Whilst 2019 was another golden year for Nordic private equity, the COVID-19 outbreak has had a major negative impact on the world economy. M&A activity typically follows economic cycles, and is naturally also affected by the outbreak. According to Mergermarket, contrasting M&A in the first half (1H) of 2020 to 1H 2019 globally, deal volume fell 32%, while deal value declined 53%.
This trend is similar in Norway, with only 211 deals announced in H1 2020, compared to 393 in H1 2019. According to Ernst & Young (EY), the number of transactions announced by the 500 largest Norwegian companies during H1 2020 (32 deals), are in line with the weakest quarters during the financial crisis in 2008-09, and represents a deal volumes drop by approximately 65% compared to average deal volumes over the past ten years.
The trend is similar for private equity transactions, although private equity has achieved a record high market share in H1 2020 globally (19.2% by volume). This is because the broader market experienced steeper decline. Contrasting H1 2020 to H1 2019, deal value of global private equity buyout deals fell by 30%, and deal count declined by 535. Deal value of global private equity exits declined by 52%, and deal count declined by 46, according to Mergermarket. Numbers for Norway are not yet available, but the general decline in M&A activity in Norway indicates that this trend is similar in Norway.
Another trend in Norway is a decrease in foreign investor presence and transactions involving foreign targets. All the 14 transactions announced by the 500 largest Norwegian companies in the second quarter (Q2) of 2020 concerned Norwegian targets, and only three comprised non-Norwegian bidders, according to EY.
A considerable portion of deals that have been signed or completed during H1 2020 are deals that were already initiated before the outbreak. In the current market, factors such as disperse price expectations, limited credit availability and an uncertain future has led many to put M&A activity on hold. With lockdowns still imposed across the world, and/or some countries reinstating strict preventive measures, uncertainty remains high. Aside from COVID-19, the recovery time will, to a large extent, depend on the time it takes for credit markets to stabilise and to align buyer and seller price expectations. There is, however, a lot of dry powder in the market, so when the market recovers, private equity investors will be ready to make deals.
The Norwegian private equity market includes all types of transactions that you may also find in any other mature markets. Private (as opposed to public) deals dominate the arena, with 59% of deals made in the last 12 months (LTM) being private. However, so far in 2020, 18 new listings have been made across the three markets of the Oslo Stock Exchange, compared to 15 at the same date in 2019. Since deal activity generally has been lower, this shows a significant increase in public deals. Merkur Market is becoming increasingly popular for listing, where both Kahoot and Quantafuel were listed in H1. Merkur Market allows for a simplified and quicker listing process compared to the Oslo Stock Exchange.
Most exits take the form of trade sales to industrial investors or a secondary sale to other private equity funds, as opposed to initial public offerings (IPOs). We foresee Merkur Market as an increasingly popular exit route for private equity investors going forward.
In terms of activity by industry, out of the 93 transactions in H1 involving Norwegian targets, the most active sectors for M&A were computer software (16) and industrial product and services (13). However, these industries are also experiencing considerable contraction compared to 2019.
Across industries, companies scoring high on ESG are more active than others.
The combination of the outbreak and the oil price war has hit companies in the oil and gas industry severely. In H1, only one transaction within the oil and gas sector was made, compared to 15 in all of 2019.
In response to the COVID-19 lockdown, the Norwegian government introduced several temporary measures aimed at preventing unnecessary liquidations. These have included the following:
Some of these may impact M&A transactions. However, since these are all of temporary nature and continuously being changed, we do not elaborate on them further in this article.
Private limited liability companies were previously effectively prohibited from providing upstream financial assistance (including participating as guarantor or co-borrower for loan financing) in connection with acquisition of shares in itself or its parent company. Since 1 January 2020, this no longer applies where the buyer already is, or in connection with the acquisition becomes part of, the same group as the target. Certain procedural rules still apply, and the assistance must be granted on normal and commercial terms.
Long-standing administrative practice in Norway has restricted any single shareholder from owning more than 20-25% in a Norwegian bank or life insurance company (or financial groups comprising such entities), unless the shareholder itself is a financial institution. This practice has effectively excluded private equity funds from acquiring more than 20-25% of the shares in Norwegian banks and life insurance companies (or financial groups comprising such entities).
On 11 March 2020, the EFTA Surveillance Authority (ESA) concluded that the ownership ceiling practice constituted a violation of the EEA Agreement between Norway and the EU. The Norwegian Royal Ministry of Finance has objected to ESA's decision. A final decision is expected during 2021. If the ESA decision is upheld, it would open up possibilities for complete takeovers of all types of Norwegian financial institutions, including by private equity funds, subject to such acquirers being deemed fit and proper for such ownership stake by the relevant authority.
On 27 February 2020, the Norwegian Ministry of Finance proposed to introduce a standard 15% withholding tax on (i) interest payments to related parties resident in low-tax countries, and (ii) royalty payments to related parties. New rules are proposed to be introduced from 1 January 2021.
The EU has issued several new directives, regulations and/or clarifications regarding the capital markets in recent years, inter alia relating to market abuse, takeover rules and prospectus regulations. In order to comply with its obligations under the EEA Agreement, Norway must adopt and implement these in some form. The revised EU Transparency Directive (as amended through Directive 2013/50/EU) has not yet been fully implemented in Norway. Notably, the disclosure obligation provisions are expected to be implemented later in 2020 or in 2021. The EU Market Abuse Regulation (EU) No 596/2014) is expected to be implemented in Norway later in 2020 at the earliest.
The Norwegian interest limitation regime was amended, effective as from 1 January 2019. Under the regime, interest payable on external (third-party) debt within consolidated group companies is subject to the same interest deduction limitation regime as interest paid to related parties. The group definition includes all companies which could have been consolidated had IFRS been applied.
The rules only apply if the annual net interest expenses exceed NOK25 million for all companies domiciled in Norway within the same group, and only if the debt/equity ratio for the total consolidated equity of the Norwegian entities within the group is higher than the equity ratio for the entire consolidated group (ie, higher ratio of debt in Norway). If the rules apply, all net interest expenses exceeding 25% of the company's taxable EBITDA will not be deductible but have to be carried forward.
In Norway, there is a general scepticism on the left of the political spectrum towards private players profiting on businesses within public service sectors, such as healthcare and pre-schools. These sectors are therefore subject to a constant risk of regulatory changes. Consequently, historically there have been, and still are, fewer transactions within these sectors.
Most Norwegian private equity transactions involved limited liability companies or limited partnerships. Thus, the main company-specific legislation that regulates M&A transactions are the Private Limited Liability Companies Act, the Public Limited Liability Companies Act and the Partnership Act. Depending on the deal in question, other general legislation supplements the aforementioned – mainly the Contracts Act, the Sale of Goods Act, the Accounting Act, the Income Tax Act, the Employment Act and the Competition Act.
The regulatory framework differs significantly for listed and non-listed targets. For non-listed targets, the parties are quite free to agree on the terms of the sale and transaction agreements. For listed entities, a comprehensive and mandatory set of rules apply as further set out in the Securities Trading Act and the Securities Trading Regulations, supplemented by rules, regulations, guidelines and recommendations issued by the Oslo Stock Exchange.
Norway has inter alia implemented (with some exceptions) the EU Prospectus Regulation, the Market Abuse Directive, the Markets in Financial Instruments Directive, the Markets in Financial Instruments Regulation, the Takeover Directive and the Transparency Directive. These rules inter alia contain offer obligations and disclosure obligations that dictate the sales process; see Section 7 Takeovers.
Government Ownership and Control
The Norwegian government is a major owner in the Norwegian economy through significant holdings in many listed companies, and non-listed entities through investment companies such as Investinor and Argentum. The government is a major investor in foreign and domestic companies through two government pension funds, the Government Pension Fund Norway (GPFN) and the Government Pension Fund Global (GPFG). The government retains monopolies on some activities such as retail sale of alcohol.
Norwegian law does not generally restrict foreign investments, but restrictions apply in certain sectors, such as power and energy (particularly hydropower, oil and gas) and finance (including financial, credit and insurance institutions). Furthermore, the Norwegian investment screening regime empowers the authorities to screen foreign direct investments of a qualified stake in Norwegian businesses on grounds of national security.
Norway has implemented the EU Alternative Investment Fund Manager Directive (AIFMD) through the Norwegian Act on the Management of Alternative Investment Funds (the "AIF Act"). The AIF 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. Most private equity funds are covered by this definition and thus fall within the scope of the act. Most of the provisions of the act, however, only apply to certain AIFs. Pursuant to the AIF Act, so-called sub-threshold AIF managers are required to register with the Norwegian Supervisory Authority of Norway (the FSAN) and are subject to certain disclosure obligations to the FSAN. These obligations apply to all AIFs.
In addition, AIF managers whose AIFs under management exceed relevant thresholds, or that intend to market to retail investors, are subject to more comprehensive rules, including authorisation requirements. This concerns managers that manage AIFs whose assets under management in total equal an amount equivalent in NOK to: (i) EUR500 million, when the portfolios consist of unleveraged AIFs that have no redemption rights exercisable during a five-year period following the initial investment; or (ii) EUR100 million, for AIFs other than those mentioned in (i). The same applies to AIF managers that manage AIFs other than domestic funds, that are to be marketed to retail investors and are also subject to authorisation requirements (irrespective of the above thresholds). These AIF managers have to be authorised by the FSAN, and marketing materials for their AIFs must be pre-approved by the FSAN.
Furthermore, notification requirements apply upon acquisition of control of non-listed companies of a certain size and of listed companies. Moreover, 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 manager must, as soon as possible – and at the latest within ten business days – notify the FSAN.
In addition, certain AIF investments entailing acquisition of control of non-listed companies of a certain size, or of listed companies, are subject to anti-asset-stripping provisions containing restrictions on distributions, capital reduction, share redemption and acquisition of own shares for a period of 24 months from the acquisition. Other provisions of the AIF Act also apply, but the aforementioned are those most relevant for private equity funds.
The FSAN is the supervisory authority of authorised and registered AIF managers established in Norway.
On 10 June 2020, the European Commission published a report on its review of the application and the scope of AIFMD in order to establish how far AIFMD's objectives have been achieved. The report does not include the Commission's current view. This is expected in the Commission's detailed consultation paper later in 2020.
The report does, however, give some insight into which suggestions or concerns were raised by those consulted, and indicates that the Commission is assessing these points. With respect to private equity managers, the report notes that some argue that AIFMD could be amended to better accommodate the private equity sector by removing unnecessary charges and looking for more effective ways to protect non-listed companies or issuers.
It also notes that AIFMD rules on reporting, depositary, risk management and remuneration do not explicitly take into account all of the specificities of managing private equity investments, and that the transparency requirements and anti-asset-stripping rules that apply to funds that acquire control of EU private companies are not "overly burdensome", but remains neutral on their added value due to the lack of available data.
Norwegian merger regulations require companies to notify the Norwegian Competition Authority (the NCA) of mergers, acquisitions and agreements by which they acquire control of other companies, if the combined annual turnover of the undertakings concerned exceeds NOK1 billion and at least two of the undertakings have an annual turnover exceeding NOK100 million in Norway.
A standstill obligation for a minimum of 25 business days applies to transactions triggering the notification requirements. Within three months after entry into the final agreement or acquisition of control, the NCA can order an undertaking to notify a concentration even if it falls below the turnover thresholds if the NCA has reason to assume that competition will be affected or if other particular considerations call for further examination.
Concentrations exempted from the notification requirement may be notified voluntarily if the parties wish to clarify whether the NCA intends to intervene prior to completion. If the transaction requires merger clearance at EU level, the EU rules suspend and absorb Norwegian requirements. In response to the COVID-19 lockdown, a new act provides for temporary extensions of a number of deadlines set out in the Norwegian Competition Act.
The level of due diligence typically conducted in the Norwegian market is red flag, at least buy-side due diligence. If sell-side requests a vendor due diligence (VDD), which is usually the case for structured sales processes, a more detailed due diligence – in particular in respect of financial VDD – is often conducted.
Due diligence is usually conducted by a legal, financial and tax team. Sometimes, separate teams for other key areas are engaged depending on the deal. Aside from business specific issues, key areas of focus for legal due diligence in private equity transactions are: GDPR; anti-trust; anti-corruption; environmental, social and governance (ESG); environmental; and regulatory matters. In recent years we have seen an increased focus on ESG, anti-corruption and trade sanctions for target groups operating in high-risk jurisdictions. Currently, impact on business resulting from COVID-19 is also a key focus, although mainly for the financial due diligence.
Following the introduction of artificial intelligence (AI) tools for due diligence, the use of programmes such as Luminance has increased. However, this is not yet the norm for due diligence processes in Norway, inter alia because most such AI tools are not yet fully trained in the Norwegian language. When applied, such tools rarely replace the traditional form of due diligence, but can represent an advantage to achieve access to potentially important information early on.
Vendor due diligence (VDD) is a common feature for private equity sellers if the exit follows a structured sales process. In that case, it makes sense to conduct a VDD to identify and clean up any material findings prior to transaction start-up. Furthermore, presenting a VDD report to potential bidders provides them with detailed information early on, enabling them to make an informed offer within a tight timeline, and can also provide some level of comfort as to the shape of the target group's business.
Where VDD reports are prepared, advisers often give credence to the report and are often instructed by their client to conduct buy-side due diligence on a confirmatory basis only (ie, to verify or look further into those findings highlighted in the VDD report).
It is fairly common that the final buyer and finance providers are offered reliance on VDD reports.
Acquisitions by private equity funds in Norway are typically carried out by private share purchase agreements combined with a shareholders' agreement applicable for the joint investment of the fund, any co-investors and management shareholders. Prior to entering into the share purchase and shareholders' agreement, the parties typically enter into a term sheet and non-disclosure agreement.
The terms of the acquisition in privately negotiated transactions, as opposed to auction sales, are generally quite similar. However, for auction sales, the transaction agreement usually contains fewer conditions precedent as an attempt from bidders to make their offer more attractive than that of their competitors. For public deals, the acquisition is typically carried out by pre-acceptance forms with material shareholders followed by public offerings.
A transaction agreement with the target including the terms and conditions for submitting the offer is quite often entered into – approximately two-thirds of all voluntary offers approved by the Oslo Stock Exchange in the period 2008-19 were made on such basis (including completed and non-completed offers). If 100% control is desirable but not obtained through voluntary offers, the buyer may opt for squeeze-out; see 7.6 Acquiring Less Than 100%.
Private equity funds established in Norway are usually structured as a silent partnership (IS), limited partnership (KS), or limited liability company (AS). The silent partnership has the most similarities with an offshore limited partnership, which is the predominant legal structure for private equity funds. In the following, both limited and silent partnerships are referred to as limited partnerships.
In the limited partnership, the general partner is the fund manager and the institutional investors are the limited partners. The general partner is usually owned through a private limited liability company set up for that particular fund and acts for the limited partnership in all external matters. The limited partners usually invest either indirectly or sometimes directly in the limited partnership.
Historically, Norwegian funds have predominantly been organised under foreign jurisdictions, usually Guernsey or Jersey. A trend from recent years is to establish the fund in the Nordic region (often Sweden) or other onshore jurisdictions such as Luxembourg.
For Norwegian acquisitions, the private equity-backed buyer entity (the acquisition vehicle) is almost always structured as a Norwegian private limited liability company (aksjeselskap) set up as a single purpose vehicle (SPV) for the transaction (BidCo).
The structure between the limited partnership and BidCo varies depending on whether the fund is organised under Norwegian law or elsewhere.
If organised under a foreign jurisdiction, the fund usually sets up (i) a foreign holding structure incorporated and tax resident outside Norway and (ii) a Norwegian structure held by the foreign holding structure. Depending inter alia on the transaction financing model and other commercial reasons, the Norwegian acquisition structure is usually comprised either only by BidCo, or also a set of holding companies (MidCo and/or TopCo).
If organised under Nordic law, a one-tier structure is normally applied where the investment is made by the limited partnership through a set of Norwegian holding companies.
The choice of acquisition structure is usually determined by which structure would allow for the most efficient return on investment upon exit. This depends – in addition to tax efficiency in respect of the acquisition, duration of investment and exit (such as rules on deductibility of interest, withholding tax, VAT and thin capitalisation) – on a number of factors, such as financing, governance structure, risk exposure, corporate liability, disclosure issues and regulatory requirements. If external financing is obtained, a structure providing for a single point of enforcement in respect of pledge of shares in BidCo for the finance provider is usually applied (ie, a BidCo, MidCo and/or TopCo structure).
The private equity fund itself is rarely involved in transaction documentation. Instead, the designated investment team and in-house legal counsel of the fund manager is typically involved, particularly in initial stages of negotiation, but is normally led by outside legal counsel. For smaller deals and add-on acquisitions, the investment team to a great extent relies on the chosen legal outside counsel.
Private equity deals in Norway are normally financed by a combination of third-party debt financing and equity. In the past few years, the equity portion has increased, especially where many deals were highly leveraged. The proportion of debt varies based on, among other things, the fund's track record, the size and robustness of the deal, the credit risk, the business sector, the fund's relationship with the banks involved and the future prospects of the target group in terms of creating revenues, profits and debt service capacity. Therefore, on a general basis, it is difficult to say that the proportion of debt financing for private equity transactions equals x. However, we seldom see the starting leverage going beyond 60% in the current market.
Another recent trend is that bond issues and direct lending play a bigger role now than before in the capital structure (either as a replacement of bank debt or in a pari passu or super-senior structure), which is due to the fact that both domestic and foreign investors have become aware of the advantages of the well-functioning and effective Norwegian bond market or how to structure direct lending within the Norwegian legal framework.
In leveraged buyouts, debt financing is usually provided to the acquiring entity (BidCo) to finance the acquisition, and sometimes also to the target group, in order to refinance existing debt and finance general corporate or working capital needs. Banks will typically not accept that co-investors or management invest directly in BidCo due to their requirement for a single point of enforcement in respect of pledge of shares in BidCo, which is one of the reasons why there is often a holding company above BidCo.
Acquisition debt is normally financed by term loans, bonds or direct lending, as is the case for refinancing of the target group's existing debt. The group's general corporate and working capital requirements are usually financed by working capital facilities, typically a revolving credit or an overdraft facility, often structured as senior debt. Any sponsor equity financing is often structured as equity and/or subordinated debt.
Under new Norwegian company legislation, a private limited liability company may, on certain conditions and by following certain procedures, make funds available and grant guarantees or security in connection with acquisition of shares in the company or its direct or indirect parent company. Hence, not only debt used to refinance the target group's existing debt or finance the group's general corporate and working capital requirements, but also acquisition debt may now be secured by not only a pledge over the shares in BidCo and its shares in the target (as well as any shareholder loans granted to the two companies to support the share pledges), but also by guarantees from the target group and security over the assets of the target group.
Banks and other lenders now require fewer financial convents than before, although financial covenants required by banks in the Norwegian market are still more extensive than what is customary, for example, in the London market. The leverage ratio covenant is almost always required, and it is often supplemented by either the interest cover ratio covenant, cash-flow cover ratio covenant or an equity-based covenant – whereas we seldom see the capital expenditure (capex) covenant any more in the Norwegian market.
We also see a higher degree of flexibility from banks in relation to other covenants, such as restrictions on acquisitions and sale of assets, etc; however, there is still more strictness than is customary in the London market. In bond issues, there are often only incurrence covenants, and the most used covenant in these tests is the leverage ratio covenant, but we also see bonds with financial maintenance covenants – such as in the form of a leverage ratio covenant or minimum liquidity covenant.
It is not uncommon for sellers to require an equity commitment letter to provide contractual certainty of funds from a private equity-backed buyer.
In most Norwegian private equity deals, the fund holds a majority stake. Over the last years, we have occasionally seen that minority stakes are acquired in listed companies, but this is rare.
Private equity deals involving a consortium of private equity sponsors are not common in Norway, mainly because the deal value of most transactions is not of a size that requires the funds to spread their risk to other private equity sponsors, inter alia to avoid exceeding their investment concentration limits.
Co-investment by other investors alongside the fund is, however, quite common. Such co-investments are typically made by both external co-investors and passive stakes made by limited partners alongside the general partner of the fund in which they are already an investor.
The predominant form of consideration structure used in private equity transactions in Norway is locked box accounts. Completion accounts are, however, not uncommon, and sometimes a fixed purchase price is applied. For auction processes, locked box accounts is by far the most common, because it is easier for the seller to compare bids based on locked box as opposed to completion accounts.
Earn-out or other forms of deferred consideration is sometimes applied, but is not a very common feature of private equity transactions in Norway. If the parties struggle to agree on the purchase price, earn-out is sometimes introduced to bridge the gap.
A private equity-backed buyer often requires selling members of management to re-invest a substantial portion of their proceeds, in which case settlement in part is made by the establishment of sellers' credits documented by promissory notes and not entirely by cash transfers. Furthermore, a private equity-backed buyer may more often than industrial buyers offer earn-out or other forms of deferred consideration, especially when investing in start-ups. A private equity-backed seller almost always asks for a clean exit and will therefore resist accepting deferred consideration.
The use of escrow arrangements is rare in private equity deals regardless of whether the seller or buyer is a private equity player, especially in recent years since most private equity deals now are warranty and indemnity (W&I) insured.
Where locked box accounts are applied, this is usually accompanied by leakage provisions regardless of whether the seller is private equity-backed or not, although leakage provisions may be more refined in a private equity deal. Furthermore, the locked box accounts on which the deal is based are usually audited, or at least partially audited, and usually covered by a warranty.
Under a completion accounts mechanism, the transaction agreement sets out the preliminary purchase price payable by the buyer at completion. The preliminary purchase price is normally based on an estimate of the completion accounts balance sheet, and is subject to a "true-up" adjustment post-transaction to reflect the final agreed values as shown in the completion accounts. The final completion accounts are rarely audited.
If the consideration payable by the buyer includes a deferred consideration element, a private equity-backed buyer rarely grants any form of security; however, certain undertakings in relation to operation of the target group post-completion may be agreed in respect of earn-out mechanisms.
Locked-box consideration structures are commonly used in private equity transactions in Norway. Interest on the locked-box amount is normally applied and predominantly in auction processes, usually at 4–5%, depending on inter alia cash flow of the target group in the relevant period. It is normally not agreed to charge interest on leakage.
Separate dispute resolution mechanisms for locked box consideration structures are not common. For completion accounts structures, a separate dispute resolution mechanism is almost always applied in relation to any disagreement on the final completion accounts.
In private equity transactions, conditions precedent relating to regulatory approvals such as no intervention by the NCA (if relevant) is almost always included. Other typical conditions precedent are:
Material adverse change clauses (MACs) are sometimes included, but we have seen a significant decline in the use of MAC in recent years in private deals. In public takeovers, MACs are usually included; in the period 2008-19, 64 out of 79 voluntary offer documents approved by the Oslo Stock Exchange contained a MAC.
In W&I-insured deals that are not subject to an auction process, the transaction agreement sometimes includes a right for the buyer to terminate the agreement in the event of new circumstances occurring in the period between signing and closing which are not covered by the W&I insurance, unless the seller compensates the buyer for any downside.
It is highly unusual for private equity-backed buyers to accept “hell or high water” undertakings to take on all of the antitrust or other regulatory risk.
In conditional deals with a private equity-backed buyer, a break fee in favour of the seller is uncommon in private deals. For public deals, in the period 2008-19, 25 out of 79 voluntary offer documents approved by the Oslo Stock Exchange contained break fee provisions (25 out of the 43 offers where a transaction agreement was entered into). Only one of the five public M&A offers launched during 2019 contained a break fee.
In private deals, there are no specific legal limits on break fees, if applied. That is also the case for public deals if the sellers are asked to pay a break fee. However, for target companies, Norwegian company law is not entirely clear as to the extent to which the target can pay a break fee. According to the Norwegian Corporate Governance Code – relevant for, in particular, listed companies – the target should be cautious of incurring break-fee liabilities, and any fee should not exceed the costs incurred by the offeror. The market level of break fees is in the range of 0.8% to 2% of the transaction value.
Reverse break fees are rarely used in Norwegian private equity deals.
For a private equity-backed buyer or seller, a right to terminate an acquisition agreement is triggered if the conditions precedent for the benefit of the seller or the buyer, as the case may be, are not met or waived within the agreed long-stop date. Otherwise, the right to terminate is limited. Certain Norwegian background law principles cannot be set aside in the transaction agreement and can, in principle, trigger termination rights, but these are reserved for cases of fraud, gross negligence or wilful misconduct which are highly unusual.
In Norwegian private equity transactions, a private equity-backed seller is hesitant to accept any deal risk and usually asks for a clean exit. This is the case also if the buyer in the same transaction is private equity-backed. Therefore, a private equity-backed seller normally resists accepting indemnities, and the warranty catalogue is usually insured under a W&I insurance. If the deal is not insured (which is uncommon for private equity-backed sellers), a private equity-backed seller usually only agrees to give fundamental warranties, as opposed to an industrial seller which usually gives more comprehensive warranties, regardless of whether the deal is insured. In auction processes, the number of conditions precedent is usually limited to no material breach, regulatory approvals and necessary third-party consents.
The main limitations on liability for the seller are linked to buyer's knowledge, financial thresholds (basket, de minimis and total cap) and time limitations; see 6.9 Warranty Protection.
Since W&I insurance has become the norm in private equity deals the recent years, warranties provided by private equity-backed sellers are usually comprehensive. This does not significantly differ where the buyer is also private equity-backed.
Customary financial limits on warranty liability are:
In W&I-insured deals, the de minimis threshold is usually closer to 0.1%, and the basket 1%. A private equity-backed seller will usually not accept a total cap of more than 10-15% unless the deal is W&I-insured; in the latter case, no recourse against the seller will apply.
Customary time limitations on warranty liability are:
Selling members of management of a portfolio company are usually obligated under the existing shareholders' agreement to provide the same warranties as the fund. Limitations on warranty liability are usually the same as those set out above.
Full disclosure of the data room is typically allowed against the warranties, meaning that the buyer is considered to have knowledge of information presented fairly in the provided information. Exceptions are often accepted for fundamental warranties.
Protections typically included in acquisition documentation other than those described above are: (i) pre-completion undertakings by the sell-side to secure continuation of the operation of the target group in accordance with past practice and to forbid shares issues and similar between signing and closing; and (ii) post-completion obligations such as non-compete and non-solicitation undertakings for a period of 12-36 months. However, private equity-backed sellers very rarely accept non-compete or non-solicit undertakings, especially not international private equity funds. If accepted, such covenants are usually limited to the fund behind the acquisition vehicle.
Private equity-backed sellers rarely accept indemnities in order to secure clean exits. Selling members of management in the portfolio group sometimes provide indemnities, which is also the case for non-private equity sellers – however, they are normally treated equally as the private equity seller.
W&I insurance has become very common on the Norwegian private M&A market, evolving from four insured deals in 2012 to approximately 55 in 2019 according to Lockton. This is particularly common in private equity deals, especially if the seller is private equity-backed, in order to facilitate a clean exit. Approximately 70% of the insured deals involved private equity players.
For public deals, we anticipate an increase in the use of W&I insurance where warranties are provided. If warranties are provided in a public deal, these are provided by the main shareholder(s), not the target. In 2018, W&I insurance was used for the first time in Norwegian public deals (Everbridge/Unified Messaging Systems and FSN Capital/Saferoad Holding).
Escrow arrangements to back the obligations of a private equity seller are unusual, as this means no clean exit.
Litigation is not a common outcome of Norwegian private equity transactions. If a deal is litigated, it has mostly concerned warranty breach. W&I insurance claims are, however, on the rise and we expect to see more of this going forward.
In the Norwegian market, most public-to-private transactions are completed by industrial buyers and not private equity buyers. There are, however, some examples of successful private equity public-to-private transactions (notably Saferoad Holding ASA acquired by FSN Capital and Link Mobility Group ASA acquired by ABRY Partners, both in 2018).
For companies incorporated under Norwegian law, disclosure obligations to the issuer and regulatory authorities arise when a shareholder's or other person's proportion of shares and/or right to shares reaches, exceeds or falls below any of the following thresholds: 5%, 10%, 15%, 20%, 25%, one-third, 50%, two-thirds and 90%. The thresholds are calculated for both (i) voting rights and (ii) capital of the target.
For non-Norwegian companies admitted to trading on a regulated market in Norway, the thresholds are calculated based on applicable law in the country of incorporation of the relevant company.
Any person who through acquisition (voluntary offer or otherwise) becomes the owner of shares representing more than one-third of the voting rights in a Norwegian company, the shares of which are quoted on a Norwegian regulated market, is obliged to make a bid for the purchase of the remaining shares in the company (with repeat triggers at 40% and 50%).
For non-Norwegian companies admitted to trading on a regulated market in Norway, the threshold depends on the country of incorporation of the relevant company.
Cash consideration (as opposed to shares) is the most common form of consideration in Norwegian takeovers. Approximately 80% of completed voluntary offers are cash offers. Share offers, or offers containing a mix of shares and cash, make up the remaining 20% of voluntary offers. Other securities, such as convertible bonds, warrants or similar, are also permitted but rarely offered.
Mandatory offers require a full cash consideration option, but an option to choose shares or other securities as all or part of the consideration is permitted.
Most successful takeover offers in Norway are structured as a friendly offer where the offeror enters into a transaction agreement with the target and undertakings to tender with key shareholders signed shortly before announcement of the transaction. In 65 (including both completed and non-completed offers) out of 79 offers approved by the Oslo Stock Exchange in the period 2008-19, the offer was recommended by the target board, and in 43 out of these 65 offers, a transaction agreement between the offeror and the target was entered into.
Norwegian takeover regulations allow significant flexibility as to the use of offer conditions in voluntary offers. Mandatory offers, on the other hand, must be unconditional. In voluntary offers, both financing conditions, due diligence conditions and similar are allowed, but rarely accepted by the target and principal selling shareholders, and therefore uncommon in successful offers. The most common conditions are those related to the recommendation of the offer not being revoked, conduct of business, MAC, regulatory approvals, acceptance rate and conditions linked to corporate approvals such as shareholder approval (if required).
In a voluntary offer, an offeror may ask for deal security measures such as no-shop/non-solicitation and limited possibility for the target to amend or withdraw its recommendation. The target board normally requires an option to withdraw or amend its recommendation in the event of a superior offer. Break fees are allowed up to a certain level; see 6.6 Break Fees.
An offer that closes at less than 90% acceptance rate may trigger repeat mandatory offer obligations. If the offeror chooses to complete the offer with less than 90% acceptance rate, additional governance rights beyond those triggered by the level of shareholding are rarely granted. For Norwegian companies, effective control of the operations and dividend levels is achieved through board control. Board control is obtained at more than 50% of the votes, and effective control over new share issues, changes to the capital structure, mergers and de-mergers are achieved at two-thirds of the votes.
For Norwegian companies, an offeror can squeeze-out remaining shareholders if the offeror successfully acquires more than 90% of the target shares. The squeeze-out procedure normally takes one to two business days and the consideration will, as the main rule, be equal to the cash equivalent in NOK of the offer price in the tender offer.
It is common to obtain irrevocable commitments to tender and/or vote by the principal shareholder(s) if the bid premium is acceptable. These are usually negotiated shortly before announcement of the offer from a selected group of shareholders.
In most cases, undertakings provide an out for the shareholder if a superior offer is made. However, unconditional undertakings are not uncommon and may be obtained if the offer is believed to be attractive by the principle shareholder(s).
Hostile takeovers are permitted in Norway. However, they are not common as, historically, they have proven hard to complete. Friendly takeovers are far more likely to succeed. In total, 64 out of 79 offers approved by the Oslo Stock Exchange in the period 2008-19 were completed. Out these 64, only five were not recommended by the target board and 22 had neutral recommendations. Furthermore, out of the 15 non-completed offers, nine were not recommended by the target board.
These statistics show that voluntary offers are usually recommended by the target board, that the probability of success is higher for recommended offers, and that voluntary offers not recommended by the target board are rarely completed. Historically, private equity-backed buyers have not been active in hostile takeover transactions in the Norwegian market.
Equity incentivisation of management is a common feature of private equity transactions in Norway. Portfolio companies' senior members of management are usually expected to co-invest to ensure that their interest remain aligned with that of the private equity fund and that they remain incentivised to create further value and maximise returns on a successful exit. Other key personnel may be invited to participate in management incentive plans or to become additional employee shareholders.
The size of management's investment varies depending on whether management already holds shares that could be rolled over or the need to inject capital. In order to achieve a tax-efficient structure, management must have capital at risk and normally subscribes at the same price as the private equity sponsor, although with a different allocation of preference and ordinary shares. Selling members of management are often required to re-invest a significant portion of their sale proceeds (20-50%, or higher for key persons), always subject to negotiations and individual exceptions.
Any gains achieved by management on re-investments are, in principle, subject to tax on capital gains. If, however, management holds the initial investment through separate holding companies and re-invests through that holding company, tax would be avoided (or more precisely postponed until distributions are made from the holding entity).
It is important both for management and for the private equity fund that management's investment is made at fair market value. Otherwise, for instance, in relation to exit bonus arrangements that are commonly used, any benefit achieved by management on the (re)investment would give rise to income tax as opposed to tax on capital gains (income tax is higher), for the management in question and also trigger payroll tax for the employer entity of up to 14.1%.
At fund level, incentivisation of key personnel is commonly equity-based. The AIF Act imposes remuneration restrictions for AIF managers.
The private equity fund and any co-investor's investment (the institutional strip) is typically comprised by a mix of ordinary and preference shares, with a significantly higher portion of preference shares. The opposite is normally the case for the management equity participation strip, however, with a lot of variations – sometimes management is asked to invest partly in the institutional strip and partly in the management equity strip, and we see variations depending on how key a person is considered. Sometimes the institutional strip also comprises shareholder loans; however, due to taxation reasons, such loans are not commonly used.
The terms applicable for the preference shares normally entitle the private equity fund to receive its entire invested amount plus a predefined return on the investment (the preferred return) before ordinary shares are entitled to distributions. Once the preferred return (including interest and investment amount) has been distributed, the remainder of the proceeds is allocated to ordinary shares. Since, normally, management is more heavily exposed in ordinary shares, base and high-case exit scenarios ensure a higher relative return on management's investment, while the opposite is the case where sales proceeds are not sufficient to entail any distribution of significance on ordinary shares.
Historically, incentive schemes aimed at management at portfolio company level have changed from option-based and bonus-based models to predominantly investment-based models; however, exit bonus arrangements (subject to employment tax as stated above) are also applied.
Management's investment is typically made in the Norwegian holding structure (TopCo or, if a MidCo level is in place, MidCo). It is common to set up a separate holding entity specifically for management participation (ManCo) in particular for lesser stakes, co-owned and controlled (indirectly) by the fund.
Members of management that co-invest are usually required to accept call options for their shares in the event of termination of employment in the target group. Leaver provisions are typically divided into (i) good leaver (eg, long-term illness, retirement, disability, death or involuntary termination without cause) and (ii) bad leaver provisions (eg, voluntary termination prior to exit, summary dismissal or material breach). Sometimes a third category is introduced: "intermediate" or "very bad" leaver. As a general rule, a good leaver will receive fair market value for the shares, whilst a bad or very bad leaver will be required to sell at a discounted price, typically the lower of cost and anywhere between 50% and 75% of fair market value.
Leaver provisions in Norwegian private equity deals are not always linked to a vesting model, but this is fairly common. When applied, the typical provisions are time-based, linked to the good leaver and/or intermediate leaver provisions and vary depending on how early the person in question terminates the employment. Up to a five-year based vesting model is often used, where the underlying principles of the vesting model is that only the vested part of the shares is redeemable at fair market value at each anniversary, and unvested shares may only be redeemed at a lower value.
Management shareholders are usually required to accept non-compete and non-solicitation provisions in addition to drag, lock-up and standstill, right of first refusal and leaver provisions including price reduction provisions triggered by leaver events. Non-compete and non-solicitation undertakings typically apply for a period of 12-24 months, although lately 12 months is more commonly applied than 24.
Non-compete and non-solicitation restrictions are usually included in the share purchase agreement (or other transaction agreement) and in the shareholders' agreement, together with other restrictive covenants. Certain regulatory limits on enforceability apply: as a rule, such restrictive covenants are legitimate under Norwegian anti-trust regulations if the obligation lasts no longer than three years and the geographic scope of the clause is limited to the area in which the target has been providing the relevant products prior to the sale.
Further, under the Norwegian Working Environment Act, non-compete clauses imposed by the employer entity require compensation to the employee and may not extend longer than 12 months from the end of the employment. Exceptions may be agreed for the CEO.
It is not common to grant management shareholders minority protection rights beyond the protection they enjoy under the provisions of Norwegian companies legislation. Pursuant to these provisions, minority shareholders enjoy certain rights – either simply on the basis of holding one share, or on the basis of representing a certain percentage of the share capital and/or votes. These rights include inter alia the right to bring legal action to render a corporate resolution void, a right to attend and speak at shareholders' meetings and certain disclosure rights. Some of these rights can, and sometimes are, waived by minority shareholders in the shareholders' agreement. However, some are invariable.
To a great extent, many minority rights can be avoided by introducing different share classes with and without voting rights and with different financial rights and through leaver provisions in the shareholders' agreement. Pooling management's investment into a separate ManCo controlled (indirectly) by the private equity fund also minimises minority protection.
Likewise, management is rarely granted anti-dilution protection, veto rights or any right to control or influence exits. Sometimes management is granted right of board representation or an observer seat at the board, but in practice this does not give management shareholders any influence or control of the portfolio company.
A private equity fund usually controls the portfolio company in its capacity as majority shareholder, pursuant to Norwegian companies legislation, due to its position as a majority shareholder and also (or alternatively if the fund does not hold a controlling stake) through the shareholders' agreement. As such, the fund usually has information rights and controls the board and all major decisions such as share issues, major acquisitions, changes to the business of the portfolio company or disposal of any substantial part thereof, borrowings, business plans and budget, liquidation and exit/IPO processes. The shareholders' agreement can also grant the private equity fund veto rights, but, where the fund already has a controlling stake, this is superfluous.
Under Norwegian law, a company and its shareholder(s) are separate legal entities and one is as a general rule not liable for the obligations of the other. This applies regardless of whether the company and its shareholder(s) constitute a subsidiary-parent structure, and regardless of whether the subsidiary is wholly owned or not. In general, the limitation of shareholder's liability under Norwegian law is robust.
Case law concludes that lifting of the corporate veil should be reserved for exceptional cases and that the general rule, also where the company is engaged in high risk business, would be upholding the corporate veil. There is no well-known example of the corporate veil being lifted by the Norwegian Supreme Court.
A shareholder (and especially a parent entity) is, however, subject to a risk of being held liable for environmental liabilities of its subsidiary under Norwegian environmental legislation.
In Norwegian private equity deals, it is common for the private equity fund to impose its compliance policies on the portfolio companies.
The typical target holding period for Norwegian private equity investments is three to five years, given that the fund typically has investors who want to see their money returned to them with capital appreciation within a reasonable period of time.
Previously, trade sales and IPOs were considered as the two most attractive exit strategies, but secondary sales have now to a large extent replaced the IPO route. According to Argentum, in 2019, only three private equity-sponsored IPOs were completed on the main markets in the Nordic region, a decrease from six such IPOs in 2018, which was also a weak year. Most exits now take the form of trade sales to industrial investors or a secondary sale to other private equity funds. Some exits are conducted as "dual track" – ie, with an IPO and sale process running concurrently – but trade sale alone is clearly more common.
It is not uncommon for private equity sellers to reinvest upon exit, although this is not the norm. Such reinvestments are more common if the funds' initial ownership period has been in the short term, or if a significant upside is still expected to be generated from the business.
Institutional co-investors and management are usually required to accept drag mechanisms in Norwegian private equity deals in the shareholders' agreement applicable for the relevant investment. The typical drag threshold in Norwegian shareholders' agreements is between 50% and two-thirds.
In a subsequent exit/sales situation, the target shares are usually sold on a voluntary basis. Therefore, actual use of the drag right is rare.
Institutional co-investors and management are usually offered tag rights for the scenario where the private equity fund sells a stake in the portfolio company. As for drag mechanisms, such tag rights are included in the shareholders' agreement applicable for the relevant investment. The typical tag threshold in Norwegian shareholders' agreements is more than 50%.
On an exit by way of IPO, the typical lock-up arrangement for the private equity seller is usually six to 12 months.
It is not customary for the private equity seller and target to enter into relationship agreements.