Private mergers and acquisitions in Norway: market analysis overview
Q&A guide to private mergers and acquisitions market practice in Norway.
The Q&A gives a high level overview of key issues including current major trends, private M&A activity, structuring and documentation in transactions, governing law and arbitration, and reform and future market trends.
This Q&A is part of the global guide to private mergers and acquisitions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/privateacquisitions-guide.
The macro perspective for 2016 continues to generate a more depressing outlook for Norway due to the collapse in oil prices, even though we lately have observed a slight positive shift in the market. Still, the rapid development in the new sources of acquisition financing that we witnessed in 2013 and 2014/15 seems to continue. Even if we have witnessed a continuing slowdown in the Norwegian high yield bond market since 2014, the market now shows signs of slight improvements, and high yield bonds have gained acceptance among many private equity sponsors as a source of financing Norwegian private M&A deals. Private equity sponsors continue considering raising acquisition debt in the bond market and/or for refinancing their existing portfolio companies' acquisition facilities by issuing bonds, all depending on the conditions in the debt capital markets and provided that the debt markets are willing to support more beneficial terms than traditional bank financing. Banks will therefore constantly have to compete with high-yield products and institutional investors, both in the traditional collateralised loan obligations (CLO) format and in direct lending initiatives. Today, private equity sponsors and other borrowers have a variety of financing options offering different results in terms, flexibility, and ability to raise additional financing and so on. The borrowers are becoming increasingly creative in their attitudes to acquisition funding showing a slight move away from traditional banks as the only alternative. This has resulted in an evolution of what is "market" for leveraged loan documentation in the Norwegian market. Another major trend in the Norway private M&A market is the increased use of warranty and indemnity insurance (W&I insurance). During 2005 to 2012, there were about four known transactions concluded with this type of insurance product. However in 2013, 16 deals were concluded with W&I insurance and in 2014, this number increased to 33 transactions. Due to a declining M&A market in 2015, we did not witness the same proportional increase for 2015. However, so far in 2016 the number of transactions concluded in which W&I insurance was offered indicates that we will see these figures continuing to increase both for 2016, but also in the years to come.
The Norwegian private equity market experienced a significant decline for 2015 in both volume and average deal sizes. Compared to 2014, the Norwegian market declined 21% in number of transactions involving private equity sponsors (either on the buy- or sell-side). The market continued to be driven by new investments and add-ons, while the number of exits declined compared to the same period in 2014.
According to data compiled by Merger Markets for the 12-month period ended 30 June 2016, the aggregate value of the Norway private M&A market was about EUR10 billion. This represented a clear decrease compared to the EUR11.6 billion for the preceding 12-month period. However, the number of deals was actually moving sideways, with 229 deals for each 12-month period. Contrary to many other jurisdictions, the Norwegian M&A market experienced a significant drop in the average reported deal values during the first half of 2016, compared with the second half of 2015. This development was a result of a more depressing outlook for the oil and gas sector, due to the severe drop in the commodity prices witnessed at the end of 2014/beginning of 2015, which continued into 2016, particularly at the beginning of the year. In 2015, sliding oil and gas prices resulted in a severe drop in M&A in the energy sector, but what is interesting is that during the summer of 2015 the market witnessed a slight increase in deal activity in the exploration and production side. At this stage the drop in oil prices contributed to many equity sponsors taking an interest in shopping for exploration and production assets at favourable price levels.
The industrial and manufacturing, and the TMT sector, together with the energy sector, accounted for most of the Norwegian private M&A market by volume for the first half of 2016. These three sectors together represented 51% of the deal volume during the first eight months of 2016. The upswing in deal activity in the oil and gas sector in 2016 has so far largely been driven by consolidations and distressed transactions, but the latest months' slight upswing in oil and gas prices has also had a positive impact on M&A activity in this sector.
For Norway, the current trends in structuring private M&A transactions are the following:
Share acquisitions continue to be the most common form of transaction structure, due to the following:
corporate shareholders (shareholders not being private individuals) domiciled in Norway normally prefer share deals, since these shareholders are generally exempt from tax on capital gains on the realisation of shares in domestic or foreign companies domiciled in EU and EEA member states, while capital gains on the disposal of business assets or a business as a whole are subject to 25% tax (proposed reduced by the government to 24% with effect from 1 January 2017);
buyers may prefer a share transaction over an asset deal, because of the comparative simplicity of completing such transactions even if an asset purchase may, from a tax perspective, in many cases be preferable to a buyer.
Cash is the most commonly used consideration in connection with acquisitions of non-listed companies. The reasons for this are:
sellers normally prefer cash instead of shares;
difficulties evaluating the future value of such consideration in a volatile macro-economic environment, compared with the certainty of receiving cash; and
buyers also tend to prefer settlement in cash, since the documentation and the negotiations normally become far more complex in order to offer settlement in shares or other securities.
Asset purchases are less frequent than share transactions, but asset deals occur regularly, particularly in distressed sales.
Locked box mechanisms continue to be the structure of choice for private equity sellers.
Locked box mechanisms are also increasingly used by trade sellers conducting auctions.
Post-closing adjustments to the purchase price (completion accounts) still remain a common feature of the Norway private M&A market, in particular if:
there is an expected delay between signing and completion of the transaction;
the business being sold is to be carved out from a larger group;
substantial seasonal fluctuation in the target's need for working capital is expected; and
a large part of the value of the target's balance sheet refers to "work-in-progress" items.
If a post-closing mechanism is used, adjustments are most commonly agreed for variations in the target's working capital and net debt, but this can vary from sector to sector.
At the moment, buyers seem to be ready to walk away from what they consider overpriced deals, or to propose earn-outs to reconcile conflicting projections. Earn-outs and deferred considerations still occur, but for 2014 and 2013 became less frequent than typically seen during the credit crunch period. Since 2015, we have continued to observe a rebound of earn-out and deferred consideration deals in particular within the oil and gas sector, but for other sectors, such arrangements are still less frequent.
Escrow structures as a basis for making contractual claims in respect of warranties and purchase price adjustments are normally not popular among sellers, and a seller will frequently resist such requests. However, depending on the relative bargaining positions of the seller and buyer, it is not uncommon for buyers to frequently request escrow structures. Currently, it does however seem that W&I insurance is continuing to gain ground, as a method for getting rid of a more traditional escrow account mechanism.
Internationally, the market fundamentals have created a sentiment for pushing up valuation multiples also in the Norwegian M&A market, with some variations by industry in particular for the oil and gas sector. Despite this, with a more cautious view on the macro-outlook for Norway due to the significant drop in oil prices that continued into 2016, buyers continue to remain generally risk adverse in relation to the other terms of the transaction. In general, deal terms used during 2015 continued to be relatively buyer friendly, with exceptions for some particularly attractive assets. The same trend continues into 2016. A contributing factor to this development seems to have been the increased acceptance and use of W&I insurance in M&A deals in the Norwegian market. Increased competition among insurers seems to have led insurers to become willing to take on more risk, by underwriting slightly more buyer friendly terms than in previous years (see below).
Having said that, the most recent trends in the terms and documentation for private M&A transactions can be summarised as follows:
If the transaction is the result of a structured sales process, sale and purchase agreements are quite often drafted in English, even if both the seller and buyer are domiciled in Norway.
Financing out conditions/clauses have not disappeared, but are rarely accepted by sellers. There also seems to be an increased use of reverse break fees, where a seller is in doubt over a buyer's ability to fund the deal at closing (even though reverse break fees are not very common in Norwegian private M&A deals).
For the last four years, material adverse change (MAC) conditions have become subject to increased negotiation. If such conditions are agreed, it has become common to include exceptions to the scope of such clauses and/or to include certain financial thresholds for triggering such clauses. For securities/assets sold in competitive auction processes, depending on the attractiveness of the securities/assets, and the various bidders' relative bargaining positions, it seems as if the number of bidders willing to drop a MAC clause in order to win the bidding process is increasing.
Even if a small shift towards slightly more seller friendly documents has been observed in the market in particular for parts of 2014 and 2015, for the first half of 2016, at the right pricing, sellers in general had to accept a broad set of representations and warranties if they wanted a deal to succeed in the Norwegian market. During this period, buyers continued to succeed in broadening the scope of the warranty coverage, for example by including some type of information warranties in the contracts. However, exceptions did apply, especially in particular sectors, often depending on the parties' bargaining position. Note that the introduction of W&I insurance coverage into a deal may often contribute to a shift in the deal-dynamics. If so, the buyer will be able to obtain more favourable representations and warranties than originally offered by the sellers (see above).
Relevant disclosures are normally made in schedules to the purchase agreement itself, and in most cases there is no separate disclosure letter (as is common, for example, in UK transactions). Sellers in general argue that disclosures have to qualify all warranties, even when set out against specific warranties. Sellers also try to argue that all due diligence information (the whole content of the data room and so on, rather than a limited subset of it) in general will qualify all seller's warranties.
It is common practice for warranties and representations to be repeated when the deal closes, in line with the general legal principle that the risk of the business passes to the buyer at this point. However, an increasing number of sellers have started to argue that repetition of the warranties at closing should be limited to certain "fundamental" warranties regarding title to shares or assets and the capacity of the seller to enter into and complete the transaction, or that only warranties in the sellers' direct control should be repeated. For the last couple of years, we have observed an increasing number of deals where bidders, depending on the attractiveness of the assets for sale, to some extent were willing to accept the sellers' argument in this respect. For some sectors, this trend has continued into 2016, while for other sectors the general trend is still that warranties and representations are repeated at closing.
It is not customary 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.
There has been a substantial increase in the number of transactions in which either the seller or the buyer seeks to obtain W&I insurance as a way to reach agreement on liability under the sale and purchase agreement, or as a way to achieve a competitive advantage in a bidding process. Sellers seeking a clean exit have for the last three years started to arrange "stapled" buy-side W&I insurance to be made available to selected bidders in structured sales processes.
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 at 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 longer warranty periods. A longer warranty period is normally agreed for tax warranties and other types of claims that could take longer to arise, for example environmental issues. For the moment, however, more and more buyers seem willing to accept slightly shorter limitation periods in order to win competitive processes, even if pricing continues to be the most vital factor for winning such processes. Also note that by the introduction of W&I insurance coverage into the deal, a buyer will normally be able to "purchase" longer warranty periods than normally agreed between a seller and buyer in these types of transactions.
Buyers' attempts to resist high de minimis and basket thresholds from the second half of 2011 and throughout 2012 were proven successful in an increasing number of cases. However, for 2014 continuing into 2015 and 2016, it looks as if a small shift in the market might happen. Depending on the attractiveness of the respective assets, it seems as if sellers have been gaining some ground over the financial limits on their liability. In this respect, it also seems as if the liability caps agreed in Norwegian private M&A transactions are slightly moving down within particular sectors. For other sectors, this trend seems to have come to a slight halt.
During 2013 to 2015, the general norm continued to be that buyers seek full recovery for any amount claimed after reaching the relevant basket threshold. However, the increasing number of deals made with W&I insurance in the Norwegian market seems to have contributed to a slight shift in this regard.
Auction processes seems to be the preferred option for private equity exits in the Norwegian market, at least for transactions exceeding EUR100 million. Even for smaller transactions, the seller's financial advisers normally attempt to conclude the sale by inviting various prospective bidders to compete against each other. However, experiences from the last three years show that it often may be quite difficult to maintain the competitive tension between various bidders until the end of the process. What initially may have started as structured sales processes (auctions) may soon develop into bilateral sales. Bilateral negotiated sales processes also seem dominant for deals among industrial players and for smaller transactions (below EUR20 million).
For 2013 and throughout most of 2014, much confidence returned to the international equity capital markets, which led to an upswing in the number of initial public offerings, both in the Norway market and the rest of Scandinavia. Due to the market sentiment, many private equity sponsors started to consider that an exit through an initial public offering could yield a better price than a normal structured sales process. As a result, "dual track" processes started to become increasingly popular for testing the market before deciding on the final exit route. This trend seems to continue into 2015 and 2016, but due to the 2016 IPO market having become slightly more sensitive to volatility and general negative economic sentiment, most Norwegian transactions that originally started with a dual track in 2016 so far seem to have ended up with a trade sale.
We have observed, beginning in late 2011, a slight shift in the Norwegian market relating to at what stage the buyer's full due diligence investigation is conducted. For this period, it was not uncommon for many auction processes to be prolonged, due to a lack of prospective bidders willing to comply with sellers' proposed time schedules. Several structured sales originally scheduled as a two stage process developed into a 2.5 phase process, in which bidders asked for a full or confirmatory due diligence after their final bid and after having been granted exclusivity by the sellers.
However, due to an improved deal finance market in the Nordic countries throughout 2013, the pendulum has now definitely swung back. In 2014, it was time for most bidders to reconsider this strategy, at least if the bidder intended to close a deal ahead of the competition. The same trend has continued into 2015 and 2016, except for transactions in the oil and gas segment, which for the moment is suffering from a more depressing outlook. Both in 2014 and in 2015, we observed an increasing number of potential buyers facing their bids being rejected, due to their reluctance to comply with the "rules of engagement" proposed by sellers' advisers. Even if it still seems that many buyers, depending on the circumstances, continue to be able to call the shots in the private M&A market, a buyer should carefully evaluate the competitive situation before deciding to use the same strategy as in 2011 and 2012. Still, in order to reduce initial costs, potential bidders seem to prefer conducting a two phased due diligence investigation. Such a two-phased investigation will normally start with a high-level investigation, to ascertain to what extent the proposed target meets the bidder's acquisition requirements. Provided there is a satisfactory result from such high-level investigation, a more detailed or confirmatory investigation is conducted.
Throughout 2011 and 2012 there was an increased focus on more extensive due diligence from many investors, who were trying to avoid some of the pitfalls experienced during the 2007 to 2009 downturn. This trend appears to have continued throughout 2014, 2015 and into 2016. Due diligence to test valuation assumptions and operational risks is a particular focus area for private M&A transactions and also for deals in the Norway market. For target groups with international operations, regulatory and compliance risk is also a particular focus area for due diligence. This is due to the reputational and financial harm that can arise for a buyer, if it later surfaces that it has acquired an operation associated with potential bribery or other forms of corruption.
Cross-border litigation and arbitration
Transactions principally relating to assets located in Norway, or transactions involving shares in Norwegian target companies, are customarily and predominantly governed by Norwegian law. Occasionally, parties may agree that foreign law will apply to such share purchase agreements, but this is not common market practice unless both seller and buyer are based outside Norway. Even if all parties are domiciled outside Norway, it is not uncommon to agree Norwegian law for transactions involving assets located in Norway unless both the seller and buyer are domiciled in the same foreign jurisdiction, in which case the parties very often prefer the laws of their home state jurisdiction.
When foreign law is applied to a Norwegian transaction, the parties in most cases agree that the laws of another Scandinavian country apply (typically, Swedish or Danish law). Alternatively, the parties agree that English or New York law will govern the share purchase agreement, typically relating to transactions in the shipping, oil/gas and oil services industries. However, very often Norwegian and Scandinavian parties to a share purchase agreement will resist US or English law applying to such agreements. Still, English law may be the preferred choice if both the seller and the buyer are domiciled in countries that base their legal systems on an Anglo-Saxon tradition. However, today (contrary to the situation 15 to 20 years ago), an acquisition agreement governed by Norwegian law quite often contains most of the provisions common internationally in acquisition agreements.
If such share purchase agreements are to be governed by foreign law, a dispute in relation to the transfer of shares will often require the dispute to be settled in a foreign court. The foreign attorneys will under such circumstances often have to request Norwegian attorneys to issue and submit legal opinions in relation to Norwegian law to such foreign courts, for example to clarify to what extent the parties are able to validly agree that the matter in dispute can be solved by foreign law. The latter may prove cumbersome and costly, and therefore even foreign parties may decide to compromise and apply Norwegian law to transactions involving Norwegian assets, even if both parties are located outside Norway. Still, in certain industries and sectors, English law may be the preferred choice of law, even for transactions involving Norwegian assets/target companies.
Arbitration provisions are commonly included in private M&A documents in Norway, in particular in the following cases:
Cross-border transactions involving one or more parties located outside Norway. Under such circumstances, an arbitration provision may offer enhanced international enforceability compared to court judgements (see below).
In transactions where the parties want to agree a neutral forum for resolving any potential disputes, that is, to ensure that a dispute is resolved at a place where neither parties is considered to hold home advantage.
In transactions where the parties consider that a dispute might require specialist knowledge of a sector or industry to be resolved, or where particular technical expertise is considered needed. Under such circumstances, the parties' ability to select an arbitrator will be considered important.
In transactions where the parties want to ensure that information regarding potential disputes between themselves remain confidential.
Where there are perceived to be other benefits for adopting a private dispute resolution procedure provided by arbitration.
In structured sales processes, sellers tend generally to propose arbitration provisions in their first drafts of the transaction documents, at least for large and mid-market transactions where such a dispute resolution mechanism is considered justifiable from a cost perspective. Such provisions are less commonly included in smaller transactions between domestic parties. However, arbitration is not right for every party in every transaction or situation, even for large transactions. It might have drawbacks, depending on a party's particular circumstances and objectives. It is therefore necessary to make a considered decision in each case.
The Norwegian Arbitration Act 2004 (NAA) provides a general statutory framework for arbitration and arbitration agreements under Norwegian law, and is based on the UNCITRAL Model Law on International Commercial Arbitration 1985. The NAA allows parties to agree to resolve all disputes arising from a particular legal relationship by arbitration. The Norwegian courts readily enforce arbitration agreements and must stay a court action on the application of a party to an arbitration agreement, provided the court is satisfied that a valid and operative arbitration agreement exists.
In 1961, Norway ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. Norway is also a party to the Washington Convention on the Settlement of Investment Disputes between States and Nationals of other States 1965. Arbitration awards falling under the scope of these conventions therefore have legal force and are generally enforceable in Norway, in accordance with the Norwegian Civil Procedure Act section 19-16, and the Norwegian Enforcement Act section 4-1(2)(f).
Recent developments and proposals for reform
Limitation on interest deductions
At the end of 2013, the Norwegian Parliament adopted a bill, taking effect from 1 January 2014, that broadly restricts interest deductions arising on related-party debt and, in some circumstances, also on third-party debt. Additional restrictions to this rule have now been implemented with effect from 1 January 2016. This limitation rule, however, applies 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 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% from 1 January 2016) 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.
As a rule, it is interest paid to related parties (that is, internal interest) that will be restricted. 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.
If a related party to the borrowing company has issued security for loans raised from an external lender (typically a bank), the interest paid to that external lender will, (subject to certain exemptions), be considered as internal interest that will become subject to limitation for deduction for tax purposes. On 24 April 2014, the Ministry of Finance adopted a regulation that sets out certain exemptions from this rule relating to:
Third-party loans from an unrelated party secured by a guarantee from another group company, provided that 50% or more of the stock in the relevant group company issuing such security is owned or controlled by the borrowing company.
Third-party loans from an unrelated party but where a related party provides either:
a pledge over that party's shares in the borrowing company; or
a pledge or charge over the related party's outstanding claims towards the borrowing company.
Based on the current regulation, it must be assumed that negative pledges provided by a related party in favour of a third-party lender cannot be deemed as security within the scope of the interest limitation rule.
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. 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.
Note that the government in the Fiscal Budget for 2016 discussed potential further amendments to the interest deduction limitation-rule in a separate proposed tax reform report. In this report, the government indicates that it will continue its work to implement further restrictions, among others to consider all external debt into the interest-capping rule, that is, disallowing tax deductions on interest payments on external bank financing. Before considering such measurements, the government will both:
Seek 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.
Take into account the final output of the OECD/G20's project on Base Erosion and Profit Shifting involving interest deductions and other financial payments.
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 and the proposed amendments of these rules on the way in which any potential negative effects could be mitigated. The government did, however, not propose any further restrictions to the interest deduction limitation rule in the Fiscal Budget for 2017. Also 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.
Tax reforms proposed
On 7 October 2015, the government proposed several changes to the Norwegian tax systems that may influence investors' investment decisions and how such investments should be structured in the future. Some of these proposed amendments have been implemented, while others are expected to be implemented during 2017/18. For more details about these proposed amendments, see Question 27, Private acquisitions in Norway: overview ( www.practicallaw.com/0-539-8165) .
Act on Alternative Investment Fund Managers
On 20 June 2014, the Norwegian Parliament adopted new legislation implementing Directive 2011/61/EU on alternative investment fund managers (AIFM Directive) into Norwegian law. The Act on Alternative Investment Fund Managers (AIF Act) entered into force on 1 July 2014.
The AIFM Directive seeks to harmonise the regulation of the various forms of investment management, including venture funds, hedge funds and private equity funds. The new legislation will apply to Alternative Investment Funds (AIF) irrespective of their legal form and permitted investment universe, subject to such AIF fulfilling certain defined criteria with regard to the size of funds under administration. Although most of the AIF Act is not directed at M&A specifically, there are certain rules that are likely to have a sizeable impact on M&A transactions. In particular the following rules must be observed:
The first applies when an AIF 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); or
is a non-listed private or non-listed public company, but employs 250 or more employees, and either has annual revenues exceeding EUR50 million 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.
The second is a rule stating that, if an AIF acquires shares in such non-listed companies as set out above, and the AIF's proportion of shares reaches, exceeds or falls below 10%, 20%, 30%, 50% or 75% of the votes, then the AIF's investment manager will, as soon as possible and no later than within ten business days, inform the Norwegian Financial Supervisory Authority (FSA) about the transaction.
The AIF Act also imposes limitations on financial sponsors' ability to take part in post-closing asset stripping of listed target companies. In line with this, the Norwegian Ministry of Finance has implemented a regulation under the AIF Act that limits the financial sponsors' ability to facilitate, support or instruct any distribution, capital reduction, share redemption or acquisitions of own shares by a listed target, for a period of 24 months following an acquisition of control of such target, if either:
any such distributions and so on 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 may not be distributed under the law or the statutes; or
any such distributions and so on 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 to 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 also applies to non-listed companies that fall within the thresholds set out in the legislation with regard to number of employees, revenue, and so on.
It is likely that the above limitation rule to some extent will limit private equity funds' ability to conduct debt pushdowns in connection with leveraged buyout transactions, and that this again will make such leverage buyouts more difficult to achieve.
Further merger control amendments introduced and so on
From 1 January 2014, the thresholds for competition filings was amended, and several other changes were made to the Norwegian competition legislation. In March 2016, Parliament adopted among other things a proposal for expansion of the scope of a simplified merger control procedure (see Question 34, Private mergers and acquisitions in Norway: overview). As of 1 July 2016, Parliament further abolished the existing Norwegian substantive test, and instead aligned the Norwegian substantive test with the test applied under the EU rules (see Question 34, Private mergers and acquisitions in Norway: overview).
Amendments to the Norwegian financial assistance prohibition proposed
The government now also proposes further easing of the Norwegian financial assistance prohibition rules, by abolishing the requirement that a buyer (borrower) must deposit adequate security towards the target company, if the buyer receives financial assistance from the target in the form of security for the buyer's acquisition financing. If adopted in its current proposed form, Norway will finally have a type of whitewash procedure that could work also for leveraged buyout (LBO) transactions.
We expect the main factors affecting the Norwegian M&A market in 2016/17 to be the following:
The macroeconomic outlook for 2016/17 continues to be more mixed than in 2014/15, which makes it difficult to predict how the market will move over the next 12 months.
A potential slowdown in China, the impact of possible interest rate rises and the potential for turmoil in emerging markets, may turn out to contribute to a reduction in the global deal-volume, which may also lead to reduced M&A activity in Norway.
At the same time European businesses continue looking for new sectors to expand into in order to diversify their activities. These businesses will normally prefer investing into familiar geographies, which again could have a positive effect on the overall deal volume also in Norway, even if many investors continue to adopt a cautious view on Norwegian economic growth for 2017, resulting from the low, but now slightly rising, oil and gas prices. At the same time, we have witnessed an improvement in Norway’s competitive position resulting from the Norwegian kroner exchange rate development.
Many experts expect, that global M&A and IPO activity will continue to rise, peaking in 2017 in developed markets and 2018 in emerging markets. Indirectly, increased global M&A activity is something that most likely will also have a positive impact on the Norwegian activity level, with slight sector variations.
Increased focus on digital transformation continues to change current business and revenue models. Companies are expected to be forced to reassess fundamental aspects of their business, which again is expected to lead to further consolidation with accompanying M&A activity.
Investments in the Norwegian oil and gas sector are expected to continue to wind down and flatten out for 2016/17. Nevertheless, we expect increased consolidation and distressed activity in the oil and gas sector, in particular in the rig and offshore sector. During the end of 2016 and beginning of 2017 we also believe there could be an upswing in the market due to counter cyclical players entering the market and driving increased deal activity, since investment activity on the Norwegian continental shelf by many experts is expected to pick up during 2018/19. The quest for geographic expansion and the need for new technologies and services may also contribute to an additional upswing in M&A activity in this sector.
In general, most investors will probably continue to view Norway as a good place to invest, due to its highly educated workforce, technology, natural resources, well-established legal framework for M&A transactions and strong regulatory system.
The new government has proposed further reductions in the general corporate tax rates, which generally may improve the attractiveness of Norway as a place to invest for foreign investors. This may again have a positive impact on Norwegian M&A activity. However, the results of these expected reforms remain to be seen.
There is also still a lot of cash waiting to be invested, and many corporates seem to want to turn their attention back to growth, which again normally also means increased M&A activity for the Norway market.
There still exists an exit overhang in the current portfolio of many private equity and venture capital sponsors due to the surge in such investments during the boom years of 2005 to 2008. These funds will continue to feel pressure to return capital to investors. We therefore expect that the number of sponsors looking to exit their existing investments may continue over the next 24 months all depending on the market conditions within the relevant industry sector. This may again have a positive impact on M&A activity in the Norwegian market.
The conservative government has stated that it still wants to reduce ownership "over time" in certain partially state-owned companies, and to sell certain state owned enterprises. This is also expected to have some positive impacts on general activity in the Norwegian M&A market. To what extent this may continue most likely depends on the outcome of the upcoming 2017 Norwegian Parliamentary election.
On the due diligence side of deals, we expect to see a continuing focus on legal compliance due to regulators in general becoming more aggressive in pursuing enforcement of bribery, corruption and money laundering laws. We also expect to see a continuing increase in the use of W&I insurance, which again may influence the deal terms used in the M&A market. However, on an overall basis, we do not expect to see a particular increased use of seller friendly terms in the final sale and purchase agreements that are signed. We do however anticipate that sellers in the year to come will continue to attempt putting pressure on bidders by proposing more seller friendly terms, in particular if the buyer universe consists of buyers from a market in which for the last few years there has been an increased use of seller friendly terms. To what extent sellers actually will be able to succeed very much depends on the parties bargaining position in each individual transaction. If prices are going to go up, we still expect that most buyers will stay conservative, and hold back on the deal-terms to balance out any increased risk exposure resulting from having to pay higher multiples for a target. Even so, there will always tend to be some exceptions from this, and therefore we expect to hear counsels on the sell side arguing that "What's market" continues to shift.
Ole K Aabø-Evensen, Senior Partner and Co-head of M&A
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, 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, 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.