Acquisition finance in Norway: overview
A Q&A guide to acquisition finance in Norway.
This Q&A is part of the global guide to acquisition finance. Areas covered include market overview and methods of acquisition, structure and procedure, acquisition vehicles, equity finance, debt finance, restrictions, lender liability, debt buy-backs, post-acquisition restructurings and proposals for reform.
Market overview and methods of acquisition
Acquisition finance market
The following parties can be involved in acquisition finance:
Legal entities of the acquirer. This will either be a private equity fund or public company.
Special purpose vehicles (SPVs). On the borrower side the acquirer will set up SPVs for the acquisition.
Banks. On the lender side, prominent Norwegian or Nordic banks typically offer both an acquisition facility and working capital facilities.
Vendors. Vendor financing by way of seller's credit is also common, usually subordinated to the bank financing. The vendors and the banks will then enter into an inter-creditor agreement (see Question 7).
Hedge funds or speciality funds. Hedge fund or speciality fund financing by way of mezzanine or second lien funding is less common, but has been increasingly observed in recent years.
Methods of acquisition
Unlike share transactions, a gain arising from the sale of an asset (or disposal of a business as a whole consisting of several assets and liabilities) is subject to taxation in Norway (and a loss will correspondingly be tax deductible). As a result, most acquisitions in Norway are carried out as share purchases (see below, Share acquisition). However, asset purchases can sometimes occur due to tax reasons, or if assets are purchased from a financially distressed company.
The documentation and procedures required for carrying out an asset acquisition can also, in some circumstances, be more complex than a share transfer, for example in relation to:
Change of contracting parties in customer contracts, as this generally requires customer consent.
Transfer of employees as part of an asset sale, which can become subject to special requirements regarding involvement of the employees.
Purchasing shares is the most common method of acquiring business entities in Norway, in particular due to the tax exemption for capital gains on shares if the seller is a domestic limited liability company (aksjeselskap).
In a merger, the assets and liabilities of one entity are consummated by another entity by operation of law, which does not give rise to tax obligations under domestic law, provided that the detailed provisions in the Tax Act are complied with. The process for carrying out a merger is lengthy, as a plan for the merger must be approved by the relevant corporate bodies of the entities involved, and a statutory creditor notification period of six weeks also applies. As a result, mergers are commonly used as a tool for intra-group reorganisations (often following a share acquisition), but not to the same extent as a tool for amalgamation between independent parties. Companies that are tax resident in Norway are covered by the tax exemption. However, a Norwegian limited liability company is able to implement a merger with limited liability company resident in another EEA state. If the receiving foreign company is resident in a low-tax jurisdiction within the EEA, it is a requirement that the company is genuinely established and carry out genuine economic activity in the relevant EEA state. Provided that the requirements in the Tax Act are complied with, a merger between two foreign limited liability companies can be implemented in accordance with the principle of tax continuity in Norway. If assets, rights or contractual obligations are transferred out of the Norwegian tax jurisdiction, these transfers are taxed under the rules on exit tax.
Structure and procedure
Acquisition financing provided by financial institutions in Norway is increasingly documented by way of a loan agreement based on the Loan Market Association acquisition finance standard, adjusted to reflect Norwegian law and market conditions.
Most transaction documents are in English, and the drafting is usually carried out by lender counsel. There is no legal requirement in Norway that any documents must be translated from English to Norwegian (or vice versa) for the purpose of the acquisition financing. However, some of the standard form floating charges that are generally part of the security package are only available for submission to the relevant registry in Norwegian.
Funding most frequently occurs based on completed loan documentation, with certain conditions precedent being postponed to a certain period post closing (for example, accession of target companies, "clean-ups" and so on).
For the acquisition of a listed company, if the acquirer launches a mandatory or voluntary bid, a financing condition may be part of the bid. If a firm commitment from lenders is provided, or more commonly, a loan agreement is signed and only the standard conditions precedent remain as conditions for utilisation, the financing condition will be lifted and the bid (more or less) becomes unconditional. Settlement of a mandatory offer must be backed by a bank guarantee from a bank authorised to carry out business in Norway.
For private acquisitions, this varies depending on the funding needs of the acquirer. Often, as soon as the loan agreement is signed, the acquirer will move quickly to close the acquisition.
For acquisitions of both private and listed companies in Norway, a bidding company structure is generally established. This involves establishing at least one special purpose vehicle (SPV) that will be the bidder for the shares. This is usually a Norwegian private limited liability company (aksjeselskap) (AS). Depending on the needs of the ultimate buyer, another SPV (midco) can be established to own the shares in the bidding company, which is also an AS. Depending on the acquirer (for example, a private equity fund), a further SPV incorporated in another tax efficient structure can be designated to own the midco. A common jurisdiction for such a vehicle is Luxembourg.
Structures and documentation
Debt financing structures
Bank debt is the most common source of acquisition debt financing in Norway. The senior loan facility is normally structured with an amortising tranche A and a bullet tranche B. Additionally, it is common to have separate tranches for working capital needs of the target as well as contemplated acquisitions or unfunded liabilities (acquisition or capital expenditure (CAPEX) tranches) to the extent applicable.
Vendor notes are also quite common, in most cases structurally subordinated to the bank debt so that this debt is obtained at the parent level, while the bank debt is incurred at the bidding company level. Vendor notes typically have payment-in-kind (PIK) interest and with a bullet repayment date following the maturity of the bank debt (that is, a one-off repayment of principal that has not been gradually reduced over a period of time).
For larger acquisitions, junior debt is sometimes also added in between the senior bank debt and a seller's credit. Such junior debt is most commonly also secured, either obtained at the parent level and with security over shares in the bidding company, or incurred at the bidding company level and sharing into the same security as the senior bank debt (but ranking second in the agreed waterfall between the parties). A junior loan can sometimes be in the form of a convertible loan. "True" mezzanine loans have also been used. However, such loans have not been commonly used in recent years. The features of the mezzanine loans have previously followed the usual structure, with a low payable interest and remaining interest as PIK, and have contained equity kickers (that is, a warrant or an option to buy equity) in the form of warrants.
There is an active high-yield bond market in Norway that has typically been used for acquisition financing in the real estate sector (for example, purchasing SPVs owning real estate). High-yield bonds are not commonly used for acquisition financing in other sectors, but this may change due to a suggested change to the Norwegian financial assistance restrictions, which will ensure that providers of acquisition financing can get a better security position than previously (see Question 17).
Norwegian high-yield bond documents are typically drafted on standard documents commonly used in the Nordic high-yield bond market.
Bank financing is almost always provided on documentation drafted on the Loan Market Association (LMA) template for leveraged financing. However, the documentation is somewhat simplified as some of the provisions contained in the LMA are already covered by domestic law.
Inter-creditor arrangements are common between various classes of creditors or between mortgagees. Generally, a junior creditor is not allowed to enforce its security without the consent of the senior creditors.
Contractual subordination of debt is possible and common in Norway, both in relation to the amounts payable and the procedures to enforce security. Contractual subordination can be achieved by a declaration from the junior security lender to not collect its debt until the senior debt is paid in full.
Structural subordination can be achieved by loans being granted to entities in the same group at different levels of the group structure, that is, further away from the source of income.
Payment of principal
In both contractually and structurally subordinated structures, there is generally an inter-creditor agreement between the lenders on the various levels of debt regarding the priority for payment of principal, so that the subordinated loan will have limited or no payment of principal during the tenor of the senior ranking loan. Vendor notes will typically be a bullet loan maturing after the senior loan.
In both contractually and structurally subordinated structures, there is generally an inter-creditor agreement between the lenders on the various levels of debt as to the priority for payment of interest, so that both senior and junior ranking loans will be paid interest on the debt during the tenor of the loan, but the senior ranking loan will usually take priority in an event of default. Parts of the subordinated debt may be on payment-in-kind (PIK) interest terms, this is for example the usual terms for vendor notes.
See above, Interest.
Sharing of security and contractual subordination of payment through a payment waterfall provision is a common structure in Norway.
Subordination of equity/quasi-equity
Generally, Norwegian law does not contain any legal doctrine regarding equitable subordination carried out by a bankruptcy court in the process of a court lead restructuring of a company. Under Norwegian bankruptcy law, transactions made by the company and which are deemed "extraordinary" in the circumstances before bankruptcy, or which gives rise to a fraudulent preference of certain creditors, can subsequently be set aside by the courts following request from the bankruptcy estate manager. Extraordinary payments can include:
Payments made by other means than money (transfer of assets).
Payments made prior to the original maturity date.
Payments that have substantially weakened the debtor's financial position (at the expense of other creditors).
Extent of security
Due to financial assistance restrictions currently in place (see Question 10), target companies cannot provide security or guarantees for the acquisition financing.
The bidding company generally provides security over the shares in the target company, as well as any bank accounts it may have and any monetary claims it has on the target company (for example, any intra-group debt).
Any other special purpose vehicle (SPV/midco) or parent company must only provide security over the shares of the bidding company as well as any intra-group loans to the bidding company, due to the restricted interest deduction for intra-group loans, to avoid providing a full parent guarantee. A full parent guarantee may cause Norwegian tax authorities to classify the external financing as intra-group debt for interest deduction purposes (see Question 9).
Types of security
Shares. The most common form of security granted in a Norwegian acquisition financing is a charge over the target shares.
Inventory. The most common form of security over an inventory is a floating charge. A floating charge over inventory is effected on registration with the Norwegian Register of Movable Property (Løsøreregisteret). As the bidding company/another SPV/parent company generally will not have an inventory or other tangible assets, an inventory charge is usually provided by the target companies where relevant as security for a working capital facility (and not for the acquisition facility due to financial assistance restrictions, see Question 10).
Bank accounts. Bank account charges over the accounts of the bidding company are usually provided.
Receivables. The most common form of security over receivables is a floating charge. A floating charge over the trade receivables is effected by registration with the Norwegian Register of Movable Property. It is usually only provided by target companies for working capital facilities.
Intellectual property rights (IPRs). The most common form of security over IPRs is a floating charge. A floating charge over the operating assets, including IPRs, is possible. Security over patents can be taken out separately as a charge registered over the patent number in the Norwegian patent register. Due to the financial assistance rules, such security is usually only provided by target companies for working capital facilities (see Question 10).
Real property. The most common form of security over real property is a mortgage with registration in the Norwegian Property Register (Statens Kartverk). A mortgage over real property can, due to a special exemption from the main financial assistance prohibition rules, also be provided by the target company and any of its subsidiaries in favour of acquisition financing incurred by the bidding company, if the target company is a real estate company (that is, not holding other assets than real estate that is not under construction or development, and not having employees other than a general manager).
Movable assets. The most common form of security over registrable movable assets is a mortgage. Registrable movable assets, such as airplanes and ships/rigs (and similar) can be mortgaged by registration in the applicable registries.
Upstream guarantees may be illegal due to the financial assistance prohibitions (see Question 10). Downstream guarantees are legal from a corporate law perspective, but can have adverse tax consequences (see Question 9).
A security trustee or security agent is commonly used in syndicated deals. The security trustee or agent in syndicated deals (as opposed to bond finance in the Norwegian bond market) does not have standing before the Norwegian courts as such (that is, it will need powers of attorney from the syndicate banks). However, Norwegian courts recognise that the security can be held by a trustee or an agent on behalf of the lending syndicate.
Norway does not have any specific thin capitalisation rules in the ordinary tax regime. However, according to transfer pricing rules (and to a certain extent national general anti-avoidance rules), interest payments relating to loans from or furnished by a related party exceeding the arm's-length loan capacity of the debtor may be disallowed.
Additionally, the possibility to deduct interest on intra-group loans is limited by a specific limitation rule, whereby interest exceeding 25% of earnings before interest, taxes, depreciation and amortisation (EBITDA) (calculated for tax purposes) is disallowed. However, the deductibility that cannot be used in one year can, as a rule, be carried forward for up to ten years. External loans that are guaranteed by a related parent company will be considered internal debt for this purpose.
Interest must always be arm's-length based. General anti-avoidance provisions regarding utilisation of tax positions are applicable.
In addition to the above, special rules apply for interest deduction for companies within the special regimes for oil taxation and tonnage taxation.
For a guarantee, loan or security provided by a Norwegian company in favour of the purchaser of shares in the company or its parent company to be valid and binding, both:
The financial exposure of the company must not exceed the amounts that the company has available for distribution of dividends to its shareholders.
Adequate security must be deposited for the repayment or recovery claim.
Additional requirements are that:
The creditworthiness of the purchaser must be evaluated by the board of directors.
The assistance must be approved by the board of directors.
The assistance must be approved by a general meeting of the company according to a special procedure.
However, exceptions are made for target companies that are pure real estate owning entities registered as private limited liability companies (that is, not holding other assets than real estate which is not under construction or development, and not having employees other than a general manager). These entities are generally exempt from the above restrictions.
Apart from acquisitions, the Norwegian Limited Liability Companies Act restricts the ability of a Norwegian company to give guarantees for the debt of its shareholders or close associates of its shareholders. However, the company can give guarantees for the debt of its parent company or other group companies, provided that such guarantees economically benefit at least one company in the group and are made on terms that are commercially ordinary (at arms' length). The test for corporate benefit for at least one company within the group is not strict.
For acquisition financing, the rules are stricter. Generally, effective financial assistance for acquisition financing can only be granted over the shares in the targetcompany and receivables against that company, as well as in the form of real estate held by a target company that is a pure real estate owning entity. However, financial assistance within the target group for refinancing of existing indebtedness in the target group is generally permitted on the terms set out above.
Regulated and listed targets
Several industries in Norway are regulated to a varying degree, including banks, financial institutions and insurance companies, aquaculture and oil production. Concession requirements vary and must be considered on a case-by-case basis.
Effect on transaction
Concession requirements can prevent the acquisition of a target until concession is achieved. For example, acquisition by a buyer (or several buyers acting in concert) of 10% or more of the share capital or voting rights, or a stake that otherwise gives the owner a "significant influence" over a Norwegian bank, financial institutions and insurance companies will be subject to concession.
Additionally, according to Norwegian merger regulations, all mergers and transactions involving acquisition of control (a "concentration") must be notified to the Norwegian Competition Authority (Konkurransetilsynet) if:
The undertakings involved in the transaction have a combined annual turnover in Norway of NOK50 million or more.
At least two of the undertakings concerned each have an annual turnover exceeding NOK20 million.
An automatic stand-still period ending at the earliest 15 working days after a filing has been made applies to all notifiable concentrations. If the transaction is of a certain magnitude so that it requires merger clearance at an EU level, the Norwegian filing requirements are suspended and the EU rules prevail.
Specific regulatory rules
The acquisition of companies listed in Norway, Norwegian and foreign (with a few exceptions), is subject to special regulations partly based on Directive 2004/25/EC on takeover bids (Takeover Directive), which has been adopted by Norway. The regulation includes:
Insider trading/inside information restrictions.
Shareholder disclosure requirements.
Various requirements for voluntary and mandatory offers.
Shareholding disclosure requirements are triggered when a party acquires the following amounts of share capital or votes in the listed target company or reduces its holdings to such levels, requiring the holder to announce its holdings to the market:
5% of share capital or votes.
10% of share capital or votes.
15% of share capital or votes.
20% of share capital or votes.
25% of share capital or votes.
One-third of share capital or votes.
50% of share capital or votes.
Two-thirds of share capital or votes.
90% of share capital or votes.
This includes options and other rights to shares held by a company or its close associates.
A requirement to make a mandatory offer for the shares in the target is triggered when the buyer acquires one-third of the voting rights in the target (with repeat triggers at 40% and 50%).
Voluntary and mandatory offers must be notified to and published by the Oslo Stock Exchange (Oslo Børs).
An offer document must be prepared in connection with an offer and must be approved by the Oslo Stock Exchange in advance. The offer document must be distributed to all shareholders of the target and made known to all its employees.
Methods of acquisition
Where consideration offered in a takeover consists of securities (wholly or partly) this can lead to a requirement to prepare a prospectus for those securities.
A mandatory offer must offer a pure cash alternative, but may also offer alternative forms of consideration. Further, a mandatory offer must be unconditional whereas a voluntary offer can be made conditional (for example, on receipt of 90% acceptance or approval from relevant authorities).
The buyer must treat all shareholders equally, although different classes of shares can be treated differently.
Settlement of a mandatory offer must be backed by a bank guarantee from a bank authorised to carry out business in Norway.
If the purchaser holds more than 90% of the shares of the target and a corresponding proportion of the votes that can be cast at general meetings of the target, the buyer has the right to acquire minority shareholdings on a compulsory (squeeze-out) basis (and minority shareholders have a right to demand that the bidder makes a compulsory acquisition).
Norwegian employers are generally required to establish a pension scheme for their employees. Practically all new schemes are defined contribution schemes. Established pension schemes can affect the terms on which asset deals may be carried out, as they affect employees' rights.
Companies may also have defined benefit schemes for all or certain of their employees. Sponsors of these schemes must pay premiums to the schemes, which can vary depending on the financial development of the scheme, as well as regulatory developments. If the sponsor also has secured its pension scheme through a pension trust (pensjonskasse), discontinuing schemes can prove complicated, and require additional funding from the sponsor. New and higher capital requirements are expected to be introduced for pension trusts and pension costs are expected to increase in the coming years.
Norway does not have special rules relating to lender liability, but liability can arise under the ordinary provisions of law. In order to claim for damages against a lender, the following three conditions must be met:
A basis for liability must be present.
There must be some kind of economic loss.
An adequate and foreseeable causality between the basis for liability and the economic loss suffered.
The basis for liability can arise both as a breach of contractual obligations (for example, breach of contract giving rise to an economic loss for the counterparty) and outside of contract. A failure to pay out the loan if all conditions under the loan agreement are met is an example of breach of contract that can give rise to liability for the lender. Outside of contract, there can be a professional liability for a lender not acting with appropriate professionalism and in breach of a code of conduct, causing an unnecessary loss for the debtor (or the other creditors of the debtor).
Debt can generally be traded under Norwegian law, and the consent of the debtor is only necessary if required pursuant to the provision of the underlying loan agreement.
Lending is at the outset a regulated activity under Norwegian law. However, there are exemptions for lending activities that do not occur on a regular basis. As a result, both sponsors and affiliates of a borrower (as well as the borrower itself) can repurchase its debt to the extent such buy-back is not prohibited under the terms of the relevant loan agreement.
In bank facilities, a debt repurchase by the borrower is unusual and most commonly prohibited through the terms of the loan agreement. However, debt purchases by sponsors/affiliates can occasionally be seen in bank facilities, although transfer of lender positions to a sponsor or affiliate is often strictly limited in the loan agreement. On the contrary, in the high-yield bond market it is an agreed possibility for the borrower or its affiliates to repurchase its bonds.
For repurchases of debt in both bank and bond loans, it is common in the Norwegian market that any debt held by the borrower or its sponsor/affiliates will be disenfranchised with respect to voting.
Generally, the new group structure will regularly be structured for tax optimisation and aim to make use of any tax benefits accumulated in the target company to the extent permitted by law (for example, using losses carried forward in one company to set-off against income in another).
Additionally, the capital structure of the new group will regularly be rebalanced to utilise any possible beneficial position of the target (for example, trying to utilise capital in the target to balance out or service debt in the buyer).
For further details on the restriction on financial assistance, see Question 10. These restrictions can also restrict possible post-acquisition restructurings such as mergers between buyer and target, which are generally deemed problematic.
The Norwegian Government has proposed that the restrictions on a company's ability to grant financial assistance for acquisition financing relating to the acquisition of itself will be lifted for private limited liability companies. This will mean that any private limited liability company being acquired by another private limited liability company or public limited liability company can grant financial assistance, provided that the terms of the assistance are agreed based on commercially ordinary terms. Similar changes are proposed for public limited liability companies, except that the financial assistance must be limited to an amount equalling the target company's dividend capacity.
In each case, the financial assistance must be approved by a two-thirds majority at the target's shareholders' meeting and be subject to a credit assessment of the recipient.
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Audun Nedrelid, Partner
Advokatfirmaet BA-HR DA
Professional qualifications. Norwegian law qualified lawyer
Areas of practice. Debt capital financing (including acquisition financing, asset-based financing, project financing and debt capital markets).
Magnus Tønseth, Senior Associate
Advokatfirmaet BA-HR DA
Professional qualifications. Norwegian law qualified lawyer
Areas of practice. Financing (including debt financing and restructuring of distressed loans).
Snorre Lyse, Senior Associate
Advokatfirmaet BA-HR DA
Professional qualifications. Norwegian law qualified lawyer
Areas of practice. Financing (including debt financing and restructuring of distressed loans).