i Deal activity
The Norwegian economy is to a large degree, directly or indirectly, exposed to the oil and gas extraction and related industries. The Norwegian economy was less affected than other countries by the consequences of the financial crisis of 2007–2008 and the subsequent sovereign debt issues in Europe, in part because of the income it derived from oil and gas extraction. However, the substantial reduction in the price of oil that started in 2014 (from US$115 per barrel in June 2014 to approximately US$30 at the start of 2016, since levelling out at around half of its 2014 high)2 had quite immediate effects in the Norwegian 'real' economy, with severely reduced investment activity, lay-offs of personnel and debt restructuring in the oil-related sectors that have only recently shown signs of abating and reversal. The oil price has since remained both relatively low and volatile.
These developments in the Norwegian economy affect private equity investors active in the Norwegian market, as they do other investors. The most direct consequence of the reduction in oil prices has been that sellers have proved hesitant to make sales based on the reduced prices. Correspondingly, buyers have been generally unwilling to make purchases based on the older higher prices. The perceptible reduction in deals in the Norwegian market towards the end of 2014 has persisted. With respect to investments made by funds advised by Norwegian sponsors,3 there was a sharp drop from top levels in 2016 of 12 billion kroner to 8.5 billion kroner in 2017. There were no public-to-private deals (of any significance) in 2017.4
The number of private equity exits by funds advised by Norwegian sponsors continued its downward trend from 43 in 2016 (and 43 in 2015) to 39 in 2016.5
In 2017, no private equity exits were made in the form of an initial public offering (IPO) in 2017. In 2018, however, government-backed venture investor Investinor (see below) partially exited poLight through an IPO. There has been a lasting decline in the number of exits being made in the form of an IPO, mirroring a decline of the Oslo Stock Exchange as a source for risk capital. This trend may indicate that IPOs are not seen as being as viable an exit route as previously in the Norwegian market, except in exceptional cases. Oslo Børs is currently the target of a possible acquisition, which may change the future attractiveness of that market place.
As at the start of 2019, a total of 147 Norwegian alternative investment fund managers were registered or authorised by the Financial Supervisory Authority of Norway, compared to 125 the year before. Approximately half are private equity managers. The exact number of alternative investment funds established in Norway is unclear, as many private equity funds will be covered by the grandfathering rules under the Alternative Investment Fund Managers Act (the AIF Act), implementing the EU Alternative Investment Fund Managers Directive (AIFMD).
From the point of view investing activity, the Norwegian private equity scene may be divided into five main categories. The first category consists of (in a Norwegian context) relatively large generalist private equity investors, such as FSN Capital, Norvestor Equity and Herkules Capital. The second category consists of sector-specialist investors, such as HitecVision, Energy Ventures or Hadean, the first two focusing on technology and assets connected to the exploration of oil and gas, and the latter a healthcare specialist. Third, there are a number of smaller sponsors in the venture and seed capital segments, such as Proventure, Verdane and Sarsia.
As a fourth category, some Stockholm and Helsinki-based managers are active in the Norwegian market to the extent of having established offices in Norway (e.g., EQT, Altor, Nordic Capital and Northzone). Increasingly, international private equity funds are active in the Norwegian market. Notable examples are the 2017 acquisition of the Norwegian software company Visma by HgCapital, Montagu Private Equity and other partners, the Triton Partners acquisition of a 75.15 per cent stake in Glamox AS, and the acquisition of Norsk Gjenvinning by Swedish Summa Equity.
A fifth category is made up of government-backed actors, and chiefly Argentum Fondsinvesteringer AS. Argentum is a government-owned investment company investing in private equity. Argentum is active both in the primary and secondary markets, and in completing co-investments with private equity funds, and it is a significant investor in most Norwegian and Scandinavian venture and private equity funds. Argentum has expanded its geographical investment area outside Scandinavia. In the venture segment, the government has established Investinor AS, an investment company for venture investments. As of Q3 2018, the investment portfolio of Investinor AS amounted to 2.2 billion kroner (unchanged from the year before). Investinor has financial assets and a commitment from the government amounting to 4.2 billion kroner, as well as an undrawn government commitment of 1.25 billion kroner.6
There were a few new fund sponsors in Norway in 2017 and 2018, such as healthcare specialist Hadean Ventures, mid-cap Explore Equity and Serendipity Partners.
ii Operation of the market
Management incentive schemes
A key element of private equity investing is appropriate incentive schemes aimed at key personnel both at the fund (sponsor) and portfolio company levels.
In Norway, incentive schemes at the sponsor level, aimed at key personnel of the manager, have traditionally been equity-based and modelled on traditional incentive schemes in the international private equity industry. The specific structuring of sponsor management equity schemes will vary from case to case depending on, inter alia, the relevant legal framework applicable to the manager, and on the participants and choice of investment model. Norwegian fund managers authorised under the AIF Act (see) are subject to remuneration rules that may affect incentive schemes that are not investment-based (carried interest).
At the portfolio company level, it is common practice for private equity funds to require key employees of a portfolio company to reinvest alongside the fund in connection with a fund's acquisition of the company. Incentive schemes aimed at such key employees have evolved over the past years, migrating from option-based and bonus-based models to almost exclusively investment-based models.
In some cases, key employees invest on the same terms as the fund ,with their investment exposed to the same risk. However, it is not uncommon that the employees' investment implies greater risk than the fund's investment, and also that the investment has the potential for a higher relative return. This is normally achieved by establishing different classes of shares in the company, the financial terms of which are often similar to the terms that are common for private equity funds (i.e., a carried-interest model). A common structure is to establish two classes of shares with different risk and return profiles. The share class with lower risk and potential for return (preferred shares) is predominantly subscribed by the fund, while the share class with higher risk and potential for return (subordinated shares) is subscribed by leading employees and, in some cases, the fund.
The exact terms of leading employees' investments differ between funds and individual portfolio companies. It is, however, possible to identify certain basic principles that apply in some form in most cases. For instance, it is customary that the terms applicable for the preferred shares state that the fund shall be entitled to receive the entire amount it has invested, plus a predefined return on the investment (the preferred return), before the subordinated shares become entitled to any distributions, hence the greater risk on the employees' investment. After the fund has received its preferred return, each subordinated share will be entitled to receive a higher amount of excess distributions than each preferred share, hence the higher potential for return on the employees' investment.
Normally, leading employees that own subordinated shares are subject to certain restrictions and obligations that do not apply to preferred shares. These include transfer restrictions and obligations such as lock-up and standstill for a predefined period, right of first refusal for the fund and drag-along obligations (employees normally also have tag-along rights). It is also common that leading employees are subject to good-leaver and bad-leaver provisions, and enter into restrictive covenants such as non-compete and non-solicitation undertakings, and restrictions on other business interests and engagements.
On 1 January 2017, new legislation concerning non-compete clauses and certain types of non-solicitation clauses in employment contracts entered into effect. Under these rules, non-competition and non-solicitation clauses were made subject to several limitations in employment contracts. Among other things, non-compete clauses require compensation and such clauses may not extend longer than 12 months from the end of the employment. Exceptions may be agreed for the CEO (only). These new restrictions mean that non-compete and non-solicitation clauses should be addressed fully in the shareholder agreements for management incentive schemes and be linked to the status as an investor.
Private equity divestments
The terms of divestments made by private equity funds will differ from case to case and generally between segments (venture, growth, buyout). The attractiveness of the target company will often be a dominant factor as to whether a sales process runs smoothly and quickly. As mentioned above, exits through IPOs are fewer now than prior to the financial crisis. Consequently, most exits take the form of a secondary sale to other private equity investors or trade sales to industrial actors.
As a general rule, divestments by Norwegian funds are made through structured auction processes targeting a limited number of potential buyers. It is good practice for the manager to formulate exit plans in connection with the original investment in the portfolio company, and also throughout the term of the investment as the relevant portfolio company and market conditions develop. For authorised AIFMs, this is a legal requirement. Buyers will, depending on the target company in question, consist of industrial actors or other funds, or a combination thereof. The time and effort necessary to complete a divestment, as well as the terms that may be obtained by the divesting fund, will vary greatly depending on the size and other characteristics of the portfolio company and the prevailing market conditions.
Authorised AIFMs (when investing in assets of limited liquidity preceded by a negotiation phase, as is typically the case for private equity investments) are required to establish and update a business plan for the investment in accordance with the duration of the fund with a view to establishing exit strategies as from the time of the investment. While most private equity fund managers would expect to put such a plan in place as a fundamental aspect of the investment process, the AIFMD requires this as a statutory duty.
ii LEGAL FRAMEWORK
i Acquisition of control and minority interests
The investment objective of private equity funds is generally to achieve superior returns through control in its portfolio companies. In this section, we provide a brief description of the legal framework for a control investment in Norwegian public and private limited companies. Our discussion is limited to equity investments (we do not discuss asset transactions).
Listed companies are a subset of public companies. The regulatory regime applicable to takeover offers on shares differs significantly, depending on whether the target company is listed on a regulated market or not. Acquisition of controlling stakes in listed companies triggers particular requirements.
Norway has implemented the EU Takeover Directive7 through rules in the Norwegian Securities Trading Act, which applies to Norwegian and (subject to certain exemptions) foreign companies listed on a Norwegian regulated marketplace (currently the Oslo Stock Exchange or Oslo Axess). The takeover rules distinguish between voluntary and mandatory offers. A voluntary offer, if accepted by the recipients of the offer, triggers a mandatory offer obligation for the buyer. A mandatory offer for the remaining shares in the target is triggered if the buyer (either through a voluntary offer or otherwise) becomes owner of more than one-third of the voting rights in the target (with repeat triggers at 40 and 50 per cent). Further, Norway has implemented the EU Transparency Directive8 through rules in the Norwegian Securities Trading Act, requiring major shareholding notifications. Norway has yet to implement the revised EU Transparency Directive (as amended through Directive 2013/50/EU). This is expected in 2019.
In the case of an unlisted target company (whether the target is a public or private limited company), the buyer is to a large extent free to determine the process pursuant to which a takeover shall be executed, subject to what may be agreed on a contractual basis with the target or the target company's shareholders.
EU fund managers that are authorised under national legislation implementing the AIFMD and non-EU fund managers that hold a marketing authorisation in an EEA Member State are subject to certain reporting requirements when investing in unlisted companies that are not small or medium-sized enterprises (SMEs).9 Such managers shall notify the regulator whenever the proportion of voting rights of the non-listed company held by the fund or funds under management reaches, exceeds or falls below the thresholds of 10, 20, 30, 50 and 75 per cent. Additional disclosure requirements are triggered upon acquiring control in the relevant company (which also applies when the company is listed). Investments by funds managed by EU fund managers authorised under national legislation implementing the AIFMD or by non-EU fund managers holding a marketing authorisation in an EEA Member State in unlisted (non-SMEs) and listed companies where the funds have acquired control of the company are also subject to rules concerning asset stripping. These rules contain certain restrictions on distributions, capital reduction, share redemption and acquisition of own shares for a period of 24 months from the acquisition.
According to Norwegian merger regulations, all mergers and transactions involving acquisition of control (concentration) must be notified to the Norwegian Competition Authority if the undertakings involved in the transaction have a combined annual turnover in Norway of 1 billion kroner or more, and at least two of the undertakings concerned each has an annual turnover exceeding 100 million kroner. An automatic standstill period, ending at the earliest 25 working days after a filing has been made, applies to all concentrations subject to the notification requirement. If the transaction is of a magnitude that requires merger clearance at EU level, the Norwegian filing requirements are suspended and absorbed by the EU rules.
Acquisition of substantive holdings or control in a target company may also trigger other filing, concession or approval requirements under Norwegian or foreign legislation. These aspects must be assessed on a case-by-case basis. In Norway, this applies within, for example, the financial sector, fisheries, oil extraction and certain infrastructure, such as production or transfer of electricity.
The above rules apply independently of the jurisdiction of establishment of the investing fund. However, the jurisdiction of establishment of the investing fund will be among the considerations relevant to the choice of structuring of an investment to obtain a structure that is suitable from the point of view of the business and exit plans for the target company, as well as the prevailing tax laws.
ii Fiduciary duties and liabilities
Private equity sponsors or managers are not subject to any specific fiduciary duties or similar duties to other shareholders in portfolio companies. However, Norwegian company law provides for shareholder minority rights in Norwegian public and private limited companies
Minority shareholders in Norwegian public and private limited companies are conferred certain rights under Norwegian company law. The most significant restriction upon majority shareholders is the principle of equal treatment. This implies that the majority shareholder 'cannot adopt any resolution which may give certain shareholders or other parties an unreasonable advantage at the expense of other shareholders or the company'.10
With respect to transactions with shareholders, the principle does not mean that all shareholders have to be treated equally at all times. Generally, differential treatment is acceptable if this can be justified based on objective grounds and the best interests of the target company as a whole.
Majority shareholders that are private equity funds should also be aware that the Norwegian Private Limited Company Act and Public Limited Company Act contain specific provisions concerning the payment of dividend and of financial assistance to other group companies. The Ministry of Justice has carried out a consultation process, proposing to introduce greater flexibility concerning financial assistance for limited companies. This would require amending the relevant company acts, which has yet to be formally proposed. It is uncertain when these changes may enter into effect.
In the case of payment of financial assistance to a group company, the minority shareholders may claim payment of an equal dividend. If the general meeting decides not to pay out a dividend, the minority shareholders may challenge this decision in court.
Minority shareholder rights will normally be supplemented by the more specific provisions of a shareholders' agreement between the private equity fund and the minority shareholders (e.g., members of management) concerning rights at exit, etc.
Potential liabilities for majority shareholders
Norwegian limited company law provides for the liability of board members, members of management and shareholders for losses in the hands of the company in the event of negligent or wilful acts or omissions. The provisions of the limited company acts only provide for damage suffered by the company, and not by third parties (although third parties may, in priority, file claims on the company's behalf).
Shareholders of a limited company may also be held liable for claims by third parties (piercing the corporate veil) in some cases. The legal basis for such claims is based on unwritten and customary law and is, to our knowledge, without legal precedent in Norway. However, case law provides that there are circumstances where the court will be prepared to come to the conclusion that shareholders are personally liable. This does not, in itself, abolish the company's position as a separate legal entity; rather it is a form of shareholder liability. Although each case will depend on the court's assessment of the particular circumstances, the court has come to such conclusions where, inter alia, a shareholder or secured creditor has a right of control over the company so that the company is in reality not organisationally or financially independent, as required by the Norwegian private limited companies act, the company has been under-capitalised compared to the financial risk involved in its operations for a long time (under-capitalisation may not in itself be a legal reason to pierce the corporate veil, but may indicate the company is not sufficiently independent of its owners) or the company's funds have been used against its interests to benefit its shareholders.
Rights of stakeholders
As a general rule, Norwegian law does not confer any legal rights on other stakeholders that are legally binding upon the members of the board of directors of a limited company. The obligations of the board members (their fiduciary duties) are to the company and to the shareholders.
Private equity investments are by nature temporary, and any acquisition by a private equity fund is made with the objective of a future exit. Acquisitions will normally be organised with the exit in mind, including measures to avoid complications due to minority shareholder rights (discussed above). As mentioned above, authorised AIFMs, are required to adopt exit plans in connection with the original investment in the portfolio company, and also update them throughout the term of the investment.
The time and effort necessary to complete a divestment, as well as the terms that may be obtained by the divesting fund, will vary greatly depending on the size and other characteristics of the portfolio company and the prevailing market conditions. Depending on the development of the relevant portfolio company or the prevailing market conditions, an exit may not be made as initially planned or set out in the exit plan; the manager may also identify more commercially interesting forms of exits at a later stage. This implies that an exit will normally require bespoke structural and legal measures.
With the exception of general contract, company, tax and competition law, few general rules govern an exit of a portfolio company. If an exit is made in the form of an asset sale, then labour law will be relevant, as the employees of the business to be transferred are conferred certain rights under Norwegian labour law. Under current Norwegian tax legislation, equity transactions will normally be treated more favourably than asset transactions.
iii YEAR IN REVIEW
i Recent deal activity
Following an all-time high in 2016 of 11.9 billion kroner invested by funds advised by Norwegian sponsors, led by investments in the buyout segment, the figure declined to 8.5 billion kroner in 2017.11 Preliminary figures suggest that the number is slightly lower for 2018, with generally lower-value (but more) deals.12
There were few large transactions made by Norwegian private equity sponsors. A notable exception was the merger of Italian energy company Eni's Norwegian operation and HitecVision-owned petroleum company Point Resources (itself a product of the merger of Core Energy, Spike Exploration and Pure E&P), creating Vår Energi.
The long-term trend is for transactions that are largely Nordic-centric, with Nordic private equity sponsors typically investing in the Nordic countries, followed by US and UK actors. The telecoms, business services and petroleum sectors dominate transactions overall. During 2018, a number of retail chains began facing financial difficulties. For a period following the fall in oil prices, retail was also an attractive sector for private equity investors. It remains to be seen whether this will force consolidations or other transactions in the sector.
One of the main consequences of the financial crisis and the ensuing sovereign debt problems of European and other countries has been a relative decline in the availability of banking finance for private equity transactions and similar transactions.
Traditionally, Norwegian sponsors have leveraged buyouts to a lesser degree than sponsors in other jurisdictions. In addition, Norwegian banks have been less affected by the market turmoil since the financial crisis than many European counterparts. The relatively minor role of non-bank financing is also related to the fact that lending is a regulated activity in Norway, which only banks and regulated financing undertakings may carry out. This means that Norwegian private equity funds have been affected to a somewhat lesser degree by the shifting credit market. The main source of finance in leveraged acquisitions is therefore still bank financing, but mezzanine financing has been used in some deals.
Terms for bank financing are highly standardised, but the content of covenants will differ from case to case based on, inter alia, the financial position and business of the target company.
iii Key terms of recent control
The terms of control transactions made by Norwegian private equity funds will vary greatly. In public-to-private deals, the rules on voluntary and mandatory bids, as well as a (normally) fragmented shareholder base, will mean that few terms will be set in such transactions.
In purely private transactions, terms will as a rule be confidential. The disclosure rules under the AIF Act with respect to acquisitions of control, applicable to certain AIFMs, do not require the disclosure of the terms. However, the timing of such acquisitions may become public knowledge faster than before. Norwegian private equity sponsors will consistently structure deals and set terms to obtain control in the portfolio companies with a view to exercising active ownership in the portfolio investments. As a rule, sponsors will seek to obtain control through a majority stake (50.1 per cent or higher) or through shareholders' agreements granting the sponsor the right to appoint the majority of the board. Such shareholders' agreements will routinely contain provisions concerning drag-along and tag-along rights, to achieve an appropriate exit, as well as to accommodate co-investment opportunities for management.
The downward trend in investment activity is also reflected in the exit activity. The number of exits by funds advised by Norwegian sponsors has declined from 79 in 2013 (the most recent high point) to 43 and 39 in 2016 and 2017 respectively.13 On the basis of preliminary data, it seems this trend has continued into 2018.14
iv REGULATORY DEVELOPMENTS
In Norway, the AIF Act, implementing the AIFMD, came into force on 1 July 2014. Before that, private equity funds were outside the scope of any specific regulatory regime in Norway. Now, the AIF Act regulates management of private equity funds, and the marketing of interests in such funds. The majority of Norwegian private equity managers have assets under management below the threshold values requiring authorisation (€100 million or €500 million, depending on the fund terms). A large number of managers are, however, affected by the authorisation requirement, which is also triggered by cross-border management or marketing, or when marketing units in funds to non-professional investors in Norway.
In Norway, private equity funds are still unregulated at the fund level. Although the AIF Act is aimed at managers only, certain provisions have effect at the fund level. This concerns primarily the requirement to appoint a depositary, but also reporting and disclosure requirements. On 15 January 2019, the Ministry of Finance initiated a public consultation on the implementation of the amendments to the EU Regulation on European venture capital funds (EuVECA),15 the EU Regulation on social entrepreneurship funds (EuSEF)16 and delegated regulation under the EU Regulation on long-term investment funds (ELTIF).17 As mentioned above, none of the main regulations have entered into effect in Norway yet, and an amendment to the Financial Undertakings Act will be required to allow such funds to provide loans. The consultation period was relatively short, suggesting that the Ministry of Finance may prioritise implementation in 2019. This will introduce these regulated fund types in Norway. With respect to EuVECA and EuSEF funds, Norwegian registered managers will also be able to market interests in such funds to non-professional investors without being authorised under the AIF Act, in contrast to the current situation.
Authorised and registered managers established in Norway are supervised by the FSAN. The FSAN also has oversight over activities of non-Norwegian managers following marketing authorisations under the national private placement regime. The FSAN has, so far, shown limited concern for the investment activity and transactions carried out by funds managed by managers under its supervision. This seems to be a policy choice, as the primary focus of the FSAN has been on investor rights and fair treatment of investors. The FSAN is, however, concerned with financial stability and market integrity, but it has yet to pursue any matters related to transactions in unlisted instruments. The FSAN will typically carry out its duties through inspections of premises or document-based inspections. In the case of non-Norwegian actors, the FSAN will typically consider whether they have the proper regulatory authorisation to carry out any regulated activities in or into Norway. With respect to investing, this will typically relate to the question of providing loans to Norwegian debtors, as this is a regulated activity (see Section III.ii).
There is otherwise no specific regime with respect to private equity transactions, which are legally no different from transactions between any other parties. The structure of private equity funds may, however, have consequences with respect to their position under competition law. Further, private equity investors as major shareholders in Norwegian companies in the financial sector (which require a prior authorisation) are a somewhat novel development. Regulators may therefore be stringent about applicants meeting documentation requirements when filing necessary applications.
Notwithstanding the market conditions affecting all investors, private equity investors are especially dependent upon professional and successful deal sourcing to be able to deploy committed capital and make divestments on optimal terms upon the prospect of the termination of a fund.
In the Nordic region, several private equity sponsors have significant amounts of uncalled capital, and this has – along with lower interest rates – raised prices for attractive targets. Norwegian insurance companies and pension funds are now both subject to Solvency II investment rules (since 2016 and 2019 respectively), and should – all else being equal – allocate more of their portfolios to long-term investments such as private equity. It remains to be seen how this will develop and whether the market will cater to such investors and provide the sought-after returns. Such investors could be expected to have extensive reporting-quality requirements (to satisfy Solvency II look-through rules), and also environmental, social and governance requirements.
The relative importance of bank financing over other financing sources may change going forward. Upon transposition of the EuVECA and ELTIF Regulations, the types of funds affected will be allowed to provide loans (within certain limitations). Further, while Norway has implemented the Capital Requirements Directive IV, the SME supporting factor – providing for a lower capital charge for exposure towards SMEs – has not yet been implemented. Norwegian authorities have proposed implementing this during 2019, but in combination with a compensatory increase of the countercyclical capital buffer. This suggests that Norwegian banks may become less competitive as sources of debt financing in future.
Norway has traditionally had a broad and deep economic relationship with the United Kingdom, both before and after the United Kingdom became a member of the EU. Norwegian fund sponsors eager to attract non-Norwegian capital have also often relied on the power of City of London-based placement agents. It remains to be seen how Brexit will affect these relations and investment activity, both in the United Kingdom by funds advised by Norwegian managers and of UK-based funds in Norway.
1 Peter Hammerich is a partner and Markus Heistad is a senior lawyer at BAHR.
2 Official Brent Oil Prices.
3 Definition by the Norwegian Venture Capital & Private Equity Association (NVCA).
4 BAHR AS internal study.
5 NVCA, Private Equity Funds in Norway – Activity Report 2016, and Private Equity Funds in Norway – Activity Report 2017.
6 Source: Investinor AS, Q3 2018 report.
7 Directive 2004/25/EC.
8 Directive 2004/109/EC.
9 Enterprises that employ fewer than 250 persons and that have an annual turnover not exceeding €50 million, or an annual balance sheet total not exceeding €43 million, or both.
10 The Private Limited Company Act and Public Limited Company Act, Sections 6–28.
11 NVCA, Private Equity Funds in Norway – Activity Report 2016.
12 Mergermarket, BAHR AS internal study.
13 NVCA, Private Equity Funds in Norway – Activity Report 2016, and Private Equity Funds in Norway – Activity Report 2017.
14 Argentum market report H1 2018, Q3 2018.
15 Regulation (EU) No. 345/2013 of the European Parliament and of the Council of 17 April 2013 on European venture capital funds.
16 Regulation (EU) No. 346/2013 of the European Parliament and of the Council of 17 April 2013 on European social entrepreneurship funds.
17 Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds.