I OVERVIEW OF M&A ACTIVITY
During the economic recovery after the banking crisis in 2008, Iceland has experienced economic growth unprecedented in recent decades. Due to the good economic situation, the state had a surplus of 46.4 billion kronur in its national budget in 2014 and of about 20 billion kronur in 2015. In addition, the financial assistance Iceland had received from the International Monetary Fund and mainly the Nordic countries is being repaid much faster than initially planned. Thus, the national debt has decreased significantly over the past couple of years. In June 2016, Iceland repaid the first bond issued after the crisis in a foreign currency and settled the remaining outstanding amount of US$503 million. Through this, the national debt decreased to 1,262 billion kronur, of which 230 billion kronur are foreign debts.
However, Iceland is still suffering from currency restrictions imposed in late 2008, and Iceland’s most challenging task remains lifting these restrictions. To this end, in June 2016 the National Bank of Iceland held an auction in which the owners of 319 billion offshore kronur (kronur owned mostly by non-residents and deposited in accounts outside Iceland) were invited to bid for euros in exchange for their kronur. The outcome of this auction, together with further auctions announced for autumn 2016, will enable Iceland to take the next step towards abandoning the currency restraints. As an additional element in the strategy to lift the capital controls, composition schemes for the failed banks were approved by the creditors and the competent courts, and the first disbursements to the creditors started at the end of 2015. The estates of the three large failed banks totalled 500 billion kronur. This amount is almost similar to the national budget, which requires that it is governed in the composition schemes how these amounts are released to the mostly foreign creditors.
As the failed banks hold the majority in the banks established in 2008 to continue operations in Iceland, the sale of these shareholdings also needs to be structured in a way so as not to affect the country’s economy. The majority in Arion banki is held by the estate of Kaupthing banki, the estate of Glitnir holds the majority in Íslandsbanki and the estate of Landsbanki Íslands holds also a very large share in Landsbankinn. The formal sale process of Arion banki started in June 2016. It is very likely that the shareholdings in Íslandsbanki and in Landsbankinn will be also offered for sale in the near future. These transactions will by far be the largest since the banking privatisation in 2003. It remains to be seen in which role foreign investors participate in this process.
Due to the massive increase in earnings from tourism over the past few years, Iceland’s foreign trade balance has been rather positive. Therefore, since 2015 the National Bank of Iceland has been in the position to allow pension funds to once again invest certain amounts abroad. The domestic investment opportunities had anyhow become far too scarce during the time outbound investments were not allowed. As a next step, it is planned that domestic companies and Icelandic residents will increasingly be granted the possibility to again enter into foreign exchange transactions. As far as can be judged, the government and the National Bank of Iceland were successful in dealing with the necessary tasks after the collapse of the Icelandic banks in 2008. This development has clearly enhanced M&A activity in Iceland.
Following the listing of the real estate companies Reitir and Eik on the Icelandic stock exchange in April 2015, their purchase strategies continued and both companies significantly increased their property portfolios. With the sale of Klettur for over 10 billion kronur and the subsequent merger with Almenna leigufélagið, Iceland’s largest real estate company holding residential units was created in May 2016. It holds more than 1,000 units, and the goal is to list the company on the stock exchange within the next two years. With the initial public offering of Iceland Seafood International in May 2016, the first listing of a seafood company in 13 years, new listings show that confidence in the economic situation is also good.
Among other industry activities, the construction of silicon metal plants continues, while the biotech and life science sectors are seeing some dynamic companies show rapid growth. With the acquisition of Zymetech by Enzymatica from Sweden and the purchase of a stake in Carbon Recycling Interional by Geely Group from China, there are clear signs that Icelandic companies, whether operating in niche markets or not, are of interest to foreign investors both strategically and financially. Icelandic companies are also back on the international market, with prosthetic producer Össur purchasing Scottish company Bionics for £27.5 million in the spring of 2016.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
The Icelandic legal system is similar to the legal systems of other Nordic countries, with particular influence from Denmark and Norway. However, it is influenced more by case law than its neighbouring Nordic jurisdictions, and thus closer to a common law system. Even though Iceland is currently not aiming for accession to the EU, it has, together with Norway and Liechtenstein as the other European Free Trade Association (EFTA) states that are also part of the European Economic Area (EEA), to adopt much of the EU legislation due to the EEA rules.
Agreements regarding domestic deals up to a certain size are done mostly in Icelandic and are fairly short. Larger deals (e.g., with international parties or financing) are usually done in English, and the documents are more detailed. The expansion of Icelandic investors to Europe and other parts of the world pre-2008 and the financial crisis bringing foreign creditors in close contact with Iceland have contributed to bringing domestic M&A documents close to international practice.
It is quite common for privately held companies to have a group of shareholders rather than being held entirely by one person. Therefore, negotiations usually include talks with several shareholders even though the more active shareholders lead the discussions and speak also for those who have only invested in the company but are not involved in its management.
Main sources of corporate law are the Icelandic Limited Act and the Stock Corporation Act. Transferring shares in a company does not require notarisation. Shareholder lists that have to be kept by the board do not have to be submitted to the Register of Enterprises, but the Act on Financial Statements requires that the shareholders and their shareholdings at yearend are disclosed in the financial statements, which have to be published.
Under both Acts, a squeeze-out of the minority shareholders can be requested if one shareholder holds more than 90 per cent of the capital and votes in the company. Likewise, a minority shareholder can demand redemption of its shares if a single shareholder holds more than 90 per cent of the capital and votes in the company. The articles of association may contain rules about the redemption of shares and the valuation method; only in a stock corporation must there be a statement about this question in the articles of association even if there is no deviation from statute law. The redemption price offered by the requesting party can be challenged by the other party, and if no agreement is reached, court-appointed experts shall determine the price.
The main rules for public takeovers are to be found in Chapter 10 of the Act on Securities Transactions. A mandatory offer to the other shareholders shall be made if a shareholder has acquired 30 per cent of the votes in a listed company, either by its own shareholding or by acting in concert with other shareholders. A mandatory offer shall also be made if a shareholder has gained the right to appoint the majority of the board members. A mandatory takeover bid must be made within four weeks after the shareholder knew or should have known that the relevant threshold had been crossed. The offer period ranges from four to 10 weeks. The decision to make a voluntary takeover offer must be announced without undue delay. If the target company faces financial problems, the Financial Supervisory Authority can grant an exemption from the duty to make a mandatory offer to a party that wants to save the company from serious financial problems or that wants to take part in the financial restructuring of the company if its board agrees to this. The breakthrough rule has not been implemented in Iceland. While the Icelandic Financial Supervisory Authority monitors compliance with these rules, the rules of the stock market NASDAQ OMX Iceland regulate the trading of securities in listed companies.
Despite the fact that the Act on incentives for initial investments in Iceland expired at the end of 2013, the government is still negotiating with foreign investors about incentives for new investments. This now happens on a case-by-case basis, and no longer according to the provisions of the expired act. Foreign new investments are exempted from the currency restrictions if correctly announced to the Central Bank. The proceeds from an exit of such new investment may thus be converted back into foreign currency and transferred out of the country. However, this regime is certain to be modified once the capital controls are lifted again.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
Due to the fact that only a handful of companies remained listed on the Icelandic stock exchange during the turbulences following 2008 and the modest size of the market in general, it is not surprising that there were few changes in the legislation on takeovers in Iceland after the modernised Act on Securities Transactions entered into force in November 2007. Since then, only minor amendments have been made.
The same applies to corporate law. While there were many changes and debates about changes in insolvency law and restructuring and competition issues in general, there have been few changes to the corporate law during the past couple of years. However, changes to the Shareholder Rights Directive and other changes in the legislative EU framework have been adopted.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
Even though some Icelandic companies are exempted from the temporary currency restrictions because more than 80 per cent of their costs and revenues stem from abroad, Icelandic companies have not been very active regarding deals abroad. However, there were some notable exceptions after 2008, as there were some disposals of foreign assets during the restructuring of Icelandic companies.
Despite the possibilities of accessing the Icelandic market with a favourable discount in the exchange rate, there have been relatively few cross-border transactions in which foreign investors entered the Icelandic market.
With the acquisition of software company Advania by Nordic investors, the purchase of a stake in Carbon Recycling International for US$45.5 million by Geely Holding Group from China and the purchase of a minority share in the franchise licence holder for Domino’s Pizza in Iceland, Norway and Sweden for 4 billion kronur by a British purchaser, international buyers are back.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
As Icelandic pension funds own close to 40 per cent of the listed companies in the main market of the Icelandic stock exchange, they play an important role in many transactions.
Real estate companies Reginn, Reitir and Eik have continued to purchase a number of smaller competitors and have acquired a large market share of rented commercial property.
As in the previous year, the most active industries at the moment are the booming tourism sector, and the energy-intensive industries trying to attract new plants and also data storage centres.
There have been rumours about foreign financial institutions bidding for the new banks that have evolved from the failed banks. However, no deals have been announced to date.
One of the most thriving sectors is still the life science sector, and a good example is pharmaceutical company Alvogen, which is led by former Actavis CEO Robert Wessman. Established after the crisis in 2008, it now employs more than 2,300 staff in more than 35 countries. Due to its close ties with Iceland, it is not unlikely that Alvogen will also purchase smaller competitors in Iceland, as it did just recently with the purchase of County Line in the US.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
The ‘new’ banks, Landsbankinn (successor of Landsbanki), Arion banki (successor of Kaupthing) and Íslandsbanki (successor of Glitnir), which took over the domestic businesses during the banking crisis in 2008, have strong market positions and continue their profitable operations. A possible privatisation in the banking sector has been discussed for some time now, but so far it has only been announced that a stake in Arion banki is for sale. When the stake that the state holds in Landsbankinn will be up for sale is still uncertain.
Depending on the parties to an M&A deal, the financing varies. The pension funds and institutional investors often pay in cash. Companies either opt for traditional bank financing or also issue bonds. The bond market in Iceland has picked up again, and faster than the stock market, after the 2008 crisis. The lack of possibility for domestic investors to invest abroad seems to have helped the bond market in the past. The financing of growth in the parts of the economy that have been expanding also depends on the type of investment. In the tourism sector, new hotel buildings have mostly been financed domestically, but the investments of foreign entities in the energy-intensive industries seem to be financed from abroad to a considerable extent. The new 90MW geothermal power plant at Þeistareykir has, for example, been financed with a €125 million loan from the European Investment Bank. Iceland is at a crossroads with its decades-old tradition of linking almost all loan agreements to the consumer price index. However, it is a relatively new development for financing to be without an indexation of the loans, and it remains to be seen whether this trend becomes stronger.
VII EMPLOYMENT LAW
The Transfers of Undertakings Directive 2001/23/EC was transformed into Icelandic law in 2002. The Icelandic Act on the Legal Position of Employees in the case of a transfer of an undertaking is applicable if a business unit is transferred in such a way that it maintains it characteristics (i.e., the structure of assets that are used in an economic objective regardless of whether it is a main or ancillary part of the operations). If such a transfer occurs, the rights and obligations of the transferor transfer to the purchaser, and the purchaser shall observe the remuneration and work conditions according to the collective labour agreement until it expires, is terminated or is superseded by a new collective labour agreement. The same principle applies in the case of a transfer regarding a bankrupt entity with the exception that rights because of a non-performance by the assignor do not transfer in this case.
The transferor and the purchaser shall jointly inform the union workplace representatives (or the employees themselves if there are no representatives) about the date of the transfer, the reasons for the transfer, the legal, economic and social consequences of the transfer for the employees, and whether any measures are planned regarding the employees. The aforementioned information shall be given well in advance, and if there are plans to take measures regarding the employees, the matter shall be discussed with their representatives (or otherwise directly with them) to reach an agreement. Both parties, transferor and transferee, are obligated under these provisions.
The Icelandic Act on Mass Redundancies is applicable if at least 10 employees are made redundant in a company of 21 to 99 employees, if at least 10 per cent of the employees are laid off in a company of 100 to 299 employees, or if at least 30 employees are made redundant in a company with 300 or more employees. The decision for layoffs shall be announced with the objective of reaching an agreement immediately to union workplace representatives, or to another representative elected by the employees for that purpose. With the cooperation, there shall at least be an attempt made to avoid mass redundancies, reduce the number of affected employees or mitigate the consequences for them with the assistance of social measures that have, inter alia, the objective of facilitating a transfer to a new job or occupational retraining.
VIII TAX LAW
A corporation is considered to be resident in Iceland if it is registered there and has its real management there or if its home according to the company’s articles is in Iceland.
Directive 90/434/EEC on mergers is not applicable in Iceland, because Iceland is not a member of the EU.
There is the possibility of a tax-exempt merger if the absorbed company is completely absorbed by the absorbing company with all assets and liabilities and the only consideration is shares in the absorbing company excluding any cash component. Under very strict requirements, a tax-exempt cross-border merger is possible. The main criterion for this is that the acquiring company is resident in the EEA or EFTA region or the Faroe Islands.
Foreign individuals and legal entities have to pay a withholding tax on dividends received. The applicable rate is 18 per cent for legal entities and 20 per cent for individuals. If dividends are paid from an Icelandic corporation to a foreign limited liability company in the EU or EEA, the withholding tax can be partly or fully refunded after a tax assessment. If a tax treaty is applicable, the withholding tax rate may also be reduced. Interest payments by an Icelandic company to a non-resident are generally subject to withholding tax. The tax rate is 10 per cent. If the recipient is a legal entity, the tax might be reduced according to a tax treaty Iceland is party to. If the recipient is an individual, there is a small tax-exempt amount applicable. In a Supreme Court judgment of 2012, it was ruled that interest paid on a loan taken in an acquisition company to finance the acquisition of shares in the target company and that was merged together with the acquisition company in the target company is not deductible.
Regarding thin capitalisation of companies, it should be noted that Iceland only has a general anti-avoidance provision that might be applicable. In addition, a regulation regarding transfer pricing was enacted on 1 January 2015. The regulation applies to businesses with more than 1 billion kronur in revenue or assets and requires the documentation of transactions between related entities.
The tax base generally follows commercial accounts. The tax resident’s worldwide income is taxable, with the possibility of deducting expenses made to generate that income. Tax grouping rules allow for a tax consolidation in Iceland, the main prerequisite being a minimum shareholding of 90 per cent in the other companies of the tax group, which must all be in Iceland. There is no difference in the taxation of distributed or retained earnings. The new Act on Stamp Duties, which entered into force on 1 January 2014, provides only for the levying of a stamp duty for the transfer of ownership in real estate and in ships.
IX COMPETITION LAW
Merger control proceedings are governed by the Icelandic Competition Act, and a notification of a merger is required if the combined revenues of the merging companies reach 2 billion kronur and if at least two of the merging parties have a revenue in Iceland of at least 200 million kronur. For the determination of the revenue, parent companies and subsidiaries are also relevant if they are directly or indirectly controlled by the merging companies.
If a merger has occurred that does not meet the above requirements for triggering a notification duty, but the relevant combined revenue is 1 billion kronur and the Icelandic Competition Authority is of the opinion that the merger may still reduce effective competition, it may order the merging parties to submit a notification of the merger.
The notification of a merger shall be jointly filed by the merging parties after the conclusion of an agreement, the announcement of a public bid or the acquisition of a controlling interest in a company, and before completion of the respective merger. It must not take effect while the Competition Authority is still examining the case. However, upon application, an exemption to this rule may be granted.
Upon receipt of an application, the Competition Authority will notify the parties within 25 working days as to whether it will further look into the case. This notification is a prerequisite to interdict a merger. If a merger is to be interdicted, this must happen within 70 working days from the time of the Competition Authority’s announcement that it intends to investigate the matter. If further information is required, the period may be extended by up to 20 working days.
The economic outlook for Iceland is positive, with the lifting of the capital restraints being well under way. In addition, the collective labour agreements currently being negotiated may lead to an increase in the price level, and may therefore trigger some inflation. However, despite some predictions that inflation may rise, we are far from the heights reached directly after the crisis of 2008, and often also below the rates the National Bank of Iceland considers desirable.
It was a surprise that the talks with the EU about a possible accession of Iceland were discontinued before any results were achieved that could have been subject to a national referendum. This gives an indication that the current government is not seeking deeper European integration even though Iceland is already obligated to transpose large amounts of the EU legislation into national law through its EFTA and EEA membership. The unwinding of the failed banks is well under way, and the composition schemes are helping the National Bank of Icelandic to structure the procedure and keep the national currency stable. The recovering economy, an unemployment rate that is once again low and the highly educated population, along with the country’s wealth of energy and natural resources, offer a stable environment for M&A activities.
1 Hans Henning Hoff is partner at Heuking Kühn Lüer Wojtek.