Private Equity 2023 Comparisons

M&A and private equity deal activity slowed down during the second half of 2022 from the previous high activity in the Nordics in general, and in Sweden in particular due to, among other things, market uncertainties and increasing financing costs. Increased activity has been seen in the first half of 2023.

In the current politically and economically complex environment, a continued trend during 2023 has been that deals tend to take longer than usual to conclude. Increased expenses related to financing and the difficulty of pricing targets in abnormal market conditions have often led to increased gaps in valuation between sellers and buyers. As a result of this, there is a tendency for purchase price mechanics to become more diversified, and elements such as re-investments, deferred payments and earn-outs have started to become part of negotiations to bridge valuation gaps.

Whilst the generally lower valuation of public companies in 2022 resulted in increased public M&A activity, the first half of 2023 only saw a few public offers. The IPO exit conditions remain less favourable, and as a consequence of this, IPO activity in Sweden remained significantly lower during 2022 and the first half of 2023 compared to recent years.

The SPAC trend has been less evident in Sweden compared to other markets and only a few have come to the markets. However, only a very limited number of de-spac transactions have been executed by the Swedish SPACs so far.

Industries that have been specifically targeted in private equity deals during 2023 include information technology and cyber security, real estate, logistics and insurance.

International Sanctions

International sanctions, mainly relating to Russia, have complicated private-equity dynamics in Sweden.

Sweden has no nationally resolved sanctions. Instead, EU sanctions are implemented on a national level in Sweden. Non-compliance is penalised and can lead to both corporate and individual liability.

EU sanctions have led to private equity firms having to scrutinise their investors and investments to avoid links to sanctioned persons. While private equity firms are not legally required to maintain sanction compliance programmes, they are required to abide by sanctions. It is therefore recommended that private equity firms have a programme in place to screen out investments from sanctions targets, even though they are not legally required to do so. It is not uncommon for prominent institutional investors to ask for sanction policies in general, and even legal opinions, with respect to specific investors and/or investments from a sanctions compliance perspective.

The stricter regulatory environment concerning sanctions has specifically put an end to direct investments in Russia. One reason for this is the difficulty of receiving and making payments to Russian counterparties under existing sanctions rules. Financial institutions in Sweden often even decline transactions with Russian counterparties not subject to sanctions due to the increased reputational and regulatory risks. Another reason for the lid on direct investments in Russia is the difficulties for Swedish entities making divestment of Russian holdings, which often requires specific authorisation from competent authorities in Sweden.

Amendments to the Security Act

The Protective Security Act (Security Act) imposes obligations on entities that to any extent undertake certain security-sensitive activities (eg, operation of airports, information systems for electronic communication and provision of payment services).

From a private equity perspective, the main implication is that the target entity is obliged to perform a special security assessment and an assessment of suitability as well as consult the supervisory authority ahead of any sale, co-operation or other activity lending a party access to security-sensitive information or activities.

Any transfer of shares pertaining to, in any part, security-sensitive activities that has not been approved by or not subjected to consultation with the supervisory authority may be declared legally invalid by the authority.

Foreign Direct Investments

A proposal to implement an audit procedure for foreign direct investments in undertakings carrying out vital societal functions and critical infrastructure has been proposed to the Swedish parliament.

Under the proposed regime, an investor must notify the competent authority before an investment. The scope of the duty of notification is proposed to include any acquisition of shares resulting in an interest of 10% or more. This includes any subsequent transfers after which the resulting interest is equal to or larger than 10%. The notification obligation is proposed to apply to both Swedish and foreign investors. The new regime will apply in parallel with the Security Act.

The competent authority is authorised to set conditions for, or ultimately prohibit, an investment in such operations. Violating the new regime can result in a penalty fee of up to SEK100 million and invalidation of any investments made in breach of the regime.

From a private equity perspective, the immediate effects are that new factors must be considered in connection with the preparation, negotiation and execution of transactions, including due diligence, responsibility and risk allocation of the new approval process and the transaction timeline.

The new legislation is expected to enter into force on 1 December 2023 but is yet to be adopted by the Swedish parliament.

ESG and Sustainability

The area of sustainability regulation has expanded significantly over the past years. Apart from regulatory requirements relating to sustainability disclosures by certain financial market participants under Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR), further reporting obligations will apply to an even broader set of undertakings following the full implementation of the amendments to the non-financial reporting obligations in Directive (EU) 2022/2464 as regards corporate sustainability reporting (CSRD). Furthermore, on 23 February 2022, the EU adopted a proposal for a Directive on corporate sustainability due diligence, requiring in-scope companies to comply with certain due diligence requirements regarding human rights and environmental standards in their supply chains. Lastly, reporting obligations under the Taxonomy Regulation (Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment), were phased in over several years. In 2023, obligated undertakings were required, for the first time, to report their share of taxonomy-eligible and -aligned activities in respect of certain KPIs.

Sustainability-related disclosures

The regulatory technical standards to the SFDR – the Delegated Regulation (EU) 2022/1288 (RTS) – started to apply on 1 January 2023, and specifies in closer detail the content, methodology and presentation of the information that is to be disclosed by private equity funds under the SFDR. The RTS was corrected and thereby amended as of 31 October 2022, and the changes started to apply on 20 February 2023. The RTS provides mandatory templates both for pre-contractual and periodic disclosures for certain financial products. Furthermore, the RTS contains mandatory templates for the statement to be published in respect of how the relevant undertaking considers certain mandatory and non-mandatory principal adverse impacts (PAI) of its investment decisions on the sustainability factors relevant to that undertaking’s business (PAI Statement). The PAI reporting template contains a number of “PAI indicators”, which need to be assessed if the undertaking considers PAI in its investment process and the first-time publication of the PAI Statement for obligated undertakings fell on 30 June 2023, covering the reporting year 2022.

Since many private equity funds invest in portfolio companies that are not themselves subject to the abovementioned sustainability regulations, such private equity funds may encounter difficulties in reporting its PAI as well as in pre-contractual and periodic disclosures. As for compliance with the SFDR, the RTS states that when the necessary information is not readily available, PAI reporting shall include details of the best efforts used (by the fund manager) to obtain the information either directly from the portfolio companies, or by carrying out additional research, co-operating with third-party data providers or external experts, or making reasonable assumptions. Notably, the European Sustainability Reporting Standards (ESRS) under the CSRD are in fact designed to cover all PAI indicators, and thereby seek to provide sufficient data for reporting of PAI.

Corporate sustainability reporting and the Taxonomy Regulation

The CSRD will, once implemented into Swedish law, entail considerably enhanced reporting obligations of sustainability information for a wider range of in-scope companies in comparison with existing rules. The new rules are designed to encompass all previous in-scope companies, but also, for instance, small- and medium-sized listed entities and certain entities domiciled outside of the EU. The same expanded group of entities will be obliged to also report under the Taxonomy Regulation.

Unlike previous non-financial reporting obligations, reporting under the CSRD shall mandatorily be carried out in accordance with ESRS (that are yet to be adopted) and the framework includes several additional features, such as audit review.

The rules under the CSRD will be applicable in tranches starting in the accounting year 2024 (with reporting in 2025) up until the accounting year 2028 (with reporting in 2029) depending on the in-scope company in question. Even if alternative investment funds and UCITS funds are excluded from the scope of the CSRD, asset managers may need to carefully assess whether any part of its operations in fact are in scope, and more importantly whether any vehicles controlled are in scope.

On a general level, there is a high degree of contractual freedom regarding acquisitions and sales of private limited liability companies in Sweden. Mandatory filings are, as a general rule, limited unless the business conducted by the target or either of the parties is regulated. Regarding acquisitions of publicly traded companies, special regulations, including the Takeover Rules for Nasdaq Stockholm and Nordic Growth Market, apply.

Merger Control Filings

The main regulatory gateway that currently arises in Sweden in private equity transactions is merger control filings. The Swedish Competition Authority (SCA) is well experienced in private equity deals and is able to swiftly process and approve straightforward cases. There has not yet been any indication that the SCA intends to follow the recently announced hawkish approach towards private equity deals to be taken by US antitrust regulators. On the contrary, while the SCA’s statutory review period is one month, recent experience indicates that the SCA may issue clearances within ten days, without any requirement of pre-notification contacts. Moreover, in more complex deals, the SCA has been able to conduct its in-depth investigation without jeopardising the deal timetable (see, for example, Accent, Tempcon, or Lincargo).

A merger filing with the SCA must be submitted by the acquirer if (i) combined turnover in Sweden of all the parties exceeds SEK1 billion, and (ii) each of at least two of the parties involved generate turnover in Sweden above SEK200 million. Similar to many other jurisdictions, the SCA has the power to investigate deals below the mandatory threshold of SEK200 million. While not unusual in industrial deals with high shares, this rarely happens in private equity-backed deals. The substantive test applied by the SCA is identical to that of the EU Commission, meaning that the SCA will oppose (or require remedies) if a transaction is liable to significantly impede effective competition.

Foreign Direct Investments and the Security Act

Please refer to 2.1 Impact on Funds and Transactions regarding notification requirements under the Security Act, and regarding the foreign direct investment regulation which has not entered into force yet.

The AIFM Act

The Swedish Alternative Investment Fund Managers Act (AIFM Act) implements Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers (AIFMD) into Swedish law. The AIFM Act sets out the central provisions on authorisation, ongoing management and disclosure obligations for managers of alternative investment funds (AIFMs) with regard to its marketing and management of alternative investment funds (AIFs) within the EU. The Swedish Financial Supervisory Authority (SFSA) is the supervisory authority under the AIFM Act.

As a main rule, no Swedish AIFM may manage an AIF unless authorised by the SFSA under the AIFM Act. However, Swedish sub-threshold AIFMs may instead apply for registration with the SFSA.

The AIFM Act also contains provisions on marketing of EEA-based and non-EEA based AIFs by Swedish and foreign AIFMs to professional and non-professional investors in Sweden and abroad. The Directive on Cross-Border Distribution of Funds (2019/1160/EU) is implemented into Swedish law.

The AIFM Act further includes an obligation to notify the SFSA of certain acquisitions and disposals. For example, if an AIF has acquired 50% or more of the voting rights of a non-listed company or 30% or more of the voting rights of a listed company (control), the AIFM will be subject to more extensive notification obligations. Following such acquisition, the AIFM must, inter alia, provide the SFSA, the target company and its shareholders with information on the identity of the AIFM and the AIFM’s policy for preventing and managing conflicts of interest. As regards acquisitions of control of non-listed companies, the AIFM is subject to additional disclosure obligations. It shall, inter alia, provide the SFSA, the target company and its shareholders with information on the chain of ownership in the AIF. The AIFM must also provide the SFSA and investors in the AIF with information on the financing of the acquisition.

Furthermore, an AIFM managing an AIF that has acquired control over a non-listed company or listed company may not facilitate, support or instruct certain distributions, capital reductions, share redemptions and/or acquisitions of own shares by the target company for a period of two years following the acquisition of control.

Finally, the AIFM Act contains extensive general information obligations for AIFMs. For example, an AIFM shall notify the SFSA prior to implementing any material changes in its operations or organisation. Each such change, which includes, inter alia, the appointment of new board members or a new CEO of the AIFM, changes in the ownership of the AIFM and changes in the use of leverage, must be subject to pre-approval by the SFSA.

This is only a selection of provisions in the AIFM Act most relevant for private equity funds. The AIFM Act (including supplementing provisions) has several other provisions affecting private equity funds.

AIFMD II

On 25 November 2021, the European Commission proposed amendments to the AIFMD (AIFMD II). Six months later, on 16 May 2022, the European Parliament issued its draft report on the Commission’s proposal. Further, on 21 June 2022, the Council of the European Union issued its proposal on amendments. After months of negotiations, the Parliament’s Committee on Economic and Monetary Affairs finally reached a political agreement on 24 January 2023.

While this political agreement confirms some amendments previously introduced, other changes that would have benefited the private equity industry did not make it into the parliament’s final position. This specifically relates to previous proposals of a new sub-category of professional investors, which was not included. On the contrary, the previously suggested changes relating to additional authorisation, marketing and reporting requirements for AIFMs were mostly confirmed.

Following the parliament’s adoption of its formal position, trilogies – ie informal tripartite meetings on legislative proposals – will begin between representatives of the parliament, the council and the commission to reach an agreement on a final version of the AIFMD II. According to plans, the AIFMD II regime will likely come into force as early as 2025 considering that the Member States will have 24 months after the proposed amendments enter into force to transpose these into national laws.

A comprehensive due diligence is typically carried out by private equity buyers covering legal, financial, tax and various commercial matters, depending on the nature of the target’s business. The scope is also to a large extent based on the demands from providers of representation and warranty insurance (RWI) to provide the necessary coverage (as RWI is customary in Swedish private equity transactions). The due diligence is typically carried out in close co-operation between legal, financial and tax professional advisors, relevant experts, and representatives of the private equity buyer’s deal team.

The legal due diligence is typically reported on in an exceptions-only format, which focuses on identified red flag issues to be addressed in connection with the transaction, and typically contains limited descriptive information. The focus areas of the due diligence are decided upon based on the nature of the target’s business and the demands from providers of RWI to provide the necessary coverage. Typical focus areas for the legal due diligence include:

• a review of the regulatory framework applicable to the business;
• a review of the contractual framework for the business;
• a review of the terms of key customer and supply contracts, as well as any joint venture, co-operation and partnership agreements (and other agreements that are material to the business);
• a review of terms for management and key employees, including addressing potential retention risks;
• past, ongoing and upcoming or expected litigation and investigations by authorities; and
• identifying other matters that are or could become impediments to the transaction and need to be handled through transaction structure, pre-signing, pre-closing or in the integration phase.

Furthermore, it is common for private equity buyers to request specific compliance, insurance and ESG due diligence. In recent years, private equity funds have increased their focus on compliance matters, which has led to areas such as compliance, anti-bribery, anti-corruption, information security, processing of personal data and related matters becoming focus points of due diligence.

In transactions that are financed with external loans, the due diligence reports are typically shared with the lending banks on a reliance basis.

In sales that are structured as auction processes, a vendor due diligence (VDD) covering financial, tax and legal issues is common. It is also becoming increasingly common for the seller to provide a legal guidance report. The purpose of the VDD, apart from expediting the auction process by limiting the work prospective bidders need to do in order to understand the target’s business, is to ensure that all bidders have access to the same information in order to maximise the value and comparability of the bids.

If the VDD report is offered with reliance for the final bidder, it is common for a private equity buyer to instruct its advisors to perform a limited top-up due diligence of the VDD report, rather than a full-scope due diligence. A top-up due diligence would typically be limited to confirming and analysing issues identified in the VDD report and performing additional due diligence on identified gaps in the VDD report or areas which are of specific interest to the buyer. The VDD report would also typically speed up the RWI underwriting process.

A private equity fund’s acquisition of a Swedish company is typically made under a private sale and purchase agreement. Share sales are most common and give the parties more flexibility than a business or asset transfer, where, for example, union consultation and consents from creditors or counterparties may be required.

The differences between the terms of an acquisition made in a bilaterally negotiated transaction and an auction sale have been limited in Sweden in recent years, and depend more on the bargaining power of the respective parties than on the fact that the sale is a bilateral or auction process. A seller in an auction sale will typically have stronger bargaining power than a seller in a bilateral sale, depending on the number of bidders and level of interest in the auction.

In line with the above, the terms in an auction sale with a private equity seller would typically include high deal certainty, with any conditionality usually restricted to merger clearance and other strictly required regulatory approvals (as applicable). Almost all private equity-backed trade sales will require the buyer to take out representation and warranty insurance, and will only offer representations and warranties to the extent that the buyer is able to insure them. To the extent that no representation and warranty insurance is taken out, or coverage of a certain warranty is not granted by the insurer, a private equity seller will typically have a very strict approach to the scope and limitations of representations and warranties.

A selling private equity fund is usually sensitive to all types of post-closing liability and will try to limit the same to the furthest extent possible. This is interlinked with the fact that any post-closing liability may require the private equity fund to set aside funds for claims during the claim period, which could have been returned to investors instead.

A private equity buyer would typically be structured by way of the private equity fund establishing a special purpose acquisition vehicle, which would consist of a multi-tier structure of three or more Swedish limited liability companies (aktiebolag). Foreign holding entities between the fund and the Swedish holding companies are not uncommon.

Typically, the structure will consist of a topco, where the equity will be held by the buying private equity fund, and by re-investing sellers and management as individuals, via wholly owned companies or via a jointly owned management company (manco). The topco owns the midco (which would take up any junior debt financing), which in turn owns the bidco. The bidco is the acquiring entity, and also the one taking up any senior debt financing.

The only transaction documentation the fund will typically be a party to is, if required, an equity commitment letter, as further outlined in 5.3 Funding Structure of Private Equity Transactions.

Swedish private equity deals are typically financed by a mixture of equity funding provided by the private equity fund, using commitments from its underlying investors, and third-party debt from banks, credit funds and other alternative lenders. The ratios of senior debt and equity vary from case to case, depending, for example, on deal size, market conditions and the sector where the investment is made.

Historically, bank loans have been by far the most common financing method for Nordic private equity transactions, but credit funds and other alternative lenders have quickly gained prominence in recent years, for example due to more flexible funding terms and the ability to invest in junior debt. This trend has been further cemented due to exacerbated market conditions during the second half of 2022 and first half of 2023, leading to a scarcity of traditional funding sources, further pivoting the market in favour of both domestic and overseas alternative lenders.

Bond debt became an increasingly popular funding source during 2020 and 2021, but the Swedish bond market effectively came to a near halt during the second half of 2022 and first half of 2023 due to market uncertainties and the increasing cost of bond debt, combined with spill-over effects of the downward pressure on real property bonds. However, bonds are expected to regain popularity once the Swedish bond market re-opens. The rapidly growing direct lending market where, for example, credit funds are increasingly active is especially interesting for certain borrowers and certain sectors where there are funding gaps.

If the private equity buyer’s acquisition structure includes a special purpose acquisition vehicle as the buying entity, the fund will (upon the seller’s request) typically issue an equity commitment letter addressed to the special purpose acquisition vehicle and the seller, committing to provide the buying entity with funds to pay amounts due under the transaction agreement. Lenders also frequently provide comfort over the debt-funded portion of the purchase price by committing certain debt funds, signing off on as many condition precedents as possible in advance.

Private equity deals in Sweden are generally control investments. The investment mandates of the funds typically require the funds to hold majority stakes. However, there has been a recent increase in minority investments as set out under 5.4 Multiple Investors, and certain private equity funds, including venture capital funds, regularly make minority investments.

In larger transactions, it sometimes happens that private equity buyers form consortiums. Albeit rare, such consortiums can include corporate investors. The size of the fundraising rounds, and the size of the investments made, have been growing steadily, and minority investments are getting more common. There are also buyout funds that have started to raise capital specifically intended for minority investments.

The management team is regularly offered to own a small portion of ordinary equity, but represents only an insignificant portion of the equity funding.

It is common for limited partners to make direct investments alongside the general partner. These investments are often passive. This kind of equity syndication is often done after the transaction has been signed but prior to the transaction being funded and closed.

Consideration Mechanisms

As outlined in 1.1 M&A Transactions and Deals, the difficulty of pricing targets in abnormal market conditions has led to purchase price mechanics again becoming more diversified. However, in Sweden the most commonly used forms of consideration structures are still locked-box and closing accounts mechanisms. The locked-box structure is most common in Swedish private equity transactions and especially favoured by sponsor sellers. Closing accounts and other true-up mechanisms are often applied in complex transactions involving a spin-off or carve-out component, where the business does not have a standalone balance sheet and/or long-term historic financials or the working capital levels of the target are difficult to predict.

Vendor Participation

Other than for management reinvestment, as outlined in 8.1 Equity Incentivisation and Ownership, vendor participation is not, or has at least not during the last couple of good years been, a common feature in Swedish private equity transactions. On occasion, vendor participation has been used to bridge valuation gaps where a buyer has difficulty raising sufficient external financing.

Earn-Outs

Earn-outs are more frequently used in times of market uncertainty and are common when private equity funds acquire a business that is founder-owned. With respect to acquisitions of recently founded growth companies, earn-out components are leveraged by private equity buyers to ensure that the consideration for the business is in line with the expected financial performance. Roll-over structures are common when the founders or management shall remain involved in the acquired company.

Level of Protection Offered by Private Equity Sellers and Buyers

The protection offered by a private equity seller in relation to consideration mechanisms is generally based on warranties and covenants during the period between signing (or, in a locked-box transaction, the locked-box date) and closing, and is similar to the protection offered by a corporate seller. In locked-box mechanisms, the additional customary protection consists of an undertaking structured as an indemnity to compensate the buyer for leakage.

The protection offered by a private equity buyer in relation to consideration mechanisms is typically limited. Escrow solutions are not the norm in Swedish transactions, and depend on the bargaining power of the parties.

Ring-fencing protection regarding earn-out mechanisms is customary. Private equity buyers rarely accept limitations on the conduct of the target’s business operations, but may instead sometimes be willing to agree to adjust the earn-out calculation to correspond to what it would have been if the breach of the ring-fencing provision had not occurred.

As discussed in 6.1 Types of Consideration Mechanisms, locked-box is the most common consideration mechanism in Swedish private equity transactions. In a Swedish locked-box transaction the purchase price generally includes an interest component where interest accrues on the equity value.

In a locked-box deal the dispute resolution mechanism for the entire agreement, which is typically arbitration under the rules of the Stockholm Chamber of Commerce, would also apply to disputes regarding the locked-box consideration. In a completion accounts deal it is common to have a specific expert determination procedure for disagreements regarding the completion accounts consideration.

Deal certainty is fundamental for private equity sellers and Swedish private equity transactions tend to have minimal conditionality, usually limited to mandatory filing obligations such as merger clearance and FDI. Material adverse change clauses are not common. Covenant undertakings from the seller to try to obtain third-party consents from key contractual counterparties are common, but only on a covenant bases, ie, not on a conditionality basis.

A private equity seller will, in accordance with the principle of minimising transaction risk, expect a buyer to assume extensive merger control obligations. A private equity buyer is typically willing to accept fairly extensive merger control obligations in a competitive auction provided that the merger filing analysis does not identify material overlaps. However, it is important to limit obligations to the buying entity, and as a general rule not accept obligations in relation to other portfolio companies, or standstill provisions, which could both constitute breaches of the fund’s fiduciary obligations towards its investors.

Break fees, including reverse break fees, are rare on the Swedish market in general, including in private equity transactions. In competitive processes they are, however, more common if there is a merger filing condition.

As deal certainty is a central component in most private equity transactions, termination rights are typically limited and heavily resisted by both parties. The acquisition agreement can typically only be terminated if conditions precedent are unfulfilled at the long-stop date commonly falling 6 months after signing, or if a party does not fulfil its obligations at closing, in which case closing would typically be rescheduled once before the agreement would be terminated.

Sellers in private equity transactions typically want to achieve a clean exit, as any residual liability would count against the return they can distribute to their investors. Private equity sellers therefore strive to limit residual liability in the transaction documentation.

In Sweden, the buyer’s knowledge (including information in the data room) will normally be considered as disclosed against the warranties, which means that any specific findings need to be priced or negotiated as indemnities. However, as warranties are typically given both at signing and closing, the risk for the target remains with the seller until closing. This is one of several contributing factors to RWI being the norm in Swedish private equity transactions, as outlined in 6.9 Warranty Protection.

The main limitations on liability for the seller regarding the seller’s warranties are outlined in 6.9 Warranty Protection. Other limitations on the seller’s liability include, as a rule:

• several liability for the sellers (as opposed to several and joint);
• a cap corresponding to each seller’s portion of the purchase price;
• provisions regarding notification of claims; and
• provisions regarding conduct of third-party claims.

General

When RWI is in place, it is common for private equity (and other) sellers to agree to a wider scope of warranties than would otherwise be the case, provided that the warranties can be insured based on the buyer’s due diligence. Correct scoping of the due diligence is very important in ensuring satisfactory coverage. In insured transactions, the scope of the warranties is a matter primarily between the purchaser and the insurer, as private equity sellers typically only assume liability for fundamental warranties in excess of the RWI limit.

In the Swedish market, buy-side RWI is by far the most common, as sell-side RWI is both more expensive and offers less coverage. On the Swedish market it is uncommon for RWI to be unavailable due to timing or other process constraints, as brokers and underwriters have developed the underwriting process and product offering to offer more flexibility.

In a deal where RWI is for any reason not taken out, a private equity seller would give fundamental warranties, but would typically resist giving business warranties. As in any other uninsured transaction, the scope of the warranties is primarily a commercial matter and would depend highly on the bargaining power of the parties.

Treatment of Private Equity Sellers compared to Management Sellers

Private equity sellers and management sellers receive, as a starting point, equal treatment under the acquisition documentation. The background is the applicable shareholders’ agreement, which as a rule does require equal treatment (with certain exceptions).

Limitation of Liability

The limitations on the seller’s liability for warranties are:

• de minimis – 0.1–0.3% of the purchase price;
• basket – 1–3% of the purchase price;
• cap – 10–50% of the purchase price (in uninsured transactions, the cap is closer to 10% for a private equity seller, and closer to 30–50% for founder or corporate sellers); and
• time limitations – 12–24 months’ general limitation period (24 months is most common as it is the norm in RWI policies, although certain RWI providers are now extending the coverage for general warranties to 36 months), with extended limitation periods for fundamental warranties and tax warranties.

As set out in 6.8 Allocation of Risk, the buyer’s knowledge (including information in the data room) will normally be considered as disclosed against the warranties, which means that any specific findings need to be priced or negotiated as indemnities.

Protection Offered by the Seller

The seller typically offers (i) warranties, (ii) covenants regarding conduct of business between signing and closing, and (iii) sometimes certain other restrictive covenants in the acquisition agreement. It is uncommon for private equity sellers to grant indemnities, as they prevent a clean exit. Tax covenants are not seen on the Swedish market (where tax warranties are deemed sufficient), but are sometimes requested in transactions where there are UK or US elements.

Typical warranty protection and RWI is outlined in 6.9 Warranty Protection. It is not common to have an escrow, reverse equity commitment letter, or other retention arrangement in place to secure the obligations of a private equity seller.

Covenants Regarding Conduct of Business

If there is a gap between signing and closing, a private equity seller usually assumes customary covenants regarding the target’s business being conducted in the ordinary course of business between signing and closing.

Post-closing Covenants

As opposed to a corporate seller, a private equity seller typically resists giving non-compete and (to a lesser extent) non-solicitation covenants. This is in line with the principle of limiting all residual liability in order to achieve a clean exit. Furthermore, it is problematic for private equity funds to take on, for instance, non-competes, as it is their primary line of business to acquire and divest companies. If any such covenants are given, they are typically limited to non-solicitation of key employees for a restricted period of time, and do not extend to portfolio companies. A private equity seller does however typically assume customary confidentiality undertakings.

Litigation is not common in relation to Swedish private equity transactions. The undertakings which private equity funds submit themselves to are usually limited, which limits the potential for litigation.

The most commonly disputed provisions are related to purchase price mechanics. Closing balance sheets and other true-up mechanics are predominantly determined by an expert appointed by the parties, and therefore are usually not subject to actual litigation.

Warranty and indemnity claim-related litigation between the parties is also limited, partly due to the fact that RWI is commonly taken out. The most dispute-driving warranties are those relating to financial information and tax.

Public-to-privates in private equity transactions have become common in recent years. Examples of such public-to-private offers that have been announced in recent years are Nordic Capital’s and CVC Funds’ joint bid on Cary Group (June 2022), Basalt’s bid on Nobina (December 2021), Advent’s and GIC’s joint bid on Swedish Orphan Biovitrum (September 2021), EQT’s bid on Recipharm (December 2020), Altor’s and Stena Adactum’s joint bid on Gunnebo (September 2020) and Altor’s bid on HiQ International (August 2020).

In a public offer situation, the target board must observe its fiduciary duties, the principle of equal treatment of shareholders as well as the general principles of respect for the stock market and respect for shareholders’ rights to decide on a public offer.

The target board also has certain information obligations, and must inform the stock exchange if an offer is imminent and likely to proceed. Leakages or rumours regarding a potential public offer may trigger an obligation for the target company to make a public announcement under the EU market abuse regulation. The target board must also, no later than two weeks prior to the expiry of the acceptance period, issue a public statement expressing its opinion of the offer and the reason for its opinion. The target board commonly supports its statement with a fairness opinion from a financial advisor.

There is a general prohibition on the target company to agree on “deal protection” measures and relationship agreements.

If an investor acquires 5% (or more) of the shares or votes in a company whose shares are listed on a regulated market in Sweden, the investor will be obliged to disclose its shareholding (subject to certain exemptions). The same applies at each consecutive 5% threshold up to 30% and then at 50%, 66⅔% and 90%. Certain “acting in concert” rules apply in relation to these disclosure obligations.

A party who holds no shares or holds shares representing less than 30% of the votes in a company whose shares are listed on a regulated market (or certain other marketplaces) in Sweden and who, through acquisition of shares in such company, attains a shareholding representing at least 30% of the votes in the company, will be obliged to announce a mandatory offer.

The shareholdings of certain natural or legal persons that are related parties to the shareholder should also be included when calculating the shareholder’s shareholding. Such persons include the shareholder’s group companies and a person with whom an agreement has been reached to adopt a long-term common position through the co-ordinated exercise of voting rights in order to achieve a controlling influence over the management of the company or who otherwise co-operates with the shareholder in order to obtain control of the company.

The obligation to announce a mandatory offer does not, however, apply if the shareholder’s shareholding reaches or exceeds the 30% threshold following completion of a voluntary public offer for all shares in such company referred to in the above paragraph.

Cash consideration is more commonly used as consideration in Swedish public offers. In recent years, about four-fifths of the public offers that have been announced have involved all-cash consideration.

Any acquisition of or agreement to acquire shares made by the bidder (or a member of a bid consortium or any closely related person to the bidder or a member of a bid consortium) during a period commencing six months prior to the launch of the public offer creates a “floor price” for the subsequent public offer. The same applies to any such transactions made during the offer period and during a period ending six months after the closing of the offer.

An offeror is allowed to announce a public offer that is subject to conditions for completion, which is also customary. If a public offer is subject to such conditions, the conditions must be worded in such detail that it is possible to determine whether the conditions have been fulfilled. In addition, the conditions must be objective and may not be worded in a way that gives the offeror a decisive influence over their fulfilment. An exception from this principle is that the offeror may make the offer conditional upon receiving the necessary regulatory approvals, for example, competition clearance, on terms that are acceptable to the offeror.

Customary Conditions for Completion

The following conditions are the most commonly used conditions for completion in Swedish takeovers (regardless of whether the offer is a private equity-backed takeover offer or not):

• the offer being accepted to such an extent that the offeror becomes the owner of more than 90% of the shares in the target company (this being the threshold for initiating a compulsory buyout procedure pursuant to the Swedish Companies Act);
• with respect to the offer and the acquisition of the target company, the receipt of all necessary regulatory, governmental or similar clearances, approvals and decisions (including from competition authorities), in each case on terms that are acceptable to the offeror;
• no other party announcing an offer to acquire shares in the target company on terms that are more favourable to the shareholders of the target company than the terms of the offer;
• neither the offer nor the acquisition of the target company being rendered wholly or partially impossible or significantly impeded as a result of legislation or other regulation, any decision of a court or public authority, or any similar circumstance;
• no circumstances having occurred that have a material adverse effect, or could reasonably be expected to have a material adverse effect, on the target company’s sales, results, liquidity, equity ratio, equity or assets;
• no information made public by the target company, or disclosed by the target company to the offeror, being inaccurate, incomplete or misleading, and the target company having made public all information that should have been made public by the target company; and
• the target company not taking any action that is typically intended to impair the prerequisites for making or completing the offer.

Offerors usually reserve the right to withdraw their offer in the event that it is clear that any of the above conditions for completion is not satisfied or cannot be satisfied. However, with the exception of the 90% shareholding condition mentioned in the first bullet above, the offer may only be withdrawn where the non-satisfaction of the condition is of material importance to the offeror’s acquisition of the target company or if otherwise approved by the Swedish Securities Council. Offerors may also (and usually do so) reserve the right to waive, in whole or in part, one or several of the conditions for completion referred to above, including, with respect to the 90% shareholding condition, to complete the offer at a lower level of acceptance.

Financing

Before announcing an offer, the offeror must ensure that it has sufficient financial resources to complete its offer. This means that debt financing (if any) must have been secured on a “certain funds” basis. If the offeror has to raise equity capital in order to finance its offer, the offeror must have obtained subscription and/or underwriting commitments to ensure that the required equity capital can be raised. If conditions for the payment of a required acquisition credit are not included as conditions for completion of the offer (it should be noted that the scope for including such financing conditions is limited), these must be conditions that the offeror can ensure are met in practice.

Deal Security Measures

In general, a target company is prohibited from taking deal protection measures that oblige the target company in relation to the offeror, including, among other things, so-called no-shop clauses that restrict the target company from holding discussions with or seeking competing offerors. Accordingly, in addition to stakebuilding, the primary deal certainty measures that an offeror may take are to obtain irrevocable commitments from principal shareholders of the target company and secure a recommendation from the target board.

The Swedish Companies Act permits compulsory buyout of minority shareholdings by a shareholder who, either alone or together with its subsidiaries, owns more than 90% of the shares of a Swedish limited liability company.

A compulsory buyout procedure following a public offer normally goes on for one to two years. However, if the majority shareholder (this being the offeror) so requests, and provides sufficient security, the majority shareholder may be granted advance vesting of title to the remaining shares in a separate award or judgment prior to the final determination of the purchase price for the shares. If the majority shareholder requests advance vesting of title and provides sufficient security, it usually takes about four to six months before the advanced vesting of title is granted, after which the majority shareholder can start treating the target company as a wholly-owned subsidiary.

If the offeror does not obtain enough acceptances in a public offer to reach an ownership of more than 90% of the shares in the target company, it will be difficult for the offeror to achieve a delisting of the target company, meaning that the target company will still be subject to the listing requirements of the stock exchange (or other marketplace) on which its shares are listed. In addition, the remaining shareholders will be entitled to certain minority shareholders’ rights preventing the offeror from obtaining full control over the target company, and without 100% ownership, a private equity-backed bidder will in practice not be able to achieve a debt push-down.

A shareholder (or group of shareholders) holding at least 10% of the shares in a Swedish limited liability company may request that an extraordinary general meeting of such company is held. Accordingly, the offeror can request that an extraordinary general meeting of the target company be convened and then elect a new board of directors of the target company at such meeting, which enables the offeror to, in practice, obtain control over the target company.

It is common to obtain irrevocable commitments from principal shareholders of a target company. Such irrevocable commitments are usually negotiated prior to announcement of an offer (sometimes even prior to the target board being approached by the offeror).

It is more common with so-called “soft irrevocables” providing the shareholder an out if a better offer is made (however, sometimes only where the consideration offered by the competing offeror exceeds certain levels), but so-called “hard irrevocables” are sometimes given by shareholders, especially where the bidder has a strong position and/or where principal shareholders are eager to sell their shares and solicit the public offer.

Equity incentivisation of the management team (and sometimes top performers outside of the management team) is a common feature in private equity transactions in Sweden, and an important part of aligning interests between owners and managers/employees.

The level of equity ownership depends on various factors, including whether the management team owned equity prior to the private equity buyer’s acquisition or not. When acquiring a founder-owned company, it is common for the private equity fund to acquire a smaller majority stake, and for the founders to be expected to reinvest a substantial part of the purchase price, typically from 30% to 50% net of tax and transaction costs. If the private equity fund acquires a business in a secondary sale, the management is also expected to reinvest a significant portion of their proceeds, but unless they originally founded the target, they would typically hold a smaller level of equity, ranging from 5% to 15%.

If the management team or other top performers do not have equity ownership prior to the acquisition by the private equity buyer, it is not uncommon for them to be expected to make cash investments in connection with closing to ensure alignment. Given the typically large value of companies acquired through this type of transaction, the level of equity ownership would be small. Generally speaking, the pot for management equity decreases as the deal’s enterprise value increases.

The equity in the management investment vehicle is typically divided into preference shares and ordinary shares. Since the preference shares have a fixed rate of return, often corresponding to the subscription amount of the preference shares plus an annual coupon on the subscription amount, the upside of the investment flows through the ordinary shares, which are entitled to all dividends in excess of the return allocated to preference shares. Instead of having typical share structures as just described, hurdle shares are sometimes created. Hurdle shares are instruments similar to stock options, ie, the value of the target company needs to have increased enough for the hurdle shares to be in the money, and are otherwise worthless. Hurdle shares can usually be acquired for a lower purchase price than “normal” shares.

Sweet equity typically comprises approximately 80% ordinary shares and 20% preference shares, while the ratio for institutional strip is the opposite, ie, typically approximately 80% preference shares and 20% ordinary shares. It is uncommon for management and key employees to subscribe for 100% ordinary shares.

Management typically invest on the same level in the acquisition vehicle structure, ie, in a three-tier holding structure, and the management team owns shares either in the parent company alongside the private equity fund or in a company directly below the parent company.

In order to facilitate a future exit, it is fairly common to pool management and employee investors in a separate holding entity (MIPCo/KIPCo/EIPCo), in particular where the buyer launches a wider programme for non-key employees to allow them to make smaller investments.

Management and key employees typically acquire shares at the same time as the buyer (at the closing of the transaction). Certain managers may also top-up their initial investments and new joiners would invest when joining the target company.

It is fairly common for private equity funds in Sweden to apply value vesting provisions. The value of the sweet equity vests over time, usually over three to six years, entailing that the value which the management or employee investors receive for their investment if they leave increases over time.

The typical leaver provisions in Sweden include those for a:

• good leaver;
• bad leaver; and
• intermediate leaver.

The criteria for defining the different leaver categories are a subject of negotiation between the management team and other employees invited to invest on the one hand, and the private equity buyer on the other hand.

Good leaver events typically include events such as retirement, long-term illness or death. A good leaver event commonly allows the individual to receive the fair value for its shares.

Bad leaver events typically include summary dismissal by the employer or other material breach by the leaver of the shareholder’s agreement and/or its employment agreement. Bad leaver events typically entitle the manager to the lower of (i) the cost (the amount invested by the individual), and (ii) the fair value of the shares with a discount (usually around 75%).

Intermediate leaver events typically include termination of the employment by the employer (other than summary dismissal), and termination of the employment by the employee. Interim leavers typically entitle the manager to the fair value of the vested shares and acquisition cost for the unvested shares.

The leaver provisions are typically structured as call options granted to the private equity majority owner, which exercises the option upon a leaver event occurring.

In private equity transactions on the Swedish market, there are often overlapping restrictive covenants in (i) the transaction documentation (usually a share purchase agreement), (ii) the terms of the MIP/KIP/EIP-programme, and (iii) the employment agreement of the management or employee shareholder. Non-compete provisions and non-solicit provisions are customary in all three documents. In the transaction document, restrictive covenants usually expire 18–24 months following closing, although they sometimes last longer. The restrictive covenants contained in the terms of the MIP/KIP/EIP-programme usually expire 12–24 months after the shares are sold. A non-compete in an employment agreement is most commonly limited to 6–12 months following termination of employment.

In addition to the above restrictive covenants, there are certain kinds of actions by the employee which usually constitute call option events under the leaver provisions in the MIP/KIP/EIP-programme. These include disparagement, fraud against the company and other crimes against the company.

Management and employee shareholders typically expressly disclaim any minority protection rights granted to them under the Swedish Companies Act, and are typically not granted any veto rights.

Management and employee shareholders typically obtain anti-dilution protection, which is customarily subject to carve-outs such as issues to reinvesting managers, finance providers and other third parties. It is uncommon for management shareholders to be entitled to director appointment rights; however, in founder-owned businesses it is more common, and even more so if the founder shareholders retain a large stake in the target.

Management and employee shareholders typically do not have any right to influence the exit of the majority owner. They are typically expected to enter into transaction documentation on the same terms as the private equity fund (ie, on the terms negotiated by the private equity fund). Management and employee shareholders do, however, typically enjoy certain protective limitations, such as a time limit for the duration of a lock-up in an IPO, and the duration of non-compete and non-solicitation covenants towards the buyer in a trade sale.

Private equity funds in Sweden have traditionally almost exclusively made control investments. As outlined in 8.1 Equity Incentivisation and Ownership, it happens that the private equity fund only acquires a weak majority when buying founder-led targets, and as outlined in 5.4 Multiple Investors, minority investments are increasing.

Voting differences entailing that the private equity buyer holds shares with stronger voting powers than management and employee shareholders are commonly used to ensure control. Under Swedish law, shares without voting rights are not permitted.

By holding a majority stake or the majority of votes in the target, the private equity buyer controls the decisions taken at shareholder level and, consequently, at board level by controlling the appointment of the board and the chief executive officer. In Sweden, private equity governance typically gives the chief executive officer control of the daily operations of the business of the target, while certain matters are reserved for the board and/or require shareholder approval under law and/or agreement.

Where the investment structure entails multiple shareholders, a shareholders’ agreement will almost always be entered into, and usually include veto catalogues in favour of the private equity buyer.

It is also usual to implement governance documents setting out structures for decision-making, including pre-determined matters which have to be raised at board or shareholder level. The most common governance documents implemented are rules of procedures for the board, instructions to the chief executive officer and instructions for financial reporting.

The fundamental principle under Swedish company law is that the shareholder’s liability for the actions of the limited liability company is limited to the equity paid into the company. There are exceptional circumstances under which the corporate veil can be pierced and there can be shareholder liability, but these circumstances are limited to situations when the shareholder has intentionally exploited and misused the limited liability granted to the company as a legal person.

The typical holding period for investments made by private equity funds is approximately three to five years.

Dual-track is the starting point for most mid and large-sized transactions, with enhanced focus either on IPO or trade sale depending on market conditions. Triple-track exits have been and continue to be uncommon. Continuation funds have emerged as an alternative exit route for private equity funds that want to keep well-performing assets as their funds near the end of their terms, or that otherwise need additional time to provide sufficient returns.

Given the uncertainties in the stock market during 2022 and 2023, trade sales have become the predominant exit route, whereas during the last five years before 2022, mid and large-size exits were more commonly conducted as IPOs.

Drag rights entail an obligation for minority holders (both management and employee shareholders, and institutional co-investors) to sell their shares to a buyer elected by the private equity fund on terms not less favourable than those offered to the private equity fund as majority holder. The typical drag threshold in Sweden is 50%, or a change of control of the target.

Shareholder agreements in Sweden typically include drag rights for the private equity fund as majority owner, in order to secure the possibility to sell 100% of the equity in the target business at exit. Usually, the drag right does not have to be formally enforced.

It is most common that dragged sellers sell through the main transaction document (often by adherence), but it does occur that dragged sellers sell through separate short-form agreements.

As a trade-off for agreeing to drag rights, management, employee and other minority shareholders (including institutional co-investors) typically enjoy tag-along rights in the sale when the private equity fund majority shareholder sells its shares in the company in a trade sale or by floatation. The typical tag threshold is the same as the drag threshold.

Elevated valuations rendered favourable IPO exit conditions in the period 2017–2021. The generally lower valuation of public companies during 2022 and 2023 has resulted in less favourable IPO exit conditions, and as a consequence the IPO activity in Sweden has ground to a near halt.

The typical lock-up arrangement for a private equity seller restricts the sellers that remain shareholders following the flotation from selling their shares (and other financial instruments in the issuer), typically for a period of 180 calendar days. The restriction is normally subject to several customary exceptions, for example, intra-group transfers and public takeover offers. 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 are generally prohibited.