I OVERVIEW OF M&A ACTIVITY
After an all-time high for M&A in 2017 easily topping even the pre-financial crisis level, the Norwegian M&A fell back throughout 2018, although deal volumes still reached the second-highest level ever recorded, only surpassed by 2017. In terms of the number of transactions, 2018 ended approximately 21 per cent down as compared with 2017.
There were 61 M&A transactions announced in Norway in Q1 2019, which is a 9.84 per cent increase in volume compared with Q1 2018. The strong Norwegian deal volume comes despite a decline in global deal volumes observed in Q1 2019. The total reported deal value for Q1 2019 ended at €2,982, which is also significant increase from the total reported deal value for Q1 2018 of €1,050 million.
The deal pipeline continues to be fairly strong, with an increasing number of respondents planning divesting parts of their business operations in the next couple of years. We also continue to see strong deal drivers, such as technological innovations and digital disruption both in Norway and the global markets in general. There were a few notable transactions during Q1 2019, in particular Nasdaq's €687 million voluntary offer to acquire Oslo Børs VPS Holding ASA, a Norwegian group that offers marketplaces for listing and trade in securities, registration of ownership and settlement of securities in Norway, market data and online solutions.
Eight of the 10 largest disclosed Norwegian M&A deals in 2018 had industrial or strategic investors on the buy side. The private equity (PE) transaction volume for 2018 declined (9.7 per cent compared with 2017's figures) but we witnessed an increase in new investments and add-ons compared with 2017, while the number of PE exits was down.
Transaction data from Mergermarket for the first four months of 2019 reveal that the volume of Norwegian transactions continues to increase compared with the same period in 2018. As at the end of April 2019, 79 transactions with a total value of €6.65 billion had been reported, whereas for the same period in 2018 there were 68 transactions with a total reported value of €1.23 billion. During April 2018, the Norwegian market also witnessed a few additional notable M&A deals, of which Hg Capital's acquisition of an additional stake in Visma AS, from Cinven and Canada Pension Plan Investment Board for €750 million is among the most notable. Partners Group Holding AG's acquisition of CapeOmega AS for €1.2 billion is also worth mentioning.
During the past few years, a large part of Norwegian deal volume has come from inbound cross-border deals, and during the first four months of 2019, inbound cross-border deals comprised 49 per cent of the total number of transactions. This is a slight increase in percentage compared with inbound cross-border transactions in the first four months of 2018, which accounted for 47 per cent of the total deal volume. This shows that many Norwegian businesses possess technology and knowledge that foreign investors continue to consider attractive, in particular from a bolt-on acquisition perspective.
There has not been much change in the market for M&A deals. Nevertheless, large auction processes continue to be slightly less common than they were 48 months ago. In the past two to three years, we have 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 full auction processes.
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, 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 (STR). These rules regulate prospectus 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 (EEA) and has therefore implemented the EU regulations of relevance to companies with publicly traded securities, including 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 EEA agreement; however, the one-stop shop principle prevents duplication of the competence of the European Commission, the European Free Trade Association (EFTA) Surveillance Authority and the NCA.
The remainder 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. Norwegian law contains a limited set of provisions governing stakebuilding, but insider dealing rules, disclosure requirements and mandatory bid rules must also be observed.
Any persons 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 the 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, which are increasing in severity.
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.i with regard to certain proposed changes 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. The latter 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 the undertakings owing 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 an agreement regarding acquisition or disposal has been entered into. 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 to 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 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 of both, and of a 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, the most practical of which is when 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, as a result of an acquisition, the offeror passes a threshold of 40 or 50 per cent of the voting shares of the company.
Regarding consolidation rules, 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 the 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 approved by the OSE before the offer is made public.
After entering into an acquisition agreement that will trigger a mandatory offer, the acquirer shall immediately notify the target company and the OSE about whether it will make an offer or sell the shares. It is possible to avoid the obligation to make an offer if the acquirer sells the shares that exceed 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 relevant 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 if 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, a 2010 EFTA court ruling found that this rule did not comply with the EU takeover rules, as it does not provide sufficient guidance on the method concerning how the market price is to be calculated. It has been assumed that the Norwegian legislator is most likely to seek to revise the relevant provision of the STA to meet the requirements of the EU takeover rules. However, this provision has not yet 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 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 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 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 (VTO) or exchange offer for a listed company, there is in general no limitation under Norwegian law as to which conditions the offer may contain. A VTO may be launched at the offeror's discretion. The offeror may also choose to make the offer to only some 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 are regularly included in Norwegian VTO documents. To complete the transaction quickly or to avoid competing bids, in some cases the offeror may decide to include very few conditions. In other cases, an offeror may decide to include more extensive conditions. In a VTO, 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 VTO under Norwegian law, but in general a shareholder may expect to achieve a premium of 20 to 40 per cent compared with the current share price. In recent years, there has been considerable variation in the level of premiums offered in VTOs, with some examples of premiums of around 60 per cent compared with the average in the preceding 30 days.
If a VTO 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 VTO document must first be approved by the OSE, but the offeror is still free to decide which conditions the 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 VTO is between two and 10 weeks, and four weeks frequently used as the initial offer period.
The target company is allowed to take a more or less cooperative approach in a takeover situation. However, there are restrictions on the board of the target company taking action that might frustrate the willingness or otherwise of an offeror to make an offer or complete an offer that has already been made. These 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 when a shareholders' meeting authorises the board or the manager to take such action with takeover situations in mind. As a result of this, a considerable number of Norwegian-listed companies have adopted 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 NCA, 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, it 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 made public through electronic notification from the Norwegian Register of Business Enterprises (the Register). A deadline may be fixed, which must be at least two months after the date of electronic notification from the Register, 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 the 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 the OSE or 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 (LLCs) 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 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, 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.
Certain formalities need to be observed to complete a merger under Norwegian law. A joint merger plan describing the general terms of the merger has to be prepared and negotiated between the surviving and surrendering companies. The joint merger plan must be signed by the board of directors prior to the general meeting of shareholders resolving to approve the merger plan. The board of directors, after signing the 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 public LLC (ASA) is involved in a legal merger there are more detailed requirements for the content of the report. In addition, each of the participating entities' boards shall ensure that a written statement containing a detailed review of the merger consideration payable to the shareholders of the participating companies is issued, including an opinion of the fairness of the consideration. This statement is to be prepared and issued by an independent expert (such as an auditor) when the participating entity is an ASA. When the participating entity is a private limited company (AS), the 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 Register 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 the 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 European Union or the EEA), allows only 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 when an exchange offer mechanism would not procure complete control under one corporate umbrella, and if 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 STA's public takeover rules; 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 a company exceeds 30. Under these 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 according to the number of employees in the 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 when the conditions for representation are fulfilled.
A bidder should 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 the Norwegian parent or sub parent.
viii Requirements of residency
The chief executive officer and at least 50 per cent of the members of the board of directors must be residents of Norway, unless the Ministry of Trade, Industry and Fisheries grants an exemption in an individual case. These residence requirements do not apply to citizens of an EEA Member State, provided the board members are residents of an EEA Member State.
ix Gender requirements
For public LLCs, Norwegian law imposes a requirement that both genders shall be represented on a board of directors. As a main rule, each gender must be represented by at least 40 per cent on the boards of directors of public companies. 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 obligation to have both genders represented on the board does not apply to Norwegian private LLCs.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
i EU initiatives
Several new EU directives, regulations and clarification statements regarding the capital markets are proposed or have been implemented in recent years. Norway will have to adopt and implement some of these to comply with its obligations under the EEA agreement. These EU initiatives are likely to have a direct or indirect impact on the regulatory framework for public M&A transactions in Norway. As a result of these initiatives, several amendments to the STA are expected to take place during the next 12 to 24 months.
The government appointed an expert committee to evaluate and propose relevant amendments to existing Norwegian legislation resulting from amendments to the Transparency Directive, MiFID I and the Market Abuse Directive. The committee was mandated to prepare three separate reports to the government. All three reports have now been delivered. The first report, inter alia, proposes implementing certain amendments to the STA with regard to disclosure requirements for derivatives with shares as underlying instruments. According to the proposal, the materiality thresholds and disclosure requirements that apply for acquisition of shares in listed companies shall now also apply for derivatives with shares as underlying instruments, irrespective of such equity derivatives being cash-settled or settled by physical delivery of the underlying securities.
The committee further proposes that both borrowing and lending of shares shall become subject to the same notification regime for both the lender and the borrower. Soft, irrevocable undertakings will remain exempt from the disclosure obligations. The existing disclosure obligations under the STA also include an obligation to disclose information in relation to rights to shares, regardless of whether the shares already have been issued or not. This is a stricter disclosure and filing obligation than what follows from the minimum requirements set out in the Transparency Directive, and the committee has proposed that the obligation be abolished. If adopted by Parliament, Norwegian law will no longer have mandatory disclosure obligations for warrants and convertible bonds not linked to any issued (existing) shares.
The second report, published in January 2017, proposed, inter alia, further amendments to the STA to implement MiFID II and MiFIR into Norwegian law. In April 2018, the Ministry of Finance issued a white paper to Parliament based on the committee's second report. In June 2018, Parliament resolved to implement these proposals into Norwegian law, but the changes do not contain amendments that are directly relevant for the bidder or target in an M&A process.
The third report deals with the implementation of the Market Abuse Regulation and includes proposals under which the STA rules governing market abuse have been expanded. These include, among others, a proposal for new rules concerning market sounding that occurs in preparations for a potential transaction. It is also proposed that primary insiders will be personally obligated to publish information about their trading activities in listed financial instruments.
The fourth report was published in January 2018 and concerns the implementation of supplementary regulations regarding MiFID II and MiFIR.
Finally, a fifth report was published in June 2018 concerning the implementation of the new Prospectus Regulation and rules regarding national prospectus requirements.
ii New takeover rules expected
In addition to the five reports referred to above, on 23 January 2019, the Committee has also submitted a report concerning the Norwegian rules on voluntary and mandatory offers, with a particular focus on the current limited regulation of the pre-offer phase. This Committee report does not arise out of changes to EU rules, but rather the need to review and update the Norwegian takeover rules on the basis of past experience and market developments.
In its report, the Committee proposes, inter alia, a new requirement that a bidder must carry out certain preparations before it announces that it will launch an offer to acquire a listed company. The Committee also proposes new content requirements for a notification that a voluntary offer will be made, including information on matters of importance for the market's assessment of the offer and for the formation of the price. It is proposed that it be clarified that the Norwegian Takeover Supervisory Authority (now the OSE) shall publish such notification immediately. Furthermore, a new requirement is proposed that bidders must present a voluntary offer no later than four weeks from the publication of the notice announcing that an offer would be issued. At the same time, it is proposed that the Takeover Supervisory Authority may grant an exemption from this deadline in special cases. The Committee proposes that the minimum length of the offer period in voluntary offers be extended from at least two to at least four weeks.
Is proposed that the existing main rule that the offer price under a mandatory offer must correspond to the highest consideration paid or agreed by the bidder in the last six months before the mandatory offer obligation being triggered be continued. However, the Committee proposes a separate regulation setting out rules for calculating the offer price in cases where there is a need for an exception from the above main rule or where it is not possible or reasonable to use the main rule for calculating the offer price. In this regard, it is also proposed that the offer price should be adjustable if the Takeover Supervisory Authority considers that the stock prices during the period in question are being kept at an artificial level, the stock purchase that is the basis for the offer price was not carried out on normal commercial terms or the mandatory offer obligation is being triggered in connection with a restructuring of a company in serious financial distress. In that case of adjustments of the offer price where stock prices have been kept at an artificial level, or where the stock purchase that is the basis of the offer price was not made on normal commercial terms, the Committee proposes that the adjusted offer price shall be calculated on the basis of three-month volume-weighted average stock prices.
Further, the Committee proposes introducing a general requirement that information published on a planned or submitted takeover offer must be correct, clear and not misleading. The scope of application is intended to be broad, and comprises the preparation phase, the phase after a bid is launched and the bidding phase.
The Committee also proposes a new right for the accepting stockholders to revoke their acceptances for a period limited to three trading days after a competing offer is made and disclosed, provided this occurs during the offer period for the original (first) offer.
Furthermore, the Committee proposes new rules on amending a tender offer, so that a bidder prior to the expiry of the offer period may amend the terms of such an offer in favour of the stockholders and also extending the offer period, provided the bidder has reserved such rights in the offer document itself and that such amendments are approved by the Takeover Supervisory Authority.
The Committee does not propose to implement rules regulating the type of transaction agreements used in connection with takeovers of listed companies or similar commitments between a bidder and a target company. Nevertheless, it proposes implementing a rule into the new legislation that authorises the government to issue more detailed rules in a separate regulation to govern the use of such agreements in connection with mandatory and voluntary offers.
It is also proposed that the takeover rules are amended to clarify the scope and applicability of such rules on companies domiciled in another country having issued stocks traded on a Norwegian regulated market. Further, the introduction of an obligation for companies domiciled outside the EEA is proposed to ensure that, if such non-EEA company's stocks are listed on a Norwegian regulated market, the company will have a special obligation to provide information on its website about the rights of its minority stockholders.
According to the proposal, the Takeover Supervisory Authority will be authorised to issue fines of up to 10 million kroner for natural persons and up to 20 million kroner for legal entities for violation of a number of key rules, or up to 2 per cent of the total annual turnover in the last annual accounts for the same. If approved by the Parliament in its proposed form, this will, inter alia, apply to:
- the obligation to provide accurate, clear and non-misleading information in connection with an offer;
- prerequisites for presenting an offer;
- the obligation to provide notification of a mandatory offer or voluntary offer;
- the obligation to make a mandatory or voluntary offer; and
- the requirement for a minimum offer price in mandatory offers.
It is currently unclear when the Parliament can be expected to adopt these amendments into Norwegian legislation. However, we do not expect the proposed changes to be implemented into Norwegian law until 1 January 2020 at the earliest.
iii Expected amendments to the prospectus regime
In June 2017, the EU adopted a new Prospectus Regulation2 to improve the existing prospectus regime. The Regulation replaces the Prospectus Directive.3 Both the Prospectus Directive and the existing Prospectus Regulation4 are implemented in Norwegian law, and the rules are set out in the STA and the STR. 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 a document is made available that contains information describing the transaction and its impact on the issuer. On 19 June 2018, a government-appointed expert committee delivered a new report in which it proposed amending the prospectus rules in the STA and STR by implementing the new Prospectus Regulation into Norwegian law. From such time that the new rules are finally implemented into Norwegian law, 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 a document is made available that contains information describing the transaction and its impact on the issuer. It is currently unclear when Norway will be able to finally implement the new Prospectus Regulation into Norwegian law.
iv New National Security Act
In March 2018, the Parliament adopted a bill for a new National Security Act. This new Act grants the government powers to intervene and stop acquisitions of shares in a company holding investments in sectors considered vital from a Norwegian national security perspective. The new Act entered into force with effect from 1 January 2019. This means that Norway has now implemented a national security review of acquisitions that is fairly similar to the type of review conducted by the US Committee of Foreign Investments.
v Proposed amendments to the Norwegian financial assistance prohibition
At the beginning of 2019, the Ministry of Trade, Industry and Fishery issued a consultation paper revisiting a previous Ministry proposal of February 2016 for the certain further easing of the Norwegian financial assistance prohibition rule (see below). The proposal was issued together with some other proposals to amend the rules of the Norwegian Companies Acts in order to implement EU Directive (EU) 2017/828 into Norwegian law. In the 2019 consultation paper, the Ministry once again has slightly revised its proposal to abolish the requirement that a buyer (borrower) must deposit adequate security towards a target company if the 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. In the past, it has been rather impractical to obtain such assistance from a target company in typical LBO transactions (see Section VI.ii). However, a proposal has not yet been put forward to Parliament, and it is too early to say whether this proposal will be forwarded to Parliament in its current form.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
Foreign nationals were relatively active in the Norwegian financial markets until a noticeable retreat in 2015, largely as a result of a collapse in oil prices. However, from 2016 and throughout 2018 foreign bidders returned and, so far in 2019, foreign appetite for Norwegian assets continues to be relatively high.
In the first half of 2018, 141 Norwegian M&A transactions were announced with a deal value of more than €5 million, of which 43.9 per cent involved foreign buyers.5 Overall, in 2017, the total number of M&A transactions with a deal value of more than €5 million was at a record high of 283, of which 47 per cent involved foreign buyers.6 Seven of the 10 largest inbound M&A deals during 2018 involved foreign buyers, while eight of the 10 largest inbound PE transactions involved foreign funds investing in a Norwegian target company.7
See Section V for examples of inbound cross-border M&A deals during 2018.
Foreign investors' appetite for Norwegian assets in the first four months of 2019 increased compared with the same period in 2018, both in terms of the number of deals, and the relative percentage of the total deal count for this period was also higher. Seven of the 10 largest M&A transactions involved a foreign buyer, one more than in the first four months of 2018, while for the same period in 2017, three of the 10 largest M&A transactions involved foreign buyers. For the same period, 79 Norwegian M&A transactions were announced with a deal value of more than €5 million, of which 49.3 per cent involved foreign buyers.8 This is an increase in terms of the percentage of the total deal volume compared with 2018, in which 47 per cent involved foreign buyers.9 In terms of the number of deals, there was an increase of 16.2 per cent in volume compared with 2018. Examples of inbound cross-border transactions so far in 2019 include Partners Group Holding AG's €1.2 billion acquisition of a stake in CapeOmega AS, Hg Capital's €750 million acquisition of a stake in Visma AS and Nasdag Inc's €687 million bid on Oslo Bors VPS Holding ASA, the Norway-based group that offers marketplaces for listing and trade in securities, registration of ownership and settlement of securities in Norway, market data and online solutions.
The foreign ownership rate of shares listed on the OSE at the end of 2018, calculated by market value, was 38.5 per cent, an increase compared with 38.36 per cent in 2017, but still below the record of 40.8 per cent from 2007.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
i Technology, media and telecommunications
In 2018, the technology, media and telecommunications (TMT) sector was largest in terms of acquisitions in Norway, accounting for 19.8 per cent of the total deal count for the year. This represented a 2.9 per cent increase in deal volume compared with 2017. However, the rise in percentage within this sector was due to a decreasing deal volume in other sectors for 2018, and the actual number of deals within the TMT sector in terms of volume actually remained flat, with a zero per cent increase compared with 2017. The strength of M&A activity during 2018 within this sector continued to be driven by global trends such as digitalisation, AI, the IoT, data analytics, infrastructure light business models and augmented reality. The increase in average deal value within the TMT sector also continued to increase in 2018. The most notable transaction in 2018 was Telia Company AB's acquisition of GET AS, an Oslo-based provider of subscription programming services, from TDC A/S for €2.2 billion in cash. The transaction was to include TDC Norway. Other significant deals were EQT's €440 million sale of Tampnet AS, a Norway-based provider of satellite telecommunications services, to an investor group composed of Arbejdsmarkedets Tillaegspension (50 per cent) and 3i Infrastructure PLC (50 per cent), and Orange's acquisition of BaseFarm AS, a Norway-based hybrid cloud and big data technology solution provider from ABRY Partners, for around €350 million.
As in previous years, the majority of deals in this sector were rather small, since several target companies originate from venture capital (VC) investments reaching a stage in their development where investors are seeking an exit. Since the post-crisis cooldown, there has been relatively moderate interest in VC investments in the Norwegian market, which to a great extent has resulted in the VC market lagging behind when compared to more mature companies. However, the trend of more people being attracted to innovative tech investments has continued.
The volume of deals within the TMT sector accounted for 22.8 per cent of the total deal volume during the first four months of 2019. However, with the exception of Hg Capital and Canada Pension Plan Investment Board's €750 million acquisition of Cinven's stake in Visma AS, the transactions have been relatively small.
Based on current market sentiment, there are likely to be relatively high numbers of TMT deals throughout the remainder of 2019, thanks largely to a domino effect whereby corporates that were inactive in 2015, 2016, 2017 and 2018 will continue to replicate peer deal success and related advantages. However, there are some concerns, including that the pricing of companies within this sector has been on the rise for some time, and some commentators feel that there could be a lack of robustness for development.
ii Industrials and manufacturing
The strong momentum within the industrial and manufacturing sector continued throughout 2018, accounting for 17.3 per cent of the total deal count for the year. This represented a 0.5 per cent decrease in the total deal volume compared with 2017. However, in terms of the actual number of deals, this represented a 16.9 per cent decrease compared with 2017. The strength of M&A activity during 2018 continued to be driven by this sector benefiting from a weakening Norwegian krone. However, most of the transactions were small. One exception was Qumei Investment AS's €594 million acquisition of Ekornes, announced in May 2018. This was the seventh-largest M&A transaction concluded last year. Another notable transaction was FSN Capital Partners' acquisition of SafeRoad AS for €244 million, also announced in May 2018.
The momentum within the industrial and manufacturing sector has continued entering 2019, with 17 deals announced in the first four months, representing 21.5 per cent of the total deal count for the period. The most notable of these deals were Tubacex SA's acquisition of Nobu Group for €51 million in deal value and AVK International A/S' acquisition of Furnes Jernstøperi AS, a Norway-based company engaged in the manufacturing of industrial equipment and machinery.
This was another busy sector in 2018, accounting for approximately 13.8 per cent of the total deal count. This is an increase from the 11.1 per cent of the total deal count for 2017, and the services sector was one of the most active sectors in 2018 with a total of 39 transactions, two more than in 2017. Many corporates in the business services sector continue to experience margin pressure. Technology-led disruptive innovations have the potential to transform the way business service providers operate, with the potential for becoming more global. With opportunities for global growth, M&A delivery scale, improved geographical footprint and capability, these are considered an attractive way for creating revenue and cost synergies.
The most notable transaction within the services sector in 2018 was announced in July 2018, when ABRY Partners, a US-based PE firm, announced its $411 million bid for Link Mobility Group.
During the first four months of 2019, nine deals were related to the services sector. The most notable was the acquisition by Sumitomo Corporation, the listed Japan-based company engaged in, inter alia, imports and exports, of Q-Part Operations BV from KKR for €398 million. The deal included the target's parking operations in Sweden, Norway and Finland.
The consumer and retail sector accounted for 10.2 per cent of the total transaction volume in 2018, a slight decrease compared with 2017 (11.7 per cent). In terms of number of transactions, the sector showed a 25.6 per cent decrease compared with 2017. In May 2018, Canadian Tire Corporation, Limited announced that it had acquired Helly Hansen AS, a Norway-based designer and marketer of high-performance outdoor clothing for a total consideration of €642 million.
Other notable deals were OpenGate Capital LLC's acquisition of Jøtul AS and Icon Capital AS's acquisition of minority stake in MaloramaAS, Norway's largest wholesaler and distributor of paint and coating products.
In Q1 2019, 11 out of a total number of 61 deals were related to the consumer and retail sector, five more than in Q1 2018.
v Energy (including oil and gas)
Throughout most of 2018, oil and gas prices continued to improve. However, at the end of the year prices started to slide back. Despite this, investments within the oil and gas sector continued to slowly improve throughout 2018. Overall, 11.7 per cent of all deals in 2018 were related to energy and oil services and the offshore sector, of which the oil and gas segment accounted for 7.1 per cent. The oil and gas industry continued to reconfigure its business model to sustain and grow in a lower oil price environment. Reduced oil prices until mid-2016 led to many sponsors taking an interest in exploration and production (E&P) assets at favourable prices, which continued into 2017 and 2018, resulting in increased interest in such assets in general. The most noteworthy transaction was announced in August 2018: the €805 million acquisition of Mime Petroleum, a Norwegian oil and gas exploration and production company, by Blackstone Group LP and Blue Water Energy LLP.
Notable transactions within the E&P segment included Neptune Oil and Gas Limited's €304million acquisition of VNG Norge AS, a Norwegian oil and gas exploration and production company, Aker PB's acquisition of a 77.8 per cent stake in King Lear Discovery for €216 million, and Polskie Gornictwo Naftowe i Gazownictwo SA's acquisition of a 42.38 per cent stake in the Tommeliten Alpha gas and condensate field for €192 million.
Within the electric power supply market, it was announced in June 2018 that Keskusosuuskunta Oulun Seudun Sahko, Vantaan Energia Oy and Oy Turku Energia-Abo Energi AB had acquired a 10 per cent stake in Hafslund Produksjon AS from Fortum Oyj AB, a listed Finland-based energy group engaged in producing power from nuclear and wind sources, for €160 million. In September 2017, it was announced that TronderEnergi Nett AS, a Norway-based company engaged in the distribution of electricity, had agreed to acquire Gauldal Nett AS from Fredrikstad EnergiNett AS for an undisclosed consideration.
In Q1 2018, two transactions were related to the oil and gas sector, which is three less than in Q1 2018. Both of these deals were in the E&P segment. However, within the oil services and equipment market segment, potential sellers continue to be reluctant to initiate sales processes, preferring to use bilateral sales processes rather than auctions. We expect that this segment will continue to improve in 2019, depending on changes in oil prices.
vi Private equity
The number of transactions involving PE sponsors either on the buy side or sell side took a dive of 9.7 per cent in 2018. Regarding buyout investments by volume, Sweden saw the highest volume with 39.5 per cent, followed by Denmark with 24.5 per cent, Norway with 18.5 per cent and Finland with 17.5 per cent.
Norway's PE industry is largely driven by new investments and add-ons, but in 2018 there was a significant decrease in the number of exits and a slight increase in the number of new investments. Of all the transactions during 2018, half were new investments and add-ons, 9 per cent were secondary and 21 per cent were exits. However, of the deals involving PE sponsors, the average reported deal size took a significant dive from €567 million in 2017 to €249 million in 2018. Of the 10 largest disclosed transactions in 2018, all 10 had a deal value exceeding €100 million (there were nine in 2017), and two of the 10 largest announced and completed transactions involved PE.
Among the most notable PE deals in 2018 were Blackstone Group LP and Blue Water Energy LLP acquiring Mime Petroleum AS for €805 million, the sale of Helly Hansen to Canadian Tire Corporation by Teachers' Private Capital, Limited for €698 million and T EQT Partners AB's €440 million sale of Tampnet AS to ATP Group. In July 2018, it was also announced that Victory Partners VIII Norway, a company controlled by ABRY Partners, launched a voluntary bid to acquire Link Mobility Group ASA for €411 million. This was among the largest PE deals in the Norwegian market in 2018.
The PE market experienced a dive at the beginning of 2019, with a 26 per cent decrease in announced deals compared with Q1 2018, and also a significant decrease in average deal size. Still, PE funds continue to look actively for opportunities in the Norwegian market.
In April 2019 it was announced that HitecVision had agreed to sell CapeOmega AS to Partners Group Holding AG for €1.2 billion. Hg Capital and the Canada Pension Plan Investment Board acquired Cinven's stake in Visma AS for €750 million, also announced in April 2019.
For the moment, it may be that PE professionals are prepared for a more challenging investment climate in 2019. Some delays and failures in deal execution as a result of market uncertainty have also started to be seen, but the pressure on PE funds to continue to put their capital to work means that deals will continue to happen. Consequently, we believe any slowdown in deal activity by PE funds is likely to be short-lived. Under all circumstances, we expect a continuing high number of PE and VC-related exits, add-ons and secondary transactions, in particular within the healthcare, industrial, TMT and consumer sectors in the next 12 to 24 months, but possibly with a drift towards more non-secular industries such as healthcare and consumer staples. The number and size of deals involving PE sponsors will depend on market developments and volatility. Some large distressed assets within the oil and gas segment may also tempt some funds into opportunistic investments.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
The high-yield bond market has recovered from a period in the doldrums and is now quite buoyant. Higher and more stable oil and gas prices, particularly during the second half of 2016 and throughout 2017 and for parts of 2018, combined with capital continuing to be inexpensive and plentiful, has contributed to a significant strengthening of the credit markets. Bidders are again considering high-yield bonds as a means of financing new acquisitions.
While some Norwegian banks continue to be selective even at the beginning of 2019, in particular for projects exposed to the oil and gas industry, the presence of alternative lenders and institutional investors in the form of collateralised loan obligations funds (CLOs) flooding the international financing markets with an ever-more borrower-friendly documentation, combined with an improved bond market, have created a very borrower-friendly environment. The trend of unitranche or term loan B-style (TLB) loans spreading globally continues and funds offering these types of loan products are marketing their products particularly towards PE sponsors.
i M&A financing
Traditionally, third-party financing of acquisitions is 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 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. Acquisition financing (in particular for PE transactions) tends to be provided by way of two or sometimes three layers of debt, with subsequent seniority. In recent years, generally we have witnessed a greater variety of combinations of debt layers and lenders involved, especially in larger LBO 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. It is rarely seen for new deals, although some traditional mezzanine funds are starting to adapt to the new market situation by offering products similar to unitranche loans. There is an increasing use of second lien facilities instead.
Using debt securities such as high-yield (junk) bonds for acquisitions has not been common in Norway, mainly because, compared with financing an acquisition with a credit facility, financing through a high-yield bond debt involves coordinating the closing of a transaction with what is, in fact, public financing. In most cases, the acquisition will be subject to various conditions, typically including various forms of regulatory approval. Funding an acquisition through a traditional credit facility is generally more feasible than a high-yield bond. Historically, larger listed corporations have dominated acquisition financing obtained through the Norwegian bond market. Such corporations have frequently 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 a drawdown with the conditions precedent under a pending sale and purchase agreement. Such instruments would generally be documented under New York or English law, or Norwegian 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.
Between May 2016 and the first half of 2019, the bond market has been improving significantly. Bidders are again raising financing in the high-yield bond market in connection with Norwegian leveraged acquisitions. We have also observed an increasing number of sponsors refinancing acquisition debt post-completion at favourable coupon rates by using the bond market. We expect that the high-yield bond market's popularity for raising acquisition financing will continue (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 TLB facilities and unitranche loans.
Vendors may occasionally also be willing to bridge the valuation gap by offering a bidder to finance parts of the purchase price to achieve the price the vendors are asking. If structured as vendor loan notes, these will sometimes (but not always) be subordinated to the other elements of the acquisition financing. Vendor loan notes will then normally be on similar terms (or senior) to the subordinated loan or preferred equity capital provided by the PE 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
A buyer may also want to borrow funds from a target company (or its subsidiaries, following completion of a 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 a share transaction. Public and private LLCs have been prohibited from providing upstream financial assistance in connection with the acquisition of shares in a target company (or its parent company).
Since 1 July 2013, the former prohibition on financial assistance has been eased by the introduction of a type of whitewash procedure. Under this rule, both private (AS) and public (ASA) limited liability target companies can, subject to certain conditions, provide financial assistance to a potential buyer of shares in the target company itself. This must be granted based on normal commercial terms and policies, and the buyer must deposit adequate security for his or her obligation to repay any financial assistance received from a target company.
Financial assistance must also be approved by the target's general assembly by a special resolution. This 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 contains information about:
- the proposal for financial assistance;
- whether financial assistance will be to the target's corporate benefit;
- conditions that relate to the completion of the transaction;
- an assessment of the effect of the assistance on the target's liquidity and solvency; and
- the price payable by the buyer for any shares in the target company or any rights to any such shares.
This report has to be attached to the notice of the general meeting sent to 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 requirement to deposit adequate security for the borrower's obligation to repay any upstream financial assistance provided by a target will, however, mean that it becomes 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. Banks normally request extensive collateral packages, so 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. The extent to which the offered security is adequate may mean that the target has difficulty providing upstream assistance unless the new 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 PE 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. It was proposed in 2016 that the requirement that a buyer (borrower) must deposit adequate security towards the target company be abolished. This proposal was not put before the Parliament, and at the beginning of 2019, a revised proposal was been published to abolish the adequate security requirement under Norwegian law. However, it still unclear when and if this revised proposal will be implemented. If it is adopted by Parliament, it will be possible in 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 also Section III.v.)
iii Corporate benefit
The power of an entity to grant security or guarantees is limited by the doctrine of corporate benefit in some situations. Under Norwegian law, a board of directors has a general duty to act in the best interests of the company and all 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 a board, following due consideration, concludes that a transaction is in a 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:
- this will not jeopardise its continuing existence;
- its corporate objects are not transgressed by such transactions;
- it can be argued that cross guarantees benefiting the company exist or that the relevant group company receives any type of guarantee fees; and
- guarantees and securities are not in breach of the financial assistance propitiation (see Section VI.ii).
The Public Limited Liability Companies Act and the Private Limited Liability Companies Act now both 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 on loans or security to a company's shareholders, provided that the loan or security will economically benefit the group. This provision indicates that a group benefit may be sufficient when issuing intragroup guarantees, even if there is no direct benefit to the individual group company that is issuing the guarantees.
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 this basis, 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 Public Limited Liability Companies Act and the Private Limited Liability Companies Act require that agreements between a 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 exceed these thresholds. If the rules apply, the board of directors must issue a report to the shareholders, including 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 the loan or security is to the benefit of the group, or the parties have adopted the new whitewash procedures relating to financial assistance.
As long as a parent company controls all shares in the relevant subsidiary issuing the intragroup loans and guarantees used, it can now be argued that there will no longer be a need for banks to request that loans and guarantees have to be approved by the shareholders. Approval may still be necessary in cases as referred to in Section VI.ii or where the parent does not control all shares in the relevant group companies issuing the loans or securities. Intragroup loans may trigger a need for shareholder approval from the receiving subsidiaries' shareholders, unless they 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 as falling outside the normal business activity of the respective company receiving the financing and, therefore, under all circumstances need to be approved by the company's shareholders.
Note that in early 2019 the Ministry proposed amended the above statute in both the Public Limited Liability Companies Act and the Private Limited Liability Companies Act so that these rules now shall only apply to agreements between a company and its related parties, and only if the company's consideration under such agreement has an actual value exceeding 2.5 per cent of the sum on the company's balance sheet. It is further proposed that the board shall deal with such agreements, and must, no later than two weeks prior to such agreement entering into force, inform all shareholders about the agreement, and each shareholder shall then be entitled to require that the agreement must be dealt with at a shareholders' meeting.
v Pricing of credit
At the time of writing, the pricing of credit in the Norwegian leveraged finance market seems to be relatively similar to the situation in 2018. To be competitive, Nordic banks are now offering TLB for 375 to 400 basis points over the Norwegian interbank offered rate (NIBOR). There has been a move away from the traditional senior A/B tranches (with even amortisation on the A tranche and bullet repayment on the B tranche) to an all-TLB structure with minimal front-end amortisation. Typically, the margin on the A tranche will be 50 basis points lower than for the B tranche. On some smaller deals where the banks' acquisition financing department has not been involved, margins have been more favourable. A tranches throughout 2018 and into 2098 have been less frequent than in previous years. When banks insist on an A/B tranche structure, they can seldom expect to achieve more than a 20/80 split, compared to a 40/60 split, or sometimes 50/50 split, as was the norm in the years immediately following the credit crunch.
Leverage multiples have continued to increase since 2015, all depending on each individual investment case. During 2018, we observed everything from 2.5 to 6.7 times EBITDA (all senior) and combinations of senior, 2nd Lien or high-yield bonds around 7.5 times EBITDA, even if most banks would hold back on accepting an increase in leverage multiples above 6 times EBITDA. For some large Norwegian targets with attractive cash flow, there were indications that some international banks were willing to support more than 7 times leverage (potentially 7.5 times 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 7 times EBITDA with senior debt leverage between 5.5 to 6.5 times EBITDA.
Throughout 2016, 2017 and 2018 and the beginning of 2019, most Nordic banks seem to be attempting to resist equity contributions below 35 per cent. There has been a clear increase in acquisition multiples and banks prefer that a borrower finances parts of the increase itself 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 20 to 30 per cent equity contribution from the sponsor; there were deals of this kind in both 2016, 2017 and 2018.
In general, in our view the arrangement fee in bilateral transactions in May 2019 was between 225 and 275 basis points. In syndicated deals, the arrangement fee now seems to be standard at 250 basis points for medium-sized transactions. If a syndicate consisted of two or three banks, of which one is a foreign bank, this very often increased the arrangement fee by 50 to 75 basis points compared with a bilateral transaction. Agency fees have also increased.10 The banks blame this, inter alia, on more cumbersome obligations to comply with know your customer guidelines.
For larger deals, unitranche structures combining senior and subordinated debt into one debt instrument at a blended price seem to have replaced traditional mezzanine. Throughout 2018, we observed some international banks willing to propose term B, C, D, E and F-style loan facilities for financing Norwegian assets at very favourable rates.
Up to May 2019, two PE sponsor-backed M&A deals were refinanced by issuing high-yield bonds in the debt capital market, one less than during the same period in 2018. These were achieved through interest rates from 365 to 700 basis points over NIBOR.
vi Financial covenants, mandatory prepayments and excess cash sweep
A full suite of financial covenants more or less used to be the norm in the leveraged debt market, usually comprising leverage, interest cover, cash-flow cover and restrictions on capital expenditure, and such covenants would be tested frequently. Borrowers would seek to amend the interest cover covenants to provide additional headroom.
However, there has been an explosive development in financing provided by high-yield bonds issued in the debt capital market. 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.
Throughout 2018 and into 2019, in larger deals with an international banking syndicate, it has become the norm to use cove lite-like terms for LBO transactions, but banks will normally seek to resist such terms on small to medium-sized transactions. To meet increased competition on smaller deals, banks continue to ease back on some of their terms and there has been a move towards more relaxed terms (covenant-loose) for senior debt in the leveraged market for mid-market deals. Typically, interest cover and capital expenditure covenants are not seen very frequently in leveraged finance transactions.
Equity cure rights (the right to cure breaches of financial covenants by injecting additional equity) are generally accepted among banks. However, permitted amounts, their use in consecutive financial quarters and the application of equity cure proceeds to repay debt are subject to negotiation. Banks will generally tend to restrict equity cures and will try to ensure that as much as possible of the equity cure amount is being applied to prepayments. By mid 2019, there seemed to be a general consensus among the larger banks that they would be prepared to accept equity cure rights of up to five times the terms of the facilities, even though it was known that, for occasional deals, banks had been willing to move to up to six times. This is one more or less the same as for 2018. We have now also started to see increased pressure on banks to accept EBITDA cures, and there have now been deals in Norway conducted with this type of cure. On large transactions, up to a 5 times EBITDA cure is fairly frequent, while for mid-sized deals, 2 times EBITDA cures should now be possible to achieve.
The scope of agreed carve-outs and de minimis thresholds for mandatory prepayment 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. However, since 2013, the sweep percentage has steadily gone down, and the downwards ratchet leverage levels at which a cash sweep ceases to apply have started to increase.
It now seems that banks' terms and conditions in the leveraged finance sector have been forced to return to those of the pre-crisis era. Obviously, banks will seek to hold back this development as long as possible. How far sponsors are able to drive the banks further in this respect remains to be seen.
VII EMPLOYMENT LAW
Under Norwegian law, employees are afforded protection through legislation, mainly the Workers' Protection Act (the Act), which implements the Acquired Rights Directive11 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 an individual's contract of employment with the target company. A transaction will not itself trigger any duties towards the target company's employees for the new shareholder. However, the target company is duty-bound to inform the employees.
When a business (asset) is acquired, according to the Act, employees as a main rule have the right to have their employment contracts transferred to the purchaser, and the purchaser will therefore assume all rights and obligations of the transferor, 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, discuss it with the employees' elected representatives and then inform each employee. Similar provisions are often provided for in collective bargaining agreements, and the provisions in these agreements may therefore also apply to share transactions.
Employees are protected against termination based on a transfer of business, but terminations resulting from rationalisation measures may take place. The rules for asset transfers also apply in cases where the identity of the employer changes after a merger.
The Act sets out detailed rules that must 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 labour unions.
Furthermore, the Norwegian Reorganisation Act of 2008 must be observed prior to plant closures and mass lay-offs. 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.
In March 2015, the 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 previous government had introduced the basis for the proposed amendments in 2010. The Bill proposal was never put forward. However, the proposed changes have now been reintroduced and, in spite of objections from several employer and business organisations, Parliament has resolved to adopt the proposal.
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. Since 1 January 2016, however, in takeover situations, a non-recruitment clause can only be agreed for a maximum of six months from the date on which the parties resolved to terminate negotiations if negotiations fail. Non-recruitment clauses can further be agreed for a maximum six-month period from the date of transfer of a business provided the employer has informed all affected employees in writing.
It is not obvious if the letter of the new law also prohibits a seller and a buyer in a share purchase transaction from agreeing non-recruitment clauses for longer periods, provided the target company itself (as the employer of the relevant employees) is not a direct party to the agreement. It can be argued that a non-recruitment clause in a share purchase agreement does not violate the new legislation as long as the non-recruitment clause only refers to the target company's employees, and the target company itself is not a party to the agreement. There is a risk that non-recruitment clauses agreed for longer periods in share sale and purchase transactions may still be invalid. The basis for this is that even if the target company is not a direct party to the sale and purchase agreement, the effects of the clauses in share purchase agreements may still turn out to be the same as if a target company had become a party to the 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 must also be considered prohibited.
VIII TAX LAW
i Acquisition of shares
Norwegian shareholders, as LLCs 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, corporate shareholders may sell shares in such companies without being taxed on capital gains derived from the sale. Costs incurred in connection with the 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, that are not conducting businesses out of such countries (controlled foreign companies (CFC) 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. This 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 these circumstances, 3 per cent of dividends are subject to taxation as ordinary income at a rate of 22 per cent (reduced from 23 per cent with effect from 1 January 2019) (giving an effective tax rate of 0.66 per cent).
Dividends received or capital gains derived from realisations of shares by shareholders who are Norwegian private individuals (personal shareholders) are taxable as ordinary income. With effect from 1 January 2019, 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, inter alia, such distributions or capital gains must be multiplied by 1.44 (an increase from 1.33 in 2018), and this grossed-up amount is thereafter to be taxed as ordinary income for private individuals at a rate of 22 per cent. In effect, this increases the effective tax rate on distributions and gains from the 30.59 per cent rate under the former tax regime to 31.68 per cent. Any losses are tax-deductible against a personal shareholder's ordinary income.
Capital gains from the realisation of shares in Norwegian LLCs by a foreign shareholder are not subject to tax in Norway unless certain special conditions apply. The extent of the tax liability of foreign shareholders in their country of residence will depend on the tax rules applicable in that jurisdiction.
Normally, an acquisition of shares in a Norwegian target company will not affect the target's tax position, 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
Capital gains derived from the disposal of business assets or a business as a whole are subject to 22 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, see Section VIII.x).
The acquirer will have to allocate the purchase price among the assets acquired for the purposes of future depreciation allowances. 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. However, the tax authorities may dispute the allocation to goodwill instead of other intangible assets with a considerably longer lifetime.
As gains from the disposal of shares in LLCs 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 a transaction will be tax-exempt for both the shareholders and the merging companies. To qualify as a tax-exempt merger, all companies involved need to be domiciled in Norway; however, according to amendments made to the tax regulations in 2011, cross-border mergers and demergers between Norwegian companies and a company domiciled within the European Union or the 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. Cash payments will be considered as dividends or as capital gains, both of which will be taxable if the receiver is a personal shareholder. If cash compensation shall be considered as dividends, it must be divided between the shareholders in accordance with their ownership in the transferor company. Dividends 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 22 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 LLC to an EEA-resident corporate shareholder provided that the shareholder is genuinely established and conducts a real business activity in the relevant jurisdiction. Furthermore, an EEA-resident corporate shareholder must be comparable to a Norwegian LLC. 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 assessments of a trading company and a holding company will not be the same. If the required criteria are not met, the withholding tax rate in the applicable double taxation treaty for the involved jurisdictions will apply. If 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 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). Regarding excessive interest and reclassified loans, see Section VIII.vi.
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 an 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 ownership of more than 90 per cent has been restricted. However, the limitation will not apply to losses on customer debt, losses on debts that represent previously taxed income by the creditor, or 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 were implemented with effect both from 1 January 2016 and from 1 January 2019. The term related parties covers both direct and indirect ownership or control, and the minimum ownership or control requirement is 50 per cent. 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 the external lender shall be considered internal interest that will be 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 an intragroup loan provided that 50 per cent or more of shares in the group company issuing the security are owned or controlled by the borrowing company. The limitation rule will also not apply to third-party loans in situations where a related party provides a pledge over that party's shares in the borrowing company, or provides a pledge or charge over the related party's outstanding claims towards the borrowing company. Further, 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 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 a company's EBITDA. If a company has paid interest on intragroup loans exceeding 25 per cent of the calculation basis, any excess amount shall be added back to its 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 at a higher or lower price than the strike price. However, 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.
At the end of the 2016, the EFTA Surveillance Authority (ESA) issued a reasoned opinion stating that the Norwegian interest limitation rules of 2015 in their current form violate the freedom of establishment, and thereby Article 31 in the EEA agreement. In a response dated 31 January 2017, the Ministry of Finance argued that the Norwegian interest limitation rules are compatible with Norway's EEA obligations; however, the Ministry also described certain proposed changes to the rules that should be implemented. The next step is for the ESA to decide whether it will take Norway to the EFTA Court for infringing its EEA obligations.
With effect from 1 January 2019, the Norwegian interest limitation regime has been amended: interest payable on bank facilities and other external debt within consolidated group companies is now subject to the same interest deduction limitation regime as interest paid to related parties'. The new amended rule only applies if the annual net interest expenses exceed 25 million kroner in total for all companies domiciled in Norway within the same group. Further, two revised escape rules' aimed at ensuring that interest payments on loans from third parties not forming part of any tax evasion scheme still should be tax deductible has been implemented. The previous interest deduction limitation rules will continue to co-exist with the new rules, but the scope of the old rules only applies to interest paid by Norwegian enterprises to a related lender outside of a consolidated group (typically where the related lender is an individual).
For enterprises within the petroleum sector, the Ministry has stated that it may consider introducing separate interest deduction limitation rules.
vii Taxation of carried interests
Under current tax law, there is no explicit 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 a fund. The prevailing view until recently has been that, as long as such managers invest capital into funds, the carried interest will be considered a capital gain and taxed at capital gains rates, and if the managers are organised as LLCs, the 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 exemption method. However, the 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 tax authorities, on one side, and Herkules Capital (a Norwegian PE fund's advisory company) and, on the other, three key executives employed by the advisory company who had an ownership interest in the advisory company. 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 46.7 per cent) in accordance with the tax authorities' primary position. The Court also rejected the tax authorities' argument that distributions from a PE 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 that such profit is subject to Norwegian taxation as ordinary income from businesses at the then-prevailing tax rate of 28 per cent (now 23 per cent). The taxpayers, being the adviser and the 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 be 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 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 22 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 contributions 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. Furthermore, the Norwegian group contribution rules are, under certain conditions, also applicable to Norwegian branches of foreign companies that are resident within the EEA. As from 1 January 2018, Parliament has implemented a rule allowing a grantor company to deduct group contributions to a recipient resident within the EEA, provided the recipient has a tax loss carried forward from previous business activity in Norway, subject to the recipient reducing the tax loss carried forward with an amount equal to any group contributions received.
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
During the past four years, the government has proposed and implemented several new rules based on a previous proposal for a broader tax reform (proposed reform) issued in October 2015.
Under the proposed reform, the government originally stated that it intended to adopt a rule allowing it to introduce withholding tax on interest and royalty payments. So far, such rules have not been adopted. However, the government has now stated that it aims to propose a new bill to be adopted by the Parliament in this regard during the course of 2019.In the fiscal budget for 2019, the Ministry of Finance has proposed a new rule, elaborating on a previous proposed reform to reduce the possibility for treaty shopping by implementing a rule stating that all entities established and registered in Norway will have Norwegian tax domicile, unless a treaty with other states leads to a different result. Consequently, companies registered in Norway shall in the future never be considered stateless. This rule will also apply to companies previously established and registered in Norway but having later moved their tax domicile out of Norway. Even companies established and registered abroad shall be considered to have Norwegian tax domicile, provided the management of such companies (in reality) is carried out from Norway. These new rules have been implemented with effect from 1 January 2019, or from the first fiscal year starting after 1 January 2019, but no later than 1 January 2020.
In the 2017 fiscal budget, the government also states that it intended to submit a consultation paper for amending the Norwegian CFC rules. The consultation paper was originally expected to be issued during the course of 2017, but it has not yet been issued.
See Section VIII.vi regarding further restrictions on the interest deduction limitation regime.
IX COMPETITION LAW
Under Norwegian law, an acquisition, merger or other concentration involving businesses must 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. The NCA is empowered to issue decrees ordering that business combinations that fall below these thresholds still have to be notified, provided that it 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 after the date of a transaction agreement or the date when the control was acquired, whichever comes first.
On 1 January 2014, Norway implemented a more comprehensive form of notification (more similar to a Form CO), though more limited in substance than the former complete filing form. However, the Ministry of Trade, Industry 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 that is similar to the EU system. In March 2016, Parliament adopted amendments to the simplified merger control procedure, which now covers:
- 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;
- the acquisition of sole control over an undertaking by a party that already has joint control over the same undertaking; and
- 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:
- 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);
- 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
- 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 a 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 a case further. The NCA must, prior to expiry of this deadline, notify the parties involved that a decision to intervene may be applicable. If it issues such a notice, it has 70 working days from the date the notice was received to complete its investigation and reach a conclusion. This basic period can be extended under certain circumstances. Since an amendment in 1 July 2016, the statutory timetable for clearance under the Norwegian merger control regime allows 145 working days total case handling time.
There is no deadline for filing a notification, but a standstill obligation will apply until the NCA has cleared a concentration. As under EU merger rules, a public bid or a series of transactions in securities admitted to trading on a regulated market such as the OSE can be partly implemented, notwithstanding the general standstill obligation. For such exemption to be effective, the NCA must be notified about the acquisition immediately (normally 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. Since 1 July 2016, the substantive test (which was previously based on a substantial lessening of a competition test) has now been aligned with the same substantial impediment to efficient competition test as applicable under the EU rules, meaning that Norway must now apply the same consumer welfare standard as the Commission instead of the previous total welfare standard.
From 1 April 2017, the power previously held by the King Council to intervene in merger control cases has been abolished. These powers have been transferred to an independent appeal board, which now handles appeals in merger control cases.
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. In principle, breaches can also be subject to criminal sanctions, but this has not yet occurred.
Even though there was a dip in Norwegian M&A activity in 2018 compared to the record year seen in 2017, 2018 was still a very strong year for M&A from a historical perspective. Despite a decline in global M&A during Q1 2019, the first four months of 2019 began with increased M&A activity in Norway compared to last year. The Norwegian oil and gas sector has now adapted to lower oil prices and as a result has regained profitability, which again has resulted in the Norwegian economy recovering from the setback experienced following the drop in oil prices in 2014. Experts expect petroleum investments to rise by 10 per cent to 14 per cent in 2019, which again is expected to help boost Norway's mainland activity further. A continuingly weak kroner is also expected to continue increasing investments within the Norwegian manufacturing sector in 2019. Currently, the Norwegian economy seems to be reasonably balanced, with a trend of policy rates being on the rise. The general impression is that there is quite a lot of optimism regarding the Norwegian M&A market, even if recently indications of economic worries and geopolitical uncertainties combining to depress the global M&A figures have been seen.
Still, Norwegian companies continue to be exposed to the same pressures that are currently driving deal activity globally, including lack of opportunities for organic growth in a generally low-growth environment, transformational developments in technology and the need to acquire new technology to stay ahead of competition. Acquiring or collaborating with technology providers to drive innovation in their processes, rather than as an asset in its own right, seems to be a key consideration across all sectors. This applies, for example, in energy, life sciences, telecommunications, transport and financial institutions. This trend also looks set to continue globally in 2019, and corporates seeming to view M&A deals as crucial for strategic growth. The relatively strong economic outlook, presence of continuing strong public markets, large cap deals, CEO confidence and transaction pipeline all seem to indicate that the Norwegian M&A market most likely will be strong in 2019 and 2020 as well.
Nevertheless, there are some uncertainties, such as the possible effects of high housing prices, which could turn out to be unfavourable even if the market for now looks to be stabilising. However, rising interest rates, a high number of unsold houses and a high level of housing starts to population growth may curb the growth in house prices. It is expected that the Norwegian Central Bank may continue to raise interest rates during the next 12 to 24 months. In combination with stricter leveraging regulations, this could trigger a housing market correction. If so, the critical issue is to what extent the market is heading for a soft or hard landing. A recent International Monetary Fund house-price regression exercise suggests that Norway's house prices were overvalued by 15 per cent at the end of 2016, which makes a soft landing possible. A housing market correction could indirectly contribute to less deal activity in the market, since it is expected to reduce spending by Norwegian households.
Globally, there are also looming uncertainties to consider, including the fact that Chinese corporate debt continues to be at a record high. If this reaches some sort of breaking point it could trigger a new financial crisis and recession, resulting in a weaker global economy. Trade wars, protectionism and escalating geopolitical turmoil may also have a negative effect on global M&A activity, indirectly affecting Norwegian deal volume. In this regard, bidders from Asia-Pacific were more or less non-existent during Q1 2019 in the Norwegian &A market. According to Mergermarket, the number of outbound M&A deals from China are currently at their lowest level since Q4 2013, indicating that the US–China trade war has started to impact cross-border deal flows.
At the same time, a survey among global companies indicates that a majority of the companies that participated in the survey plan to divest within the next two years, which is expected to have a continued positive effect on M&A deal activity in Norway. Companies are now very often looking to streamline their operating models, which quite often will have an impact on their divestment plans for the next 12 to 24 months. We also believe that many investors continue to view Norway as a good place to invest owing to its highly educated workforce, technology, natural resources and well-established legal framework for M&A transactions. Consequently, the total M&A deal volume in the Norwegian market should remain relatively strong in 2019, with certain sectors showing a clear amount of increased activity.
One sector in which we believe there will be more activity in 2019 than last year is the energy sector, and in particular within the oil and gas segment. Still, things often shift rapidly in today's market environment: a slight short-term improvement in oil prices combined with executives' fears of losing opportunities to competitors may have a substantial effect on the level of optimism in the market and potential investors' willingness to carry out deals. 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 way to be differentiated, typically by adding new technology through acquisitions. This is an important factor currently spurring M&A activity around the world, which is also influencing the Norwegian M&A market. Many Norwegian businesses possess important technology and intellectual property rights that may be useful in sectors and businesses other than those for which they were originally developed. An increase in interest from foreign investors wanting to acquire Norwegian technology through M&A has recently been observed, and we believe that this is likely to continue irrespective of how oil and gas prices develop.
1 Ole K Aabø-Evensen is a founding partner of Aabø-Evensen & Co Advokatfirma.
2 Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017, repealing Directive 2003/71/EC.
3 Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003, amending Directive 2001/34/EC.
4 Commission Regulation (EC) No. 809/2004 of 29 April 2004 implementing Directive 2003/71/EC.
5 Source: Mergermarket (based on announced deals above €5 million where the target is Norwegian. Excludes lapsed or withdrawn bids).
6 Source: Mergermarket.
8 See footnote 5.
10 In a syndicated loan agreement, one bank 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.
11 Council Directive 2001/23/EC.