The Mergers & Acquisitions Litigation Review: Denmark
Post-M&A disputes in Denmark are typically over warranty breaches, calculation of earn-out, and purchase price adjustments. They are primarily cases between the seller and the buyer based on a share sale and purchase agreement (SPA).
Other disputes are related to shareholder claims against, for example, the target company itself, the sellers in an IPO, the issuing banks, advisers and (the former) management of the target company.
There is a strong tendency for Danish SPAs to contain an arbitration clause. This fact, combined with a relatively low number of shareholder claims, means the body of M&A litigation case law in Denmark is not very extensive compared to other areas of law. However, a significant amount of shareholder disputes are currently being dealt with by the Danish courts.
M&A disputes dealt with by the Danish courts are normally heard by the Maritime and Commercial High Court, which is a specialised court with expert judges, or by one of the country's two high courts as first instance. On appeal, matters will be decided by one of the high courts or the Supreme Court.
Publicly available statistics show that M&A and shareholder disputes accounted for approximately one third of the cases filed at the Danish Institute of Arbitration in 2019.2
A fairly limited number of Danish attorneys – the authors of this chapter among them – have been involved in the M&A and shareholder disputes over the past decade and therefore have a unique insight into the market, even though the details of such cases are rarely known to the general public.
Legal and regulatory background
The Danish legal system is based on a civil law tradition with the main source of law being statutes implemented by the Danish parliament. Relevant and widely used supplements thereto include statutory orders, preparatory works and case law as well as general principles of law, which are often applied by Danish courts, especially in actions for damages, as the legislation within this area is high-level and vague.
The regulatory framework governing Danish M&A transactions is comprehensive, ranging from regulation of the relationship between the seller and buyer or the shareholder and the company (e.g., the law of contracts, company law, securities law) to the relationship between the companies and the outside world (e.g., competition law and tort law).
Regulators might be involved in Danish M&A transactions – both on their own initiative and on request – depending on the nature of the transaction. Frequently involved Danish regulators and public authorities are the taxation authorities, the Labour Market Council, the Danish Financial Supervisory Authority, the Danish Business Authority, the competition authorities, the Danish Consumer Ombudsman and the foundation authority.3 Most decisions by Danish regulators can be appealed – either to a specific body within the authority handling appeal or complaints, or to the courts.
At present, there is no act on Foreign Direct Investments, and no demand for approval by regulators or public authorities of foreign investments in Danish companies, but the Danish Minister for Justice has appointed a working committee on the matter. Especially on the area of critical infrastructure, Danish legislation on the subject is to be expected.4 The working group was appointed in the wake of the new Regulation (EU) 452/2019 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union. Under Article 3 of the Regulation, Member States can adopt mechanisms to screen foreign direct investments in their territory on the grounds of security or public order to the extent that the legislation is in line with the framework for the Regulation.5
i Common claims and procedure
Shareholder claims in Denmark include (without limitation):
- claims under the Danish Companies Act, Section 361, which covers directors' and officers' liability, equivalent to a claim for breach of fiduciary duties;
- claims against sellers, banks, former management, advisers, etc., for statements made in prospectuses or other public announcements, price manipulation, etc.; and
- claims related to, for example, compulsory redemption of shares in connection with a transaction, including disputes over the takeover price.
The legal basis of liability in these types of tort claims are ordinary negligence, except for claims against professional advisers, who are subject to professional liability.
Regarding (a), above, the threshold that the buyer, or the target company itself, must meet to successfully bring a claim for damages against the (former) management of the target company is rather high, and there are several recent examples of the Danish Supreme Court having refused to impose liability.
The most predominant is the Memory Card Technology case (U.2015.2075H) and the rationale applied by the Supreme Court.
In this case, the former majority owner and CEO was sentenced to six years' imprisonment due to fraudulent financial reporting. The board of directors was not involved in the fraudulent reporting, but the chairman of the board did receive a letter in which the CFO, who had held the position for a couple of months only, resigned and described the CEO's fraudulent actions quite accurately.
The chairman's response was to ask the CEO if the allegations in the letter were true, which the CEO denied. The chairman made no further enquiries, nor did he inform the other members of the board of directors or the company's auditor about the letter. The Supreme Court held (unofficial translation):
The Supreme Court finds that [the chairman] in the performance of his duties lived up to his obligations as chairman of the board. It was, though, an erroneous assessment that he, on the basis of i.a. his long-standing trusting collaboration with the CEO, D, accepted his reply of 3 March 2000 to the criticism in the letter of 1 March 2000 from the resigned Group CFO […] without informing the other board members and the auditors. Based on an overall assessment, however, the Supreme Court finds that a single error of this nature is not sufficient to establish liability on the part of [chairman].
Thus, the Supreme Court explicitly recognised the proposition that even though a management member errs in the execution of his or her duties, this is not in itself sufficient to incur liability, especially if the management of the company in other respects has been flawless.
The Supreme Court has also, within the past couple of years, rendered its two first decisions in relation to management liability for losses within the financial sector following the financial crisis. These decisions are, to some extent at least, generally applicable and illustrate the willingness of Danish courts to exercise restraint when assessing whether management members have incurred liability with regard to shareholders or the company itself.
In the first case, U.2019.1907H (Capinordic), the Supreme Court reiterated the business judgement rule and asserted that the courts should exercise caution in setting aside business judgement decisions of the management, unless management is found to have pursued interests that are irrelevant to the company, for example, own interests or other interests outside the objects of the company.
Consequently, to stay in the 'safe zone', management of a target company must focus on the interests of the target company and not the interests of its owners or the potential buyers. In some cases, this may prove to be a delicate balancing act for members of management, who will typically be involved in due diligence, have meetings with potential owners on new strategies, MIP programmes, etc., and may potentially also have a personal economic interest in either a high or low purchase price.
As a general rule, members of management cannot be criticised for their involvement in the sales process. They do, however, need to appreciate that their fiduciary duty lies with the target company rather than the buyer or the seller, and they cannot, therefore, act against the interests of the target company. If, as an example, management is deliberately sandbagging in an attempt to lower the purchase price, which potentially will be a benefit in a new MIP programme, or enable management to exceed expectations under the new owner, the management would not have pursued the interests of the target company, and therefore the courts are unlikely to be lenient if asked to scrutinise such decisions.
In the second case (EIK Bank Danmark), the Supreme Court expanded the scope of application of the business judgement rule.6
In previous rulings, Danish courts had found that a prerequisite for applying the business judgement rule is that an appropriate basis for the relevant decision is present, and the courts did not expressly exercise caution when determining whether an appropriate basis exists. In the EIK Bank Danmark case, the Supreme Court ruled that courts should also exercise caution when determining whether an appropriate basis for a certain decision was present.
Obviously, there might be situations where it is clear that a management decision is unfounded, for example, where the management has failed to obtain input or advice from the organisation or external advisers, basing its decision solely on its own expectations of a future value development. However, if management makes sure to obtain relevant input, one can expect the courts to be reluctant to disregard the management assessment of what constitutes an appropriate basis for decision.
In summary, under Danish law, if the management has overall control of the company and is generally conducting the board work in a responsible, decent and careful manner, making sure to obtain appropriate basis for its decisions and acting in the interests of the company itself, the management will have a fair amount of leeway and the courts will allow room for mistakes.
Regarding (b), above, in Denmark, very few cases have been conducted as class actions or actions akin thereto between new shareholders and the target company itself, the sellers in an IPO, the issuing banks, advisers or (the former) management of the target due to alleged misstatements in prospectuses, stock market announcements, etc., or the creation of an artificially high stock price.
However, with a number of such cases currently being heard by the Danish courts, the area is expected to undergo a significant development over the coming years.
The landmark case within this area is U.2002.2067H (Hafnia), where the Supreme Court held that although a prospectus could be criticised on isolated points, it gave in overall terms a true and fair view of the target company, and the Supreme Court, therefore, unlike the lower court, found no basis for liability.
As with management liability, the Supreme Court illustrates a willingness to forgive minor misstatements if the general picture is satisfactory.
In a newer case, U.2013.1107H (BankTrelleborg), the Supreme Court did find, however, that misstatements in the prospectus were of such a magnitude that the plaintiffs' claim for damages was accepted.
In a new judgment (Parken/Clipper), the Copenhagen City Court found a company and part of its former management liable with regard to a buyer of shares, as the court found that the stock price had been inflated.7 However, owing to a lack of evidence of any causal loss, the damages awarded were only a small percentage of the loss claimed by the claimant.
Regarding (c), above, a relatively modest portion of cases relate to pre-emption rights or compulsory redemption. The Danish Companies Act contains tag-along and drag-along provisions if certain criteria are met (primarily that a single shareholder owns 90 per cent of the shares). Obviously, such provisions are also commonly found in articles or shareholder agreements, but the Companies Act is to some extent mandatory: For example, the articles cannot legally subject minority shareholders to a compulsory buyout if the majority shareholder owns less than 90 per cent of the shares (see U.2007.2546 (TDC)).
Disputes of this type might relate to whether the relevant criteria are met (i.e., is a sufficiently large portion of the shares sold or in the possession of one party, is a pre-emption right triggered if all assets rather than the shares are sold, etc.), but the vast majority of disputes arise over the setting of the takeover price.
This often necessitates the involvement of experts. In arbitration cases, the parties have the possibility of calling their own expert witnesses, whereas the Danish court system requires that such appraisals are performed by a court-appointed expert. In cases regarding redemption according to the Companies Act, the Act sets forth the procedure for determining the value of the redeemed shares.
Danish law does not recognise punitive damages. Plaintiffs will therefore only be able to recover substantiated actual losses.
In general terms, the buyer will have the possibility of claiming damages, a proportionate reduction of the purchase price, and rescinding the agreement. To be able to successfully claim damages, the buyer needs to prove that the seller acted culpably, that the buyer has suffered a causal and foreseeable loss, that no contributory negligence exists on its own side and that it has not accepted the risk which materialised, and that it has complied with its duty to mitigate damages.
The burden of proving an actual loss lies with the plaintiff and is relatively hard to meet when it comes to management liability cases, whereas it is easier when it comes to misstatements in prospectuses, etc., as the Supreme Court has accepted to reverse the burden of proof of causation.
Cases of this type can be extremely time consuming when dealt with by the courts. At present the Danish Supreme Court is hearing management liability cases on appeal that were filed approximately 10 years ago. Normally, the time frame for complex cases will be three to five years if they are appealed.
Typically, defendants' first line of defence will be that no basis of liability exists, that there is no causation or no documented loss.
Other defences include acquiescence, statute-barring, contributory negligence, that the loss should be borne by other co-defendants, and relaxation.
Section 362 of the Danish Companies Act furnishes former shareholders with a further defence, as it requires gross negligence or intent on the part of a (former) shareholder in order for a plaintiff to hold that shareholder responsible. The provision can therefore be used by defendants to argue that the plaintiff can only successfully raise non-contractual tort claims if it can be proved that the defendant has acted in gross negligence or with intent.
iv Advisers and third parties
Advisers – auditors, investment bankers, management companies, lawyers, etc. – can be held liable under a professional liability norm. Such claims are rarely successful in Denmark, but some of the ongoing cases referred to above also involve advisers, and within this field, a development of the law might therefore also be expected within the coming years.
v Class and collective actions
The filing of class actions has been possible in Denmark for almost 15 years now.8 While relatively few class actions have been carried through, recent years have seen quite a few significant class actions being instigated.
Certain requirements must be met and ultimately the court will decide whether such requirements have been met.9 The requirements are:
- uniform claims that apply to several persons;
- uniform claims that can be dealt with in Denmark;
- the court in which the class action is brought is competent to deal with one of the claims;
- a class action is considered the best way of dealing with the claims;
- the members of the group may be identified and informed of the matter in an appropriate manner; and
- a group representative can be appointed.
Recent case law includes the acceptance of a class action brought against members of the management in OW Bunker A/S and others (U.2019.962OE).
vi Insurance and indemnification
It is increasingly common for the target company or its owners to take out a D&O policy to cover liability of the directors and officers of the company. Such policies will usually – besides cover for the actual claim – also cover defence costs and other litigation related costs up to a given maximum amount.
Professional liability policies will also be relevant to consider if the claim is raised against professional advisers.
Cases are not seldomly settled, but as punitive damages is not recognised under Danish law and Danish courts are generally reluctant to award high levels of damages, the risk associated with the cases are easier to manage for defendants than in other jurisdictions, and therefore the settlement ratio is relatively low.
viii Other issues
Third-party funding still being in its very early phase in Denmark, Denmark can be considered an emerging market within this area.
Danish M&A transactions are largely inspired by English and American traditions.
Despite this outlook towards international norms and common law traditions, it is important to appreciate that whenever an SPA is governed by Danish law then principles and norms under Danish law will apply and these diverge significantly from common international norms. For example:
- while the actual wording of the SPA is obviously the starting point, it is not always considered exhaustive and can be supplemented by other documentation to support and obtain an understanding of the parties' intention when entering into the agreement, potentially conflicting with the international norm of applying a strict interpretation of the wording;
- unless otherwise specifically provided for in the SPA, the parties will be subject to a fault-based negligence standard norm rather than an objective liability norm as in other jurisdictions;
- the caveat emptor principle in relation to the buyer is applied, and the seller will not typically be held accountable for facts and circumstances that were known to the buyer; and
- all remedies for breach of contract are, in principle, available unless their applicability is limited in the SPA.10
i Common claims and procedure
As mentioned in the introduction, the most common cases in an M&A context are cases concerning warranty breaches, earn-out disputes and purchase price adjustments. Another frequent type of case is a 'books and records action', by which normally the seller is able to get, within strict limits, access to information about the financials of the target company even after the transaction has closed. This feature is typically linked to disputes related to, for example, earn-out and purchase price calculations, as such disputes often require insight into the target company's financials to be solved properly.
Warranty breach cases are almost solely dealt with by arbitration, and thus no significant body of publicly available case law exists.
A few overall observations can, however, be made with respect to such cases:
- in general terms, Danish jurisprudence sets a relatively low threshold for when a warranty is considered breached. The seller therefore needs to be cautious if asked to accept liability on a no-fault basis or by way of ordinary negligence unless such warranty breaches are covered by a W&I insurance;
- the well-established, and under Danish law meticulous applied, caveat emptor principle requires caution on the part of the buyer to carefully having clarified in the SPA, or an SPA appendix, which information has been received, and specifically if certain relevant information has not been received, as part of the due diligence process;
- arbitral tribunals are increasingly including fairness considerations in their deliberations rather than solely applying strict legal principles. Thus, the more precisely the SPA can be formulated, the more difficult it becomes for the arbitrators to set aside the wording in favour of fairness considerations;
- Danish law contains relatively extensive representation principles. Thus, the contracting parties need to appreciate the risk that acts and omissions of other persons might be attributable to them unless the SPA is extremely specific;
- no discovery or disclosure procedure is recognised in Danish law. In international arbitration cases, a 'Redfern process' will often be carried through, but at least civil law arbitrators tend to adopt a restrictive approach. This is often to the disadvantage of the selling entity, as the seller normally will not have access to relevant material pertaining to the target company. Consequently, the seller should consider contractual protection from ending up in a dispute with no possibility of access to relevant material; and
- more and more frequently warranty breaches are covered by W&I insurance. As this is still a relatively new product on the Danish market, the insurance companies seem to have been willing to accept also debatable claims. In 2019, a large arbitration case between a buyer and an insurance company was settled by way of the insurance company paying the entire sum insured. The settlement was publicly recorded, but the rationale behind the settlement is not publicly available.
With regard to earn-out disputes and purchase price adjustment disputes, these are often handled by an alternative dispute resolution mechanism containing the obligation of the parties to appoint an independent accountant to deal with the accounting issues and render a decision on this aspect of the dispute. This is indeed a practical solution when the amounts in question are relatively modest.
Typically, the independent accountant clauses contain a dividing of the task between the independent accountant and an arbitral tribunal, with the tribunal handling the legal and contractual issues related to the dispute. While logical from a theoretic point of view, this division of responsibilities is not always appropriate for practical purposes. The parties, therefore, need to carefully consider whether to carve out, for example, disputes above a certain amount or of a certain nature and leave such disputes to be dealt with by arbitration only, with the due process protection that this ensures, and with the possibility of having an auditor appointed as an expert under the auspices of the arbitral tribunal.
Post M&A disputes dealt with by way of arbitration will normally be finalised within one to two years even though they are large and complicated. Similar disputes that are litigated might be under way in the court system for more than five years.
The remedies available to a buyer depends on the contractual scheme. Often the parties will have included contractual provisions whereby the buyer waives certain remedies (e.g., claims for proportionate reduction of the purchase price and rescinding the agreement), basis of liability (e.g., ordinary negligence) and claims (e.g., claims under a predetermined threshold), and whereby the seller on the other hand accepts to be liable for some warranty breaches on a strict liability basis and with certain predetermined amounts (penalty payments).
Such contractual provisions aside, the available remedies are the same as described above with respect to shareholder disputes.
Often the SPA will include clauses regarding discharge or waiver of liability with regard to certain entities or persons and types of liability or claims (see above).
Such contractual provisions aside, the available defences are the same as described above with respect to shareholder disputes.
Arbitration is by far the preferred venue in SPAs for counterparty claims, and Danish arbitration is well-known for its high integrity as well as a very efficient handling of M&A disputes.
Normally, the SPA will include jurisdiction and choice of law clauses and thus cross-border transactions should not be difficult to assess in Denmark if the dispute is between the contracting parties (i.e., the seller and the buyer). However, if claims are based on tort law, jurisdiction and choice of law become complex and relevant.
At present, there are several cases pending before Danish courts where choice of law or jurisdiction issues are being tested.
Year in review
During the past year, several significant cases on management liability have been dealt with by the Danish courts. They have established the rather reluctant approach by the Danish courts to make management responsible for mistakes. See Section III.i.
Outlook and conclusions
Several post-M&A disputes are currently pending before the Danish courts and are expected to give an indication as to how the courts will handle post-M&A disputes that are tort-based and not SPA-based. This will, without doubt, be interesting and have a tremendous impact on the way SPAs and, for example, shareholder agreements will be negotiated and drafted in the future.
1 Kolja Staunstrup and Frank Bøggild are partners and Linnea Klingberg-Jensen is a senior attorney at Kromann Reumert.
2 The Danish Institute of Arbitration, 'Statistics 2019': https://voldgiftsinstituttet.dk/en/about/statistics2017/.
3 Jahannus Egholm Hansen and Christian Lundgren, Køb og salg af virksomheder, 6th edition, pp. 62–65.
4 The Foreign Affairs Committee, Consultation question J: www.ft.dk/samling/20181/almdel/uru/samspm/j/index.htm.
5 Hansen and Lundgren, pp. 65 and 709.
6 The decision was rendered on 22 June 2020, Case Nos. 209/2018 and 214/2018.
7 The decision by the Copenhagen City Court was rendered on 4 September 2020.
8 The Danish Administration of Justice Act, Chapter 23a.
9 The Courts of Denmark, Class action requirements: www.domstol.dk/alle-emner/anlaeg-civil-sag/gruppesoegsmaal/.
10 Hansen and Lundgren, pp. 37–38.