In October 2008, Iceland experienced a banking collapse of extraordinary proportions. The overall loss in confidence triggered a run on the country's already weakened currency, the Icelandic króna (ISK). When investors fled the economy, the capital outflow of ISK led to a significant depreciation of the currency which pushed up inflation in an economy that relies heavily on imports. Private sector balance sheets, which were to a great extent funded in foreign currency or inflation-indexed debt, experienced increased leverage. The economic downturn led to a wave of foreclosures of share pledges by the banks that had financed the unprecedented number of buy-outs during the boom years of 2004 through 2007.
After three multinational banks had defaulted, the Icelandic Financial Supervisory Authority (FME) founded three new banks that took over majority of the domestic assets and liabilities on the basis of Act No. 125/2008, commonly referred to as the emergency act. This complicated the matter: not all corporate debt was transferred to the new banks from the predecessors as the debts were duly considered bad assets.
The aftermath of the collapse can be characterised in three ways. First, by the microeconomic efforts, being the financial restructuring of viable companies. These restructuring efforts have, in many cases, led to the ownership of the creditors of the formerly highly leveraged corporates. These creditors turned proprietors are institutional investors and international as well as Icelandic banks, both the newly-established ones and the failed ones that are in process of winding up. These parties now want to, or must due to regulatory constraints, dispose of their holdings.
On the buy side can be found the Icelandic pension funds, competitors, various investment funds, family offices and international investors eyeing Iceland's recovery. Since 2008 the number of bankruptcies in Iceland has been higher than ever before, reflecting the fact that many businesses were not eligible for financial restructuring. The court appointed bankruptcy trustees are required by law to dispose of the bankruptcy estates' holdings.
Second, by the macroeconomic efforts undertaken for the purpose of stabilising the economy. The government of Iceland, in conjunction with the International Monetary Fund (IMF), has been regaining confidence in the sustainability of government debt and government spending has been cut back. In November 2008, the government introduced capital controls with the aim of stabilising the ISK and having its exchange rate determined by current account flows (exports, imports, interest payments and debt repayment), but not capital flows as it was in the years leading up the collapse. The effect of these controls on the M&A environment are discussed below.
Third, by the nation's will to confront the reasons for the financial collapse. Althingi, the Icelandic Parliament, established a Special Investigation Commission (SIC) in December 2008, to investigate and analyse the processes leading to the collapse of the three main banks in Iceland. The SIC delivered its report to Althingi on April 12 2010.
The limiting factors for a healthy recovery and more deal-flow are first the scarce availability of funding as the banking system has yet to fully recover and so much of its activities concern the work- out of their own assets; second, the fact that sellers believe that the Icelandic corporates are undervalued and they are, in some cases, incentivised to wait for a positive development with regards valuation; and third, the capital controls, introduced in 2008, that have had an impact on all customary valuation methods. In general, the uncertainty surrounding the business environment results in investors continuing to discount heavily the assets that are for sale.
The legal environment
On January 1 1994 the European Economic Area Agreement (EEA) took effect. As a member of the 30-nation European Economic Area, Iceland and its laws reflect the business environment of the European Union. Except in a few limited areas, all EU commercial legislation and directives take effect in Iceland.
The legal tradition in Iceland is the same as in the other Nordic countries, being between the Anglo-Saxon common law system and the continental European civil law system, but leaning more towards civil law. The principal source of law is specific acts issued by the Althingi. Traditionally, acts are short and focused on specific issues, such as contracts, limited liability companies, securities trading, sales of goods or competition. It is common within commercial law in Iceland to allow the contracting parties to negotiate whether or not certain articles or chapters of the relevant acts will apply to their contractual relationship.
The legislative branch can authorise the executive branch of the government to issue executive orders. Orders issued by a minister are regulations and agency issued orders are usually referred to as rules. Executive orders are commonly used when there is a need to lay down technical or more detailed rules than are considered applicable in legislation, and must keep within the limits laid down in the respective legislation.
Iceland does not possess a single piece of legislation dealing with mergers and acquisitions in particular. Laws relevant to these transactions are derived from specific acts as well as the general rules on obligations, contracts and torts. When mapping out the legal environment with respect to a merger or an acquisition in Iceland, one must first recognise the legal status of the target. In addition to legislation the target's articles of association may affect the route chosen for an acquisition or tender offer. The articles of association of non-listed companies in Iceland may include restrictions on acquisitions of shares without the consent of the board of directors or provisions as to the right of redemption by the target company itself or its shareholders, should the target's shares be offered or sold to a third party.
Even though the Icelandic legal system allows for reliance upon statutory law and general concepts of fairness, loyalty and reasonableness, contracts concerning M&A transactions do not reflect that parties to such agreements choose to leave much for general law to govern. Most Icelandic M&A transactions involving medium to large corporates will involve most of the same steps and document styles as one would expect to see in a multinational deal governed by English law, but one should always take into consideration the counterparties and the fact that documents will be construed in accordance with Icelandic legal tradition.
The core of liability concerning M&A in Iceland is that any acquisition of shares or business will necessarily involve the creation of some type of contract. Therefore, the principal heads of liability for damages in contract for negligent or fraudulent misrepresentation, or damages under tort of deceit, or damages under the tort of negligence, and compensation or proprietary liabilities in relation to breach of the duty of loyalty will apply. The principal remedies are rescission, discount, damages for breach of contract, damages for tortious loss and damages for breach of duty of loyalty.
Acquisitions of listed companies
If a shareholder, alone or in concert with others, acquires direct or indirect control of a listed company, the shareholder shall extend a takeover bid to other shareholders in the company. For the purpose of chapter X of the securities trading act No. 108/2007 the definition of "control" of a company constitutes a 30% holding of voting rights in that company or the right to appoint or dismiss a majority of the company's board of directors.
A decision on a takeover bid must be disclosed to the market without delay, and the bid must be presented to the employees of the takeover target. The takeover bid should be launched no later than four weeks after the shareholder knew (or ought to have known) that he had control or a decision on the bid had been taken. The offer period ranges from four to 10 weeks.
The put up or shut up principle applies in Iceland and the FME may require a person contemplating a takeover bid to provide, within a specified time limit, a public account of his intentions. The disclosure is binding for a period of six months.
The takeover obligation rests with the person acting in concert which, by increasing its holding, causes the takeover threshold to be reached. If that person is not the leading party in the group acting in concert, the FME Authority may decide that the mandatory bid obligation should be transferred to the leader.
Shareholders who acquire control of companies in serious financial problems, or shareholders that are in the process of restructuring a company because of its financial problems, will not be subject to making a mandatory takeover offer if the board of the company approves the restructuring effort and the shareholders submit to the FME a written and reasoned application requesting to be released from the takeover obligation for a specified amount of time. Such exemptions have been granted since the collapse of 2008 and have proved to be in the interests of shareholders, creditors and the market as whole.
The purchase price in a takeover must reflect the principle of equal treatment of shareholders. Therefore, all shareholders of the same class of shares should receive the offer on the same terms. The purchase price offered in a takeover must be equivalent to the highest price paid by the bidder or by parties acting in concert with the bidder, for shares in the target during the past six months before making the bid. The bid must, however, be at least equal to the latest transaction price for shares in the undertaking in question the day before the takeover obligation arose or notification was given of the takeover bid.
If the bidder, or party acting in concert with the bidder, pays a higher price than stated in the takeover bid during the offer period, the bidder must adjust the takeover bid and offer that price. If a bidder, or parties acting in concert with the bidder, pay a higher price or offers better terms for shares in the company in question during the three months following the conclusion of the offer period, those shareholders who accepted the original offer shall be paid a supplemental payment corresponding to the difference. The offer must be made for cash consideration and/or listed shares; if the shares are not listed there must be cash alternative.
The neutrality rule applies to takeovers in Iceland, but the breakthrough rule and the reciprocity rule have not been implemented into Icelandic law. Therefore, the board of directors must not take any action, other than seeking alternative bids, which may influence the bid except with prior authorisation of a shareholders meeting.
If the bidder acquires more than nine-tenths of the share capital and voting rights in the target company, the bidder and board of the company may jointly decide that other shareholders shall be subject to redemption of their shares. By contrast, a minority shareholder has a right to be bought out.
Capital controls
In the midst of the banking collapse, the Althingi approved a temporary provision to the act on foreign exchange No. 87/1992. The provision authorises the Central Bank of Iceland (CBI), upon approval from the Minister of Economic Affairs, to issue rules that limit or stop certain types of cross-border capital movements or foreign exchange transactions related thereto, that the CBI estimates to cause serious and substantial monetary and exchange rate instability. According to the provision, the authorisation is valid until August 31 2011. The CBI has issued a white paper report stating its conditions for the gradual removal of the capital controls. Most observers believe the authorisation will be prolonged.
According to rules on foreign exchange issued by the CBI (No. 370/2010), all cross-border movement of currency is prohibited. However, transactions involving actual imports and exports of goods and services are allowed, as are interest and dividend payments. Most capital transactions involving ISK against another currency are controlled for residents and non-residents of Iceland. Residents must repatriate all foreign currency that they acquire. However, major exporters and corporates with large international operations are exempted in part from the CBI's rules on foreign exchange.
Foreign direct equity investment in Iceland is generally not limited by capital controls, but if a foreign investor sells an Icelandic equity investment, the receipts can only be exchanged into foreign currency if certain conditions are met:
(i) The cash consideration for the respective investment must not be a current foreign exchange deposit within a domestic bank or foreign exchange received from export revenues, but new inflow of foreign exchange.
(ii) The foreign exchange must be converted into ISK with an Icelandic bank.
(iii) The new investment must be notified to the CBI within two weeks from the date of exchanging the new foreign currency into ISK.
Foreign investment in the form of loans is limited to intra-group borrowing and lending and to lending to Icelandic financial institutions. Investors complying with this provision of the rules on foreign exchange will not be hindered when they choose to exit.
The above is important in light of the fact that capital controls have facilitated two separate markets with ISK: the foreign exchange market operated by the CBI whose official rate of the ISK published daily on the CBI's website (referred to as onshore ISK); and ISK held by foreign banks within the blocked accounts that may only be deposited within Icelandic banks or used to purchase Icelandic government bonds (referred to as offshore ISK). The exchange rate offered for offshore ISK reflects its limited usability. An investor entering Iceland should therefore strategise with respect to the investment and the exit.
Legal advice on currency controls should be obtained before entering into negotiations about any type of acquisition or merger involving a resident and non-resident of Iceland.
Merger control
The Competition Authority is responsible for monitoring mergers of companies. The total turnover in Iceland of the merging companies must be at least ISK2 billion ($11 million). Calculation of such turnover must include the turnover of parent companies and subsidiaries, companies within the same group and the turnover of companies directly or indirectly controlled by the parties to the merger. At least two of the companies participating in the merger must have a domestic minimum annual turnover of ISK200 million.
A merger is considered to have taken place according to Article 17(1) of the competition act (No. 44/2005) when:
(i) the merger is of two or more previously independent companies or parts of companies;
(ii) a company is taking over another;
(iii) the acquisition is by one or more persons already controlling at least one company, or by one or more companies, whether by purchase of securities or assets, by contract or by any other means, of direct or indirect control of the whole or parts of one or more companies; or
(iv) a joint venture is being created performing on a lasting basis all the functions of an autonomous economic entity.
The merging parties must jointly file a notification to the Competition Authority about the respective merger before completion and after one of the following has taken place: (i) the conclusion of an agreement; (ii) the announcement of a public bid; or (iii) the acquisition of a controlling interest in an undertaking.
The Competition Authority will, within 25 working days, notify the merging parties if it sees reason for further investigation of the competitive impact of the merger. If no notification is received from the Competition Authority within 25 working days, the Competition Authority cannot annul the merger. A decision on the annulment of a merger shall be made no later than 70 working days from the time that a notification within the 25-working-day time limit has been sent to the party notifying the merger. If it is necessary to obtain further information, the Competition Authority may extend this time limit by up to 20 working days.
If the Competition Authority is of the opinion that a merger will obstruct effective competition by giving one or more companies a dominant position or by strengthening such a position, or will result in a significant distortion of competition in the market in other respects, it may annul the merger.
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About the author
Gunnar Sturluson was admitted to the bar in Iceland in 1993 and became a supreme court attorney in 1999. He was nominated as an IFLR 1000 leading lawyer in financial and corporate law in 2011. In addition to his Icelandic law degree, he holds a masters degree from the University of Amsterdam in European law and international trade law.
He specialises in transactional M&A, general corporate law, contract law and the documentation of financial transactions as well as competition law, and has published articles on European law and lectured on competition law at the University of Iceland. |
Contact information
Gunnar Sturluson
Logos Legal Services
Efstaleiti 5
IS - 103 Reykjavík
Tel: +354 5 400 300
Fax: +354 5 400 301
Email: logos@logos.is
Web: www.logos.is |
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About the author
Asgeir Reykfjord is a member of the firm’s corporate and banking group. He holds an Icelandic law degree was admitted to the bar in Iceland in 2009.
He specialises in financial services regulation, securities regulation, general corporate law, transactional M&A and financial restructuring, and lectures at the University of Reykjavik on securities regulations and the general laws of obligation.
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Contact information
Asgeir H. Reykfjord
Logos Legal Services
Efstaleiti 5
IS - 103 Reykjavík
Tel: +354 5 400 300
Fax: +354 5 400 301
Email: logos@logos.is
Web: www.logos.is |