The Technology M&A Review: Sweden
Sweden 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, which inevitably attracts the interest of more established Swedish and international businesses.
We expect to see a boost in activity and a rise in the number of M&A transactions in software, e-industries such as e-commerce, e-pay, e-learning, e-gaming and e-health as well as data-rich industries, including data centres, data and cybersecurity, virtual conferences, data analytics and logistics. New approaches and actions adopted within and post the global pandemic will accelerate these markets, resulting in more M&A transactions.
Year in review
In June 2020, Evolution Gaming Group AB, a Sweden-based and listed video-streamed live dealer gaming operator agreed to acquire NetEnt AB, a Sweden-based and listed developer and licenser of gaming systems. The transaction valued NetEnt at more than €2 billion. The transaction was structured as a recommended public offer under Sweden's applicable laws and regulations. The combined company will become a leading online gaming provider with a strong platform for international growth and expansion, both organic and through additional acquisitions.
In July 2020, EQT VIII and EQT IX, funds managed by EQT, alongside TA Associates agreed to acquire IFS, a Swedish enterprise software provider, from EQT VII, another fund managed by EQT. The transaction valued IFS at more than €3 billion. EQT funds and TA Associates will support the company with continued investments in its organisation and product capabilities, both organically and through add-on acquisitions. The transaction was subject to customary regulatory approvals and closed at the end of August 2020.
Legal and regulatory framework
Sweden has the following laws and regulations that govern the behaviour of buyers and sellers within the Swedish technology M&A market:
- the Swedish Companies Act, which regulates all the general rules in the creation and functioning of companies;
- the Swedish Competition Act, which sets the Swedish legal groundwork for the protection of competition including merger control;
- the Income Tax Act on all tax-related legislation regarding Swedish limited liability companies;
- the Employment Protection Act concerning salaried employees' legal position in an acquisition; and
- the Copyright Act, Patents Act and Trademark Act on the protection of intellectual property rights.
Furthermore, the respective laws and regulations of the European Union also directly or indirectly apply within the Swedish legal system, and as such impact the legal and regulatory framework of the Swedish technology M&A market.
There are limited types of activities that require separate permits and licences that must be obtained from the Swedish authorities, such as 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 the licences and permits required for the conduction of a business.
Key transactional issues
i Company structures
Business activities in Sweden can be conducted by individuals through an individual enterprise or by several individuals as a partnership. However, the liability for these types of business activities comes with a personal liability for the individuals involved, and therefore most business activity in Sweden is conducted through limited liability companies by way of a public limited liability company, or a private limited liability company, where 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 Swedish M&A transaction in the Swedish market.
The establishment of a public limited liability company requires a minimum capital of 500,000 Swedish kronor, which must be paid in cash. A public limited company must have a board of directors consisting of at least three board members. One of the members must be appointed chair. A managing director must also be appointed.
The establishment of a private limited liability company, on the other hand, requires a minimum capital of 25,000 Swedish kronor, thereby making it a more frequently used corporate vehicle for entrepreneurs and startups because of the lower share capital requirement. A private limited liability company may have a board of directors with one or more members and a managing director.
ii Deal structures
The deal structure in M&A transactions in Sweden is typically made up of a share purchase or an asset purchase, whereas a share purchase is the most common deal type in the Swedish technology M&A market.
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 apply (e.g., local marketplace rules, takeover rules and EU capital markets regulations).
The involvement and role of advisers in M&A transactions on the Swedish 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 (legal, tax, financial, environment, etc.). 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 Swedish technology transaction are:
- the 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 or post-closing covenants, as non-competition clauses;
- the share purchase agreement in the case of an acquisition of all shares;
- the business transfer agreement in the case of an acquisition of assets;
- the investment agreement in the case of an injection of new capital into the target; and
- the shareholders' agreement in the case of a partial acquisition or investment of shares, or both.
In addition, the key provisions in a typical share purchase agreement and business transfer agreement in a Swedish private M&A transaction customarily have the following features:
Price is usually the foremost issue for both parties in a corporate acquisition. In addition to agreeing the headline amount that will be paid for the target shares or business assets, the parties will also need to consider and document in the acquisition agreement a number of related issues, including the following.
- how the price will be satisfied and the form of consideration payable;
- whether the price will be a fixed sum or subject to a price adjustment mechanism;
- when the price will be paid including, in particular, whether payment is to be made in full at the time of completion of the transaction, or if it will be deferred to a later time; and
- if the price will not be paid in full at completion, whether:
- the seller requires any security for the buyer's payment obligations; and
- the buyer expects to be able to set off any warranty or indemnity claims against the deferred element of the consideration.
The main two types of consideration payable in respect of a corporate acquisition are:
- a cash consideration: this is the most common and straightforward form of consideration, where the buyer usually pays a fixed cash sum to the seller in full on completion of the transaction; or
- a non-cash consideration: the most common forms of non-cash consideration are the allotment and issue of shares in the capital of the buyer to the seller and the issue of buyer loan notes to the seller.
In most M&A transactions, the purchase price is typically determined in relation to a target's most recent financial statements. Purchase price adjustments generally shield a purchaser from changes in the value of the target between the date the target was valued and the transaction closing. In this respect, the purchaser and seller must agree on a valuation method and have adopted accounting policies that are similar or that can be reconciled. The purchase price will be in either cash or shares (or a split of these two assets). In the majority of cases consideration is 100 per cent cash.
Representations, warranties and specific indemnities
Representations and warranties are given by both parties to disclose material information to each other. 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 the target's business activity, the level of their thoroughness differs depending on the transaction, and are 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 see an increasing applicability of warranty and indemnity insurance; however, these types of insurances are still fairly new to the Swedish M&A market.
Conditions precedent, or closing conditions, are stipulations agreed by the parties that must be satisfied, or waived, before the acquisition may close. Conditions precedent must be drafted with care. They are typically specific to a transaction and the needs and circumstances of the parties. Conditions precedent typically found in sale and purchase agreements (SPAs), among others, are:
- approvals: both parties shall have received all relevant regulatory and other governmental approvals in relation to the transaction from any place with jurisdiction over the subject matter of the SPA;
- delivery of documents: each party shall have delivered executed copies of all ancillary documents; and
- payment: the purchaser shall have delivered the purchase price to the seller (or escrowee).
Other typical closing conditions involve the approval of key customers and suppliers if contractual arrangements contain change of control provisions and new service contracts with the executive managers of the target. The buyer may seek to resolve material findings in the legal due diligence by conditioning closing on the remedy of these findings.
Indemnification clauses address liability for losses incurred due to misrepresentations and breaches of warranties, covenants and other agreements. The indemnification clause can be drafted as an exclusive remedy or a non-exclusive remedy to assert such claims. Typical indemnification obligations of a seller are, among others, to indemnify the purchaser from breaches of representations and warranties made by the seller and breaches of covenants or other obligations of the seller.
Post-closing covenants apply after a transaction closes; they are tailored to the needs of the parties and are contextual. They may, among other things:
- ensure the purchaser cooperates with the seller to maintain certain tax and business records (in the case of tax or other regulatory audits);
- ensure the purchaser maintains directors and officers insurance for outgoing directors and officers of the target company;
- prevent the seller from competing with the target company; and
- prevent the seller from soliciting employees of the target company.
The financing of M&A transactions varies according to the type of purchaser. The Swedish Companies Act includes a provision hindering the target from participating in the self-financing of purchasing its own shares (with certain exceptions), entailing that the purchaser must finance its acquisition by either equity or utilisation of new or existing financing facilities.
v Tax and accounting
Holders of shares not resident in Sweden are normally not subject to Swedish taxation on any gains realised on a sale of shares, irrespective of the ownership period, subject to certain anti-avoidance rules seeking to prevent that taxable dividend payments are converted to tax-exempt capital gains. If an investor holds the shares in connection with a trade or business conducted from a permanent establishment in Sweden, gains on shares may be included in the taxable income of such activities.
Further, there are participation exemption rules that apply to investments made by corporate shareholders, which constitute a very favourable holding regime. A tax exemption applies for Swedish corporations (limited liability companies) and European equivalents on capital gains on, and dividends from, shares held for business purposes. Shares in Swedish corporations and participations in partnerships, as well as in foreign companies, can qualify as shares held for business purposes.
Unlisted shares are in principle always regarded as held for business purposes. Listed shares are regarded to be held for business purposes if the shareholding company holds at least 10 per cent of the voting rights or, in certain situations, if the shares are held in the course of the business. In addition, listed shares must be held for a minimum period of one year.
There is, however, an exception from the capital gains tax exemption, which applies on a disposal of shares in a 'shell company'. A shell company is a company or partnership where the fair market value of liquid assets, such as of cash, shares and other marketable instruments (other than shares held for business purposes), and similar assets, exceeds 50 per cent of the consideration paid for the shares. The sale of a shell company results in punitive taxation where the entire consideration, and not just the gain, is taxed. However, the tax can be completely avoided by filing a special tax return for shell companies, which must be done within 60 days of signing or closing.
vi Cross-border issues
Sweden has a very liberal attitude towards foreign investment. Foreign investors are generally treated equally to Swedish 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 National Inspectorate of Strategic Products. Furthermore, new amendments to the Protective Security Act will enter into force on 1 January 2021, whereby transactions that may harm Sweden's security could be prohibited. Transactions covering military activities, important infrastructure and services such as airports, power plants, information systems for electronic communication and healthcare services are covered by these new rules. Before initiating a transfer of a company involved in any such sensitive activities, the operator will be required to conduct and document a special security assessment and a suitability assessment. Operators will also be required to consult with a consultation authority ahead of a transfer. The consultation authority should be able to order operators to take measures to fulfil their obligations under the Act and, ultimately, be able to decide on a prohibition (i.e., that a transfer may not be effectuated).
The Swedish Copyright Act, Patents Act, Trademark Act and Design Protection Act are the primary statutory laws on the protection of intellectual property (IP) rights.
In addition to the above, a number of European and international regulations relating to IP protection are also effective in Sweden. It should be noted that at a European level the IP protection is consistent and harmonised, and Swedish law regarding IP rights is aligned with international regulations.
In a ground-breaking case for copyright holders and internet service providers (ISPs) in Sweden, the Patent and Market Court of Appeal (PMCA) recently declared, for the first time, that dynamic blocking injunctions are in line with Swedish legislation. Unlike regular static blocking injunctions that cover only a specific infringement by a specific infringer, dynamic blocking injunctions also cover other infringements and possibly those by other infringers.
In this case, the PMCA declared that, to prevent ISPs from being accomplices to online copyright infringements committed on illegal file-sharing sites by providing internet access to such sites to their customers, ISPs can be ordered to block not only the domain names and web addresses that lead to the illegal file-sharing sites, but also future undefined domain names and web addresses whose main purpose is to provide access to these illegal file-sharing sites.
In Sweden, the use of non-competition restrictions is governed by Section 38 of the Swedish Contracts Act and two collective bargaining agreements entered into in 1969 and 2015 (agreements). The latter agreement replaced the collective bargaining agreement from 1969. The agreements cover a large part of the Swedish labour market, and even though not all Swedish employers are directly bound to apply the agreements, they have a normative effect, and the Swedish Labour Court has historically found guidance in the agreements when assessing whether a non-competition restriction is reasonable.
A non-competition restriction must be reasonable to be enforceable. When assessing if it is reasonable, the courts take into account, inter alia, the scope of the restriction (both geographic scope and its definition of what constitutes a competitive business), the duration of the restriction, the employee's position and access to trade secrets, and the risk of damage if trade secrets are used in a competitive business. In short, the employer must have a legitimate interest to protect its trade secrets that outweighs the employee's interest in being free to pursue his or her profession.
Based on case law and the agreements, it is customary to agree on a restricted period of between nine to 12 months. According to the agreement from 2015, the duration should not exceed 18 months unless a special circumstance exists. Further, compensation during the restricted period is, as a general rule, mandatory. According to the agreement from 2015, the compensation shall amount to the difference between the employee's average monthly income and the lower monthly income the employee is receiving or could have received from a new employer, capped, however, at 60 per cent. A top executive (who is not protected under mandatory Employment Protection Act) is not covered by the agreements, and there may be further possibility to deviate from the provisions in the agreements in relation to such an employee.
There are no statutory rules on non-solicitation restrictions preventing solicitation of customers and poaching of employees, and there is no compensation requirement to enforce such restrictions. Nevertheless, such restrictions cannot be used arbitrarily. Recent case law also indicates the restricted period should be reasonable and based on the employer's need of protection.
Works for hire does not exist in Sweden, except for patentable inventions and computer programs. Based on the Act on the Rights to Employee Inventions and the collective bargaining agreement regarding the right to employees' inventions, an employer has a preferential right to acquire a patentable invention depending on how closely related the invention is to the employer's business and on whether the invention has been developed within the scope of an employee's duties. Fair compensation is mandatory if an invention is acquired by the employer. Computer programs are irrevocably assigned from the employee to the employer.
Other types of IP rights such as design rights and copyright will, as a generally rule, be assumed by the employer with a limited right of use, provided that such rights have been developed as part of the employee's normal work duties. However, to ensure full ownership and right of use, it is advisable to enter into a separate IP rights agreement, including a right for the employer to further develop, amend, and license and transfer the rights. In a transactional context it is important to ensure that such agreement exists prior to the signing of transactional documents.
A duty of confidentiality exists during the employment relationship, but to protect the employer after the termination of an employment, an explicit confidentiality restriction is needed. There are, however, limits on how trade secrets may be used and disclosed in the Swedish Act on Trade Secrets.
To ensure effective enforcement of a non-competition restriction, a non-solicitation restriction and confidentiality restrictions, a liquidated damages clause is advisable, as otherwise the employer would need to establish the size of the actual damage in the case of a breach, which is difficult and may render the restrictions rather ineffective. The liquidated damages are regarded reasonable if capped at six months' salary.
Finally, litigation involving employees is not especially common, but in technology-intensive sectors it is increasingly common, with disputes pertaining to unlawful use of trade secrets and competing activities.
Transactions and due diligence in Sweden will entail obligations for parties involved that are established or operating in the EU (the target, buyer, seller and all participating advisers), and they will be governed by Regulation (EU) 2016/679 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data (GDPR) and the Swedish Data Protection Act.2 The Swedish Data Protection Authority has not addressed the question of personal data processing in connection with M&A transactions.
In connection with the due diligence of the target in which the purchaser or its advisers, or both, review the legal documentation of the target, the reviewers will typically access documentation in the data room that contains personal data (e.g., of the target's customers or employees). Disclosure of information in connection with a purchaser's due diligence must have a legal basis according to the applicable personal data legislation. The general principles in the GDPR should be taken into account (e.g., the principle of data minimisation). Access to personal data should be restricted to what is necessary, and it should be considered whether the information should be anonymised (especially when it concerns special categories of data or other sensitive data (e.g., social security numbers).
Disclosure of personal data to a buyer (or its advisers, or both) based in countries outside the European Union will be deemed to be a transfer of personal data to a third country, which generally requires additional security measures or mechanisms for the transfer to be compliant. Such measures and mechanisms will depend on the country to which the data is transferred.
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). Partial sales of a company's assets, including personal information (such as registers of customers and employees) may be deemed as a disclosure of personal information, and thereby would require due and proper consent from the relevant person unless based on another legal basis.
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 for salaries for developers and other similar costs.
Typically, these subsidies do not entail any commercial restrictions on utilisation or future exits.
The purchaser will in most cases require a legal due diligence conducted by its legal advisers. In some instances, we see that the seller's legal representatives outline a red flag vendor due diligence report to attract potential purchasers.
The 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, an online request in the data room and a 'live' Q&A meeting with the seller, the target's management and other key personnel.
The due diligence report may be limited to only contain red flags (i.e., findings that have material impact on the feasibility of the proposed transactions).
Legal due diligence in M&A technology transactions should focus on title and rights, including IP rights. Further, from our experience, data in the context of the GDPR has become increasingly important. With respect to title, rights and data, we often find 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 IP does not infringe another person's IP rights.
There should be a specific focus on the agreements under which the target has acquired or uses IP and on the proper registration of all key IP in the relevant registers. Pending and threatened 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 on certain aspects.
The growing amount of regulation of the technology industry calls for an increased focus on due diligence of the general compliance of the target, especially regarding specific industry-related regulations.
Documents governing M&A transactions in the Swedish market usually provide that disputes are to be resolved through arbitration. Parties often seek to resolve their disputes through arbitration because of a number of perceived potential advantages over judicial proceedings, such as:
- when the subject matter of the dispute is highly technical, arbitrators with an appropriate degree of expertise can be appointed;
- arbitration is often a quick and efficient way to resolve a dispute;
- arbitration can be cheaper and more flexible for businesses;
- arbitral proceedings and an arbitral award are generally non-public, and can be made confidential;
- because of the provisions of the New York Convention 1958, arbitration awards are generally easier to enforce in other jurisdictions as opposed to court judgments; and
- there are very limited avenues for appeal of an arbitral award.
Arbitration in Sweden may be conducted both as an ad hoc or institutional arbitration, depending on the arbitration clause. Institutional arbitration under the rules of the Arbitration Institute of the Stockholm Chamber of Commerce3 is normally preferred in M&A transactions.
Sweden is a party to the New York Convention; as such, foreign arbitration awards rendered in a country that has signed the Convention are, as a general rule, recognised and enforceable in Sweden. By contrast, a judgment rendered by an ordinary foreign court will not automatically be recognised and enforced in Sweden.
As in other jurisdictions, the consequence of the covid-19 outbreak in the spring of 2020 are not fully developed or understood at the time of writing.
From a major fall in M&A activity in the first months of the covid-19 outbreak in Sweden, the market seems to have stabilised. Even though transactions may either be cancelled or postponed in the current covid-19 environment, we are seeing high levels of investor confidence, a constant stream of innovation, relatively cheap capital, rapidly developing supporting technologies and a strong push to create earnings growth through acquisitions. As such, we expect technology M&A to continue to boom in 2021.
The continued development of European Union regulation within the technology sector is a driver for business opportunities for new and existing technology companies, and also within the legal services revolving around M&A, including but not limited to a greater focus on regulatory due diligence and reviewing compliance with such regulation (e.g., the GDPR).
M&A-related contracts will adapt very quickly to the new circumstances post-covid-19. Increasing risks mean that buyers have a growing need for security. We believe that the relevance of material adverse change and material adverse effect clauses in M&A contracts will increase, and that and covid-19 will serve as an example in future negotiations.
Due diligence should also review technology companies' terms and conditions with regards to the possibility of postponing deliverance due to pandemics. We are seeing provisions in terms and conditions regarding force majeure that would 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 the target in the event of further outbreaks.