The Technology M&A Review: Denmark
Denmark has experienced an increase in M&A technology transactions, especially within highly regulated sectors such as fintech and telecoms, which is partly a consequence of the thriving startup scene producing a consistent stream of innovative new players in these sectors that inevitable attract the interest of more established Danish and international businesses. Further, due to increased regulation in the technology sector, and traditional technology companies expanding activities into other highly regulated sectors, the complexity of these M&A technology transactions is notably increasing.
With a higher volume than before and due to the implementation of a less-strict prospectus regime, small cap technology companies are fairly successful in raising capital on First North Growth Market.
Year in review
In autumn 2019, Nets, a leading European PayTech company, and Mastercard, a leading technology company in the global payments industry, announced that Mastercard had entered into an agreement to acquire Nets' account-to-account based services, including clearing and instant payment services, and e-billing solutions for €2.85 billion.
In 2019, DXC Technology (NYSE: DXC), the world's leading independent, end-to-end IT services company, announced its acquisition of the service business of EG A/S, one of the leading integrators of Microsoft Dynamics 365 in the Nordic region.
Legal and regulatory framework
The following laws and regulations govern the behaviour of buyers and sellers within the Danish technology M&A market:
- the Danish Companies Act, which regulates all the general rules in the creation and functioning of companies;
- the Danish Competition Act, which sets the Danish legal groundwork for the protection of competition, including merger control;
- the Danish Company Taxation Act on all tax-related legislation regarding Danish limited liability companies;
- the Danish Act on Corporate Acquisition concerning salaried employees' legal position in an acquisition; and
- the Danish Copyright Act on the protection of intellectual property (IP) rights.
Furthermore, the respective laws and regulations of the European Union also directly or indirectly apply within the Danish legal system, and as such potentially have an impact on the legal and regulatory framework of the Danish technology M&A market.
There are limited types of activities that require separate permits and licences that must be obtained from the Danish authorities, such as for, inter alia, financial services, insurance brokers and gambling providers. Therefore, certain regulatory requirements in the finance and insurance sector do impact on the technology sector in terms of licences and permits required for the conduct of business.
Key transactional issues
i Company structures
Business activities in Denmark can be conducted by individuals through an individual enterprise or by several individuals as a partnership. However, liability for these types of business activities comes with personal liability for the individuals involved, and therefore most business activities in Denmark are conducted through limited liability companies by way of a public limited liability company (Aktieselskab, A/S) or a private limited liability company (Anpartsselskab, ApS ), so that the shareholders' liability is limited to the amount invested in the company.
The limited liability company is also the company form that most often constitutes a target in a Danish M&A transaction in the Danish market.
The establishment of a public limited liability company requires a minimum capital of 400,000 Danish kroner, which must be paid in cash or contributed as assets. It is based on a mandatory two-tier system with either a board of directors with a minimum of three persons and at least one managing director, or a supervisory board with a minimum of three persons and at least one executive director.
The establishment of a private limited liability company, on the other hand, requires a minimum capital of 40,000 Danish kroner, thereby making it the corporate vehicle used more often by entrepreneurs and startups because of the lower share capital requirement. A private limited liability company may have a sole managing director, or a board of directors with one or more members and a managing director.
Denmark recently decided to remove the opportunity to establish new entrepreneurial limited companies (Iværksætterselskab, IVS) that made it cheaper for entrepreneurs and others who wanted to create a limited liability company, because this type of company form only required a minimum capital of 1 Danish krone. Furthermore, all existing entrepreneurial limited companies must be converted into private limited liability companies before 15 April 2021.
ii Deal structures
The deal structure in M&A transactions in Denmark is typically a share purchase or asset purchase, whereas a share purchase is the most common deal type in the Danish technology M&A market. Asset purchases are used in connection when dealing with an insolvent or partly insolvent company, or in instances where a separate activity or business unit is defined and segregated and sold.
The volume of M&A transactions regarding listed companies is somewhat low. Insofar as a listed company is to be acquired, obligatory capital market rules (local marketplace rules, Danish rules and EU capital markets regulations) apply, introducing the necessity of tender offers. After a successful tender offer, purchasers normally immediately initiate a delisting process in accordance with the marketplace rules.
Typically, mergers are not commonly used as a means of conducting deals in the Danish market; however, mergers may at times be performed as a post-closing action in connection with, inter alia, the reorganising of a corporate structure.
The involvement and role of advisers in M&A transactions on the Danish market largely depend on the size and nature of a transaction and the characteristics of the target. Larger transactions often engage a diversified set of advisers, including investment bankers, who usually lead the process and coordinate the work of the advisers responsible for respective subject matters (e.g., legal, tax, financial, environmental). On the other hand, in smaller transactions, legal advisers are at times the only advisers who coordinate the process.
iii Acquisition agreement terms
The most important documents governing a Danish technology transaction are the following:
- a letter of intent: a short term sheet document in which the parties agree to the main terms of the proposed transaction, including but not limited to the purchase price, purchase price regulation, specific assets and post-closing covenants, such as non-competition clauses;
- a share purchase agreement, in the case of an acquisition of all shares;
- an asset purchase agreement, in the case of an acquisition of assets;
- an investment agreement, in the case of an injection of new capital into the target;
- a shareholders' agreement, in the case of partial acquisition or investment of shares, or both; and
- a closing memorandum: a document signed by all the parties documenting that the conditions for closing are complied with (or waived) and that the necessary steps for closing have been taken.
The key provisions of share and asset purchase agreements in M&A transactions in the Danish market customarily have the following features:
Purchase price and purchase price regulation
A purchase price consideration will be in either cash or shares (or a split of these two assets). In the majority of cases the consideration is 100 per cent cash.
The purchase price may be split up in two types of payments: an upfront payment at the time of closing, and following earn-out payments conditioned on measurable conditions such as earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation and amortisation (EBITDA) or revenue. Typically, the earn-out payments are to be paid in steps after an accounting year based on the figures for that specific accounting year for the earn-out period.
The earn-out payment regulations also include detailed provisions regarding administration, government and decision making in the target, ensuring that the purchaser does not alter the business and administration of the target in such a manner that effectively hinders the target from reaching the earn-out condition thresholds. If the target is dependent on key shareholders (typically management or founders, or both), a stay-on mechanism in the earn-out payment is included to ensure retention.
The payment on closing shall include closing payment adjustment mechanisms such as locked box provisions or closing balance sheet provisions.
Representations, warranties and specific indemnities
The scope of representations and warranties largely depends on the character and negotiation position of the parties. While representations and warranties typically cover the whole range of a target's business activity, the level of their thoroughness differs depending on the transaction at hand, and is often higher in the case of strategic sellers as compared to private equity (PE) sellers. In transactions involving PE firms (either on the sell side or the buy side), we are seeing an increasing applicability of warranty and indemnity insurance; however, these types of insurance are still fairly new to the Danish M&A-market.
The most common closing condition is the requirement to obtain a merger clearance from the Danish Competition and Consumer Authority, which is required if the following revenue thresholds have been met:
- the aggregate Danish revenue of the parties to the transaction exceeded 900 million Danish kroner and at least two of the parties to the transaction has a total revenue in Denmark of that exceed 100 million Danish kroner; or
- at least one of the parties to the transaction has a total yearly revenue in Denmark exceeding 3.8 billion Danish kroner and at least one of the parties to the transaction has a worldwide revenue exceeding 3.8 billion Danish kroner.
Other typical closing conditions involve approval from key customers and suppliers if contractual arrangements contain change of control provisions and new service contracts with the executive managers of the target. Finally, the purchaser will seek to resolve material findings in the legal due diligence by conditioning closing on the remedy of these findings.
The wording of the contract will typically contain provisions limiting the seller's liability. As a main rule, a person cannot ringfence itself from liability in the case of wilful misconduct and fraud. Furthermore, in most cases, a person cannot fence him or herself from liability due to gross negligence.
By law, in most instances, the standard statute of limitations is three years. For tax liabilities, the time varies. Following this, the purchaser and seller shall agree on a contractual statute of limitations, which often will include sufficient time for the target to audit two annual accounts.
De minimis, baskets and caps are also agreed upon. Baskets will typically be tipping baskets.
Insofar as the seller is a holding company, the purchaser will try to ensure that the ultimate owners guarantee the cash balances in the holding company in the warranty period; these cash balances may be reduced gradually over the warranty period.
It is standard to include non-competition clauses for up to three years for the selling companies and ultimate owners, effectively hindering the seller and its owners from competing with the business just sold. Fixed liquidated damages are typically agreed, as it is difficult to assess the actual loss of the target or buyer when breaching a competition clause. It is also standard to include the right of the target to seek appropriate injunction relief or any other temporary measures to stop the breach of a competition clause and the consequences thereof without providing any security.
A non-solicitation clause may be agreed between the seller and buyer in which the seller and its affiliated parties agree not to hire any current employee of the target or any employee of the target who has left the target, or in any way cause or encourage such employees to leave the company. Such non-solicitation clause is, however, limited to a period of six months.
The financing of M&A transactions varies according to the type of purchaser. The Companies Act includes provisions hindering a target from participating in the self-financing of purchasing its own shares (with certain exceptions), meaning that the purchaser must finance its acquisition by either equity or the utilisation of new or existing financing facilities, even by pledging the target's shares to a third-party liquidity provider.
v Tax and accounting
Holders of shares not resident in Denmark are normally not subject to Danish taxation on any gains realised on a sale of shares, irrespective of the ownership period, subject to certain anti-avoidance rules seeking to prevent taxable dividend payments being converted into tax-exempt capital gains. If an investor holds the shares in connection with a trade or business conducted from a permanent establishment in Denmark, gains on shares may be included in the taxable income of such activities.
vi Cross-border issues
Denmark has a very liberal attitude towards foreign investment, and therefore very little legislation specifically governing foreign investments. Foreign investors are, therefore, generally treated equally to Danish investors, and are in broad terms able to invest in the same sectors and companies as domestic investors.
A few exceptions do, however, apply. For example, war material can only be produced or assembled with a permit from the Danish Ministry of Justice. Besides a permit to produce war materials, a company with a desire to produce or assemble war material in Denmark must have an additional distinctive permit if the ownership or management structure in the company is, or will be changed to, the following:
- if the ownership or management structure in the company that produces war material has or will have its registered address outside of Denmark;
- if the company gets directors or employees authorised to sign on behalf of the company who are not Danish citizens;
- if the percentage of the company's board of directors who are Danish citizens is or will be less than 80 per cent;
- if the share capital is or will be less than 60 per cent owned by Danish citizens;
- if foreigners through their ownership of the share capital represent or will be representing more than 20 per cent of the votes in the company; or
- if foreigners moreover through the possession of the share capital or in any other way have or will have a determining influence in the company.
Furthermore, a Danish company producing or assembling war material must get a distinct permit from the Ministry of Justice if the company wants to obtain a loan from, for example, a foreign investor or bank.
Furthermore, the Danish part of the continental shelf belongs to the Danish state and can. as a result thereof. only be explored or exploited of others with a permit or licence given by the state. Besides the above, foreign investors who are not domiciled in Denmark need to obtain a permit from the Ministry of Justice before being able to acquire real estate in Denmark. The possibilities to obtain such permits are limited. Companies domiciled in an EU or an EEA Member State may, however, purchase real estate in Denmark without obtaining the permission of the Ministry of Justice if a company has its head office or registered office in the EU or in an EEA Member State; and the company has set up or will set up subsidiaries or agencies, or will provide services in Denmark.
Finally, Denmark is subject to the EU Foreign Direct Investment Screening Regulation,2 which introduced a more integrated approach to screening in the EU to protect critical technologies and critical infrastructure.
i Main legislation
The main legislation regulating IP rights in Denmark are:
- the Danish Act on Copyright of 23 October 2014;
- the Danish Act on Patents of 29 January 2019;
- the Danish Act on Utility Models of 29 January 2019;
- the Danish Act on Designs of 29 January 2019;
- the Danish Act on Trademarks of 29 January 2019; and
- the Danish Marketing Practices Act of 17 January 2020.
In addition to the above, a number of European and international regulations relating to IP protection are also effective in Denmark. It should be noted that at the European level, IP protection is consistent and harmonised among Member States, and Denmark's law regarding IP rights is also aligned with international regulations.
ii Recent rulings
Recent rulings that are of importance for the protection of IP include the following.
Coop Danmark A/S v. K H Würtz by Kasper Heie Würtz3
This case invovled an infringement of copyright through the use and depiction of parts of the author's ceramic tableware in marketing and on food packaging.
This case is significant as it confirms what has so far has been common practice in advertising – to use copyrightable works without the consent of or payment to the authors, as long as the object is not well known or eye-catching, but is used solely for a practical purpose. The decision states that such use does not constitute a copyright infringement – regardless of the copyright owner's consent to the use – if the use of a work protected by copyright, even in a commercial, marketing context, is of minor importance. Thus, the assessment will depend on the factual circumstances at issue.
In the case at issue, the Court stated that the defendant's use constituted a copyright infringement: use of tableware in the presentation of the food that was the subject of the advertisement.
Descendants of the well-known Danish physicist H C Ørsted v. the Danish energy company Ørsted and its affiliates using the name Ørsted 4
This case concerns whether descendants of the well-known Danish physicist H C Ørsted (the Court found that Ørsted is a protected surname in Denmark) can prevent the defendant companies from using Ørsted as part of their company names and trademarks.
Despite the fact that defendant companies used the name Ørsted without using the first name or the initials of H C, the Maritime and Commercial Court found that, considering H C Ørsted's close connection to the basis for electricity production, which is the defendants' main business area, the trademark Ørsted was not excluded from registration, as it referred to the long-deceased scientist H C Ørsted and did not refer to the family of Ørsted in general.
The plaintiffs applied for permission to appeal the case directly to the Supreme Court. The Supreme Court permitted this appeal on the grounds that the case raises a fundamental question of general significance concerning the understanding of the rules of the Danish Act on Names and their interaction with the rules of the Act on Trademarks, the Companies Act and the Danish Act on Internet Domains.
IJH A/S v. Morsø Sko Import A/S5
This case concerns whether IHJ A/S's rights under the Act on Copyright and the Marketing Practices Act for a rubber boot, RUB 1, designed by renowned designer Ilse Jacobsen, had been infringed by Morsø Sko Import A/S's marketing of a rubber boot called the VRS rubber boot.
Following a judgment of the European Court of Justice of 12 September 2019 (Cofemel ), the Supreme Court stated that clothing designs can, depending on the circumstances, be qualified as works of applied art that enjoy copyright protection. However, in the circumstance that clothing designs generate, over and above their practical purpose, a specific and aesthetically significant visual effect, does not, in and of itself, make it possible to determine whether that design meets the requirements of originality. The same applies in the event that clothing designs are the result of manufacturing concepts and processes recognised as being innovative in the fashion world.
The Supreme Court further stated that the same must be assumed to apply to footwear. The Supreme Court did not find grounds to establish that RUB 1 met the requirement of originality, which was a condition for qualifying the boot as a work of applied art, although an expert opinion statement determined that RUB 1 was an expression of an independent creative effort. RUB 1 was therefore not a work that enjoys protection under copyright law.
The Supreme Court further stated that RUB 1 possesses such a degree of distinctiveness that it enjoys protection against imitations under the Marketing Practices Act. However, the VRS rubber boot differed from RUB 1 to such an extent that the marketing of the VRS rubber boot did not constitute an infringement of JHI A/S's rights under the Marketing Practices Act. Thus, the plaintiff's claims were dismissed.
iii Specifics of technology-related transactions
As regards the specifics of technology-related transactions, particular attention should be paid to:
- the limited lifetime of particular IP rights (patents, designs);
- potential assistance from the seller after an acquisition of IP rights to provide updates in relevant databases with respect to the current owner of IP rights;
- co-ownership of particular IP rights; and
- if the subject of a transaction is a computer program, the aspect of providing the source codes for that computer program.
There are no statutory rules on non-compete or non-solicitation-of-customers clauses for executives or directors (there are only restrictions on employees), so there are no legal restrictions. However, restrictive covenants can be subject to a judicial (fairness) trial, and therefore we do not usually see these clauses having a time limit of longer than 18 to 24 months after the termination date.
For white collar employees, the rules in the Danish Restrictive Covenants Act apply if agreed in an employment contract. The legal maximum time frame for the restrictive covenants is 12 months after the termination date if only one clause is agreed upon, and six months if both non-compete and non-solicitation-of-customers clauses are in place. It is a requirement that the employee is compensated with either 40 or 60 per cent of his or her salary depending on the length of the obligation and the number of clauses in place (24 or 16 per cent if an employee obtains other suitable employment).
Non-solicitation-of-employees clauses (no-hire clauses or no-poach agreements) are as a rule not allowed under Danish law unless they are entered into in connection with a transaction (and in this situation, the prohibition can only apply in relation to employees with more than three months' service). In such situation (business transfers), no-hire clauses can be entered into for a maximum duration of six months.
All immaterial and IP rights that an employee may create, discover or develop, either alone or in collaboration with others during his or her employment, through the performance of his or her employee's duties, or that relate to such duties or to the business of the target, are, as a main rule, irrevocably assigned from the employee to the company. The employee is entitled to compensation for this, which will be considered as a part of the employee's salary unless the invention or creation is deemed to have a significant value that cannot be considered as included in the salary. As for the general terms, white collar employees will be covered by the rules of the Danish Salaried Employees Act and the terms agreed in the individual contract. Blue collar employees are covered by the terms agreed in an individual contract and in some cases also a collective bargaining agreement (CBA) (which in some cases also covers white collar employees). In relation to an asset transfer, all employees are required to transfer, and all terms and obligations will transfer automatically as well. In relation to CBAs, a CBA will also transfer automatically unless specifically denounced within a specific deadline in accordance with the Danish TUPE Act,6 Section 4a.
Litigation with former employees is not standard, but nor is it unusual. Most often, a severance agreement is made whereby any disputes are settled.
Transactions and due diligence regarding Danish targets will entail obligations for involved parties established in the EU (the target, buyer, seller and all the advisers participating), and they will be governed by Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing the General Data Protection Regulation (GDPR).7
In connection with executing the due diligence of a target in which a purchaser or its advisers review the legal documentation of the target, the documentation in the data room will typically contain personal data about the target's employees.
Disclosure of information in connection with a purchaser's due diligence must have a legal basis in the personal data regulations, including the GDPR.
According to a statement made by the Danish Data Protection Agency (before the GDPR was introduced), ordinary, non-sensitive personal information may in most cases be disclosed in connection with due diligence based on the parties' legitimate interests, provided that a purchaser and its advisers have entered into confidentiality agreements. In contrast, sensitive information may not be passed on without the due and proper consent of the relevant person.
It is, in all instances, recommended the certain personal information such as, inter alia, social security numbers, be anonymised.
Disclosure of personal data to a buyer (or its advisers, or both) based in any country outside the European Union will be deemed to be a third-party transfer of information that requires further action to be in compliance with the GDPR.
Regarding the transaction itself, transactions involving shares or a complete transfer of the totality of a company's assets are in most cases deemed a succession, and as such a disclosure has not occurred (however, the due diligence disclosure may still have occurred); thereby, it is not a disclosure requiring consent from relevant persons. Partial sales of a company's assets, including personal information (such as registers of customers and employees), may be deemed to be a disclosure of personal information, and thereby would require due and proper consent from the relevant person unless based on the parties' legitimate interest.
Technology startups, in most cases, utilise the possibility of subsidies. These subsidies will typically be granted to projects that the subsidy provider finds innovative and new. These subsidies are earmarked to salaries for developers and to other similar costs.
Typically, these subsidies do not entail any commercial restrictions on utilisation or future exits.
The purchaser will in most cases require legal due diligence to be conducted by its legal advisers. In some instances, we do see a seller's legal representatives outline a red flag vendor due diligence report to attract potential purchasers.
Due diligence comprises three stages: retrieval of information, review and outlining of the due diligence report.
The retrieval of information includes the building of a virtual data room (often based on the purchaser's request list), searching on public registers, online requests in the data room and a 'live' Q&A meeting with the seller, the target's management and other key personnel.
A due diligence report may be limited to only contain red flags, that is, findings that have a material impact on the feasibility of a proposed transaction.
Legal due diligence in M&A technology transactions must focus on title and rights, including IP rights. Further, in our experience data in the context of the GDPR has become increasingly important. With respect to title, rights and data, we often see that additional information or Q&A sessions are needed to obtain the necessary in-depth knowledge to assess those matters. A purchaser, as well as the purchaser's advisers, shall obtain from the management and inventors information on IP assets within the company, how these are protected and what measures have been implemented to ensure that the target's use of the IP does not infringe other person's IP rights.
A specific focus shall be on the agreements under which the target acquired or uses IP and the proper registration of all key IP in the relevant registers. Pending and threatening litigation with respect to IP is an additional area of concern. Where a technology due diligence assessment has been performed, it tends to be beneficial to cooperate with the technology due diligence team regarding certain aspects.
The increasing amount of activity in regulating the technology industry calls for an increased focus on due diligence of the general compliance of targets, and specifically regarding specific industry-related regulations.
Documents governing M&A transactions in the Danish market usually provide that disputes are to be resolved through arbitration rather than the ordinary courts. The rationales behind this are, as a general rule, that arbitration is normally faster than court proceedings, the deeper subject matter expertise of arbitrators compared to court judges and the confidential nature of arbitration.
Usually the decision as to whether an arbitration should be conducted in Denmark or not depends on the value of the transaction (due to the underlying arbitration costs) and the origin of the parties to the transaction.
Arbitration in Denmark may be conducted either as an ad hoc or institutional arbitration, depending on the arbitration clause. Institutional arbitration under the rules of the Danish Institute of Arbitration8 is normally preferred in M&A transactions.
Denmark is a party to the New York convention: hence, foreign arbitration awards rendered in a country that has signed the Convention are, as a general rule, recognised and enforced in Denmark.
By contrast, a judgment rendered by an ordinary foreign court will not automatically be recognised and enforced in Denmark, unless the parties have not entered into a choice of law and venue agreement referring to the laws and courts of this country, or Denmark is bound by an international treaty to recognise the judgment.
As in other jurisdictions, the consequences of the covid-19 outbreak in the spring of 2020 in Denmark are neither fully developed nor understood at the time of writing.
However, from a major fall in M&A activity in the first months of the covid-19 outbreak in Denmark, the market seems to have stabilised, and going into the autumn 2020 (including in the M&A segment) appears to be rising.
The continued development of EU regulations within the technology sector is a driver for business opportunities for new and existing technology companies, and also for those firms providing legal services revolving around M&A: there is, inter alia, a greater focus on regulatory due diligence and reviews of compliance with the regulations (for example, the GDPR and arising fintech regulations).
Learning from the covid-19 pandemic, we expect to see developments in, or at least an increase of, legal discussions around negotiation tables regarding material adverse change clauses for the period between signing and closing. What is to be defined as a material adverse change? Would a new outbreak in covid-19 (or other similar pandemic) trigger a material adverse change, and under what conditions? Is it a material adverse change if the pandemic does not directly influence the market of a target, but on the other hand has an effect on the production possibilities and operation of the target?
Due diligence should also review technology companies' terms and conditions in regards of the possibility of postponing delivery due to pandemics. We see terms and conditions provisions regarding force majeure that do not include the covid-19 pandemic. Being a highly relevant force majeure, legal due diligence should ensure that a target's material contracts contain appropriate provisions protecting that target in the event of further outbreaks.
1 Ted Rosenbaum is a senior associate and Filip Patrzalek Kaas is a junior associate at Bird & Bird.
2 EU Foreign Direct Investment Screening Regulation (2019/452).
3 Danish Supreme Court, Coop Danmark A/S v. K H Würtz by Kasper Heie Würtz, U.2019.1109 H, 18 December 2018.
4 Danish Maritime and Commercial Court, Descendants of the well-known Danish physicist HC Ørsted v. the Danish energy company Ørsted and its affiliates using the name Ørsted, U.2020.216 H, 11 November 2019.
5 Danish Supreme Court, IJH A/S v. Morsø Sko Import A/S, U.2020.2817 H, 10 June 2020.
6 Transfer of Undertakings (Protection of Employment) Act.
7 Directive 95/46/EC.