Guarantees and collateral for acquisition financings in Sweden

Guarantees and collateral

Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?

Subject to any capital maintenance rules or provisions on financial assistance (as further described in question 15), there are generally no Swedish law limitations on Swedish or foreign-registered related companies providing guarantees (secured or unsecured) for their affiliates’ obligations.

If a Swedish limited liability company guarantees the obligations of another party without deriving any corporate benefit as a result, the guarantee will only be valid up to the aggregate amount of the distributable reserves of the guarantor at the time the guarantee is granted. The existence of corporate benefit is a question of fact, and there are no established methods to determine whether it has been obtained by the relevant guarantor, so it needs to be carefully analysed on a case-by-case basis. However, a company providing a downstream guarantee in support of obligations incurred by its subsidiaries is generally believed to have received adequate corporate benefit, unless special circumstances are at hand.

Furthermore, a Swedish limited liability company is prohibited from providing financial assistance:

• to facilitate the acquisition of its own shares or shares in any superior company (or in any subsidiaries of such superior company) that belongs to the same group of companies (defined as a group headed by a Swedish company); or
• made for the purpose of being applied against the obligations of any direct or indirect shareholder of that Swedish company or any person which is under the control of such direct or indirect shareholder, unless such direct or indirect shareholder or other person is a member of the same group of companies as the Swedish company and the parent of such group is domiciled in the EEA.

It is market practice in Sweden to include limitation language in the relevant finance documents when upstream or cross-stream guarantees are provided in financing transactions, so that the guarantee will be limited to the extent required by the application of the Swedish law provisions referred to above.

There are generally no costs or taxes associated with the provision of guarantees.

Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?

As mentioned in question 14, a Swedish limited liability company is prohibited from providing financial assistance to facilitate the acquisition of its own shares or shares in any superior company (or in any subsidiaries of such superior company) that belongs to the same group of companies (defined as a group headed by a Swedish company). The term ‘financial assistance’ is understood to cover any kind of financial assistance, including the provision of upstream loans to the bidder for the purpose of servicing the acquisition debt, providing guarantees or granting security for such debt, subordination of claims, providing indemnities or similar.

There are no whitewash procedures under Swedish law and the members of the target group cannot lawfully grant security or otherwise provide financial assistance to the lenders in connection with completion. However, it is customary in the Swedish market to agree that financial assistance can be granted by the members of the target group after a certain time has passed from completion of the acquisition. What constitutes a reasonable time is not clear, but the lender should have taken an actual credit risk on the purchaser.

Financial assistance provided in breach of this prohibition could be declared null and void and a violation of the relevant rules may also lead to criminal sanctions and result in personal liability for the directors of the target.

As mentioned in question 14, the financial assistance restrictions and corporate benefit limitations are usually addressed in the documentation by standard limitation language.

It should also be mentioned that minority interests will limit what a company and its subsidiaries can do. In a takeover process it is customary that the target and its subsidiaries do not provide guarantees or security for any debt incurred by the bidder (being the majority shareholder), until the bidder has become the owner of all the shares in the relevant target.

What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?

Sweden does not have a universal corporate security interest or a blanket lien covering all present and future assets. It is possible to grant business mortgages over a company’s business which cover property owned by the company, but certain assets are not included in such mortgages and additional separate security agreements may be required. The most common assets subject to separate security are shares, real property, bank accounts, trade or intra-group receivables, insurances, IP rights and rights under an acquisition agreement.

Lenders usually require a complete security package covering the material assets of the target group. As business mortgages and real estate mortgages may involve stamp duties, these are often subject to commercial discussions.

Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?

Each security interest must be perfected, by taking certain mandatory legal steps applicable to the relevant security, to become valid against creditors of the borrower and on the borrower’s insolvency. Certain security assets, such as shares and negotiable promissory notes, require delivery of the share certificates and notes to the lender or security agent, whereas security over intellectual property rights requires registration with the relevant authority.

Other types of security are, however, due to the salient Swedish perfection requirements, less practical to grant, perfect and deal with. The reason is that for the security to be validly created under Swedish law, the pledgor must be effectively deprived of its right to dispose of, or deal with, the assets being the subject of the security. For example, security over bank accounts or trade receivables is not very practical from a Swedish law perspective, because the pledgor will not be able to withdraw or in any other way dispose of the funds standing to the credit of a pledged bank account or receive any monies paid under the trade receivables. As a result, it is common that such security remains unperfected until the occurrence of a certain triggering event (often a default or an event of default), at which point the bank account is blocked and payment streams under trade receivables are directed to the lender or security agent. However, a delayed perfection causes a risk for the secured parties, as the security may be subject to hardening periods following the late perfection.

Future assets acquired by the borrower can usually be covered by the initial security agreement, provided that the security is sufficiently identified. The security interest over such future assets will not be perfected until the assets have been acquired and the perfection formalities have been complied with. A business mortgage will, however, automatically cover future assets (if of a type generally covered by a business mortgage).

Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?

Generally, once the security interest is perfected no further procedures are necessary in order for the security to remain in force. There are certain exceptions to that rule such as amendments to the definition of ‘secured obligations’ or similar or an increase of the loan amount which could require a security confirmation to be entered into in order to ensure that the provided security remains in place and continues to secure the secured obligations, including any increases or amendments thereto. As mentioned above, further perfection steps may be required in relation to future assets becoming part of the security assets.

Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?

No: ‘works council’ or similar consents are not required under Swedish law. A board resolution is typically sufficient.

Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?

Security under Swedish security documents is usually granted to the security agent acting on behalf of itself and the other secured parties. A change of lender will not affect the validity of the security held by the security agent on the assumption that the underlying claim remains the same, so no amendments of the security documents are usually required.

What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?

There is no equivalent to the Trust Indenture Act under Swedish law. However, the lender is typically only obliged to release the security once the secured liabilities and obligations under the finance documents have been finally discharged in full.

The finance documents usually contain provisions regarding the requirements that must be fulfilled before security can be released. In addition, it is common that a release letter or release agreement is entered into by the parties prior to a release of the security in order to set forth the terms of the release and when the security agent is contractually obliged to release the security.

Describe the fraudulent transfer laws in your jurisdiction.

Swedish law stipulates that any transactions made with a fraudulent purpose or intention should be deemed null and void. If it is evidenced that an asset stripping took place as a result of a fraudulent transaction, liabilities may be imposed on the parties to the relevant transaction.