I OVERVIEW OF M&A ACTIVITY

Since the capital controls were lifted in March 2017, having been in place for more than eight years, a number of Icelandic companies have acquired businesses abroad and others are returning to the international financial markets.

There were more domestic M&A deals in 2017 than in previous years. There has even been some public M&A, with the fishing company Brim acquiring a 34 per cent stake in publicly listed seafood company HB Grandi in April 2018 for US$215.5 million; this has made it necessary for a takeover bid to all shareholders.

As the restructuring of Icelandic banks is now almost complete, the question of ownership of these 'new' banks is even more in the limelight than before. Arion Bank, the successor to the infamous Kaupthing, is currently being listed on the Icelandic Stock Exchange. However, because of a relatively modest performance by Arion recently, the number of shares listed is estimated to be only between 20 and 25 per cent of the bank's overall shares.

Away from banking, prosthetic producer Össur, which had been dually listed in Reykjavik and Copenhagen since 2009, decided to withdraw its listing in Iceland. Since December 2017, the company's shares are listed only on the Copenhagen stock exchange.

While the restructuring and repaying of the national foreign debt is still happening much faster than scheduled initially, there are the first signs of the economy slowing down. The main source of earnings from abroad in the last couple of years was from tourists visiting Iceland in ever-increasing numbers. This sector has even outdone the fishing sector and the earnings from the power-intensive industry with its aluminium smelters and silicon metal plants. However, while the earnings from the latter two sectors have been significant for decades, the tourism sector hs exploded in the past 10 years and many new hotels and guesthouses have opened in Reykjavik and in rural areas. Thus, it is not a huge surprise that Icelandair Group, which has had a strong foothold in the hotel business for many years, has put up its 13 hotels for sale and will also divest the 10 summer hotels it has under management and which are located in boarding schools during the long Icelandic summer holidays. In the future, Icelandair will concentrate on its main business but will keep its travel agencies, which it regards as being part of its core business.

The increasing number of aircraft operated by WOW air, Icelandair, Primera Air and the air cargo and leasing airlines Air Atlanta Icelandic and Bluebird were a direct consequence of the increasing number of tourists visiting Iceland and the ever-increasing importance of airfreight services. To a smaller extent, however, it may have been a reaction to the demise of some of the low-cost airlines, such as Air Berlin and Monarch Airlines and Norwegian's continuing struggles.

As in previous years, the four publicly listed real estate companies – Reitir, Eik Reginn and Heimavellir – have strengthened their property portfolios. Several new funds were set up to meet the increased demand for investment; for example, Icelandic Securities has set up a fund to invest in domestic companies. Other funds aim at financing infrastructure projects in public–private partnerships as, for example, investments infrastructure, which is financed to a large extent by Icelandic pension funds.

II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A

The Icelandic legal system is similar to that of other Nordic countries, with particular influence from Denmark and Norway. However, it is influenced more by case law than its neighbouring Nordic jurisdictions, and thus its legal system is closer to a common law system. Even though Iceland is currently not aiming for membership of the European Union, it is obliged, with Norway and Liechtenstein as the other European Free Trade Association (EFTA) states that are also part of the European Economic Area (EEA), to adopt much of the EU legislation, as stipulated in the EEA rules.

Agreements regarding domestic deals up to a certain size are done mostly in Icelandic and are fairly short. Larger deals (e.g., with international parties or financing) are usually done in English, and the documents are more detailed. The expansion of Icelandic investors into Europe and other parts of the world before 2008, and the financial crisis bringing foreign creditors in close contact with Iceland, have contributed to bringing domestic M&A documents closely in line with international practice.

It is quite common for privately held companies to have a group of shareholders rather than being held entirely by one person. Therefore, negotiations usually include talks with several shareholders even though the more active shareholders lead the discussions and speak also for those who have only invested in the company but are not involved in its management.

The main sources of corporate law are the Icelandic Limited Act and the Stock Corporation Act. Transferring shares in a company does not require notarisation. Shareholder lists that have to be kept by a company's board do not have to be submitted to the Register of Enterprises, but the Act on Financial Statements requires that the shareholders and their shareholdings at year-end are disclosed in the financial statements, which have to be published.

Under both Acts, a squeeze-out of the minority shareholders can be requested if one shareholder holds more than 90 per cent of the capital and votes in the company. Likewise, a minority shareholder can demand redemption of its shares if a single shareholder holds more than 90 per cent of the capital and votes in the company. The articles of association may contain rules about the redemption of shares and the valuation method; only in a stock corporation must there be a statement about this matter in the articles of association, even if there is no deviation from statute law. The redemption price offered by the requesting party can be challenged by the other party, and if no agreement is reached, court-appointed experts shall determine the price.

The main rules for public takeovers are to be found in Chapter 10 of the Act on Securities Transactions. A mandatory offer to the other shareholders shall be made if a shareholder has acquired 30 per cent of the votes in a listed company, either by its own shareholding or by acting in concert with other shareholders. A mandatory offer shall also be made if a shareholder has gained the right to appoint the majority of the board members. A mandatory takeover bid must be made no more than four weeks after the shareholder knew or should have known that the relevant threshold had been crossed. The offer period ranges from four to 10 weeks. The decision to make a voluntary takeover offer must be announced without undue delay. If the target company faces financial problems, the Financial Supervisory Authority can grant an exemption from its duty to make a mandatory offer to a party that wants to save the company from serious financial problems or that wants to take part in the financial restructuring of the company if its board agrees to this. The breakthrough rule has not been implemented in Iceland. While the Icelandic Financial Supervisory Authority monitors compliance with these rules, the rules of the stock market NASDAQ Nordic regulate the trading of securities in listed companies.

New foreign direct investments may now again be eligible for tax and other benefits pursuant to the Act on incentives for initial investments in Iceland.

III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT

Since only a handful of companies remained listed on the Icelandic stock exchange during the turbulences following 2008 and the modest size of the market in general, it is not surprising that there have been few changes in the legislation on takeovers since the modernised Act on Securities Transactions entered into force in November 2007. There have been only minor amendments since then.

The same applies to corporate law. While there were many changes and debates about changes in insolvency law and restructuring, and competition issues in general, there have been few changes to corporate law during the past few years. However, changes have been adopted as a result of the Shareholder Rights Directive and other changes in the legislative EU framework.

IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS

The first-ever Fortune 500 acquisition of an Icelandic software company was the purchase of Greenqloud ehf. by NetApp Inc. Greenqloud offers cloud computing software and services entirely driven by Iceland's renewable energy.

It is also expected that foreign investors might purchase shares in the other banks, Íslandsbanki and Landsbankinn.

In public M&A, funds advised by US-based Wellington Management have recently purchased shares in software company Origo, gas station operator N1 and telecommunication firm Síminn, which are all publicly listed.

It is now many years since the generic drug producer Actavis (now part of Allergan) stirred the world with its extensive growth strategy. However, a number of mergers later, this chapter seems to have come to an end for the time being as far as Iceland is concerned because the former Icelandic production site has now been divested by Teva Pharmaceutical Industries in a management buyout by a company called Corinpharma, which is backed by some Icelandic investors.

V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES

With the initial public offering of Arion Bank, the privatisation of the banking sector has started for the second time since 2003 and the question of Landsbankinn's future ownership is of great interest beccause of the bank's eminent role in financing many of the larger companies in Iceland.

Because Icelandic pension funds have been allowed to invest abroad again, even before the capital controls were lifted, their traditionally large share in the listed companies of the Icelandic stock exchange did not increase further.

The concentration of the real estate market with large listed companies Reginn, Reitir, Eik and Heimavellir continues.

The most active industries are the booming tourism sector and the energy-intensive industries trying to attract new plants and data storage centres.

One of the most thriving sectors is still the life science sector. In addition to the pharmaceutical company Alvogen, which is led by former Actavis CEO Robert Wessman, there is quite a number of smaller companies which are increasing their international reach and may, mid-term, make a significant contribution to Iceland's earnings abroad. Often, development of this kind is accompanied by M&A activities, and it is likely that the large international players will also acquire some of the Icelandic start-ups in this field.

On the negative side is the possible closure of Icelandic operations by the innovative shipyard Rafnar, which is the brainchild of Össur Kristinsson, the founder of the prosthetic producer Össur. Mr Kristinsson is purported to have spent around US$50 million on the project, which received acclaim within the industry. But since the Icelandic krona is currently very strong and the main markets for Rafnar are outside Iceland, the operations are to be moved elsewhere.

Literally a hot industry is geothermal energy production and, in the European project Geothermica, up to 7 billion kronur is to be spent on research and demonstration projects. Iceland is participating in both this project and SET-Plan (the European Strategic Energy Technology Plan), which aims to improve low-carbon technologies. Iceland, with its wealth of renewable energies, is a preferred platform for such projects.

In terms of business success, Marel, the producer of fish and meat processing technology, is worthy of mention. Not only has Marel's annual turnover now exceeded €1 billion, but the company has increased its position in many of its key markets and has recorded good profits in recent years.

VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS

The 'new' banks that took over the domestic businesses during the banking crisis in 2008 – Landsbankinn (successor of Landsbanki), Arion Bank (successor of Kaupthing) and Íslandsbanki (successor of Glitnir) – still have very strong market positions and their operations continue to be profitable. Privatisation in the banking sector will most probably also have an effect on the financing of deals.

Depending on the parties to an M&A deal, the financing varies. Pension funds and institutional investors often pay in cash. Companies either opt for traditional bank financing or issue bonds. The bond market in Iceland has picked up again, and more quickly than the stock market, following the 2008 crisis. The lack of opportunity for domestic investors to invest abroad seems to have helped the bond market in the past. The financing of growth in the parts of the economy that have been expanding also depends on the type of investment. In the tourism sector, new hotel buildings have mostly been financed domestically, but investments by foreign entities in the energy-intensive industries seem to be financed from abroad to a considerable extent. Iceland is at a crossroads, with its decades-old tradition of linking almost all loan agreements to the consumer price index. However, it is a relatively new development for financing to be without an indexation of the loans, and it remains to be seen whether this trend becomes stronger.

VII EMPLOYMENT LAW

The Transfers of Undertakings Directive 2001/23/EC was transformed into Icelandic law in 2002. In the event of a transfer of an undertaking, the Icelandic Act on the Legal Position of Employees is applicable if a business unit is transferred in such a way that it maintains its characteristics (i.e., the structure of assets that are used in an economic objective regardless of whether it is a main or ancillary part of the operations). If such a transfer occurs, the rights and obligations of the transferor transfer to the purchaser, and the purchaser shall observe the remuneration and work conditions according to the collective labour agreement until it expires, is terminated or is superseded by a new collective labour agreement. The same principle applies in the case of a transfer regarding a bankrupt entity, with the exception that rights relating to non-performance by the assignor do not transfer.

The transferor and the purchaser shall jointly inform the union workplace representatives (or the employees themselves if there are no representatives) about the date of the transfer, the reasons for the transfer, the legal, economic and social consequences of the transfer for the employees, and whether any measures are planned regarding the employees. All the aforementioned information shall be given well in advance, and if there are plans to take measures regarding the employees, the matter shall be discussed with their representatives (or otherwise directly with them) to reach an agreement. Both the transferor and the transferee are obligated under these provisions.

The Act on Mass Redundancies is applicable if (1) at least 10 employees are made redundant by a company that has between 21 and 99 employees, (2) if at least 10 per cent of employees are laid off by a company that has between 100 and 299 employees, or (3) if at least 30 employees are made redundant by a company that has 300 or more employees. The decision for the lay-offs shall be announced to union workplace representatives with the aim of reaching an agreement immediately, or to another representative elected by the employees for that purpose. Regarding cooperation, an attempt, at least, shall be made to avoid mass redundancies, to reduce the number of affected employees or to mitigate the consequences for them with the assistance of social measures that have, inter alia, the aim of facilitating a transfer to a new job or occupational retraining.

VIII TAX LAW

A corporation is considered to be resident in Iceland if it is registered here and if it has its real management here, or if its main base, according to the company's articles, is in Iceland.

Because Iceland is not a Member State of the European Union, Council Directive 90/434/EEC on mergers is not applicable in Iceland.

There is the possibility of a tax-exempt merger if a company is completely absorbed by an absorbing company with all assets and liabilities, and the only consideration is shares in the absorbing company, excluding any cash component. Under very strict requirements, a tax-exempt cross-border merger is possible. The main criterion for this is that the acquiring company is resident within the EEA or EFTA region or in the Faroe Islands.

Foreign individuals and legal entities have to pay a withholding tax on dividends received. The applicable rate is 18 per cent for legal entities and 20 per cent for individuals. If dividends are paid from an Icelandic corporation to a foreign limited liability company in the European Union or the EEA, the withholding tax can be partly or fully refunded after a tax assessment. The withholding tax rate may also be reduced if a tax treaty is applicable. Interest payments by an Icelandic company to a non-resident are generally subject to withholding tax; the tax rate is 10 per cent. If the recipient is a legal entity, the tax might be reduced according to a tax treaty to which Iceland is a party. If the recipient is an individual, a small tax-exempt amount is applicable. In a Supreme Court judgment of 2012, it was ruled that interest paid on a loan taken in an acquisition company to finance the acquisition of shares in the target company, and that was merged with the acquisition company in the target company, is not deductible.

Regarding thin capitalisation of companies, it should be noted that Iceland only has a general anti-avoidance provision that might be applicable. In addition, a regulation regarding transfer pricing was enacted on 1 January 2015. The regulation applies to businesses with more than 1 billion kronur in revenue or assets, and requires the documentation of transactions between related entities.

The tax base generally follows commercial accounts. The tax resident's worldwide income is taxable, with the possibility of deducting expenses made to generate that income. Tax grouping rules allow for a tax consolidation in Iceland, the main prerequisite being a minimum shareholding of 90 per cent in the other companies of the tax group, which must all be in Iceland. There is no difference in the taxation of distributed or retained earnings. The new Act on Stamp Duties, which entered into force on 1 January 2014, provides only for the levying of a stamp duty for the transfer of ownership in real estate and in ships.

IX COMPETITION LAW

Merger control proceedings are governed by the Icelandic Competition Act, and a notification of a merger is required if the combined revenues of the merging companies reach 2 billion kronur and if at least two of the merging parties have a revenue in Iceland of at least 200 million kronur. For the determination of the revenue, parent companies and subsidiaries are also relevant if they are directly or indirectly controlled by the merging companies.

If a merger has occurred that does not meet the above requirements for triggering a notification duty, but the relevant combined revenue is 1 billion kronur and the Icelandic Competition Authority is of the opinion that the merger may still reduce effective competition, it may order the merging parties to submit a notification of the merger.

The notification of a merger shall be jointly filed by the merging parties after the conclusion of an agreement, the announcement of a public bid or the acquisition of a controlling interest in a company, and before completion of the respective merger. It must not take effect while the Competition Authority is still examining the case. However, upon application, an exemption to this rule may be granted.

Upon receipt of an application, the Competition Authority will notify the parties within 25 working days as to whether it will further look into the case. This notification is a prerequisite to interdict a merger. If a merger is to be interdicted, this must happen within 70 working days of the Competition Authority's announcement that it intends to investigate the matter. If further information is required, the period may be extended by up to 20 working days.

X OUTLOOK

The economic outlook for Iceland is still positive, but the exchange rate of the krona already poses a threat to certain Icelandic businesses. Unlike the strategy of the Icelandic National Bank before 2008, there is now a much stronger minimum reserve policy in place, which should result in greater stability for the financial sector and following indirectly from it for other businesses.

The general investment climate is still very positive and the government that has been in office since the parliamentary elections in autumn 2017 is pursing many long-term projects, including in infrastructure and the health sector, which should help to ensure that Iceland remains one of the European countries that are well prepared for the future.

The strong economy, an unemployment rate that is once again low and the highly educated population, along with the country's wealth of energy and natural resources, offer a stable environment for M&A activities.


Footnotes

1 Hans Henning Hoff is partner at Heuking Kühn Lüer Wojtek.