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Transaction formalities, rules and practical considerations
Types of private equity transactions
What different types of private equity transactions occur in your jurisdiction? What structures are commonly used in private equity investments and acquisitions?
The Swedish private equity (PE) market remains active and the amount of PE transactions involving Swedish targets or Swedish PE fund managers (or both) continues to be high. The Swedish PE market is considered strong and is one of the largest in Europe (measured in terms of its share of GDP). Buyers and sellers are quite accustomed to private equity sponsors and their concerns, which facilitates deal execution and structuring.
Infrastructure-related deals have traditionally been frequent on the Swedish PE transaction market. In respect of the number of PE transactions, the wholesale and retail, consumer goods, financial institutions and technology (internet-based services, fintech, medtech, biotech and gaming) sectors have also dominated the Swedish market.
A majority of the Swedish PE players focus on mid-cap target companies. In general, target companies are exited through trade sales, secondary buyouts and IPOs. In recent times most of the established Swedish PE funds have quite mature portfolios, which are currently exited through IPOs owing to the high valuations present on the Swedish stock exchanges.
Controlled auctions are still quite commonly used regarding PE transactions involving non-public target companies. However, owing to the fierce competition for Swedish target companies, PE players continue to focus heavily on approaching target companies at a very early stage to conduct bilateral, exclusive negotiations.
PE transactions involving large-cap and mid-cap targets are often executed by PE funds organised as a limited partnership, wherein the institutional investors participate as direct or (normally) indirect limited partners, and wherein the fund manager acts as the general partner, normally owned through a private limited liability company specifically organised for this purpose. The domicile, tax status and internal structure of the manager sponsoring the fund will drive the choice of structure of the general partner. The acquisition of shares in a Swedish target company will be made by a foreign or domestic holding structure through a Swedish-incorporated and tax-resident special purpose vehicle (SPV or BidCo). Additional holding companies could be added to the structure to allow for flexibility in obtaining subordinated debt financing and for other tax and commercial reasons.
Corporate governance rules
What are the implications of corporate governance rules for private equity transactions? Are there any advantages to going private in leveraged buyout or similar transactions? What are the effects of corporate governance rules on companies that, following a private equity transaction, remain or later become public companies?
The Swedish Corporate Governance Board is an association that issues guidelines and best practices for the Swedish stock market. The Swedish Corporate Governance Code (the Code) sets out rules applicable to companies listed on a regulated market, under the principle of ‘comply or explain’. Several of the rules in the Code seek to improve transparency within public companies, by, for example, prescribing a certain composition of independent directors of the board and the requirement to annually publish a corporate governance report. The measures needed to be taken under the Code, from the moment of going public on a regulated market, impose additional costs and administrative burden on companies and their boards of directors. Although the Code may be applied on non-regulated markets, the use of the Code would not be of any significant value for a private company with a limited number of shareholders and low share float. Thus, going private would save costs and untie the prescribed board composition in this respect.
The governance arrangements commonly used by PE funds to gain management control over their portfolio companies tend to be relatively detailed, but we may see substantial variations between domestic funds compared to the governance structure deployed by European or global PE funds. It is a common strategy to influence and steer the portfolio companies by appointing directors of the board. There would be a limited availability to do so for a company listed on a regulated market, owing to the Code. Although the Code is possible to deviate from by explanation, deviations related to board composition are not well received by the market and regulators, making them very hard to justify in practice. Such portfolio company often has to elect a new, or amended, board of directors prior to going public, in order to be approved for listing at all.
Further, the public environment is generally full of market rules on transparency, besides the Code. By going private, thus lifting the stock off a marketplace, the company will avoid the requirements of press releasing price-sensitive events and publish information on holdings in the future. This may in itself be a reason to take the company private.
Issues facing public company boards
What are some of the issues facing boards of directors of public companies considering entering into a going-private or private equity transaction? What procedural safeguards, if any, may boards of directors of public companies use when considering such a transaction? What is the role of a special committee in such a transaction where senior management, members of the board or significant shareholders are participating or have an interest in the transaction?
Takeover bids are regulated under the Swedish Stock Market (Takeover Bids) Act. The Swedish Financial Supervisory Authority and the regulated market places monitor companies’ compliance with the regulation, which comprises of both the Takeover Bids Act and the more detailed takeover rules as set out by the Swedish Corporate Governance Board and the regulated market places (Nasdaq Stockholm and NGM Equity). The Swedish Securities Council may upon request provide guidance on interpreting the takeover rules and grant exceptions from the rules in specific cases.
The board of directors of the target company is prohibited from taking defensive actions without the support of the general meeting in connection with a takeover bid. Such actions involve measures taken in order to obstruct the bidder from acquiring the shares, such as pursuing a share repurchasing or a reversed offering to the bidder’s shareholders. However, the board of directors is generally not prohibited from screening for other bidders. A potential bidder will quite often find it challenging to successfully conclude a take-private transaction by launching a public bid without the cooperation and positive recommendation of the target’s board of directors since, as a rule, parts of the process and the requests from the bidder is under the discretion of the target company’s board of directors, such as the decision to allow or restrict the scope of a due diligence process of the target company or allowing certain bonus packages targeting employees of the target company to be offered. Consequently, one of the bidder’s main hurdles in such public deals is obtaining access to due diligence. Provided that the target’s board is prepared to recommend such an offer, the bidder will normally be admitted to a confirmatory due diligence of the target. It is therefore not surprising that a prospective acquirer (particularly PE funds) will almost always seek the upfront recommendation of the target board.
When the board of a listed company reviews a going-private proposal, the board must ensure to satisfy their fiduciary duties. The board of directors must prepare a report evaluating the company effects of the bid and present the board’s view of the bid and the reasoning thereof to the shareholders. The report shall include the board’s view on the consequences for the business and business strategy, the employment and the regions where business is conducted.
All directors of a listed company considering entering into a going-private transaction also must assess if and to what extent they can and should assist in the transaction, or if they have a conflict of interest. If a director in the target company has a specific interest in a potential bidder or in a bidder in competition of a first bidder, such director will become incompetent, and must not participate in the handling of an issue relating to the bid.
Further, if a director of the board, an employee of the management or a closely related party to such person of the target company participates in the bid, the board of directors shall obtain an independent valuation report in order to mitigate the bidder’s information advantage, compared to the shareholders’ general and perhaps limited information, related to the company value. The duty to obtain a valuation report is terminated if an independent third party provides a second bid on the target company, which is then functioning as a relative benchmark.
Are there heightened disclosure issues in connection with going-private transactions or other private equity transactions?
A takeover of a publicly listed company under Swedish law is more extensively regulated than takeovers of private companies. Both the prospective buyer of listed targets and the targets’ boards will have to observe a detailed set of rules and regulations that govern these types of transactions. These rules comprise, among others, insider dealings rules, mandatory offer thresholds, disclosure obligations with regard to ownership of shares and other financial instruments, limitations on the content of the offer documents, filing and regulatory approval of the offer documents, the length of the offer periods, employee consultations, limitations on type of consideration offered, etc.
In principle, there are several avenues of approach for PE houses desirous to taking a publicly listed company private under Swedish law - one of which is to launch a voluntary tender offer to the shareholders. The principal rules regulating takeovers of publicly listed companies is found in takeover rules as set out by the Swedish Corporate Governance Board and the regulated market places (eg, Nasdaq Stockholm). One of the beneficial features with a voluntary offer is that, in general, there are no limitations in law as to which conditions such an offer may contain as long as it can be determined whether they are fulfilled or not; this affords the PE fund a great deal of flexibility (eg, with respect to price, type of consideration and required conditions precedents). A voluntary tender offer may be launched at the bidder’s discretion as soon as it has sent notice to the relevant stock exchange that it undertakes to comply with the stock exchange’s regulations for takeover bids and to accept the sanctions that the stock exchange is allowed to decide on in the event of breaches to these regulations. The bidder can also choose to make the offer to only some of the shareholders. Additionally, the offers are conditional on more than 90 per cent of the shareholders tendering their shares since minority squeeze-out rules make it efficient to acquire the remaining shares. A voluntary offer can also be made subject to a financing condition, although this is rare.
What are the timing considerations for a going-private or other private equity transaction?
In a PE transaction relating to a private company under Swedish law, there is no fixed timetable. Except for competition clearance and sector-specific rules (eg, regarding financial institutions), corporate transactions in general do not require consent from Swedish authorities, hence regular share purchases can be completed in accordance with the time schedule agreed upon by the parties. However, standard waiting periods pursuant to relevant competition legislation will, of course, apply. The major issues affecting the timetable for private transactions in Sweden are as follows:
- the initial due diligence exercise that the purchaser intends to undertake;
- in the event that it is necessary to file the transaction with domestic or foreign competition authorities, the time required to prepare the necessary merger filing. In respect of a Swedish merger filing, a standstill obligation applies until the Swedish Competition Authority has cleared the transaction. After receipt of the filing, the Swedish Competition Authority has up to 25 working days to make its initial assessment of the proposed transaction;
- timing of and speed of work stream for financing discussions. The time required for such discussions will normally be heavily dependent upon the complexity and size of the deal;
- timing necessary for implementing relevant co-investment arrangements with investing management;
- timing necessary to establish the desired investment vehicles and special purpose vehicles in order to execute and complete the contemplated transaction; and
- if the target company is operating within certain industries or sectors, there may be specific requirements to consider (such as requirements for public permits and approvals). Such industries are, for example, banking, insurance, petroleum, hydropower, media, infrastructure and telecoms.
The issues influencing the timetable for going-private transactions in Sweden will, in general, be similar to those above. However, the following additional issues must be taken into account:
- the time necessary to prepare and receive approval of the offer document;
- the time necessary for the target’s board to evaluate the offer and any alternatives;
- in a voluntary tender offer, the offer period must be no less than two weeks and no more than 10 weeks, and in a mandatory offer, the period must be at least four weeks and no more than six weeks;
- the time necessary to conduct squeeze-out of the minority shareholders; and
- the application process for delisting the target in the event that the bidder has not managed to acquire more than 90 per cent of the shares and some of the remaining shareholders file an objection against delisting the target company.
Dissenting shareholders’ rights
What rights do shareholders have to dissent or object to a going-private transaction? How do acquirers address the risks associated with shareholder dissent?
When a company decides to suggest its shareholders take the company from public to private, the general meeting will have to resolve upon the matter. The resolution is valid if all shareholders present at the general meeting vote for the decision and that they together represent at least nine-tenths of all shares in the company. As a consequence of the above, 10 per cent or more of the votes can challenge a transaction.
To address the risks associated with shareholder dissent, the acquirer prepares and structures the transaction accordingly. Firstly, the acquirer may seek the pre-approval by the target’s board of directors for their recommendation to its shareholders and further secure conditional or unconditional acceptances from major shareholders of the target company. The target company may not enter into agreements with the acquirer, involving restrictions on competing bids or break-up fees, without a prior approval from the Swedish Securities Council. The approval has to be applied for in a certain course of action and may only be obtained under certain conditions, one of which is that the prospect of a bid is of benefit to the shareholders. Secondly, due preparations with respect to due diligence of the target company and preparations with respect to financing and other key conditions are conducted to mitigate the risk of revaluing or declining the offer.
What notable purchase agreement provisions are specific to private equity transactions?
Strategic players and PE players employ quite similar purchase agreement provisions on the Swedish market. The purchase agreement is usually adapted heavily to the business of the target companies and the type and leverage of the seller.
The main focus areas include calculation and payment of the purchase price, closing conditions, warranties and restrictive covenants. It should be noted that warranty and indemnity (W&I) insurance is increasingly common in the Swedish PE market, bridging gaps between the seller and the buyer.
It is common to see that the PE bidder will have to prove to the seller that financing of the purchase price is obtained through confirmation from the proposed debt provider prior to entering into a purchase agreement. Further, the bidder normally provides the seller with an equity commitment letter guaranteeing that drawdown of sufficient equity from the fund or the fund’s investors will be done to cover the remaining part of the purchase price due by BidCo not covered by the debt provider. The financing package is normally in place at the time of signing.
Regarding both PE buyers and sellers, a ‘locked box’ purchase price mechanism is preferred. The locked box mechanism is generally preferred as it offers certainty in the purchase price, avoids post-closing adjustments and potential disputes in relation thereto, and enables prompt distribution of sale proceeds to investors and sellers after closing. When a locked box mechanism is used, it is common that an interest component is introduced calculated from the locked box date, depending on the type of business, corresponding to, for example, the cash flow generated by the business. Depending on the seller, it is not uncommon that part of the purchase price is paid as consideration shares in the SPV, or part of the purchase price is financed by the seller through a vendor loan note.
Deal certainty is a decisive factor for PE players, and conditions precedents are in general kept to a minimum. The closing conditions most commonly seen are merger control clearance (if applicable), often implying heavy obligations on the buyer to obtain approval, and other sector-specific clearances and deal-specific requirements (such as the mitigation of issues discovered in the due diligence process).
A PE seller (at least in higher ranges of mid- and large-cap or highly competitive processes) usually only provides fundamental warranties such as title, capacity and authority and absence of certain events warranties (ordinary course), unless the liability is insured under a W&I insurance policy. Management might provide more extensive warranties than the PE seller, but usually all sellers are treated equally in the purchase agreement, mainly because of customary drag provisions under the sellers’ shareholders’ agreement where equal treatment is normally a general rule. There are several standard limitations to the warranties, including baskets and caps, exclusion of tax deductible items and exclusions for information provided during the due diligence process. A typical trend is, especially where the seller is a PE fund, extensive limitation of liability, facilitating clean exits as far as possible.
Finally, restrictive covenants including restrictions on how the business is run between signing and closing and non-competition/non-solicitation covenants of two to five years following the transaction are common, however this depends heavily on the type and leverage of the seller.
Participation of target company management
How can management of the target company participate in a going-private transaction? What are the principal executive compensation issues? Are there timing considerations for when a private equity buyer should discuss management participation following the completion of a going-private transaction?
How the managers and directors of the target company can participate is subject to the rules set out in questions 3 and 4. It is important that the board may not act in its own interests or allow itself to be directed by the interests of only one or some shareholders. However, a PE investor may (after seeking the approval of the board) discuss compensation, bonus and similar arrangements with the senior management prior to making its offer public. A determination of whether such approval should be given must be made based on the obligation to act in the interests of shareholders. The discussions then need to be disclosed when the offer is made public.
The compensation arrangement provided by PE investors typically includes management incentives shares in the SPV used to make the offer. The incentive shares are used to align the interests of management with the interests of the investor. Tax issues for this sort of compensation typically need to be addressed. Further, normally strong transfer restrictions apply through a shareholders’ agreement. The management typically need to sell back their shares should they wish to leave their employment through good-leaver and bad-leaver provisions; and drag-along and tag-along provisions are present to enable a smooth exit process.
What are some of the basic tax issues involved in private equity transactions? Give details regarding the tax status of a target, deductibility of interest based on the form of financing and tax issues related to executive compensation. Can share acquisitions be classified as asset acquisitions for tax purposes?
The vast majority of transactions on the Swedish PE market are conducted through share deals as a share deal is normally tax-exempt for the seller under the Swedish participation exemption rules. When acquiring a Swedish limited liability company the buyer assumes the historical tax risks related to the acquired company. The reassessment period in Sweden is six years following the fiscal year-end, meaning that tax issues for the fiscal year (FY) 2011 onwards (not openly disclosed) can generally be reassessed by the Swedish tax agency until 2017. The type of tax risks depends on the business conducted by the target company.
When establishing the acquisition structure the following tax issues should, for example, be considered:
- financing structure: to the extent that interest deductibility is achieved (see below), it can be possible to allow for the taxable income of the Swedish target group to be offset against interest payments related to the acquisition. Therefore, a Swedish acquisition company may be established. Provided the acquisition company holds more than 90 per cent of the shares in the target company, tax consolidation may be achieved by way of group contributions as of the year after the year of acquisition. Measures may, however, be considered to establish consideration sooner (eg, a merger or change of FY);
- repatriation of funds: there is no withholding tax on interest payments. Dividends from a Swedish company to an EU-resident parent company are normally exempt from withholding tax. However, should the beneficial owner of the dividend be a non-EU company, the amendments to the EU Parent or Subsidiary Directive regarding anti-abuse should be further analysed; and
- tax-optimised exit structure: under the Swedish participation exemption rules, a Swedish holding company can generally sell the shares in a Swedish wholly owned and unlisted subsidiary tax-exempt without any holding requirements.
It should be noted that there are no formal debt-equity rules, thin capitalisation rules or earning stripping rules in the Swedish tax system. Interest payments on external loans have historically been fully deductible in Sweden, and in 2017 the Swedish Ministry of Finance presented its proposal on how Sweden will adapt its legislation regarding interest deductions in line with the EU Anti-Tax Avoidance Directive of 12 July 2016. The government primarily proposes a general limitation of interest deductions in the corporate sector primarily as an earnings before interest and tax (EBIT) rule (where the cap for deduction is calculated as 35 per cent of EBIT) and, secondarily, as an earnings before interest, tax, depreciation and amortisation (EBITDA) rule (where the cap for deduction is calculated as 25 per cent of EBITDA). The proposal is now subject to consultation and the rules are expected to enter into force in July 2018.
The current Swedish interest deduction limitation rules for intra-group loans are fairly complex and the interpretation of the rules is not clear. It is worth mentioning that, according to the main rule, interest payments on all loans between affiliated companies are non-deductible. There are also special rules if the lender is a company subject to yield tax. In typical limited partnership-based PE-structures, these rules mean that no deduction is allowed for interest payments on shareholder loans granted by the fund. Albeit uncertainty arguably exists, potentially also interest deductions relating to loans granted directly by the fund or the investors in the PE-funds may be denied. In connection with the proposal referred to above, the existing interest deduction limitation rules are proposed to remain in place but are amended and provide that interest is not deductible where the debt relationship has been entered into ‘exclusively or as good as exclusively’ for the group to obtain a significant tax benefit. Deductibility also requires that the lender:
- is resident within the EEA;
- is resident in a country with which Sweden has a double tax agreement; or
- is subject to tax of at least 10 per cent.
Dividend payments on stocks (common stocks or preferred stocks) are not deductible for Swedish limited liability companies (there are exceptions for companies classified as investment companies and certain associations).
As a general rule, all types of salaries and benefits paid to an employee should be considered an employment income taxed with progressive tax rates. Salary costs are also subject to social security contributions for the employer, which is a deductible cost for the employer.
Generally, management incentive programmes in Swedish target companies are structured so that management is offered the opportunity to invest in the fund or target companies through an instrument that will qualify as a security for Swedish tax purposes (shares, warrants, convertible bonds, profit participation loans). In order to reduce the initial investment, management may be offered to invest in the highly debt-financed acquisition company. An alternative may be to issue warrants or to use different types of share classes. In order to avoid a tax exposure it is important to make a third-party valuation of the instruments offered to management and to ensure that the instruments are not subject to severe restrictions.
Share acquisitions are in general not classified as asset acquisitions for tax purposes. One exception worth mentioning is that Sweden has controlled foreign corporation rules stating that a foreign company registered in a low-tax jurisdiction owned by a Swedish company or Swedish individual should be disregarded for tax purposes meaning that the Swedish company or individual for tax purposes are considered holding the assets of the foreign company directly.
Debt financing structures
What types of debt are typically used to finance going-private or private equity transactions? What issues are raised by existing indebtedness of a potential target of a private equity transaction? Are there any financial assistance, margin loan or other restrictions in your jurisdiction on the use of debt financing or granting of security interests?
The typical debt financing of a going-private or PE transaction in the Swedish market combines (two or more of) subordinated debt that is treated as equity for ranking and covenant purposes, mezzanine or high-yield bond debt and senior bank loans. The concept of second lien is rarely seen in the Swedish market. Mezzanine debt is not as commonly used as it was pre-crisis, whereas the market for high-yield bonds has seen a significant development in the past few years.
Typically, existing indebtedness in a target group will be refinanced on the closing of an acquisition. Timing issues may arise in relation to prepayment notices, where the target’s management is hesitant to send a binding notice of prepayment to the incumbent bank group before they are completely certain that new funds will be available on closing. Commercial and timing issues may also arise in relation to prepayment or breakage costs.
Swedish law contains financial assistance rules that prohibit the making of loans or granting of security or guarantees with the purpose of financing an acquisition of shares in the lender or grantor itself or its parent or sister company. There is no whitewash procedure under Swedish law; however, the prohibition on financial assistance is not perpetually linked to a certain loan (differing from, for example, Norwegian law). Therefore, a target company or its subsidiaries cannot provide cash loans, security or guarantees in direct relation to an acquisition of said target. However, the target group may provide security and guarantees after a period of time; subject to certain other caveats regularly advised on by practitioners.
The granting of security and guarantees by a target or subsidiary under Swedish law is further subject to general company law restrictions on distributions, certain prohibited loans and the purpose of a company’s business. Whether and to what extent such restrictions apply, and how they are dealt with, requires analysis on a case-by-case basis. Generally, however, a limitation language to address these issues is inserted in any relevant security or guarantee document.
Debt and equity financing provisions
What provisions relating to debt and equity financing are typically found in going-private transaction purchase agreements? What other documents typically set out the financing arrangements?
In a going-private transaction, the bidder may include a financing condition in its offer. However, such condition may not relate to equity financing and could effectively only be invoked should the financing banks fail to fulfil their obligations under the relevant loan agreement. The debt financing for a takeover bid therefore typically includes ‘certain funds’ language, meaning that the lenders may not refuse to make available acquisition facilities unless a default occurs because of circumstances within the bidder’s control. Debt facilities will be negotiated and either a full loan agreement or a short-form loan agreement (enough for the banks to fund their participations but intended to be replaced by a fully negotiated agreement in time for completion) will typically be signed prior to submitting a binding offer.
Fraudulent conveyance and other bankruptcy issues
Do private equity transactions involving leverage raise ‘fraudulent conveyance’ or other bankruptcy issues? How are these issues typically handled in a going-private transaction?
The Swedish financial assistance regulations prohibit a target company from granting loans or in other ways providing assets to enable a third party in acquiring the target company’s shares. These restrictions decrease the risk of creditors being defrauded which leaves fraudulent conveyance issues uncommon. Fraudulent conveyance issues and bankruptcy issues are also handled by warranties and representations made by the seller in the purchase agreement, stating that the target company is not insolvent or that insolvency proceedings or similar proceedings have not been started or threatened.
Shareholders’ agreements and shareholder rights
What are the key provisions in shareholders’ agreements entered into in connection with minority investments or investments made by two or more private equity firms? Are there any statutory or other legal protections for minority shareholders?
Shareholders’ agreements are deemed standard documentation to regulate business strategy and protect investments in practically all joint investments involving financial players such as PE funds. To ensure foreseeability or to enable the value creation of, for example, the sponsor or the management, the agreement typically contains provisions on corporate governance issues, refinancing and exit, share transfer restrictions and specific sanctions. From a governance perspective, an important requirement for the sponsor is to ensure that the shareholders’ agreement provides the sponsor with continuous access to updated information about the company.
The ability to appoint directors, and to control the board if necessary, is one of the most important tools for a sponsor. It is not uncommon, though, that some PE funds want to appoint an independent chairman to provide strategic oversight and create an independent bridge between the sponsor and the investing management, and some international funds may also want to implement a separate management board. The sponsor-appointed directors will usually have control over important decisions through veto rights or preferential voting rights vested in them through the shareholders’ agreement (or both); such decisions typically being new acquisitions and disposals, approval of the business plan and annual budgets, new investments outside of the business plan, etc, as well as provisions about appointment and dismissal of directors (always subject to consent from the general meeting, often meaning the sponsor itself), as well as audit and remuneration, transfer and issue of shares and financial instruments. Other typical provisions include confidentiality and other restrictive covenants, management of an exit process, and customary drag-, tag- and shot-out provisions. Some sponsors may divide the list of vetoes between those requiring director consent and those that require the consent from the sponsor itself at shareholder level.
It has been increasingly common to include a detailed set of protective provisions in Swedish portfolio companies’ articles of associations. Traditionally, most domestic PE funds have preferred to keep these types of provisions in the shareholders’ agreements for confidentiality and flexibility reasons. For the past few years, it has nonetheless become more common to also include certain protective provisions in the articles, especially if the portfolio company is controlled by an international PE fund.
It is important to note that neither the board (as a governing body) nor the CEO will be bound by veto rights in a shareholders’ agreement. This means that even if a shareholders’ agreement grants a director appointed by the sponsor a veto over certain important board resolutions, there will always be a risk that the board disregards such rights of veto and instead resolves the matter in question as the board’s majority finds appropriate. In order to cater for the risks of disobedience by the board, one could potentially consider requesting each director to sign some form of adherence agreement to the shareholders’ agreements. Such adherence would potentially be deemed unreasonable by a court since the board owes fiduciary duties to the shareholder community as a whole and the company that are above those of the shareholders appointing the respective director, unless otherwise set out in the company’s articles of association. As a result, some funds seek to cater for such risk by implementing provisions in the portfolio companies’ articles of association, stating that the shareholders and the company have entered into a shareholders’ agreement regulating, inter alia, restrictions on the transfer of shares, veto rights, etc.
Normally, an appropriate and well-tailored enforcement mechanism in the shareholders’ agreement itself will, however, in most situations, be considered sufficient to ensure that no party (in particular the directors holding shares) has any incentive to breach the terms of the shareholders’ agreement, and therefore that it will not be necessary with any further enforcement. In practice, most Swedish funds seem to rely on such enforcement mechanisms in the shareholders’ agreements instead of implementing lengthy articles of associations.
The term of Swedish shareholders’ agreements is typically fixed (eg, for the investment horizon of the sponsor or 10 years), but automatically renewed. This is because of Swedish principles of law making it possible to terminate indefinite agreements subject to a ‘reasonable’ notice period.
As the vast majority of PE transactions involve acquisition of a majority stake, shareholders’ agreement minority protection rarely becomes a major issue. However, the Swedish Companies Act contains varying minority protection provisions. As a general principle all shareholders should be treated equally. This means that the majority investor is prohibited to make illegal value transfers that benefit itself at the cost of other shareholders. Further, certain decisions such as new share issues that are not offered pro rata to the current investors require the support of a qualified majority. Finally, there are certain specific minority protection rules (eg, entitling the minority to appoint an additional auditor and special requirements for majority investors acting poorly to redeem the minority shares at market value).
Acquisition and exit
Acquisitions of controlling stakes
Are there any legal requirements that may impact the ability of a private equity firm to acquire control of a public or private company?
There is no general regulation with certain acquiring restrictions related to private equity firms. However, depending on the business acquired there may be restrictions and requirements such as capital requirements, ownership assessments and permits related to, for example, financial institutions and insurance companies.
If a public company is to be fully acquired, the regulation for public takeovers applies and sets out the rules for such process. If an acquirer, directly or indirectly, obtains 30 per cent or more of the votes for all shares in the target company, a mandatory bid requirement on the whole target company may be triggered.
Information requirements related to holdings in public companies applies as an acquirer crosses a holding of 5, 10, 15, 20, 25, 30, 50, 66 and 90 per cent of the total votes or shares of the target company. This is not a restriction itself, but a mandatory compliance regulation increasing the disclosure burden of the shareholders and the transparency of the company.
What are the key limitations on the ability of a private equity firm to sell its stake in a portfolio company or conduct an IPO of a portfolio company? In connection with a sale of a portfolio company, how do private equity firms typically address any post-closing recourse for the benefit of a strategic or private equity buyer?
There are no general exit restrictions specific to PE investors. Selling shares is of course subject to transfer restrictions in the articles of association and shareholders’ agreement concerning the target company. However, as mentioned in question 13, PE-initiated shareholders’ agreements typically contain drag-along provisions that enable the PE investor (and the remainder of the owners) to exit the target company.
Since PE funds have a limited life span, the PE investors typically reject to offer extensive warranties and indemnifications as mentioned above. The strength of the parties and the state of the target company determine what warranties and indemnifications are needed. In secondary buyouts it is not uncommon that the PE investor needs to provide more warranties than in other cases. PE players typically reject to provide an escrow to cover potential claims. Therefore, especially in the Swedish mid-cap segment, the interest for W&I insurance has increased, providing clean exits and minimising time spent on negotiating the warranties. W&I insurance is typically required when PE investors are buying from company founders that will keep a minority stake in the target company. However, as mentioned above, there has also been an increase in the use of insurance when the PE investor itself exits a portfolio company because of the mature Swedish W&I insurance market (offering reasonable pricing for extensive insurance coverage).
Portfolio company IPOs
What governance rights and other shareholders’ rights and restrictions typically survive an IPO? What types of lock-up restrictions typically apply in connection with an IPO? What are common methods for private equity sponsors to dispose of their stock in a portfolio company following its IPO?
The starting point related to the shares in a going public transaction is to dissolve all rights and restrictions related to the shares, including internal restrictions such as within a shareholders’ agreement and external restrictions such as within the company’s articles of association. All rights in violation with applicable market rules must be dissolved, of which the board appointment rights is one of the central subjects of discussion if a majority shareholder retains its majority position post the initial offering.
Lock-up restriction may apply depending on the transaction and the function and demand of the appointed advisers, whether it is book runners, underwriters or the recommendation of any other financial adviser. If the owners are considering a full exit of their holdings, a lock-up period will mitigate the price drop of a sudden disposal. If a financial adviser is acting as an underwriter, he or she would normally not be willing to take on the associated price risk of such sudden disposal upon listing. A lock-up period of at least six months or a year would be common in such case.
When disposing the shares, the owners normally use book runners and financial institutions to identify investors and allocate shares, sometimes following an auction process. If an underwriter is appointed, the institution will itself purchase the agreed number of shares if the institution fails to allocate the shares to the market at the time of listing.
Target companies and industries
What types of companies or industries have typically been the targets of going-private transactions? Has there been any change in focus in recent years? Do industry-specific regulatory schemes limit the potential targets of private equity firms?
Historically, the number of going-private transactions has been limited on the Swedish market because of high valuations of Swedish public companies. In recent years, however, public tender offers, involving PE players as well as strategic buyers, have increased significantly. The targets include companies in the technology, manufacturing and retail sectors.
What are the issues unique to structuring and financing a cross-border going-private or private equity transaction?
Being one of the most internationally integrated economies in the world, Sweden is generally considered to be an attractive country in which to invest. There are no structuring or financing issues that are unique to cross-border going-private or PE transactions. Foreign entities may acquire shares in Swedish corporations or become partners in Swedish partnerships without obtaining permission from any Swedish authorities. Sweden has no foreign investments restrictions, save from certain sensitive areas such as the energy, nuclear and defence sectors.
Club and group deals
What are some of the key considerations when more than one private equity firm, or one or more private equity firms and a strategic partner or other equity co-investor is participating in a deal?
Swedish law does not contain any restrictions that prevent or constrain a PE firm to take part in club or group deal among other PE firms (or one or more PE firms and a strategic partner). When PE firms enter into a cooperation of this nature, the financial strength and capability of each party are the focus of attention.
In order to set out the respective rights and obligations of each party as joint owners, the conditions between the participants in a club or a group deal are generally regulated in a shareholders’ agreement. The tenderers need to respect any confidentiality undertakings in favour of the seller when forming the club. A prohibition against entering into a club without the seller’s consent is common.
Issues related to certainty of closing
What are the key issues that arise between a seller and a private equity buyer related to certainty of closing? How are these issues typically resolved?
Although deal-specific, some key issues related to certainty of closing can be identified. The competition clearance process and the process of mandatory government approval concerning target companies in certain sectors (eg, financial institutions) cannot be evaded if they are or become applicable. Further, the purchaser’s ability to obtain financing at a reasonable cost and the management of due diligence findings prior to closing are of course subject to negotiation that largely depends on the parties’ negotiation power.
The parties typically try to manage all non-mandatory filing-related issues prior to signing. If signing and closing cannot take place simultaneously, certainty is traditionally obtained by making the closing subject to certain conditions (related to the above-mentioned issues) that have to be fulfilled. A waiver clause is included in the purchase agreement that allows either party to, at its sole discretion, waive the conditions not fulfilled or to terminate the agreement. Traditionally, neither of the parties is entitled to a termination fee as a result of a condition precedent not being satisfied. The closing precedents are, however, typically kept to a minimum. For instance, PE transactions between Swedish players rarely contain material adverse change provisions.
Update and trends
Update and trends
Have there been any recent developments or interesting trends relating to private equity transactions in your jurisdiction in the past year?
In 2017 the Swedish PE market remained stable and heavily focused on the mid-cap segment - where domestic fund managers are experienced and the availability of targets in need of growth capital is high. On the fundraising side, notable events during 2017 include the final close of EQT’s €4 billion third infrastructure fund, EQT’s €1.6 billion Mid-Market Europe Fund as well as Adelis Equity Partners’ second fund of €600 million.
2017 saw a continued strong deal flow in the Swedish tech sector, and specifically the vibrant fintech sector, with a significant investment by Permira into Klarna (backed by Sequoia Capital and Atomico) and iZettle. From the European perspective, Sweden is among the four countries which attracted the highest investment to the fintech sector, both in terms of number of deals and dollar investments. The sector also saw a spectacular large-cap deal when Nordic Capital sold its payment services portfolio company Bambora to French Ingenico Group for €1.5 billion.
Both foreign and domestic PE funds continue to divest their mature Swedish portfolios, and exits through IPOs continue to be an attractive approach. Among the notable PE fund IPO divestments in 2017 are Triton/KKR’s divestment of Ambea (healthcare), the IK Investment Partner-led IPO of Actic Group (fitness), FSN’s IPO of Instalco (industrial services), Nordic Capital’s IPOs of Munters (air treatment and climate control) and Handicare international (medtech) and Segulah’s divestment of its holding in Balco (construction).
The Swedish PE community continues to be affected by the tax authorities’ continuous scrutiny of PE structures and the taxation of owners in PE management companies. In April 2017, the Administrative Court of Appeal delivered 85 judgments against PE employees of the leading Swedish management companies Altor, EQT, IK Investment, Litorina, Nordic Capital and Triton, ruling in favour of the Swedish Tax Agency and holding that the returns or profits on capital received by the employees should be treated as income from services according to rules that apply to companies instead of being taxed as capital gains. The judgments have been appealed to the Supreme Administrative Court.
2017 also saw the publication of the final report by the government commission calling for a cap on profits for all private companies operating in the education and welfare sectors funded by tax money, which continues to cast a pall over the willingness to invest in the sector.