In recent years, the Danish market has seen a vast increase in alternative credit providers in the form of debt funds. Whereas previously, debt funds typically only played a role in the secondary market, in particular if the debt was distressed, they are now also taking up roles as arrangers or originators of deals, as debt funds are not required to have a banking licence, and they continue to gain market share significantly in financing Danish leveraged buy-outs.
Large cap leveraged deals are, however, still dominated by major international investment banks, whereas mid-market leveraged deals and below are dominated by the largest domestic or Nordic banks, with the debt funds squeezing themselves into all types of leveraged deals. Furthermore, insurers and pension funds are dipping their toes into the leveraged finance market. As regards the market for corporate loans, this space is predominantly occupied by domestic and Nordic banks.
As the above indicates, the Danish lender-side market is highly developed and highly competitive, providing borrowers and sponsors alike with numerous lending options of a high quality. Generally, the deals in the Nordic market have been smaller than in the larger markets in Europe. There is a well-serviced loan market in the Nordic region, which has offered both a competitive bank market and various other alternative sources of funding, such as direct lending from pension funds.
In the Danish market, however, the first uni-tranche facilities are now beginning to appear, which have otherwise been kept out as a result of the well-serviced loan market.
Denmark does not provide for a developed high-yield market that is as active as is the case in many other Northern European jurisdictions, and as such does not constitute a real alternative to credit lending. High-yield issues for the purpose of financing acquisitions of Danish targets are primarily done by way of bond issues in Sweden, Norway, England and in the US.
Since 2010, the number of leveraged finance transactions in Denmark has increased each year, and as regards the larger syndicated deals, the leveraged finance transactions in the Danish market have continuously been subject to lighter and lighter covenant provisions, which is a development that is primarily driven by strong sponsors.
The terms of the smaller and more local leveraged finance transactions in the Danish market have, however, been more conservative. The covenant-lite and covenant-loose structures seen in the larger syndicated deals have not been fully adopted into the local Danish market, although a softening of terms has been identified.
In 2018 and 2019, the Danish FSA (Finanstilsynet) increased its focus on the risk of leveraged financing – both in respect of alternative investments by pension funds and in respect of the risk profiles of bank lending.
For the first time in a number of years, towards the end of 2018 the Danish market also saw covenant breaches and even some full-blown restructurings and bankruptcies were driven purely by general macroeconomic developments.
On the corporate lending side, there has not been such a rapid development towards lighter and lighter covenant provisions, as most corporate lenders seem to be comfortable with covenant packages that do not materially deviate from the default options of the LMA investment grade template.
As regards the larger syndicated deals, both in respect of the leveraged finance transactions and in respect of corporate loans, the vast majority of these transactions is governed by English law, although this tendency is most noticeable on the leveraged finance transactions.
The smaller and more local leveraged finance transactions and corporate loans are mainly governed by Danish law, although occasionally such deals are governed by Swedish or German law.
Standard agreements, such as Loan Market Association (LMA) standards are primarily used in syndicated and larger bilateral financing agreements. Smaller corporate loan agreements, however, tend to be based on standard documents supplemented by business terms and conditions. Loan agreements governed by Danish law are typically shorter than those used in common-law jurisdictions, which is inter alia attributable to the tradition of Danish courts to put emphasis on the intention of the parties as well as the wording, thereby reducing the need to stipulate exhaustively the position of the parties in the terms of the agreement.
Finance agreements and other documents drawn up in Danish and English are accepted and enforceable in Danish Courts.
It is not uncommon for legal opinions to be given in transactions concerning Danish parties, serving to identify relevant legal risks related to an acquisition or due to expectations that a loan will be syndicated at a later stage. It is customary for legal opinions to be submitted in English, regardless of the nationalities of the parties involved. Reliance on the opinion is restricted to the addressee of the legal opinion, but in some instances a window of typically six months will be given so that syndicate members joining within that period may also rely on the legal opinion. If the legal opinion proves inaccurate, the addressee may have a claim for damages against the soliciting attorney for any causative losses.
It is common for counsel to restrict its opinion to capacity issues and, in the case of securities being taken, for the lender counsel to provide an opinion on the securities, including on their perfection.
Senior loans are the most prevalent form of acquisition financing used by Danish companies, most of which are issued by commercial banks. Larger acquisitions are typically structured as club deals, with several banks and other financial institution issuing a loan collectively. Syndicated loans comprising banks from several jurisdictions are exclusively used in very large acquisitions.
While leveraged finance in Denmark continues to be dominated by 'senior loans', the growth of alternative debt-providers providing mezzanine loans represents a diversification in the source of acquisition finance. In addition, the state-backed Danish finance institute, The Danish Growth Fund – that has recently seen its mandate increased significantly – plays a huge role in providing mezzanine financing to small and medium-sized companies, in particular within emerging technologies and internationalisation.
Bridge loans are short-term facilities commonly used to bridge a financing gap until long-term financing can be obtained. Bridge loans are inter alia used to accommodate an immediate need for financing until a capital increase can be executed, by private equity funds as interim financing to bridge the equity financing from the investors of the fund, or as refinancing into a longer-term facility.
Corporate bond issues have historically been used to a limited degree in Denmark, in part due to time-constraints involved and market conditions. Furthermore, the risk that a company may require a banking licence to issue bonds under certain circumstances is likely to have deterred companies from the financing form, in part due to market conditions, time-constraints and market size. Historically, only larger Danish companies and certain larger banks have issued corporate bonds.
Private placements, where securities are typically offered to a limited number of institutional investors, do not trigger an obligation to publish a prospectus. Private placements may thus be a time-efficient source of financing, although it is currently often in direct competition with direct lending funds on larger transactions and even with banks on small transactions.
Inter-creditor agreements governed by Danish law often include clauses regulating:
For the larger leveraged finance deals, bank/bond transactions are commonly used, primarily senior secured high-yield bonds in combination with a super-senior Revolving Credit Facility (RCF). Domestic and international lenders alike are comfortable with dealing with such financing structures.
However, as noted above, in Denmark there is no liquid bond market. Therefore, any high-yield bond issues for the purpose of financing acquisitions of Danish targets are primarily done by way of bond issues in Sweden, Norway, England and the US.
In Danish large cap leveraged finance transactions, it is customary to require the borrower to enter into hedging in respect of a minimum proportion of its term facilities in order to mitigate against upward interest rate fluctuations and/or adverse exchange rate movements. In such cases, the lenders will require any parties providing the relevant hedging (ie, the hedging counterparties) to be party to the inter-creditor arrangement governing the relationship between the various creditors to the borrower.
The hedging counterparties will usually be allowed to benefit from the transaction guarantees and security granted by the borrower for amounts that may become owing to them. Therefore, any hedging counterparty will be party to the inter-creditor agreement in its capacity as a hedge counterparty, even if it is already party in another capacity.
In most transactions, it is still the case that hedging liabilities would rank pari passu with the senior lenders’ debt. This reflects the position adopted by the Loan Market Association precedent inter-creditor agreement for leveraged acquisition finance transactions where the hedging liabilities rank pari passu with the senior facility liabilities. The reason for this is that in the Danish market, hedging continues to be provided primarily by the senior lenders who expect their hedging liabilities to rank alongside the senior debt.
If the bank role is limited to providing a super-senior RCF, the hedging will typically continue to benefit from the transaction guarantees and security, but the ranking of the hedging liabilities is a matter of negotiation between any non-bank lenders and the bank RCF provider; typically, a portion of the hedging liabilities will rank pari passu with the super-senior RCF, whilst the remainder of the hedging liabilities will rank pari passu with the term debt provided by the non-bank lenders.
The assets over which security is most commonly taken in Denmark include, but are not limited to, the following:
In the case of issued bearer share certificates, security may be taken in shares by way of a pledge. The pledge is perfected by the transfer of possession of the bearer share certificates to the pledgee and the giving of notice to the issuing company, which is obliged to register the pledge in its share register.
In the case of issued non-bearer share certificates or where no share certificates have been issued, security is taken by way of charge. The security is perfected by notification to the issuing company, which is required to register the charge in its share register.
In the case of listed (dematerialised) shares, the charge is created and perfected by way of registration with the Danish Central Securities Depository, which is done through the bank where the pledgor keeps its securities account. In addition to the registration, it is market practice that a separate security agreement is entered into.
Share certificates are hardly ever used in practice in Denmark, as bearer shares are uncommon, and as non-bearer shares are normally registered in the name of the shareholder in the company’s share register instead of by way of share certificates. Listed companies normally only use dematerialised shares.
Ongoing Business-related Assets
The ongoing business-related assets of a Danish company may be subject to a floating business charge. A floating business charge may create security over some or all of the assets of the business that are related to the daily operations and the security covered by the Danish Registration Act, including inventories (stock), trade receivables (no notice to debtor required), operating equipment and machinery, livestock and intangibles (including, inter alia, patents, trade marks, copyrights, designs, domain names and goodwill).
The floating business charge must be registered the Danish Registration Court to ensure perfection, which carries a registration fee of 1.5% of the secured amount (as set by the parties) as well as a nominal base fee. On the application of the company the registration authority records the registration by which the security is perfected. The registration must be renewed every ten years.
Inventory or Equipment, including Moveable Assets
Security may be taken over inventory and equipment by pledge, fixed charge or as part of a floating business charge. Creating a pledge over inventory or equipment is impractical, since perfection requires delivery of the inventory or the equipment to the beneficiary or a third party (alternatively, through separation and full identification and control of such assets) and the pledgor must be prevented, legally and practically, from dealing disposing over the pledged assets. Security over inventory and equipment is therefore usually created by way of a floating business charge (see above under Ongoing Business-related Assets).
A fixed charge may be created over inventory or equipment where it is possible to identify with certainty such assets by way of a unique identification number on the assets, or by way of other means of undisputable identification measures (which is often not practical in respect of inventory). The fixed charge must be registered in order to ensure perfection.
Receivables (including contractual rights) can be secured by way of a fixed charge or as part of a floating business charge. A fixed charge over receivables can be created by way of security agreement and perfected through notice to the debtor. Special rules apply to bearer instruments. If payments by the debtor to the chargor (instead of to the charge) of the secured receivables are allowed under the security agreement, once paid, that payment will not be seen as perfected. However, if the payment is made into a charged account to which the charger has no access, the paid amount will be secured by the account charge.
Security over present and future receivables can be created by means of a floating business charge, which must be registered (see above under Ongoing Business-related Assets). It is not necessary to serve notice on debtors in respect of receivables which are within the scope of a floating business charge.
Security over real estate and land can be created by way of a mortgage, which must be registered with the Danish Registration Court to secure perfection. Registration carries a registration fee of 1.45% of the secured amount (as set by the parties) as well as a nominal base fee.
Stock-in Trade/Work in Progress
In order to perfect a pledge, assets must be handed over to the pledgee or a third party (alternatively, through separation and full identification and control of such assets by the pledgee/third party) and the pledgor must be prohibited, legally and practically, from dealing with the pledged assets.
Due to the impracticalities of the possession requirement, security rights over stock in trade/work in progress are usually created by way of a floating business charge. Work in progress can be secured by a floating business charge until it has been finalised and delivered, at which point the floating business charge attaches to the claim for payment (unless receivables are subject to a factoring agreement).
Danish bank accounts can be secured by way of a fixed charge or a pledge, which is perfected by giving notice to the account bank according to which the charger must not be allowed to dispose of amounts in the account. This makes this type of security less practical or unperfected in most cases.
All securities registered with the Danish Registration Court are created digitally by registered users (typically law firms and Danish banks) using the simple online forms. The forms are often supplemented by an agreement between the parties to which no form requirements apply. Generally, no other form requirements apply.
A Danish target company and its subsidiaries may grant up-stream security in favour of a parent company, subject to compliance with the rules on corporate benefit and corporate authorisation as well as the prohibitions on financial assistance as outlined below.
Where an up-stream security is granted in a group of companies comprising Danish and foreign companies, only the Danish group companies will be subject to the Danish rules regarding corporate benefit and corporate authorisation; any foreign group companies providing security in favour of one or more Danish companies will not.
A company may not grant loans, or provide security or guarantees, to a person who is a shareholder, board director or managing director (including spouses, co-habitants, children, parents and other close relatives) of the company or of any company with "deciding influence" over the company, nor to any legal entities controlled by any such person. For these purposes "deciding influence" means the power to control the financial and operational decisions of the company. "Deciding influence" typically exists where the beneficiary controls, directly or indirectly, more than half of the voting rights in the company or has the power to control the financial and operational decisions of the company pursuant to the articles of association or any agreement or has the power to appoint the majority of the board of directors.
If a parent entity of the Danish company is domiciled in Denmark or, if domiciled outside Denmark, within the EU or, to some extent, within the OECD, and that parent entity in respect of incorporation, limitation of liability, management and other central parameters is similar or substantially similar to a Danish limited liability company, it is exempt from the prohibition against loans to shareholders, see above. Any foreign subsidiary of a controlling Danish parent is also outside the general financial assistance prohibition.
Furthermore, and as a separate and important rule, a Danish limited liability company may not, directly or indirectly, advance funds, grant loans, guarantees or securities for a third party's acquisition of shares in the company itself, or in its direct or indirect parent company.
Financial assistance must always comply with the Danish provisions on corporate benefit and corporate authorisation described in 5.5 Other Restrictions below. Financial assistance provided by way of an advance or a loan in breach of the above prohibition referred to in 5.5Other Restrictions, will not be valid and the advance or loan must be repaid immediately, including a statutory interest rate, irrespective of whether or not the recipient acted in good faith. Financial assistance provided by way of security or guarantee is valid, provided that the secured party beneficiary acted in good faith at the time the security or guarantee was granted.
Any individuals responsible for the decision to provide financial assistance in breach of the prohibition (primarily directors in the company providing the financial assistance) may be liable for damages and/or subject to fines or imprisonment if the breach was intentional or grossly negligent.
Unless a company's articles of association state otherwise, a company may only undertake transactions from which the directors believe the company derives real and adequate corporate or commercial benefit. Therefore, a company may only provide a security for a third party’s obligations if, after due and careful consideration, its board of directors (or the managing director if there is no board in place) is of the opinion that the company would benefit from the transaction. It is not a requirement that a benefit be derived from each transaction undertaken, provided that the benefits from transactions between group companies are considered to equalise over time. The issue of corporate benefit is a business decision and it is ultimately a question for the board of directors of the company to determine before entering into a transaction. Danish court practices so far have afforded considerable latitude in this field with reference to the business judgement rule.
It can be difficult to conclude whether sufficient corporate benefit exists in the case of up-stream security. The assessment is subjective in nature but must be based on the facts of the matter and after due and careful consideration by the board on a case-by-case basis. A subsidiary may, for example, receive corporate benefit when providing a guarantee/security for the obligations of its parent because the parent company’s loan is used to make intercompany loans to the subsidiary. If the board of directors does not believe the company will derive corporate benefit from providing a security to another entity, the granting of a security may be regarded as an unlawful transfer of value without consideration. If the company suffers a loss due to an unlawfully provided security, and the loss is not fully compensated for by the beneficiary, the individuals responsible for taking or implementing the decision to provide security might be personally liable to cover the company's loss.
There are certain provisions under Danish law that set out the procedure for enforcement and realisation of security, but contractual regulations in the security documents may override these (except for provisions under the Danish Bankruptcy Act - see below).
An enforcement clause in a security document usually gives the secured party the right to sell the secured assets by private or public sale or in any other way and on such terms as the secured party in its sole discretion deems fit (including the right for the secured party to purchase the asset itself). However, the secured party has a duty of care and may not realise the security in a way unduly adverse to the party granting the security.
Where the security-provider objects to enforcement of security over its assets, any attempted enforcement by the secured party of its rights under a security document requires the involvement of the bailiff’s court. The bailiff’s court is entitled to refuse the secured party’s request for enforcement, provided that the secured party’s evidence does not clearly substantiate its claim. As a general rule, if the evidence put forward by the secured party does not require extensive preparation or examination by the bailiff’s court, it will be admitted before the bailiff’s court. However, if the bailiff’s court finds that such extensive preparation or examination is required or that the evidence does not clearly substantiate the claim of the secured party, it will refer the decision to the ordinary courts. Any such referral will be at the sole discretion of the bailiff’s court.
There is no concept of receivership in Denmark and there is no right for a secured creditor to appoint a person who will operate or realise the secured assets with a view to repaying the secured debt.
In the case of bankruptcy there are special provisions in the Danish Bankruptcy Act that may override any contractual provisions. The Danish Bankruptcy Act states that, in the event of bankruptcy, a secured party may dispose of a charged asset by way of public auction, or, if the asset is a financial instrument listed on a Danish or foreign stock exchange or other regulated market, through a securities institute. This disposal process must be conducted in a form prescribed by the Bankruptcy Act. An administrator of the bankruptcy estate is normally appointed by the court, and he or she or any creditor may in most circumstances ask for a postponement of an auction and for a second auction to achieve the best possible sales result for the bankruptcy estate. Also, an administrator has the right to redeem a secured creditor if this is seen to be in the interest of the bankruptcy estate.
There are regulations concerning financial restructuring and standstill periods, which give a company time to try to solve its financial difficulties. A compulsory restructuring arrangement with its creditors is subject to a court decision and prevents most seizure and other executive measures and also restricts the possibility of filing a petition for bankruptcy. It does not, however, prevent enforcement against secured assets which are chattels or receivables.
A compulsory restructuring proposal prepared by a court-appointed restructuring administrator and based on input from the major creditors must be presented to all creditors and put up for voting within six months from a first meeting with all creditors, that first meeting to be held shortly after the company entered into restructuring. Claims cannot normally be reduced to less than 10% of their pre-restructuring value. The execution of a compulsory restructuring arrangement requires a 60% majority of the voting creditors (subject to certain de minimis thresholds).
Under Danish law, any out-of-court arrangements with a company’s creditors may only be made with the creditors that voluntarily agree to be involved. No creditor can be forced into an out-of-court restructuring arrangement.
Mandatory provisions govern the order of priority between the creditors in a bankruptcy or in connection with a seizure. A debtor’s payment obligations under an unsecured loan rank pari passu with the claims of all other unsecured creditors, except for certain mandatory obligations preferred by law (for example employee’s salary claims).
Set-off rights can generally be exercised under Danish law if the counter claim is also due for payment and if the claims are of the same nature and between the same parties. In a bankruptcy, a claim against the debtor raised by the creditor may also be used by that creditor to set off against a claim that the debtor had against the creditor at the time of the bankruptcy if that set-off would have been possible, regardless of the bankruptcy.
A company may in principle provide up-stream, cross-stream and down-stream guarantees for the financial obligations of group companies, subject to the limitations set out in 5.4 Financial Assistance and 5.5 Other Restrictions above.
The rules regarding corporate benefit and corporate authorisation, in addition to the prohibitions on financial assistance, as outlined in Section 5 Security, are equally applicable to the provision of guarantees.
There is an increased transfer-pricing (tax) focus, depending on whether a guarantee is granted free of charge or is a balanced quid pro quo.
In the event of bankruptcy, the order in which claims rank is governed by the Danish Bankruptcy Act. The dividends from the realisation of assets in a bankruptcy estate are paid according to different classes of claims according to their level of priority, noting that proceeds from realisation of securities are kept entirely separate. The different classes of claims are in simplified terms prioritised in the following order:
The rules governing claw-back are set out in the Danish Bankruptcy Act. The general claw-back period is three months. Charges and other securities granted prior to insolvency proceedings are subject to an objective claw-back, if the act of perfection was effected later than three months prior to the reference date, which may be before the actual bankruptcy decree date. Where a charge or transaction has been granted in favour of a person closely connected to the debtor, the claw-back period may be up to two years or without limitation, provided that the company was insolvent at the time of the execution of the transaction in question, and the participating party was aware or ought to have been aware of that fact.
Payments of debt may be subject to a claw-back period longer than three months, if such payments have been effected by unusual means of payment, before the normal due date for the payment, or if the payment has been effected in amounts which substantially impaired the debtor's solvency. With regard to payments of debt effected after the reference date, such payments may be avoided, unless the debt falls within the scope of the rules on the order on equitable subordination, see 7.1 Equitable Subordination Rules above.
Furthermore, certain transactions may be subject to claw-back without limitation, if the transaction constitutes an undue preference of a creditor over other creditors, the debtor's property is withheld from serving to satisfy other creditors, or the debtor's debts are increased to the detriment of the creditors. Such transactions may be avoided, if the debtor was or became insolvent as a consequence of the transaction and the preferred party knew or ought to have known of the debtor's insolvency.
Other than publicly listed debt, there are no restrictions on buying back one's own debt, whether at par, at discount or at a premium.
Stamp tax is payable for the registration of the transfer of certain assets with the Danish Registration Court. A deed of transfer of real estate is subject to a stamp duty of 0.6% of the transfer sum plus a fixed sum of DKK1,660, whereas real estate pledges are subject to a stamp duty of 1.45% of the transfer sum plus a fixed sum of DKK1,640. The stamp duty applicable to the registration of security is 1.5% of the transfer sum plus a fixed sum of DKK1,660.
A foreign corporate lender may be subject to Danish withholding tax on interest and capital gains accrued on “controlled debt” owed by a Danish company.
A debt is a "controlled debt” if it is owed by a Danish debtor company to a foreign corporation that directly or indirectly (i) controls the Danish debtor, (ii) is controlled by the Danish debtor or (iii) is under common control with the Danish debtor. In this context, "control" means the direct or indirect possession of more than 50% of the share capital or votes.
An exemption from withholding tax relating to controlled debt is only possible if the foreign lender meets the following requirements:
The above requirements are strictly applied by the Danish tax authorities and the issue of withholding tax should always be considered carefully when dealing with cross-border loan arrangements involving Danish corporations.
There are no corporate thin-capitalisation rules other than a general risk of liability for trading in an unwarrantable fashion, but in tax law thin capitalisation will restrict the right to deduct interest from taxable income.
Banks and other financial undertakings such as mortgage-credit institutions, investment services companies, investment management companies and insurance companies, are subject to detailed regulation in Denmark. Any natural or legal person planning to acquire directly or indirectly a qualified interest of 10% of the voting rights or share capital in a financial undertaking, a financial holding company or an insurance holding company is required to submit a written application for prior approval by the Danish Financial Supervisory Authority (Danish FSA) for the planned acquisition. Approval must also be sought prior to the increase in the qualifying interest which will result in the interest equalling or exceeding of a threshold of 20%, 33% or 50% of either the share capital or voting rights.
In its assessment of the application, the Danish FSA takes into account the likely influence of the intended acquirer on the undertaking, particularly with regard to the sound and prudent management of the undertaking and the financial soundness of the intended acquisition in relation to a number of criteria.
If the requirement to seek formal approval from the Danish FSA prior to the acquisition of a qualified interest is not met, the voting rights associated with the equity investments of the relevant owners can be suspended by the Danish FSA.
Acquisitions of Danish listed targets are primarily regulated by the Danish Capital Markets Act and the Executive Order on Takeover Bids. Both voluntary takeover bids and transactions, whereby a mandatory bid obligation is triggered, are subject to a requirement to publish an announcement of the offer. The offeror is also required to draw up and publish an offer document within four weeks, which must be filed with the Danish FSA. The requirements pertaining to the contents of the offer document are set out in the Executive Order on Takeover Bids.
A mandatory bid obligation may be triggered if a transaction leads to the establishment of a controlling influence. Controlling influence is deemed to be established when the acquirer holds more than one third of the voting rights in a listed company, unless it can be unequivocally demonstrated that such ownership does not constitute a controlling influence. In certain circumstances, however, the ownership of less than one third of the voting rights can lead to the establishment of a controlling influence if, for example, an acquirer by virtue of an agreement with other shareholders has the right to exercise at least one third of the voting rights.
Completion of a voluntary takeover offer can be, and is typically, subject to conditions, such as conditions regarding the minimum acceptance as well as antitrust and other regulatory approvals. The offeror may, however, not condition the completion of the offer upon events that are under the control of the offeror itself. A mandatory takeover offer is prohibited from being subject to conditions.
The consideration for the target's shares in a voluntary takeover offer may be in either cash, shares or other contribution in kind, or a combination thereof, although certain informational requirements are applicable to considerations not made in cash. As regards mandatory takeover offers, the consideration may be in the form of shares, cash, or a combination thereof. If, however, the shares offered are not liquid shares admitted to trading on a regulated market, it is a requirement that cash consideration be offered as an alternative.