2022 Activity

The 2022 M&A market faced challenging market conditions with rising inflation and interest rates and a rapidly changing geopolitical landscape. Nevertheless, the M&A activity in terms of number of deals remained strong. Coming out of a record-breaking fourth quarter of 2021 we saw increasing quarterly numbers in the first half of 2022 (reaching 198 announced through Mergermarket in the first quarter), decreasing towards the second half – yet, still above pre-COVID-19 quarterly averages.

However, IPO activity in 2022 was more significantly affected, with the number of IPO/listings decreasing significantly. A total of 16 IPOs/listings (of which eight were on Euronext Growth) took place in the second half of 2022 compared to the all-time high of 82 listings (of which 61 were on Euronext Growth) in 2021.

The 2022 deal activity was mostly dominated by technology (18%), services (business support services, consulting services, engineering services, etc) (14%), energy (10%) and the construction sector (10%).

2023 Activity

Despite continued growth in inflation and high market volatility, the M&A activity in Norway has remained strong, registering 182 transactions in the first quarter followed by 200 at the end of the first half of 2023. This pace is on par with, if not surpassing, the robust performance of 2022. Sectoral trends have largely mirrored the previous year, with the energy sector registering a marked uptick in activity.

The number of IPOs/listings continued to decrease in the second half of 2022 and the first half of 2023 due to the ongoing challenging market conditions. During the first half of 2023, only seven IPOs/listings (of which two were on Euronext Growth) were completed.

Private M&A activity in Norway is expected to remain relatively strong, owing to the resilient Nordic and Norwegian economies, intraregional activity, an optimistic deal pipeline, and sufficient capital available on the financing and equity markets. As a result of the aforementioned factors, Norway and the Nordic region are currently among the safest investment regions in the world. Going forward, Norwegian businesses should remain highly attractive targets for US and European private equity investors.

According to the registered data available on Mergermarket, approximately 75% of the deals made in the last 12 months (LTM) were private, as opposed to public deals.

Norwegian private equity markets include all types of transactions that can be found in mature markets across the globe.

Deals involving the oil and gas and supply industries have historically been a significant sector. The recent decline in oil prices and the green shift have dampened the deal activity within this sector. Nevertheless, the oil price has recently increased and stabilised, in conjunction with the current geopolitical turmoil in Europe, which has increased demand for fossil fuels. As a result, it is anticipated that deal activity within the oil and gas industry, and, in the near future, deals in the supply industry, will increase.

Before the general valuation decline in the tech sector, deal activity within this sector was high but is increasing as valuation gaps between buy-side and sell-side is starting to close.

Historically, most exits have taken the form of trade sales to industrial investors or secondary sales to other private equity funds, rather than IPOs. As mentioned in 1.1 Private Equity Transactions and M&A Deals in General and10.1 Types of Exit, the escalation of private equity-backed IPOs in 2020 and 2021 has subsided as a consequence, inter alia, of market instability and lower investor appetite.

In line with recent years, the Norwegian M&A market continues to be significantly affected by cross-border transactions, of which two-thirds have a cross-border element. Also looking at inbound and outbound cross-border transactions, we are seeing a consistently higher average of inbound transactions (foreign companies buying Norwegian targets) compared to outbound transactions (Norwegian companies buying foreign targets).

ESG

Across industries, companies scoring high on environmental, social, and governance (ESG) are more active than others. M&As are and will continue to be influenced by ESG considerations, including in the selection of targets, due diligence, valuation, deal financing and post-closing considerations such as integration and corporate governance. Newly implemented sustainable finance regulation adopted by the EU, including the EU Sustainable Finance Disclosure Regulation, amplifies the importance, significance and weight of such ESG considerations. The Government Pension Fund of Norway has accelerated both divestments from companies that are highly exposed to sustainability risks and its efforts in enforcing companies’ transition towards net zero. In addition, the Norwegian government has articulated clear expectations for ESG integration in companies with direct state ownership, as detailed in the White Paper “Meld. St. 6 (2022-2023) Greener and more active state ownership – The State’s direct ownership of companies”.

Rising Interest Rates

The Norwegian M&A market is showing resilience in the face of rising interest rates. The Norwegian Central Bank is forecasting more rate rises, which might further dampen economic growth, resulting in a potential decline in M&A activity in the second half of 2023.

Decreased Krone Rate

The Norwegian krone was down considerably in the first half of 2023 compared to most major currencies since 2022. Combined with the overall fall in stock prices on the Oslo Stock Exchange, this provides international investors with considerable discounts on public-to-private takeovers, in which we have already seen increased interest.

Ownership in Bank or Life Insurance Company

Norway has a long-standing administrative practice that restricts any single shareholder from owning more than 20–25% of a Norwegian bank or life insurance company (or financial groups comprising such entities), unless the shareholder is itself a financial institution.

The European Free Trade Association (EFTA) Surveillance Authority (ESA) has concluded that the ownership ceiling practice violates the EEA Agreement that exists between Norway and the EU. At the time of writing, the most recent development in this case occurred on 19 July 2023 when the ESA issued two reasoned opinions to the Norwegian government regarding the incorrect implementation and application of EEA rules in the financial sector. In light of this, Norway has a two-month window to adopt corrective measures. Failing this, the ESA holds the discretion to escalate the matter to the EFTA Court.

Should the ESA’s stance be validated and adopted by the Norwegian authorities, it could pave the way for full acquisitions of various Norwegian financial institutions. This includes potential buyouts by private equity funds, contingent upon relevant regulatory bodies deeming such entities fit for qualified ownership stakes.

Withholding Tax on Liquidation Proceeds for Foreign Shareholders

Under the current Norwegian tax regime, liquidation proceeds distributed from a Norwegian entity are not taxable for foreign shareholders (unless the shares are owned as part of a taxable business in Norway). An expert committee appointed by the Norwegian government has recently proposed to introduce withholding tax on liquidation proceeds to foreign shareholders. It is not clear if and when such rules will be introduced, but if the rules are introduced they will have an effect on the level of taxation when exiting investments in Norway through liquidation. However, certain exemptions are expected for corporate shareholders resident within the EEA.

Withholding Tax on Interest and Royalty Payments

With effect from 1 July 2021, a standard 15% withholding tax will apply on interest paid to related parties who reside in low-tax jurisdictions (countries where the effective tax rate is lower than two-thirds of the Norwegian tax rate on corresponding income). From 1 October 2021, the same applies to royalties and rental payments for certain physical assets. The withholding tax is imposed on gross earnings, meaning that the earnings are taxable even if the recipient is operating at a loss. Exemptions apply pursuant to certain tax treaties that stipulate lower tax rates.

Brexit Tax Implications

One of several Brexit tax implications is that, effective 1 January 2021, the exemption method for investments in UK entities by Norwegian investors are conditional on the investor owning at least 10% of the shares in the UK entity for a minimum of two years. Otherwise, dividends and capital gains are taxable. The exemption method is no longer applicable to UK investors in Norwegian entities. This implies that dividends from Norway to the UK are subject to withholding tax, limited to up to 15%. UK entities that own at least 10% of the capital in the company paying the dividends may, on certain conditions, be allowed a zero rate on dividend distributions.

EU Directives and Regulations

The EU has issued several directives, regulations and/or clarifications regarding the capital markets in recent years 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. On 1 March 2021, the Market Abuse Regulation (EU) No 596/2014) came into force in Norway. The revised EU Transparency Directive (as amended through Directive 2013/50/EU) has been integrated into Norwegian legislation, and the enhanced provisions pertaining to disclosure obligations officially took effect on 1 September 2022.

The EU sustainable finance framework has had a notable impact on private equity funds and transactions, also in Norway. The implementation of the EU Taxonomy Regulation and the EU Sustainable Finance Disclosure Regulation in Norway in early 2023 has contributed to driving the focus and importance of ESG considerations for private equity funds. As the Sustainable Finance Disclosure Regulation (SFDR) establishes disclosure obligations for Article 8 and 9 funds, ESG considerations now play a more significant role in shaping private equity funds’ investment choices and exercising of active ownership. The expected implementation of the EU Corporate Sustainability Reporting Directive in 2024 is set to further bolster this trend.

Public Service Sectors

On the left of the political spectrum in Norway, there is some scepticism about private players profiting from public service sectors, such as healthcare and pre-schools. As a result, these sectors are subject to a constant risk of regulatory change. There have historically been fewer transactions within these sectors, and this trend continues today.

General

Most Norwegian private equity transactions involve limited liability companies. Thus, the main company-specific legislation that regulates M&A transactions are the Private Limited Liability Companies Act and the Public Limited Liability Companies 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 Taxation Act, the Employment Act and the Competition Act.

Listed Targets

The regulatory framework differs significantly for listed and non-listed targets: where the parties are largely free to agree on the terms of the sale and transaction agreements in respect of non-listed targets, for listed targets the Securities Trading Act and the Securities Trading Regulations (supplemented by rules and guidelines issued by the Oslo Stock Exchange) provide a comprehensive and mandatory set of rules. These rules do not apply to targets listed on Euronext Growth (non-regulated market), yet market practice (based on the eight public tender offers made for Euronext Growth listed companies since 2019) suggests that such acquisitions to a large extent are structured similarly to acquisitions of listed targets, despite no equivalent set of mandatory regulations.

Norway has implemented (with some exceptions), inter alia, the EU Prospectus Regulation, the Market Abuse Regulation, the Markets in Financial Instruments Directive, the Markets in Financial Instruments Regulation, the Takeover Directive and the Transparency Directive. These rules contain, inter alia, offer obligations and disclosure obligations that dictate the sales process for companies listed on regulated markets; see 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. Through two government pension funds, the Government Pension Fund Norway (GPFN) and the Government Pension Fund Global (GPFG), the government invests heavily in foreign and domestic companies. In some areas, such as the retail sale of alcohol, the government retains a monopoly.

AIF

Norway has implemented the EU Alternative Investment Fund Manager Directive (AIFMD) through the Norwegian Act on the Management of Alternative Investment Funds (the AIFM Act). The AIFM Act applies to managers (AIFMs) of alternative investment funds (AIF). By definition, AIFs are 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. Norwegian private equity funds generally fall under this definition. As a result, they are categorised as AIFs and their managers are thus duly governed by the AIFMD framework.

In implementing AIFMD in Norwegian law, most of the provisions of the AIFM Act apply only to the AIFM (and not directly the AIFs), but the obligations of the AIFM indirectly cover the activities of the AIF. At the outset, the licence requirement applies to all AIFMs, meaning that they are subject to the full scope of the AIFM Act and under full regulatory supervision by the Financial Supervisory Authority of Norway (FSAN). However, pursuant to the AIFM Act, certain exemptions apply to so-called sub-threshold AIFMs, which may register with the FSAN and only be subject to the anti-money laundering regime and certain disclosure obligations to the FSAN. To qualify as a sub-threshold AIFM, the AIFM cannot manage AIFs with aggregated assets under management equal to or exceeding an amount equivalent in NOK to:

• EUR500 million, when the portfolios comprise unleveraged AIFs with no redemption rights exercisable during a five-year period following the initial investment; or
• EUR100 million, for AIFs other than those mentioned above.

However, sub-threshold AIFMs cannot market their AIFs to retail investors or passport their services into other EEA member states.

The FSAN supervises licensed and registered AIFMs in Norway.

Acquisition of control

Notification requirements apply to the acquisition of control of listed companies and non-listed companies of a certain size. In addition, if an AIF’s voting share of non-listed companies reaches, exceeds or falls below 10%, 20%, 30%, 50% or 75%, the AIFM must notify the FSAN as soon as possible (at the latest within ten business days).

AIFs are also subject to the asset stripping provisions under the AIFMD/AIFM Act, meaning that there are limitations on distributions, capital reductions, share redemptions and acquisition of own shares by EU-incorporated portfolio companies during the first two years following acquisition of control by an AIF, individually or jointly together with other AIFs.

There are other provisions of the AIFM Act that also apply, but the aforementioned often impact private equity funds.

From 1 August 2021, implementation of relevant EEA regulations in the AIFM Act made it possible to establish European venture funds (EuVECA) and social entrepreneurship funds (EuSEF) in Norway. Implementation of the European Long-Term Investment Fund (ELTIF) Regulation followed thereafter, taking effect in Norway on 1 January 2023.

In November 2021, the European Commission proposed changes to the AIFMD (the AIFMD II), focusing on aspects like loan origination, delegation, risk management, and reporting. In July 2023, the EU Council announced a provisional agreement with the EU Parliament on AIFMD II, settling key points of contention. The agreement aims to ease cross-border lending within the EU and proposes expanded services for certain AIFMs. The specifics of Norwegian implementation remain uncertain, but it is anticipated that AIFMD II might be adopted in Norway by 2025/2026 at the earliest. In particular, the possibility of loan-originating AIFs (LO-AIFs), with defined criteria and safeguards, is seen as a positive development in relation to the existing regulatory constraints on financing activities in Norway.

Merger Control

In accordance with Norwegian merger regulations, companies must notify the Norwegian Competition Authority (NCA) of concentrations where the combined Norwegian annual turnover of the undertakings concerned exceeds NOK1 billion and at least two of the undertakings concerned have an annual Norwegian turnover exceeding NOK100 million.

Transactions triggering a notification cannot be closed until they have received clearance from the NCA.

The NCA may also, within three months of a final agreement/acquisition of control, call in for review transactions falling below the turnover thresholds if the NCA has reason to assume that competition will be affected. It is also possible to voluntarily notify the NCA of a transaction, although this is rarely done.

No notification is required to the NCA if the parties meet the thresholds for a mandatory notification to the European Commission under the EU Merger Regulation, or if they need to make a notification to the EFTA Surveillance Authority.

One must also consider whether other European regulations, such as the Foreign Subsidies Regulation, might apply to the transaction.

Foreign Direct Investment

The current Security Act (SA) provides that entities handling classified information, controlling information, information systems, objects or infrastructure that are of vital importance to fundamental national functions, and/or engaging in activities that are of vital importance to fundamental national functions, shall be designated as subject to the SA. Then, where at least one-third of the shares in that company are subject to an acquisition, whether by a Norwegian or foreign acquirer, the acquirer must notify the relevant ministry or National Security Authority about the transaction.

In addition, entities providing goods/services of significant importance to fundamental national functions or national security interests may be made subject to the SA. In either case, the relevant provisions of the SA only apply where the target entity has been designated as being subject to the SA by formal decision. There is currently no public register of entities that have been designated, and so an acquirer must ask about designation during due diligence.

A number of changes to the SA have been proposed, but are not in force yet. These changes include: (i) a standstill obligation, preventing the closing of an acquisition until the relevant ministry has provided its approval for the investment; and (ii) a lowering of the threshold for when a notification is required, to a ten percent stake, with recurring filing obligations arising when the ownership stake passes one third, fifty percent, two thirds and ninety percent.

Anti-bribery, Sanctions and ESG

The surge in sanctions against Russia and Russian nationals by Norway, the EU, the UK and the US, as well as Russian countermeasures to those sanctions, continues to impact the attention bidders pay to sanctions and export control issues during due diligence.

The Norwegian Act relating to enterprises’ transparency and work on fundamental human rights and decent working conditions (Transparency Act) entered into force on 1 July 2022, and intends to promote companies’ respect for fundamental human rights and decent working conditions in their own operations and in their supply chains and business partners. Non-compliance with the Transparency Act could lead to enforcement or infringement penalties, and the Transparency Act is a focus of legal due diligence processes.

The level of due diligence typically conducted in the Norwegian market is red flag-focused, at least when conducted by the buy-side. If sell-side requests a vendor due diligence (VDD), which is usually the case for structured sales processes, a more detailed VDD may be conducted, particularly in relation to financials.

Due diligence is usually conducted by a legal, financial and tax team. Sometimes, separate teams are engaged for other key areas depending on the transaction. Other than business-specific issues, key areas of focus for legal due diligence in private equity transactions include:

• GDPR;
• anti-trust;
• anti-corruption;
• environmental, social and governance (ESG); and
• regulatory matters.

There has been an increase in focus on ESG, anti-corruption, and trade sanctions for target groups operating in high-risk jurisdictions, in particular due to the Russian-Ukrainian war and related sanctions.

As AI tools are advancing rapidly and testing and integration into due diligence processes accelerate, there are still several challenges that hinder full implementation into Norwegian processes (eg legal complexity and nuance, language), and as such remains in a trial phase. While AI tools can process vast amounts of data, enhancing efficiency and accuracy to provide early crucial insights, we expect these tools to be complementary to legal advisers in due diligence processes rather than fully replace them.

Vendor due diligence (VDD) is a common feature for private equity sellers if the exit follows a structured sales process, where it makes sense to conduct a VDD to identify and clean up any material findings prior to transaction start-up. Also, presenting a VDD report to potential bidders means they will have detailed information early on, allowing them to make an informed offer within tight timeframes. It may also provide some level of comfort related to the target’s business.

The format of the VDD report varies, but in the Norwegian market, we typically see traditional issue-based reports or more descriptive fact books of the target group. Such reports are normally provided by sell-side legal advisers in structured sales processes.

In cases where VDD reports have been prepared, advisers will often rely on the report and be instructed by their clients to conduct buy-side due diligence only on a confirmatory or “top-up” basis (ie, to verify or further explore the findings highlighted in the VDD report).

The final buyer and finance provider are often offered VDD reports for reliance.

Private equity funds in Norway typically acquire companies through private share purchase agreements as well as shareholder agreements applicable to joint investments by 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.

Compared to auction sales, the terms of the acquisition in privately negotiated transactions are generally quite similar. In auction sales, the transaction agreement typically contains fewer conditions precedent as bidders will use this as a tool to make their bid more appealing to the sellers.

In public deals, to reduce transaction risk, the acquisition is often carried out by material shareholders and members of the execution management and the board who own shares in the target agreeing to pre-accept the offer, followed by a public offering. A transaction agreement describing the terms and conditions for submitting the offer is quite often entered into with the target’s board, and by the board pre-agreeing to recommend the target’s shareholders to accept the offer. Close to 75% of all voluntary tender offers approved by the Oslo Stock Exchange from 2008 to August 2023 (both completed and uncompleted) were made on this basis. If the bidder is unable to achieve 100% control through a voluntary tender offer, the bidder may on certain conditions opt for a squeeze-out; see 7.6 Acquiring Less than 100%.

Norway's locally domiciled private equity funds are usually structured as a partnership (indre selskap (IS)) or limited liability company (aksjeselskap (AS)). The partnership model shares the most similarities with the common-law domiciled limited partnerships, which are the predominant legal structure for private equity funds.

Historically, funds managed by Norwegian-based advisers have predominantly been established under foreign jurisdictions, usually in Guernsey or Jersey. In recent years, onshore jurisdictions like Luxembourg have been used frequently.

In domestic and foreign limited partnership structures, the general partner of the limited partner manages the fund and the limited partners are the investors. For funds established in Guernsey and Jersey, for example, the Norwegian investment team has historically delivered investment advice services to the general partner in Guernsey or Jersey, while domestically established funds typically have a Norwegian alternative investment fund manager responsible for the portfolio and risk management functions relating to the fund.

Acquisitions

In Norwegian acquisitions the private equity-backed buyer entity (acquisition vehicle) is almost exclusively structured as a Norwegian private limited liability company (aksjeselskap), set up as a single purpose vehicle (SPV) for the transaction (BidCo). Foreign funds with foreign managers also often invest in the BidCo structures through separate holding structure in, for example, Luxembourg or the UK.

The structure between the limited partnership and BidCo varies depending on whether the fund is organised under Norwegian law or under another law.

Often, a fund organised under a foreign jurisdiction will set up:

• a foreign holding structure that is incorporated and tax resident outside of Norway; and
• a Norwegian structure held by the foreign holding structure.

Acquisition Structure

Depending, inter alia, on the transaction financing model and other commercial factors, the Norwegian acquisition structure usually consists of either only 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, including financing, governance structure, the existence of co-investors, risk exposure, corporate liability, disclosure concerns, and regulatory requirements. Normally, if external financing is obtained, a structure that provides a single point of enforcement of the pledge of shares in BidCo for the finance provider is applied (eg, a BidCo, MidCo and/or TopCo structure).

The private equity fund itself is rarely involved in the documentation of the transactions. Most often, the designated investment team and in-house legal counsel of the fund manager are involved, particularly in the initial stages of negotiation, but outside legal counsel normally leads the process. Larger deals and add-on acquisitions require the investment team to rely to a great extent on outside legal counsel.

General Trends

In Norway, private equity deals are normally financed by a combination of third-party debt financing and equity. During the past few years, the equity portion has increased, particularly in deals that 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 debt providers 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, it is rare to see the starting leverage going beyond 40-50% in the current market.

In addition, there has been an increase in the role of bond issues and direct lending in the capital structure (either replacing bank debt or in a pari passu or super-senior structure). This is due to the fact that both domestic and foreign investors have become aware of the advantages of the Norwegian bond market as well as how to structure direct lending in accordance with the Norwegian legal framework.

Leveraged Buyouts

In leveraged buyouts, debt financing is generally provided to the acquiring entity (BidCo) to finance the acquisition, and sometimes also to the target group to refinance existing debt and finance general corporate or working capital requirements. Typically, debt providers will not accept co-investors or management investing directly in BidCo due to their requirement for a single point of enforcement in connection with a pledge of shares in BidCo, which is one of the reasons why there is usually a holding company above BidCo.

Acquisition Debt

Term loans, bonds or direct lending are commonly used to finance acquisition debt as well as refinance the target group’s existing debt. Generally, the group’s working capital and corporate financing requirements are met through working capital facilities, such as revolving credit or overdraft facilities, which are often structured as senior debt. Any sponsor equity financing is often structured as equity and/or subordinated debt.

Provision of Funds

A private limited liability company may, under certain conditions and in accordance with certain procedures, make funds available and grant guarantees or security in connection with the acquisition of shares in the company itself or in the company’s direct or indirect parent.

Hence, both BidCo’s acquisition debt and the target group’s refinancing debt may now be secured by a pledge of BidCo’s shares and its shares in the target, along with guarantees and security provided by the target group.

Banks and other lenders now require fewer financial covenants 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 a capital expenditure (capex) covenant is seldom seen in the Norwegian market.

There is 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 bonds with financial maintenance covenants have been seen – 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 (or to the extent relevant from debt providers) to provide contractual certainty for the equity-funded portion of the purchase price from a private equity-backed buyer.

In most Norwegian private equity deals, the fund holds a majority stake. In recent years, minority stakes in listed companies have occasionally been acquired, but this remains a rare occurrence.

Club deals or similar buy-outs involving a consortium of private equity sponsors are not common in Norway. Most often this is due to the typical deal value not reaching a level that would require the funds to spread risk across other private equity funds, which is more often done to, inter alia, avoid exceeding investment concentration limits or similar restrictions.

Co-investment by other investors alongside the fund is, however, quite common. These co-investments are typically made by both external co-investors and existing limited partners in the fund.

Primary Consideration Structures

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 are by far the most common, as it is easier for sellers to compare bids if they use a locked box account rather than a completion account.

Locked box accounts on which the deal is based are usually audited, or at least partially audited, and are usually covered by a warranty.

In a completion accounts mechanism, the transaction agreement specifies the preliminary purchase price payable by the buyer at completion. The preliminary purchase price is usually 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.

Earn-outs or other forms of deferred consideration are sometimes applied, but are not a very common feature of private equity transactions. A private equity-backed seller almost always asks for a clean exit and will therefore resist accepting deferred consideration. If the parties struggle to agree on the purchase price, earn-out is sometimes used to bridge the gap. 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 buyer often requires selling members of management to re-invest a substantial portion of their proceeds, where settlement in part is made by the establishment of sellers’ credits documented by promissory notes and not entirely by cash transfers. Private equity-backed buyers rarely provide any security if the consideration payable includes a deferred consideration element; however, certain undertakings in relation to the operation of the target group after completion may be agreed upon in relation to earn-out mechanisms.

Escrow

Use of escrow arrangements is rare in the Norwegian market and private equity deals regardless of whether the seller or buyer is a private equity player. This is largely due to most private equity deals now including warranty and indemnity (W&I) insurance.

Leakage Provisions

Whenever locked box accounts are applied, leakage provisions are usually also included, regardless of whether the seller is backed by a private equity firm (although leakage provisions may be more refined in private equity deals).

In a completion accounts mechanism the post-transaction “true-up” adjustment will adjust for relevant leakage.

In Norway, locked-box consideration structures are commonly used in private equity transactions. Interest on the locked-box amount is normally applied and predominantly in auction processes, usually in the range between 2–5%, depending on, inter alia, the cash flow of the target group in the relevant period.

Normally, leakage occurring during the locked-box period is not charged with interest.

Separate dispute resolution mechanisms for locked-box consideration structures are not common. For completion accounts structures, a separate dispute resolution mechanism is almost always used to resolve disagreements.

In private equity transactions, conditions precedent relating to regulatory approvals, such as no intervention by the NCA or FDI (if relevant), are almost always included. Other typical conditions precedent include:

• no material breach occurring in the period between signing and closing; and
• due diligence-specific findings, such as key third-party consents.

Material adverse change clauses (MACs) are sometimes included in private deals, but their use has declined significantly in recent years. In public takeovers, MACs are usually included; in the period 2008–21, 75 out of 89 voluntary offer documents approved by the Oslo Stock Exchange contained a MAC.

The transaction agreement of W&I-insured deals, which do not undergo an auction process, sometimes includes a right for the buyer to terminate the agreement if new circumstances arise during 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 assume all of the antitrust or other regulatory risks related to the completion of the transaction. Typically, the buyer can walk away from the transaction if merger control approval or FDI clearance is not obtained.

In conditional deals with a private equity-backed buyer, a break fee in favour of the seller is uncommon. For public deals, out of 94 voluntary offer documents approved by the Oslo Stock Exchange in the period 2008– August 2023, 54 involved a transaction agreement, of which 26 contained provisions for break fees.

There are no specific legal limits on break fees if applied to the sellers in private and public deals. However, 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 – particularly relevant for listed companies – the target should be cautious of undertaking break-fee liabilities, and any fee should not exceed the costs incurred by the bidder. The market level of break fees is usually in the range of 0.8% to 2% of the transaction value.

Norwegian private equity deals rarely use reverse break fees.

In private equity deals the right to terminate the acquisition agreement is triggered if the conditions precedent for the benefit of the seller or the buyer are not met or waived within the agreed long-stop date. Otherwise, there is a limited right to terminate. There are certain Norwegian background law principles that cannot be set aside in a transaction agreement and may, in principle, trigger termination rights, but these are reserved for cases of fraud, gross negligence or wilful misconduct, which are highly unusual.

Typical long stop dates vary, although a useful rule of thumb is to set the long stop date as the expected time it would take to obtain regulatory approvals, with a buffer of one to several months.

In Norwegian private equity transactions, a private equity-backed seller is hesitant to accept any deal risk and usually requires a clean exit. It is also the case if the buyer in the same transaction is backed by private equity. A private equity-backed seller normally resists accepting indemnities, and the warranty catalogue is usually insured under 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 whereas an industrial seller usually provides 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 the buyer’s knowledge, financial thresholds (basket, de minimis and total cap) and time limitations; see 6.9 Warranty Protection.

With W&I insurance becoming the norm in private equity deals, warranties provided by private equity-backed sellers are usually comprehensive. This does not significantly differ where the buyer is also private equity-backed.

The following are the customary financial limits on warranty liability:

• de minimis: 0.1–0.2%;
• basket: 1–2% of purchase price; and
• total cap: 10–30% of purchase price.

In W&I-insured deals, the de minimis threshold is usually closer to 0.1%, and the basket closer to 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 this case, no recourse against the seller will apply.

The following are the customary financial limits on warranty liability:

• general limitation period: between 12 and 18 months (24 months in case of W&I insurance);
• tax warranty limitation period: five years (seven years in case of W&I insurance); and
• fundamental warranties: three to five years.

Management co-investors 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.

The following protections are typically included in acquisition documentation:

• 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
• 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 sponsors.

If accepted, the application of such covenants is usually limited only to the relevant fund(s) making the divestment and their portfolio companies (and not the portfolio companies of other funds managed by the same managers).

Private equity-backed sellers typically do not provide indemnities to buyers in order to secure clean exits. Management co-investors and non-private equity sellers may sometimes provide indemnities, but they are typically treated the same as private equity sellers.

W&I insurance is becoming very common in the Norwegian private M&A market. This is particularly common in private equity deals, particularly if the seller is backed by private equity, to facilitate a clean exit. Approximately 70% of the insured deals involve private equity players, but W&I insurance is becoming increasingly popular for industrial players too.

For public deals, W&I insurance brokers report an increased use of W&I insurance where warranties are provided.

Escrow arrangements to back the obligations of a private equity seller are unusual, as this opposes the private equity sponsor’s desire for a clean exit.

Litigation is not a common outcome of Norwegian private equity transactions. However, the most common cause of litigation is a breach of warranty.

The number of W&I insurance claims is on the rise. We have seen an increase in disputes related to completion accounts, although these are often settled outside of the courts, by way of settlement agreements or expert’s decisions.

The majority of public-to-private transactions in Norway are completed by industrial buyers rather than private equity buyers. However, some successful examples of private equity public-to-private transactions include EcoOnline Holding AS acquired by Apax Partners (2022), Mercell Holding ASA acquired by Thoma Bravo (2022), Bank Norwegian ASA acquired by Nordic Capital's portfolio company Nordax Group (2021) and Ocean Yield ASA acquired by KKR (2021), which indicate a general expectation in the Norwegian market that the number of private equity-backed public-to-private transactions may increase in the future, also in light of the significant number of IPOs in Norway during 2020 and 2021.

Once a target listed on a regulated market is made aware that an offer (either mandatory or voluntary) for the shares will be made, the target’s board and CEO become subject to restrictions with respect to certain corporate actions, and the board is required to make a statement with respect to the offer and its consequences for the target’s shareholders.

A transaction agreement is often entered into between the target’s board and the bidder in a friendly process. Such agreements are also common in deals involving Euronext Growth-listed targets.

Stakeholders in Norwegian companies listed on a regulated market are subject to disclosure obligations to the issuer and regulatory authorities if the proportion of shares and/or right to shares of a person or entity reaches, exceeds or falls below any of the following thresholds: 5%, 10%, 15%, 20%, 25%, one-third, 50%, two-thirds and 90% of either (i) the voting rights and/or (ii) the capital of the listed company.

For non-Norwegian listed on a regulated market in Norway, the thresholds are determined in accordance with the applicable law in the respective company’s country of incorporation.

If, through acquisition (voluntary offer or otherwise), a person becomes the owner of more than one-third of the voting rights of a Norwegian company listed on a Norwegian-regulated market, that person is obligated to bid on the remaining shares (with a repeat trigger upon reaching 40% and 50% of the voting rights). The threshold is calculated on a consolidated basis with the respective shareholders’ closely associated persons (defined in the Securities Trading Act), which may include target shares held by affiliated or related funds or portfolio companies.

In the case of non-Norwegian companies that are admitted to trading on a regulated market in Norway and which have their registered office within another EEA country, the threshold depends on the country of incorporation of the company.

The most common form of consideration in Norwegian takeovers is cash (as opposed to shares). It is estimated that approximately 80% of completed voluntary offers are cash offers. The remaining 20% of voluntary offers comprise shares or offers that include both shares and cash. Securities such as convertible bonds, warrants, and similar instruments are also permitted, but are rarely offered.

Mandatory offers must at minimum equal the highest price paid the previous six months. Mandatory offers require a full cash consideration option. However, shares or other securities may constitute alternative consideration.

The most successful takeover offers in Norway are structured as a friendly offer where the bidder and the target’s board enter into a transaction agreement. Out of 94 voluntary tender offers between 2008 and August 2023, 77 offers (both completed and non-completed) were recommended by the target’s board, of which 54 involved such a transaction agreement.

The Norwegian takeover regulations allow for a wide range of offer conditions in voluntary takeover offers, while mandatory offers must be unconditional. In voluntary offers, conditions relating to both financing and due diligence are allowed, although such conditions are likely to not be accepted by the target’s board and key shareholders.

A common condition for launching the offer is that key shareholders and board members owning target shares pre-accept to sell their shares in the offer. Other common conditions relate to the target’s board not revoking or amending the recommendation of the offer, ordinary conduct of business, MAC, regulatory approvals, acceptance rate (often set at 90% to facilitate for the subsequent squeeze-out – see 7.6 Acquiring Less Than 100%), and corporate approvals, such as shareholder approval (if required).

As part of a voluntary offer, a bidder may also request deal security measures such as no-shop/non-solicitation.

In the event of a superior offer, the target’s board normally retains the option of withdrawing or amending its recommendation. It is permissible to charge break fees up to a certain level; see 6.6 Break Fees.

If an offer closes with less than 90% acceptance rate, repeated mandatory offer obligations may apply (see 7.3 Mandatory Offer Thresholds), but no additional governance rights beyond those triggered by the level of shareholding are granted. In Norwegian companies, effective control of the company’s operations and dividend levels is achieved through board control which is achieved at more than 50% of the votes cast. Effective control over new share issues, capital structure changes, mergers and de-mergers is achieved at two-thirds of the votes cast.

A bidder can squeeze out remaining shareholders if the bidder successfully acquires 90% or more of the target shares. A squeeze-out procedure usually takes one or two business days, with the consideration, as the general rule, being the cash equivalent in NOK of the tender offer price.

Debt pushdown is usually facilitated through dividend payments from the target being resolved after the bidder has conducted a squeeze-out and acquired 100% of the shares in the target.

It is common for the principal shareholder(s) to obtain irrevocable commitments to tender and/or vote if the bid premium is acceptable. These agreements are usually negotiated shortly before the announcement of an offer from a selected group of shareholders.

In most cases, undertakings provide the shareholder with the opportunity to withdraw if a superior offer is made. It is possible, however, to obtain unconditional undertakings if the principal shareholder(s) believes the offer is attractive.

Equity incentivisation of management is a common feature of private equity transactions in Norway. Portfolio companies’ senior management members (or other key personnel) are usually expected to co-invest to ensure that their interests remain aligned with those of the private equity fund and that they are incentivised to create further value and maximise returns on successful exits.

The size of management’s investment varies depending on whether it already holds shares that could be rolled over or whether it must inject capital. Management must have capital at risk in order to achieve a tax-efficient structure and typically subscribes at the same price as the private equity sponsor, although with different allocations of preference shares 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 realised by management on re-investments are, in principle, subject to capital gains tax. 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, although the tax authorities have historically recognised that the shares acquired by management can be transferred at a reduced market value (typically a 20-30% reduction) to reflect the value impact of lock-up provisions, minority position and illiquidity. These reductions are typically calculated based on the Black-Scholes-Merton approach. If the incentives for the management are not granted at market price, any benefit achieved by management on the (re)investment would typically give rise to payroll tax as opposed to tax on capital gains (payroll tax is higher) for the management in question and also trigger social security contributions for the employer entity of up to 19.1%.

At fund level, incentivisation of key personnel is commonly equity-based. The AIFM Act imposes certain remuneration restrictions on AIF managers.

The private equity fund and any co-investor’s investment (institutional strip) are typically comprised of a mix of ordinary and preference shares, with a significantly higher percentage of preference shares. The opposite is normally the case for the management equity participation strip, but there are many variations in this – sometimes management is asked to invest partly in the institutional strip and partly in the management equity strip, and there are variations depending on the level of importance a person is deemed to have. Sometimes the institutional strip also comprises shareholder loans; however, due to taxation reasons, such loans are not commonly used.

Terms applicable to the preference shares normally entitle the private equity fund to receive its entire invested amount plus a predefined return on the investment (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. As management is usually more heavily exposed in ordinary shares, base and high-case exit scenarios ensure a higher relative return on management’s investment (which also reflects the increased risk associated with the ordinary shares), 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 payroll tax and social security contributions 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). For management participation, particularly for minority stakes, it is common to establish a separate holding management company (ManCo) co-owned and controlled (indirectly) by the private equity fund.

Members of management who co-invest are usually required to accept call options for their shares in the event that their employment in the target group is terminated. Leaver provisions are typically divided into:

• good leaver (eg, long-term illness, retirement, disability, death or involuntary termination without cause); and
• bad leaver provisions (eg, voluntary termination prior to exit, summary dismissal or material breach).

Sometimes, a third category is introduced: "intermediate" or "very bad" leavers. As a general rule, a good leaver will receive fair market value for the shares, whereas 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 100% 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. An up to a five-year vesting model is often used, with the underlying principle being that only the vested part of the shares from time to time may ordinarily be redeemed at fair market value, while 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) in the shareholders’ agreement, together with other restrictive covenants, as well as in the employment/service agreement. Certain regulatory limits on enforceability apply. As a general rule, such restrictive covenants are legitimate under Norwegian anti-trust regulations if the obligation lasts no longer than three years (but the timeline depends on whether or not the transaction involves important goodwill or know-how) 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.

In addition, under the Norwegian Working Environment Act, non-compete clauses imposed by the employer entity require compensation for the employee and may not extend beyond a period of 12 months following the termination of employment. Exceptions may be agreed on for the CEO, and there is scope to treat restrictive covenants in the employment agreement separate from those applicable to the employee in its capacity as an ongoing shareholder and/or selling shareholder.

It is uncommon for management shareholders to be granted minority protection rights beyond what is provided under the Norwegian company legislation, unless they will have a significant minority stake and strength in the transaction negotiations. Under company legislation, minority shareholders enjoy certain rights, either by holding one share, or by representing a certain percentage of the share capital and/or voting rights. These rights include, inter alia, the right to bring legal action to render a corporate resolution void, attend and speak at shareholder meetings, as well as certain disclosure rights. Some of these rights can, and sometimes are, waived in the shareholders’ agreement; however, some are statutory.

Many minority rights can be avoided to a large extent by introducing different share classes with and without voting rights and financial rights, as well as by incorporating leaver provisions into the shareholders’ agreement. Pooling management investments into a separate ManCo that is controlled (indirectly) by the private equity fund also helps control the impact of the minority protection.

Likewise, management is rarely granted anti-dilution protection, veto rights or any right to control or influence exits. In some cases, management is granted the right of board representation or an observer seat on the board, but in practice, this does not give management shareholders any influence or control over the portfolio company.

Norwegian private equity funds will generally seek to obtain control of the portfolio company in order to exercise active ownership. Control is obtained by way of majority shareholding and is typically governed by a shareholders’ agreement (also an alternative if the fund does not obtain a controlling stake). The fund will typically be granted information rights, control of the board and all major decisions, including share issues, major acquisitions, changes to the business of the portfolio company or disposal of a substantial portion thereof, borrowing, business plans and budget, liquidation and exit/IPO procedures. The shareholders’ agreement may also grant veto rights to the private equity fund, but this is unnecessary where the fund possesses a controlling interest.

Pursuant to Norwegian law, a company and its shareholder(s) are separate legal entities, and neither is generally responsible for the obligations of the other. This applies regardless of whether the company and its shareholder(s) are a part of a subsidiary-parent structure or if the subsidiary is wholly owned. In general, the limitations on shareholder’s liability under Norwegian law are robust.

The prevailing view in case law is that piercing the corporate veil should be reserved for exceptional cases, and that the general rule would be to uphold the corporate veil even where the company is engaged in high-risk business. In terms of the Norwegian Supreme Court piercing the corporate veil, there is no well-known example. There is, however, a risk that a shareholder (and especially a parent company) may be held liable for the environmental liabilities of its subsidiary under Norwegian environmental legislation.

The target holding period for Norwegian private equity investments is usually 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.

Trade sales and IPOs have historically been considered the two most attractive exit strategies. In the Nordic countries, prior to the COVID-19 pandemic, secondary sales had to a large extent replaced the IPO route, indicating that trade sales to industrial investors or secondary sales to other private equity funds were the most common exit mechanisms. The record-high IPO activity in 2020-2021 has subsided and the decrease in the number of private equity-backed IPOs in 2022 has continued into 2023, as discussed in 1. Transaction Activity. This may suggest that the IPO peaks in 2020-2021 were a result of opportunities sought during specific market conditions, rather than a change of trends.

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.

Some exits are conducted as “dual track” – ie, with an IPO and sale process running concurrently – but trade sale alone is clearly more common.

“Triple track” exit processes have traditionally been less common in the Norwegian market and if a recapitalisation (or refinancing) is not conducted independently from an exit, it is typically explored once it is determined that there is limited interest in the market.

We see a trend towards more and more investments being rolled over to continuation vehicles or later flagship funds in general partner-led transactions.

Drag and tag rights are typical in equity arrangements in Norwegian private equity deals to accommodate for an appropriate exit.

Institutional co-investors and management are usually required to accept drag mechanisms in the shareholders’ agreement applicable to the relevant investment. The typical drag threshold in Norwegian shareholders’ agreements ranges between 50% and two-thirds of the aggregate equity. In the event of a subsequent exit or sale, the target shares are usually sold on a voluntary basis. As such, the actual use of the drag right is rare.

Institutional co-investors and management are generally offered tag rights in the event that the private equity fund sells its stake in the portfolio company. As for drag mechanisms, such tag rights are included in the shareholders’ agreement applicable to the relevant investment. In Norwegian shareholders’ agreements, the tag threshold is typically set at 50% or more of the aggregate equity.

In an exit by way of an 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.