Ever since the world's financial markets collapsed in the early 1930s, dividend-linked participating debentures and principal-linked participating debentures (Sw. vinstandelslån och kapitalandelslån) have been prohibited for Swedish companies. However, the new Swedish Companies Act that came into effect on January 1 2006 made it possible again for Swedish limited liability companies to issue debentures. The Act has already been reviewed in certain respects and, as a part that review, the conditions for issuing debentures somewhat modified.
Before July 1 2007, Chapter 11, Section 11 of the Act required the adoption of a shareholders' resolution in order to enable a Swedish company to validly issue debentures. For this requirement, the Act defined debentures as debt where the interest or repayment of the debt was, in whole or in part, dependent on dividends to the shareholders, fluctuations in the price of the company's shares or the company's financial results and position. The definition was very broad and inadvertently caught many debt issues not intended to be subject to the requirement of a shareholders' resolution (the rationale being to put a debenture issue on an equal footing with the payment of dividends, which of course also requires approval from a shareholders' meeting).
In particular, the Act's resolution requirements for debentures caused difficulties in leveraged finance, where it is very common for the various debt layers to feature elements that got caught in the Act's definition (such as floating interest rates linked to the development of the earnings of the target and Pik (Payment-in-kind) notes). Consequently, the Act has been revised with effect from July 1 2007 and now provides that the general meeting of shareholders only has to approve debt issues where the repayment or the interest increase if the company's earnings or its payment of dividends also increase. In all other cases the board can issue debentures at will. This greatly eases the issuing of many types of debentures and decreases transaction costs in many leveraged debt issues.
The revised Chapter 11, Section 11 of the Act, then, provides more flexibility for Swedish companies in procuring financing. As a general matter, a new financial instrument has been brought to the market and a number of new legal aspects will have to be considered. Debentures, like any other financial instrument, will become subject to trading in the future and thereby bring exciting opportunities for the legal community to embrace, following Sweden's debenture debut.