The COVID 19 pandemic has not seriously affected deal pace in Iceland in the last 12 months and, in fact, 2020 was quite active compared to previous years in terms of M&A transactions in relation to listed companies. In 2020, three takeover bids and a statutory merger of two listed companies were announced. The takeover bids were mandatory bids as the relevant bidders had acquired more than 30% of the respective target’s votes, either individually or by acting in concert with other shareholders.
The three bids all had different outcomes: one bid was successful, one bid was not intended to be successful as the bidder had acquired the stake it wanted (just over 30%) and publicly stated that it had no desire to acquire a further stake in the relevant target and the last bid can be considered unsuccessful as the bidder acquired a majority stake outside of the takeover process.
The year 2020 also saw the commencement of a statutory merger process of two listed companies which has not occurred in Iceland for some years.
In relation to listed companies, the key trend was heavier market activity both in terms of general turnover in the market and the number of listed companies, one of the reasons being that interest rates are at record lows and investors still have a need to get returns on their investments.
As regards unlisted companies, the tech sector was very active with numerous transactions, a majority of which involved foreign buyers.
There were no particularly discernible trends with regard to M&A relating to listed companies; however, as regards unlisted companies, the tech sector was very active with foreign buyers acquiring several companies.
COVID-19 has had a huge impact on Iceland’s tourism industry, which is a comparatively large one. Despite this impact, government and lender measures have reduced the need for large-scale restructuring and afforded the industry some breathing space. There have been some mergers aimed at greater synergies; however, none in relation to listed companies.
The primary means for acquiring a company is through the purchase of existing shares. The technique differs somewhat depending on whether the target is listed on a regulated market or not.
Listed companies are acquired through a more heavily regulated takeover process where the necessary documentation is under scrutiny by regulators, the key document being an offer document.
In relation to unlisted companies, acquisition is generally obtained by negotiating the sale of existing shares from the shareholders and the key transaction document is a share purchase agreement.
In a statutory merger, the key document required is a merger plan. The merger plan is, to some extent, comparable to the offer document. The board is required to issue a memorandum on the merger plan and a fairness opinion must be obtained from independent experts.
The Act on Securities Transactions (STA) governs issues specific to M&A transactions where the relevant target is listed on a regulated market, primarily NASDAQ Iceland.
The Central Bank of Iceland, Financial Supervision (FME) is the key regulator in acquisitions of listed companies and reviews and accepts key transaction documents.
In addition, if the acquisition warrants antitrust filing (explained in more detail below) the Icelandic Competition Authority (ICA) is a key regulator as the acquisition cannot be completed until antitrust approval has been obtained.
In general, no specific rules apply to foreign buyers, however, there are special sector-specific rules which affect foreign buyers.
Certain restrictions apply to foreign investment in industries which are considered vital to the Icelandic economy, such as fisheries, energy and air transport, and statutory limits apply concerning the authorised level of foreign ownership in undertakings operating in those sectors. Ownership of, and the right to use, real estate is also subject to certain limitations for foreign parties or domestic entities owned by foreign parties. These restrictions primarily apply to parties outside the EEA and those to whom they apply can obtain a permit to own or use real property despite the restrictions. Furthermore, we note that financial and insurance undertakings fall under the supervision of the FME and its consent is required for holding a qualified holding. Qualified holding means controlling, directly or indirectly, 10% or more of issued shares or votes in an undertaking.
Icelandic rules on competition matters are based on the Competition Act No 44/2005 and notifications of mergers, as defined in the Competition Act, may need to be given to either the ICA or to the European Commission (the “Commission”). We note that only a single competition authority will have jurisdiction to examine a merger, so merger notification will only be sent either to the Commission or to the ICA. The conclusion as to which competition authority will have jurisdiction depends on the turnover of the merging companies and where that turnover is generated. The ICA will examine a merger if:
Where a merger notice is required to be filed with the ICA, the parties can expect the ICA to have processed the notice and reached a conclusion within 115 business days at the latest.
Unions and collective bargaining agreements dominate the Icelandic labour market with labour law aimed at affording minimum rights, such as paid vacation, maternity/paternity leave, sick leave, and pension rights. As regards M&A transactions, the Icelandic Transfer of Undertakings, Protection of Employees legislation must be considered in relation to any potential workforce reductions, renegotiation of employment terms, etc, and also in relation to the right of employees to receive information on the transaction.
National security review does not happen in relation to acquisitions in Iceland. There are, however, sector-specific limitations on foreign investment as discussed in 2.3 Restrictions on Foreign Investments, which, inter alia, have the aim of protecting national interests.
The past three years have not seen any significant court decisions or legal developments in relation to M&A transactions.
A quite litigated issue was the concept of acting in concert, which may require parties to submit a mandatory takeover bid if their collective holdings exceed 30%. The burden of proof thereof lay with the regulator and was near always disputed if that was its finding. However, following legislative changes, the burden of proof has been reversed which has significantly reduced litigation on this point.
There have been no significant changes to the takeover chapter of the STA in the past 12 months and none are expected in the next 12 months.
In relation to listed companies, bidders generally have a stake in the target prior to launching a takeover offer. That is, however, rarely the case in unlisted companies.
Stakebuilding can trigger disclosure requirements, explained in more detail herein and trigger a mandatory offer requirement.
In relation to listed companies, the bidder is required to notify the target and the FME if its percentage of votes reaches, exceeds or falls below the following thresholds: 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 50%, 66.66% and 90%. No such requirements apply in relation to unlisted companies.
Certain types of convertible securities and irrevocable undertakings have to be taken into account.
If the issuer makes changes to its share capital or voting rights that lead to any of the above-mentioned thresholds being reached, an obligation to notify the target and the FME is also triggered. This means that disclosure can be triggered without any action by the bidder.
The target has effectively no control over stakebuilding as the hurdles are prescribed by law, being mainly disclosure requirements and eventually a requirement to place a mandatory bid.
There are no particular restrictions on dealing in derivatives; however, if the derivatives are equity-related and have a voting right element, such derivatives have to be counted into the disclosure requirement.
If the derivative has an element of control over the underlying equity interest such derivative is effectively the same as holding the shares, therefore they have to be fully counted in any disclosure requirement and for the determination of whether control has been obtained for the purposes of evaluating whether an obligation to submit a mandatory offer has arisen or whether an antitrust filing is required.
Once the decision to make an offer has been made, the bidder is required to notify the regulated market without delay. That notice is then published by the regulated market. If any incentive, compensation or remuneration is offered to the board or management of the target, this has to be disclosed in the offer document.
The trigger for a disclosure requirement is a decision to make an offer; this results in negotiations being generally confidential.
It should be noted that if rumours of a potential takeover spread, then the target may be required to disclose the negotiations.
Under the same circumstances, the FME is authorised to require the potential bidder to publicly disclose whether the bidder intends to make an offer or not. If the bidder declares that no offer will be made, or fails to publicly announce the intention to make an offer, the bidder is restricted from making a takeover offer for a period of six months.
There is little difference between market practice on timing and the legal requirements. Disclosure generally occurs once the decision has been made but, in some instances, rumours start spreading before the decision is made and the necessary transaction documents are in place. Therefore, in rare instances disclosure is made to preserve the right to make the offer.
If target and bidder are both listed, due diligence exercises generally have a very limited scope as both parties have disclosure duties. If the business combination takes the form of a statutory merger the non-listed party is generally subject to a wide-scope due diligence. The same applies if the target is listed and a general scope is financial, tax and legal due diligence. Additional due diligence exercises are sometimes undertaken, such as technical and environmental investigations if the operations of the target demand this.
In relation to listed companies, standstills and exclusivity are very uncommon especially from the target. Irrevocable commitments, although not common, are used and negotiated with individual shareholders.
In relation to unlisted companies, exclusivity is, however, very common and can almost be said to be market practice.
A takeover offer for a listed company requires the issuance of an offer document which is to include all offer terms and conditions. The offer document must contain, inter alia:
If the consideration is not cash, the principles applied in the valuation of the consideration must be provided, as well as information on how the offer is financed and forward-looking statements by the bidder.
As regards unlisted companies, the process can be completed within the timeframe agreed between the parties, provided that in those instances where regulatory approvals are required, such as from the ICA, which can influence the length of the process.
As regards listed companies, once a requirement to make a mandatory takeover offer has been triggered, the offer must be made within four weeks from the time a bidder knew or should have known that the requirement arose. A bidder must announce an offer to the regulated market without delay once a decision on the offer has been made.
The STA stipulates that an offer must be valid for a term of at least four weeks, but no longer than ten weeks. The offer, if successful, must be settled within five business days after the expiry of the validity term.
The FME is authorised to extend the validity term of an offer if there are valid reasons for such an extension. Additionally, if a competing offer is made, the term of the original offer is extended to match that of the competing offer if the original offer is neither revoked nor amended.
Mandatory offers are required to be made when a party has gained direct or indirect control over the target, whether individually or acting in concert with other shareholders. A party is considered to be in “control” if they and the parties they are acting in concert with control 30% or more of votes directly or on the basis of any sort of understanding with other shareholders which gives the right to control at least 30% of the votes, or if they have gained the right to appoint or dismiss the majority of the board of the company.
Under the STA, bidders can offer cash, securities with voting rights attached or a combination of the two as consideration for the shares in the target. Cash is generally the consideration offered unless the business combination is in the form of a statutory merger.
In respect of listed companies, voluntary offers are the only type of offer which can be subject to conditions. The most common condition is acquiring the level of shareholding the bidder deems necessary, ie, at least 90% if the bidder wishes to acquire the target as a whole.
In addition to the above, regulatory consent is the most common condition, which can be from the FME if the target is a financial or insurance institution or from the ICA if antitrust filings are required.
As mentioned in 6.4 Common Conditions for a Takeover Offer, only voluntary offers can be subject to the condition that a certain level is reached. However, there are no mandatory minimum approval or acceptance levels. A bidder needs to acquire at least two thirds of the votes to acquire full control of a company. If a bidder acquires 90% of shares, the bidder can effect a squeeze-out of the remaining shareholders and thereby acquire 100%.
Under the Companies Act, a statutory merger requires the approval of at least two thirds of votes cast and shares represented at a shareholders’ meeting of the target, unless the articles of association of the target require a higher acceptance level.
As regards listed companies, funding has to be obtained prior to making the offer, as cash offers must be guaranteed by a credit institution authorised to operate within the EEA. Funds do not, however, need to be committed or made available prior to the settlement of a successful offer.
With regard to non-listed companies there is no requirement to obtain funding prior to the transaction and the transaction can therefore be conditional upon financing.
Deal security needs to be negotiated on an individual shareholder level and the STA does not have any rules prohibiting such measures. Irrevocable undertakings by large shareholders are sometimes used to increase the likelihood that the offer is successful.
Negotiating deal security with the target itself is rare as the target has little control over the success of the offer.
COVID-19 has not resulted in much change to the approach generally used in Iceland and deal security measures remain somewhat uncommon.
The most common way for a bidder with less than a 100% shareholding to achieve additional governance rights would be by means of a shareholder agreement. Such agreements are, however, subject to limitation in relation to listed companies as the parties to such agreements would be deemed to act in concert and if they collectively own more than 30% of the target's share capital it would trigger a mandatory offer requirement. Therefore, seeking additional governance rights outside of the shareholding is almost never used in listed companies.
Voting by proxy is authorised in Iceland.
If the bidder acquires more than 90% of shares in the target, the bidder can squeeze out the remaining shareholders, by notification thereof. The notice to the remaining shareholders shall contain information on the terms and conditions for the squeeze-out and the method by which the squeeze-out price is established. If the squeeze-out is demanded within three months from the expiry of a takeover offer, then the price offered therein is assumed to be fair, unless the bidder has paid a higher price for shares in the target after the takeover offer has expired.
Irrevocable commitments are not commonly used, but if utilised are generally negotiated concurrently with the drafting of the relevant transaction documents and disclosed once finalised. These commitments, when used, are usually only related to the offer, ie, to accept the offer (typically with an "out" if a better offer is made) or in some cases not to accept the offer, in a mandatory bid scenario where the bidder has no interest in acquiring a larger stake.
Once the decision to make an offer has been made, the bidder is required to notify the regulated market without delay. That notice is then published by the regulated market.
If the consideration offered requires the issuance of a prospectus, there are significant disclosure requirements in prospectuses or a document that is, in the estimation of the FME, equivalent to a prospectus.
The prospectus must contain sufficient information on the issuer and the securities to enable the shareholders of the target to assess the issuer’s assets, liabilities, financial standing and financial results and the rights attached to the securities offered, among other things. The prospectus is required to be submitted to the FME for approval.
If securities in the bidder are offered as consideration and a prospectus is required, the bidder will need to include financial information in the prospectus. The financial information there included is to be set forth on the basis of the bidder's accounting practices.
The key transaction documents that are always required to be disclosed, are (i) the notification to the regulated market of the bidder’s decision to make an offer; (ii) the offer documents; (iii) the opinion of the board of the target; and (iv) the publication, by the bidder, of the results of the offer.
Certain ancillaries may need to be disclosed, such as irrevocable commitments, but that needs to be assessed on a case-by-case basis.
Once a bid has been made public the board has a duty of neutrality. Additionally, the board must act in the best interests of the company and the shareholders.
Special or ad hoc committees are rarely established as the board of the target has little control over takeover bids. While the board has an obligation to publish its opinion of the bid, the conflicted parties generally excuse themselves in connection thereto.
If the business combination is in the form of a statutory merger the target’s board has greater impact; however, that rarely results in any additional official committees being established.
Icelandic courts generally defer to the business judgement of the board of directors and rarely seek to overrule decisions based on business judgement, even when they have proven in hindsight to be poor decisions, unless other factors apply as well, such as conflict of interest.
The target’s board may seek outside advice from counsel in relation to takeover offers; however, such advice is rarely extensive and mainly relates to what obligations the board has, its authority to make decisions in the offer period and in relation to the opinion it must publish.
Conflicts of interest of directors have been the main focus of judicial scrutiny and, for the most part, this scrutiny has focused on instances where directors have failed to excuse themselves from determining matters in which they are conflicted. This scrutiny has not, however, extended to decisions in relation to takeover offers.
Pursuant to the STA, there is effectively no distinction between hostile and friendly offers. Under Icelandic corporate law the final decision on an offer rests with the shareholders.
The STA prohibits defensive measures. Under the STA, the following decisions of the target’s board must receive the prior approval of a shareholders’ meeting:
Defensive measures are so limited that they are very rarely employed.
The board of the target is obliged to issue and publish its opinion on the terms and conditions of the offer, and its estimation of the effects of the offer on the target, the target’s employees and any possible relocation of the target’s operation. Furthermore, the board is obliged to provide shareholders with the opportunity to make an independent decision on an offer.
Generally, directors do not have sufficient authority to prevent a business combination. It is only in instances of statutory mergers in which the directors of the surviving entity have such authority, and effectively such a process does not commence without sufficient director support.
Litigation in relation to M&A deals is very uncommon and is mostly related to warranty breaches.
Litigation is mainly focused on warranty breaches in relation to non-listed companies and as a result is brought after completion. While, historically, there was significant litigation in relation to the potential obligation to submit a mandatory takeover offer that sort of litigation has largely ceased as a result of regulatory changes.
Broken deal disputes have not commonly found their way to courts and are, if they arise, generally settled out of court. No deal in relation to a listed company broke down as a result of COVID-19 and it is too early to tell whether any disputes will find their way to the courts for any broken deals in relation to unlisted companies.
Generally, minority shareholder rights are well protected under Icelandic law but individual shareholder disputes sometimes arise. If so, they are focused on individual decisions of directors which allegedly contain some element of unfairness, such as self-dealing or failure to seek sufficient shareholder approval.
Shareholders that disagree with a direction of a company generally seek to gain influence in the manner described in 11.2 Aims of Activists and 11.3 Interference with Completion.
Shareholders seeking to encourage M&A transactions, divestitures etc, mainly try to do so by gaining a seat on the board of directors and impacting director decisions in that manner. This is generally accomplished by gaining shareholder support in director elections with an aim to encourage such activities. In limited instances such activists have submitted takeover offers to secure enough votes to have sufficient influence on such decisions.
Activists rarely seek to interfere with completion, thought that sometime occurs. If activists are against takeover offers, they are more focused on gaining support for declining the offer than interfering with completing the offer.
In unlisted companies, rights of first refusal are common and shareholders seeking to interfere with completion tend to try to exercise those rights, thus depriving the bidder of the deal. In such instances the bidder generally has little or no recourse against the sellers as this is a common condition for completion.