I OVERVIEW OF M&A ACTIVITY
While 2015 became an extraordinary year for global M&A activity, in many countries topping previous years’ records both in terms of value and number of deals, the sudden turn of events in the form of collapsing oil and gas prices had a direct and negative impact on Norwegian deal activity throughout most of last year. In terms of the number of transactions, 2015 ended approximately 18 per cent down compared with 2014.
Going into 2016, Norwegian M&A transaction volumes in the first quarter showed 50 transactions, which is a 12 per cent reduction in volume compared with the first quarter of 2015. The decline in deal volume follows from a retreat of foreign buyers resulting from the collapsing oil prices and a more negative outlook for the Norwegian economy. That said, the total reported deal value for the first quarter of 2016 ended on €2,118 million, which actually is up from last year’s total reported deal value of €1,072 million for the first quarter of 2015. However, it is worth noticing that this increase in deal value in first quarter of 2016 was solely attributable to one transaction only, namely Golden Brick Silk Road’s €1.12 billion bid for Opera Software ASA, which was the most notable transaction that quarter. Except for this, the Norwegian market witnessed few major M&A deals, with IK VII Fund’s acquisition of TeleComputing AS being the most noteworthy. In reality, the market seems to have moved sideways down, while the average deal values, with a few exceptions, seem to continue to shrink.
Five months into 2016, transaction data from Mergermarket reveals that the volume of Norwegian transactions actually may have started to improve slightly, with a 4.2 per cent increase compared with the same period in 2015. At the end of May 2016, 74 transactions with a total value of €3.2 billion was reported, while for the same period during 2015, there were 71 transactions with a total reported value of €2.7 billion. During April and May 2016, the Norwegian market also witnessed a few additional notable M&A deals, with Lundin Norway AS’ acquisition of a 15 per cent stake in the Edvard Grieg field from Statoil ASA for €442 million and Praxair, Inc’s acquisition of a 34 per cent stake in Yara Praxair Holdings AS for €300 being the two most notable. Altor’s acquisition of a 25 per cent stake in Skandiabanken ASA for €132 million is also worth mentioning. The slight increase in Norwegian deal activity may reflect the fact that during the past couple of months we have witnessed an increase in the oil and gas prices, with the Brent spot price increasing from around US$27 per barrel at the end of January 2016 to US$50 per barrel at the end of May 2016.
During the past few years, a large part of Norwegian deal volume has come from inbound cross-border deals. However, during the first five months of 2016, inbound cross-border deals only comprised 43 per cent of the total number of transactions. This is a substantial decline in percentage compared with inbound cross-border transactions in the first five months of 2015, which accounted for 56.3 per cent of the total deal volume. However, foreign players continue to be prevalent, particularly in parts of the M&A market. This shows that, irrespective of a decline in oil prices, many Norwegian businesses possess technology and knowledge that foreign investors consider attractive, in particular from a bolt-on acquisition perspective.
There has not been much change in the market for M&A deals. Nevertheless, the amount of time between large auction processes has become slightly longer during the past 12 months. We have also observed an increase in the use of more tailored sales processes, particularly within the oil and gas segment, involving one or a very limited number of participants rather than auctions.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
The Limited Liability Companies Act (1997), the Public Limited Liability Companies Act (1997) and the Partnership Act provide the fundamental statutory framework and, together with the Contract Act (1918) (which applies to almost any kind of contract) and the Norwegian Sales of Goods Act (1988), form the legal basis for the purchase and sale of corporate entities.
Public companies whose securities are listed on the Oslo Stock Exchange (OSE) or another regulated market in Norway are additionally regulated under the Securities Trading Act (2007) (STA) and the Securities Trading Regulation. These rules regulate prospectus requirements and information requirements, establish a regime to prevent market abuse and insider dealing, and set out more detailed regulations with respect to tender offers involving listed shares under Norwegian law. These statutes are supplemented by, inter alia, guidelines and recommendations issued by the OSE, and the rules and regulations of the OSE. Mergers and takeovers of private companies and unlisted public companies have no equivalent regulations. Anyone familiar with M&A transactions in most other parts of Europe will find the Norwegian landscape relatively familiar, in particular with respect to public takeovers. Norway is part of the European Economic Area and has, therefore, implemented the EU regulations of relevance to companies with publicly traded securities. This includes the Prospectus Directive, the Takeover Directive, the Transparency Directive, the Market in Financial Instruments Directive (MiFID) and the Market Abuse Directive.
The Competition Act (2004) gives the Norwegian Competition Authority (NCA) the power to intervene against anticompetitive concentrations. Companies that are active in the Norwegian market (generally in larger transactions) must also abide by the merger control provisions set out in the European Economic Area (EEA) Agreement; however, the ‘one-stop-shop’ principle prevents duplication of competence of the European Commission, the European Free Trade Association (EFTA) Surveillance Authority and the NCA.
The remaining part of this section describes the key rules applicable to public takeovers and certain particular issues arising under Norwegian law.
i Stakebuilding in public traded companies – disclosure obligations
No limits exist regarding the speed at which a stake can be built, and Norwegian law contains a limited set of provisions governing stakebuilding, but insider dealing rules, disclosure requirements and mandatory bid rules all need to be observed in connection with such stakebuilding.
Any person owning shares in a company whose securities are listed on a Norwegian regulated market (OSE or Oslo Axess) must immediately notify the company and the OSE if their proportion of shares or rights to shares in such company reaches, exceeds or falls below any of the following thresholds: 5, 10, 15, 20 or 25 per cent, one-third, 50 per cent, two-thirds or 90 per cent of the share capital, or a corresponding proportion of the votes, as a result of acquisitions, disposal or other circumstances. Specific rules apply with regard to the calculation of voting rights and share capital. Breaches of these disclosure rules will frequently result in fines, and such fines are increasing in severity.
Investors should also observe that certain types of convertible securities, such as subscription rights and options, are counted when calculating whether a threshold requiring disclosure has been reached; however, see Section III.ii, infra, with regard to a recent proposed change in this regard. It is possible, and to some extent customary, to seek irrevocable undertakings or pre-acceptances from major shareholders as well as from key or management shareholders during a stakebuilding process, prior to announcing a mandatory or voluntary bid. Such irrevocable undertakings are typically either drafted as ‘soft irrevocables’ or ‘hard irrevocables’. ‘Hard irrevocables’ are irrevocable undertakings to sell the shares regardless of whether a subsequent competing higher bid is put forward. ‘Soft irrevocables’ will normally be limited to a commitment to accept the offer provided that no higher competing bids are made. There are no particular disclosure requirements for such undertakings, other than the general disclosure obligations and the disclosure obligations regarding options and similar instruments as part of stakebuilding, which, however, may imply early disclosure of such undertakings due to the low thresholds set out by law. In Norwegian legal theory, it has so far been assumed that the disclosure requirements will not be triggered by properly drafted soft irrevocable undertakings.
Notification must be given as soon as the agreement regarding acquisition or disposal has been entered into. It is important to be aware that crossing one of these statutory thresholds requires disclosure even if it is ‘passive’ (i.e., caused by changes in the share capital of the issuer where the person crossing the relevant threshold does not acquire any shares or rights to shares or dispose of any shares). In such cases, notification must be given as soon as the shareholder becomes aware of the circumstances causing the shareholder’s holdings in the company to reach, exceed or fall below the relevant thresholds. Consolidation rules do apply and require the consolidation of shares held by certain affiliates and closely related parties. Hence, the combined holdings of the acquirer or the disposer, or both, and of such party’s close associates, are relevant when deciding whether any disclosure obligations have been triggered.
ii Mandatory offers
If a stake of one-third or more of the votes is acquired (directly or indirectly, or through consolidation of ownership) in a Norwegian target company whose shares are listed on a Norwegian regulated market, but also in, inter alia, foreign companies listed in Norway but not in their home country, a mandatory offer to buy the remaining shares must be made. Certain exceptions do apply, and the most practical of these is where the shares are acquired as consideration in mergers and demergers. In practice, a mandatory offer usually follows a voluntary offer, triggered by the voluntary offer reaching the mandatory offer threshold. The offeror is further obliged to make subsequent mandatory offers when, due to acquisition, the offeror passes the thresholds of 40 or 50 per cent of the voting share of the company.
Consolidation rules do apply. In this regard, note that certain derivative arrangements, such as total return swaps, may be considered as controlling votes for the purpose of the mandatory offer rules. A voluntary offer will also be subject to certain provisions of the mandatory offer requirements if such offer – if accepted – may take the offeror above the thresholds for a mandatory offer. This means that a voluntary offer document for all the shares in a listed company must, inter alia, be pre-approved by the OSE before the offer is made public.
After entering into an agreement on an acquisition that will trigger a mandatory offer, the acquirer shall immediately notify the target company and the OSE about whether the acquirer will make an offer or sell the shares. It is possible to avoid the obligation to make such offer if the acquirer sells the shares exceeding the relevant threshold within four weeks. After announcing that an offer will be made, the announcement may not thereafter be changed to an announcement of sale.
The offeror must then prepare an offer document to be approved by the OSE before it is issued. In practice, the approval procedure takes one or two weeks, or longer if there are difficult issues to deal with or if the OSE finds errors within the offer document. In a mandatory offer document, the offeror must give a time limit of between four and six weeks for acceptance by the shareholders.
The share price offered in a mandatory offer must be equal to the highest price paid by the offeror (or agreed to be paid by the offeror) for shares (or, under the circumstances, rights to shares) in the target company during the previous six months. According to the STA, the takeover authority may invoke that the offer must be based on market price, where it is clear that the market price at the time the offer obligation was triggered was higher than the highest share price the bidder paid or agreed to pay. However, an EFTA court ruling from 2010 found that this rule did not comply with EU takeover rules, as it does not provide sufficient guidance on the method concerning how such a market price is to be calculated. Previously, it has been assumed that the Norwegian legislator most likely would seek to revise the relevant provision of the STA to meet the requirements of the EU takeover rules. So far, the provision in question has not been amended.
A mandatory offer must be unconditional and apply to all issued shares in the target company, and the consideration needs to be in cash; however, it is possible to offer alternative forms of consideration under such a mandatory offer (e.g., shares in the offeror) provided that an option to receive the total offer price in cash is also made and that this option is at least as favourable as the alternative consideration. The consideration offered must be unconditionally guaranteed by either a bank or an insurance undertaking, in each case authorised to conduct business in Norway.
If the offeror acquires more than 90 per cent of the shares and the capital of the target company, squeeze-out rights will be available.
iii Voluntary offers
In a voluntary tender offer or exchange offer for a listed company there is, however, in general no limitation under Norwegian law as to which conditions such offer may contain. A voluntary tender offer may be launched at the offeror’s discretion. The offeror may also choose to make the offer to only some of the shareholders. Conditions such as a certain level of acceptance from existing shareholders (90 per cent or two-thirds of the shares and votes), regulatory or competition approvals, completion of satisfactory due diligence and a ‘no material adverse change’ clause would regularly be included in Norwegian voluntary tender offer documents. In some cases, the offeror may decide to include very few conditions in order to complete the transaction quickly or to avoid competing bids. In other cases, an offeror may decide to include more extensive conditions. In a voluntary tender offer, the offeror can offer consideration in shares or other non-cash forms or a combination, also with cash as an element. In principle, it is also possible to make a voluntary offer conditional upon financing, but the offer document must include information on how the acquisition is to be financed.
There are no provisions regarding minimum consideration in a voluntary tender offer under Norwegian law, but in general a shareholder may expect to achieve around a 20 to 40 per cent premium compared with the current share price. In recent years, there has been a considerable variation in the level of premiums offered in such voluntary tender offers, with some examples of premiums of around 60 per cent, compared with the average over the past 30 days.
If a voluntary tender offer is accepted and brings the offeror control over voting rights so that it triggers an obligation to issue a subsequent mandatory offer, several of the obligations relating to mandatory offers will also apply, including an obligation of equal treatment of shareholders. Under these circumstances, the voluntary tender offer document must be pre-approved by the OSE, but the offeror is still free to decide which conditions such voluntary offer may contain. The mandatory offer requirements will not apply if the offeror has reserved the right to refuse or reduce acceptance if the offer gives the offeror at least one-third of the voting rights, or if the offer is addressed specifically to certain shareholders without it being made simultaneously or in conjunction and with the same content.
The offer period for a voluntary tender offer is between two and 10 weeks, with a four-week period frequently used as the initial offer period.
The target company is allowed to take a more or less cooperative approach in a takeover situation. There are, however, restrictions on the board of the target company taking actions that might frustrate the willingness or otherwise of an offeror to make an offer or complete an offer that has already been made. Such restrictions apply after the target has been informed that a mandatory or voluntary offer will be made. During this period, the target company may, as a main rule, not issue new shares or other financial instruments, merge, or sell or purchase material assets or shares in the company. These restrictions do not apply to disposals that are part of the target’s normal business operations or where a shareholders’ meeting authorises the board or the manager to take such actions with takeover situations in mind. As a result of this, a fairly large number of Norwegian-listed companies have started to adopt defensive measures aimed at preventing a successful hostile bid.
The Norwegian Competition Act provides that all transactions fulfilling certain thresholds must be notified to the Norwegian Competition Authority, and that completion is suspended until clearance.
It is rare that an offeror can expect to acquire 100 per cent of the shares and votes in the target company through a voluntary or mandatory offer process; however, if the offeror is able to acquire more than 90 per cent of the shares and voting rights in the target, the offeror has the right to acquire (squeeze out) the remaining shares even if the minority shareholders refuse.
The Limited Liability Companies Act and the Public Limited Liability Companies Act provide that if a parent company, either solely or jointly with a subsidiary, owns or controls more than 90 per cent of another company’s shares and voting rights, the board of directors of the parent company may, by resolution, decide to squeeze out the remaining minority shareholders by a forced purchase at a redemption price. Minority shareholders have a corresponding right to demand the acquisition of their shares by a shareholder with a stake of more than 90 per cent of the company’s shares.
The resolution shall be notified to the minority shareholders in writing, and shall also be made public through electronic notification from the Norwegian Registry of Business Enterprises. A deadline may be fixed that must be at least two months from the date of electronic notification from the Registry of Business Enterprises, within which the individual minority shareholders may make objections to or reject the offered price. The acquirer becomes the owner of (and assumes legal title to) the remaining shares immediately, following a notice to the minority shareholders of the squeeze-out and the price offered and the depositing of the aggregate consideration in a separate account with an appropriate financial institution.
If any minority shareholders do not accept the redemption price per share offered, they are protected by appraisal rights that allow shareholders who do not consent to seek judicially determined consideration for their shares, at the company’s expense. The courts decide the actual value of the shares. In determining the actual value, the starting point for the court will be to establish the underlying value of the company divided equally between all shares. However, if the squeeze-out takes place within three months of the expiry of the public tender offer period for a listed company, then the price is fixed on the basis of the price offered in such tender offer, unless special grounds call for another price.
Provided that the conditions for a squeeze-out are met, it is a straightforward process to have the target company delisted from OSE or the Oslo Axess. However, if these conditions are not met, it could be substantially more challenging to delist the target company, even when the offeror has managed to acquire more than 80 per cent of the votes.
vi Statutory mergers
Subject to the approval of the majority of two-thirds of the votes and the share capital represented at a general meeting of shareholders, Norwegian limited liability companies may merge, creating a company (the surviving company) that takes over all assets, rights and obligations of one or more assigning companies (the surrendering company or companies). The articles of association of a company may provide for a higher majority threshold, but may not set a lower one. Under a statutory merger, the shareholders of the surrendering company have to be compensated by way of shares in the surviving company, or alternatively by a combination of shares and cash, provided that the amount of cash does not exceed 20 per cent of the aggregate compensation. If the surviving company is part of a group, and if one or more of the group companies hold more than 90 per cent of the shares and the votes of the surviving company, the compensation to the shareholders of the surrendering company may consist of shares in the parent company or in another member of the surviving company’s group. It is further possible to effect a merger by combining two or more companies into a new company established for the purpose of the merger. After completion of a statutory merger, any surrendering companies are dissolved.
Under Norwegian law, a statutory merger will be considered as a continuation of the companies involved in the merger, implying that the transaction does not represent an assignment of the original companies’ rights and obligations.
To complete a merger under Norwegian law, certain formalities need to be observed by the companies involved. A joint merger plan describing the general terms of the merger has to be prepared and negotiated between the surviving and the surrendering company. Such joint merger plan has to be signed by the board of directors prior to the general meeting of shareholders resolving to approve such merger plan. The board of directors will, after signing such a joint merger plan, have to issue a report to the shareholders explaining the reasoning behind the merger and how, inter alia, this may affect the company’s employees. If a Norwegian public limited liability company (ASA) is involved in a legal merger there are more detailed requirements for the content of such a report. In addition, each of the participating entities’ boards shall ensure that a written statement, which contains a detailed review of the merger consideration payable to the shareholders of the participating companies, is issued, including an opinion of the fairness of such consideration. Such statement is to be prepared and issued by an independent expert (such as an auditor) in cases where the participating entity is an ASA. In cases where the participating entity is a private limited company (AS), such statement may be issued by the board and confirmed by the company’s auditor. The resolution to merge the companies must be reported to the Norwegian Register of Business Enterprises within certain time limits to avoid the resolutions being deemed void. The shares used as consideration to the shareholders in the surrendering company are issued according to the rules applicable to a capital increase.
Since Norway implemented Directive 2005/56/EC, it is further possible to conduct a statutory merger of a Norwegian company cross-border within the European Union and EEA; however, public tender offers and other offer structures are often used instead of a statutory merger, which cannot be used by foreign companies (outside the EU or EEA), only allows 20 per cent of the consideration to be given in cash, requires more formalities and documentation, and normally takes longer to complete than a public offer. Still, a statutory merger may be suitable where an exchange offer mechanism would not procure complete control under one corporate umbrella, and where there is not enough cash available to effect a mandatory offer and squeeze out the minority shareholders.
Statutory mergers are generally not regulated by the public takeover rules in the STA; however, transactions that are similar in form to mergers (share-for-share exchanges) but whose structures do not meet the formal requirements for a merger under Norwegian legislation may be subject to the STA’s takeover rules if the target company’s shares are listed on the OSE.
vii Employee board representation
In both ASAs and ASs, employees are entitled to be represented on the board of directors, provided that the number of full-time employees in such a company exceeds 30. Under such circumstances, employees will be entitled to elect between one and up to one-third of the members of the board from among the employees. The exact number of employee representatives on a board varies with the number of employees in the relevant company. Employee representatives will have the same voting rights as the other board members. Employee board representation is not mandatory under Norwegian law, but cannot be rejected if requested by employees where the conditions for such representation are fulfilled.
A bidder should also note that the employees of a Norwegian subsidiary may also demand to be treated as employees at the Norwegian parent or sub-parent level, thus obtaining representation on the board of directors of such Norwegian parent or sub parent.
viii Requirements of residency
The CEO and at least 50 per cent of the members of the board of directors must be residents of Norway, unless the Ministry of Trade and Industry grants an exemption in an individual case. These residence requirements do not apply to citizens of an EEA Member State, provided such board members are residents of an EEA Member State.
ix Gender requirements
For public limited liability companies, Norwegian law imposes a requirement that both genders shall be represented as directors on the board. As a main rule, each gender must be represented by at least 40 per cent on such public companies’ board of directors. Consequently, on a board of five directors there cannot be fewer than two members of each gender. Exceptions apply to the directors elected from among employees.
The aforementioned obligation to have both genders represented on the board does not apply to Norwegian private limited liability companies.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
i EU initiatives
Within the EU, several new directives, regulations and clarification statements regarding the capital markets are proposed or have been implemented in recent years.2
These EU initiatives will most likely have an impact (directly or indirectly) on the regulatory framework for takeovers in Norway. Because of these initiatives, in 2015, the government appointed an expert committee to evaluate and propose relevant amendments to the existing Norwegian legislation resulting from the EU amending the Transparency Directive, MIFID I and the Market Abuse Directive. The committee was mandated to prepare three reports to the Parliament, the first to be delivered no later than by 11 December 2015, the second to be delivered by 24 June 2016 and the last report by 23 June 2017. In February 2016, the committee issued its first report proposing certain amendments to the STA with regard to disclosures and periodical reporting (see below).
ii Proposed amendments to the STA and the Norwegian Stock Exchange Regulation (STR) – periodical reporting and disclosures
On 1 February 2016, a government-appointed committee proposed abolishing the requirements for quarterly financial reporting by publicly listed companies, as currently set out in the STR. The proposed amendments comes as a result of an amendment to the Transparency Directive (2004/109/EC) by Directive 2013/50/EU, under which the national authorities in the respective EU Member States are prohibited from requiring financial reporting from publicly listed companies more frequently than semi-annually. The various national authorities may still require such quarterly reporting from financial institutions. However, nothing in these rules will prevent issuers from disclosing such quarterly reports on a voluntary basis in the future. We also expect that after the new rules have entered into force, the OSE may suggest that the issuers should continue financial reporting on a quarterly basis to avoid long periods of information shortage.
As described in Section II.i, supra, any person owning shares in a listed company must notify the company and the OSE if their shareholding reaches, exceeds or falls below certain thresholds. To comply with its obligations under the EEA agreement, the government-appointed expert committee also proposed that the same materiality thresholds and filing requirements shall apply for derivatives with shares as underlying instrument, irrespective of such equity derivatives being cash-settled or settled by physical delivery of underlying securities. In this regard, the committee also proposes that both the borrowing and lending of shares shall be subject to the same notification regime for both the borrower and the lender. Soft irrevocable undertakings, however, will still not be subject to such disclosure obligations.
Further, the disclosure and filing obligations under the STA currently comprise an obligation to disclose information in relation to ‘rights to shares’, regardless of whether such shares have already been issued. This is a stricter disclosure and filing obligation than what follows from the minimum requirements set out in the Transparency Directive, and it has now been proposed that this rule be abolished under Norwegian law. If this proposal is being finally adopted by the Parliament, this will mean that there will no longer be any mandatory disclosure obligations under Norwegian law for warrants and convertible bonds that are not linked to any issued (existing) shares.
Even though Directive 2013/50/EU was implemented in the EU in November 2015, it has still been awaiting implementation under the EEA agreement. We expect the Parliament to adopt such amendments to the Norwegian legislation during 2016, and that the above proposed new rules most likely will enter into force from 1 January 2017.
iii Proposed amendments to prospectus regime
The Commission has now issued a proposal for a new Prospectus Regulation. This regulation is intended to replace the existing Prospectus Directive (2003/71/EC). Both the Prospectus Directive and existing Prospectus Regulation 809/2004 are implemented under Norwegian law, and these rules are currently set out in the STA and the STR. If adopted within the EU in its current form, the requirement of a prospectus or equivalent document will no longer apply to securities offered in connection with a takeover by means of an exchange offer, merger or division, provided that a document is made available that contains information describing the transaction and its impact on the issuer.
Provided this proposal is finally adopted by the EU, the Prospectus Regulation can only enter into effect for Norway after implementation under the EEA agreement. We expect that this can take place in mid-2017 at the earliest.
iv Proposed amendments to the Norwegian financial assistance prohibition
In February 2016, the Ministry of Trade, Industries and Fisheries (Ministry) issued a consultation paper proposing the further easing of the Norwegian financial assistance prohibition rule. The Ministry now proposes to abolish the requirement that a buyer (borrower) must deposit ‘adequate security’ towards the target company if such buyer receives financial assistance from the target in the form of security for the buyer’s acquisition financing. If adopted in its current proposed form, Norway will finally have a type of ‘whitewash’ procedure that could work also for leveraged buyout (LBO) transactions. Up until now, it has been rather impractical to obtain such assistance from a target company in typical LBO transactions (see Section VI.ii, infra). However, it is too early to say if the proposal will be adopted by the Parliament in its current form.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
Previously, foreign nationals used to be relatively active in the Norwegian financial markets. However, during the past 12 months we have seen that foreign buyers seem to be noticeably retreating from the Norwegian M&A market, mostly due to last year’s collapse in oil prices. While Norway, contrary to most of its neighbouring countries, was considered a safe haven by many foreign investors due to its energy resources, strong inland and governmental economy, low interest rates, low unemployment rates and high oil prices, the collapse in oil prices has made many foreign investors more concerned. Entering 2016, this trend seems to have continued, and foreign appetite for Norwegian assets continues to decrease.
For the first half of 2015, 108 Norwegian M&A transactions were announced with a deal value of more than €5 million, of which 47 per cent involved foreign buyers.3 Overall in 2015, the total number of Norwegian M&A transactions with a deal value of more than €5 million was 219, of which 43 per cent involved foreign buyers.4 Eight of the 10 largest inbound M&A deals in Norway during 2015 involved foreign buyers. However, only three of the 10 largest inbound private equity transactions involved foreign funds investing in a Norwegian target company.5
Significant examples of inbound cross-border M&A deals in Norway in 2015 included Citicon Oy’s acquisition of Sektor Gruppen AS, valuing the business at a total enterprise value of €1.476 billion, DEA Deutsche Erdoel AG’s acquisition of E.ON E&P Norge AS for €1.4 billion and Cargill Inc’s acquisition of EWOS AS for €1.35 billion.
Foreign investors’ appetite for Norwegian assets for the first five months of 2016 has, however, reduced compared with the same period in 2015. During the first five months of 2016, only five of the 10 largest M&A transactions in the Norwegian market involved a foreign buyer. This is actually the same number as for the first five months of 2015, while for the same period in 2014 eight of the 10 largest M&A transactions involved foreign buyers. For the same period, 74 Norwegian M&A transactions were announced with a deal value of more than €5 million, of which 43.24 per cent involved foreign buyers.6 This is a significant reduction compared with 2015, in which 56.3 per cent involved foreign buyers.7 Examples of such inbound cross-border transactions for the first five months of 2016 include Golden Brick’s €1.121 billion takeover bid for Opera Software ASA, Nordic Wind Power’s acquisition of a 40 per cent stake in Fosen Vind AS for €440 million and Praxair, Inc’s acquisition of a 34 per cent stake in Yara Praxair Holdings AS for €300 million.
The foreign ownership rate of shares listed on the OSE at the end of 2015, calculated by market value, was 36.08 per cent, a slight increase compared with 36.1 per cent in 2014, while still somewhat below the record of 40.8 per cent from 2007. The rest of Scandinavia, Germany, the United Kingdom and the United States are normally of particular importance to Norwegian M&A activity, both with respect to inbound and outbound deals.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
i Industrials and manufacturing
For 2015, the industrial and manufacturing sector was the largest sector for acquisitions in Norway, and accounted for 16.4 per cent of the total deal count for that year. Even if this represented a 3.2 per cent increase compared with 2014, there was an actual decrease in number of deals within this segment compared with 2014. As most other sectors in Norway also experienced declining deal activity for 2015, the relative activity within the industrial and manufacturing segment was less affected by the collapse in the oil and gas prices even if the oil and gas market influenced the deal activity within several other sectors for 2015. For many this came as a surprise, since the transaction activity within the industrial and manufacturing sector, historically, often has been directly or indirectly related to the oil and gas sector. In this regard, it is however important to remember that two counteracting factors shaped Norway’s economy in 2015: the collapse in oil prices obviously also had an effect to the financial Norwegian financial markets, but at the same time the exchange rate development actually helped Norway’s competitive market position. The relative strength of M&A activity within the industrial and manufacturing segment for 2015 resulted from the latter factor (i.e., many of the businesses in this sector benefited from a weakening in the currency rate of the Norwegian krone). Even if the industrial and manufacturing space took a large chunk of the total Norwegian deal volume, most of the transactions in this sector for 2015 were small and not very noteworthy. One exception was TransDigm Group Inc’s €639 million acquisition of Nordisk Aviation Products AS, which was announced in February 2015.
Entering 2016, the industrials and manufacturing sector seems to remain one of the most popular sectors to make acquisitions in Norway, with a strong 15 deals for the first five months of 2016, representing 20.2 per cent of the total deal count for the first five months. As for most other sectors, the Norwegian market is seeing a continuing decline in the average deal size also within the industrial sector, and the most noteworthy transaction within this space so far in 2016 has been Praxair, Inc’s acquisition of a 34 per cent stake in Yara Praxair Holdings AS, which is Yara International’s European CO2 business, for €300 million.
ii Technology, media and telecommunications (TMT)
The strong momentum within the TMT sector continued throughout 2015, accounting for 14.2 per cent of the total volume of Norwegian deals last year. TMT was the second most active sector for M&A deals in the Norwegian market in 2015, even though it witnessed a reduction in number of deals compared with 2014. The TMT sector also seems to have experienced a decline in average deal values. For 2015, the most noteworthy transactions within this sector comprised Tele2 Sverige AB’s sale of Network Norway AS, a Norway-based provider of mobile broadband, to Ice Communication Norge AS. Other deals worth mentioning within this sector are Norvestor Equity’s €143 acquisition of Phonero AS, a Kristiansand-based wireless telecommunications carrier, and KMD A/S of Denmark, a unit of Advent International Corp, acquired Banqsoft AS, an Oslo-based software publisher, from Verdane Capital IV AS.
However, the majority of deals within the TMT sector continued to be rather small in 2015, since several of the target companies within this sector in many cases originate from venture capital investments reaching a stage in their development where the investors are seeking an exit. Since the post-crisis cool down, there has been relatively moderate interest in venture capital investments in the Norwegian market, which to a great extent has resulted in the Norwegian venture capital market lagging behind when compared to more mature companies. However, in 2014, we reported that the confidence had returned to the current venture capital players, and that more and more people also seemed to be attracted to innovative tech investments in the Norway market. This trend appears to have continued throughout 2015.
Entering 2016, the continuing high volume of deals within the TMT sector accounted for 16.2 per cent of the total deal volume. It is worth mentioning that so far in 2016, we have also seen some fairly large transactions within this deal-space in Norway. The most noteworthy of these were China’s Opera Software ASA SPV €1.121 billion bid tender for Opera Software ASA (Opera), an Oslo-based listed developer of web browser software, in an LBO transaction. Opera Software ASA SPV is a special purpose vehicle formed by Golden Brick Silk Road (Shenzhen) Equity Investment Fund II LLP, a unit of the Golden Brick Capital Management Ltd’s (Golden Brick Management) Golden Brick Silk Road (Shenzhen) Equity Investment Fund II LLP unit, Beijing Kunlun Tech Co Ltd, Qihoo 360 Software (Beijing) Co Ltd and Yonglian (Yinchuan) Investment Co Ltd, a unit of the Golden Brick Silk Road Fund Management (Shenzhen) LLP’s Golden Brick Management, for the purpose of launching a tender offer to acquire Opera Software ASA. The offer was launched in February 2016, and was conditional upon at least 90 per cent of Opera’s ordinary shares being tendered. Upon completion, Opera was to be delisted from Oslo Stock Exchange.
In January 2016, it was also announced that IK VII Fund had acquired the total issued share capital of TeleComputing AS, a Billingstad-based provider of computer facilities management services, from Fc-Invest AS, owned by Ferd AS, in an LBO transaction. Terms were not disclosed, but this was in fact one of very few traditional large-scale auction processes that were run in Norway during the second half of 2015.
Based on current market sentiment, we expect that it is quite likely that we may continue to see high numbers of TMT deals throughout the remainder of 2016, particularly due to a ‘domino effect’ where corporates that were inactive in 2015 seek to replicate peer deal success and related advantages. However, there are some concerns, one of which is that the pricing of companies within this sector now for some time has been on the rise, and some commentators appear to have started arguing that there could be a lack of robustness for such development. The absence of mega-deals within this sector in Europe for Q1 2016 and of consolidations within the telecom industry, combined with continued economic uncertainties in Europe, has made some commentators ask if 2016 will be a continuation of TMT’s golden age.
iii Energy – including oil and gas
The Norwegian M&A market has traditionally seen an oversupply of oil, gas and supply industry-related deals. The foregoing notwithstanding, as oil prices rapidly declined during 2014 and 2015, and both the oil and gas sector and the debt financing market underwent a parallel dry spell, many planned and ongoing transactions in Norway were hampered or the worst, cancelled, due to the inability of the respective parties to bridge ever-expanding valuation gaps (i.e., cash-flow projections). For 2015 overall, 12.3 per cent of deals were related to energy, oil services and the offshore sector, of which the oil and gas segment accounted for 8.2 per cent of the total deal count for 2015. However, what is interesting is that while the activity level within oil and gas during the first part of 2015 was rather muted, during the summer of 2015 the market witnessed a slight increase in deal activity within the exploration and production side. The drop in oil prices seemed to lead to a stampede by private equity sponsors looking for deals in the energy sector, and many sponsors took an interest in shopping for exploration and production assets at favourable price levels. In October 2015, for example, it was announced that that Tellus Petroleum AS had agreed to acquire a 15 per cent stake in Gina Krog oil field of Total SA Tellus Petroleum AS, a Norway-based company engaged in the production of oil and gas and a subsidiary of Sequa Petroleum NV. Sequa Petroleum NV, a listed UK-based oil and gas company registered in the Netherlands, specialises in taking discovered oil and gas reserves and resources from appraisal through to production.
Again in October 2015, it was announced that DEA Deutsche Erdoel AG had agreed to acquire E.ON E&P Norge AS from E.ON SE for a total consideration of around US$1.6 billion. DEA also agreed to acquire interests in additional developments and discoveries, including Snilehorn, Snadd and Fogelberg, as well as a broad portfolio of exploration licences on the Norwegian Continental Shelf. In December 2015, Statoil announced that it had sold a 15.2 per cent stake in the Gudrun fields to Repsole SA for a total deal value of €199 million. At the end of October 2015, it was further announced that Lotos Exploration & Production Norge AS, a unit of LOTOS Petrobaltic SA, acquired the Sleipnergas field licence of ExxonMobil Exploration & Production Norway AS, a Sandnes-based producer of crude petroleum and natural gas ultimately owned by Exxon Mobil Corp, in a €169 million transaction.
During 2015, we also continued to witness some noteworthy M&A transactions within the electric power supply market. One player that continues to be quite active in this segment is Aquila Capital of Germany, which in November 2014 acquired the entire share capital of Grønnkraft AS, an Oslo-based electric utility. In November 2015, it was announced that Aquila Capital had agreed to acquire the entire share capital of Smakraft AS, a Bergen-based electric power distributor, from Agder Energi AS, state-owned BKK AS, state-owned Skagerak Energi AS and Statkraft SF. In December 2016, Aquila Capital also announced that it had agreed to acquire a 64.8 per cent stake in Midtfjellet Vindkraft AS, a Fitjar-based electric power generation facility operator, from Energiselskapet Buskerud AS, jointly owned by state-owned Vardar AS and state-owned Buskerud Fylkeskommune. Even if none of these announcements disclosed the final deal terms, the Smakraft transaction in particular was a fairly large transaction in the Norwegian market within this segment.
Entering 2016, M&A activity within the oil and gas sphere continued to be muted: out of the 50 announced transactions in the first quarter of 2015, only five were related to the oil and gas sector, which is just one deal more compared with the first quarter of 2014. Of these five deals, only one was related to exploration and drilling services and equipment, while all the other announced deals took place within the exploration and production segment. For the moment, the oil service and equipment market for the oil and gas segment continues to be very difficult. Within this segment of the market, potential sellers also seem reluctant to initiate sales processes in the current market environment. As a result, there has been a slight upswing in the use of bilateral sales processes rather than auctions in the Norwegian market, particularly within the oil service segment. We expect that this market segment will continue to be difficult for most of 2016 and probably also for parts of 2017.
Another sector with high M&A activity in 2015 was the services sector, which accounted for approximately 12 per cent of the total deal count in 2015. Even if this was a reduction compared with the 13.6 per cent of the total deal count for 2014, this sector continued to be one of the most active in the Norwegian market, with a total of 26 transactions. Still, this was 10 transactions less than those observed in 2014 within the same segment. Like the industrial and manufacturing segment, deal activity within the services segment has traditionally been closely linked to the oil and gas sector. When the market is being hit by declining oil and gas prices, as witnessed during 2015, this naturally also has an impact on the deal activity within the services sector. This has also had a clear impact on the average deal size within this sector, which remains at the low end of the segment.
The most noteworthy transaction within the services sector for 2015 was announced in December 2015, when Norvestor Equity announced that it had acquired 4Service Gruppen AS, a Lysaker-based caterer, in an LBO transaction (see below).
However, at the beginning of 2016, the Norwegian services sector seems to have been hit by a further cool down in deal activity due to a more pessimistic outlook for the Norwegian economy resulting from the recent collapse in oil prices. For the first quarter of 2016, only four out of a total of 50 deals were related to the services sector. The most noteworthy transaction within this segment during the first five months of 2016 was actually a distressed transaction, when Aegopodium AS, a unit of H Ogreid & Sonner AS, acquired operations of Atlantic Offshore AS, an Agotnes-based provider of deep sea freight transportation services, for a total 16.9 million kroner. The transaction included Atlantic Offshore Gamma AS, Atlantic Offshore Alpha AS, Atlantic Offshore Epsilon AS, Atlantic Offshore Eta AS, Atlantic Offshore Zeta AS, Atlantic Offshore Management AS and Atlantic Offshore Crew AS.
v Private equity
For 2015, the Norwegian private equity transaction volume witnessed a substantial decline compared with the 2014 figures, with a 21 per cent decrease in number of transactions involving private equity sponsors either on the buy side or on the sell side. Looking at Nordic buyout investments by value for 2015, Denmark saw the highest volume with 35 per cent, followed by Sweden with 30 per cent and Finland with only 21 per cent. Norway trailed behind, taking only 17 per cent of investments. 2015 saw the lowest number of private equity transactions in Norway since 2008/2009. During second half of 2015, there were only 12 announced deals with private equity involvement in the Norwegian market, compared with 27 announced deals for the second half of 2014.
Norway’s private equity industry continued to be driven by new investments and add-ons, and we witnessed a substantial decline in the number of exits in 2015. Of the total number of transactions involving private equity during 2015, 68 per cent were new investments and add-ons, only 6 per cent were secondary and 22 per cent were exits.
The majority of transactions involving private equity in the Norwegian market also continue to be fairly small, and in 2015 there was a clear reduction in deal value for these deals. Out of the 10 largest disclosed private equity transactions in 2015, only five had a deal value exceeding €100 million, while four of the 10 largest announced and completed Norwegian transactions involved private equity. This is a clear decline compared with 2014, in which nine out of the 10 largest disclosed private equity transactions had a deal value exceeding €100 million. There is therefore no doubt that the rapid decline in oil prices that started in September 2014 has had a negative impact on the volume and size of private equity investments into the Norwegian market during 2015. This was a development that started at the end of 2014, when several planned and ongoing private equity transactions in the oil and gas sector were hampered or cancelled.
The most noteworthy private equity deal in 2015 was Bain’s and Altor’s sale of EWOS AS to Cargill Inc for €1,350 billion. Permira IV, LP’s €695 million sale of Pharmaq AS to Zoetis Inc and Nordic Capital’s €177 million investment into yA Holding AS via Resurs Bank AB are also worth mentioning.
In the first quarter of 2016, no private equity deals in the Norwegian market had a disclosed deal value exceeding €100 million. Of the private equity transactions with an undisclosed value during this period, we only know of one that actually had a deal value exceeding €100 million. The private equity market had continued to experience a clear slowdown at the beginning of 2015, with a 38 per cent drop in activity measured by announced private equity deals compared with the first quarter of 2015. In general, this reflected the fact that the drop in oil prices has caused a negative outlook about Norway’s largest industry, and also a somewhat reduced economic sentiment domestically. Nevertheless, at the beginning of 2016, we still saw some decent-sized private equity transactions in the Norwegian market, with IK VII Fund’s investment into TeleComputing AS being the most noticeable. Altor’s acquisition of a 25 per cent equity stake into Skandiabanken ASA, for €132 million, announced in April 2016, is also worth mentioning. Several private equity funds want to continue their plans to exit some of their existing portfolio companies. Some of these planned processes were put on halt when the market was hit by the declining oil prices. However, many of these processes are expected to be reinitiated as soon as sellers feel they have more clarity on the short to medium-term direction of the oil price. We also expect a continuing increase in the number of private equity and venture capital-related exits, add-ons and secondary transactions, in particular within the TMT sector, over the next 12 to 24 months. The number and size of deals involving private equity sponsors will depend upon market developments and volatility in the months to come. An expected increase of distressed transactions within the oil and gas segment may also tempt some funds into opportunistic investments into this sector during the next 12-month period.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
Credit markets continued to strengthen during most of 2014. The Norwegian debt capital markets prospered during the first half of 2014, with several new high-yield bonds issued at favourable coupon rates. The trend of previous years, with an increasing number of private equity sponsors taking advantage of a buyout high-yield bond market to raise acquisition financing, seemed to continue. At the beginning of the third quarter of 2014, the Norwegian debt capital market was still looking strong. However, in September 2014, declining oil prices started to create challenges for sponsors and bidders considering high-yield bonds as a means of financing new acquisitions. Nevertheless, the Norwegian banking sector remained strong, with improved liquidity, and the banks continued to be open to lend, although we also saw that at the end of 2014, most Nordic banks started to become more severely selective than in previous months of that year. Transactions within the offshore, oil and gas sectors became difficult to finance from November 2014, remaining difficult throughout most of 2015 due to the dropping oil prices. Throughout most of 2015 (with some exceptions), the Norwegian high-yield bond market was more or less closed for raising new acquisition financing. Some Nordic banks also seemed to attempt to take slight advantage of reduced competition from the high-yield bond market when offering their terms for new acquisition financing, and some banks obviously wanted to take back some of the ground gained by borrowers over the past few years with lending becoming increasingly borrower-friendly.
As a result, during 2015, an increasing number of borrowers, in particular foreign sponsors, turned elsewhere than the high-yield bond market and traditional banking financing when considering financing packages for new acquisitions, in particular for larger LBOs. These potential borrowers would in most situations be able to capitalise on the shifting investor base in the credit markets with an increasing presence of institutional investors in the form of collateralised loan obligations funds (CLOs) flooding the international financing markets with an ever-more borrower-friendly environment, particularly on larger transactions. For large transactions, there has been an increasing trend of unitranche or term loan B-style loans spreading globally, and funds offering these types of new loan products are now increasingly marketing their products also in the Norwegian market specifically towards private equity sponsors. Most Nordic banks therefore continued to remain relatively disciplined, and did not gain much ground in borrowing terms even during periods when high-yield bond financing in the Norwegian market was not an option for raising new acquisition debt. Generally, banks continue to look for businesses that generate stable cash flow, do not have high capital expenditure requirements, are large in size, have a high brand value and also enjoy a high cash conversion ratio.
Entering 2016, the banks continued to be selective in particular for projects exposed to the oil and gas industry. Most large Nordic banks present in the Norwegian market actively compete for their share of the acquisition financing market, and many of these banks are able to offer relatively high leverage multiples and attractive covenant headroom. Consequently, unitranche funds will have to be competitive to gain ground in the Norwegian market. Borrowers doing deals in the Norwegian market nowadays have a much wider variety of financing combinations available than ever, particularly on larger transactions, where various alternatives are actively being considered and occasionally used.
i M&A financing
Traditionally, third-party financing of acquisitions in Norway is usually provided by way of bank loans. In large transactions, the senior loan will be governed either by Norwegian or English law, with one bank acting as agent for the syndicate of lenders. In such syndicated transactions, the senior loan agreements used will normally be influenced by the forms used internationally, in particular the standard forms developed by the Loan Market Association. It has been common for acquisition financing (in particular for private equity transactions) to be provided by way of two or sometimes three layers of debt, with subsequent seniority. A typical leveraged private equity structure used to be a combination of senior facilities (term loans and revolving credit facilities) and mezzanine facilities (term loans), whereby security is granted to a security agent. The ranking and distribution of proceeds of the security is then arranged in an inter-creditor agreement. In today’s market, however, there has become a shift in how the financing for such LBOs are structured. They are now structured with a greater variety of combinations of debt-layers and lenders involved, especially on the larger transactions.
Increasing competition from the high-yield bond market, unitranche funds (see below) and mezzanine providers, which ask for high interest rates, has made mezzanine financing less competitive than other options available. Today, the mezzanine market seems virtually shut down, and sponsors continue to view this type of financing as being too expensive despite the fact that the market continues to see a further tightening of the spread for such loans. This does not mean that mezzanine structures are not being considered as an alternative, but mezzanine financing is currently rarely seen in the Norwegian market for new deals. What we have seen, however, is that some traditional mezzanine funds are starting to adapt to a new market situation by offering products similar to unitranche loans.
Using debt securities such as high-yield (junk) bonds for acquisitions has not been common in Norway. The main reason is that, compared with financing an acquisition with a credit facility, financing through a high-yield bond debt involves coordinating the closing of the transaction with what is, in fact, a public financing. In most cases, the acquisition itself will be subject to various conditions, typically including various forms of regulatory approval. From such a perspective, funding an acquisition through a traditional credit facility is generally more feasible to coordinate than a high-yield bond. Historically, larger listed corporations have dominated acquisition financing obtained through the Norwegian bond market. Such corporations have very often been willing to take a practical approach by issuing bonds and uploading debts on their balance sheet to have dry powder easily available for future acquisitions without necessarily having to take into consideration how to coordinate the drawdown with the conditions precedent under a pending sale and purchase agreement. Such instruments would then generally be documented under New York or English law, reflecting the historic dominance of these markets for such securities. These types of instruments could also historically be issued with Norwegian law as the governing law for issue in the local market. However, from 2012 to September 2014, acquisition financing raised in the Norwegian debt capital market was increasingly popular. During this period, it also became fairly common among sponsors to attempt to refinance acquisition debt post-completion by using the Norwegian bond market. Bonds governed by Norwegian law are usually issued pursuant to the standard terms of Nordic Trustee ASA, which acts as the trustee for the majority of bonds issued by Norwegian companies.
During 2012 and throughout third quarter of 2014, there was an increasing number of private equity sponsors and other bidders, in particular on larger deals, willing to raise financing in the high-yield bond market in connection with Norwegian leveraged acquisitions. Examples of acquisition financing raised in the Norwegian high-yield bond market for 2014 included Segulah’s acquisition of Beerenberg, Aqualis ASA’s acquisition of Weifa AS and Nordic Capital’s acquisition of Lindorff AS. The two first deals were issued using Norwegian bond agreements governed by Norwegian law. The Lindorff bond was issued as a notes indenture governed by New York law, while the inter-creditor agreement, a revolving credit facility and the escrow agreements were all governed by English law. As a result of the collapse in the oil and gas market, and except for a bond raised by Nordic Capital’s acquisition vehicle relating to the acquisition of Virtz Group, from November 2014, throughout 2015 and in 2016 up to May 2016, there has been no known acquisition financing raised by sponsors via the Norwegian high-yield bond market. Having said that, during this period there were examples of a limited number of real estate investment trusts using the Norwegian high-yield bond market to raise financing for acquiring Norwegian real estate portfolios. We do, however, expect that the high-yield bond market’s popularity for raising acquisition financing will pick up again (all depending on how the debt capital markets develop).
In the past year, there has been increased activity from non-bank (alternative) lenders and funds that are offering to replace or supplement traditional senior secured bank loans to finance M&A transactions. The products these lenders are offering typically include term loan B facilities, unitranche loans, etc.
During the relative freeze in the debt markets in 2008 to 2010, and for parts of 2011 and 2012, it also became common for sellers to participate in financing acquisitions, either in the form of an earn-out arrangement or by structuring a deferred consideration. In today’s market, and depending on individual circumstances, sellers may also occasionally be willing to offer such financing to achieve the price they are asking. The declining oil prices, in combination with the temporary closedown of the high-yield bond market witnessed at the end of 2014 and throughout most of 2015, saw vendor financing re-emerge in discussions between sellers and buyers as a way to bridge valuation gaps. If structured as vendor loan notes these will sometimes, but not always, be subordinated to the other elements of the acquisition financing. The vendor loan notes will then normally be on similar terms (or senior) to the subordinated loan capital provided by the private equity sponsor, but are usually priced to give a lower rate of return. The split between debt finance and true and quasi-equity will be determined on a transaction-by-transaction basis, and particularly by reference to the underlying business and its funding requirements.
Other forms of debt financing that may be used in acquisitions, such as securitisations, are relatively rare in Norwegian business combinations.
ii Financial assistance and debt pushdown
The buyer may also want to borrow funds from the target company (or its subsidiaries following completion of the transaction). While, as a general rule, there are no major obstacles in this regard in an asset deal where the business assets are bought by the entity financing the deal, a ‘debt pushdown’ is substantially more difficult in the case of a share transaction. Norwegian public and private limited liability companies have, as a general rule, been prohibited from providing upstream financial assistance in connection with the acquisition of shares in the target company (or its parent company). This prohibition has previously prevented any Norwegian target company from participating as co-borrower or guarantor of any acquisition financing facilities. Previously there has been no ‘whitewash’ procedure by which otherwise-prohibited financial assistance was permissible. There have, however, always been a number of possibilities available to achieve at least a partial debt pushdown, which should not be regarded as a breach of the prohibition against financial assistance.
From 1 July 2013, the Norwegian prohibition on financial assistance has been eased by introducing a type of ‘whitewash’ procedure. Under this rule, both private (AS) and public (ASA) limited liability target companies can now, subject to certain conditions, provide financial assistance to a potential buyer of shares in the target company itself. Such financial assistance must be granted based on normal commercial terms and policies, and the buyer must also deposit adequate security for his or her obligation to repay any financial assistance received from a target company.
Such financial assistance must also be approved by the target’s general assembly by a special resolution. This type of resolution requires the same support from the target’s shareholders as would be needed to amend the target’s articles of association (i.e., unless otherwise required by the articles themselves, at least two-thirds of the votes cast and the share capital represented at the general meeting).
In addition, the target’s board has to prepare a special report that shall contain information on:
- a the proposal for financial assistance;
- b whether such financial assistance will be to the target’s corporate benefit;
- c conditions that relate to the completion of the transaction;
- d an assessment of the effect of the assistance on the target’s liquidity and solvency; and
- e the price payable by the buyer for any shares in the target company or any rights to any such shares.
Such report has to be attached to the notice of general meeting sent to the shareholders.
The target company’s board will also be under an obligation to obtain a credit rating report on the party that is to receive such financial assistance.
The rule’s requirement for depositing ‘adequate security’ for the borrower’s obligation to repay any upstream financial assistance provided by a target will, however, mean that it becomes fairly impractical to obtain direct financial assistance from the target company in most LBO transactions due to the senior financing banks’ collateral requirements in connection with such deals. The reason for this is that banks normally request extensive collateral packages, so that in practice there will be no ‘adequate security’ left, or available, from the buying company (or its parent company) for securing any financial assistance from the target group, at least for the purchase of the shares. While in theory a number of possibilities may still apply for securing such claims, the extent to which the offered security is ‘adequate’ may mean that the target, in practice, has difficulty providing such upstream assistance unless the new ultimate owners, or the vendors, are able to come up with some additional collateral. Consequently, in practice, the new rules have so far had little impact on how LBO financing is structured under Norwegian law, at least in private equity transactions. In most cases, the parties continue to pursue debt pushdowns by refinancing the target company’s existing debt, as had previously been the case. However, based on a recent proposal by the Ministry in early 2015, there are now reasons to expect that the current ‘adequate security’ requirement will be amended. If the Ministry’s proposed amendment is adopted by the Parliament as originally proposed, it will in the future become possible for LBO transactions for a buyer to receive financial assistance from the target company in the form of security for the buyer’s acquisition financing (see Section III.iv, supra).
iii Corporate benefit
The power of a Norwegian entity to grant security or guarantees may, in some situations, be limited by the doctrine of corporate benefit. Under Norwegian law, the board of directors will have a general duty to act in the best interests of the company and all of its shareholders. There is currently limited case law to determine the boundaries of the corporate benefit requirements, but it has been assumed that boards enjoy fairly wide discretion to consider the corporate benefit. If the board, following due consideration, concludes that a transaction is in the company’s interests, it will be difficult to challenge a well-documented resolution to this effect.
However, under Norwegian law it is uncertain to what extent a group benefit is sufficient when there is no benefit to the individual group company, for example, in connection with granting a guarantee or providing a security.
In principle it is assumed that a Norwegian company is able to provide upstream and cross-stream guarantees and security, provided that:
- a this will not jeopardise its continuing existence;
- b its corporate objects are not transgressed by such transactions;
- c it can be argued that such cross guarantees benefiting the Norwegian company exist or that the relevant group company receives any type of guarantee fees; and
- d such guarantees and securities are not in breach of the financial assistance propitiation (see Section VI.ii, supra).
As of June 2013, both the Norwegian Public and Private Limited Liability Companies Acts contain a provision in Section 8-7(3) No. 3 stating that a loan or security to the benefit of another legal entity within the group is not included in the prohibition of loans or security to a company’s shareholders, provided that such loans or security will economically benefit the group. This new provision in both acts indicates that a group benefit may be sufficient when issuing such intragroup guarantees, even if there is no direct benefit to the individual group company that is issuing such guarantees.
Under Norwegian law, the validity of a legal act entered into by a legal entity can be set aside if, as a result, its objects are transgressed and the counterparty was or ought to have been aware of the transgression. Lenders will typically require the submission of corporate resolutions in which the borrower’s board of directors confirms that the transactions contemplated by the finance documents to be entered into by the Norwegian company are beneficial to the interests of the company. On such basis, the lenders can argue that they did not know or could not have known that the corporate objects had been transgressed.
iv Need for shareholder approval
Both the Norwegian Public Limited Liability Companies Act and the Private Limited Liability Companies Act require that agreements between the company and a shareholder, the shareholder’s parent company, a director or the general manager, a shareholder’s related party, or someone who acts according to an agreement or understanding with any of the aforementioned parties, must be approved by the company’s general meeting if the consideration to be paid by the company has an actual value exceeding 10 per cent (AS) or 5 per cent (ASA) of the company’s share capital at the time of the transaction. It has been assumed that the rules in principle also apply to loans and guarantees, provided the interests and fees paid under such loans and guarantees exceed these thresholds. If the aforementioned rules apply, the board of directors must issue a report to the shareholders. Such report must contain a statement that there is a reasonable correlation between the value of the consideration to be paid by the company and the value of the consideration received by it. In addition, an independent expert (ASA) or the company’s auditor (AS) must issue a statement confirming that the board’s statement is correct.
Certain exemptions apply, such as agreements entered into following the rules governing the incorporation or share capital increase against a contribution in kind, certain management remuneration arrangements, transfers made according to publicly quoted prices, and what are referred to as ‘agreements entered into as part of the company’s normal business and that contain price and other terms that are customary for such agreements’. An exemption rule now exists for intragroup agreements entered into between a parent company and a subsidiary provided that the parent owns all shares in the relevant subsidiary and such loan or security is to the benefit of the group as such; or the parties have adopted the new whitewash procedures relating to financial assistance.
During the past few years, Norwegian banks have increasingly started to request that intragroup loans and guarantees used in connection with acquisition financing be approved by the shareholders as a condition for drawdown under acquisition facilities. However, as long as a parent company controls all shares in the relevant subsidiary issuing such intragroup loans and guarantees used, it can now be argued that there will no longer be a need for banks to request that such loans and guarantees have to be approved by the shareholders. Shareholders’ approval may still be necessary in such cases as referred to under Section VI.ii, supra, or where the parent does not control all shares in the relevant group companies issuing such loans or securities. It can still be argued that such intragroup loans may trigger a need for shareholder approval from the receiving subsidiaries’ shareholders, unless the loans are entered into as part of the relevant subsidiaries’ ordinary business activity and contain prices and other terms that are normal for such agreements. In legal theory, it has been argued that intragroup loan agreements entered into in connection with M&A transactions very often must be considered to fall outside the normal business activity of the respective company receiving such financing and, therefore, under all circumstances need to be approved by such company’s shareholders.
v Pricing of credit
Entering 2016, the pricing of credit in the Norwegian leveraged finance market started to tighten. A few examples of deals at around 300/325–350/375 basis points over the Norwegian Interbank Offered Rate (NIBOR) through the senior A/B tranche on certain bilateral transactions only involving Scandinavian banks still exist. Even if this are very deal-specific, in 2016 most Nordic banks operating in Norway will request 400/450 basis points over NIBOR through the senior A/B tranches. However, for attractive assets and in a highly competitive process, banks may be willing to reduce the margin slightly. Most banks will argue that the leveraged finance market in 2016 is more or less the same as for 2015. Nevertheless, it looks as if at least some banks may attempt to take slight advantage of the weak high-yield bond market. Margin ratchets on the basis of reduction in leverage continue to apply. On some smaller deals where the banks’ acquisition financing department has not been involved, we have also observed margins that are more favourable.
Leverage multiples continued to increase since early 2012, and well into 2014, but all depending on each individual investment case. During 2015, we observed everything from 3–5.5 x EBITDA (all senior) and combinations of senior and high-yield bonds around 6.5 x EBITDA, even if most banks would hold back in accepting to increase such leverage multiples above 5 x EBITDA. On some large Norwegian targets with attractive cash flow, there were also indications that some international banks were willing to support 7 x leverage (potentially also 7.5 x if cash flows or valuation were supportive), while most Nordic banks would, subject to credit committee approval, be willing to accept a debt structure of 6.5 x EBITDA with senior debt leverage between 5–5.5 x EBITDA. Entering 2016, most Nordic banks seemed, at least at the beginning of the year (when the Brent oil prices fell below US$30 per barrel), to have become slightly more cautious.
Throughout the second half of 2013 and well into 2014, the banks became more accommodating than in previous years about accepting reductions in equity contributions, and equity levels of around 35 to 40 per cent became fairly common. During this period, we also observed examples of equity contributions of around 30 per cent, although not very frequently. Such terms would normally only be offered to long-standing customers with long banking relationships and strong balance sheets. For 2015 and entering 2016, most Nordic banks operating in Norway seem to be attempting to resist equity contributions below 40 per cent. The reason is that there has been a clear increase in the acquisition multiples, and banks prefer that a borrower itself finances parts of such increase by contributing more equity to the structure. Sponsors may still attempt to circulate draft term sheets to the banks with ‘financing ideas’ with only a 30 per cent equity contribution from the sponsor, and we have seen such deals in the Norwegian market in both 2015 and 2016.
In general, it is our view that the arrangement fee in bilateral transactions in May 2016 was between 275 and 300 basis points. In syndicated deals, the arrangement fee seems to be between 275 and 325 basis points or higher. If the syndication consists of two or three banks, of which one is a foreign bank, this will very often increase the arrangement fee by 50 to 75 basis points compared with a bilateral transaction. This is more or less the same as for 2014 and 2015 transactions. It is also worth mentioning that the agency’s8 fees have increased compared with 2014/15. The banks blame such increase on more cumbersome obligations to comply with ‘know your customers’ guidelines, etc.
For the first quarter of 2014, €360 million was raised in five mezzanine deals in the European mezzanine market, which in fact was the highest number of transactions since the first quarter of 2010, when six deals were reported. The first quarter activity within the European mezzanine market for 2014 could, at least initially, be taken as a sign that the market was about to improve compared with 2013, when the mezzanine market was considered as more or less rock bottom when just six mezzanine deals appeared on the radar for a total of €485 million. However, throughout 2015, it became clear that this was not the situation. With a total of six mezzanine deals amounting to only €386 million reported in Europe for all of 2014, it turned out that the mezzanine market remains virtually completely shut down. So far, in 2016, no European mezzanine transactions have been observed in the market, and there is no available statistics on pricing. For the first time since Standard & Poor’s began tracking the European mezzanine market in 2000, it decided not to publish the LCD European Mezzanine Review for any quarter since Q4 2014 due to lack of sufficient statistics. Mezzanine is, for the moment, virtually non-existent in Norwegian leveraged M&A transactions. The reason is that nearly all Norwegian buyout deals for 2015 were either financed on an all-senior basis, via the high-yield bond market, unitranche or term loan B style, or a combination of the such alternatives. For larger deals, unitranche structures combining senior and subordinated debt into one debt instrument at a blended price seem to have substituted traditional mezzanine. At the end of 2014 and continuing into 2015, we observed some international banks being willing to propose term loan B, C, D, E and F-style facilities for financing Norwegian assets at very favourable rates.
Up to May 2016, no private equity sponsor-backed Norwegian M&A deals have been financed or refinanced by issuing high-yield bonds in the Norwegian debt capital market. At the same time in 2014, a total of six private equity sponsor-backed deals was financed, or refinanced, by issuing such debt instruments at very favourable interest rates. Some of these deals were done at interest rates from 465 to 500 basis points over NIBOR. In 2014, we observed a total of 15 Norwegian M&A deals financed or refinanced by issuing high-yield bonds in the Norwegian market, and the majority of these transactions were private equity sponsor-backed.
vi Financial covenants, mandatory prepayments and excess cash sweep
Historically, a full suite of financial covenants more or less used to be the norm in the Norwegian leveraged debt market, usually comprising leverage, interest cover, cash-flow cover and restrictions on capital expenditure, and where such covenants would be tested frequently. Traditionally, borrowers would seek to amend the interest cover covenants to provide additional headroom.
However, over the past few years, there has been an explosive development in financing provided by high-yield bonds issued in the Norwegian debt capital market. During parts of 2013 and in 2014, it was also possible to raise leveraged acquisition financing in the Norwegian bond market on ‘cov-lite’ terms (i.e., excluding quarterly-tested financial maintenance covenants). Such bond financing may still retain incurrence-based financial covenants (i.e., compliance with a fixed-charge covenant test or leverage test measured at the time debt is incurred, investments are made or dividends are issued). Nowadays, most Norwegian banks are willing to grant acquisition financing only based on leverage and cash flow cover covenants.
For most of 2014, private equity and institutional investors all attempted to take advantage of attractive debt packages offered by the bond market, and banks would constantly have to compete with high-yield products and institutional investors, both in the traditional CLO format but also in direct lending initiatives. As a result, senior lenders were all under strong pressure from sponsors to accept similar terms and conditions to those common before the Lehman Brothers crisis, at least for parts of the senior debt. Entering into 2016, ‘cov-lite like’ terms have started to become more common also for senior facilities in the Norwegian market, but banks will normally seek to resist such terms on small to mid-sized transaction. That said, to meet the increased competition, banks continue to loosen up on some of their terms, and there has been a constant move towards more relaxed terms (covenant-loose) for senior debt also in the Norwegian leveraged market. Typically, interest cover and capital expenditure-covenants are not very frequently seen in Norwegian leveraged finance transactions. On larger deals with an international banking syndicate, the norm has now become cove-lite like terms for Norwegian LBO transactions.
Equity cure rights (the right to cure breaches of financial covenants by injecting additional equity) are generally accepted among banks in today’s market. However, permitted amounts, their use in consecutive financial quarters and the application of equity cure proceeds to repay debt continue to be subjects of negotiation. The banks will, on a general basis, tend to restrict such equity cures, and will also try to ensure that as much as possible of the equity cure amounts are being applied to pre-payments. By mid-2016, there seemed to be a general consensus among the larger banks that they would be prepared to accept equity cure rights of up to four times the term of the facilities, even though it was known that, for occasional deals, banks had been willing to move to up to five times. This is more or less the same as for 2015. It is worth mentioning that we have now also started to see increased pressure on banks also to accept EBITDA cures, and there have now also been deals conducted in Norway with this type of cure.
As usual, the scope of agreed carve-outs and de minimis thresholds for mandatory pre-payment in cases of disposal proceeds, acquisition proceeds, insurance proceeds and excess cash flow continue to be the subject of hard negotiations, and will vary according to the deal in question. However, during 2013 and 2014, the sweep percentage has been steadily going down, and the downwards ratchet leverage levels at which the cash sweep ceases to apply have started to increase. Entering 2016, it is not uncommon for the cash sweep provision to cease to apply when the leverage levels have been reduced by 25 per cent compared with the situation per drawdown.
Provided that the current sentiment in the debt market continues, we expect that the banks’ terms and conditions in the leveraged finance sector may be forced to return to very close to those of the pre-crisis era. Obviously, the banks will seek to hold back such a development as long as possible. How far sponsors are able to drive the banks in this respect remains to be seen.
VII EMPLOYMENT LAW
Under Norwegian law, employees are afforded protection through legislation, mainly the Workers’ Protection Act, which implements the Acquired Rights Directive,9 and collective bargaining agreements. The Act further includes protection against, inter alia, unlawful dismissals and mass layoffs.
Private acquisitions of, or public offers for, shares in a target company will not generally affect the terms of the individual’s contract of employment with the target company. Such a transaction will not itself trigger any duties towards the target company’s employees for the new shareholder. The target company is, however, subject to a duty to inform the employees.
When a business (asset) is acquired, according to the Act, the employees as a main rule have the right to have their respective employment contracts transferred to the purchaser of the business, and the purchaser (the new employer) will therefore assume all rights and obligations of the transferor relating to the transferred employees, provided that the unit being transferred is an independent economic unit that keeps its identity subsequent to the transfer. Certain exceptions apply to pension regimes. An employee may refuse the transfer of his or her employment to the new employer. The former and the new employer shall, as early as possible, provide information concerning the transfer and discuss it with the employees’ elected representatives and, later on, inform each of the employees.
Similar provisions are often provided for in collective bargaining agreements in Norway, and the provisions in such agreements may therefore also apply to share transactions.
Employees are protected against termination based on a transfer of business, but terminations due to rationalisation measures may take place. The rules described for asset transfers also apply in cases where the identity of the employer changes due to a merger.
The Act sets out detailed rules that will have to be observed with respect to, inter alia, workforce reductions, dismissals and redundancy notices, and transferring and relocating employees, in particular in a business combination that takes place as an asset deal. These rules are supplemented by notification and discussion obligations in connection with a business combination, set out in collective bargaining agreements (if applicable) with some of the Norwegian labour unions.
Furthermore, the Norwegian Reorganisation Act of 2008 must be observed prior to plant closures and mass layoffs. This Act sets out detailed rules and imposes an obligation on the owner of a business if it is considering a workforce reduction that involves more than 90 per cent of the company’s workforce, or if it is considering closing the business activity.
It is also worth mentioning that in March 2015, the new Conservative government surprisingly reintroduced a bill proposal implying changes to the rules relating to restrictive covenants in employment relationships. The Ministry of Labour under the former government originally introduced the basis for the proposed amendments in 2010. This proposal was highly controversial among most Norwegian business organisations. Nevertheless, the former Labour government expected to introduce a final bill proposal as early as 2011. Such bill proposal was never put forward, and most observers assumed that such bill proposal would not be reintroduced under the new conservative government, which took office in 2013. Irrespective, these proposed changes have been reintroduced, and in spite of objections to the proposal from several employers’ and business’ organisations, the Parliament has resolved to adopt the government’s proposal.
As from 1 January 2016, non-recruitment clauses between an employer and other businesses will be invalid, except when such undertakings are agreed in connection with takeover situations. After 1 January 2016, a non-recruitment clause can, however, in takeover situations only be agreed for a maximum period of six months from the date the parties resolved to terminate their negotiations, if such takeover negotiations fail. Non-recruitment clauses can further be agreed for a maximum time-period of six months from the date of transfer of business provided the employer has informed all affected employees in writing about such provisions.
It is not obvious if the ‘letter of the new law’ in fact also prohibits a seller and a buyer in a share purchase transaction from agreeing such non-recruitment clauses for longer time-periods, provided the target company itself (as the employer for the relevant employees) is not a direct party to such agreement. It can be argued that a non-recruitment clause in a share purchase agreement does not (at least directly) violate the new legislation as long as the non-recruitment clause only refers to the target company’s employees, and such target company itself is not a party to the agreement. There is a risk that non-recruitment clauses agreed for longer time periods between buyers and sellers in such share sale and purchase transactions may still be invalid. The basis for this is that even if the target company itself (as the employer for the relevant employees) is not a direct party to such sale and purchase agreement, the effects of such clauses in share purchase agreements may still turn out to be the same as if a target company in fact had become party to such agreement. Consequently, it can be argued that non-recruitment clauses agreed for longer durations in share purchase agreements at least violate the spirit of the new legislation, and thus also must be considered prohibited.
VIII TAX LAW
i Acquisition of shares
Norwegian shareholders, as limited liability companies and certain similar entities (corporate shareholders), are generally exempt from tax on dividends received from, and capital gains upon the realisation of, shares in domestic or foreign companies domiciled within EU and EEA Member States. Losses related to such realisation are not tax-deductible. Consequently, Norwegian corporate shareholders may sell shares in such companies without being taxed on capital gains derived from the sale. Costs incurred in connection with such sale of shares are not tax-deductible. Certain restrictions exist regarding foreign companies not located in EU or EEA Member States, or located in low-income tax states within EU and EEA Member States, and that are not conducting businesses out of such countries (Controlled Foreign Companies rules). On 1 January 2012 Norway abolished the former 3 per cent clawback rule on capital gains so that capital gains earned by corporate shareholders has become subject to zero tax. The amendment applies regardless of whether the exempted capital gain is derived from a Norwegian or a qualifying non-Norwegian company. Dividends received by a Norwegian company on business-related shares in group subsidiaries within the EEA, held directly or indirectly with more than 90 per cent inside the EEA, are also exempt from Norwegian corporate tax in the hands of the receiving corporate shareholders. The 3 per cent clawback rule will, however, apply to dividends received by corporate shareholders owning less than 90 per cent of the shares, and for foreign corporate shareholders with a permanent establishment in Norway that receive dividends from Norwegian companies, subject to such foreign corporate shareholders participating in or carrying out business in Norway to which such shareholdings are allocated. Under such circumstances, 3 per cent of such dividends are subject to Norwegian taxation as ordinary income at a rate of 25 per cent (reduced from 27 per cent with effect from 1 January 2016) (giving an effective tax rate of 0.75 per cent).
Dividends received from, or capital gains derived from realisations of, shares by shareholders who are Norwegian private individuals (personal shareholders) are, however, taxable as ordinary income. With effect from 1 January 2016, the government increased the tax rate on dividends received from or capital gains derived from the realisation of shares held by Norwegian private individuals. According to the new rules, the amount derived from such distributions, capital gains, etc., must be multiplied by 1.15, and such grossed-up amount is thereafter to be taxed as ordinary income for such private individuals at a rate of 25 per cent. In effect, this increases the effective tax rate on such distributions and gains from the 27 per cent rate under the former tax regime to 28.75 per cent. Any losses are tax-deductible against such personal shareholder’s ordinary income.
Capital gains from the realisation of shares in Norwegian limited liability companies by a foreign shareholder are not subject to tax in Norway, unless certain special conditions apply. The extent of the tax liability of such foreign shareholders in their country of residence will depend on the tax rules applicable in such jurisdiction.
Normally, an acquisition of shares in a Norwegian target company will not affect the target’s tax positions, including losses carried forward, and such attributes normally remain with the target unless the tax authorities can demonstrate that the transfer of shares is primarily tax-motivated.
ii Acquisitions of assets
The tax treatment of sales of business assets is fairly different to that of shares. Capital gains derived from the disposal of business assets or a business as a whole are subject to 25 per cent tax, and losses are deductible. A Norwegian seller can defer taxation by gradually entering the gains as income according to a declining balance method. For most assets, the yearly rate is a minimum of 20 per cent, including goodwill (however, also note Section VIII.x, infra).
The acquirer will have to allocate the purchase price among the assets acquired for the purposes of future depreciation allowances. One should keep in mind that the acquirer will be allowed a stepped-up tax basis of the target’s asset acquired. The part of the purchase price that exceeds the market value of the purchased assets will be regarded as goodwill. Recently, however, the tax authorities have disputed the allocation to goodwill instead of other intangible assets with a considerable longer lifetime.
As gains from the disposal of shares in limited liability companies are generally exempt from tax for corporate shareholders, this will, in many instances, make the sellers favour a share transaction over an asset transaction. This will not, however, be the case in transactions involving a loss for the seller, as a loss will still be admitted for the sale of assets.
Under Norwegian law, an enterprise can be acquired through a tax-free statutory merger in return for the shareholders in the transferor company receiving shares as consideration. Such transaction will be tax-exempt both for the shareholders and for the merging companies. To qualify as a tax-exempt merger, all companies involved in the merger need to be domiciled in Norway; however, according to amendments made to the Norwegian tax regulations in 2011, cross-border mergers and demergers between Norwegian companies and a company domiciled within the EU or EEA (subject to certain conditions being fulfilled) can also be carried out as tax-free mergers or demergers under Norwegian law.
To qualify as a tax-free merger, all tax positions will have to be carried over without any changes, both at the company level and at the shareholder level.
A cash element may be applied as consideration in addition to shares in the transferee company, but may not exceed 20 per cent of the total merger consideration. Such cash payments will be considered as dividends or as a capital gains, both of which will be taxable if the receiver is a personal shareholder. If such cash compensation shall be considered as dividends, it must be divided between the shareholders in accordance with their ownership in the transferor company. Such dividend or gain will be tax-exempt if the shareholder is a corporate shareholder, except for the tax on 3 per cent of their dividend income derived from shares in the merging companies, which is taxed at a tax rate of 25 per cent if the shareholder owns less than 90 per cent of the shares in the merging companies.
iv Distribution of dividends and interests
No withholding tax is imposed on dividends or liquidation dividends paid by a Norwegian limited liability company to an EEA-resident corporate shareholder, provided that the shareholder is genuinely established and conducts a real business activity in the relevant jurisdiction. Furthermore, this EEA-resident corporate shareholder must be comparable to a Norwegian limited liability company. In this context, an assessment would need to be performed to determine whether the company is genuinely established pursuant to a business motive, and that the establishment is not purely tax-motivated. The assessment will differ according to the nature of the company in question, and it must be assumed that the assessment of a trading company and a holding company will not be the same. If such criteria are not met, then the withholding tax rate in the applicable double-taxation treaty for the relevant jurisdictions involved will apply. If such a foreign holding company is considered an agent or nominee for another real shareholder (not a legal and economic owner of the dividends) or a pure conduit company without any autonomy to decide what to do with its income, the Norwegian tax authorities may apply the default 25 per cent withholding tax rate (i.e., not accept treaty protection). Foreign buyers of Norwegian assets should thus be cautious when setting up acquisition structures and include tax reviews of any prior holding structures when conducting due diligence.
Interest payments are not subject to withholding tax, even if payments are made outside the EEA; however, the government has proposed a new tax reform, which includes a rule allowing the government to introduce withholding tax on interest and royalty payments (see Section VIII.x, infra). Further, see our comments on excessive interest and reclassified loans in Section VIII.vi, infra.
v Deducting losses on receivables between related companies
A company may finance its subsidiaries either by loans or by equity. If using a relatively high amount of loan financing, the parent company could deduct the losses on receivables (bad debt) in the case of an unsuccessful investment while realising a tax-exempt gain on shares where the investment is successful. As of 6 October 2011, a parent company’s right to deduct losses on receivables on related entities where the creditor has an ownership of more than 90 per cent has been restricted. The limitation will not, however, apply to losses on customer debt, losses on debts that represent previously taxed income by the creditor, and losses on receivables arising from mergers and demergers.
vi Thin capitalisation and transfer pricing
Under Norwegian law, significant restrictions on the deduction of interest paid to ‘related parties’ were implemented with effect from 1 January 2014. Additional restrictions to this rule have been implemented with effect from 1 January 2016. The term ‘related parties’ covers both direct and indirect ownership or control, and the minimum ownership or control requirement is 50 per cent. Note that, where a related party to the borrowing company has issued security for loans raised from an external lender (typically a bank), the interest paid to such external lender shall be considered as ‘internal’ interest that will become subject to limitations for deduction for tax purposes. Nevertheless, a loan from an unrelated party secured by a guarantee from another group company shall not be considered as an intragroup loan, provided that 50 per cent or more of shares in the group company issuing such security are owned or controlled by the borrowing company. The limitation rule will also not apply to such third-party loans in situations where a related party provides a pledge over such party’s shares in the borrowing company, or provides a pledge or charge over such related party’s outstanding claims towards the borrowing company. Further, note that negative pledges provided by a related party in favour of a third-party lender will not be deemed as security within the scope of the interest limitation rule. Notwithstanding the above, the interest limitation rule will still apply if the loan from an unrelated party can be considered as a de facto back-to-back loan from a related party.
According to the interest limitation rules, interest expenses will, in general, still be fully deductible against interest income. However, interest expense excluding interest income (net interest expense) will only be fully deductible if the total amount of interest expenses does not exceed 5 million kroner (a threshold value, not a basic tax-free allowance) during a fiscal year or if the interest expense is paid to a non-related party. Outside these situations, from 1 January 2016 the rules now hold that net interest expenses paid to a related party can only be deducted to the extent that external and internal interest expenses combined do not exceed 25 per cent (previously 30 per cent) of the taxable profit after adding back net internal and external interest expenses and tax depreciation. This is a type of taxable approach to the company’s EBITDA. If the company has paid interest on intragroup loans exceeding 25 per cent of the calculation basis, any excess amount shall be added back to the company’s taxable income.
An example of the determination of the calculation basis for the limitation rule can be illustrated as follows:
Ordinary income (before the effect of the interest deduction limitation rule)
Net interest costs
25 per cent of the calculation basis (maximum interest deduction)
Net interest on intragroup loans
In this calculation, the limitation of interest deduction would, in principle, be 50, as net interest costs are 150 and the maximum interest deduction is 100. However, the limitation of interest deduction cannot exceed the interest paid on intragroup loans, as this is 20. The denied interest deduction (the amount to be added to the taxable income) is reduced from 50 to 20. In this example, this means that an amount of 20, which is the denied interest deduction, will be added to the taxable income.
For the purpose of calculating the net interest paid, which may be subject to limitations, the term ‘interest’ includes any payment considered as interest for Norwegian tax purposes – including certain premiums and discounts. The same applies to gains and losses on receivables issued to a higher or lower price than the strike price. However, such gains and losses are not regarded as interest income or interest expenses for the person who has acquired the debt in the secondary market. Currency gains or losses are not considered as interest; nor are gains or losses on currency and interest derivatives.
Further, the limitation of interest deductions shall be calculated on a per-legal-entity basis, and any related-party interest payments that are not deductible due to such limitation may be carried forward for a maximum period of 10 years. Interest received shall be classified as taxable income for the creditor company, even if the debtor company is denied deductions due to the proposed limitation. Group contributions and losses carried forward may not be used to reduce income resulting from interest limitation. Interest limitation will thus result in payable tax.
In October 2015, the government proposed a tax reform to address tax evasion (see Section VIII.x, infra). In its proposal, the government states that it is considering implementing further restrictions on the interest limitation deduction regime by ensuring that external interest costs also become subject to the limitation regime. At the same time, the government states that such additional restrictive measures will be conditional on the extent that it is possible to find a safety valve to ensure that interest payments on loans from third parties not forming part of any tax evasion scheme still are tax deductible.
Further in May 2016, the EFTA Surveillance Authority, through a ‘letter of formal notice’ to the Norwegian Ministry of Finance, notified that it has initiated formal proceedings against Norway relating to the Norwegian interest limitation rules. These proceedings were initiated based on a preliminary assumption by the Surveillance Authority that the Norwegian interest deduction limitation rules could give rise to a restriction of the freedom of establishment, and thereby violate Article 31 of the EEA Agreement. The government has been requested to submit its observations on the content of the Surveillance Authority’s letter within two months of its receipt.
vii Taxation of ‘carried interests’ – final ruling
Under current tax law, there is no explicit Norwegian rule for taxation where managers of investment funds receive ‘profit interest’ or ‘carried interest’ in exchange for their services and receive their share of the income of the fund. The prevailing view until recently has been that, as long as such managers invest capital into the funds, the carried interest will be considered as a capital gain and taxed at capital gains rates, and if the managers are organised as limited liability companies, such corporate stockholders’ income in the form of dividends and gains on stocks or ownership interest in other companies would also be exempt from taxation in accordance with the Norwegian exemption method. However, the Norwegian tax authorities have initiated several administrative actions challenging the prevailing view by seeking to treat such capital gains as income, subject to ordinary income taxation as salary at a higher tax rate.
In December 2013, Oslo District Court rejected the tax authorities’ primary claim in a dispute between the Norwegian tax authorities on one side, and Herkules Capital (a Norwegian private equity fund’s advisory company) and three key executives employed by the advisory company who had an ownership interest in such advisory company on the other. The Court concluded that there was no basis for considering carried interest as income from labour to be taxed as wage and salary income at a much higher maximum tax rate (now 47.2 per cent) in accordance with the tax authorities’ primary position. The Court also rejected the tax authorities’ argument that distributions from a private equity fund to its partners should be subject to additional payroll tax (14.1 per cent). However, the Court concurred with the tax authorities’ alternative claim, namely that such profit is subject to Norwegian taxation as ordinary income from businesses at the then-prevailing tax rate of 28 per cent (now 25 per cent). The taxpayers, being the adviser and three key executives, had not argued that carried interest should be taxed as a capital gain allocated to the general partner, as the general partner (in this particular case) did not have any ownership interest in the fund. The question of whether carried interest should be treated as a capital gain was therefore not considered by the Court.
The tax authorities filed an appeal, and in January 2015, the Court of Appeal reversed the District Court’s ruling and upheld the tax authorities’ original tax assessment (i.e., that the carried interest should considered as salary income for the relevant key executives). The Court of Appeal further concluded that the distribution to the key executives of such profits in this particular dispute also was subject to payroll tax (at 14.1 per cent) under Norwegian law, and also ordered the key executives to pay a 30 per cent penalty tax on top.
The taxpayer appealed the ruling to the Norwegian Supreme Court, and in November 2015, the Supreme Court finally overturned the Court of Appeal and invalidated the tax authorities’ tax assessment. The Supreme Court concluded that the carried interest should be considered as ordinary income from business taxed at the then-prevailing tax rate of 28 per cent (now 25 per cent), but that such income could not be considered as salary income for the relevant key executives. As such, there could be no question of payroll taxes on such distributions.
viii Group contributions
Norwegian companies cannot file consolidated tax returns or form fiscal unities, but a transfer of taxable income within an affiliated group of Norwegian entities is possible through group contributions to offset taxable profits against tax losses in another Norwegian entity. It is possible to grant more group contribution than taxable income, but the grantor company will not be able to deduct the excess amount. This excess amount, which is not deductible for the grantor, would equally not be taxable for the recipient. The distributable reserves form the limit for total group contributions and dividend distributions. To enable group contributions, the contributing and receiving entities must be corporate entities taxable in Norway, an ultimate parent company must hold more than 90 per cent of the shares and voting rights of the subsidiaries (either directly or indirectly) at the end of the parent’s and the subsidiaries’ fiscal year, and the companies must make full disclosure of the contribution in their tax returns for the same fiscal year.
ix Stamp duty and capital duties
Norway does not levy capital duties. Stamp duty is triggered only if real property is acquired. If the shares in a company owning real property are acquired, no stamp duty is levied.
x The 2016 Norwegian tax reform
In October 2015, the government released a proposal for a tax reform (the proposed reform). The proposed reform is a follow up on a report issued by an expert committee appointed to evaluate the corporate tax system in light of recent corporate tax changes and lower tax rates in other countries, the global mobility of corporate taxpayers and their effect on the erosion of the Norwegian tax base.
The proposed reform includes, inter alia:
- a reducing the tax rate on ordinary income to 22 per cent, which should take effect over the period from 2017 to 2018;
- b increasing taxes on dividends or gains derived from the realisations of stock held by Norwegian private individuals to a rate 31.68 per cent. This increase is to take effect at the time when the Norwegian tax rate on ordinary income for companies and individuals is reduced from 25 to 22 per cent; and
- c implementing a rule allowing the government to introduce withholding tax on interest and royalty payments.
In the proposal, the government also stated that it would consider implementing further restrictions on the interest deduction limitation regime by ensuring that external interest costs also become subject to the limitation regime (see Section VIII.vi, supra). The government also proposes reducing the possibility for treaty shopping by implementing a rule stating that all entities established and registered in Norway will have a Norwegian tax domicile, unless a tax treaty with other states leads to a different result. Consequently, companies registered in Norway shall in future never be considered ‘stateless’. Finally, the government also intends to follow up and may introduce further amendments based on the OCED’s recommendations resulting from its BEPS project, particularly with regard to the arm’s-length principle, anti-hybrid rules, the definition of permanent establishment, etc.
On 5 May 2016, the leaders of Norway’s major political parties issued a press release confirming that they have agreed on a settlement about some main principles for a tax reform, including reducing the tax rate on ordinary income to 23 per cent (instead of the originally proposed reduction to 22 per cent), which should take place before 2018. The press release also states an aim to introduce a new ‘tax on the financial services industry’, which should be introduced from 2017. However, the final content and design of these rules will not be presented prior to the state budget for 2017, which will be presented in October 2016. The planned tax on the financial services industry will be a tax on the ‘value-add’ associated with the financial services and banking industry, and must be seen in light of the financial sector being exempt from VAT.
IX COMPETITION LAW
Under Norwegian law, an acquisition, merger or other concentration involving businesses will have to be notified to the NCA if the following conditions are met: the undertakings concerned on the target side have a group turnover in Norway exceeding 100 million kroner; the acquirer has a group turnover in Norway exceeding 100 million kroner; and the combined group turnover of the acquirer and the target in Norway is 1 billion kroner or more. Note that the NCA will be empowered to issue decrees ordering that business combinations that fall below these thresholds still have to be notified, provided that the NCA has reasonable cause to believe that competition is affected, or if other special reasons call for such investigation. Such a decree has to be issued no later than three months from the date of the transaction agreement or from the date when the control was acquired, whichever comes first.
On 1 January 2014, Norway implemented a type of more comprehensive notification (more similar to a Form CO), but that is somewhat more limited in substance than the former ‘complete’ filing form. However, the Ministry of Trade, Industries and Fisheries has also adopted a simplified procedure for handling certain transactions that do not involve significant competition concerns within the Norwegian market – a short-form notification somewhat similar to the EU system. In 2015, the Ministry proposed certain new amendments to the Norwegian merger control regime, including a proposal for an expansion of the scope of such simplified merger control procedure, and in March 2016, the Parliament finally adopted these proposed amendments. The amendments will enter into force as determined by the government.
Once the amendment has entered into force, the simplified procedure will cover:
- a joint ventures with no or de minimis actual or foreseen business activities within Norway. A turnover and asset transfer test of less than 100 million kroner is used to determine this;
- b the acquisition of sole control over an undertaking by a party that already has joint control over the same undertaking; and
- c concentrations under which one or more undertakings merge, or one or more undertakings or parties acquire sole or joint control over another undertaking, provided that (1) none of the parties to the concentration is engaged in business activities in the same product and geographic market (no horizontal overlap), or in a product market that is upstream or downstream from a product market in which any other party to the concentration is engaged (no vertical overlap); (2) two or more of the parties are active on the same product or geographical market (horizontal overlap), but have a combined market share not exceeding 20 per cent (previously 15 per cent) (horizontal relationships); or (3) one or more of the parties operates on the same product market that is upstream or downstream of a market in which the other party is active (vertical overlap), but none of the parties individually or in combination has a market share exceeding 30 per cent (previously 25 per cent).
After receipt of the filing under the new rules, the NCA now has up to 25 working days to make its initial assessment of the proposed transaction, allowing, however, for pre-deadline clearance, so that at any time during the procedure the NCA can state that it will not pursue the case further. The NCA must, prior to the expiry of this deadline, notify the parties involved that a decision to intervene may be applicable. In such notification, the NCA must demonstrate that it has reasonable grounds to believe that the transaction will lead to or strengthen a significant restriction of the competition not compatible with the intent behind the Norwegian rules. If the NCA issues a notice that it may decide to intervene, it will have a basic period of 70 working days from the date the notice was received to complete its investigation and come to its conclusion on the concentration. This basic period can be extended under certain circumstances.
There is no deadline for filing a notification, but a standstill obligation will apply until the NCA has cleared the concentration. As under the EU merger rules, a public bid or a series of transactions in securities admitted to trading on a regulated market such as the Oslo Stock Exchange can be partly implemented, notwithstanding the general standstill obligation. For such exemption to be effective, the acquisition will have to be notified immediately to the NCA; ‘immediately’ in this regard will normally mean the day on which control is acquired.
A simplified notification may, under the new regime, be submitted in Danish, English, Norwegian or Swedish, whereas a standardised notification has to be submitted in Norwegian.
It should also be mentioned that the government-appointed committee originally had proposed aligning the substantive test with the substantial impediment to efficient competition (SIEC) test under the EU rules. However, this proposal was rejected by the government. In 2015, the Ministry once again circulated a proposal abolishing the former Norwegian substantive test, which was based on a substantial lessening of competition test, and instead align the Norwegian test with the same SIEC test as applicable under the EU rules. In March 2016, the Parliament finally adopted the government’s proposal, meaning that Norway in future merger control cases will apply the same ‘consumer welfare standard’ as applied by the Commission, instead of the ‘total welfare standard’ as previously applied under the Norwegian merger control regime.
The amendment will enter into force as determined by the government. It is currently proposed by the Ministry that the above amendments will all enter into force on 1 July 2016.
Further, in 2016, the Parliament also approved the implementation of an independent appeal board for handling appeals in merger control cases under Norwegian law. From the time such independent appeal board is established and the new rules enter into force, the previous power held by the King Council to intervene in merger control cases will be abolished. The Ministry has proposed that this amendment shall take effect on 1 January 2017.
Failure to comply with the notification duty leads to administrative fines. The NCA may issue fines of up to 10 per cent of the undertaking’s worldwide turnover. The highest fine so far amounted to 25 million kroner and was issued to Norgesgruppen in 2014. The level of this fine represents a substantial increase compared to the period prior to February 2014, where the highest fines issued only amounted to 350,000 kroner. In principle, such breaches can also be subject to criminal sanctions, but this has not yet occurred.
The short-term oil price uncertainty has created a somewhat negative outlook for the Norwegian economy. Reduced investment activity on the Norwegian Continental Shelf has also started to be reflected in the mainland economy, increasing the risk of a Norwegian recession. The oil price drop has served as a timely reminder that a flexible, competitive and productive mainland economy and floating exchange rates are central to cushioning external shocks once income from the oil and gas sector is reduced. At the moment, global headwinds seem to have hit Norway hard, and its economic growth has halted, with experts predicting that future growth will stay subdued at least on a short-term basis. Norway largest bank, DnB, predicts in its latest macro outlook that investments on the Norwegian Continental Shelf is expected to continue falling, although with a turnaround in 2018 and with higher growth in 2019. Unemployment is expected to rise further and peak in 2018.
That said, Norway’s competitive position continues to improve due to positive exchange rate developments. The OECD has predicted that the Norwegian economy will recover gradually, envisaging mainland output growth of 1.6 per cent for 2016 and 2.2 per cent growth for 2017. Most experts also seem to agree that unlike many other countries, Norway is in the lucky position of having great reserves in its policy tool chest to be used to prevent recession and ease a structural shift in the economy.
Still, Norway needs to manage a transition from an oil-dominated to a more diversified economy. The OECD expects that Norway’s non-oil business investments will increase as global demand increases and domestic prospects improve as firms become more competitive. Nevertheless, for 2016, a fall in production in the petroleum sector is expected to dent total Norwegian export growth, although new investment projects will partly offset a decline in ongoing projects within the oil and gas sector. Even if the OECD expects Norway to ride out the storm within the oil and gas industry, and thereby escape recession, there is no doubt that current events have made Norway more exposed to the force of world events than it has been in previous years. Therefore, the outcome may well depend on global macroeconomic developments. In this regard, it is worth noticing that the profile of risks for Norway is complex, and the OECD also stresses that the possible outcomes are fairly wide within its central projections due to such external risks.
On a short-term basis, there is no doubt that the Norwegian economy’s more uncertain and negative outlook supports the more-muted expectations for the M&A market going forward, and is making the market less predictable. Still, we remain cautiously optimistic for the M&A market for 2016/2017. One reason is that even if the current concern about oil prices will most likely continue to weigh on the deal activity within this sector, several private equity funds have kept their powder dry and are now eager to put such firepower to work. Some of these funds also seem to have remained bullish about the energy sector due to high-quality assets that may now be available at bargain prices. During 2016 and 2017, we also expect to see an increasing level of distressed deal activity, particularly within the Norwegian offshore rig market. Changing market conditions will also probably lead to an increasing need for consolidation within certain industries, and it is likely that we will see an increasing number of mergers or transactions with equity as settlement instead of cash.
Irrespective of which position one takes, we believe that many investors will continue to view Norway as a good place to invest due to its highly educated workforce, technology, natural resources and well-established legal framework for M&A transactions. The fact that the Norwegian krone has weakened over the past 12 to 18 months, and is expected to continue to be weak throughout 2016 and 2017, could also continue to contribute to high M&A activity levels, since foreign investors may feel this creates an extra opportunity for bargains. In our experience, things often shift rapidly in today’s market environment. Just a slight short-term improvement in oil prices combined with executives’ fears of missing opportunities to competitors may turn out to have a substantial impact on the ‘optimism’ in the market and potential investors’ willingness to carry out deals. One reason for this seems to be that many businesses are currently driven by rapid technology changes and the battle for customers. Consequently, businesses are fighting to stand out from their competitors, and cross-sector convergence (i.e., expanding beyond traditional core activities to acquire new capabilities) is one alternative to be differentiated, typically by adding new technology through acquisitions. This is an important factor currently spurring M&A activity around the world, and is also influencing the Norwegian M&A market. Many Norwegian businesses possesses important technology and intellectual property rights that may be useful in other sectors and businesses than those for which they were originally developed. We have recently observed increased interest from foreign investors wanting to acquire Norwegian technology through M&A, and we believe that such interest most likely will continue irrespective of how the oil and gas prices develop.
1 Ole K Aabø-Evensen is a partner at Aabø-Evensen & Co Advokatfirma.
2 Such EU initiatives include, inter alia, Directive 2013/50/EU amending the Transparency Directive (Directive 2004/109/EC); Regulation (EU) No. 596/2014 of 16 April 2014 on market abuse (MAR), replacing the Market Abuse Directive; Directive 2014/65/EU on markets in financial instruments (MiFID II), which replaces the MiFID I; the proposed Market in Financial Instruments Regulation (MiFIR, replacing MiFID I); and rules from the European Securities and Markets Authority, including a public statement on shareholder cooperation and acting in concert under the Takeover Bid Directive. A new proposal for Regulation 2015/0268 amending the current Prospectus Regulation (809/2004) has also been issued (see below).
3 Source: Mergermarket (based on announced deals above €5 million where the target is Norwegian. Excludes lapsed or withdrawn bids).
4 Source: Mergermarket.
6 Source: Mergermarket (based on announced deals above €5 million where the target is Norwegian. Excludes lapsed or withdrawn bids).
8 In a syndicated loan agreement, one of the banks will act as an agent on behalf of the other banks in the syndicate according to a clause in the agreement. For this, the borrower will have to pay an annual agency fee.
9 Directive No. 2001/23/EC.