Purchasing and selling business entities require both
planning and insight. This is especially the case for foreign
buyers who must gain insight to the target company as well as the
operational and legal framework that applies in
Norway.
The same applies for Norwegian entities contemplating
selling shares or assets to foreign companies or investors. We have
written this comprehensive guide based on our experience in
assisting foreign entities in acquiring Norwegian
entities.
It is our ambition that the article provides both
overview and an insight into the Norwegian rules that
apply.
1. What are the main types of acquisitions in Norway?
Acquisitions refer to an agreement between two companies, where
ownership or assets are transferred from one of the entities to the
other. Together with mergers (an agreement between companies to
form a new entity) they fall within the scope of what is referred
to as Mergers & Acquisitions or M&A.
In Norway acquisitions take two main forms:
- Share purchase agreements (SPAs)
- Assets purchase agreements (APAs)
1.1. What is a share purchase agreement
(SPA)?
A share purchase agreement is where the purchaser acquires
shares of the target company in exchange for payment to the target
company’s shareholder(s). The agreement that governs the
transaction is referred to as an SPA—share purchase
agreement. There are many aspects the parties should pay attention
to in SPAs. We highlight the following:
- All assets and liabilities are absorbed: The
buyer purchases all assets and liabilities of the company, even
those that do not follow from the balance sheet. - Requirement of shareholder involvement: An SPA
also requires the involvement of other shareholders than the
sellers, both in the target company and in the seller’s
company. In addition, there might be regulations in a shareholder
agreement or in the articles of association to be considered, for
instance rights of first refusal, drag-along or tag-along
regulations, requirements of board approval etc. - Tax considerations: Tax considerations are
complex and deal-specific in M&A transaction. We would like to
highlight the following: From a buyer perspective, goodwill paid
above value cannot be amortized and can only be deducted if the
shares are resold. For the seller, the compensation could bear tax
liability as the seller is paid directly. If the seller is a
company, the profits are exempt from capital gains tax through the
so-called exemption method.
1.2. What is an asset purchase agreement
(APA)?
An asset purchase agreement is where the purchaser acquires
certain assets of the company as regulated in the asset purchase
agreement (APA). The deal would most often involve all hard assets
and liabilities necessary to operate the business and which
constitute the business entity. The seller, on the other hand, may
retain ownership of assets such as cash, accounts receivable,
working capital and other assets that do not fall within the scope
of the “business entity”https://www.mondaq.com/”asset” being bought
/ sold.
Parties should note the following:
- Not all assets and liabilities are assumed: As
the purchaser only acquires the assets as defined in the APA, other
assets and liabilities are not absorbed. The purchaser should apply
scrutiny so that the itemizing of bought assets and assumed
liabilities are correct. - Local company or acquisition vehicle in Norway might be
necessary: In some cases of asset purchase the buyer would
need to set up a local company or branch (so-called NUF) for the
acquisition of the assets and for continued business, for reasons
of license and public permits, employer responsibilities or VAT
considerations. - Employees of the target company: Transfer of
assets could trigger automatic transfer and protection for
dismissal and of rights for the employees. Special consideration
must also be made with regards to pension and collective bargaining
agreements. - Tax considerations: As is the case of stock
deals, tax issues are complex and deal-specific when it comes to
asset sales. There are nevertheless taxation rules that generally
make asset purchase preferable over share purchase. One main reason
is that the buyer can depreciate the costs in payment of goodwill,
which might follow from the transaction.
2. How is the transaction prepared?
Companies or assets change ownership for a variety of reasons.
From the seller’s perspective, a sale process is often
structured within these sets of variants:
- Bilateral sale process: In a bilateral sale
process, the buyer and seller would already have found each other.
The terms would be agreed upon in the buyer and seller’s system
of agreements, including the SPA or APA. - Structured sale of the company: In a
structured sale process, potential buyers are invited to make an
offer on the company, where the price may be determined in an
auction process or through competing offers. - Dual-track process: In a dual-track process, a
company is preparing an initial public offering (IPO) while also
running through a private M&A process, for instance through
structured sale or a bilateral sale.
2.1. Vendor due diligence
The seller might prepare the transaction through a so-called
vendor’s due diligence. This is basically the seller applying a
rigorous due diligence process on its own asset or subsidiary unit
destined for sale. The purpose is to uncover potential risks so
seller addresses these before the transaction takes place, for
instance through a restructuring process, demergers, redundancies
etc. Vendor due diligence might also speed up the process and
enhance and uncover hidden values that could increase the sales
price.
It could also enhance the bargaining position of the seller at
the negotiating stage after the buyer has conducted its own due
diligence investigation, as it would give the seller an independent
assessment of the target company and a chance to assess it prior to
the actual negotiations with the purchaser.
In the case of possible foreign purchasers, a vendor’s due
diligence is generally advisable.
2.2. Screening of the target company (so-called pre-due
diligence) and preparation of “teaser” documents from the
seller
There are a variety of reasons why a purchaser might show
particular interest in the target company or asset. It might have
screened the target company on its own initiative and through
publicly available documents.
In other cases, the purchaser might have received documents of
the target company. This documentation, sometimes branded as
“deal creation”, might be created by the company itself
or it might be prepared by a professional advisor.
The documentation often contains “teasers”, for
instance of the company’s most prominent value drivers, assets
and other input factors that are deemed suitable for creating an
interest in the acquisition of the company.
When facing possible foreign buyers, the teaser documentation
should include possible requirements that must be in place for
foreign ownership or asset purchase. Examples are—possible
requirements to the owner for the continuation of public licenses,
permits, certificates etc of the target company or for the
continuation of certain businesses in case of asset sale.
2.3. Seller’s screening and identification of
possible buyers and others involved in the transaction
It might be advisable for the seller to screen the prospective
purchaser. At the very least, the seller should make sure that the
purchaser may fulfil the financial duties that would follow from
the transaction. We have experienced that some purchasers do not
and are either speculating in bargaining the purchase price or on
reselling the asset again to a new buyer.
AML duties (anti-money laundering and counter-financing of
terrorism) would, in any case, require the advisors to perform a
costumer due diligence (CDD) on their client, as well as the other
parties involved, to make sure they are who they claim to be. In
some cases, there are requirements of enhanced due diligence, for
instance if it involves an entity established in a high-risk
country or if it involves a politically exposed person (PEP).
2.4. The non-disclosure agreement (NDA)
If the purchaser shows continued interest in the company, the
seller will nearly always demand that the prospective purchaser
signs a non-disclosure agreement (so-called NDA-agreement) as a
precondition for receiving confidential and prior information of
the target company or asset. The purpose of the NDA is to protect
misuse or spreading of non-public business information.
The NDA should not be more broad than necessary. From time to
time it happens that NDAs contain a hidden non-compete clause, a
too wide definition of confidential information or that it lasts
longer than necessary. The purchaser should therefore examine the
NDA closely.
3. Pricing and valuation models of the target company or
asset
3.1. Valuation models of the target company or
asset
As a part of analysing the target company or the particular
asset or business unit, the buyer would need to assess its
value.
The valuation should include the value of the target
company’s capital structure (debt and equity), as well as the
value of intangible assets such as goodwill, brand equity, IP,
position in the market, value of customers and expertise and
competence and “know-how” of the company’s management
and employees. A buyer would also screen the company for intrinsic
values that might follow from the transaction such as potential
synergies that might follow from the transaction.
There is a wide variety of ways to value a company. For the
purpose of this article, we would like to emphasise two common
valuation models:
- Book valuation: Valuation of the company based
on information from the balance sheet. This valuation method is
particularly relevant with real estate transactions or
“simple” transactions, where the different assets of the
company easily can be traded in the secondary market. It would also
be more relevant in the case of APAs. - Earning multiplier (P/E): Earnings multiplier,
also known as price-to-earnings ratio, is a financial metric where
the company’s future earnings as a way of multiplying the
earnings of the business, form the basis of the valuation of the
company. If future earnings are uncertain, for instance for small
to mid-sized businesses, or for other reasons are at greater risk /
higher uncertainty, then the multiplier would generally be low
(perhaps between 2-5). In case the risk is low, for instance in
real estate transactions or for a more established company with
reliable customers or prominent intangible assets (branding,
position in the market, IP rights), the multiplier would be higher
(perhaps between 10-15). The reason is that future earnings are
more certain and the risk is viewed as lower. The multiplier might
be based on revenue (times revenue method), EBITDA, EBIT or
earnings, depending on the company, industry, type of business and
other circumstances of the case.
There are deviations to the valuation models, such as discounted
cash flow (DCF), which is similar to earnings multiplier but takes
into account in the calculation inflation of the present value.
Other examples are enterprise value (EV), which is somewhat similar
to book valuation, though the value is calculated by combining
equity and debt and then subtract cash not used to fund business
operations.
From a legal perspective, the framework of the transaction would
depend on the valuation model used and which critical value drivers
constitute the value of the target company going forward.
3.2. Letter of intent (LOI)
The seller and possible buyer often agree on a letter of intent,
or LOI, as a pre-contractual document in the early stages of a
transaction. The purpose of the LOI is to outline certain terms
which the parties intend to use as a basis if they do reach a
legally binding agreement.
The potential purchaser would often seek exclusiveness in the
negotiations and flexibility in determining the final purchase
price (depending on what the due diligence process might uncover)
through regulations in the LOI. The seller, in turn, would often
seek certainty with regards to the purchase price, the extent of
guarantees that must be given limitation as well as in
responsibility.
LOIs are especially practical and serve a special purpose in
Norway:
Firstly, they minimize the risk of a legally binding agreement
being reached without both parties having a clear intention in
doing so. According to Norwegian law, an agreement will be binding
if there an offer and an acceptance coincides or if the parties are
ruled to have agreed on the substantial elements that constitute
the agreement.
Secondly, even if not legally binding, the LOIs form a basis for
the parties’ expectations and thus also in the negotiations as
part of the remaining part of the transaction.
3.3. Term sheet
A variant of an LOI is a so-called term sheet. Similar to a
letter of intent, a term sheet is a non-binding understanding of
interest. A term sheet is shorter and less detailed as it confines
itself to an outline in bullet points of the price and structure of
the transaction.
4. The due diligence process (DD)
A due diligence or DD process is a structured approach where a
potential purchaser examines every part of the target company or
asset through documentation and information provided by the seller.
The due diligence process is important so the purchaser and seller
will undertake the transaction from an informed standpoint.
A purchaser occasionally reserves the right to carry out due
diligence after an agreement has been reached. This variant is
generally not advisable for the seller.
A DD has the seller sharing substantial amounts of documents,
including sensitive information of the target company. For that
reason, it is not unusual that a more extensive NDA is agreed on as
a precondition for receiving such sensitive information as part of
the DD.
4.1. The buyer’s request list and
Q&A
At the initial stage of a DD, the purchaser would need to do the
following:
- Assess the scope of review needed for the transaction; and
- prepare a so-called Q&A / questionnaire.
The scope and vigorousness of the review depends on the nature
and size of the transaction and the particular circumstances that
apply to the target entity. The amount of scrutiny should be
reflected in the scope and degree of detail in the Q&A.
In general, a Q&A constitutes a list of requested
information and documentation from the seller that at the
buyer’s request is to be examined in connection with the
transaction. Documents or copies are expected to be provided to the
extent possible, and the seller to disclose information
independently of the list, to whatever extent the seller finds such
information may be of significance in relation to the
transaction.
A list requesting information and records could be systemized in
these categories:
- Corporate information and records
- Financial reports and information
- Contractual relationships
- Employment matters
- Real estate and other property, plant and equipment
- Financing, security and capitalization of the company
- IP rights, IT and technology
- Insurance
- Tax matters
- Governmental regulations, filings and compliance
- Litigation
- Competition and antitrust
- Environmental and human rights
4.2. The virtual data room (VDR)
To address the Q&A and provide the relevant information and
documentation, the seller usually sets up a virtual data room (VDR)
with a folder structure that coincides with the structure of the
Q&A. A physical data room is not practical anymore.
There are different providers of virtual data rooms in Norway,
with admin control the common denominator. International providers
such as Dealroom, Firmroom, Merill Datasite, Firmex or Intralinks
may be preferable to foreign clients.
There could be rules as to which documents may be accessed by
whom. For instance, sensitive information may be made available
only to advisors of the buyer, not the buyer.
5. The result of the DD and the implications for the
transaction
5.1. The due diligence report
The result of the DD is usually structured in a due diligence
report (DD report). The amount of detail and scrutiny put into the
due diligence report, depends on the nature and complexity of the
transaction, as well as the risks the buyer is willing to take.
However, a full DD report with full review of all different aspects
of the target would minimize risk.
There is also the option of a more limited and focused due
diligence report. The main categories here are:
- Selective focus due diligence report, or
- Red flag report.
A selective focus due diligence report would focus on certain,
specific sub-areas of the target that are considered particularly
important or decisive to the buyer.
A red flag report would confine itself to obstacles that may
threaten the deal itself. Minor discrepancies are therefore
excluded from the report.
All reports include assessment and legal recommendations. They
also address discrepancies that meet so-called materiality
thresholds.
5.2. Materiality thresholds – which discrepancies
are significant enough?
Not every issue with a target business is of such significance
that it affects the acquisition, so generally one operates with
so-called material thresholds. Material thresholds take on two
forms:
- Quantitative material thresholds
- Qualitative material thresholds
Quantitative material thresholds refer to issues concerning a
certain percentage of the business or the value of the transaction.
Issues concerning a value that falls below that percentage are
viewed as non-significant.
Qualitative material thresholds refer to certain discrepancies
set by the buyer that, due to their nature, are viewed by the buyer
as significant enough for them to impact the buyer’s
willingness to proceed with the transaction.
5.3. Consequences of the findings and subsequent
negotiations
In theory, the due diligence process should identify risks
associated with the transaction. Subsequently, the parties should
agree to the allocation of these risks through negotiations of the
definitive transaction agreements, including the SPA and APA. It
could also lead to the buyer withdrawing from the transaction,
depending on the circumstances and what the parties been agreed
upon with regards to consequences of withdrawal, for instance as
part of an LOI or a term sheet.
If the parties decide to proceed with the transaction, the
findings in the DD and the subsequent negotiations would be
reflected in the provisions of the agreement and the terms of the
transaction (including the purchase price).
Findings could be addressed in the purchase price, whereas
reflected representation and warranties, closing conditions,
disclosure schedules and indemnification provisions could be laid
out in the definitive transaction agreements (SPA or APA). This is
covered in section 6 below.
6. Drafting of the transaction agreements (SPA, APA and
IA)
Once terms have been agreed, the agreement would need to be
drafted in either:
- SPA, in case of transfer of ownership,
- APA, in case of transfer of assets and not ownership, or
- IA, in case the agreement has the purchaser buying into the
company through a capital increase in the target company.
6.1. SPA: What is important when drafting a Norwegian
SPA?
An ordinary Norwegian SPA includes the same layout and
provisions as in other countries. The agreements tend to be shorter
as background rules of law in any case supplement the regulations
of the SPA. For instance, entire Agreement provisions are less
common than in other countries.
The SPA would usually begin by specifying the parties involved.
Thereafter the SPA is broken down into provisions, whereof the most
important are the following:
- The transaction and terms of sale: This
section will specify the number of shares, the price and the date
for transfer of shares. - Purchase price adjustment provisions (PPAs) and
earn-out clauses: Purchase price adjustment clauses
(so-called PPA clauses) protect buyers from fluctuations in the
value of the target company during the period between valuation and
closing. Its purpose is to effectively mitigate risk and to
counteract actions of bad faith from the seller such as illegal
distributions before closing.Price adjustment clauses are structured to redefine the purchase
price due to fluctuations in underlying assets of the target
company such as equity accounts, working capital, net worth or net
assets. In that way the purchase price will go down if the assets
of the target company are diminished and vice versa, in case they
increase.
Earn-out clauses serve as a payment method where part of the
purchase price depends on how the target company performs for a
specific period following the sale.The purpose is to address the
price issue following from the fact that the seller’s and the
purchaser’s expectations for future earnings and growth do not
always align. - Restrictive covenants: Restrictive covenants
serve to safeguard the value of the target company following the
transaction. Typical provisions that fall within the scope of
restrictive covenants are:- Non-compete clauses:Provisions that prohibit
creation of and participation in competing ventures. - Non-solicitation clauses: Provisions that
prohibit poaching of customers, clients or business relations. - Non-poaching clauses: Provisions that prohibit
poaching of employees.
Both non-compete and non-solicitation clauses must be drafted in
accordance with the univariable law. Especially if a non-compete
clause is deemed to regulate an employment relationship, where the
employee would be entitled to wage compensation as long as the
clause is in force. Furthermore, the non-compete clause cannot be
invoked in case of redundancy and may in any case not last for more
than one year after the employment relationship has ended.Norwegian law also restricts the use of non-solicitation clauses,
especially in employment relationships. The clause must be in
writing, cannot last longer than one year after the termination of
employment and the employer must provide a written account of its
necessity, which must also include a list of customers covered by
the clause. Lastly, the clause can only involve customers the
employee was in direct contact with during his / her last year of
employment. - Non-compete clauses:Provisions that prohibit
- Representations and warranties:
Representations and warranties are important provisions in the SPA.
Representations are assertions of facts or opinions whereas
warranties are promises of certain facts. As they include
assertions or promises about the target company, they serve the
purpose of allocating risk and reducing unnecessary examination
during the DD process.Although shorter, Norwegian SPAs’ representations and
warranties from the seller tend to be fairly extensive as an
important part of the business should be included, such as
circumstances and the state of significant assets and the existence
and viability of significant agreements.For the purchaser it is
important that the warranties and representations first and
foremost cover what is found to be the crucial factors creating
value in the target company going forward. Secondly, it should also
cover risks that might reduce value.Breach of warranties and representations would give right to
indemnification claims or might give right to terminate or refuse
to close the transaction. Other remedies might be that a certain
percentage of the price is withheld for some time in case of a
breach. Most warranties and representations are subject to baskets
and caps, which regulate when they are triggered and the maximum
liability amount.They include assertions or promises of the target
company and thus serve as a foundation for risk allocation. - Closing conditions (CP): Closing conditions or
condition precedent specify certain conditions that must be met
before closing. The conditions might therefore delay obligations to
close the transaction until the closing conditions agreed on are
met. - Remedies, including indemnification and
termination: The SPA should spell out the remedy
provisions in case of a breach. Breach of warranties,
representation and restrictive covenants are often ruled by
indemnity clauses. These clauses regulate procedures for seeking
compensation as well as provisions on the minimum amount, caps and
limits, for instance as a percentage of the purchase price. Breach
of provisions might also give the right to terminate the agreement
or withhold a percentage of the purchase price. - General provisions: The last section usually
is a catchall that covers announcements and confidentiality, taxes,
terms of payment and dispute resolution, including governing laws
and jurisdiction.
6.2. APA: What is important when drafting a Norwegian
APA?
Asset purchase agreements are less common in Norway than SPAs.
One reason for this is that most business units are structured as
separate companies (“aksjeselskap” or “AS”).
Asset purchase agreements also tend to be more complex and
time-consuming. Nevertheless, sometimes you will come across APA
transactions.
When they are used, they typically have fairly similar structure
to SPAs, with the exception of the added need for a separately
drafted agreement and documents for different assets be made
available. There are also other important issues that we would like
to emphasise:
- Which assets and liabilities are to be
transferred?The APA must lay out in detail which
particular tangible and intangible assets and liabilities are to be
extracted from the target in exchange for the agreed purchase
price. The APA must thus itemize which assets are to be bought and
which contracts and liabilities are to be assumed by the purchaser.
This itemization is often laid out in detail as scheduled in the
APA. Certain aspects require special focus:
- A foreign purchaser would need to set up a transaction
vehicle: A foreign purchaser would most likely need to set
up a local transaction vehicle, meaning an “AS”
(“aksjeselskap”), to register and exercise ownership to
the different assets that is included in the transaction, and to
act as a party. - Change of control issues and third-party
permissions: The parties in APA agreements would encounter
a greater number of changes in control issues than if the
transaction was structured as an SPA. This is because consent from
contractual counterparties will often be necessary for changing
contracting party to the purchaser. This means that there is a need
for separate arrangements for the contracts and liabilities that
are to be transferred. - Special considerations regarding employees: As
part of an agreement of transfer of certain assets, employees might
have a right to transfer on the same terms and conditions that
apply for their employment relationship. This follows from the
EU’s “the transfer of undertaking” directive
(directive 2001/23/EC) which has been implemented into Norwegian
law as part of the Working Environment Act chapter 16.Foreign
buyers would need to pay special attention to protective rules for
employees as part of an APA. If the transfer is viewed as a
transfer of an undertaking within the scope of the directive, and
chapter 16, employees are protected from dismissals or a weakening
of their rights as employees following the transfer. Special
considerations should be made concerning collective bargaining
agreements and employees’ pensions schemes as certain changes
may be made by the purchaser. - The need for legal protection for acquired
assets: When transferring assets, the purchaser must
secure legal protection for the different assets. Real estate would
need to be registered in the Norwegian property register. Other
assets such as IP-rights, ownership of equipment and vehicles,
would need to be transferred and secured through separate transfer
procedures.
- The importance of purchase price adjustment provisions
(PPAs):As the value of the assets, subject to the APA,
might vary between signature and closing time, it is important that
the APA has well-functioning price adjustment provisions. There are
numerous ways to regulate price adjustments and the devil is most
often in the details. Special consideration should be put into
these provisions by both parties so the provisions are in alignment
with the legitimate interests of the parties. - Restrictive covenants: Especially if a deal is
structured as an APA, the agreement should include restrictive
covenants such as non-compete, non-solicitation of clients and
non-poaching agreements. For the purchaser it is often very
important that the seller commits to not compete with the business
he / she has just sold, as the price would rely on the seller not
doing so. The provision will provide comfort and safeguard the
commercial value of the newly acquired assets. - Representations and warranties:
Representations and warranties are as natural in APAs as in
SPA’s. The number of representations and warranties depend on
the business and the circumstances related to the transaction. As
you are buying assets through an APA it is important that these
provisions cover assets included in the agreement that are to be
transferred to the purchaser at closing. - Closing conditions (CP):in APAs, special
consideration should be put into setting up the closing conditions.
Closing would presuppose that the agreed-upon assets are fully
transferred to the purchaser. This is technically more complicated
than transferring shares (SPA-agreements), as different transfer
rules apply for different assets (real estate, intellectual
property, agreements, loans, ongoing contracts etc.).
6.3. IA: Investment agreements
The Purchaser might buy into a business through a cash-in
transaction structured as a capital increase of the company. An
agreement on capital increase is often referred to as an investment
agreement (IA agreement). The IA agreement presupposes that the
purchaser only buys a percentage of the shares from the seller, not
the entire company.
The IA agreement would regulate the percentage of the investment
that is to be allocated to the company through a capital increase
and the terms and percentage of the company the purchaser acquires
through this capital increase.
The IA agreement would likely only be part of the contractual
framework constituting the transaction, and would be drafted in
combination with the following:
- The SPA agreement, and
- The shareholder agreement.
The negotiation of the IA would concern how much of the purchase
price is to be injected into the company through a capital increase
and how much is allocated to the seller through the purchase of
shares as part of the SPA agreement.
Typical provisions of IA agreements might be:
- Terms:Terms of an IA agreement including
participants, share price and timetable for the agreed upon capital
increases. - Milestone provisions:Milestones and benchmarks
that must be reached before there is an obligation to participate
in capital increase. - Representations and warranties: Provisions of
representations and warranties, as described above, are natural
parts of IA agreements. If there is a breach of contract it often
follows that the IA agreement contains indemnity clauses where the
purchaser is held harmless in case of breach. - Closing conditions: Closing conditions that
must be present before capital injections should be regulated in
the IA agreement.
7. Associated agreements in connection with the
transaction
7.1. Shareholder agreements
If only some of the shares of the company are sold, it means
both the purchaser and the seller will be shareholders in the
company going forward. It is therefore only reasonable that the
purchaser and seller agree on a shareholder agreement.
7.1.1. What is a shareholder agreement?
A shareholder agreement is a legally binding agreement between
the shareholders that outline and regulate shareholders’ rights
and obligations towards each other and the company.
The purpose is to establish predictable rules on how the company
is to be managed and how shareholders are to conduct their
shareholders’ rights. A shareholder agreement would seek to
outline a legal framework regulating what may be discussion topics
between shareholders. One of its aims is to mitigate the risk of
legal shareholder disputes going forward. A good shareholder
agreement limits legal uncertainty, as possible discussion topics
are regulated in detail in order to avoid such disputes.
The shareholder agreement will establish more detailed rules and
dispute resolution mechanisms that do not follow from Norwegian law
but are established on a contractual basis through the shareholder
agreement.
Unlike the statutes of association, the shareholder agreement is
confidential and not in itself binding for the company. Its
confidentiality means that a shareholder agreement, unlike
statutes, can regulate sensitive business matters.
7.1.2. What are the normal provisions in a shareholder
agreement?
A typical Norwegian shareholder agreement would include the
following provisions:
- Provisions on board representation and board
decisions: The shareholder agreement often contains
regulations on the composition of the board, entitling specific
shareholders to appoint a certain number of the directors of the
board. The shareholder agreement may also establish veto provisions
for certain decisions, meaning that certain board decisions require
that all directors representing certain shareholders vote in favour
of the decision. Veto clauses would often relate to important
decisions such as:
- Purchase and sale of the company, assets, or business
- Decisions on the company’s equity such as distributions
from the company, capital increase, convertible loans - Decisions that substantially deviate from the company’s
strategy - Dispositions that exceed a certain threshold (for instance 0.5
MNOK, 1 MNOK, 10 MNOK, 50 MNOK etc). - Agreements between the company and shareholders
- Provisions on transferability of
shares:Shareholder agreements often limit the
transferability of shares. This can be done through a variety of
provisions such as “lock up”-provisions, requirements of
board approval, shareholder requirements to acquire and hold shares
in the company (for instance that the shareholder is employed),
provisions of first refusal etc.The shareholder agreement might
also contain so-called drag-along or tag-along provisions. - What is a tag-along clause? A tag-along clause
gives a shareholder the right to join a transaction and sell their
shares on the same terms as another shareholder, if this other
shareholder has negotiated a sale for their shares in the company.
It thereby protects the interest of a minority shareholder as it
ensures that this shareholder also may capitalize on a deal
negotiated by another shareholder. - What is a drag-along clause?A drag-along
clause enables a shareholder to force another shareholder to join
in a sale of shares in the company. The other shareholder is
dragged along on the same terms as the shareholder that called in
the drag-along clause. In most cases, a controlling majority or
more would be required to trigger a drag-along clause.The purpose
of provisions of transferability of shares is to establish control
over who may be shareholders in the company. In a transaction
context, the purchaser would often demand limitations on the
transferability of shares. These limitations are often agreed upon
in combination with the purchaser buying the remaining shares at
such terms as determined in the shareholder agreement. - Put and call options: It is not uncommon that
shareholders agree on so-called “Put options” and / or
“Call options” as part of a shareholder agreement in
connection with a transaction.If the purchaser and seller are both
to be shareholders, it is often a prerequisite that this is for a
limited period only and that the purchaser will buy the remaining
shares at a future date or on the occurrence of certain agreed upon
circumstances.
The purchaser’s right to buy shares is often regulated by a
so-called “Call option.” Call option is a right to buy
all or a certain number of shares at a predetermined price at some
future date or upon occurrence of certain circumstances (as
regulated in the call option).The counterpart is a “Put
option”, which gives a shareholder a right—but no
obligation—to sell their shares in the company after a period
of time or upon occurrence of certain agreed upon
circumstances.These options also tend to regulate a predetermined
price. The valuation metric is subject to negotiations. Pricing
may, for instance, be based on the same valuation methods as stated
in item 3.1 above. Furthermore, restrictive covenants, closing
conditions and representations and warranties are often agreed upon
as part of the Put or Call-option. - Non-compete clauses and other restrictive
covenants: Shareholders commonly agree to a non-compete
clause for as long as they are shareholders in a company and for a
certain period afterwards. Special attention must be paid to
mandatory rules of non-compete in employment relationship. In
accordance with Norwegian employment law, an employee is entitled
to compensation for the duration of the non-compete period. Details
follow from the Norwegian Working Environment act chapter 14A. - Dispute mechanisms: A shareholder agreement
should contain provisions for resolving disputes that may occur.
The shareholder agreement can contain provisions of mediation or
specify that financial matters, such as valuation, are referred to
an independent financial expert.Provisions of dispute mechanisms
should also contain provisions of legal venue and choice of law.
Lastly, it may contain contractual penalty clauses. This is often
practical as the claimant is only entitled to covering economic
loss that follows from the breach. This may be hard both to
calculate and to prove.
7.2. Transitional services agreements (TSA)
A transitional services agreement, or TSA, is an agreement
between purchaser and seller aiming to ensure seamless and orderly
administrative transition after the closing of a transaction. A
well-crafted TSA should clearly define and specify:
- The scope of services to be provided,
- the terms that apply for those services; and
- the length of service / transitional period.
7.3. Escrow agreements
As part of an M&A, the parties may agree on a so-called
Escrow agreement. An escrow agreement is an agreement involving a
third party, appointed by the purchaser and seller, to hold in
escrow a portion of the purchase price until certain conditions
post-closing have been met by the seller.
An escrow agreement will reduce the buyer’s risk, as the
buyer will usually get the escrow funds back unless certain terms
are met following the transaction.
8. Disputes
8.1. What are the most common reasons for disputes
following M&A transactions?
In Norway, as elsewhere, disputes sometimes happen following
M&A transactions. Some of the most common disputes are:
- Purchase price and price adjustment
disputes:Price adjustment disputes are common in Norway.
They may occur due to changes effecting the value of a target
company between signing the SPA and closing. They may also occur
due to disagreements in the interpretation of the price adjustment
provision or due to behaviour from the seller that influences the
value of the target, including disloyal activities. - The seller withholds or provides erroneous information
of the target company:Violation of the seller’s
pre-contractual duty to inform is a common basis for disputes.
These disputes are often covered by representation and warranties,
but if they are not, the seller has an obligation, in accordance
with Norwegian case law, to provide correct information and not
withhold any information that may in retrospect be viewed as
important to the buyer. Claims may be based on misstatements on the
value of assets or status of liabilities, or the purchaser might
base their claim on financial projections on future earnings that
prove not to be correct. - Breach of representation and warranties:
Breach of representation and warranties represent a common reason
for post-closing disputes following the transaction. - Post-closing activities:Sellers might involve
themselves in post-closing activities that lead to disputes.
Examples are breach of non-compete clauses or poaching of the
target company’s clients. - Claims for indemnification: Disputes are not
uncommon in connection with indemnification clauses provided by the
seller. The disputes may involve whether a claim is covered by the
clause or the consequences of the claim not being covered by such
clauses. - Post-closing shareholder disputes: If the
purchaser does not fully acquire the company, but just a portion of
the shares, shareholder disputes regarding how the target company
is to be operated going forward are not uncommon. Such disputes are
often governed by shareholder agreements.
8.2. Personal liability
Personal liability for representatives of the target company
(board members or CEO), or from the seller’s representatives,
is increasingly common in Norway.
The legal basis for such claims is Section 17-1 of the Norwegian
Limited Liability Companies Act, stipulating that representatives
may be held personally liable for economic damage that they, in
their role as representatives of the company, intentionally or
negligently have inflicted on others.
The main reason is if the representative provides misleading or
incorrect information of the target company which results in an
economic loss for the purchaser. Personal liability is especially
relevant if the seller is in economic distress or if the
representatives act on behalf of the target company. In case of the
latter, a claim for damages against the target company may be
meaningless, as it would influence the value of the company and
thus also the value of the purchaser’s shares in the target
company.
For more information, please read our article on director’s liability under
Norwegian law.
8.3. What are the most common dispute mechanisms in
Norway?
The parties of M&A transactions are in principle free to
structure how disputes are to be resolved. Exceptions include
certain legal areas such as employment-related matters, tax law and
competition law. The transaction documents (SPA / APA and
shareholder agreement) should thus provide dispute mechanism
provisions and the parties should emphasize laying them out to
align with their best interest.
8.3.1. Legal venue and governing law
The SPA or APA should contain provisions on legal venue and
governing law. Where the parties have not agreed on provisions of
legal venue, correct legal venue might follow from these rules in
accordance with Norwegian law:
- For companies domiciled in Norway, they will as a main rule be
sued in the courts of Norway. - If the claim relates to the contract, correct legal venue could
be the courts of the place of performance of obligation in
question. - If the claim relates to tort, delict or quasi-delict, correct
legal venue might be the place where the harmful event occurred or
may occur.
Choice of law / governing law follows other sets of rules. One
main rule, which also follows from Norwegian international private
law, is that a dispute should be subject to the governing law of
the country where it has the closest connection. This also follows
from the Rome Convention on the law applicable to contractual
obligation (80/934/EEC). The convention has not been ratified or
incorporated in Norway, but it has been assessed that Norwegian
international private law is the same when it comes to this
matter.
8.4. Negotiations
Before litigation, it is advisable that the parties make serious
attempts at trying to resolve disputes through negotiations.
Litigations may become a lengthy and often expensive matter for the
parties.
It is therefore advisable that the parties try to negotiate a
settlement before claims are litigated, and thus advisable that the
transaction documents (SPA / APA) contain provisions on duties to
negotiate in good faith before litigation.
8.4.1. Arbitration or court-based
litigation?
The parties have a choice between arbitration and court-based
litigation.
Arbitration may be agreed upon beforehand as part of the
transaction documents or the parties may agree on arbitration when
a dispute arises. In cross-border transactions, arbitration has
historically been preferred over national court proceedings. Partly
due to the fact that the New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards are enforceable without
subsequent proceedings in national courts where the decision is to
be enforced.
Arbitration has become less common as international conventions
have been put in place. For Norway in particular, the ratification
of the Lugano Convention means that rulings from Norwegian courts
are enforceable in other countries bound by the convention.
There are various reasons why arbitration or public litigation
may be preferable. Public litigations are public and may take
longer time, as decisions may be appealed to the appeal courts.
Arbitration, on the other hand, is not public and is faster, since
there is no option to appeal. The preparation phase is also more
limited.
8.5. Account based arbitration
Certain types of disputes might be referred to written
arbitration. This may especially concern disputes involving
technical and account-based issues, such as purchase price
calculation and adjustments and working capital.
9. Dispute processes in Norway in connection with M&A
transactions
9.1. Some distinctive features in litigation cases
before Norwegian courts
If disputes are brought before the courts, there are some
distinctive features that foreign entities should be made aware
of.
Firstly, the Norwegian dispute mechanisms are based on the
negotiation principle. It is up to the parties to produce evidence
to form the basis of the court’s decision. As a result, this
also means the court cannot base its decision on any other factual
basis than what has been provided by the parties.
Secondly, Norwegian dispute mechanisms are based on the
principle of contradiction. Each party has an equal right to
present their case before the court decides on the matter.
Thirdly, Norwegian courts will decide on a case only on material
presented orally, directly before the court. The court will hear
the parties and witnesses directly and base its decision on the
arguments provided in court. In this way, Norwegian legal
proceedings distinguish themselves from other European countries,
where parties will present their argument in writing, and where
statements from parties and witnesses will be written
down—and cases are decided upon that written material as
well.
9.2. How a case is prepared and conducted
A public litigation begins with the plaintiff sending in a writ
of summons. The pleading should cover the facts and legal arguments
constituting the claim.
The respondent sends their defence within a deadline. Failure to
respond might result in a ruling in favour of the plaintiff by
default.
The plaintiff and the respondent might send in pleadings for the
duration of the so-called preparatory period which lasts until two
weeks before the court case.
When it comes to the oral proceedings, the time is usually
divided equally between the parties. The proceedings start with the
parties’ opening statements, which lay out the facts and the
evidence supporting these facts.
After that, each party give their statements before other
witnesses are called in to give theirs. Each party has a right
cross-examine the opposition’s witnesses and the court may also
ask questions.
The court case ends with each party presenting their closing
arguments. After that the court decides on the case in the form of
a ruling which usually comes within a month. The decision by the
district court can be appealed to the appeal court.
Originally published 24 March 2023
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
