Private mergers and acquisitions in Norway: overview
Q&A guide to private mergers and acquisitions law in Norway.
The Q&A gives a high level overview of key issues including corporate entities and acquisition methods, preliminary agreements, main documents, warranties and indemnities, acquisition financing, signing and closing, tax, employees, pensions, competition and environmental issues.
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Corporate entities and acquisition methods
Foreign investors can carry out an acquisition of a Norwegian target either directly or through separate legal entities. These entities can be a limited liability company or a general or limited partnership, organised either under Norwegian or under foreign law. Historically, a foreign bidder from a tax structuring perspective normally prefers to establish a Norwegian acquisition vehicle, preferably a private limited liability company (aksjeselskap) (AS) (private company). This can be incorporated from scratch or through purchasing a shelf company. A law firm can establish and register an acquisition vehicle with the Registry of Business Enterprises in just a couple of days, provided that the registration is done electronically.
In private acquisitions, both the target and the acquisition vehicle are most commonly organised as private companies. The target and the acquisition vehicle can also (more rarely) be organised as public limited liability companies (allmennaksjeselskap) (ASA) (public companies). At the end of 2015, there were about 74 unlisted public companies in Norway, while the number of private companies was 277,748.
The main difference between a public and a private company is that only public companies can raise capital by a share issue to the general public. A share issue by a private company must be carried out through private placements.
A private company must have a share capital of at least NOK30,000 and 100% of the nominal value of each share must be paid in.
A public company must have a share capital of at least NOK1 million and 100% of the nominal value has to be paid in.
The target can also more rarely be a general partnership (ansvarlig selskap (ANS)), partnerships with proportional liability (selskap med delt ansvar (DA)), an internal or silent partnership (indre eller stille selskap (IS)) or a limited partnership (kommandittselskap (KS)) established under the Partnership Act 1985 or other form of legal entity. In these cases, an asset purchase is normally preferable for a buyer.
In general, there is no preferred method of direct investment, and the choice of method depends on the specific circumstances in each case, based on such considerations as tax, liability and capital structure. A Norwegian leveraged buy-out (LBO) transaction often involves multiple holding companies and multiple layers of debt on the buy-side, depending on tax structuring issues and the banks' requirement for structural subordination of the acquisition financing, and so on.
Restrictions on share transfer
In relation to private companies:
By law, shares have limited negotiability, in that shares can only be acquired if a company grants its consent to the acquisition, unless otherwise stipulated in the company's articles of association (articles). A transferee who is already a shareholder will need corresponding consent to increase his ownership interest in such a company.
Transfers that take place in connection with inheritance or the administration of an estate require consent. The same applies to a share transfer in a forced sale. However, consent cannot be refused for a change of ownership by inheritance itself, or to a party that in some other way is personally related to the former owner or a relative in the direct line or ascent or descent.
If a corporate shareholder of the target gets new owners, it is not necessarily considered a transfer that requires consent from the target (Supreme Court Decision, referred in Rt 1989 page 1198). However, some authors argue that under special circumstances change of ownership to the shares of a holding company may also trigger consent requirements in the holding company's subsidiaries. There are currently no precedents that directly relate to the lifting of the corporate veil in relation to the consent rules, but there are some precedents in other legal areas under Norwegian law that may support this view.
In general, consent can only be refused on "justifiable grounds". The Private Companies Act 1997 itself does not specify what may constitute justifiable grounds. However, it has been assumed that the decisive factor is primarily if, and to what extent, the proposed acquisition is in conflict with the company's interests. The articles may stipulate more comprehensive conditions for refusing or granting consent, either directly through a condition of the consent, by determining who may be shareholders, or more indirectly through a specific objects clause for the company.
If a share in a private company is to be sold or change owner in other ways, the other shareholders have a pre-emption right to purchase the relevant shares, unless otherwise stipulated in the articles.
Other transfer restrictions may also be contained in the articles. The articles may further provide exemptions that certain transferees are exempt from the consent requirements. The articles can also authorise corporate bodies other than the board of directors (board) to grant consent, for example the company's shareholders in a general meeting (shareholders meeting) or the general manager. However, it is assumed that the articles cannot make a share acquisition contingent on the consent of parties outside the company.
For limited companies established before 1 January 1999 (that is, before the entry into force of the Private Companies Act) the general rule is the opposite: board approval and right of first refusal only apply if they are explicitly stipulated in the articles.
In relation to public companies:
In general, the shares are freely negotiable. However, even public companies have extensive options to limit the assignability of their shares.
The articles can stipulate that the shares can only be transferred with the consent of the company (the board, unless provided otherwise in the articles), except if the shares are acquired by inheritance and the person that inherits the shares is personally related to the former owner.
Consent can only be refused on justifiable grounds. As for private companies, the Public Companies Act 1997 does not specify what may be justifiable grounds to refuse consent. However, it is assumed that the grounds to refuse consent in a public company are more limited and to some extent must be more "objectively" justifiable than for a private company. The articles may also provide further conditions for withholding consent.
The articles can also stipulate that a shareholder or acquirer of a share in a public company must have specific qualities, or that a shareholder or another person has a right to take over a share that has been or is to be transferred.
If the public company is listed on the stock exchange, an unreasonable refusal of consent may be considered a breach of the Stock Exchange Regulations requirement that shares listed on the stock exchange must be freely transferrable.
For Norwegian general partnerships, partnerships with proportional liability, internal or silent partnerships and for limited partnerships, the transfer of a partnership share requires consent from the other partners, unless otherwise stated in the partnership agreement.
Foreign ownership restrictions
There is no general legislation that requires notification to or clearance of a governmental agency when a foreign owned (or foreign controlled) company makes an acquisition in Norway. However, in certain sectors governing vital national interests, such as the power and energy sector (including oil, gas and hydropower) and the finance sector (including financial, credit, and insurance institutions), certain limitations on ownership and business operations apply. Note that parliament resolved to adopt a revised Financial Institution Act in 2015. This new act entered into force from 1 January 2016, regulating the acquisitions of banks, insurance companies and other financial institutions under Norwegian law. Also, note that as from 1 July 2016, the Norwegian Media Authority's control over media ownership was abolished. This means that for the future, the review of changes in media ownership will exclusively become the responsibility of the Norwegian Competition Authority.
However, the chief executive officer and at least half the members of the board in a limited company must either be residents of Norway, or be European Economic Area (EEA) nationals residing in an EEA state. The Ministry of Trade and Industry may grant exemption from the residency requirements on a case-by-case basis.
Norway, being a member of the European Free Trade Agreement (EFTA) and the EEA, must also adhere to anti-protectionism regulations adopted by these institutions.
The most common ways to acquire a private company
Share purchases are the most common way to acquire a private company in Norway. The main reason is that Norwegian corporate shareholders (shareholders not being private individuals) normally favour a share transaction over an asset transaction due to certain tax advantages (see below). Asset purchases do occur but are not as frequent as share transactions, even if an asset purchase may, from a tax perspective, in many cases be preferable to the buyer.
If a legal entity plans to divest part of its assets or liabilities to one or more acquiring entities, the parties can also effect the business combination by way of a statutory merger and/or demerger. The respective assets and liabilities of the divesting legal entity are then transferred by operation of law to the acquiring company, and the shareholders of the divesting legal entity receive shares or a combination of shares and cash in the acquiring company as consideration.
Based on Regulation (EC) 2157/2001 on the statute for a European company (European Company Statute Regulation), a business combination involving a European company (SE) can also be formed in various ways, including by establishing a holding company (an SE) of a Norwegian limited company and another company incorporated in an EU jurisdiction. Following Norway's implementation of Directive 2005/56/EC on cross-border mergers of limited liability companies, it is also possible to conduct a legal merger of a Norwegian company cross-border in the EU and EEA.
Share purchases: advantages/asset purchases: disadvantages
The main advantages of a share purchase and disadvantages of an asset purchase are:
It is technically easier to transfer the shares because the entire business of the target is transferred when transferring the shares. In an asset purchase, all assets and liabilities to be transferred have to be identified and individually transferred and assumed. This also implies that a buyer in an asset transaction will need to secure legal protection of the ownership to each asset against seller's creditors. Further:
in an asset purchase, third party consents and approvals are usually required, while in a share purchase, third party consents are generally not required (subject to consents from public authorities and change of control provisions);
if the asset transaction is structured as a legal merger and/or demerger under Norwegian law, all assets and liabilities of the assignor company will be assumed by the assignee company by operation of law. However, there are other disadvantages to such mergers/demergers. Mergers/demergers normally require a longer period of time to complete. Such transactions must also be disclosed and will require consent from both the involved companies' shareholders. Moreover, the merging/demerging companies' creditors are entitled to demand payment or security for their claims before the transaction can be completed.
The target's business contracts are generally unaffected by the transfer, subject to change of control provisions.
Transfer tax or stamp duty does not apply on a share purchase. On an asset purchase, transfer tax and various public fees can be triggered, depending on the assets (see Question 25, Asset sale).
Norwegian corporate shareholders can benefit from tax-exempt capital gains on the sale of shares in domestic or foreign companies domiciled in EU and EEA member states (see Question 27, Share sale).
There are generally no tax consequences for the target due to a transfer of its shares. A disposal of the target's assets or the business as a whole will trigger 25% tax on the company's capital gains from the sale (subject to certain rules for deferring the tax (see Question 27, Share sale). On 6 October 2015, the Norwegian Government submitted the 2017 Fiscal Budget in which it has proposed that the 25% tax rate will be reduced to 24%, effective from 1 January 2017. The sitting Government has also proposed a further reduction in the tax rate to 23% over the period from 2017 to 2018.
If the target's shareholders are individual persons, there is a potential double tax charge for the ultimate owners, on the sale of the target's business and distribution of the sale proceeds to the shareholders as dividends (instead of the shareholders selling their shares).
Tax losses in the target can generally be carried forward, unless it is likely that the buyer's use of the target's overall tax position has been the predominant motive for the transaction. It may be possible to repackage an asset purchase as a share purchase if the buyer transfers the business (including tax losses) to be sold to a newly formed subsidiary (NewCo) by a combined demerger/merger and sells the shares in the NewCo to the buyer. Such hive down may enable tax losses to be carried forward. Up until 2014, there was a substantial risk that the Norwegian tax authorities could challenge a combined demerger/merger followed by a share sale, and reclassify such transaction into an asset sale. However, due to a 2014 ruling by the Norwegian Supreme Court, the risk of such reclassification is now reduced substantially (see Question 28, Asset sale).
From an accounting perspective, an asset purchase requires the acquiring company to allocate the purchase price to the various assets and liabilities acquired/assumed by the transaction. In most cases, this results in an amount being paid in excess of identified assets being entered as goodwill in the acquirer's company accounts. In most cases a purchase of shares (depending on the acquirer's accounting principles) only results in the acquirer having to enter goodwill in its consolidated financial statements. Prior to 1 July 2013 goodwill in the acquirer's company accounts would reduce the acquirer's ability to distribute dividends with an amount equal to the amount of goodwill entered in the acquirer's company accounts. This was something that could make buyers prefer a share transaction instead of an asset transaction. From 1 July 2013 the limitation in private and public companies' ability to distribute dividends due to goodwill in their company accounts was abolished.
Except for a purchase of a business as a going concern, an asset purchase incurs value added tax (VAT) (see Question 29, VAT).
Unless there are specific information/consultation requirements under collective bargaining agreements (or unless the target is listed on a regulated market), it is normally not necessary to inform or consult employees or unions on a share purchase (see Question 31, Share sale).
In an asset purchase of a business with a transfer of employees, it is necessary to inform and consult with the employees and their representatives (see Question 31, Asset sale).
An asset transaction involving the sale of all or substantially all of the seller's business and assets may be a factual liquidation under Norwegian law. This could trigger requirements for shareholders' consent and to put the selling company into liquidation or change its purpose. A liquation is normally less confidential than a share transaction.
Share purchases: disadvantages/asset purchases: advantages
The main disadvantages of a share purchase and advantages of an asset purchase are:
The buyer can pick and choose the parts of the seller's business it wishes to acquire (subject to some exceptions, see below) and leave liabilities with the seller.
In a share transaction the buyer takes over the deferred historical tax risks of the target, while in an asset transaction this can be avoided.
The base cost of capital assets may be stepped up for tax purposes in an asset transaction (allowing greater relief from corporation tax on capital losses on later sales).
Depending on the allocation of the purchase price between the different assets, the buyer can in an asset transaction gain tax relief in a relatively short time on substantial parts of the purchase price. The purchase price for current assets is deducted at the time the asset is realised. The purchase price for fixed assets is subject to depreciation according to the Taxation Act.
If an asset transaction generates a loss, the loss is generally tax deductible for the selling company (the target). This may also enable the target's shareholders to indirectly deduct the loss for tax purposes (if the target's shareholders are Norwegian corporate shareholders and a sale of their shares would generate a loss, this loss is not tax deductible for the corporate shareholders).
The buyer can grant security to lenders over the assets acquired to finance the purchase price. On a share purchase, any security taken over the company's assets may be prohibited financial assistance (although from 1 July 2013 financial assistance can now also be given by Norwegian limited companies, subject to certain restrictions and whitewash procedures) (see Question 19).
In a target with several minority shareholders unwilling to sell their shares, the target's shareholders meeting can with at least a two-thirds majority decide to sell the entire business as an asset sale.
An asset purchase avoids the problem of trying to locate missing minority shareholders.
Over the last 12 years sales of companies by auction have become quite common in Norway, particularly in a seller's market and where the sales process is initiated by a seller. In most cases the auction process is organised as follows:
The financial adviser prepares:
an initial valuation of the target, providing the seller with an indication of the target's value;
a short presentation, containing both financial and factual key information about the target (a teaser);
an information memorandum; and
in co-operation with the seller, a list of the prospective bidders.
The seller usually instructs an audit firm and/or a law firm to prepare a data room. A well prepared seller will also usually instruct an audit firm and its legal advisers to conduct vendor due diligence of the target. If the most likely buyers are private equity funds, the seller will also ensure that at least a financial vendor due diligence (VDD) report and a financial data book are made available to the bidders in the data room. In recent years, it has become rather common for the seller's legal adviser to prepare a legal VDD report, to be made available for prospective bidders.
The financial adviser contacts prospective bidders and offers them the teaser.
Serious prospective bidders are offered an information memorandum or a management presentation, provided they are willing to sign a confidentiality agreement. At this stage the seller's counsel normally starts preparing a draft sale agreement.
Following distribution of the information memorandum, the prospective bidders are asked to submit a non-binding indicative offer.
Based on the indicative offers the seller, in co-operation with its advisers, invites certain bidders to carry out a due diligence investigation of the target, and to review the draft sale agreement.
After the due diligence investigation the bidders are asked to submit a final and binding offer to the seller, together with a mark-up of the sale agreement.
Negotiations follow with one or maybe two bidders, leading to conclusion of a sale.
Some sellers and their advisers may prefer modifications to this process. For example, bidders could be requested to submit their non-binding indicative offer with a mark-up of the draft sale agreement. Sometimes bidders are required to reconfirm their indicative offers in the middle of phase II in order to proceed with its due diligence, or to submit a conditional offer.
An auction/structured sales process is not subject to any specific regulations and the seller can organise the process as it considers expedient. However, the seller and its advisers may still have to observe the Marketing Practices Act, which prohibits misleading marketing and misrepresentations in sales and marketing documentation.
Normally, auction processes are organised outside the scope of the prospectus rules, but if they do apply, then they must be observed (see Question 18). The seller's financial advisers also have to observe the Securities Trading Act's (STA) rules on good business practice.
Further, the Data Protection Act quite often applies to parts of the information a seller wants to make available to the bidders. If the seller wants to market his company abroad it is necessary to consider if this requires certain registration procedures in the relevant foreign country, and/or if the advisers need special authorisations in that country.
The seller and his advisers must also observe the rules in the Contract Act on offers and acceptances, and consider that under Norwegian law both oral and written contracts are generally binding on the parties. Consequently, the seller should make clear at the start of the sales process that it will not be obliged to accept any bids, nor to consider any offers tendered. Further, the seller should generally reserve its discretion to modify the auction process. The seller is also recommended to disclaim liability for any information in information memorandums or otherwise (this should also be emphasised in the final sale agreement).
Letters of intent
Letters of intent (sometimes called heads of terms, term sheet or memorandum of understanding) are quite commonly used in one-to-one negotiations between buyers and sellers in a business acquisition. However, if the sales process is organised as an auction/structured sales process they are normally not used. A letter of intent records the main commercial topics agreed (or intended to be agreed) between the parties, and the basis for the further process to a final and binding agreement. Letters of intent typically cover the following key issues:
Transaction structure (share or asset purchase, merger or demergers, pre- or post-closing divestures, need for transitional services and so on).
Price or the formula for calculating the price.
Access to due diligence and timing for such investigations.
Other major terms and conditions.
Responsibility for preparing the first draft of the legal documentation.
Time schedule towards final agreement and expected completion.
Status of agreement (whether legally binding).
Choice of law and dispute resolution mechanism.
A letter of intent can be considered a legally binding agreement under Norwegian law. The Contract Act also stipulates that both oral and written agreements are binding on the parties. To what extent a written document creates legal obligations on the parties will have to be decided from the content of the document itself. If the parties name the document a "letter of intent", this does not itself imply that the document is not binding. To ensure that a letter of intent is not legally binding, it is necessary to include provisions making this expressly clear.
Sometimes a letter of intent may include both legally binding provisions (that at least one or both of the parties wants or intends to be legally binding) and provisions clearly meant to be just a non-binding expression of the parties' intentions. Examples of provisions which at least one of the parties intends to be binding include exclusivity (no-shop), break-fee and no-solicitation provisions.
It is more common for letters of intent to contain confidentiality provisions that both parties want to be legally binding. A buyer may also try to use a letter of intent to (legally or morally) commit the seller to accept that certain warranty and other restrictive covenants are included in the final sale agreement. The parties should therefore always seek to explicitly state in letters of intent which provisions are binding and which are not binding.
In general, it is assumed that a seller can negotiate in parallel with more than one potential buyer, and such negotiations in themselves do not impose any liability on a seller. However, even non-binding letters of intent may to some extent, and in certain circumstances, oblige the parties to negotiate in good faith. A breach of this obligation could be a fault in conclusion of contract (culpa in contrahendo) and might involve an obligation to pay damages (see Question 10).
A non-binding letter of intent may also limit the parties' room for manoeuvre during the negotiations. In most cases it will at least create a type of moral obligation that may be difficult to avoid when negotiating the final sale agreement. The parties will have to evaluate whether to enter into a letter of intent, as it may not be appropriate in every acquisition. Letters of intent are usually most useful if the transaction is complex, and the process leading up to signing is expected to be costly and time-consuming.
An exclusivity agreement (sometimes called a no-shop or lock-out agreement) is an agreement in which one party, normally the seller, agrees not to enter into negotiations with another party during a certain period of time.
They are commonly used in business acquisitions in Norway, and are legally binding under Norwegian law, even if they do not provide for any consideration. If the seller breaches its exclusivity obligation, the buyer can claim damages for breach of contract. However, it may be difficult for a potential buyer to prove that the seller has entered into negotiations with other potential buyers and violated the exclusivity agreement. If a potential buyer does show this, it is likely that it will only be entitled to claim damages for the negative contractual interest (see Question 10), not the (potential) loss suffered because the seller did not finalise a deal. It is therefore advisable for a buyer to include a penalty clause in the exclusivity agreement, although the seller will normally be reluctant to accept this. Specific performance is in theory possible, but is not normally granted in practice under Norwegian law.
An exclusivity agreement can be a separate, stand-alone agreement or can be included as a separate provision in a letter of intent (see above, Letters of intent). If it is included in a letter of intent, the buyer must ensure that the exclusivity provision is expressed to be legally binding.
Non-disclosure (confidentiality) agreements (also called an NDA) are quite commonly used at the initial stages of a business acquisition or a sales process as a separate, stand-alone agreement. These are agreements under which the parties agree not to disclose information received from the other party to a third party. A non-disclosure agreement can be drafted mutually, but in a typical auction process it is usually drafted to make the seller the only beneficiary.
If a non-disclosure agreement is concluded at the start of an acquisition/sales process, it will often later be replaced by a confidentiality clause in a letter of intent, an exclusivity agreement or in the final acquisition agreement. If a confidentiality clause is included in a letter of intent (see above, Letters of intent) it is important that the seller ensures that the non-disclose obligation is expressed to be legally binding.
Under Norwegian law there are no specific formalities to enforce the agreement. If a party breaches non-disclosure agreements the breaching party can be held liable and may have to pay damages. However, it will often be difficult, or rather impossible, for the seller to prove that the potential buyer has breached its non-disclosure obligation. Further, it will often be very difficult for the seller to show its financial loss. Consequently, it is advisable to include a provision regarding liquidated damages in non-disclosure agreements.
Even without non-disclosure agreements, section 25 and section 28 of the Marketing Practices Act, together with some provisions in the Penal Code, provide certain basic statutory protection for a party disclosing confidential information to another party in a business acquisition. However, it is still advisable for the seller to enter into a specific non-disclosure agreement in such transactions.
A non-disclosure agreement also often includes other provisions such as non-solicitation of employees or protection of IP rights. Note that as from 1 January 2016, non-recruitment clauses between an employer and other businesses will now be invalid, except when such undertakings are agreed in connection with takeover situations. After 1 January 2016, a non-recruitment clause can, however, in takeover situations only be agreed for a maximum period of six months from the date the parties resolved to terminate their negotiations, if such takeover negotiations fail. Non-recruitment clauses can further be agreed for a maximum time-period of six months from the date of transfer of business, provided the employer has informed all affected employees in writing about such provisions. At present it is not obvious if the "letter of the new law" in fact also prohibits a seller and a buyer in a share purchase transaction from agreeing such non-recruitment clauses for longer time-periods, provided the target company itself (as the employer for the relevant employees) is not a direct party to such agreement. It is possible to argue that a non-recruitment clause in such a share purchase agreement does not (at least directly) violate the new legislation, as long as the non-recruitment clause only refers to the target company's employees, and the target company itself is not a party to the agreement.
Note that there is a risk that non-recruitment clauses agreed for longer time-periods between buyers and sellers in such share sale and purchase transactions may still be invalid. The reason being that even if the target company itself (as the employer for the relevant employees) is not a direct party to the sale and purchase agreement, the effects of such clauses in share purchase agreements may still turn out to be the same as if a target company in fact had become party to the agreement. Consequently, it can be argued that non-recruitment clauses agreed for longer durations in share purchase agreements at least violate the spirit of the new legislation, and therefore also must be considered prohibited.
If an asset purchase is carried out in the traditional way, there is generally no automatic transfer of assets and liabilities that cannot be excluded, except employment relationships and liability for contaminated land (see Question 35).
If the business is sold as a going concern, contracts of employees who are employed in the business automatically transfer to the buyer (see Question 32). The buyer is obliged to employ the transferred employees on the same terms as prior to the transaction. The buyer will be jointly and severally liable with the seller for any employee claims accrued before the transfer.
Historical tax liabilities generally remain with the seller.
If the asset sale is structured as a statutory merger under the Public and Private Limited Companies Acts, all assets, rights and liabilities of the transferor company transfer to the transferee as a whole by operation of law. A statutory merger is considered a continuation of the companies involved in the merger, implying that the transaction does not represent an assignment of the original companies' rights and obligations. A transferor may be precluded from transferring rights under a contract due to change of control provisions in the agreement itself. In theory it has also been argued that the transferor company, in special circumstances, may be prevented from transferring rights under a contract due to breach of implied conditions under a contract. If some assets, rights or liabilities are excluded from a statutory merger, it is considered a statutory demerger. In these circumstances, both the transferor company and the transferee company are jointly and severally liable for such obligations, limited to the net value received in the demerger.
If an asset purchase is performed through a statutory merger or statutory demerger, all assets and liabilities generally transfer by operation of law. Strictly speaking, it is not necessary to obtain the creditor's explicit consent, unless required by change of control provisions in the transferor or transferee companies' contracts.
Resolutions to merge and demerge companies must be notified to the Register of Business Enterprises. The Register of Business Enterprises will publish the merger and/or demerger resolutions, and notify the companies' creditors that any objections to the merger or demerger must be reported to the company within six weeks from the announcement in the Register Centre's electronic bulletin for public announcement. If a creditor with an undisputed and matured claim raises any objection before the expiry of the six week period the merger and/or demerger may not be completed until the claim has been settled. A creditor with a disputed or unmatured claim may require adequate security unless his claim is already adequately secured. The District Court resolves any disputes as to whether a claim exists and whether the security is adequate.
In a traditional asset sale, there is no automatic transfer of assets and liabilities, except in relation to certain matters (see Question 6). Creditors must be notified and their explicit consent obtained if the creditors' claims are to be transferred. However, if the seller's obligations to a creditor are not part of the asset sale, notification to and/or consent by the creditor is only required if there is a contractual obligation to do so. Having said that, if the seller is insolvent, the asset sale may later be challenged and may be voidable in a subsequent bankruptcy on the grounds that the buyer has not paid fair market value for the assets, and/or that the transaction was structured in a way that favours some creditors over others. If the seller is subject to judicial debt restructuring proceedings the sale of its real estate, offices, and other substantial assets is subject to consent from a court appointed creditor's committee.
The type of conditions precedent (CP) included in a share sale agreement should always be tailored to the specific target and the buyer's individual needs. The following are examples of some CPs typically found in a share sale agreement in Norway:
Governmental approvals (for example, by the competent competition authority, or other regulatory authorities).
No material adverse change (to what extent this is included may very much depend on market conditions).
Third party consents (for example, if the contracts include change of control provisions, target's board consents and so on).
Waiver of pre-emptive rights to the shares or assets.
Release of pledges in the shares or the target's assets.
Release of guarantees issued by the target in favour of its shareholders and so on.
Accuracy of representations and warranties.
Reorganisation of the target's business.
Sometimes, the seller or the buyer may also want to make the transaction subject to board approvals. Normally this is considered an option, and will therefore be resisted by the other party. In special cases a party may also want the transaction to be subject to an advance clearance from the tax authorities, or a buyer may want to include a financing CP. The seller will normally try to resist the buyer's attempt to include a financing CP, since it may reduce the seller's deal certainty.
Other CPs may be relevant based on the transaction. For example, the parties may want to include CPs requiring some of the target's agreements to be renegotiated, and/or the target or the buyer to enter into a transitional service agreement with the seller or one of the seller's other group companies.
In a highly leveraged transaction, the buyer may want to include a CP that the sellers will procure each target to use commercially reasonable endeavours to comply with the buyer's reasonable requests to satisfy any of the buyer's banks CPs under the relevant financing agreements. This could include facilitating the giving of reliance on the seller's vendor due diligence reports to the new lenders. In a seller's market it is normal for sellers to seek to reduce the list of CPs down to an absolute minimum. Recently, we have even seen examples in Norway where the seller wanted to resist any and all types of CPs in the acquisition agreement.
The parties usually include an undertaking in the acquisition agreement to use best efforts to ensure that the CPs are satisfied by a specified date (also called a drop-dead date, long stop date or conditions deadline). If the CPs are not satisfied or waived by this date, the acquisition agreement normally provides withdrawal rights for the party not in breach of the CPs. Failure to use reasonable efforts to comply with the CP may result in the relevant party being liable for damages.
Seller's title and liability
In a private company, a person entered in the target's register of shareholders is authorised to sell and dispose of the shares, unless a pledge or other types of encumbrance over the shares has been entered into the register of shareholders (Private Companies Act). A private company's register of shareholders is accessible to anyone.
A buyer of shares in a private company can only exercise shareholder rights when the transfer has been entered in the register of shareholders, or when the transfer has been reported and proved as not prevented by restrictions on trade under the articles or statute.
In connection with a change of ownership to the shares in a private company, shareholder rights can be exercised by the seller, unless the rights have been transferred to the buyer (Private Companies Act). For public companies, the Public Companies Act contains more or less the same rule, except that for public companies the register of shareholders is created in a security registry. Also, the articles of public companies may provide that the right to attend and vote at the shareholders meeting can only be exercised if the transfer has been entered in the register of shareholders five working days before the meeting.
If a sale of shares in the target, either by law or according to the articles, is subject to target's board consent, pre-emption rights, or if the parties want to agree that the title to the shares will pass at a future date, the parties should agree who will be entitled to vote at the target's shareholders meeting. For public companies, it is assumed that the seller loses this right from the date he enters into a binding agreement to sell the shares, and that the buyer cannot exercise this right until he is entered in the register of shareholders. Consequently, there is a risk that no one will be entitled to vote on the sale shares until the buyer has been approved by the target's board as a new shareholder and so on.
Previously, it was unclear if the parties could agree that the seller was entitled to exercise this right until the buyer is entered in the register of shareholders. Now, the Public Companies Act states that the parties can agree that shareholder rights can be exercised by the seller until they have been transferred to the buyer. A prudent buyer will therefore seek to agree that the seller is entitled to exercise shareholder rights during such interim periods, and also how the voting rights at any shareholders meeting will be exercised.
Without agreement to the contrary, a transfer of shares is governed by the Sale of Goods Act 1988. According to this act, a seller must transfer the shares free from all third party rights other than those that the buyer is or should have been aware of. The seller is also, subject to the same exception, liable for the existence of the shares and the rights relating to them. Since the Sale of Goods Act is not particularly suited to complex transactions such as a sale of a business or all the shares in a company, the seller and buyer tend to contractually exclude the Sale of Goods Act from the transaction. The parties commonly set up their own rules by agreeing specific representations relating to title to the shares and so on. A prudent buyer will typically request the following representations:
Ownership and title to shares.
No encumbrances or limitations on seller's rights to sell or dispose.
The representations are not qualified by the buyer's knowledge.
The representations are made independent of the seller's fault.
Carve out of (not affected by) de minimis rules or liability caps (or at least a higher cap than on other representations).
No time limits on pursuing claims on the buyer (or at least a longer period than for other representations).
According to the Sale of Goods Act, the Contracts Act and general principles of contract and tort law, a seller can be liable for pre-contractual misrepresentation, misleading statements or failing to disclose material information to the buyer. However, the seller and the buyer often exclude the Sale of Goods Act (see Question 9). Sometimes, the seller also seeks to include "entire agreement clauses" in the acquisition agreement, to exclude (to the extent possible) both the Contract Act and other principles of contract and tort law.
It has not yet been tested to what extent such an entire agreement clause of the kind commonly used in acquisition agreements under Norwegian law will be read as impliedly excluding remedies for pre-contractual misrepresentation. The author assumes that the Norwegian courts will most likely require an entire agreement clause to expressly state that the parties want to exclude all other rights, including those in tort or under statute, for such clause to have this effect.
However, it must be assumed that a seller under Norwegian law will not be able to "contract out" of these principles of law and/or such liability, if a Norwegian court finds that the seller acted in a fraudulent, intentional, wilful, or grossly negligent way when misrepresenting the facts, or if he provided the buyer with a misleading statement or omitted to disclose material information to a buyer. In these circumstances, the courts will most likely find ways to interpret the contract to make the seller pay. However, if the seller did not wilfully or with gross negligence misrepresent the facts, the balance may shift, provided that all parties clearly and explicitly agreed in the acquisition agreement that these principles of law should not apply.
In the absence of contractual obligations the adviser may (in theory) be liable based on tort. However, as the party is generally identified with its adviser, it is more common for the respective party, and not the adviser, to be sued.
The main document in an acquisition is the share or asset sale agreement. The first draft of these documents is usually prepared by the buyer's counsel. However, if the sale is structured as an auction, it is common for the seller's counsel to prepare the first draft.
Unlike for example in the UK, it is not usual to prepare a separate tax indemnity or separate disclosure letter qualifying the seller's warranties. These provisions are usually included in the sale agreement or a schedule to it. However, in large deals where the buyer is a foreign entity or controlled by a foreign entity, and the sale is not by auction, disclosure letters may also be used in Norway. The first draft of these letters is then generally prepared by the seller.
An asset sale also normally includes asset lists which define the assets (and/or the liabilities) that are included or excluded from the transaction. These lists are normally prepared by the buyer and its counsel.
If the target is part of a larger group owned or controlled by the seller, or if an asset deal only involves certain parts of the seller's business, it is often necessary or desirable to enter a transitional services agreement between the target and/or the buyer and the seller and/or another company in the seller's group. This is to ensure that the target is able to continue its business uninterrupted after closing on a stand-alone basis. In complex acquisitions, transitional services agreements can be one of the most important documents. Quite often, but not in general, the first draft of the transitional service agreement is provided by the seller, since the seller has detailed knowledge about the services the target needs.
If a buyer acquires less than 100% of the shares in a target, and/or in a private equity transaction where the target's management is invited to invest with the private equity sponsor, it is common to enter a shareholders agreement (sometimes called an investment and shareholders agreement) between the buyer and the target's other shareholders. In general, the buyer prepares the first draft of the shareholders' agreement. However, in an auction where the seller intends to retain a large stake of the shares after completion, it is not uncommon for the seller's counsel to prepare the first draft of the shareholders agreement.
The main substantive clauses in a share purchase agreement are:
Definitions (and interpretations), which may be attached in exhibits or a schedule.
Agreement to purchase and sell shares.
Consideration including price and price adjustment.
Conduct of business between signing and closing (including no-leakage undertaking, competition and other clearances, buyer information rights, other post-closing actions and so on).
Action pending closing (if any, which may include transitional service arrangements and so on).
Representations and warranties.
Remedies (compensation, conduct of claims including limitation of liability).
Special indemnifications (normally limited to potential liabilities revealed during due diligence).
Further covenants (typically including non-compete, non-solicitation, confidentiality clauses, public announcement and so on).
Miscellaneous provisions (taxes, costs, amendments, assignment, notices, entire agreement, illegality, counterparts and so on).
Governing law, jurisdiction and dispute resolution
The main substantive clauses in an asset purchase agreement are:
Definitions (and interpretations), which may be attached in exhibits or a schedule.
Assets (and business) to be sold and purchased. A detailed description of assumed assets, assumed liabilities, contracts, books and records to be taken over is very often attached as an exhibit or schedule to the agreement.
Consideration including purchase price calculation, price adjustment and VAT treatment.
Action before closing, which typically includes estimates of figures, co-operation between parties, insurance, third party agreements, employee and employee benefit matters (including notices, informing employees and so on), customer letters, competition and other clearances, buyer information rights, and other post-closing actions.
Action pending closing (this may include transitional service arrangements, third party agreements after closing, use and termination of rights to trade marks, right to information and documents, wrong box assets, conduct of claims in respect of assumed liabilities and of claims in respect of excluded liabilities, ongoing proceedings and claims related to the acquired business).
Representations and warranties.
Remedies (including limitation of liability).
Special indemnifications (normally limited to potential liabilities revealed during the due diligence).
Further covenants (typically including non-compete, non-solicitation, confidentiality clauses, public announcement and so on).
Miscellaneous provisions (taxes, costs, amendments, assignment, notices, entire agreement, illegality, counterparts and so on).
Governing law, jurisdiction and dispute resolution.
Norwegian law is based on the principle of freedom of contract, subject only to limited restrictions. The parties may therefore agree that the share purchase agreement is governed by foreign law. In general, provisions of national law would then not apply.
However, certain mandatory rules of Norwegian law would still automatically apply relating to, for example (if relevant):
Tax and VAT.
Mechanics for transferring shares.
Legal protection of rights.
Perfection of pledges.
Warranties and indemnities
In general, Norwegian acquisition agreements are far less detailed than in most Anglo-Saxon jurisdictions. However, seller warranties are now commonly included in most acquisition agreements in Norway.
There are also wide variations in the number of warranties included and the descriptions they contain. There may also be substantial differences between the warranties in acquisition agreements where the buyer and seller are both Norwegian, and where the buyer is foreign. There is a more pragmatic and sometimes very relaxed approach to warranties under Norwegian law. Historically, this is due to the seller's general statutory duty to disclose information that it would be dishonest for a seller to withhold, and the Sale of Goods Act having explicit and wide provisions governing the seller's duty of disclosure compared to many other jurisdictions.
Norwegian courts used to imply a principle of reasonableness, good faith or fair dealing in its interpretation of contracts, to avoid unjust solutions based on a literal interpretation of a contract. For example, the Contracts Act gives extensive powers to a judge to correct the parties' will in the name of reasonableness. The principle of good faith and fair dealing also resulted in extensive duties of loyalty between the parties, both during performance and in negotiations.
Traditionally, a Norwegian contractual party would very often expect some interference, either to integrate or to correct the agreed contractual provisions. A Norwegian party would often feel no need to cover all possible scenarios in the contract. A foreign buyer would often experience tension between what it felt was needed to be covered in the acquisition agreement, compared with what the seller wanted to accept or thought was necessary to include.
However, for the last ten to 15 years the Supreme Court has taken a more literal approach, particularly when interpreting contracts between business parties. The courts now acknowledge the parties' need for certainty, and are more concerned with preserving freedom to contract and to ensure contracts are performed according to their wording, rather than with providing fairness. In particular, if the parties have put much time and effort into drafting and negotiating detailed rules in their contract, which is typically the case in an acquisition agreement.
As a result, an acquisition agreement governed by Norwegian law now normally contains many of the provisions that are common internationally in acquisition agreements. This also includes warranties. This is also because the parties in these agreements often seek to contract out of some Norwegian statutory provisions, for example the Sale of Goods Act. This practice has also made more detailed contractual provisions necessary.
Including a warranty in an agreement governed by Norwegian law may result in the party giving the warranty being considered to guarantee the information disclosed in the contract, and therefore becoming subject to strict and absolute liability for damages if the information later proves to be wrong. Whether a warranty will qualify as a guarantee under Norwegian law has to be assessed in each case, based on the wording of the relevant provision. Despite the general move towards more detailed acquisition agreements under Norwegian law, the number of warranties and their wording is subject to increased negotiation, and often varies given the deal and market conditions.
For the last few years sellers have generally had to accept a full set of representations and warranties to make a deal in Norway. However exceptions did apply, especially in particular sectors, and often depending on the parties' bargaining position.
An acquisition agreement governed by Norwegian law may include warranties in relation to:
Power and authority.
Ownership of shares or assets and no encumbrances.
Ownership of subsidiaries.
Financial statements, management accounts (and locked box accounts).
Finance and guarantees.
Books and records.
Intellectual property rights.
Conduct of business.
Customers and suppliers.
No material changes.
Pensions and employee plans.
Labour disputes and compliance with labour laws.
No change of control.
Ownership of real property.
Compliance with laws.
No insolvency or dissolution.
No corruption or bribery.
Agreements with sellers or sellers' related parties.
A seller taking an aggressive approach may sometimes start negotiations by only offering the buyer a very limited set of warranties, for example:
Ownership of shares or assets and no encumbrances.
Business since the locked box date.
The shares represent 100% of the outstanding share capital.
The warranties should always be tailored to the transaction, the target, the target's industry, the level of due diligence available to the buyer, and the buyer's individual needs and willingness to take on risk.
Indemnities are common in share purchase agreements and asset purchase agreements. Indemnities mainly cover potential claims, losses or liabilities that the buyer has revealed during its due diligence that have not been addressed as a "to be fixed" issue or by a price reduction.
Typical risks that a buyer may want to be covered by indemnities are:
Doubtful book debts.
Repayment of loans by the target.
Product liability claims in relation to products sold before completion.
Litigation for infringement of intellectual property rights that may have a significant impact on the target's business.
Taxes not provided for in the relevant accounts or liability under anti-avoidance provisions.
It is not customary in Norway for a buyer to require the seller to give warranties on "an indemnity basis" like in the US. Normally, a seller will resist such an approach and instead provide indemnities for specific identified risks.
Limitations on warranties
It is normally in the seller's interest to limit the scope of the warranties. Such limitations may include:
Qualifying warranties by disclosure.
Buyer's duty to mitigate loss.
Requirement of notice of a breach of warranty.
Time limits for bringing claims.
Exclusion of small claims (de minimis) and/or prevention of claims until a specified threshold has been met (basket) for all claims exceeding the de minimis threshold.
Maximum cap on the seller's financial liability.
Recovery from third parties.
Statute of limitations.
Prevention of double recovery, for example the buyer cannot claim against the seller if the buyer can claim against the insurance company and get full recovery.
Rules on conduct of claims from third parties.
The seller may also insist that the warranties are not repeated when the deal closes and are only valid at the time of signing. This is subject to increased negotiation between sellers and buyers. However, warranties and representations are, depending on the market, very often repeated when the deal closes, in line with the general legal principle that risk in the business transfers to the buyer at closing. However, in many cases sellers argue that only warranties relating to circumstances under their direct control should be repeated at closing.
Qualifying warranties by disclosure
Warranties are normally qualified by disclosure made by the seller. Relevant disclosures are normally made in schedules to the sale agreement itself, and in most cases there is no separate disclosure letter (as is common for example in UK transactions). Sellers normally seek to ensure that disclosures will qualify all warranties, even when set out against specific warranties. In a sellers' market, a seller often attempts to qualify the warranties by all due diligence information (the whole content of the data room and so on, rather than a limited subset of it), instead of referring to the relevant disclosures in schedules to the sale agreement.
In general, a seller will normally seek to agree that the sole remedy in case of breach of warranties is damages, and that the buyer has to prove that it has suffered loss (that is, the value of the shares or the business acquired has been reduced) caused by the breach of the warranties. Occasionally, the parties may agree that the seller will have a right to remedy the breach. Sometimes, but less frequently, the parties may agree that a buyer is entitled to a reduction in the purchase price.
Under the Sale of Goods Act, further remedies are available for breach of warranties. For example, the buyer has a statutory right to rescind the acquisition agreement if the seller has committed a substantial breach of contract. However, the parties normally agree to contractually exclude the Sales of Goods Act, including any rights to rescind the acquisition agreement.
It is assumed that the parties are not entitled to contract out of certain statutory remedies in case of fraud, intentional or wilful misconduct or gross negligence.
Time limits for claims under warranties
The limitation period for warranty claims may vary substantially depending on market conditions, the parties' bargaining position, the target's industry sector, and individual circumstances. However, the time limit is usually agreed to be between 12 to 36 months. In a sellers' market, it may be at the lower end of this scale and even less than 12 months. In a buyers' market, sellers usually have to agree to longer warranty periods. A longer warranty period (sometimes even up to ten years) is normally agreed for tax warranties and other types of claims that could take longer to arise, for example environmental issues.
Consideration and acquisition financing
Forms of consideration
The main form of consideration is cash, funded by debt or equity.
Sometimes, the buyer proposes to settle the purchase price (or parts of it) through deferred consideration (vendor notes), or by issuing shares in the buyer or in the buyer's parent, often combined with cash. A seller could be offered warrants, payment in kind (PIK) notes, preferred equity certificate (PEC) notes, convertible bonds or other hybrid instruments issued by the buyer. However, they are not very common in Norway.
If the consideration is structured as vendor loan notes they will sometimes be subordinated to the other elements of the acquisition finance. They are then normally on similar terms to any subordinated loan capital provided by the buyer's shareholders to the buyer company, but are usually priced to give a lower rate of return.
The split between debt finance and true and quasi-equity is determined on a transaction by transaction basis and particularly by reference to the underlying business and its funding requirements. A seller may also be requested to continue to provide working capital to the target during a transitional period after closing.
If the seller and buyer are not able to agree the value of the target, the buyer may often seek to bridge the valuation gap by offering the seller an earn-out. Earn-outs may also be offered where the buyer seeks to ensure that the seller (or one or some of the sellers) will continue working for the target after completion. In these circumstances, the buyer may also want to settle parts of the consideration by issuing shares as consideration.
Factors in choice of consideration
The choice of consideration is often complex, since it may have substantially different consequences for the parties. Relevant factors are:
If the seller wants a complete exit from the target's business or wants to retain an interest in the combined business. This quite often depends on the buyer's previous record in creating value for its shareholders, and the seller's belief in the target's continuing growth. A seller also normally requires a future exit, in order not to be locked in as a minority stakeholder in the target or in the buyer.
The buyer's ability to pay cash or obtain loan financing.
If the seller agrees to grant credit, the buyer's ability to meet payments and grant security.
If the consideration consists of shares or other forms of financial instruments, it is necessary to determine their actual value. This could be challenging unless the financial instruments are listed and traded on a regulated market. It is also necessary to consider their negotiability.
The outlook for the price of shares or financial instruments received. Sellers have often seen the share price of consideration received fall after the transaction became known in the market. In particular, if the market believed that the price paid was too high.
Any statutory limitations or rules if the consideration includes shares or other financial instruments, for example prospectus rules and licence requirements.
Any limitations that will prevent the sellers from owning property or securities offered as consideration.
If the buyer is a listed company, what effect (if any) the choice of consideration may have on its own stock prices.
How the settlement will be carried out technically.
The time frames for settling payment. Issuing new shares or financial instruments quite often complicates the process and causes delays, increasing the transaction costs for both parties.
The shareholder structure, including the number of shareholders in the buyer company, capital market conditions and timing, normally determine the structure used by the board to raise cash to fund an acquisition by issuing shares.
If the buyer is a public company listed on a Norwegian regulated market, the board at an early stage usually requests the shareholders meeting to authorise the board to increase the share capital by issuing new shares. It is also quite common for the shareholders meeting to be requested to set aside the existing shareholders' preferential rights in connection with the share issue.
Provided that the resolution is approved by the shareholders' meeting, the buyer's financial advisers will often recommend the company to capitalise itself in the capital market through a private placement, based on an accelerated bookbuilding process to a few named national or international institutional investors. Such processes will normally start after the stock exchange's close of business and be carried out prior to the stock exchange's opening the next day. Alternatively on Friday evening, with an aim of announcing a successful close of a private placement Monday morning. The reason for this having become popular among listed companies is that the shares issued in such private placements are admitted to listing without application or a prospectus (if the company has issued less than 10% of the total issued shares over a period of 12 months). Such offerings are normally undocumented and mainly based on publicly available information. However, note that a buyer company that is listed on the Oslo Stock Exchange (OSE) is subject to an obligation of equal treatment of its shareholders. Therefore, the board must always evaluate whether there is an acceptable reason for deviating from the principle of equal treatment when conducting a private placement. Often the investment bank may argue that the fact that the issuer is able to avoid issuing a prospectus should be considered as sufficient grounds to deviate from this equal treatment requirement. If, on the other hand, a prospectus is required for listing the shares issued in such private placement, the company's board together with its financial advisers will often structure the offering to include a subsequent repair offering to all existing shareholders that were not invited to participate in the private placement. In such cases the offering of shares in the repair offering is considered a public offering which requires the approval of an offering prospectus. In 2014 OSE published a circular clarifying that setting aside the preferential rights will only be justified if it is in the best interest of the issuing company and the shareholder community collectively, and provided the disadvantages of any single shareholder must be relatively proportionate. On a regular basis, OSE now requests that listed companies disclose their evaluation and assessment made relating to the resolution to complete private placements in which the preferential rights are set aside. Non-compliance with OSE's new guidelines may lead to sanctions typically in the form of penalty charges.
Occasionally, a rights issue with pre-emptive rights for existing shareholders or public offerings can be used to raise cash to fund an acquisition. An equity offering using local investment banks does not normally include underwriting. However, sometimes it may involve a type of soft underwriting, such as a payment guarantee, instead of hard underwriting (where the underwriter guarantees a subscription for the offering). However, if an international investment bank is involved, it will underwrite the offering according to standard international practice.
Consents and approvals
If the buyer's board has power of attorney to increase the share capital by a specified amount within a period of time it can, within the limits of the power, issue new shares without a new resolution by the shareholders meeting. Otherwise, the issue of new shares has to be approved by the shareholders meeting. Such resolutions generally require a two-thirds majority of the votes cast and the capital present at the shareholders meeting.
Requirements for a prospectus
Norway has implemented Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (Prospectus Directive). Changes to the Prospectus Directive were approved in Directive 2010/73/EC and the government implemented these changes in 2012.
An issue of new shares (irrespective of whether the issuer is listed) generally requires a prospectus if the offer is addressed to 150 or more persons in the Norwegian securities market and involves at least EUR1million calculated over a 12-month period. There are some exceptions. Offers that involve issuing shares above EUR1million and less than EUR5 million now require a simplified prospectus to be filed with the Register of Business Enterprises.
Offers that involve issuing shares with a value of at least EUR5 million, directed to 150 persons or more, require a full prospectus.
A full prospectus must be prepared in line with the contents requirements set out in the Prospectus Directive. It must also be approved by the Financial Supervisory Authority (Finanstilsynet). The Financial Supervisory Authority charges a fee of NOK85,000 to approve the prospectus.
Having said this, a listed company which during a 12-month period (on a revolving basis) resolves to increase its share capital in the same class as the listed shares by 10% or more must prepare a listing prospectus. The Financial Supervisory Authority levies a fee of NOK100,000 for this approval.
The EU Commission has recently published a proposal for a new Prospectus Regulation, intended to replace the existing Prospectus Directive. In this proposal, the Commission proposes that the requirements of a prospectus or equivalent document should no longer apply to securities offered in connection with a takeover by means of an exchange offer, merger or division. The condition for such an exemption is proposed to be that a document must be made available to the shareholders receiving an exchange offer, describing the transaction and its impact on the issuer. If the proposed Prospectus Regulation is finally adopted in the EU, it can only enter into effect for Norway after implementation under the EEA agreement, most likely at the earliest by mid-2017.
Public and private companies are prohibited from providing upstream financial assistance in connection with the acquisition of shares in the target (or its parent company). This has previously prevented a Norwegian target from participating as a co-borrower or guarantor of acquisition financing facilities. Previously there was no whitewash procedure. However, there have been a number of possibilities to achieve at least a partial a debt pushdown, which should not be regarded as a breach of the prohibition against financial assistance.
However from 1 July 2013, there is a new type of whitewash procedure (see below, Exemptions). Private equity and venture capital sponsors taking part in leveraged buyout transactions in the Norwegian market must, from 1 July 2014, also observe the new anti-asset stripping provisions (see below, New anti-asset stripping rules). These new rules may limit the sponsor's ability to conduct a debt pushdown depending on the status of the target (listed or non-listed), the number of the target's employees and the size of such target's revenues or balance sheet.
Under the new rules in the Private and Public Companies Acts, both private and public target companies can now, subject to certain conditions, provide financial assistance to a potential buyer of shares in the target. The financial assistance must be granted on normal commercial terms and policies, and the buyer must also deposit adequate security for his obligation to repay financial assistance received from a target.
Further, the financial assistance must be approved by the target's shareholders meeting by a special resolution. The resolution requires the same majority from the target's shareholders as is needed to amend the articles, that is (unless otherwise required by the articles) at least two-thirds of the votes cast and the share capital represented at the shareholders meeting.
In addition, the target's board must prepare a special report which must contain information on:
The proposal for financial assistance.
Whether or not the financial assistance will be to the target's corporate benefit.
Conditions that relate to the completion of the transaction.
The assistance's impact on the target's liquidity and solvency.
The price payable by the buyer for the shares in the target or any rights to the shares.
The report must be attached to the notice of the shareholders meeting.
The target's board must also obtain a credit rating report on the party receiving the financial assistance.
Additional exemptions from the financial assistance prohibition are granted by separate regulation to private companies classified as real estate companies. Subject to certain conditions, such companies can provide security in the form of mortgages over real estate. The security can be provided in favour of a buyer of shares in the relevant real estate company or in its parent company.
The same regulation also allows private and public companies to provide financial assistance (on a very limited basis) to its employees for the purpose of enabling employees to acquire shares in the company. In most cases, this exemption has so far not assisted a buyer of the target, due to the conditions that apply. The Ministry of Trade, Industry and Fisheries has, in early 2016, proposed to amend the current requirement for adequate security. If the Ministry's proposed amendment is adopted by parliament as originally proposed, it means that for LBO-transactions it also will become possible for a buyer to receive financial assistance from the target company in the form of security for the buyer's acquisition financing.
New anti-asset stripping rules
On 20 June 2014, the Norwegian Parliament adopted new legislation implementing the EU Alternative Investment Fund Managers Directive (AIFMD) into Norwegian law. The Act on Alternative Investment Fund Managers entered into force on 1 July 2014. Although most of the new Act is not directed at M&A specifically, there are certain rules that must be observed by private equity-sponsors/venture funds, if they acquire control of a non-listed private or a non-listed public company that employs 250 or more employees, and such target either has:
Annual revenues exceeding EUR50 million.
A balance sheet exceeding EUR43 million.
If so, the new anti-asset stripping provisions set out in a regulation adopted by the Ministry of Finance will apply on the private equity funds' investment. These anti-asset stripping provisions impose limitations on the financial sponsors' ability to facilitate, support or instruct any distribution, capital reduction, share redemption or acquisitions of own shares by such target for a period of 24 months following an acquisition of control of a target that fulfils the above criteria, if either:
Any such distributions/transactions mean that the target's net assets set out in the target's annual accounts on the closing date of the last financial year are, or following such a distribution would become, lower than the amount of the subscribed capital plus those reserves which cannot be distributed under the law or statute.
Any such distributions/transactions exceed the profit for the previous fiscal year plus any subsequent earnings and amounts allocated to the fund for this purpose, less any losses and other amounts that in accordance with applicable law or statute must be allocated to restricted funds.
The above limitations on distribution do not apply on a reduction in the subscribed capital, the purpose of which is to offset losses incurred or to include sums of money in a non-distributable reserve, provided that the amount is no more than 10% of the subscribed capital. The above anti-asset stripping provision will also apply to such fund's acquisitions of listed target companies, irrespective of the number of employees, size of revenue or balance sheet for such listed targets.
These rules are to some extent likely to limit private equity funds' ability to conduct a debt pushdown in connection with leveraged buyout transactions, and that this again will make it more difficult for such funds to immediately use the target's cashflow to pay down any acquisition debt obtained to finance such buyouts.
Signing and closing
The following documents are commonly produced and executed at signing:
The acquisition agreement (share purchase or asset purchase agreement respectively).
Power of attorney (if an attorney is appointed to execute transaction documents in the absence of a party).
Disclosure letter (if any).
The following documents are commonly produced and executed at the closing of a share transaction:
A share certificate (aksjebevis) confirming that the buyer has been registered in the target's shareholder register as the owner of the shares.
Transcript from the target's shareholder books (ledger) confirming that the buyer has been registered as the owner of the shares free and clear of any encumbrances.
Confirmation from the operator of the VPS (Central Securities Depository) account (or accounts) that the shares have been transferred to the buyer's VPS account, free and clear of any encumbrances (if applicable).
Target's board resolution approving the share transfer (if applicable).
Waiver of pre-emption rights to the sale shares (if applicable).
Resignation letters for the target's resigning board members.
Agreements and other documents necessary to comply with the buyer's bank financing (if necessary).
Bank confirmation that the purchase price has been transferred to the seller's bank account.
Share certificates for consideration shares (if necessary).
Security documents, for example share pledge agreements (if necessary).
Escrow agreements (if applicable).
Guarantees, vendor loan agreements or other documents relating to payments to be made after closing (if applicable).
Release of any security and/or guarantees relating to the shares and/or assets of the target (if applicable).
Agreements necessary to comply with the closing obligations under the acquisition agreement, such as transitional services agreements and licences (if applicable).
Shareholders' resolution to replace the shareholder elected board members in the target and to exempt the resigning board members from liability.
Closing minutes/(completion checklist).
The following documents are commonly produced and executed at the closing of an asset transaction:
Documents required to transfer title to the transferred assets (for example, bills of sale, deeds of conveyance for real estate, deeds and declarations of assignments, consent of superior landlord of sublease, required counterparty consents to assignment or transfer of third party agreements and so on).
Bank confirmation that the purchase price has been transferred to the seller's bank account.
Data processor agreement (if applicable).
Handover customer lists and other documents to be transferred (if applicable).
Handover lists of stocks and inventory as at completion (if applicable).
Employee and employee benefit related documents.
Agreements and other documents necessary to comply with the buyer's bank financing (if necessary).
Security documents, for example pledge agreements (if applicable).
Escrow agreements, (if applicable).
Guarantees, vendor loan agreements or other documents relating to payments to be made after closing (if applicable).
Release of any security and/or guarantees relating to the transferred assets (if applicable).
Agreements necessary to comply with the closing obligations under the acquisition agreement, such as transitional services agreements and licences (if applicable).
Closing minutes/(completion checklist).
Under Norwegian law the validity of an agreement is generally not subject to compliance with a particular form, unless otherwise prescribed by law. Even oral agreements are generally binding and enforceable, provided that the person entering into the agreement on behalf of the company is an authorised signatory or has been issued a valid proxy. However, business acquisition agreements relating to shares or assets are normally executed in writing and signed by all persons on whom the contract imposes obligations.
A share sale agreement could in principle be executed without observing any particular form under Norwegian law. The formalities for an asset purchase agreement depend on the type of assets.
For some assets, additional transfer documents or notices to creditors or third parties may be required to transfer title to the assets. For example, a deed of conveyance (skjøte) is needed to transfer title to real property. The deed of conveyance must contain information about the transfer, for example the seller, buyer, and sale amount. This information must be registered in the Land Register to protect the buyer's title. The seller must sign a conveyance form in the presence of two witnesses domiciled in Norway, or a Norwegian lawyer or estate agent (both of these can act as a sole witness).
Legal documents issued on behalf of companies incorporated in Norway must be executed and signed by the companies' authorised signatories as set out in the articles, or by a duly authorised attorney-in-fact in accordance with a written proxy. The proxy must be executed and signed by the companies' authorised signatories. It is not normally necessary to have these signatures certified by witnesses. However, the proxies are generally signed in front of witnesses, particularly if the attorney-in-fact is authorised to sign documents in foreign jurisdictions. If signing abroad, the proxies should also be signed in front of a notary public and the signatures legalised under the Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents 1961 (Hague Legalization Convention).
Certain legal documents have to be executed and signed in front of witnesses. These include deeds of conveyance, certain mortgages and pledge deeds that have to be registered with the Land Register or the Register of Mortgaged Movable Property, and enforceable promissory notes.
In principle Norwegian law does not impose special formalities for the execution of documents by foreign companies, other than those imposed on a Norwegian company (see Question 21). However a Norwegian bank financing the transaction will request a specimen of the signature of each person authorised to sign on behalf of a party, together with a copy of a utility bill for that person. The specimen will have to be certified by a Norwegian lawyer. If not, the banks may ask that the signature copies are certified by a notary public and legalised under the Hague Legalization Convention, to make sure that the correct person has signed the relevant document.
It is generally good business practice to request documents provided by a foreign company, to evidence that a person is entitled to act as its authorised signatory, to be certified by a notary public and then legalised (unless it is at least possible and easy to have the relevant information verified through an electronic search of the relevant foreign business registry). A foreign company should also expect to be asked to ensure that any proxies are certified by a notary public and then legalised. Strictly speaking this is not required for the agreement to be valid under Norwegian law, as long as it is possible to evidence that the agreement has been signed by the relevant authorised signatories. These precautions are normally only requested to avoid future discussions about the validity of a signature.
A legal opinion may also be requested if the buyer and/or the seller is a foreign company. This is prepared by a lawyer qualified in the relevant company's jurisdiction of incorporation, and will confirm the existence and good standing of the company and the due execution of the transaction documents. There are no specific rules of any local professional body concerning legal opinions.
Norway implemented an Act on Electronic Signatures in 2001. An authenticated electronic signature based on an authenticated certificate issued by a provider of certification services is admissible as evidence in legal proceedings. It will satisfy the legal requirements of a signature in relation to data in electronic form in the same way as a handwritten signature, subject to any statutory or contractual provisions to the contrary.
The following formalities are required to transfer title to shares in a private company:
The buyer must notify the target about the share transfer and must submit proof of the share acquisition.
If a transfer of shares is subject to target's consent, a decision is made as soon as possible following notification of the acquisition to the target. The buyer must without delay be notified of the decision. If consent is not granted, the buyer shall be provided with the reasons for this, and be informed of any action required to remedy the situation.
If the buyer has not been informed that consent has not been granted within two months following notification to the target, consent is deemed to have been granted.
When a buyer has reported and proved his acquisition of shares, and provided that no consent for the acquisition is needed or consent has been granted, the target must register the buyer in the shareholders register without undue delay.
The target must issue a share certificate (aksjebevis) to the buyer, which is evidence of the shareholding.
The registration of ownership to the shares in the target's register of shareholders formally transfers title to the shares. Registration has constitutive effect, and legally protects the buyer from any action from the seller's creditors and/or from competing third party buyers.
There are no stamp duties, share transfer taxes or other governmental fees in connection with a share sale.
An asset transaction is considered to be a sale of each asset that is part of the transaction. An asset sale may trigger various transfer taxes, depending on the assets. For example, the sale of real estate incurs a 2.5% transfer/registration tax (stamp duty), calculated on the market value of the real estate, and a nominal registration fee of NOK525, if the transfer is recorded in the Land Register. Registration is in principle necessary to protect the buyer's title.
If shares in a company owning real estate are acquired (and not the property itself) no transfer tax is levied. If a transfer of real estate is due to a legal merger or demerger, registration of the transfer of title in the Land Register is exempt from registration tax. In such cases a nominal registration fee to the Registry of Business Enterprises has to be paid.
Transfer of ownership to motor vehicles in connection with an asset sale has to be registered with a Driver and Vehicle Licensing Office and will in general incur a registration fee.
Transfers of real estate and ownership to motor vehicles due to a transformation of a legal entity carried out at tax continuity are now exempt from such transfer/registration tax and registration fee, provided the conversion and any accompanying transfers took place after 1 January 2016. Note that neither tax free intra-group transfers, other forms of reorganisations, nor transactions under which the Ministry of Finance has the power to grant individual tax reliefs are comprised of such proposed exemptions.
Not applicable (see Question 25).
Certain techniques are used to avoid or mitigate real estate transfer taxes. However, some are normally only suitable if a buyer intends to develop the property and later sell it. Buyers often use a combination of "in blanco" deeds of conveyance and mortgages issued and registered in favour of the buyer, combined with certain lock-up statements registered in favour of the buyer. To what extent this can be recommended needs to be considered in each case. These techniques are not foolproof and may create problems for the buyer in case of succeeding distrait from the seller's creditors, or if the buyer later wants to have the deed registered and the seller no longer exists because it has been liquidated or is insolvent.
Another method is to transfer real estate into single purpose entities owning one property each through a combination of demergers and mergers, and then sell the shares in the single purpose property instead of selling the property itself. This could be achieved without triggering transfer taxes or capital gains tax for the seller. However under Norwegian tax legislation, measures against predominantly tax-motivated restructurings are generally more aggressive than in many other jurisdictions. The Norwegian tax authorities therefore quite frequently used to challenge such transactions. However, due to a Supreme Court ruling from 2014, the tax authorities had to amend their position on this particular area (see Question 28, Asset sale ( www.practicallaw.com/3-525-3665) ). Previously, up until 31 March 2014, it was considered that such demergers also might trigger some adverse VAT-effects. However, this is no longer the situation (see Question 28, Asset sale ( www.practicallaw.com/3-525-3665) ).
A transfer of title to motor vehicles will not trigger a registration fee if the transfer is the result of a legal merger. Up until 1 January 2016, the Directorate of Customs and Excise was of the opinion that if a transfer of title to motor vehicles took place through a demerger or in a combination of demerger and merger, this would trigger a registration fee. However, from 1 January 2016 (see Question 25, Asset sale ( www.practicallaw.com/6-547-7367) ) this has now changed. Transfers of title to motor vehicles taking place through a demerger or a combination of demerger and merger will also no longer be subject to such registration fee.
Norwegian shareholders that are limited companies and certain similar entities (corporate stockholders) are generally exempt from tax on dividends received from, and capital gains on the realisation of, shares in domestic or foreign companies domiciled in EU and EEA member states. Losses related to such realisation are not tax-deductible. There are certain restrictions relating to capital gains and dividends derived from shares in foreign companies not located in EU/EEA states, or located in low-income tax states in the EU/EEA, that are not conducting business out of such countries (controlled foreign company rules). However, from 1 January 2016, a new rule was introduced into the Norwegian tax code, which attempts neutralising the effects of hybrid mismatch arrangements by denying corporate stockholders to apply the Norwegian participation exemption rule on distributions received from an entity which has been, or will be, granted tax deductions on such distributions.
As from 1 January 2012 Norway abolished the former 3% claw back rule on capital gains, so that capital gains earned by corporate shareholders have become subject to zero tax. This applies whether the capital gain is from a Norwegian or a qualifying non-Norwegian company. The claw back rule is still relevant for dividends received by corporate shareholders owning less than 90% of the shares, and for foreign corporate shareholders with a permanent establishment in Norway that receive dividends from Norwegian companies, subject to the foreign corporate shareholders' participating or carrying out a business in Norway to which the shareholdings are allocated.
Dividends received from, or capital gains derived from realisations of, shares held by shareholders who are Norwegian private individuals (personal shareholders) are taxable as ordinary income at an effective tax rate of 28.75%. Any losses are tax-deductible against the personal shareholder's ordinary income. The Government has with effect from 1 January 2017 proposed to increase the tax rate on dividends received from, or capital gains derived from realisations of, shares held by Norwegian private individuals (in excess of the allowance for shareholder equity), but so that the government's proposal aims to maintain the overall marginal tax rate on dividends and capital gains. This will be carried out by first taking the amount derived from such dividend distributions, capital gains and so on; multiplying the relevant amount by 1.24 (an increase from 1.15 for 2016) and such grossed-up amount is thereafter to be taxed as ordinary income for such private individuals at a tax rate of 24% (reduced from 25% for 2016). In effect, this will increase the effective tax rate on such distributions and/or gains from today's 28.75% to 29.76%. The proposal is justified by the government's proposal to reduce the Norwegian tax rate on ordinary income for both companies and individuals from 25% to 24%. By resolving to distribute extraordinary dividends for 2016, it will nevertheless be possible for individual shareholders to achieve a 1.01% tax saving compared to distributing the same amount of dividend in 2016. Note, however, that it will be necessary to consider implementing measures (if possible) to avoid potential negative double-wealth tax effects.
In order to counter attack tax planning and simplify the regulatory framework, with effect from 7 October 2015, the government implemented a rule that now taxes loans granted from a Norwegian company to any of its direct or indirect shareholders being private individuals (or to such shareholders' related parties) as dividends on the part of such individual shareholder. This rule is justified by the need for preventing individual shareholders avoiding tax on dividend distributions, by instead borrowing funds (directly or indirectly) from the company. This rule also applies if loans are granted from third party lenders to such individual shareholders, provided the company in which such borrower owns shares, and/or another company within the same group of companies, provides security for such third-party loans.
Capital gains from the realisation of shares in Norwegian limited companies by a foreign shareholder are not subject to tax in Norway, unless certain conditions apply. The tax liability of such foreign shareholders in their country of residence will depend on the tax rules applicable in such jurisdictions.
Normally, an acquisition of shares in a Norwegian target will not affect the target's tax position, including losses carried forward, unless the tax authorities show that the transfer of shares is primarily tax-motivated.
Simultaneously with the submission of last year's fiscal budget for 2016, the government also released a proposal for a tax reform (the Proposed Reform). This was a follow-up on a report issued by an expert committee appointed in 2013 to evaluate the corporate tax system, particularly in light of recent corporate tax changes (and lower tax rates) in other countries, the global mobility of corporate taxpayers and its effect on erosion of the tax base. The expert committee provided its report in early December 2014, and proposed several changes to the Norwegian tax system. The government's revised proposal included inter alia:
Implementing a rule allowing the government to introduce withholding tax on interest and royalty payments. In the 2017 fiscal budget, the government does not, for the moment, propose withholding tax on interest payments and royalties as previously announced. The latter may however, still become a reality over the next couple of years.
Considering implementing further restrictions on the interest deduction limitation regime to ensure that also external interest costs becomes subject to the limitation regime, provided a safety valve is found to ensure that interest payments on loans from third parties not forming part of any tax evasions should still be tax deductible (see Question 30, Thin capitalisation and transfer pricing ( www.practicallaw.com/3-525-3665) ).
Attempting to reduce the possibility for treaty shopping by implementing a rule stating that all entities established and registered in Norway will be considered to have Norwegian tax domicile, unless a tax treaty with the other state leads to a different result, that is, that companies in Norway under no circumstances will be "state-less".
The Government will follow up and introduce further amendments based on recommendations made by OECD's project relating to "Base Erosion and Profit Shifting" in particular with regard to the arms-length principle, anti-hybrid rules, and the definition of permanent establishment, and so on.
The general anti-tax avoidance rule applicable under Norwegian law is to be considered codified, and the Ministry commissioned a professor at the University of Oslo to propose the text for such new rule. The professor issued a report in March 2016, and his proposal is currently under consideration.
The Ministry also intends to submit a consultation paper for amending the Norwegian controlled-foreign-companies (CFC) rules. This report will most likely not be issued until the beginning of 2017.
Considering implementing VAT on financial services rendered against compensation, together with a special tax on financial institutions' income on margins. To what extent it will be practically possible to implement such new rules will have to be evaluated in more detail, and a final proposal can, if at all, be expected at the earliest in connection with the Fiscal Budget for 2017. In the fiscal budget for 2017, the government has now proposed to instead introduce a new tax on the financial services industry, which among others entails that the corporate income tax for institutions in this industry will remain at 25% instead of being lowered to 24%, as applicable for other businesses. At the same time the government proposes to introduce a 5% special payroll tax, which for most financial institutions in effect will mean that instead of 14.1% payroll taxes, the same institutions will have to pay 19.1% payroll tax. The new tax regime will apply to parties operating in the financial services industry that provides VAT-exempted services under Section 3-6 of the Norwegian VAT Act.
Capital gains on the disposal of business assets or a business as a whole are subject to 25% tax (proposed reduced to 24% with effect from 1 January 2017) (see above, Share sale), and losses are deductible. A Norwegian seller can defer tax by gradually entering the gains as income according to a declining balance method. For most assets the yearly rate is a minimum of 20%, including goodwill.
The buyer can benefit from future depreciation allowances, by allocating the purchase price among the assets acquired. The buyer is allowed a stepped-up tax base cost for the assets acquired. Part of the purchase price exceeding the market value of the purchased assets is regarded as goodwill. However, recently the tax authorities have disputed the allocation to goodwill instead of other intangible assets with a considerably longer lifetime.
Since gains from the disposal of shares in limited companies are generally exempt from tax for corporate shareholders, this will often make sellers favour a share sale over an asset sale. However, if the transaction involves a loss for the seller, the seller will probably prefer an asset deal, since the loss will still be allowed on the sale of assets.
In 2013, the government introduced a first year additional depreciation allowance of 10% of investment costs for machinery. This means that the tax depreciation rate for such assets was increased from 20% to 30% for the first year. However, in the proposed fiscal budget for 2017, the government now proposes to abolish this first year additional depreciation allowance, that is, reducing the tax depreciation rate for such assets to 20% for the first year.
An expert committee to evaluate the corporate income tax system was set up two years earlier and the committee provided their report at the start of December 2014. Based on this report, the government submitted a Proposed Reform (see above, Share sale). Even if the government for the 2017 fiscal year proposes to maintain the existing tax depreciation rates, the government concurs with the expert committee that for most classes of assets, the yearly depreciation rates have been too high. Even so, for certain motor vehicles, the government actually proposes to increase the yearly tax depreciation rate from 20%/22% to 24% from 1 January 2017.
Transfers of shares between corporate shareholders are generally exempt from tax. Capital gains derived from realisations of shares by private individuals (personal shareholders) are taxable at a rate of 28.78% in 2016, proposed to be increased to 29.76% in 2017, to be further increased to 30.59% in 2018 (see Question 27, Share sale).
The most common way to mitigate tax liability in a situation where the shares in the target are owned by personal shareholders is structuring the acquisition as a legal merger, or if possible a combination of demergers and mergers.
An enterprise can be acquired through a tax free legal merger (or through a combination of tax free legal demergers and mergers) in return for the shareholders in the transferor company receiving shares as consideration. To qualify as a tax free merger, all companies involved must, as a main rule, be domiciled in Norway. However, according to amendments made to the tax regulations in 2011, cross-border mergers and demergers between Norwegian companies and companies domiciled in the EU or EEA (subject to certain conditions) can now be carried out as a tax-free merger or demerger under Norwegian law. In addition, all tax positions must be carried over without any changes, both at company level and at shareholder level.
Cash can also be used as consideration in addition to shares in the transferee company, but the cash element cannot exceed 20% of the total merger consideration. Cash payments are considered a dividend or as a capital gain, both of which are taxable if the recipient is a personal shareholder. If such cash compensations will be considered as dividends, they have to be divided between the shareholders in accordance with their ownership in the transferor company.
Such a dividend or gain is tax exempt if it is paid to a corporate shareholder, except that 3% of its dividend income derived from shares in the merging companies is taxed at 25% (giving an effective tax rate of 0.75%) if the shareholder owns less than 90% of the shares in the merging companies (see Question 27, Share sale). From 1 January 2017, this tax rate is proposed reduced to 24% (giving an effective tax rate of 0.72%) if such corporate shareholder owns less than 90%.
If a share sale or legal merger triggers negative tax effects for a corporate shareholder, it can seek to use group contributions to allocate profits in one company against losses in another group company to mitigate the group's total tax liability (see Question 30).
The most common way to mitigate tax liability in an asset sale is to structure the transaction as a legal merger or demerger (see above, Share sale).
Alternatively, the seller can transfer the assets tax free into a subsidiary (NewCo1) owned by the seller (hive-down). In theory the hive-down could be achieved through a combination of a tax-free legal demerger (into NewCo2) followed by a legal merger (between NewCo1 and NewCo2), then selling the shares in the merged NewCo1 to the buyer. However, for many years, the tax authorities took an aggressive approach intervening against such transactions, arguing that these transactions were predominantly tax-motivated restructurings and should therefore be set aside and taxed as an asset sale. In 2014, the Norwegian tax authorities had to reconsider their previous position relating to such hive-down transactions, due to a Supreme Court ruling. In ConocoPhillips v the Norwegian Petroleum Tax Office, the Supreme Court ruled in favour of ConocoPhillips, and concluded that a tax-free demerger, which later was followed by a sale of the shares in the demerged company, would not trigger any taxation for the corporate shareholder selling its shares in the relevant subsidiary. The Supreme Court clearly stated that this would be the case, even though it was quite obvious that the potential tax savings for the corporate shareholder was the main motive behind structuring the transaction as a demerger followed by a share sale. Up until 31 March 2014, these types of demergers could, under certain circumstances also trigger some adverse VAT effects. However, on this date, the Norwegian Tax Inspectorate (Skattedirektoratet) issued a regulation abolishing such potential adverse VAT effects on these forms of demergers.
In a group controlled by the same ultimate parent company owning more than 90% of the shares and the votes of the companies involved, it is possible (subject to certain conditions) to transfer assets tax free between the group companies. However, if the group companies are later sold out of the group (that is, the parent company is no longer controlling more than 90% of the shares and the votes in the group company) the sale will also trigger tax on the original asset sale.
The Ministry of Finance can grant individual tax reliefs for transfers of assets that are part of the rationalisation of a company's business organisation. However, this may only be granted if there are special reasons for doing so, and the exemption or reduction will clearly facilitate the reorganisation or restructuring of the business.
If an asset sale triggers negative tax effects for a corporate shareholder, it can seek to use group contributions to allocate profits in one company against losses in another group company (see Question 30).
A transfer of shares is exempt from VAT. A transfer of assets is generally subject to VAT at 25%. However, if the asset sale is structured as a transfer of an undertaking (a transfer of a business as a going concern) no Norwegian VAT applies.
Norwegian withholding tax
If a foreign buyer acquires shares in a Norwegian company, it will have to consider to what extent later dividend distributions from the target, or any of the buyer's Norwegian holding companies controlling the target, may be subject to Norwegian withholding tax, or if payment of interest on intra-group loans could be subject to withholding tax. As per today, Norway does not levy withholding tax on interest payments. However, the Ministry of Finance has recently submitted a Proposed Reform requesting the Parliament to adopt a rule allowing the government to introduce withholding tax both on interest payments, on royalty payments and on certain form of leased assets like drilling rigs and so on. However, in its proposal for the 2017 fiscal budget, the government did not propose withholding tax on interest and royalties.
In general, Norway does not impose further withholding tax on liquidation dividends. However, if any distributions of dividends from a Norwegian company abroad are required before an exit, Norwegian withholding tax would need to be considered. Depending on the circumstances and the individual tax treaty between Norway and the buyer's jurisdiction, withholding tax rates of 0%, 5%, 10%, 20% or 25% could apply on dividend distributions from a Norwegian entity.
No withholding tax is imposed on dividends paid by a Norwegian limited company to an EEA resident corporate shareholder, provided that the shareholder is genuinely established and conducts real business activity in the relevant jurisdiction. Further, the EEA resident corporate shareholder must be comparable to a Norwegian limited company. In this context an assessment is required of whether it can be shown that these conditions have been fulfilled. The assessment will differ according to the nature of the company. If the shareholder located in the EEA country is considered an agent or nominee for the real shareholder (not a legal and economical owner of the dividends), or a pure conduit company without autonomy to decide what to do with its income, Norwegian tax authorities may apply the default withholding tax rate of 25% and not recognise tax treaty protection.
Norwegian companies cannot file consolidated tax returns or form fiscal unities. However, a transfer of taxable income within an affiliated group of Norwegian entities is possible through group contributions, to offset taxable profits against tax losses in another Norwegian entity. It is possible to grant more group contribution than taxable income, but the grantor company cannot deduct the excess amount, which is also not taxable for the recipient. The total group contribution and dividend distribution are limited to distributable reserves. To enable group contributions:
The contributing and receiving entities must be corporate entities taxable in Norway.
An ultimate parent company must hold more than 90% of the stocks and voting rights of the subsidiaries (either directly or indirectly) at the end of the parent's and the subsidiaries' fiscal year.
The companies must make full disclosure of the contribution in their tax returns for the same fiscal year.
Deducting losses on receivables between related companies
A company can finance its subsidiaries by loans or equity. If using a relatively high amount of loan financing, the parent can deduct losses on receivables (bad debt) in an unsuccessful investment, and realise a tax-exempt gain on shares where the investment is successful. From 6 October 2011, a parent's right to deduct losses on receivables from related entities where the creditor owns more than 90% has been restricted. However, this does not apply to losses on customer debt, losses on debts that represent previously taxed income by the creditor and losses on receivables from mergers and demergers.
Thin capitalisation and transfer pricing
Under Norwegian tax legislation, interest costs on related-party debt have in general, previously been fully tax deductible, to the extent that the quantum and terms of the debt were conducted at arm's length. However, taking effect from 1 January 2014, a bill entered into force, which broadly restricts interest deductions arising on:
Third party debt raised from an external lender (typically a bank), to the extent, a related party of the borrower has an accounts receivable on the third-party lender, and such receivable is related to the debt forming the basis of the interest costs provided by the third party lender to the borrower.
Third party debt raised from an external lender (typically a bank), to the extent a related party of the borrower has provided security for such third party debt.
Additional restrictions to this rule have now been implemented with effect from 1 January 2016. The term related parties will cover both direct and indirect ownership or control, and the minimum ownership or control requirement is 50% (at any time during the fiscal year) of the debtor or creditor. On 24 April 2014, the Ministry of Finance adopted a regulation, which now sets out that loans from unrelated parties secured by another group company in the borrower’s group will, nevertheless, not be considered as intra-group loans, if either:
50% or more of the shares in the group company granting such security is, (directly or indirectly) owned or controlled by the borrowing company.
The security provided by the related party is a pledge over such related party's shares in the borrowing company.
The security provided by the related party is a pledge or charge over such related party's outstanding receivables towards the borrowing company.
In June 2014, the Ministry of Finance also issued an interpretive ruling relating to the rules on the limitation of the deductibility of interest. In this ruling, the Ministry clarified that negative pledges provided by a related party in favour of a third party lender will not be deemed as security within the scope of the interest limitation rule. The Ministry also stated that a general security from related parties, such as an indemnity, costs in connection with loans not used and so on, which is not related to the debt forming the basis of the interest costs, will not lead to a re-classification of the interest on the loan. However, the Ministry indicated that a letter of comfort issued by a parent company vis-a-vis the third party lenders of such parent's subsidiaries might lead to a re-classification of the interest on the loans from such third party lenders. To what extent such informal provisions of security is covered or not will be decided in each individual case, and there is a requirement that the provision of such informal security has affected the borrowing opportunity of the relevant subsidiary compared to what would be achievable in the market without such informal security being provided.
This new limitation rule will apply only if the net interest cost (external and internal) exceeds NOK5 million (a threshold value, and not a basic tax-free allowance) during a fiscal year. This means that if, or when, the threshold is exceeded, the limitation rules also apply to interest costs below the threshold. The new limitation rules state that net interest expenses paid to a related party can be deducted only to the extent that the internal and external interest costs combined do not exceed 25% (reduced from 30%) of the taxable profit after adding back net internal and external interest expense and tax depreciation (tax EBITDA). When calculating the net interest paid, certain premiums and discounts connected to the loan are considered as interest under the limitation rule. The same applies to gains and losses on receivables issued to a higher or lower price than the strike price. However, such gains and losses are not regarded as interest income or interest expenses for the person who has acquired the debt in the secondary market. Currency gains or losses are not considered as interest. Neither are gains or losses on currency and interest derivatives.
Non-deductible interest cost can be carried forward for a maximum period of ten years. Interest received will be classified as taxable income for the creditor company even if the debtor company is denied deductions due to the interest limitation rule. However, group contributions and losses carried forward cannot be used to reduce income resulting from the interest limitation rule. Also note that interest costs that are carried forward will be deductible before current year interest cost. Again, this will prolong the life of the restricted interest cost where the company is in a tax-paying position. Going forward, the new limitation rules will apply on an annual basis. This means that it will now be important to monitor the level of equity, external debt and internal debt, as well as expected taxable income and tax depreciation, to ensure that interest is deductible for tax purposes.
In particular, private equity funds should make sure that financing structures set up under the old rules, in connection with the acquisition of their existing portfolio investments, are revisited and reviewed to understand the effects of the new rules on the way in which any potential negative effects could be mitigated.
Additional restrictions on the interest-capping rule is proposed:
In the Proposed Reform: the Ministry states that the government intends to continue its work to implement further restrictions, among others to consider including all external debt into the interest-capping rule, that is, disallowing tax deductions on interest payments on external bank financing, subject to:
the possibility to find alternatives for ensuring that interest payments on external bank financing not forming part of any type of tax evasions and avoidance schemes in principle should continue to be tax deductible under Norwegian law; and
taking into account the final outputs of the OECD/G20 Base Erosion and Project Shifting Project involving interest deductions and other financial payments.
Note that in May 2016, the EFTA Surveillance Authority has by a letter of formal notice to the Ministry of Finance notified that it has initiated formal proceedings against Norway relating to the Norwegian interest limitation rules. These proceedings were initiated based on a preliminary assumption that these rules could give rise to a restriction of the freedom of establishment, and thereby violates Article 31 in the EEA Agreement. Norway has submitted a response in which its rejects such violation, and the EFTA Surveillance Authority is currently evaluating this response.
If the asset sale is structured as a transfer of an undertaking (a transfer of a business as a going concern), both the buyer and the current employer (the seller) have certain duties to notify and consult with employees and their representatives in accordance with chapter 16 in the Workers' Protection Act. However, there are no requirements to obtain consent from the employees to carry out an asset sale. Chapter 16 in this act implements Directive 2001/23/EC on safeguarding employees' rights on transfers of undertakings, businesses or parts of businesses (Transfer of Undertakings Directive) (which consolidated the Acquired Rights Directive) into Norwegian law.
There is an obligation both on the seller and the new employer (buyer) to provide information about the transfer of the employees as early as possible, and to discuss it with the employees' elected representatives (Workers' Protection Act). Information must particularly be given concerning:
The reason for the transfer.
The agreed or proposed date for the transfer.
The legal, economic and social implications of the transfer for the employees.
Changes in circumstances relating to collective pay agreements.
Measures planned in relation to the employees.
Rights of reservation or preference and the time limit for exercising such rights.
If the seller or the buyer is planning measures relating to their respective employees, they must further consult with the elected representatives as early as possible on the measures, with a view to reaching an agreement.
Both the former and the new employer must in addition, as early as possible, inform all the affected employees about the transfer. It is assumed that the information obligation to all employees is triggered a little later than for the employees' elected representatives. Information must particularly be given concerning the same matters as the seller and the buyer must discuss with the employees' representatives.
Further consultation and information obligations are normally included in any union or collective bargaining agreements that the seller or buyer have entered into.
Each employee has a right to object to the transfer of his employment relationship to the buyer. If an employee wants to exercise this right, he must notify the seller of this in writing within a time limit specified by the seller. The time limit cannot be shorter than 14 days after the employees receive information about the transfer. An employee who has been employed for at least 12 months during a two-year period before the transfer, and who exercises his right of objection, has a preferential right to a new position with the seller, for one year from the date of transfer, unless the employee is not qualified for the position.
Share acquisitions do not generally affect an employee's employment contract with the target. It will not (for a private company) normally trigger any duties on the new shareholder to the target's employees. However, if the target is listed on a Norwegian regulated market, the Securities Trading Act imposes additional obligations to inform the employees in connection with a share sale or a public bid for shares in the company.
If the target is bound by a collective bargaining agreement with trade union(s), it may be obliged to notify its employees if a shareholder's (buyer's) ownership percentage exceeds certain thresholds. In addition, the target may also have to contribute to the buyer informing the target's employees of its plans.
For a statutory merger, the boards of the merging companies must prepare a thorough statement covering the merger and its anticipated effects on employees. Employee representatives also have a statutory right to receive all relevant information and related reports and statements, and to discuss the merger with the board. These rules apply both to listed- and non-listed Norwegian companies.
If a buyer is a Norwegian entity (listed or non-listed) and bound by a collective bargaining agreement with a trade union(s), the buyer may also be required to inform and consult with the relevant union(s) before making an offer, if the acquisition would involve a legal reorganisation of the buyer's existing business.
There is, however, no statutory requirement to obtain employee consent to carry out a share sale or to carry out a share purchase.
As from 1 July 2014, when an alternative investment fund (AIF) (typically a private equity or venture fund) which (individually or jointly) acquires control of a company that fulfils certain criteria, the fund's investment manager (AIFM) will have to notify and disclose the AIF's intentions with regard to the future business of a target and the likely repercussions on employment, including any material change in the conditions of employment, to each of:
The Financial Supervisory Authority of Norway (Finanstilsynet) (FSA).
The target company.
The target's shareholders.
This disclosure requirement is triggered when such alternative investment fund acquires control (more than 50% of votes) of a target company, that either:
Has its shares admitted to trading on a stock exchange or another regulated market (irrespective of that listed target company's number of employees, revenues or balance sheet).
Is a non-listed private or non-listed public company, but employs 250 or more employees, and either has:
annual revenues exceeding EUR50million; or
a balance sheet exceeding EUR43million.
The AIF's fund manager is, under these circumstances, obliged to issue a notice of the transaction as soon as possible, and no later than within ten business days after the AIF has acquired control. In addition, the AIF is obliged to specify in such notice the number of votes acquired, the timing and conditions (if any) for obtaining control, including specification of the involved shareholders and persons entitled to exercise any voting rights on their behalf. For such non-listed target companies as set out above, the AIF's fund manager is obliged to inform the target and its shareholders about any strategic plans for the target and any potential consequences for the target’s employees. The AIF's manager is also obliged to request that the target’s board inform the target’s employees about such information.
These disclosure requirements will not apply to target companies whose sole purpose is to own, acquire or administer real properties.
Private equity and venture funds will also have to observe a new rule setting out that, if an AIF acquires shares in non-listed companies such as those set out above, and the AIF's proportion of the shares reaches, exceeds or falls below 10%, 20%, 30%, 50% or 75% of the votes, the AIF's investment manager is to inform the FSA of the transaction as soon as possible, and no later than within ten business days thereafter.
The employees of a Norwegian employer are explicitly protected against dismissals based on a transfer of a business (Workers' Protection Act).
An employer may still be entitled to layoff parts of its workforce after an asset acquisition due to rationalisation measures, provided the employer ensures that the selection of the employees to be made redundant is made objectively. It is assumed that the new employer must take the total workforce after completion of the acquisition into consideration, and not only the newly acquired employees, when he decides which employees to dismiss. The dismissals will not be objectively justifiable if the employer has other suitable work in the undertaking to offer the employee. These rules also apply if the employer changes due to a merger.
Norwegian law generally provides significant safeguards against dismissal of employees, and restricts the circumstances in which it can take place. A dismissal must, as a rule, be justified by circumstances relating to the employee or the employer. A dismissal relating to the employee can be justified if the employee has done something "censurable" or has materially underperformed.
An employee also has a statutory right to remain in his position during a dispute whether the employment was legally terminated by the employer. This is normally a concern to an employer, since it can be quite often abused by employees trying to persuade the employer to accept expensive out of court settlements.
Further the employer, before issuing a formal notice of dismissals, must observe certain legal formalities (Workers' Protection Act). If they are not observed, there is a risk that the dismissals may be ruled invalid by a court, and that the employer may have to pay compensation to the relevant employees.
The Reorganisation Act 2008 must be observed before plant closures and mass layoffs. It sets out detailed rules and imposes obligations on the owner of a business considering a workforce reduction involving more than 90% of the company's workforce, or if the business activity is being considered for closure.
A share acquisition does not generally affect an employee's employment contract with the target. The employees as a rule continue to be employed by the target, even if the ownership of its shares changes. A share acquisition is not considered a transfer of undertaking, and does not fall within the Transfer of Undertakings Directive, or within the rules in the Workers' Protection Act protecting employees in a transfer of undertakings.
The buyer must observe the general rules protecting employees against dismissals. It is also assumed that a change in the ownership of the target's shares is not in itself justifiable grounds for dismissing target employees. If a buyer wants to reduce the target's workforce after an acquisition, it must show other grounds for this (see above, Business sale).
If the buyer wants to integrate the target's operations with the buyer's after completion, and starts moving assets, people, operations or work tasks between different legal entities in the buyer's group, the post-completion integration may fall within the Transfer of Undertakings Directive and the Workers' Protection Act.
Transfer on a business sale
Norway has implemented the Transfer of Undertakings Directive, and statutory protection in the Workers' Protection Act is in line with it. Any judicial precedent from the Court of Justice of the European Union interpreting the Transfer of Undertakings Directive may also be directly relevant.
A transfer of a business as a going concern falls within the scope of the Transfer of Undertakings Directive. Under such circumstances, the employees, their employment contracts and all related rights and obligations are automatically transferred to the buyer as of the day of the transfer, unless the employees exercise their right to object (see Question 31, Asset sale). A new formal offer of employment is not required.
The employees have a legal right to demand to be transferred according to the principles of the Transfer of Undertakings Directive. The new employer is generally responsible for the transferred employees' accrued benefits, including salary, holiday pay and other terms and conditions of the employment contracts. Certain exceptions apply relating to pension benefits (see Question 33, Pensions on a business transfer).
In a business transfer subject to the Transfer of Undertakings Directive, the seller's collective bargaining agreements continue to apply to the buyer after the sale. However the buyer can, within three weeks following completion of the sale, notify the employees' union that the buyer will not be bound by these collective bargaining agreements. Following this, any collective terms in the agreements will not apply between the buyer and the new employees. However, if the agreements contain "individual" terms, they will continue to be binding between the buyer and each individual employee, until the agreement(s) lapse or a new collective bargaining agreement is entered into between the buyer and the employees.
Employees have the right to be informed and consulted in connection with a business transfer (see Question 31, Asset sale). If these rights are breached, the business sale does not in itself become null and void. There are no direct remedies under the Workers' Protection Act for such breaches. However, failing to inform and consult can affect the validity of dismissals. Failing to inform and consult in relation to collective redundancies may also result in the employees' notice period being extended. Employers bound by collective bargaining agreements may also be liable to pay fines to the union for failing to inform and consult.
Private pension schemes
In general pension schemes in Norway can be divided into three main categories:
A statutory public old age pension (entitling eligible persons pension on retirement, normally from the age of 67) and a disability pension which, together with the public social security system, is consolidated in the National Insurance Scheme.
Private pension schemes established by employers (occupational pensions).
Individual pensions/savings plans.
It has become common for employees to participate in occupational pensions, in addition to the National Insurance Scheme. Occupational pensions are mainly either:
A funded approved scheme, providing benefits on a final pay (defined benefits) or a money purchase (defined contribution) basis.
A non-funded scheme, provided as an operating expense by the employer's ongoing operations.
Most occupational pension schemes are established at company level, normally in co-operation with insurance companies, a fund/trust manager, or as a separate pension fund. Effective from 1 January 2014, Norway has implemented new rules for occupational pension plans, that now include an option for new tax-favoured hybrid plans that combine defined benefit plan features and defined contribution plan features (see below).
Several companies and labour unions have also organised collective pension plans for their employees and members based on sectoral collective labour agreements. Many employees are entitled to an early retirement pension (AFP) pension under such schemes, from 62 years of age. Such an AFP-plan is in fact a defined benefit multi-employer plan, but is in general accounted for as a defined contribution plan until there is reliable and sufficient statistical information available. Note that this type of early retirement pension in Norway by most is considered to be underfinanced using current premium levels. However, with the current statistical data available, it is considered by most as impossible to estimate the actual funding requirements and real costs of such AFP-schemes. Most bidders will therefore, when evaluating the effect of such AFP-schemes to a target's value, very often add a buffer to the salary costs going forward to take this situation into account. It is now rather uncommon for Norwegian companies to provide a pension on a non-funded basis as an operating expense from its ongoing operations. However, occasionally exceptions may exist, particularly for top hat plans.
In 2006 it became mandatory for all employers taxed in Norway with at least one employee (who has no ownership interests in the employer and a salary amounting to that of at least 75% full time employment) to provide a supplementary occupational pension for its employees.
Occupational pensions must comply with the Act on Mandatory Occupational Pensions 2005. Employers must have a defined contribution or a defined benefit scheme.
The employer's yearly contribution in a defined contribution scheme must be at least 2% of the employees' gross income between 1 base amount (B) and 12B (B is the national insurance basic amount, as from 1 May 2016 1B is NOK92,576). No contributions are paid for income exceeding 12B. Under the new rules introduced from 1 January 2014, a major change to the defined contribution schemes increases the limit on contribution to 7% of employee earnings from 1B to 7.1B, and to 25.1% of earnings from 7.1B to 12B. It is now also possible to contribute 7% of the employee earnings from 0B to 1B.
A defined benefit scheme must ensure that at retirement age, the employee receives a percentage of the employee's salary, after deducting the national insurance benefits received by the employee. This percentage must not exceed 100% of the employee's earnings from up to 6B, 70% of the earnings between 6B and 12B and 0% of the earnings exceeding 12G. Defined benefit schemes make it difficult to predict the employer's future annual premium payment under the schemes. In addition, a defined benefit scheme must fulfil some of the minimum requirements that apply to defined contribution schemes.
Both pension schemes must include an additional insurance element, which must ensure that employees continue to earn pension entitlements in the event of disability. Employees under the age of 20 and those in part time employment of less than 20% of a full time position can be excluded from these pension schemes.
The new pension and tax regime that became effective from 1 January 2014 also allows an employer to offer a hybrid plan, which will include certain guarantee features similar to a defined benefit plan, including:
Limits on contribution to employee accounts the same as those for defined contribution schemes.
Employers can select the overall investment portfolio for all employees or determine an investment portfolio from which the employees may select.
Employers can guarantee a minimum rate of return that prevents the nominal loss of contribution in accounts.
Employers are responsible for the administrative expenses during the accumulation and the post-retirement investment phase for the employees.
Employers are responsible for ensuring that any pension indexation costs meet the national insurance regulations, and investment returns above such guaranteed rate may help finance such costs.
The rules allow employers greater flexibility in designing and funding pension plans, since before the new rules entered into force, they had to offer a defined benefit or a defined contribution plan to its employees. Under the current rules, Norwegian companies can offer a benefit more comparable to a defined benefit plan through a defined contribution plan or a hybrid plan.
A Norwegian target can have its own pension scheme or participate in the seller's group scheme.
Pensions on a business transfer
If an employee is transferred as part of a business acquisition, the employee's right to retirement pension, survivor's pension and disability pension under a pension scheme is transferred to the new employer, provided the transfer is a transfer of an undertaking (Workers' Protection Act). The new employer can generally decide to apply its existing pension scheme to the transferred employees. However, this does not apply if the new employer does not have a pension scheme when the transaction is completed. In these circumstances, the transferred employees are entitled to the same pension rights from their new employer as they had before the transfer.
A concentration of undertakings arises in any of the following situations (Competition Act):
A merger of two or more previously independent undertakings or parts of undertakings.
One or more persons already controlling at least one undertaking (or one or more undertaking(s)) acquire direct or indirect control on a lasting basis of the whole or parts of one or more other undertakings.
The creation of a joint venture performing on a lasting basis all the functions of an autonomous economic entity (fully functioning joint venture).
The parties to a merger, those who acquire control, or the parties to a joint venture (see above) must notify the concentration to the Competition Authority before they can complete (close) the transaction.
Historically, the Norwegian turnover thresholds have been considered very low compared to most other jurisdictions. However, from 1 January 2014, notification is only required if both the following revised turnover thresholds are met (Regulation on Notification of Concentrations):
The combined group turnover of the acquirer and the target in Norway is NOK1 billion or more.
At least two of the undertakings concerned each has an annual turnover in Norway exceeding NOK100 million.
In addition, the new rules contain amendments concerning the entities included when calculating the parties' group turnover, to harmonise with Regulation (EC) 139/2004 on the control of concentrations between undertakings (Merger Regulation). The NCA will also be empowered to issue decrees ordering that business combinations falling below these thresholds still have to be notified, provided it has reasonable cause to believe that competition is affected, or if other special reasons call for investigation. Such a decree must be issued no later than three months from the date of the transaction agreement, or from the date control is acquired, whichever comes first. Notification may also be required under the Competition Act (or under the EU merger control regime) if the parties sell to Norwegian customers, even if none of them are established in Norway.
Notification is not required unless there is an acquisition of lasting control. Control is constituted by rights, contracts or any other means that, either separately or in combination, and having regard to the considerations of fact or law involved, confer the possibility of exercising decisive influence on an undertaking, in particular by ownership or the right to use all or part of the assets of an undertaking, or rights or contracts that confer decisive influence on the composition, voting, or decisions of the decision-making bodies of an undertaking. An acquisition of minority shareholdings that do not confer control is not subject to notification.
The Competition Authority (NCA) still has power to intervene against an acquisition or concentration (even if it does not lead to control) that has effect or is liable to have effect in Norway, provided that the Competition Act's material and procedural conditions for intervention apply. If so, the NCA must order the submission of a notification no later than three months after the date of a final acquisition. NCA may also within two years from the date of the most recent acquisition intervene against a successive transaction that has taken place, provided that the substantive condition for intervention is fulfilled.
Notification and regulatory authorities
A concentration meeting the thresholds (see above Triggering events/thresholds) must be notified to the Competition Authority before consummation. The Competition Authority can prohibit the transaction or impose conditions and limitations if it finds that it would have a negative impact on competition in the relevant Norwegian market. If a filing is required under the EU merger control regime, no filing is needed with the Competition Authority.
From 1 January 2014, the former Norwegian two-legged notification procedure has been abolished. Instead of the former system with standardised notifications possibly leading to complete notifications, the new regulation introduces a new type of more comprehensive notification (more similar to a Form CO), but more limited in substance than the present complete filing form.
However, the Ministry has adopted a new simplified procedure for handling certain transactions that does not involve significant competition concerns within the Norwegian market. This is a type of short-form notification similar to the EU system. In March 2016, parliament adopted among others a proposal for an expansion of the scope of the simplified merger control procedure. After this amendment, the simplified procedure now covers:
Joint ventures with no or de minimis actual or foreseen business activities within Norway (a turnover and asset transfer test of less than NOK100 million is used to determine this).
The acquisition of sole control over an undertaking by a party who already has joint control over the same undertaking.
Concentrations under which one or more undertakings merge, or one or more undertakings or parties acquire sole or joint control over another undertaking, provided that:
none of the parties to the concentration is engaged in business activities in the same product and geographic market (no horizontal overlap), or in a product market which is upstream or downstream from a product market in which any other party to the concentration is engaged (no vertical overlap);
two or more of the parties are active on the same product or geographical market (horizontal overlap), but have a combined market share not exceeding 20% (previously 15%) (horizontal relationship); or
one or more of the parties operates on the same product market which is upstream or downstream of a market in which the other party is active (vertical relationship), but none of the parties individually or in combination has a market share exceeding 30% (previously 25%).
After receipt of the filing, the NCA has up to 25 working days to make its initial assessment of the proposed transaction. The NCA must, prior to the expiry of this deadline, notify the parties involved that a decision to intervene may be applicable. In such notification, the NCA must demonstrate that it has reasonable grounds to believe that the transaction will significantly impede effective competition, in particular as a result of the creation or strengthening of a dominant position (see below, with regard to the new amended substantive test). If no notice of possible intervention is given, the transaction is cleared. The current rules increased the first-stage handling period from the previous 15 to 25 working days, however, allowing for pre-deadline clearance, so that the NCA at any time of the procedure can state that it will not pursue the case further. If the NCA issues a notice that it may decide to intervene and opens an in-depth (Phase II) investigation, it will have a basic period of 70 working days from the date the notice was received to complete its investigation and come to its conclusion on the concentration. This basic period can be extended under certain circumstances. From 1 July 2016, the total case handling time will now amount to 145 working days compared to 115 working days under the former regime.
If the notifying parties want to avoid Phase II of the investigations, remedies must be offered within 20 working days after NCA's receipt of the notification. If so, the Phase I of the investigation is extended by ten working days. In such case, the NCA may accept and make binding the remedies within the extended deadline. During Phase II of the investigation, the parties can offer remedies within 55 working days after NCA's receipt of the notification, to avoid a 15-working day extension of the NCA's deadline. If the parties present remedies later than 55 working days from submission of the notification, the NCA's deadline is extended accordingly. The parties will have an additional 15 working days to submit their comments to any draft prohibition decision, and after such comments, the NCA will have 15 working days to issue its decision. If remedies are presented after the NCA has issued a draft prohibition decision, the NCA's deadline to issue its decision after comments from the parties can be extended by 15 working days.
From 1 July 2016, the NCA may, if so requested or approved by the parties, extend its final deadline to issue its decision with an additional 15-working days, thereby the maximum timetable for clearance will be 145 working days.
Note that the parties could additionally prolong the deadlines of the NCA due to incomplete notifications and presentation of remedies. NCA applies a strict approach to the marking of business secrets in the notification documents and the parties' substantiation of claims for such confidentiality. The NCA will commonly argue that a notification is not complete due to the parties not having adequately substantiated a claim for such confidentiality. This will result in delaying the process, and in some situations, the notification process could take up to six months.
All notifications are published on the NCA's webpage. The announcement on the webpage is also the NCA's confirmation that the notification has been received. Further information on notification is available on the Competition Authority website at www.konkurransetilsynet.no/en/mergers-and-acquisitions/Obligation-to-notify-concentrations/
There is no deadline for filing a notification, but a standstill obligation will apply until the NCA has cleared the concentration. As under the EU merger rules, a public bid or a series of transactions in securities admitted to trading on a regulated market such as the Oslo Stock Exchange and Oslo Axess, can be partly implemented notwithstanding the general standstill obligation. In order for such exemption to be effective, the acquisition will have to be notified immediately to the NCA; "immediately" in this regard will normally mean the day on which control is acquired. The acquiring party cannot at any time "exercise any form of control" over the target until the end of the standstill period following the filing. It has, however, been assumed that a bidder, during such standstill period, can use the voting rights to such shares to protect its investment without being in violation of the prohibition against exercising any form of control. Nevertheless, the bidder cannot start integrating and co-ordinating the target's future operations with the bidder's own operations.
Failure to comply with the notification duty can be subject to administrative fines. The NCA may issue fines up to 10% of the undertaking's worldwide turnover. The highest fine so far amounts to NOK25 million and was issued to Norgesgruppen early in 2014. In principle such breaches can also be subject to criminal sanctions, but this has not yet occurred.
The substantive test under the Competition Act used to differ from that under the EU Merger Regulation. Previously the Competition Act applied a twofold test consisting of the substantial lessening of competition test (SLC) and an efficiency test.
As of 1 July 2016, the Norwegian substantive test was harmonised with that of the EU Merger Regulation, which means that the Competition Authority from such date will only prohibit concentrations that significantly impede effective competition (a SIEC-test), in particular as a result of the creation or strengthening of a dominant position). In this regard, it is in particular worth mentioning that historically, under Norwegian law any strengthening of competition in a market in which competition is already significantly restricted would qualify for intervention. Now, as from 1 July 2016, on the other hand, minor impediments of competition (measured with changes in the HHI before and after the concentration) will normally not qualify for intervention under the new SIEC-test.
Under the new rules, the Competition Authority will now also apply a consumer welfare standard, similar to that of the Commission, while up until 1 July 2016, a total welfare standard used to apply in Norway.
Even if the conditions for intervention are met, the Competition Authority may not intervene if an exemption applies for a well-functioning Nordic or European market and the concentration does not adversely affect Norwegian customers. The government also used to have an opportunity, through the power of the King in Council to intervene in cases affecting "public principles or interest of major significance". This is something that, in principle, used to give the government an opportunity to allow broader political interest to be taken into account. However, it used to be assumed that neither the NCA nor the Ministry itself would be permitted to take into account such other broader political interests. In March 2016, parliament resolved to abolish the King in Council's powers to intervene in merger control cases. Instead, it was resolved to implement an independent appeal board for handling appeals in merger control cases under Norwegian Law. The Ministry has proposed that the latter amendment will first take effect on 1 January 2017.
The Pollution and Waste Control Act 1981 is based on the principle that the entity responsible for the pollution is liable for the clean-up of contaminated land (polluter pays principle). The polluter is also under strict liability to cover social and community expenses caused by the pollution. However, the Pollution Control Authority can also order any person that possesses, does, or initiates anything that may result in pollution to arrange or pay for any investigations or similar measures that may reasonably be required to determine whether and to what extent the activity results in or may result in pollution, or ascertain the cause of or impact of pollution (section 51, Pollution and Waste Control Act).
Consequently, if the polluter can no longer be identified or held responsible, the current landowner can be liable for investigations and remedial actions. Therefore, an owner of real property is always at risk of becoming jointly liable with the polluter, regardless of whether the owner is to blame. It can very often be difficult to prove who is responsible for the pollution. Further, a lessee's liability for pollution will survive the term of a lease, as long as it is possible to prove that the lessee has caused the pollution (Pollution and Waste Control Act).
If the target has caused pollution (for example under an existing or former lease), or controls contaminated land, it can be liable for remediation costs and so on, even if its shares are sold in a share sale. In this sense, liability of the seller can be passed on to the buyer through a share sale.
A buyer may seek to avoid such liability by structuring the transaction as an asset sale. However, it is far from certain whether this will help the buyer to avoid liability. Even though the buyer, in theory, should not be liable for any historical contamination, the buyer may still have acquired a property with ongoing pollution, that in many cases may continue after completion of the transaction.
In some cases the pollution may also relate to toxic materials located on the acquired property, which the buyer becomes liable for removing or cleaning-up. In these circumstances the buyer has to seek restitution from the seller, to the extent the seller still exists and can be held liable under the sale agreement. In a ruling from 2012, the Supreme Court concluded that the current owner of property can be liable to the Pollution Control Authority for reimbursing the authorities' clean-up costs relating to contamination on the property, under section 7 of the Pollution and Waste Control Act. This applies even where the pollution was caused by a former lessee of the property, and even though the property was already contaminated when the current landowner acquired title. The court also stated that an exception would only apply if the claim against the landowner could be considered unreasonably burdensome for the owner, or an abuse of authority to pursue the claim against the landowner rather than the polluter.
In the Hempel Case from 2010, the Supreme Court ruled that a Danish parent company (Hempel) could be liable for carrying out investigations about the level of soil pollution on two sites previously owned by the parent's subsidiary (Hempel Coatings AS), which produced paint. In this particular matter, the pollution on the land had not been caused by the subsidiary itself, but by a company that produced paint on the site before the properties were taken over by Hempel Coating through a legal merger. Later, the properties were sold to a third party buyer and the subsidiary Hempel Coating was liquidated. The buyer who acquired the properties from Hempel Coating was also later liquidated due to financial difficulties. In this matter the Supreme Court ruled that since Hempel had full control over its subsidiary, and had resolved to liquidate the subsidiary, the parent was found to be responsible for carrying out the investigation of contamination on the sold properties and also to pay the costs in this regard.
In the Hempel II Case from November 2014, Gulating Court of Appeal ruled that the same parent company (Hempel) also was responsible, not only for carrying out such investigations, but also for paying the remediation costs relating to the same property.
These rulings show that even in an asset sale, the buyer may be at risk of inheriting the seller's liability for contaminated land, and that Norwegian courts may hold the seller liable even after the contaminated properties are sold. In some cases, even the seller's shareholders' may be liable for investigation and clean-up costs, if a subsidiary formerly owning the properties is liquidated, and even if the property was polluted before the shareholders acquired their shares in the company that later took over the contaminated properties.
Norwegian Labour Inspection Authority
Description. The official website of the Labour Inspection Authority, containing general information on working conditions in Norway. An English translation of the Working Environment Act can be downloaded from the website.
Norwegian Financial Supervisory Authority
Description. The official website of the Financial Supervisory Authority of Norway.
Norwegian Competition Authority
Description. This is the official website of the Norwegian Competition Authority. The website contains general information on the Norwegian merger control regime. In addition, an English translation of the Competition Act is available.
Faculty of Law Library, University of Oslo
Description. The website contains a collection of unofficial English translations of Norwegian acts and regulations, compiled by the Faculty of Law Library, University of Oslo. The translations are potentially out-of-date.
Ole K Aabø-Evensen, Partner
Aabø-Evensen & Co Advokatfirma
Professional qualifications. Norway, 1988
Areas of practice. Public and private M&A, including corporate finance, tender offers and take private transactions, mergers, demergers (spin-off), share exchange, asset acquisition, share acquisition, group restructuring, joint ventures, LBO, MBO, MBI, IBO, private equity acquisitions and exits, due diligence, takeover defence, shareholder activism, securities and securities offerings including credit and equity derivatives, acquisition financing, anti-trust and TUPE-issues.
Languages. English, Norwegian and the other Scandinavian languages.
Professional associations/memberships. The Norwegian Bar Association; the International Fiscal Association; International Bar Association; the American Bar Association.
- Aabø-Evensen: On acquisitions of Companies and Business, Universitetsforlaget, Oslo (2011), 1,500 page Norwegian textbook on M&A.
- The Mergers & Acquisitions Review – Tenth Edition (2016), Norway chapter.
- (Getting the Deal Through) Mergers & Acquisitions in 59 Jurisdictions World Wide 2016 edition, Norway chapter.
- Chambers' Practice Guide: Mergers & Acquisitions (2016), Norway chapter.
- (Global Legal Insight) International Mergers & Acquisitions - Fifth Edition (2016), Norway chapter.
- International Comparative Legal Guide to: Private Equity - Second Edition (2016), Norway chapter.
- International Comparative Legal Guide to: Mergers & Acquisitions (2016), Norway chapter.
- The Mergers & Acquisitions Review – Ninth Edition (2015), Norway chapter.
- (Getting the Deal Through) Mergers & Acquisitions in 59 Jurisdictions World Wide 2015 edition, Norway chapter.
- Chambers' Practice Guide: Mergers & Acquisitions (2015), Norway chapter.
- (Global Legal Insight) International Mergers & Acquisitions – Fourth Edition (2015), Norway chapter.
- The Mergers & Acquisitions Review - Eighth Edition (2014), Norway chapter.
- International Comparative Legal Guide to: Private Equity - First Edition (2015), Norway chapter.
- (Global Legal Insight) International Mergers & Acquisitions – Third Edition (2014), Norway chapter.
- International Comparative Legal Guide to: Mergers & Acquisitions (2014), Norway chapter.
- (Euromoney Publication) International Mergers & Acquisitions' Review 2014: Norway – Key aspects of M&A transactions: Recent trends and developments from a legal perspective.
- Practical Law: Private Acquisitions Multi-jurisdictional Guide – First Edition (2013), Norway chapter.
- The Mergers & Acquisitions Review – Seventh Edition (2013), Norway chapter.
- Chambers' Practice Guide: Mergers & Acquisitions (2013), Norway chapter.
- International Comparative Legal Guide to: Mergers & Acquisitions (2013), Norway chapter.
- (Euromoney Publication) International Mergers & Acquisitions' Review 2013: Norway – Trends and updates.
- (Global Legal Insight) International Mergers & Acquisitions – Second Edition (2013), Norway chapter.
- The Mergers & Acquisitions Review – Sixth Edition (2012), Norway chapter.
- (Euromoney Publication) International Mergers & Acquisitions' Review 2012: Norway – M&A transactions: a legal perspective.
- (Global Legal Insight) International Mergers & Acquisitions – First Edition (2011), Norway chapter.
- (Euromoney Publication) International Mergers & Acquisitions' Review 2011: Norway – M&A transactions: recent legal developments and proposed or expected changes.
- (Getting the Deal Through) Mergers & Acquisitions; the 2009, 2010, 2011, 2012, 2013 and 2014 editions, Norway chapter.
- Recognised by international rating agencies such as Chambers, Legal 500 and European Legal Experts.
- In the last 12 years, he has been rated among the top three M&A lawyers in Norway by his peers in the annual surveys conducted by the Norwegian Financial Daily (Finansavisen). In the 2012 and 2013 edition of this survey, he was named by the Norwegian Financial Daily as Norway's number one M&A lawyer.
- Former head of M&A and corporate legal services of KPMG Norway, and is now the co-head of Aabø-Evensen & Co's M&A team.