Contributed By Baker McKenzie
Similar to the rest of the world, the Swedish market ground to a halt in the spring of 2020 as the COVID-19 pandemic swept across the world. However, business in Sweden has made a quick recovery, and 2021 is proving to be a busy year for private equity. To date, over 300 different investors have made 319 private equity-related deals in Sweden.
Sweden has remained the most targeted country in the Nordic region, both in terms of value and volume, with Swedish targets attracting five of the eight largest deals announced in the first half of 2021.
A general trend has been the extraordinary performance of the stock markets in Sweden, which has driven private equity funds to use IPOs as exit routes, as well as public-to-private buyouts. It has thereby also challenged the dealmaking in the private M&A market.
In line with the global trend, the Swedish stock market was severely affected when the COVID-19 pandemic struck at the beginning of 2020. The Swedish stock market, however, recovered during the second half of 2020 and has continued to perform strongly. In particular, IPOs have risen to record levels. This has impacted the private equity sector, both in terms of a rise in valuations as well as an increased interest from private equity funds to exit their investments through IPOs.
While there are inherent disadvantages in exiting a private equity investment via an IPO, private equity funds generally consider taking the opportunity to exit via an IPO, given the current stock market, when planning an exit from an investment.
Special purpose acquisition companies have also begun to attract interest from private equity funds and investment professionals as an alternative route for raising and deploying capital.
The top five targeted industries for private equity deals in Sweden have been commercial services (77 deals), software (47 deals), commercial products (29 deals), IT services (15 deals) and pharmaceutical and biotechnology (15 deals).
The regulatory landscape has not seen any material changes impacting the private equity industry. However, just like virtually all other industries, private equity has been impacted by COVID-19. This development along with a couple of other changes to legislation impacting the private equity industry are outlined below.
The main legal developments that have taken place in Sweden during the last few years relate to the COVID-19 pandemic. The Swedish government has introduced and amended various legislation and rules during the period since the pandemic struck in early 2020. The rules include lockdowns, travel restrictions and other similar measures.
In order to mitigate the adverse effects of the pandemic and restrictions imposed on businesses, the Swedish government has introduced a number of temporary measures. Such measures include deferral of tax payments, reduced employer social contributions, rent subsidies, turnover support, and the right to make short-term furloughs combined with governmental support to pay the salaries of furloughed employees.
These new rules, applied by the government to counteract the pandemic and support affected businesses, have affected private equity funds and their portfolio companies just like any other business.
Interest Deduction Limitation Rule
The Swedish government introduced a new general interest deduction limitation rule with effect from 1 January 2019 in line with the Anti-Tax Avoidance Directive adopted by the European Commission. The new rule contains a limitation linked to the EBITDA of the business and prescribes that the right to deduct interest expenses is limited to 30% of EBITDA.
Amended Security Act
On 1 January 2021, an amended version of the Swedish Security Act (SFS 2018:585) (the "Security Act") entered into force. The amendment serves to protect infrastructure of a potentially sensitive nature for Sweden's security in connection with transfers of the infrastructure.
The Security Act includes:
The Security Act applies to all transfers of ownership, including intragroup transfers. There is no threshold as to the size of the ownership. The only express exemptions from the new requirements are sales of shares in public companies and sales of real estate.
In the preparatory works to the Security Act, services such as airports, power plants and information systems for electronic communication, as well as services that could be of fundamental importance to Sweden’s national security, are identified. Moreover, sectors such as healthcare, financial services, artificial intelligence, innovations and food supply have been mentioned in the preparatory works as potentially being captured.
Suppliers of vital services or products to operators who perform security-sensitive activities may also be covered. This makes it necessary for suppliers to assess whether their own operations are subject to the legislation. A decisive factor for whether an activity is security-sensitive is whether a hostile act could lead to damaging consequences on a national level.
As the Act has only recently entered into force, precedents and case law on the scope of the law, as well as how it should be interpreted, are rather limited.
Merger Control Filing
The main regulatory issue that usually arises in private equity new money transactions is mandatory merger control filing.
The Swedish Competition Authority (SCA) may prohibit an acquisition or merger (including, under certain conditions, the creation of a joint venture) if it is liable to significantly impede the existence or development of effective competition in the country as a whole, or a substantial part of it. The Swedish competition test corresponds to the approach adopted in the EU Merger Regulation. If it is sufficient to eliminate the adverse effects of an acquisition or merger, a party, instead of being subject to a prohibition, may instead be required to make commitments, such as divesting an undertaking or a part of an undertaking, or to take some other measure having a favourable effect on competition.
The thresholds for mandatory notification in Sweden entail two separate but cumulative thresholds (based on the figures for the preceding financial year):
If the parties' combined turnover in Sweden exceeds the first SEK1 billion threshold, but not the second SEK200 million threshold, a party can voluntarily notify, or the SCA can require a notification, where special circumstances exist.
Notifications are normally to be made by the buyer.
Secondly, as a EU member state, Sweden has implemented the Alternative Investment Fund Manager Directive (AIFMD) through the Swedish Alternative Investment Funds Act (Sw. lag 2013:561 om förvaltare av alternativa investeringsfonder) (the "Swedish AIFM Act"). The Swedish AIFM Act applies to managers of alternative investment funds (AIF), defined as collective investment undertakings that are not undertakings for collective investment in transferable securities (UCITS) and which raise capital from a number of investors with a view to investing that capital for the benefit of those investors in accordance with a defined investment policy. Private equity funds typically structure their funds as alternative investment funds and hence the managers of such funds fall within the scope of the Swedish AIFM Act. An AIF manager operates under supervision of the Swedish Financial Supervisory Authority (SFSA) and is therefore also subject to additional legislation, including, among other things, Swedish anti-money laundering regulations such as the Anti-Money Laundering Act (Sw. lag 2017:630 om åtgärder mot penningtvätt och finansiering av terrorism) and such supplementary regulations and formal guidance that the SFSA issues from time to time.
An AIF is not, per se, subject to an authorisation or licensing in Sweden and the formation of an AIF (save for AIFs formed as special funds ‒ a subcategory of domestic funds that derogate from a wider spectrum of regulation, which may not be freely marketed abroad) is not contingent upon the SFSA’s approval of the fund rules (or similar documentation).
However, AIF managers shall apply for authorisation with the SFSA provided that:
a) the AIF constitutes a special fund;
b) the AIF assets under management in total equal an amount equivalent to (i) EUR100 million if leveraged or (ii) EUR500 million, when the portfolios consist of unleveraged AIFs that have no redemption rights exercisable during a five-year period following the initial investment in each AIF;
c) in the marketing of an AIF (other than a special fund) to retail investors, such marketing requires that the units or shares of the AIF are admitted to trading on a regulated market (ie, an exchange or a multilateral trading facility) or constitute an overseas fund equivalent to a special fund; or
d) the AIF wishes to provide cross-border activities through the EEA passporting scheme.
AIF managers whose assets under management in total do not exceed the threshold set out in b above (provided none of the other conditions above apply) may carry out its services without authorisation by the SFSA provided the AIF manager is registered with the SFSA. Such unauthorised but registered AIF managers may only carry out marketing activities to professional investors.
The Swedish AIFM Act contains certain disclosure and notification obligations. The AIF manager shall annually submit information to the SFSA regarding the managed assets and the AIF manager shall, as soon as possible – and at the latest within ten business days – notify the SFSA upon acquisition of control of non-listed companies of a certain size and of listed companies and where an AIF's voting share of non-listed companies of a certain size reaches, exceeds or falls below 10%, 20%, 30%, 50% and 75%. The Swedish AIFM Act also imposes restrictions on certain AIF investments entailing acquisition of control of non-listed companies of a certain size, or of listed companies, against so-called asset stripping which prohibits certain forms of distributions, share redemptions, etc, that may have an impact on the equity of a portfolio company of an alternative investment fund for a period of 24 months from the acquisition. The prohibition applies to the AIF manager and the restrictions under the Swedish AIFM Act are highly similar to the restrictions on dividends that the Swedish Companies Act imposes on all Swedish limited liability companies and, in relation to scope and interpretation, guidance can therefore be sought in the general Swedish company law. Furthermore, the Swedish AIFM Act stipulates that any change of control entailing a direct or indirect holding of 10% or more of the shares and/or votes, ie, a qualified holding, of an AIF manager will require the acquirer to submit suitability assessments to the SFSA and obtain approval on such assessments in order for the acquisition of the qualified holding to be complete and valid. Other provisions of the Swedish AIFM Act also apply, but the aforementioned are those most relevant for private equity funds.
Amended Security Act
Please also see the discussion on the amended Security Act in 2.1 Impact on Funds and Transactions.
Private equity buyers typically carry out focused due diligence of the business, covering legal, financial, tax and commercial matters. It has also become commonplace for buyers to perform specific environmental, social and governance (ESG), insurance, environmental and integrity due diligence. The due diligence is typically carried out by professional advisors.
Reporting from the legal due diligence typically contains limited descriptive information and focuses on identified issues and exceptions, including mechanical or process issues to be addressed in connection with the transaction or following the closing of the transaction. Contract summaries are, for example, uncommon, and schedules with descriptive information are typically limited to areas such as corporate information, key employees, leases and intellectual property rights.
The focus areas of the due diligence depend on the nature of the target's business. The typical areas include commercial contracts, employee arrangements, intellectual property rights and real property. In recent years, areas such as compliance, privacy, anti-bribery, information security and related matters have risen in prominence, generally due to the increased focus of private equity funds (and society, in general) on compliance matters. Private equity funds investing in Sweden have also increasingly focused on ESG matters, and a dedicated ESG due diligence is often carried out, not only by dedicated impact funds but also by generalist private equity funds.
Vendor due diligence (VDD) is a common feature in structured auction sale processes for private equity sellers. Private equity sellers commonly procure financial, tax and legal advisors to perform diligence and issue reports.
Advisors generally provide credence to VDD reports prepared by reputable advisors. It is common for a buyer to instruct its advisors to perform a limited top-up due diligence. Such top-up due diligence would, for example, be limited to confirming and analysing issues identified in the VDD report and performing additional due diligence in specific areas.
It is fairly common that the ultimate buyer and its finance providers are offered reliance on VDD reports.
Acquisitions of Swedish businesses by private equity funds are nearly always made under a private sale and purchase agreement.
Typically, there are limited differences between terms of the acquisition made in a bilaterally negotiated transaction and an auction sale in Sweden. The differences would typically be similar to those in other mature markets in the sense that the terms generally depend on the bargaining power of the respective parties, and a seller in an auction sale would typically have a strong bargaining power corresponding to the number of bidders and level of interest in the auction.
In line with the above, the terms in an auction sale would typically include fewer conditions precedent to closing.
In a typical leveraged buyout transaction, a private equity buyer would be structured by way of the private equity fund establishing a multitier acquisition vehicle structure consisting of two or more Swedish limited liability companies (Aktiebolag). The structure may also include other foreign holding entities, sitting between the private equity fund and the Swedish holding companies.
Historically, Swedish buyout funds have predominantly been domiciled in the Channel Islands. During the last few years, several buyout funds have opted to set up their new funds as Swedish limited liability companies or partnerships (kommanditbolag).
Smaller private equity funds, including venture capital funds, often do not establish separate acquisition vehicles but instead make direct investments themselves.
The private equity fund would set up a holding company in which the management invests and/or reinvests. Such holding company would set up and own 100% of a second holding company that would act as the buyer entity. Due to requirements by the relevant debt finance providers, the buyer entity would typically be a blocker entity, and a separate holding company would own 100% of the shares in the buyer entity.
If the private equity buyer's acquisition structure includes a special purpose vehicle that acts as the buyer entity, the private equity fund would typically not be involved in the transaction documentation at all. The only exception would be a customary equity commitment letter, as further discussed in 5.3 Funding Structure of Private Equity Transactions.
Swedish private equity buyout deals are typically financed through a combination of equity and third-party debt.
If the private equity buyer's acquisition structure includes a special purpose vehicle that acts as the buyer entity, the fund would (upon the seller's request) typically issue a customary equity commitment letter addressed to the buyer entity and the sellers, under which the fund provides contractual certainty of funds from the buyer entity to the seller, by committing to put the buyer entity in funds to pay amounts due under the sale and purchase agreement.
Generally, private equity buyout deals in Sweden are investments where the private equity funds own a majority of the shares and/or votes in the target company. The investment mandates of such funds typically require the funds to hold majority stakes. Smaller private equity funds such as venture capital funds, on the other hand, often make minority investments.
It is fairly uncommon for private equity sponsors in Sweden to form a consortium in a transaction. Due to the general size of deal values in the Swedish market, private equity funds are typically able to take on the full equity ticket themselves. It does, however, occur in the larger transactions that take place in the market from time to time.
There are also cases where a private equity fund retains a minority stake in connection with a secondary sale to another private equity fund.
In line with the international trend, it is also common for limited partners to make direct passive investments alongside the general partner in which the limited partner is already an investor. Such structures are often leveraged by the general partner in transactions with large equity tickets.
The predominant forms of consideration structures used in private equity transactions in Sweden are locked-box and closing accounts mechanisms. Locked-box can be considered as the default mechanism, and closing accounts mechanisms are applied, for example, in carve-outs or where the working capital levels of the target business are unpredictable.
The COVID-19 pandemic has also led to buyers and sellers using a closing accounts mechanism as a tool to bridge valuation gaps with respect to targets that perform abnormally, and this is deemed to be a temporary effect of the pandemic.
Earn-outs are a common feature when a private equity fund acts as the buyer of a founder- or management-owned business. As is the case for any buyer of a management-owned business, an earn-out mechanism can serve as an incentive for management to stay on with the business for a certain period after the transaction.
Private equity funds in Sweden increasingly invest in recently founded growth companies that often have a limited history of sales and financial performance. With respect to such businesses, private equity funds – similar to any other corporate buyers – leverage earn-out components to ensure that the consideration is in line with the financial performance based on a longer period of time.
Conversely, private equity funds strive to avoid earn-outs when acting as a seller. The same applies for closing accounts mechanisms. Private equity funds often exist as structured processes, and earn-out components and closing-accounts mechanisms decrease both price certainty and comparability between bidders' offers.
Level of Protection Offered by Private Equity Seller
The level of protection offered by a private equity seller in relation to various consideration mechanisms would be similar to that of a corporate seller. This would generally include fundamental and business warranties and covenants during the period between signing and closing. In locked-box mechanisms, this would also include compensation for leakage. In closing accounts mechanisms, there are covenants not to manipulate working capital practices of the business.
Level of Protection Offered by Private Equity Buyer
The protection offered by a private equity buyer in relation to consideration mechanisms is typically limited and generally comprises limited ring-fencing protection regarding earn-out mechanisms. Swedish private equity buyers, similar to corporate buyers, are hesitant to assume far-reaching limitations on their freedom to operate the acquired business during the earn-out period. Accordingly, private equity buyers rarely accept de facto limitations on the conduct of the target's business operations and instead agree to adjust the earn-out calculation to correspond to what it would have been, had the relevant breach of ring-fencing provisions not been made.
As discussed in 6.1 Types of Consideration Mechanisms, a locked-box consideration mechanism is the default mechanism in a Swedish private equity transaction.
As is generally the case in Swedish locked-box deals, the purchase price generally includes an interest component, pursuant to which an interest accrues on the equity value. Such interest serves as compensation to the seller for the accrued and/or projected earnings of the business from the locked-box date until closing. It is uncommon for interest to be charged on leakage.
The typical dispute resolution in a Swedish private equity deal would be arbitration under the rules of the Stockholm Chamber of Commerce. It is common practice to have a specific expert dispute resolution mechanism for disagreements relating to completion-accounts consideration structures. It is not common to have a specific dispute resolution mechanism in a locked-box deal.
The typical level of conditionality in private equity transactions is generally very low. A private equity seller would rarely accept any conditions other than mandatory merger control approval (if applicable).
Except in deals where the private equity buyer has a strong bargaining position, such as acquisitions from founder-led companies, it is uncommon for deals to be subject to extensive levels of conditionality, including for example financing, third-party consents, and shareholder approval.
Similarly, material adverse change/effect provisions are uncommon, and deals are not often conditional upon third-party consents such as key contractual counterparties of the target business, which would rather be mitigated through informal contacts and cooperation covenants by the seller.
Provided that a merger filing analysis is made that does not identify any material overlaps, a private equity buyer typically accepts fairly extensive merger control obligations. However, it is relatively common to see the obligations limited to offering remedies in relation to the target business only (ie, to not accept obligations to offer remedies in relation to other portfolio companies, or to maintain a standstill and not acquire any other businesses which may impede the relevant merger filing).
In conditional deals with a private equity-backed buyer, a break fee in favour of the seller is uncommon. If such buyer accepts a break fee, it would typically be quantified and limited to the seller's transaction costs.
Reverse break fees are rare in the Swedish market.
The right for a private equity buyer or seller to terminate the acquisition agreement is typically limited, and can typically only be made if:
The Swedish Sale of Goods Act (Köplagen) applies to the sale of shares and assets but is always disapplied under the acquisition agreement, as it contains provisions that are inappropriate for business transfers.
As further discussed in 6.9 Warranty Protection and 6.10 Other Protections in Acquisition Documentation, a private equity seller is hesitant to assume risk in Swedish transactions, in order to limit residual liability and achieve a clean exit.
Like other sellers, private equity sellers are also hesitant to agree to any risks affecting deal certainty, such as (non-mandatory) conditions precedent.
Therefore, the buyer, including where the buyer is a private equity fund, generally assumes most of the risk under the acquisition documentation.
Risks Assumed by the Seller
As further discussed in 6.10 Other Protections in Acquisition Documentation, W&I insurance is the norm for private equity sellers in order to limit residual liability.
A private equity seller would also resist other residual liability. See 6.10 Other Protections in Acquisition Documentation regarding other risks, such as specific indemnities and seller covenants.
Other Limitations on Liability
Please see 6.9 Warranty Protection regarding the main limitations on liability for the seller regarding the seller's warranties.
Other main limitations on the seller's liability include:
The allocation of risk typically does not differ based on whether the other party is a private equity fund or not.
As further discussed in 6.10 Other Protections in Acquisition Documentation, warranties and indemnities (W&I) insurance has become the norm in the Swedish market, including in private equity deals.
As long as W&I insurance is in place, a private equity seller gives fairly comprehensive warranties (relative to Swedish deals in general), as the private equity seller only assumes liability for fundamental warranties in excess of the W&I insurance.
In the Swedish market, W&I insurance is typically taken out by the buyer. If W&I insurance cannot be taken out (eg, if the transaction process is time constrained), a private equity seller often resists giving any business warranties and accordingly only gives fundamental warranties.
Equal Treatment of Private Equity Seller and Management Sellers
Private equity sellers and management sellers typically receive equal treatment under the acquisition documentation. It is uncommon for management shareholders to provide more extensive protection than that granted by the private equity seller. This is driven by the norm that the private equity seller's drag rights under the shareholders' agreement requires equal treatment, subject only to certain exceptions. Such exceptions include non-compete and non-solicitation covenants, as further discussed under section 6.10 Other Protections in Acquisition Documentation.
Limitation of Liability
The typical limitations on the seller's liability for warranties are as follows:
The limitation of liability typically does not differ where the buyer is a private equity fund.
The protection offered by the seller in acquisition documentation typically includes the following:
W&I insurance is very common in the Swedish market, including in private equity deals.
In the Swedish market, W&I insurance is typically structured as a buyer's insurance. If W&I insurance cannot be procured (eg, if the transaction process is time constrained), a private equity seller often resists giving any business warranties, and only gives fundamental warranties in line with the general private equity principle to limit residual liability.
It is very uncommon to have an escrow, reverse equity commitment letter, or other retention in place to back the obligations of a private equity seller. Based on recent developments, including warranty claims towards private equity sellers and the developments in other jurisdictions, it remains to be seen whether such recourse rights may become more commonplace.
Covenants Regarding Conduct of Business between Signing and Closing
A private equity seller usually assumes customary covenants to provide that the target's business is conducted in the ordinary course of business between signing and closing in order to preserve the value of the target and keep its operations consistent.
A private equity seller typically resists and rarely gives specific indemnities, in line with the principle of achieving a clean exit.
A private equity seller typically resists giving non-compete and non-solicitation covenants, also in line with the principle of achieving a clean exit. If any such covenants are given, they are typically limited to non-solicitation of key employees.
A private equity seller typically assumes customary confidentiality obligations.
Litigation is fairly uncommon in Swedish transactions. W&I warranty claims in cases of warranty breaches are fairly common, which may be driven by the high prevalence of W&I insurance in the market.
The most commonly litigated provisions are consideration mechanics, mainly closing accounts and earn-outs, and warranties. The most commonly litigated warranties are financial warranties.
Public-to-privates in private equity transactions are becoming more and more common, as long as the valuation considerations are deemed attractive. Recent examples are Altor's takeover of Transcom, CVC's takeover of Ahlsell, and Bridgepoint's takeover of Cherry.
An investor acquiring or disposing shares in a company listed on a regulated and thereby passes (in either direction) any of the thresholds 5%, multiples of 5% up to 30%, and 50%, 66.67% and 90%. The disclosure obligation applies to the investor and various related parties.
Any investor who acquires shares and thereby achieves a shareholding representing at least three tenths of the voting rights of all shares in the company is obliged to announce a mandatory offer. This obligation applies both for issuers listed on regulated markets and certain other market places.
Cash offers are more commonly used in Sweden as consideration. During 2014-18, 86% of all takeover offers made were all-cash offers.
As a general standpoint, the bidder may stipulate conditions for completion of the offer (completion conditions). A completion condition must be formulated so it can be determined objectively whether or not the condition has been fulfilled. Accordingly, the condition may not be formulated in such a way that the bidder has a decisive influence over its satisfaction. Conditions used in a Swedish context are fairly standardised, regardless of whether the takeover is private equity-backed or not.
Customary Completion Conditions
During the period 2014-18, the following conditions were used in 82-95% of all announced takeovers:
a) the takeover is accepted to such an extent that the bidder becomes the owner of shares representing more than 90% of the total number of outstanding shares in the target company;
b) no other party announces an offer to acquire shares in the target company on terms that are more favourable to the shareholders of the target company than the bidder's takeover offer;
c) all necessary clearances, approvals, decisions and other actions from authorities or similar clearances, including approvals from competition authorities, are granted, in each case on terms which the bidder deems acceptable;
d) neither the offer nor the takeover is rendered wholly or partially impossible or significantly impeded as a result of legislation or other regulation, any decision by a court or public authority, or any similar circumstance, which is actual or can reasonably be anticipated, and which the bidder could not reasonably have foreseen at the time of announcement of the public takeover;
e) no circumstances have occurred which could have a material adverse effect upon the target company's sales, profit, liquidity, solidity, equity or assets;
f) no information made public by the target company is materially inaccurate, incomplete or misleading, and the target company has made public all information which is required to be made public; and
g) the target company does not take any measures that are likely to impair the prerequisites for making or completing the takeover.
Normally the bidder reserves the right to withdraw the takeover in the event that it is clear that any of the above conditions are not satisfied or cannot be satisfied. However, with regard to conditions b)–g) above, the takeover may only be withdrawn provided that the non-satisfaction of such condition is of material importance to the bidder's takeover.
It is also customary for the bidder to reserve the right to waive, in whole or in part, one or several of conditions outlined above, including, with respect to condition a), to complete the takeover at a lower level of acceptance.
The bidder can make the takeover conditional on a lender disbursing an acquisition loan. A completion condition of this nature gives the bidder an opportunity not to complete the takeover in the event that the lender fails to disburse the loan in breach of the loan agreement, eg, due to insolvency on the part of the lender. Conditions for disbursement of the loan contained in the acquisition loan agreement may not be invoked as grounds for not completing the takeover. In order for the bidder to be able to invoke such conditions, they are to be stipulated as conditions for completion of the takeover. Reliance on such condition may be subject to an assessment of materiality by the Swedish Securities Council. Notwithstanding the aforementioned, the bidder may accept that the lender stipulates conditions for disbursement of the loan which are not included as conditions to completion of the takeover. However, in order to ensure that such conditions do not conflict with the general requirement that the bidder must have ensured that it has sufficient financial resources to implement the takeover, the conditions must be of such a nature that the bidder is personally able to ensure that the conditions can be met in practice. This may include, for example, conditions that agreed security will be provided and the requisite loan documentation signed. Non-fulfilment of such conditions may not constitute the basis for withdrawing the takeover and, consequently, the bidder itself bears the risk that the loan will not be disbursed for such reasons.
Irrevocable undertakings from major shareholders are the most common way to secure a public takeover. Unless approved by the Swedish Securities Council, the target company may not commit itself to any offer-related arrangement vis-à-vis the bidder. The term “offer-related arrangement” refers to any and every arrangement related to the offer which entails an obligation on the offeree company vis-à-vis the bidder. However, this does not include confidentiality clauses or undertakings not to solicit the bidder’s employees, customers or suppliers.
From a listing governance perspective, it is difficult to have the target company delisted unless the bidder reaches 90% of the total number of outstanding shares (as it may then be argued that there are still grounds for a functional trading). If the target company cannot be delisted, the target company has to comply with the listing rules. A shareholder holding at least 10% of the outstanding shares can request that an extra general meeting is held. At such meeting, the bidder can elect a new board and, in practice, control the company.
In terms of a squeeze-out procedure, a bidder holding not less than 90% of the number of shares in the target company has the right to acquire the minority shareholders’ shares in a squeeze-out procedure.
Where a squeeze-out procedure is initiated following a takeover, the consideration for the remaining shares of the target company shall be the actual value of the shares on the day when the procedure was initiated. However, an explicit exemption from this rule is stipulated in the Swedish Companies Act and becomes applicable if a takeover is made to acquire all shares not belonging to the bidder and the takeover is then accepted by shareholders representing at least 90% of these shares. In such cases, absent special circumstances, the price of the remaining shares shall be the same as in the takeover offer.
Below is a sample timeline for a squeeze out-procedure.
As indicated above, it is common to obtain irrevocable commitments/undertakings to tender and/or vote by the principal shareholder(s) if the takeover price is attractive. The timing of these commitments varies; they could be negotiated prior to the approach of the target company's board of directors in order to have strong support when the board is approached. The commitments could also be negotiated shortly before the announcement of a takeover.
Usually, these undertakings are soft undertakings enabling the shareholder to accept a competing takeover if such competing takeover is a certain percentage higher than the bidder's takeover offer, potentially with a right for the bidder to match the competing offer. Unconditional undertakings are not uncommon and may be obtained if the bidder has a strong position. Another option is to acquire the principal shareholders' shares and thereby trigger a mandatory offer.
Hostile takeovers are permitted in Sweden. However, they are not common as, historically, they are more difficult to complete. Approximately 80% of all takeovers during 2014-18 were recommended before or during the takeover. Historically, private equity-backed bidders have not been active in hostile takeover transactions in the Swedish market and it is difficult to see that this would change in the short term.
Equity incentivisation of the management team is standard practice in private equity transactions in Sweden.
The level of equity ownership for the management team typically depends on whether the management team owns any equity prior to the private equity buyer's acquisition or not.
Managers are typically offered to invest in institutional strip on the same terms as the private equity fund, particularly if they are founders of the business and reinvest/own a large equity stake in the business.
Key members of management often receive offers to invest fully or partially in sweet equity.
The typical structure in Sweden is a customary mix of ordinary shares and preference shares. Preference shares constitute preferred instruments that entitle investors to a return corresponding to the subscription amount of the shares plus an annual coupon on such subscription amount. Preference shares rank above ordinary shares. Ordinary shares, on the other hand, entitle investors to a return corresponding to all dividends and any other proceeds in excess of the return allocated to preference shares.
Sweet equity typically comprises both ordinary shares and preference shares. It is uncommon in Sweden for key managers to subscribe for 100% ordinary shares.
Managers typically invest on the same level in the acquisition vehicle structure, ie, in a two-tier holding structure, and the management team owns shares in the parent company alongside the private equity fund.
It is fairly common to pool management investors in a separate holding entity (ie, a ManCo/EmCo) in order to simplify administration and the ultimate exit process, in particular where the private equity fund launches a wider investment program for non-key employees who make smaller equity investments.
Historically, private equity funds commonly granted shareholder loans instead of, or in addition to, preference shares. Due to changes in tax rules and legislation during the last decade, however, such loans have become unusual.
The typical leaver provisions in Sweden include (i) good leaver, (ii) bad leaver, (iii) material breach, and (iv) other events where the management shareholder loses control over its shares.
Good leaver events typically include a termination of the employment by the company without cause, or similar events such as retirement, long-term illness or death. A good leaver event typically entitles the manager to fair value for its shares.
Bad leaver events typically include a termination of the employment for any other reason, such as a termination by the employee or a summary dismissal by the employer. Bad leaver events typically entitle the manager to the lower of the amount invested by the manager, and a discount on the fair value of the shares corresponding to a purchase price of between around 50% to 75% of the fair value.
Due to Swedish tax rules, it is not efficient for the company to redeem shares from its shareholders. The private equity fund therefore typically acquires the shares from the manager. Accordingly, the leaver provisions are typically structured as a call option granted to the private equity fund, which exercises the call option upon a leaver (or other applicable) event and acquires the shares from the management shareholder.
It is fairly uncommon for private equity funds in Sweden to apply vesting provisions. Where vesting provisions are applied, the typical structure is a ratchet over 3-5 years. It is, however, not uncommon to grant the manager fair value for its shares if the manager becomes a bad leaver after a certain number of years from its investment.
The customary restrictive covenants agreed to by management shareholders in Sweden are typically non-compete and non-solicitation covenants. Such covenants typically apply during the period that the shareholders own shares and two years thereafter. Under Swedish law, a non-compete cannot apply for more than three years after a sale of the relevant shares.
Management shareholders are typically not requested to agree to separate non-disparagement undertakings. It is, however, not uncommon for such undertakings, including fraud against the company or other crimes, to constitute call option events under the leaver provisions.
Manager shareholders typically obtain anti-dilution protection, subject to customary carve-outs such as issues to reinvesting managers, finance providers and other third parties.
Manager shareholders are typically not granted any veto rights, including in structures where management holds a significant minority. It is not uncommon for manager shareholders to be entitled to director appointment rights, particularly when the private equity fund acquires a founder-owned business where the manager shareholders retain a large stake in the company.
Manager shareholders typically do not have any right to control or influence the exit of the private equity fund. However, manager shareholders often enjoy certain limitations and protections such as a time limitation on a lock-up in an IPO, duration of non-compete and non-solicitation covenants towards the buyer in a trade sale, and similar.
A private equity fund shareholder would typically control a majority of the votes in its portfolio companies. Private equity funds in Sweden typically make control investments. However, as discussed in 8.1 Equity Incentivisation and Ownership, it is common for the private equity fund to only acquire a weak majority of the shares when buying a founder-led company. In such scenarios, especially when the investment is a platform investment or a buy-and-build investment case, and the fund may be diluted to a less than 50% shareholding, it is common for the private equity fund to hold shares with more votes per share than the shares held by management shareholders. The private equity fund thereby maintains control over the company.
By holding a majority of the votes in the company, the private equity fund controls the appointment of the board. The fund thereby controls the decisions taken by both the shareholders and the board – including, for example, decisions regarding share issues (except directed share issues, which require a supermajority), M&A activities, business plans and budgets. Accordingly, it is not necessary to include such rights contractually in the shareholders' agreement with the other shareholders.
A private equity fund typically invests in a Swedish limited liability company (aktiebolag). Under Swedish law, the shareholder and the company are separate and, as the name indicates, shareholders do not have any liability for the company's obligations other than the equity paid into the company. The corporate veil was pierced on certain occasions, but in these exceptional cases, the shareholder intentionally and maliciously exploited the limited liability regime that applies to Swedish limited liability companies.
It has become increasingly common for private equity funds to either impose their own compliance policy or, if available, revised versions of the company's own policies.
The typical holding period for private equity investments is approximately three to five years. As the private equity market matures, various alternative structures emerge. For example, certain Swedish private equity funds have launched funds to which existing investments have been rolled over in order to prolong the holding period beyond the terms of the relevant fund's investment mandate. In addition, several private equity funds have mandates that permit longer holding periods up to ten years or more.
Please also see the discussion in 1.1 M&A Transactions and Deals regarding dual-track exits.
Reinvestment by a private equity seller is rare and typically only occurs in specific circumstances, such as where the fund sells on the target shortly after its acquisition, as means for the private equity buyer to buy a target with a larger equity ticket, or to enable the selling private equity fund to make a partial exit and at the same time enjoy the opportunity of an expected significant development of the target going forward.
Equity arrangements in Sweden typically include drag rights for the private equity fund, in order to be able to sell 100% of the target in the exit. For the same reason, private equity funds typically utilise the drag mechanism in exits.
Institutional co-investors are typically also subject to a drag mechanism.
The typical drag threshold in Sweden is 50%, or a change of control of the target.
Management shareholders typically enjoy tag rights when the private equity fund shareholder sells its stake. The typical tag threshold is the same as the drag threshold, ie, 50% or a change of control of the target. Institutional shareholders are typically also entitled to a tag mechanism.
The typical lock-up arrangement for a private equity seller contains a restriction for the seller to not sell its shares (and related financial instruments in the issuer) for a period of 180 calendar days. The restriction is normally subject to several customary conditions such as intra group transfers. While it is uncommon, the lock-up can also be waived by the investment bank(s) before the lock-up period has expired. Relationship agreements do not exist on the Swedish market.