict. These products have also caught the attention of the FSA and the Supreme Court of Norway has issued judgments relating to structured products (see question 13 for a description of the main judgment).
With the exception of the aforementioned, there arise no specific Norwegian legal issues in the design and issuance of structured products linked to an unaffiliated third party’s shares or to a basket or index of third-party shares. If the product is physically settled (not cash-settled), this complicates the structure of the product. Depending on the number of underlying shares included in the structured product and whether physical hedging transactions are entered into, general rules relating, for example, to disclosure, ownership and mandatory offers may be relevant. If the product is linked to a proprietary index, there are no specific Norwegian law issues that arise.Liability regime
Describe the liability regime related to the issuance of structured products.
See question 13.Other issues
What registration, disclosure, tax and other legal issues arise when an issuer sells a security that is convertible for shares of the same issuer?
When an issuer issues a convertible security, the possible increase of the stated share capital of the issuer shall be registered with the Norwegian Register of Business Enterprises. There are no particular disclosure requirements and no tax consequences for the issuer of the convertible security. If the initial sale of the convertible security is made as a public offer, it may trigger a prospectus requirement depending on the transaction specifications (including number of investors and size). If a controlling shareholder of the issuer subscribes for convertible securities of the issuer, the right to tax deduction could be affected. Please also note that transactions with related parties need to be separately scrutinised for possible tax consequences.
What registration, disclosure, tax and other legal issues arise when an issuer sells a security that is exchangeable for shares of a third party? Does it matter whether the third party is an affiliate of the issuer?
Generally, the same legal issues arise when an issuer issues a security that is exchangeable into shares of a third party, as opposed to shares in the issuer. However, in such circumstances, the issuer must have access to the relevant shares. If the shares to be exchanged are acquired, the acquisition can trigger disclosure and other legal consequences depending on the size of the shareholding, type of company and other deal-specific issues.
As a starting point, it should not matter whether the third party is an affiliate of the issuer, although in practice it can be important. Securities that are exchangeable into shares of an entity other than the issuer itself are rare in the Norwegian market. This is, presumably, largely because of the difficulty of getting access to the relevant shares if exchange occurs and a lack of commercial reasons to issue such instruments. In some of the transactions witnessed in the Norwegian market, the issuer has offered to exchange the instrument into shares of an affiliate as part of a restructuring or other merger and acquisition transaction.