Contributed By Advokatfirmaet BAHR AS
Lending is a strictly regulated activity in Norway, meaning that acquisition financing is mainly provided by local and, to some extent, by international banks. Debt funds are not particularly active in the Norwegian market due to the licensing requirements, but are sometimes seen as debt-providers to non-Norwegian acquirers where there is a relationship with the purchaser from before entering the Norwegian market and the initiation of the financing has taken place outside of Norway under an exemption for “reverse solicitation” which is generally acceptable.
Shortfall in bank lending capacity has primarily been covered by tapping into Norway’s very active high-yield bond market where the internationally oriented business areas such as shipping and offshore service suppliers in particular have been able to raise asset-secured debt capital. The high-yield bond market has, in addition to traditional corporate financing, to a certain extent also been used as a source for financing of acquisitions, and this is a trend which is expected to continue in the years to come.
Acquisition financing in Norway is primarily driven by leveraged lending, where specialised Private Equity funds have been particularly active in driving the market. Active owners and existing management in the target company are usually provided with reinvestment opportunities and/or management incentive plans in the form of investment schemes in the bidco following the acquisition. However, there have not been many leveraged buy-outs seen in the Norwegian market, as the acquisitions are usually in the form of acquiring separate companies (whether stock exchange-listed or companies) and thereafter to grow the companies with add-on investments.
Acquisition financing in Norway is primarily driven by leveraged lending, where specialised private equity funds have been particularly active in driving the market. Active owners and existing management in the target company are usually provided with reinvestment opportunities and/or management incentive plans in the form of investment schemes in the bidco following the acquisition. There have not, however, been many leveraged buy-outs seen in the Norwegian market, as the acquisitions are usually in the form of acquiring separate companies (whether stock exchange-listed or companies) and thereafter to grow the companies with add-on investments.
Acquisition financing provided by financial institutions in Norway is increasingly documented by way of a loan agreement based on the Loan Market Association acquisition finance standard, adjusted to reflect Norwegian law and market conditions.
Funding most frequently occurs based on completed loan documentation, with certain conditions precedent being postponed to a certain period post-closing (for example, accession of target companies, "clean-ups" and so on).
For the acquisition of a listed company, if the acquirer launches a mandatory or voluntary bid, a financing condition may be part of the bid. If a firm commitment from lenders is provided, or more commonly, a loan agreement is signed and only the standard conditions precedent remain as conditions for utilisation, the financing condition will be lifted and the bid (more or less) becomes unconditional. Settlement of a mandatory offer must be backed by a bank guarantee from a bank authorised to carry out business in Norway.
For private acquisitions, this varies, depending on the funding needs of the acquirer. Often, as soon as the loan agreement is signed, the acquirer will move quickly to close the acquisition.
Most transaction documents are in the English language, and the drafting is usually carried out by lender counsel. There is no legal requirement in Norway that any documents must be translated from English to Norwegian (or vice versa) for the purpose of the acquisition financing. However, some of the standard form floating charges that are generally part of the security package are only available for submission to the relevant registry in Norwegian.
Lender counsel will usually provide legal opinions to agents/lenders concerning both capacity and legality/validity. The provision of borrower counsel opinions is less common.
This is the main source of acquisition financing in the Norwegian market, and usually follows the standard form based on the LMA leveraged template.
Mezzanine loans are sometimes seen; however, since the Norwegian market has very strict licensing requirements for providing financial services to the usual “mezzaniners“ and such loans are not as commonly seen in the Norwegian markets, this is therefore a less common type of financing in Norway. PIK loans have been seen and are not uncommon in acquisition financing, but they are usually in the form of vendor notes or other instruments providing seller credits.
Acquisition bridge facilities are sometimes seen on the largest financing, as back-up for the syndication process; however, this is not a common feature in Norwegian markets, as most leveraged financings are small enough for the banks to take the whole initial amount without any further syndication being an absolute requirement.
The Norwegian high-yield bond market is very active, and has also been used for acquisition financing. This trend must be expected to continue in the years to come.
This is usually not a typical feature in the Norwegian market, except for smaller placements that have been carried out for financing of real estate companies. Otherwise, such financings would usually be done by way of tapping into the bond market.
Inter-creditor arrangements are common between various classes of creditors or between mortgagees. Generally, a junior creditor is not allowed to enforce its security without the consent of the senior creditors.
Contractual subordination of debt is possible and common in Norway, both in relation to the amounts payable and the procedures to enforce security. Contractual subordination can be achieved by a declaration from the junior security lender that it will not collect its debt until the senior debt is paid in full.
Structural subordination can be achieved by loans being granted to entities in the same group at different levels of the group structure, that is, further away from the source of income.
Payment of Principal
In both contractually and structurally subordinated structures, there is generally an inter-creditor agreement between the lenders on the various levels of debt regarding the priority for payment of principal, so that the subordinated loan will have limited or no payment of principal during the tenor of the senior ranking loan. Vendor notes will typically be a bullet loan maturing after the senior loan.
In both contractually and structurally subordinated structures, there is generally an inter-creditor agreement between the lenders on the various levels of debt as to the priority for payment of interest, so that both senior and junior ranking loans will be paid interest on the debt during the tenor of the loan, but the senior ranking loan will usually take priority in an event of default. Parts of the subordinated debt may be on payment-in-kind (PIK) interest terms; these are the usual terms for vendor notes.
Sharing of security and contractual subordination of payment through a payment waterfall provision is a common structure in Norway.
Subordination of Equity/Quasi-equity
Generally, Norwegian law does not contain any legal doctrine regarding equitable subordination carried out by a bankruptcy court in the process of a court-led restructuring of a company. Under Norwegian bankruptcy law, transactions made by the company and which are deemed "extraordinary" in the circumstances before bankruptcy, or which give rise to a fraudulent preference of certain creditors, can subsequently be set aside by the courts following a request from the bankruptcy estate manager. Extraordinary payments can include:
Bank/bond deals have so far not been seen very often in the Norwegian market for acquisition financing. However, the Nordic High Yield Bond Market has seen issuances in the past of junior bonds to go along with senior bank financing. This has typically been done more in asset financing than in acquisition financing.
Hedge counterparties would normally be secured, but would be behind the senior creditors in the waterfall.
Extent of Security
Due to financial assistance restrictions currently in place (see 5.4 Financial Assistance), target companies cannot provide security or guarantees for acquisition financing.
The bidding company generally provides security over the shares in the target company, as well as any bank accounts it may have and any monetary claims it has on the target company (for example, any intra-group debt).
Any other special-purpose vehicle (SPV/midco) or parent company must only provide security over the shares of the bidding company, as well as any intra-group loans to the bidding company, due to the restricted interest deduction for intra-group loans, to avoid providing a full parent guarantee. A full parent guarantee may cause Norwegian tax authorities to classify the external financing as intra-group debt for interest deduction purposes (see 9 Tax Issues).
Types of Security
The most common form of security granted in a Norwegian acquisition financing is a charge over the target shares.
The most common form of security over an inventory is a floating charge. A floating charge over inventory is effected upon registration with the Norwegian Register of Movable Property (Løsøreregisteret). As the bidding company/another SPV/parent company generally will not have an inventory or other tangible assets, an inventory charge is usually provided by the target companies, where relevant, as security for a working capital facility (and not for the acquisition facility due to financial assistance restrictions, see 10 Takeover Finance).
Bank account charges over the accounts of the bidding company are usually provided.
The most common form of security over receivables is a floating charge. A floating charge over the trade receivables is effected by registration with the Norwegian Register of Movable Property. It is usually only provided by target companies for working capital facilities.
Intellectual Property Rights (IPRs)
The most common form of security over IPRs is a floating charge. A floating charge over the operating assets, including IPRs, is possible. Security over patents can be taken out separately as a charge registered over the patent number in the Norwegian patent register. Due to the financial assistance rules, such security is usually only provided by target companies for working capital facilities (see 10Takeover Finance).
The most common form of security over real property is a mortgage with registration in the Norwegian Property Register (Statens Kartverk). A mortgage over real property can, due to a special exemption from the main financial assistance prohibition rules, also be provided by the target company and any of its subsidiaries in favour of acquisition financing incurred by the bidding company, if the target company is a real estate company (that is, not holding assets other than real estate that is not under construction or development, and not having employees other than a general manager).
The most common form of security over registrable movable assets is a mortgage. Registrable movable assets, such as aircraft and ships/rigs (and similar) can be mortgaged by registration in the applicable registries.
Up-stream guarantees may be illegal due to the financial assistance prohibitions (see 5.4 Financial Assistance). Down-stream guarantees are legal from a corporate law perspective, but can have adverse tax consequences (see 9.3 Thin-capitalisation Rules).
A security trustee or security agent is commonly used in syndicated deals. The security trustee or agent in syndicated deals (as opposed to bond finance in the Norwegian bond market) does not have standing before the Norwegian courts as such (that is, it will need powers of attorney from the syndicate banks). However, Norwegian courts recognise that the security can be held by a trustee or an agent on behalf of the lending syndicate.
Please see 2 Documentation.
Please see 5.4Financial Assistance below.
For a guarantee, loan or security provided by a Norwegian company in favour of the purchaser of shares in the company or its parent company to be valid and binding, both:
Additional requirements are that:
However, exceptions are made for target companies that are pure real estate-owning entities registered as private limited liability companies (that is, not holding any assets other than real estate which are not under construction or development, and do not have employees other than a general manager). These entities are generally exempt from the above restrictions.
Apart from acquisitions, the Norwegian Limited Liability Companies Act restricts the ability of a Norwegian company to give guarantees for the debt of its shareholders or close associates of its shareholders. However, the company can give guarantees for the debt of its parent company or other group companies, provided that such guarantees benefit economically at least one company in the group and are made on terms that are commercially ordinary (at arms' length). The test for corporate benefit for at least one company within the group is not strict.
For acquisition financing, the rules are stricter. Generally, effective financial assistance for acquisition financing can only be granted over the shares in the target company and receivables against that company, as well as in the form of real estate held by a target company that is a pure real estate-owning entity. However, financial assistance within the target group for refinancing of existing indebtedness in the target group is generally permitted on the terms set out above.
In general, transactions between group companies (and between shareholders and their companies) must be made on regular market terms and on an arms’-length basis. This includes paying appropriate guarantee fees for a group company providing guarantees or security for another company in the same group.
The Norwegian Enforcement Act (the “Act”) is invariable (Nw: Ufravikelig – cf Section 1-3) and sets out requirements for enforcement of both private and public claims (cf Section 1-1), with the exceptions of financial collateral in accordance with the Norwegian Financial Collateral Act, certain receivables and patent rights.
In relation to financial collateral, the parties are free to agree on the enforcement procedure through a written agreement. As a consequence, this type of assets may be enforced in accordance with the terms of a pledge agreement without the involvement of the enforcement authority.
For non-financial collateral, enforcement must occur through the enforcement authority.
Transactions are usually structured so that there is no guarantee from any entity above the Bidco, other than that the parent company of Bidco provides a share charge over Bidco. This is done particularly due to adverse tax consequences for guarantees from parent entities of the borrower (see 9.3 Thin-capitalisation Rules).
Please see 5.4 Financial Assistance above.
Pursuant to the Norwegian Companies Act, intra-group transactions shall be made on ordinary business terms. This implies that guarantee fees must be charged as if the parties were third parties.
Norway does not have special rules relating to lender liability, but liability can arise under the ordinary provisions of law. In order to claim for damages against a lender, the following three conditions must be met:
• a basis for liability must be present;
• there must be some kind of economic loss; and
• an adequate and foreseeable causality must exist between the basis for liability and the economic loss suffered.
The basis for liability can arise both as a breach of contractual obligations (for example, breach of contract giving rise to an economic loss for the counterparty) and outside of contract. A failure to pay out the loan if all conditions under the loan agreement are met is an example of breach of contract that can give rise to liability for the lender. Outside of contract, there can be a professional liability for a lender not acting with appropriate professionalism and in breach of a code of conduct, causing an unnecessary loss for the debtor (or the other creditors of the debtor).
A violation of the restrictions on financial assistance for acquisitions can result in guarantees and security being deemed void; see 5.4Financial Assistance.
Debt can generally be traded under Norwegian law, and the consent of the debtor is only necessary if required pursuant to the provision of the underlying loan agreement.
Lending is at the outset a regulated activity under Norwegian law. However, there are exemptions for lending activities that do not occur on a regular basis. As a result, both sponsors and affiliates of a borrower (as well as the borrower itself) can repurchase its debt to the extent that such buy-back is not prohibited under the terms of the relevant loan agreement.
In bank facilities, a debt repurchase by the borrower is unusual and is most commonly prohibited through the terms of the loan agreement. However, debt purchases by sponsors/affiliates can occasionally be seen in bank facilities, although transfer of lender positions to a sponsor or affiliate is often strictly limited in the loan agreement. Conversely, in the high-yield bond market it is an agreed possibility for the borrower or its affiliates to repurchase its bonds.
For repurchases of debt in both bank and bond loans, it is common in the Norwegian market that any debt held by the borrower or its sponsor/affiliates will be disenfranchised with respect to voting.
There are no relevant stamp taxes in Norway.
Norway does not currently impose withholding tax on interest payments. However, the Government has repeatedly stated that they are working on a proposal regarding implementation of withholding tax on interests and royalty. No proposal has been released to date, but it is expected that this may happen before the year end, with a potential effective date of 1 January 2021.
Norway does not have any specific thin-capitalisation rules in its ordinary tax regime. However, according to transfer-pricing rules (and to a certain extent national general anti-avoidance rules), interest payments relating to loans from or furnished by a related party exceeding the arm's-length loan capacity of the debtor may be disallowed.
The possibility to deduct interest is limited by a specific limitation rule, whereby interest, exceeding 25% of earnings before interest, taxes, depreciation and amortisation (EBITDA) (calculated for tax purposes) is disallowed. For companies that are part of a group, deduction of interest on debt to both related (ie, intra-group loans) and non-related parties is limited. However, the rule will not apply where the ratio between equity and total assets in the consolidated financial statement for the Norwegian part of the group is equal to or higher than the corresponding ratio in the consolidated financial statement for the group as a whole. Furthermore, the rule only applies where the Norwegian part of the group has deductible interest above a 25MNOK threshold. For companies outside of a group, the same EBITDA rule will apply, but only on interest to related parties (or on debt guaranteed for by that party) above a threshold of 5MNOK. Any deductible interest that is disallowed in one year can be carried forward for up to ten years.
Interest must always be arm's-length-based. General anti-avoidance provisions regarding utilisation of tax positions are applicable.
In addition to the above, special rules apply for interest deduction for companies within the special regimes for oil taxation and tonnage taxation.
Several industries in Norway are regulated to a varying degree, including banks, financial institutions and insurance companies, aquaculture and oil production. Concession requirements vary and must be considered on a case-by-case basis.
Effect on Transaction
Concession requirements can prevent the acquisition of a target until concession is achieved. For example, acquisition by a buyer (or several buyers acting in concert) of 10% or more of the share capital or voting rights, or a stake that otherwise gives the owner a "significant influence" over a Norwegian bank, financial institutions and insurance companies will be subject to concession.
Additionally, according to Norwegian merger regulations, all mergers and transactions involving acquisition of control (a "concentration") must be notified to the Norwegian Competition Authority (Konkurransetilsynet) if:
An automatic standstill period ending, at the earliest, 15 working days after a filing has been made applies to all notifiable concentrations. If the transaction is of a certain magnitude so that it requires merger clearance at an EU level, the Norwegian filing requirements are suspended and the EU rules prevail.
Norwegian and foreign companies listed on a regulated market in Norway is (with a few exceptions) subject to special regulations partly based on Directive 2004/25/EC on takeover bids (Takeover Directive), which has been adopted by Norway. The regulation includes:
Shareholding-disclosure requirements are triggered when a party acquires the following amounts of the share capital or votes in the listed target company or reduces its holdings to these levels, requiring the holder to announce its holdings to the market:
This includes options and other rights to shares held by a company or its close associates.
A requirement to make a mandatory offer for the shares in the target is triggered when the buyer acquires one third of the voting rights in the target (with repeat triggers at 40% and 50%).
Voluntary and mandatory offers must be notified to and published by the Oslo Stock Exchange (Oslo Børs).
An offer document must be prepared in connection with an offer and must be approved by the Oslo Stock Exchange in advance. The offer document must be distributed to all shareholders of the target and made known to all its employees.
Methods of Acquisition
Where consideration offered in a takeover consists of securities (wholly or partly) this can lead to a requirement to prepare a prospectus (in accordance with the Prospectus Regulation ((EU) 2017/1129) for those securities.
A mandatory offer must include a cash-only alternative, but may also offer alternative forms of consideration. Further, a mandatory offer must be unconditional, whereas a voluntary offer can be made conditional (for example subject to receipt of a minimum 90% acceptance or approval from relevant authorities).
The buyer must treat all shareholders equally, although different classes of shares can be treated differently.
Settlement of a mandatory offer must be backed by a bank guarantee from a bank authorised to carry out business in Norway.
If the purchaser holds more than 90% of the shares of the target and a corresponding proportion of the votes that can be cast at general meetings of the target, the buyer has the right to acquire minority shareholdings on a compulsory (squeeze-out) basis (and minority shareholders have a right to demand that the bidder make a compulsory acquisition). Funding of the squeeze-out must be backed by a bank guarantee from a bank authorised to carry out business in Norway.