I OVERVIEW OF M&A ACTIVITY
Activity on the Danish private M&A market is picking up in 2016 and looks more promising than it has been during the past couple of years. With plenty of financing available, Danish M&A activity is predicted to be buoyant in 2016, despite a relatively slow start to the year. Large Danish corporates, including Novo, are sitting on big piles of cash, and private equity funds are eager to both buy and sell.
As elsewhere in Europe, the past few years have been affected by first the financial turbulence in 2008 to 2009, and then the sovereign debt crises and the global macroeconomic uncertainties. Confidence now seems to be rising, but market players are still attentive to new disturbing events. Following several years of low activity, there are many players in the M&A market, including corporates, industrials and private equity firms, which are keen on carrying out transactions both as sellers and buyers (especially within the small and medium-sized companies segment).
The current market conditions have led to more tailored sales processes with one selected bidder, but the first half of 2016 has welcomed several structured processes. Furthermore, it typically takes longer to complete a transaction, since bidders are spending more time on the valuation and analysis of the business and any issues arising in the deal context.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
i Private M&A transactions
Privately negotiated M&A and similar corporate transactions are largely unregulated under Danish law, and purchase agreements are structured in the context of general contract law.
Acquisition agreements in the Danish market – being either share purchase or asset purchase agreements – basically apply the same structures and principles as those known from UK and US purchase agreements, but significant differences in tradition do exist. For example, in Danish M&A practice, information reasonably disclosed in due diligence (and not only information in a disclosure letter) will typically be allowed to qualify the seller’s representations and warranties.
The corporate-specific legal framework is, on a case-by-case basis, supplemented by various and more general regulations found in, inter alia, the Danish Contracts Act and the Danish Sales of Goods Act, which are both applicable to most contracts, the Danish Competition Act, which also covers antitrust, the Salaried Employees Act and the Danish Act on Transfer of Undertakings.
ii Public M&A transactions
The primary legal regime for public takeovers in Denmark is the Danish Securities Trading Act2 and the accompanying Executive Order on Takeover Bids3 (Takeover Order) implementing the EU Takeover Directive (2004/25/EC). The rules on prospectuses and listing of shares are relevant if a share consideration is offered.
The Takeover Order applies to takeovers of Danish and non-Danish target companies with shares admitted to trading and an official listing on a regulated market or an alternative marketplace in Denmark. Following the closure of the GXG Markets A/S regulated market on 18 August 2015, only one regulated market exists in Denmark, operating under the name ‘Nasdaq Copenhagen A/S’. In addition, securities may be traded on an alternative marketplace called Nasdaq First North Denmark, which is categorised as a multilateral trading facility and is not a regulated market. If shares are also listed in another EEA Member State, the Takeover Order applies if the initial listing took place in Denmark or if the securities were listed at the same time on different regulated markets, and the Danish Financial Supervisory Authority (DFSA) has been appointed as the competent supervisory authority by the target company.
In addition, the Danish Companies Act governs public takeovers by way of statutory mergers, and contains certain limitations as to how a takeover or a defensive strategy may be legally structured.
The takeover regulation sets forth that the acquisition of a ‘controlling influence’ by an acquirer triggers an obligation of the acquirer to submit a tender offer to minority shareholders. A duty to make a mandatory offer is triggered upon a transfer of shares whereby the acquirer obtains control by way of a ‘controlling influence’.
Where an acquirer holds less than one-third of the voting rights, control is established if the acquirer has:
- a the power to exercise at least one-third of the voting rights by virtue of an agreement with other investors;
- b the power to control the financial and operating decisions of the target company pursuant to any articles of association or agreement; or
- c the power to appoint or remove a majority of the members of the board of directors, and the board has control of the business.
The existence and effect of potential voting rights, including rights to subscribe for and purchase shares that are currently exercisable or convertible, are aggregated when assessing whether the thresholds have been reached.
The Danish takeover regulation recognises the concept of ‘joint control’ according to which independent parties ‘acting in concert’ may be considered as one party under the takeover regulation.
The obligation to make a mandatory offer is triggered even though the controlling interest is acquired through a public offer or subscription of new shares in the company against contribution in kind or for cash.
A mandatory offer must be made as soon as possible and no later than four weeks after the obligation has been triggered. The Takeover Order sets out detailed rules for mandatory offers: for example, the minimum price and the form of consideration (cash only or shares).
The mandatory takeover rules do not apply if control has been obtained by way of a voluntary takeover offer allowing all shareholders to sell all of their shares in the bidder and the bidder, as a result of such voluntary offer, controls more than 50 per cent of the votes in the target company.
The above-mentioned rule is that control is established if the acquirer owns at least one-third of the voting rights in the target company, unless it can be clearly demonstrated that such ownership, in exceptional cases, does not constitute a controlling influence (e.g., voting caps).
A subsequent squeeze-out of minority shareholders in limited liability companies generally requires that the bidder hold at least 90 per cent of the share capital and voting rights. The support of the target’s board is not required to effect the squeeze-out.
The DFSA has been the supervisory authority with respect to public takeovers in Denmark since 1 September 2006. Denmark has no takeover panel, and the administration of the takeover regime lies with the DFSA and the DFSA’s Governing Board (replacing the Danish Financial Council with effect from 1 July 2014). Due to a limited number of public takeovers in the Danish market and confidentiality constraints, publicly available decisions of the DFSA are very limited. Bidders and their advisers will therefore often have to consult with and obtain opinions from the DFSA on a non-binding basis.
The Danish Companies Act contains the principal regulation of limited liability companies, and the regulation contained in the Danish Companies Act plays a central role for both public and private M&A. A distinctive feature of Danish corporate law is its acceptance of voting right differentiation and voting caps – even in publicly traded companies.
The Danish Companies Act contains ‘break-through’ provisions allowing for suspension of voting rights differentiation and other control restrictions in connection with a tender offer. The provisions, however, function only as an ‘opt-in’ regime, and their application must be approved in advance by a qualified majority of shareholders.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
i Development in Danish corporate law
Danish corporate law has been reformed in recent years by amending in particular the Danish Companies Act (Companies Act), which entered into force on 1 March 2010, with a second, third and fourth part becoming effective as of 1 March 2011, 1 January 2014 and 15 March 2015, respectively.
The Companies Act facilitates four types of companies where the shareholders’ liability is limited to the capital contributed as payment for the shares:
- a the public limited company (A/S);
- b the private limited company (ApS);
- c the limited partnership company (P/S); and
- d the newly introduced private limited company (IVS) with a low minimum capital requirement of 1 Danish krone, which is mainly intended and expected to be used by entrepreneurs and other new businesses.
The provisions of the Companies Act applicable to the A/S apply mutatis mutandis to the ApS, the P/S and the IVS.
With effect from 15 December 2014, Danish companies should register shareholders owning 5 per cent or more of a company with the Danish Business Authority in the Danish Public Shareholders’ Register. Registration must be made when any shareholder in an A/S, ApS, IVS or P/S reaches a holding of shares or voting rights totalling 5 per cent of the share capital or the voting rights of the company. The register has been accessible to the public since 15 June 2015.
The Danish Public Shareholders’ Register arises out of the reform relating to the Companies Act. The purpose of the public register is to create the enhanced transparency of ownership in Danish companies. The register is also established to improve Danish compliance with the EU regulation that is to counter money laundering and improve public authorities’ possibilities for investigating and combating white-collar crime.
ii Development in Danish takeover rules
Recent amendments to the Danish Securities Trading Act substantially change the rules on takeover bids in Denmark with effect from 1 July 2014. The amended Danish Securities Trading Act specifies the threshold for when a mandatory bid must be made (see above). Under the new rules, a shareholder must make a mandatory bid when he or she holds one-third or more of the voting rights after an acquisition of shares in a listed company. The amended Danish Securities Trading Act brings the Danish rules on takeovers in line with the rules in a number of other European countries.
iii EU Market Abuse Regulation (MAR) and MiFID II
On 1 July 2016, the Danish Securities Trading Act was amended as a result of the entering into force of MAR. Consequently, all existing provisions in the current Danish Securities Trading Act regarding material non-public information and inside information, disclosure, insider trading, price manipulation, etc., will be abolished and replaced by the provision in MAR that will be directly applicable in Denmark. Issuers whose shares are listed on Nasdaq Copenhagen A/S must adhere to the terms and conditions for admission for listing as set out in the latest revised version of the Nasdaq Copenhagen A/S ‘Rules for issuers of shares’ of 3 July 2016, which are being amended to be aligned with MAR.
On 1 January 2017, the Danish Securities Trading Act will be subject to a revision and replaced with a new act, the Capital Markets Act. While the new Act will implement MiFID II into Danish law and include changes related to the MiFIR, the Danish Securities Trading Act will not change the existing rule of law on most of the substantial areas in the existing Danish Securities Trading Act, such as the rules on prospectuses, public bids, major shareholder flaggings, etc.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
The strengthening US economy has led to a weakening of many global currencies against the dollar. These conditions seem to be giving a boost to cross-border M&A activities for the US corporate sector, as many assets in Europe appears more attractive in dollar terms. The inbound M&A market in Denmark is dominated by players from the Nordic countries, the rest of Europe and North America. Asian and Middle Eastern investors are rare, and it therefore attracted attention when Taiwan’s GlobalWafers Co Ltd, after a bidding process, acquired the entire silicon business from the listed Danish company Topsil Semiconductor Materials A/S.
Activity was bolstered by the €1 billion acquisition of roofing manufacturer Icopal by GAF Corporation, a US-based provider of shingles and roof materials, which accounted for 60 per cent of Danish M&A deal value during Q1 2016. Outbound M&A, on the other hand, enjoyed a strong start to the year due to DONG Energy’s €884 million divestment of its UK-based offshore wind farm to Kirkbi and PKA. As a result, Denmark’s outbound deal activity seems to have reached its highest Q1 2016 deal value since 2013 (12 deals, €1.6 billion).
Large Danish companies have turned their attention to streamlining and disposing of non-core activities. AP Moller–Maersk divested Esvagt, and could still sell assets including Svitzer and Damco.
In addition to foreign industrial buyers, Nordic and pan-European private equity houses remain very active in the Danish market.
As for financial advisers, Danish and Nordic players, including SEB, Carnegie, Nordea, Handelsbanken, Danske Bank and FIH Partners, continue to receive the majority of the larger mandates in the country, and they are involved in most of the big-ticket deals. A considerable number of other corporate finance advisers are active in the market for mid-sized and smaller M&A and equity capital market and debt capital markets transactions – in particular, ABG Sundal Collier, Clearwater International, Dansk Merchant Capital, Audon, ATRIUM Partners, Zenith Advisory, Nordic M&A, etc.
The ‘big four’ auditing firms all have a presence in Denmark after KPMG International opened a new office following the merger in 2013 between the Danish activities of EY and KPMG, with the newly merged firm looking to operate under the EY name. Further, the corporate finance advisory firm, Schrøder Partners, was acquired by BDO Danmark to strengthen its services within this space.
The international investment banks are typically active in the larger international deals and in initial public offering or equity capital market processes involving offerings outside Denmark.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
M&A activity in the past was spread across many different sectors and industries. The energy, wind and infrastructure, financial, real estate, retail, foods and healthcare sectors were reported as the most active for M&A. Other sectors that have attracted investments include the consumer sector, the services sector and the energy sector. The global increase in biotech and pharma deals has also been reflected on the Danish market.
There is a trend towards further consolidation within the telecoms and the financial sectors. Although maybe of more interest at the venture capital stage, the Danish growth equity scene is becoming increasingly interesting – in particular after the successful exits of Sitecore, a Denmark-based provider of customer experience management software, to EQT Partners AB along with its investors Danica Pension and Sampension KP Livsforsikring A/S and the management of Sitecore Corporation A/S.
During 2015 and first half of 2016, the private M&A market has been picking up, although the number of transactions is not at the levels of 2006 and 2007 yet. Most transactions may still take a longer time to complete due to negotiations and preparation periods, but the risk appetite has increased. In general, it can be noted that although interest in transactions has increased, interest in participating in structured processes such as controlled auctions remains rather low. Instead, actors aim at negotiated processes. Having said that, controlled auctions are still seen if the target company is expected to attract interest from many potential investors, including an increased interest from Chinese investors, even though the number of actual successful deals continues to be very low.
The financial, real estate and energy sectors will likely continue to see substantial activity in the near future, but apart from this it is very difficult to predict the focus for M&A activity in the Danish market in the next few years.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
Most credit institutions in Denmark have put the financial crisis behind them. Loan financing for acquisitions of Danish target companies are in most cases supplied by Danish and Nordic banks with offices in Denmark. Other European and US banks are typically involved in only the largest deals where syndication is required.
The combination of a level of capitalisation that for many institutions exceeds the current capital requirements considerably, very low interest rate levels, high excess liquidity cover and limited demand for new loans has created a basis for fiercer competition for customers. Competition may intensify further in the near future, and it appears to be of importance that the banks do not lower their credit standards. Direct lending from the Danish pension funds is also being perceived as an interesting new development in the market for corporate financing.
Highly leveraged private equity deals are still limited in number in the Danish market, and most of the largest M&A transactions in the past year have involved industrial buyers less dependent on loan market financing.
In M&A transactions that have attracted bank financing, comfort for the banks is prerequisite through financial covenants and comprehensive collateral packages. Floating charges and pledges in receivables are a common part of financing or refinancing packages. Registration fees amount to 1.5 per cent of the secured amount.
The Danish Companies Act allows target companies to provide financial assistance subject to certain conditions and safeguards and enables banks to obtain valuable collateral for acquisitions financing. The financial assistance cannot exceed distributable free reserves and must be reasonable considering the financial position of the target company. The financial assistance is further subject to shareholder approval and public registration. In addition, the target’s board of directors is required to assess the creditworthiness of the receiving party and to issue a statement on, inter alia, the expected implications of the financial assistance on the target’s liquidity and solvency.
Partly due to these fairly strict and procedurally cumbersome requirements, post-acquisition lending and dividend payments are in most cases preferred to the application of the financial assistance regulation.
VII EMPLOYMENT LAW
The Danish labour market is unique for having a long-standing tradition of agreements between employer organisations and labour unions, and a substantial part of the Danish labour market is organised under such bilateral negotiated agreements without governmental interference. Collective agreements typically regulate work conditions in relation to, inter alia, minimum pay, termination of employment, work hours, time off, pensions and vocational training.
Danish employment law and collective bargaining agreements and local agreements are generally well balanced and seldom affect the structure or timing of M&A transactions.
Through bilateral negotiations, employer organisations and trade unions have reached a balance between flexibility and security (often referred to as ‘flexicurity’). This approach is an advantage for both employers and employees, as on one hand it allows the companies the flexibility to adjust to the market demands, and on the other it increases employment security, because companies are not afraid to hire the people they need.
In asset purchase transactions, the Danish Act on the Transfer of Undertakings4 provides for an automatic transfer of employees and related rights and obligations. If the asset purchase constitutes a transfer of an autonomic business entity, this implies an obligation for the purchaser to take over the employees who have been engaged by the acquired business activity. Employees are entitled to be taken over on the same terms and conditions that have applied during the employment with the seller, including seniority as well as rights for holiday allowances that are maintained. If the seller has been bound by a collective bargaining agreement, the purchaser will be considered as having acceded to said collective bargaining agreement if no announcement is given within a certain time limit to the union being a party to the collective agreement.
In M&A transactions, simple notification or consultation procedures typically have to be observed, but employees cannot block or postpone a transaction. Employees are entitled to be consulted prior to the transaction if significant changes to their employment terms are planned or intended as a result of the transfer.
For pre-transaction agreements, it should be noted that Danish employment law restricts the use of non-solicitation clauses, preventing, for example, a buyer from hiring target employees. Danish law generally entails that non-solicitation restrictions are enforceable only if the individual employee has accepted the restriction and is paid compensation equal to half the normal salary in the restricted period. Non-solicitation clauses agreed between the buyer and seller in connection with business transfers are exempt from these requirements, but are limited to a period of up to six months from completion. This exemption is applicable to asset as well as share transfers.
In December 2015, Danish lawmakers passed a bill on post-termination restrictions, thereby considerably tightening the existing regime for restrictive covenants.
Danish employment law generally allows employees to receive a pro rata share of any type of bonus, including even exit and stay-on bonuses, upon termination of their employment. A recent ruling by the Danish Supreme Court implies that it may be possible to agree on stay-on bonuses being subject to continued employment during a full bonus period, but this possibility is limited to special circumstances.
Danish law also features the mandatory regulation of share-based incentives in the Danish Stock Option Act,5 which should be considered when setting up or unwinding incentive programmes in connection with an M&A process. Under this regulation, ‘good leavers’ have a statutory right to receive share-based incentives on a pro rata basis and to retain any share-based incentives received on unchanged terms. In ‘bad leaver’ scenarios, share-based incentives may be cancelled even if they are fully vested.
VIII TAX LAW
Most transactions over Danish target companies are structured as share purchase transactions due to the fact that the seller in most cases will be exempt from Danish tax on any capital gains realised on the sale of the shares using a holding company structure. However, depending on the circumstances, an asset acquisition may also be advantageous.
In a share deal, the acquirer will in effect inherit indirectly all historic tax liabilities of the acquired target company. However, provisions are typically made in the share purchase agreement that pass liability back to the seller by requesting the seller to guarantee that all tax obligations have been fulfilled, and that the current tax liabilities of the target company are as presented in the annual accounts and the documents provided during the due diligence process. Moreover, in a share acquisition, the acquirer will inherit any tax losses realised by the acquired company. Such tax losses may be carried forward against future tax liabilities on future trade income derived by the acquired company. In contrast, the acquisition of business assets leaves all tax liabilities and tax assets (tax losses) with the seller.
An acquirer of shares in the target company will also indirectly inherit the target company’s tax base cost in its assets, and the tax book value of the assets and liabilities of the target company will remain unchanged for Danish income tax purposes. The purchase price paid by the acquirer is thus allocated to the acquirer’s acquisition cost of the shares in the target. The shares are not depreciable.
In an asset purchase transaction, only limited tax warranties are typically provided by the seller as the tax liabilities under Danish law do not pass to the acquisition company. The net purchase price is allocated proportionally to the acquired assets, and the purchase price will serve as the basis for the acquirer’s tax depreciation of the acquired assets.
The acquisition of shares is exempt from Danish VAT, and no transfer tax or stamp duty is levied on the acquisition of shares. An asset acquisition may, in certain circumstances, be subject to VAT depending on the assets in question, although qualifying transfers of businesses or parts of a business will normally be exempt from VAT.
For tax-resident shareholders, the Danish participation regime generally exempts all dividends and capital gains on shareholdings of at least 10 per cent received, provided the receiver is a corporate shareholder (irrespective of the period of ownership).
Dividends and capital gains on company shareholdings of less than 10 per cent will, on the other hand, be taxable.
For non-tax residents, capital gains on shareholdings remain free of Danish tax (irrespective of ownership percentage). Further, dividends are also tax exempt for company shareholdings of 10 per cent or more in Danish companies (some exceptions apply). Dividends from company shareholdings of less than 10 per cent are subject to Danish withholding tax, generally at a rate of 27 per cent, subject, however, to reduction under a treaty.
The Danish joint taxation rules require that upon divestment of an entity in a tax group, an ordinary tax statement must be prepared covering the period from the income year most recent to closing. Provisions dealing with the calculation and payment of tax for this period are therefore included in share purchase agreements involving targets in a tax grouping. Danish entities within a tax group are jointly liable for tax payments of the tax group entities. If an entity ceases to be part of the tax group, the entity will, as of the time it ceased being part of the tax group, only be liable for taxes related to income that is attributable to the entity.
IX COMPETITION LAW
The competent authorities in respect of merger control in Denmark are the Danish Competition and Consumer Authority (DCCA) and the Danish Competition Council (DCC). The DCC has primary responsibility for the enforcement of the Danish Competition Act, while the DCCA is the secretariat of the DCC and is responsible for the day-to-day administration. In practice, the DCC primarily makes decisions in major cases and cases of fundamental importance, while the DCCA, on behalf of the DCC, makes the majority of decisions. DCC and DCCA decisions may be appealed to the Competition Appeals Tribunal, and decisions of the Competition Appeals Tribunal may be appealed to the ordinary courts in Denmark.
In general, Danish competition law closely mirrors EU competition law, building on a general prohibition on anticompetitive agreements and a prohibition on the abuse of a dominant position. The scope of these prohibitions generally follows their EU counterparts. The merger control rules are set out in the Danish Competition Act,6 which is accompanied by the Executive Order on the Notification of Mergers,7 as well as the Executive Order on the Calculation of Turnover in the Competition Act.8
The Danish merger control regime is substantially similar to the EU merger control regime, requiring mandatory pre-notification of business combinations when certain turnover thresholds are met. Notification in Denmark is required when the undertakings concerned realise an aggregate Danish turnover of at least 900 million kroner, and at least two of them each realise a Danish turnover of at least 100 million kroner; or when one of the undertakings concerned realises a Danish turnover of at least 3.8 billion kroner, and one of the other undertakings concerned realises a worldwide turnover of at least 3.8 billion kroner.
As of 1 August 2013, merger fees are payable for merger notifications submitted to the DCCA. The fee for a simplified notification amounts 50,000 kroner, whereas the fee for a full notification amounts to 0.015 per cent of the aggregate annual turnover in Denmark of the undertakings involved, to a maximum amount of 1.5 million kroner.
Completion of the transaction prior to merger control clearance is not permissible. However, the DCC may exempt a merger from the prohibition to complete the merger before clearance is obtained if it assesses that effective competition will not be impeded. As under the EU Merger Regulation, it is possible to implement a public bid provided the acquirer does not exercise the voting rights attached to the shares.
The time frame for the scrutiny of a merger by the DCC does not begin until a complete notification has been submitted. Within 10 working days after the receipt of a notification, the DCC must inform the notifying parties whether the notification is deemed to be complete or whether further information is required. The time limit for a Phase 1 decision is 25 working days, whereas the deadline for a Phase 2 decision is 90 working days from the initiation of Phase 2, which may be extended by a maximum of 40 working days.
The Danish merger control regulation allows for a short-form notification and a standard notification – closely reflecting the Form CO and Short-Form CO known from notifications to the European Commission. In the short-form notification, the conditions for withdrawing a merger approval are less stringent.
The majority of mergers filed in Denmark have received clearance following a simplified procedure. In more complex cases, the DCC will conduct a close review, and in recent years a number of mergers have received clearance subject to conditions, which may include undertakings divesting parts of the combined business.
To comply with Danish and European Commission competition law, and to ensure that premature implementation of a transaction prior to completion does not occur, parties engaging in M&A activity in Denmark should pay close attention to information exchange schemes when structuring their due diligence review. In this respect, one should note the European Commission’s best practice of 2 June 2015 on the disclosure of information in data rooms in proceedings under, inter alia, the EU Merger Regulation.
The markets expect interest rates in Denmark and the rest of Europe to remain low in the next few years. Despite the slightly increased interest level in certain months during the first half of 2015, the continued low interest rate levels and existing funding sources for banks should, however, offer some support to the larger banks’ willingness to finance acquisitions.
The combination of an upswing in the Danish economy and extraordinarily low interest rates means that the conditions for a build up of systemic risks exist. It could be brought on, for example, by excessive risk appetite among credit institutions and borrowers. The extraordinarily low interest rates could speed up this development and lead to a faster build up of systemic risks with a potential impact on the stability of the Danish M&A market.
Private equity firms have demonstrated increased activity in the Danish market, focusing increasingly on ‘buy-and-build cases’, and are expected to continue this trend with significant unused funds available and numerous portfolio companies remaining in the pipeline for near-future divestments. There seems to be a trend for private equity funds to hold their investments longer than before the financial crisis, and an ownership period of more than five years in not unusual. Exit preparations of portfolio companies are frequently conducted through dual-track processes, with final decisions being made later on once the preferred exit option is visible.
1 Sebastian Ingversen is a partner and Nicholas Lerche-Gredal is a senior associate at LETT Law Firm P/S.
2 Consolidated Act No. 1530 of 2 December 2015.
3 Executive Order No. 562 of 2 June 2014.
4 Consolidated Act No. 710 of 20 August 2002.
5 Consolidated Act No. 309 of 5 May 2004.
6 Consolidated Act No. 869 of 8 July 2015.
7 Executive Order No. 171 of 22 February 2013.
8 Executive Order No. 808 of 14 August 2009.