The Mergers & Acquisitions Review: Iceland

Overview of M&A activity

In 2020, the covid-19 pandemic has affected the Icelandic economy in many areas. The tourism sector, which had greatly helped the Icelandic economy after the financial crisis of 2008, almost completely collapsed after the outbreak of the virus. The turnover of Icelandair decreased by 81 per cent in the third quarter of 2020 compared to the previous year and the air traffic in the control area around Iceland was in September 2020 less than a third than it was a year ago. This will most likely mean that the planned resurrection of a new WOW air will not happen, at least in the near future, and the launch of the announced new airline Play also appears to be halted. One transaction in this sector was concluded just prior to the crisis as Avia Solutions Group from Lithuania acquired Blue Bird Cargo, a cargo airline based in Iceland. As a direct consequence of the coronavirus situation, both Icelandair and the cargo and wet lease company Air Atlanta Icelandic have decided to scrap some models of their aircraft fleets. PAR Capital Management has divested large portions of its shares in Icelandair and it did not subscribe to the new shares issued in order to secure future operations. In early April 2020, the 75 per cent divestment of Icelandair Hotels to Berjaya Land Berhad from Malaysia was finally concluded.

However, despite such discouraging news, there is still some M&A activity. The country's largest listed company, Marel, which produces fish- and meat-processing machinery, has purchased the German producer of cutting technology TREIF Maschinenbau GmbH for €128 million in cash and 2.9 million shares in Marel in September 2020, resulting in a purchase price of over €140 million. Earlier this year, Marel refinanced €700 million of its debts with a syndicated loan.

In the energy sector, HS Orka, the largest privately held electricity company with a market share of 8 per cent, remains a sought-after target. HS Orka operates geothermal power plants in the area of the famous tourist destination Blue Lagoon. Financial investor Ancala Partners and Jarðvarmi, a cooperative venture of 14 Icelandic pension funds, acquired all shares in HS Orka, each holding 50 per cent.

This year, there are also a number of inbound transactions as, for example, French Gaztransport & Technigaz purchased all shares in Marorka, a company specialising in the optimisation of energy consumption on ships for an undisclosed amount.

As in previous years, the four publicly listed real estate companies, Reginn, Reitir, Eik and Heimavellir, have strengthened their property portfolios. In August 2019, property development company Kaldalón was successfully launched to the First North segment of the stock market and the company's capital was raised to 3.7 billion kronur in this context.

In the area of public M&A, Guðmundur Kristjánsson concluded the purchase of the majority of shares in seafood company Brim by acquiring another stake in Brim for 6.5 billion kronur.

There is some ongoing debate regarding the renewal and improvement of the country's infrastructure. Because hydropower and geothermal energy make up the largest portion of the energy market, it has taken some time to set up Iceland's first wind farms; however, there are now a number of projects around the island. Also, several harbours are being extended, and there are promising signs regarding the Finnafjord Port Project in North East Iceland, a joint effort between German port operator Bremenports and several public bodies in Iceland.

Such infrastructure investment could create opportunities for international and domestic investors alike. Several Icelandic pension funds have thus set up an infrastructure investment fund that aims at financing infrastructure projects in public–private partnerships. In September 2019, they acquired a 13 per cent stake in HS Veitur, which is active in the field of district heating and electricity and water distribution.


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General introduction to the legal framework for M&A

The Icelandic legal system is similar to the legal systems of other Nordic countries, and is particularly influenced by the legal systems of Denmark and Norway. However, it is also influenced more by case law than its neighbouring Nordic jurisdictions, and thus its legal system is closer to a common law system. Even though Iceland is currently not aiming for accession to the EU it has, together with Norway and Liechtenstein as the other European Free Trade Association (EFTA) states that are also part of the European Economic Area (EEA), adopted much of the EU legislation owing to EEA rules. Finally, the Third Energy Package was adopted in Iceland in 2019, and was subject to very controversial debates.

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

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

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

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

The main rules for public takeovers are to be found in Chapter 10 of the Act on Securities Transactions. A mandatory offer to the other shareholders shall be made if a shareholder has acquired 30 per cent of the votes in a listed company, either by its own shareholding or by acting in concert with other shareholders. A mandatory offer shall also be made if a shareholder has gained the right to appoint the majority of the board members. A mandatory takeover bid must be made within four weeks after the shareholder knew or should have known that the relevant threshold had been crossed. The offer period ranges from four to 10 weeks. The decision to make a voluntary takeover offer must be announced without undue delay. If a target company faces financial problems, the Icelandic Financial Supervisory Authority can grant an exemption from the duty to make a mandatory offer to a party that wants to save the company from serious financial problems or that wants to take part in the financial restructuring of the company if its board agrees to this. The breakthrough rule has not been implemented in Iceland. While the Financial Supervisory Authority monitors compliance with these rules, the rules of the NASDAQ OMX Iceland stock market regulate the trading of securities in listed companies.

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

Strategies to increase transparency and predictability

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Developments in corporate and takeover law and their impact

Owing to the fact that only a handful of companies remained listed on the Icelandic stock exchange during the turbulence following 2008 and the modest size of the market in general, it is unsurprising that there were few changes in the legislation on takeovers in Iceland after the modernised Act on Securities Transactions entered into force in November 2007. Since then, only minor amendments have been made.

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

Us antitrust enforcement: the year in review

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Foreign involvement in M&A transactions

In August 2019, Norwegian listed food company Orkla ASA purchased a 20 per cent share in sweets producer Nói-Siríus hf. Established in 1920, Nói-Siríus hf is very well known in Iceland as it was one of the first domestic brands in its field.

Norvik, one of the largest family-owned companies in Iceland with interests in real estate, port operations, DIY stores, timber production and IT-start-up companies, plans to increase its foreign investments, in particular in Eastern Europe, where it already has several operations.

Pharmaceutical company Alvogen, which was founded by former Actavis CEO Robert Wessman, increased its capital by €100 million in the summer of 2020. The majority in Alvogen is held by CVD Capital Partners and Temasek Holdings, Singapore's sovereign wealth fund.

Significant transactions, key trends and hot industries

While Iceland was for decades known only for its seafood and energy-related industry, it now has a lively start-up scene, which is intended to fuel the future growth of the Icelandic economy. The hot industries are healthcare, IT and many research-driven ventures, such as Carbon Recycling International, which produces green ethanol from CO². There are also companies such as bicycle parts producer Lauf forks and furniture maker NORR11.

Another hot industry is represented by companies such as Skaginn 3X and Valka, which, like Marel, are producing turnkey solutions to the fish- and food-processing industries and excel at their high-tech-approach. In particular, Skaginn 3X was successful in marketing its solutions on the Russian market.

Centara, a subsidiary of the more established software firm Hugbúnaður hf, purchased Wise Lausnir from AKVA group in Norway, paying 1.1 billion kronur. Another software firm, Hugvit, is also increasing the scope of its operations and is another good example of the Icelandic contribution to this very international industry.

Telecom and media company Sýn has purchased all shares in Endor ehf, which specialises in supercomputing and has, for example, BMW among its business partners.

At the same time, more established industries seem to struggle. A number of pension funds that participated in the silicon plant built by German PCC SE, refused to participate in yet another US$40 million cash injection. It remains to be seen when this US$360 million plant will turn profitable.

Financing of m&a: main sources and developments

The new banks, Landsbankinn (successor to Landsbanki), Arion banki (successor to Kaupthing) and Íslandsbanki (successor to Glitnir), which took over domestic businesses during the banking crisis in 2008, still have very strong market positions and continue their profitable operations. The privatisation in the banking sector will most probably also impact the financing of deals.

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

Employment law

The Transfers of Undertakings Directive2 was transformed into Icelandic law in 2002. The Icelandic Act on the Legal Position of Employees in the case of a transfer of an undertaking is applicable if a business unit is transferred in such a way that it maintains its characteristics (i.e., the structure of assets that are used in an economic objective regardless of whether it is a main or ancillary part of the operations). If such a transfer occurs, the rights and obligations of the transferor transfer to the purchaser, and the purchaser shall observe the remuneration and work conditions according to the collective labour agreement until it expires under, or is terminated or superseded by, a new collective labour agreement. The same principle applies in the case of a transfer regarding a bankrupt entity, with the exception that rights because of non-performance by the assignor do not transfer in this case.

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

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

Tax law

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

Because Iceland is not a Member State of the EU, EU Directive 2009/133/EC on mergers is not applicable in Iceland.

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

Foreign individuals and legal entities have to pay a withholding tax on dividends received. The applicable rate is 20 per cent for legal entities and 22 per cent for individuals. If dividends are paid from an Icelandic corporation to a foreign limited liability company in the EU or EEA, the withholding tax can be partly or fully refunded after a tax assessment. If a tax treaty is applicable, the withholding tax rate may also be reduced. Interest payments by an Icelandic company to a non-resident are generally subject to withholding tax. The tax rate is 12 per cent. If the recipient is a legal entity, the tax might be reduced according to a tax treaty to which Iceland is party. If the recipient is an individual, a small tax-exempt amount is applicable. In a Supreme Court judgment of 2012, it was ruled that interest paid on a loan taken in an acquisition company to finance the acquisition of shares in the target company and that was merged together with the acquisition company in the target company is not deductible.

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

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

Competition law

Merger control proceedings are governed by the Icelandic Competition Act, and a notification of a merger is required if the combined revenues of the merging companies reach 3 billion kronur and if at least two of the merging parties have a revenue in Iceland of at least 300 million kronur. For the determination of the revenue, parent companies and subsidiaries are also relevant if they are directly or indirectly controlled by the merging companies.

If a merger has occurred that does not meet the above requirements for triggering a notification duty, but the relevant combined revenue is 1.5 billion kronur and the Icelandic Competition Authority is of the opinion that the merger may still reduce effective competition, it may order the merging parties to submit a notification of the merger.

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

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


Given the current situation, the economic outlook for Iceland is rather unclear. However, despite the severe downturn in the tourism sector, the Icelandic state, pension funds and private investors and funds focus on highly innovative companies and at the same time try to improve Icelandic infrastructure to be prepared for the next expansionary phase.

As one of the first countries to launch a coronavirus-tracing app and a capable landscape of test centres and infection-tracing teams, Iceland seems to be managing the covid-19 pandemic relatively well and should return with some strength from the crisis as it now tries to prepare the change of the island's economy towards a more green and sustainable future.

The general investment climate is, therefore, still positive, and the government, which has been in office since the parliamentary elections held in autumn 2017, is also pursuing many long-term projects that should help to keep Iceland in upcoming years within the group of European countries that are well prepared for the future.


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

2 Directive 2001/23/EC.

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