Norway: Still going strong

Author: | Published: 1 Mar 2011
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Although the Norwegian economy was, comparatively, not as hard hit as that of neighbouring countries during the financial turmoil of 2008, M&A activity was still significantly less pronounced in the aftermath of the financial crisis. Activity in 2010 seems to have returned to pre-2008 levels. Norwegian law firms have increased their relative part of Scandinavian M&A work in 2010, indicating comparably higher activity in Norway than before.

The Norwegian economy in general is powered to a large extent by the energy and shipping industry; however significant M&A activity will occur across a broad spectrum of industries. The largest transaction in 2010 was Norsk Hydro's acquisition of Brazilian Vale Group.

The Oslo Stock Exchange (OSE) has, as predicted by most analysts, experienced a volatile year. OSE is the world's largest marketplace for seafood. Further, OSE is the second-largest European regulated market for shipping and the third-largest for shipping worldwide; it is also the second-largest in Europe for energy. These three, rather volatile, sectors have been the key drivers of the development on OSE in 2010.

A total of 19 public offers were launched on the OSE, comparable to the level in 2009. However, the 20 new listings in 2010 on the OSE (including Oslo Axess), including the IPO of Gjensidige Forsikring ASA, represent a significant increase from only three in 2009.

Norwegian law is consistent with the latest European Union regulations, and has implemented key EEC directives relating to takeovers, merger control and similar. However, Norwegian legislation often applies stricter control mechanisms and lower thresholds for obligations to apply than its European counterparts. This article outlines key elements of the procedures for mergers and acquisitions of Norwegian limited companies, both as regards privately-held entities as well as listed companies.

Acquisition of privately-held companies

The acquisition of a company or business may take numerous forms, depending both on the requirements of the acquirer, the corporate structure of the target company and the nature of its business. When structuring an acquisition, it is natural to consider whether the deal shall take the form of an acquisition of the entire corporate entity or certain subsidiaries, of certain assets or as a merger. In determining the structure, one must consider which liabilities shall be assumed from the target company and tax aspects. An acquisition of a privately-held company is not subject to such strict statutory requirements as an acquisition of a listed company. In an acquisition of a privately-held company, the shareholders' agreements and the articles of association are normally of greater importance.

Transfer of shares in a privately-held company is subject to the existing shareholders' pre-emptive rights, unless the company's articles of association provide otherwise. In connection with share capital increases, the shareholders pre-emptive rights are made statutory.

Further, a transfer of shares requires the approval of the board of directors, unless otherwise provided for in the articles of association. Such consent shall be made as soon as possible after the transfer has been reported to the company and cannot be unreasonably withheld.

If the board does not consent, the acquirer is entitled to either reverse his or her agreement (subject to contract terms or transferor's approval), to dispose of the shares, to commence legal action or, in certain cases, to claim redemption of the shares by the company.

An investor acquiring more than 90% of the share capital and an equivalent share of the voting rights, may squeeze out the remaining shareholders. The minority shareholders have a corresponding right to require the majority shareholder to acquire their shares.

If the selling company is a shareholder in the buying company there are certain additional procedures regarding consent, documentation and registration that need to be followed in the acquisition process.

Tax issues with the acquisition of assets or shares

A sale of a company's assets is considered a realisation of the individual assets transferred, which constitutes a taxable event. Such a realisation may give rise to a capital gain or loss depending on the market value of the assets transferred compared to their tax basis.

A capital gain will be subject to tax at a rate of 28%. The tax may in some cases be deferred depending on the type of asset in question. Capital loss may be carried forward and deducted in future years, provided that the transferring company continues to exist.

In an asset purchase, the purchase price must be allocated among the assets acquired. How the purchase price is allocated on the individual assets can be of great importance to the parties because the tax rules regarding, for instance, depreciation and deduction, differ from one type of asset to another. Allocation must be made on the basis of market value, independent of what the book value of the seller was. Any payment in excess of the market value of the tangible assets may be classified as acquired goodwill and depreciated at a rate of 20%. The tax authorities are entitled to reallocate the purchase price between assets, if they deem the allocation made by the parties to be in conflict with the real market values.

If it is likely that a sale will result in capital gain, it will, from a seller's perspective, often be preferable to acquire shares rather than assets. Corporate shareholders that are tax resident in Norway are comprised by the exemption method, which means that only 3% of the gain is subject to tax (at a rate of 28%), which gives an effective tax of 0.84%. Loss is, on the other hand, not deductible under the exemption method, so if the sale is likely to produce a loss, a sale of assets would be preferable.

As a general rule, investors who are not tax resident in Norway are not subject to Norwegian taxation on any gain on sale of shares in Norwegian companies. However, there are some exceptions: for personal investors that carry out business activities in Norway, for instance.

From the buyers perspective it will for various reasons, however, often be preferable to buy assets rather than shares. For instance, in a share acquisition the purchase price cannot be depreciated, it creates no step-up of the tax base of the assets of the enterprise, and no part of it may be allocated to depreciable goodwill.

Merger

A merger of limited liability companies is defined as the transfer by one or several companies of all assets, rights and obligations as a whole, with the shareholders of the surrendering company being compensated by way of shares in the surviving company. Alternatively the compensation may consist of a combination of shares and cash, provided the amount of cash does not exceed 20% of the aggregate compensation.

In the event that the surviving company belongs to a group, and if one or more of the group companies hold more than nine-tenths of the shares and the votes at the general meeting of the surrendering company, the compensation to shareholders of the surrendering company may also consist of shares in the parent company, or in another member of the surviving company's group. In any event, once the merger has been consummated by the surviving company the surrendering company is liquidated.

A merger may also be effected pursuant to the rules set out above by combining two or more companies into a new company established for the purpose, and thereby liquidating the surrendering companies.

As a general rule, the merger and a specific plan for the merger shall be approved by a qualified majority of two-thirds of the votes at the general meeting in each of the merging companies. In addition to the merger plan, there are certain other documents that must be prepared in the merger process. It is the responsibility of the board of directors to prepare the necessary documentation, and they are obliged to inform the employees about the merger plan. The remuneration shares to the shareholders in the surrendering company are issued according to the rules applicable for capital increases.

The merger resolutions must be reported to the Register of Business Enterprises within a certain period of time to avoid the resolutions being deemed void.

In the event of a merger between a parent company as the surviving company and its wholly-owned subsidiary, the merger process is somewhat simplified insofar as all resolutions may be passed by the board of directors of the two companies, thus avoiding (among other things) the necessity for resolutions by the general meeting.

In the case of a merger between one or more limited liability companies and one or more foreign companies with limited liability, the Norwegian legislation is based on the provisions in EC Council Directive 2005/56/EF, but accommodated to the Norwegian public limited companies act. Such merger is conditioned on the foreign company having a registered office or head office in another EEA state and being governed by the laws of an EEA state other than Norway. A private or public limited liability company can only be merged with such foreign company as here described, which has a company structure that, according to its state's company legislation, corresponds to a private or a public limited liability company.

Under current law, most mergers between limited liability companies may be carried out tax free at both company and shareholder level if the book value of the assets in the companies involved in the process remains as before. A loss carry-forward is not automatically lost in a merger, except where utilisation of a loss carry-forward for tax purposes is in fact the dominant reason for the merger. Irrespective of which accounting method is applied for accounting purposes, continuity must be used in the tax accounts. A merger cannot give any right to the appreciation of assets for tax purposes.

Public takeovers

Norwegian applicable law requires that a mandatory offer must be presented to all shareholders of a Norwegian company listed on OSE if any person (or consolidated group) as a result of acquisition(s) becomes owner of shares representing more than one-third of the voting rights. A mandatory offer is subject to a regulation which implements Directive 2004/25/EC on takeover bids.

A voluntary offer may be launched at the offeror's discretion; however, if a voluntary offer is made which, if accepted by shareholders eligible to accept, may lead to the passing of the one-third threshold, certain parts of the regulation concerning the mandatory offer regulation will apply to the voluntary offer. The main difference between a mandatory bid and a voluntary bid is that under a voluntary bid the offeror may make the bid conditional and offer consideration other than cash.

Key issues when structuring a takeover strategy, apart from determining whether to launch a mandatory or voluntary offer, include issues such as the target's disclosure requirements, handling of insider information, securing pre-acceptances for the forthcoming bid, and considering whether to tie up the board of the target company through a transaction agreement.

Mandatory offers

Any person or consolidated group that acquires more than one-third of the voting rights of a Norwegian company listed on a regulated market is required to make an unconditional general offer to acquire all issued shares of the company within four weeks. The mandatory offer requirement is also triggered when a shareholder, through acquisitions, controls 40% or 50% or more of the voting rights in the company, provided that the shares are not acquired under the initial mandatory offer. The shareholder may also dispose of the shares to avoid the obligation to present an offer.

An offeror acquiring more than 90% of the share capital and an equivalent share of the voting rights, may squeeze out the remaining shareholders, usually at the price payable in the public offer. Thus, a public offer is generally considered successful if a 90% acceptance level is reached.

The offer price shall, as a general rule, be equivalent to the highest price the acquirer has paid or agreed to pay in the six-month period before the requirement to make a mandatory offer. Settlement under a mandatory offer must be in cash, but the offeror may also give the offerees a right to choose other forms of settlement.

The offer document must be approved by the supervisory authority before publication. The approval process takes up to two weeks from the time when the draft offer document is presented to OSE.

The board of directors of the target company must also issue a statement on the offer, disclosing its opinion on the effects of the offer. Such statement must be published no later than one week before the end of the offer period.

Voluntary offers

Under a voluntary bid the offeror shall also prepare an offer document which must be approved by the supervisory authority, OSE, before publication. The board of directors of the target company must still issue a statement on the offer, disclosing its opinion on the effects of the offer. The offeror is also under a strict obligation of equal treatment of the shareholders of the target company. A voluntary offer may be subject to conditions. Common conditions are minimum acceptance levels, financing, satisfactory due diligence and governmental approvals.

Merger control

Norwegian merger-control rules are to a large extent inspired by and similar to the EU merger control regime. There are however certain differences. The principles for calculating the parties' relevant turnover are apparently more favourable than in the EU (the turnover of jointly-controlled undertakings is not included). The conditions for clearance of problematic mergers on the basis of efficiency gains are also less strict than in the EU, and mergers that have been prohibited may be overturned on political grounds.

Furthermore, the Norwegian turnover thresholds are very low compared to most other jurisdictions. A takeover will require filing in Norway if the purchaser and the target company both have a turnover in Norway exceeding NOK20 million ($3.57 million), provided that their combined turnover in Norway exceeds NOK50 million. Norwegian merger-control rules are of significant practical importance due to the low turnover thresholds. Merger filing in Norway will often be required if both parties have some sales to Norwegian customers, even if none of them are established in Norway.

The procedure of the Norwegian Competition Authority (NCA) in merger cases is divided into two main phases, similar to the EU merger control rules. However, phase one of the Norwegian regime is rather peculiar compared to most other jurisdictions. The content requirements for a so-called standardised notification, which starts off phase one, are very limited, and the duration of the initial review is only 15 working days.

This initial review phase makes sense, since the very low turnover thresholds for notification in Norway leads to a significant number of filings that raise no competition concerns. If the NCA finds reason to examine the merger in further detail, it will order the submission of a complete notification, bringing the case to phase two. The content requirements for a complete notification are considerably more detailed than for a standardised notification.

A standstill obligation applies to all transactions that have to be notified to the NCA, which means that the parties cannot implement the transaction until the expiry of the 15-working-day period at the earliest. If the submission of a complete notification is ordered, the standstill obligation will be extended for at least another 25 working days following the submission.

As under the EU merger rules, a public bid or a series of transactions in securities admitted to trading on a market such as the Oslo Stock Exchange, can be partly implemented notwithstanding the general standstill obligation. In order for the exemption to be effective, the acquisition will have to be notified immediately to the NCA. In the NCA's comments to the regulation in question, it is stated that "immediately" will normally mean the day on which control is acquired.

Standardised notifications may be submitted in English, while complete notifications have to be submitted in Norwegian.

About the author

Susanne Munch Thore is a member of the firm’s corporate group and advises international and Norwegian clients on corporate law, securities law, capital markets and M&A transactions. She heads the Norwegian Bar Association’s permanent advisory group on security law and holds a number of directorships. Thore has a law degree from the University of Oslo as well as an LLM awarded by Georgetown University.

Contact information

Susanne Munch Thore

Wikborg Rein
Kronprinsesse Märthas pl. 1
0160 Oslo

Tel: +47 22 82 75 00
Fax:  +47 22 82 75 01
Web: www.wr.no


About the author

A member of the firm’s corporate group, Christian Emil Petersen advises both international and Norwegian clients on corporate law, securities law, capital markets and M&A transactions. He holds a Master’s of Law from the University of Oslo.

Contact information

Christian Emil Petersen
Wikborg Rein

Kronprinsesse Märthas pl. 1
0160 Oslo

Tel: +47 22 82 75 00
Fax:  +47 22 82 75 01
Web: www.wr.no


About the author

Sunniva Lillebø Wahl is part of the firm’s corporate group and advises international and Norwegian clients on corporate law and tax law issues, as well as capital markets and M&A transactions. She was awarded a Master’s of Law by the University of  Bergen.

Contact information

Sunniva Lillebø Wahl
Wikborg Rein

Kronprinsesse Märthas pl. 1
0160 Oslo

Tel: +47 22 82 75 00
Fax:  +47 22 82 75 01
Web: www.wr.no