During the last months, Norway has been witness to a spectacular case involving the Norwegian State and government, the top echelon of the current Norwegian cabinet and two companies in the Swedish Wallenberg sphere on one side and on the other billionaire fisherman Kjell Inge Røkke.
The undisputed winner of this battle has now been crowned; Kjell Inge Røkke.
How did Røkke come to inflict such a painful and humiliating loss of face and likely of economic value on not only the Norwegian State and ruling cabinet, but also on two of the most powerful entities in Scandinavian society, the Norwegian Labour Party and the Swedish Wallenberg family? Quite simple; he had ensured that he was in total control by applying the relevant agreements and applicable laws and regulations in a correct manner. He stuck to his guns when his counterparts became very unhappy with the consequences this had for them.
This highlights the need for all investors (with an ambition to have control and influence) to secure adequate legal protection when becoming minority stakeholders in Norwegian limited liability companies. The main lesson to be learned from the case is that minority right provisions in regards to the target company will not be adequate for such an investor unless extended to include the group companies as well.
Government investment - 2007
To get the full picture we have to go back to 2007. This was the year the government resolved to invest in the OSE-listed Norwegian engineering company Aker Solutions ASA. The company is one of many in the Røkke controlled Aker Group. Aker Solutions is a holding company for several operative companies, including Aker Solutions AS (AKSO). The government's incentive and main argument was that the investment was an important step in order to secure that Aker Solutions remained a Norwegian owned company, which, allegedly, was in the interest of Norway.
A joint ownership through the holding company Aker Holding was established with the Røkke controlled Aker owning a 60% majority stake, the Norwegian State 30% and the Wallenberg family controlled Saab and Investor with 7.5 % and 2.5% respectively. Thereby the Røkke controlled Aker had the controlling interest of Aker Holding. Aker Holding in turn owns 40.1% of Aker Solutions and is the dominant shareholder in Aker Solutions.
The government was fully aware that the investment was controversial and anticipated criticism from other political parties and the media. This was especially the case since Røkke has openly courted and formed strong ties to the mighty alliance of the Norwegian Labour Party and the Norwegian Confederation of Trade Unions. The government publicly argued that the investment was favourable for the nation and that the interests of the minority shareholders were adequately secured. This was because the shareholders' agreement entered by the parties prohibited a sale of shares in Aker Solutions and alledgedly provided adequate legal protection in relation to possible transactions with Røkke or Aker.
In fairness to Saab and Investor it must be noted that these companies secured a put option for their shares in Aker Holding with Aker. For the duration of this put option their investment is protected by this exit possibility if Aker survives.
The shareholders agreement
The parties had agreed a shareholders' agreement in order to ensure long term Norwegian ownership of Aker Solutions and also a veto right for the minority shareholders in relation to transactions with related parties.
The agreement states that Aker and the Norwegian state may not sell their shares in Aker Holding / Aker Solutions for 10 years. Further, Røkke has agreed to retain a controlling interest in Aker in this period.
The shareholders agreement also provides the minority shareholders with a right to veto any proposed related party transactions between Aker Solutions and Aker Solutions' shareholders and related parties to the shareholders. This includes Røkke and companies that he controls. Such related party transactions require a unanimous vote from the board members of Aker Holding elected by Aker, the government, Saab and Investor.
The shareholders agreement has the same definition of a related party transaction as the Norwegian Public Limited Companies Act. The government believed that the shareholders agreement provided the minority shareholders with a right to veto any transaction between companies controlled by Røkke and the Aker Solutions group of companies, even though the provisions of the shareholders agreement were not extended to include group companies.
Aker Solutions investments - 2009
Just before Easter in 2009, AKSO acquired four subsidiaries from Aker and increased its shareholding in a fifth subsidiary through a share issue (the investment). The total cost of the investment was approximately kr1.9 billion. The investment was financed by a seller's credit to AKSO, and an expressed intention that Aker Solutions obtained a bond loan in the Norwegian marked to be sub-lent to AKSO for the purpose of financing the investment. Moreover, Aker guaranteed subscription of the bond loan.
Aker Solutions was, with the exception of the intention to participate in the financing, not a direct party in the investment.
Upon disclosure of the investment, numerous critics argued that the investment was not commercially sound, and moreover that the agreed consideration was far above market price. They also argued that the main purpose of the transaction appeared to be to secure Røkke's economic interests in the face of current market turmoil and economic downturn. The movement of the share prices of Aker and Aker Solutions gave the markets verdict; Aker rose sharply and Aker Solutions fell sharply.
The government, represented by leading cabinet members and the prime minister objected strongly and publicly against the investment and what they believed represented an infringement of their veto right.
No veto right
The shareholders agreement sets forth that minority shareholders approval is required for matters which are to be approved by the general meeting of Aker Solution. Hence, the government would have had a veto right if approval of the investment by the general meeting of Aker Solutions was required.
As regards to related party transactions, the Norwegian Public Limited Companies Act requires, subject to certain terms, approval by the general meeting. It is generally acknowledged, and supported by the Act, that a related party transaction requires approval by the general meetings of the parties participating in the transaction, and not approval by the general meeting of the parent or ultimate parent company.
Hence, the investment would have required approval by the general meeting of Aker Solutions, and consequently needed the government's approval according to the shareholders agreement, had Aker Solutions been a party to the investment. This was not the case as AKSO, Aker Solutions subsidiary, was the party carrying out the investment.
Nevertheless, the government claimed that approval by the general meeting of Aker Solution was required, and therefore triggered their veto right. The government argued that (i) Aker Solution was intended to fund the investment, (ii) that Aker Solution, rather than its subsidiary AKSO, was the actual purchaser, and (iii) that using AKSO as a tool for bypassing the minority shareholders veto right represented an infringement of the spirit of the shareholders agreement.
In our view the government's position has little legal merit. Røkke, and his advisors, were evidently convinced of this from the very beginning and did not budge, even when put under massive pressure by the cabinet led by the prime minister.
Phantom rights
Upon investing in Aker Holding, the government advocated that it had secured long term and stable Norwegian ownership to Aker Solutions. This is correct in respect of the shares in Aker Solutions, due to the 10 year lock-up undertaking by Aker. However, the shareholders agreement has no undertakings in respect of sales of the business and assets of Aker Solutions or shares in Aker Solutions subsidiaries.
The government may rely on claiming that sale of all, or most of, the assets and business of Aker Soloutions will require an amendment to the articles of association of Aker Solutions. In particular its stated business and purpose. Such amendments will require a qualified majority resolution passed by the general meeting of Aker Solutions and thereby trigger the government's veto right. However, this seems to be yet another phantom protection for the government.
The articles of Aker Solutions are fairly standard, and such articles can hardly prevent even vast sales of assets initiated and carried out by Aker Solutions, provided that Aker Solutions is thereby not reduced to a pure or predominately cash vehicle.
The government's publicly advocated core ambition and intention therefore seem poorly aligned with the corresponding legal protection negotiated by the government upon investing in Aker Holding in 2007.
Harsh lessons
Where investors obtain a minority position but require influence, particular attention needs to be given to a shareholders agreement and the articles of association.
When investors face becoming minority shareholders, and have expressed an intention to secure influence beyond what follows directly from applicable law, the best advice is to negotiate and enter into an appropriate shareholders agreement.
In hindsight, it often proves to be the case that applicable company legislation provides less statutory protection to minority shareholders than expected. A majority shareholder may, to a very large extent lawfully, use voting powers to implement a wide range of actions that are opposed by the minority shareholders.
Legal protection beyond applicable legislation for a minority shareholder is obtained by entering into a shareholders' agreement with the majority shareholder. Relevant provisions in the shareholders agreement should also be implemented in the company's articles of association in order to enhance the desired protection level.
Breach of provisions that are part of the articles of association may lead to the breaching resolutions being null and void, as opposed to the remedies normally available under a shareholders agreement. Further, the articles of association must be acknowledged by third parties, who are not bound by the shareholders agreement.
The shareholders agreement ought to provide a veto right for actions that are important for securing the minority's investment. In addition to customary provisions related to the general operation of the company and the group, related party transactions should be properly addressed.
The rights provided to the minority shareholders need to be implemented for all group companies in order to be effective and prevent the majority shareholders bypassing the shareholders rights by channelling transactions through subsidiaries of target.
The minority shareholders representation on the executive boards should be considered extended across the target group and not limited to the target company.
Remedies and sanctions in applicable law often turn out to be insufficient, time consuming and costly to enforce. It is particularly challenging to prove adequate loss or damage before a court of law. Moreover, loss or damage may be irrelevant if a transaction at market terms has taken place in violation of minority shareholders veto rights or other right. A breach of the shareholders agreement may in such cases have no noticeable consequence for the majority shareholder. Provisions which allow for agreed minimum cash penalties or put or call options in respect of the shares in target are advisable.
Minority shareholders influence will normally be subject to negotiation where price is predominant factor. This is hardly any consolation for the Government as few will argue that its investment in 2007 represented a bargain.
Adequate measures
The shareholders agreement for Aker Solutions does not contain provisions of the above nature. As a consequence Røkke and his Aker have been able to sell significant assets into the Akers Solutions group, and in the process alleviating Aker of major future financing obligations, despite the objections of the partners and co-shareholders. The case has demonstrated that the shareholders agreement in question did not provide adequate measures to address the stated ambitions of the government. The matter, as a consequence, ended with the government agreeing in public that the investment shall be completed unchanged.
A special hearing has been called by the Parliament. The government will have to disclose relevant matters in relation to the initial investment in 2007 and its subsequent handling of the investment and conflict of 2009. The government's explanation in regards to their endeavours to obtain the legal protection they erroneously thought they had secured is eagerly anticipated.
| Author biographies |
Thomas Farhang
Kvale & Co
Thomas Farhang is head of M&A and corporate at Kvale & Co. He has practised law in Oslo and London since 1995 and has considerable experience from Norwegian and international M&A work. Farhang's practice also extends to tax and litigation. He advises large international companies.
Øystein Løken
Kvale & Co
Øystein Løken is a partner in the M&A and corporate department at Kvale & Co. His practice extends across a wide area of M&A and corporate, with a particular focus on domestic public corporate and securities law. Øystein focuses on advice to listed Norwegian companies. |