Ole Aabø-Evensen and Harald Blaauw of Aabø-Evensen & Co in Oslo look at the latest changes to the Norwegian M&A regime
Brief note on Norwegian M&A – the international perspective
In terms of methodology, legislation and practical approach, the Norwegian book of M&A should prove quite the perspicuous read for those otherwise accustomed to European transactional regimes. The reason for this is twofold.
Firstly, the Norwegian legislative backdrop is generally clear and straightforward, and incorporates, through EFTA and the EEA, most of the pertinent EU-regulations pertaining to M&A transactions (e.g. the Prospectus, the Takeover, the Transparency, the Market Abuse, and the Markets in Financial Instruments Directive). Amid these antitrust and merger control regulations is found a well-structured national statutory framework regulating M&A, wherein the Private and the Public Limited Liability Companies Act together with the Partnership Act form the main pillars and wherein transactions involving a public company whose securities are listed on a regulated market place in Norway furthermore are subjected to the Norwegian Securities Trading Act and the Securities Trading Regulation.
Secondly yet equally important, the Norwegian methodology and practical M&A approach has gradually evolved in unison with the international markets (in particular the US and the UK), and most of the undertakings necessitated or otherwise prescribed by an international transaction will, to a greater or lesser extent, find its cordial counterpart in Norwegian practice – whether the matter being public or private acquisitions, leveraged buyouts, corporate finance, shareholder activism, group restructuring, security offerings, etc.
Legislative update – New reporting routines for i.a. private equity funds
Although Norway weathered the storm sweeping over the global shores of financial stability and prosperity in 2008/09, many European markets did not fare so well. In the aftermath, many curative measures (if not remedial at lease responsive) were introduced by inter alia the European Commission, one of which being the Alternative Investment Fund Managers Directive (AIFMD).
The directive recognises that managers of alternative investment funds (AIF) such as hedge funds, private equity funds, real estate funds and a wide range of other institutional funds, by virtue of managing vast quantities of assets and contributing to the leverage build-up in the global financial system (which so untimely and rapidly came undone during the financial crisis), have become significant actors in the European financial market. As the name implies, the directive seeks to monitor and regulate the behaviour of such managers, the overarching aim being the protection of investors through transparency (e.g. disclosure of significant holding), as well as equipping national supervisors, such as the Norwegian Financial Supervisory Authority (FSA), with the relevant tools necessary to monitor and respond to risks regarding the stability of the financial sector, possibly caused or exasperated by such managers and the funds they manage.
The AIFMD was implemented in Norwegian law on July 1 2014 (the "Act"), and applies to managers of all collective investments vehicles (irrespective of legal structure, albeit not Ucits funds) that call capital from a number of investors pursuant to a defined investment strategy. As the Act pertains to managers and not the funds themselves, it has been questioned whether the general partner in a private equity structure (PE) falls within the Act's management definition ("portfolio management and risk assessment for alternative investment fund"), the issue being that a general partner often manages and acts on the advice of others. Although the Norwegian Ministry of Finance in preparing the Act suggested freedom of choice for AIFs wherein commercial decisions and risk assessment are divided between different units, the Act defines a manager as any "entity that on a commercial basis manages an alternative investment fund", and it seems clear, from our point of view, that the general partner of a PE fund must abide by the Act.
There are two levels of adherence under the Act. The first is a general obligation to register the AIF-manager with the FSA, and provide the agency with information, on a consecutive basis, about the fund's investment strategy; the main category of instruments it invests in; and the largest engagements and concentrations under its management. Failure to comply with these reporting requirements may induce the FSA to demand immediate rectification, or to impose a temporary ban on the manager's and the fund's activities. The foregoing applies to all AIFs, whereas the second level of adherence (see below) only apply to funds that either (a) manage portfolios of AIFs whose assets under management exceed a threshold of €500 million when the portfolio consists of AIF’s that are unleveraged and where its investors do not have redemption rights for the first five years of investment, or (b) manage portfolios of AIFs whose assets under management, including assets acquired through use of leverage in total exceed €100 million. Where an AIF exceeds these thresholds, the manager must, in addition to the reporting requirements above, obtain authorisation from the FSA to manage and market the fund's portfolio, herewith conducting its own risk assessments, etc. An application for authorisation must include all pertinent information about the manager (e.g. qualifications, remuneration and organisation) and the funds to be managed, and must further establish (inter alia) financial capability and prudent governance routines of the manager (not the fund), pursuant to stipulations of the Act. In addition, the manager shall each year furnish the SFA with complete and descriptive accounts of each AIF under management, herewith its annual accounts and annual report.
From a transactional point of view, and particular with respect to new obligations for PE actors operating in the Norwegian market, the Act stipulates five points of special interests.
The first is disclosure of control in non-listed companies and stipulates that if a fund, alone or together with another AIF, acquires control (more than 50 % of votes) in a non-listed company with at least 250 employees and either revenues exceeding €50 million or a balance sheet exceeding €43 million, the manager must, within 10 business days, inform the SFA. Exempt from the forgoing are acquisition of companies whose sole purpose is ownership or administration or real property. The notification must include information about when and how control was acquired, shareholdings and voting rights of the target, any planned undertakings to avoid potential conflicts of interest and planned communication strategy vis-à-vis investors and employees. The target and its residual shareholders shall also be informed about the fund's strategic plans, and how the acquisition may potentially affect employees.
Secondly, and ensuing an acquisition of such non-listed targets as described above, the manager is under duty to inform the SFA within 10 business days if and when the fund's shareholdings in such targets either reaches, exceeds or falls below 10, 20, 30, 50 or 75%.
The third point of interest is that a manager for each AIF must establish a maximum level of gearing, and determine what part(s) of the asset base that, in a cautious and appropriate manner, is suitable as collateral. The manager must regulate this with due respect to the fund's investment strategy, capital needs and risk exposure and he must be able to demonstrate that his decisions are responsible and sound – if otherwise concluded, the SFA may interject their own limitation of maximum gearing level, etc.
Fourthly, the manager must for each AIF appoint a depository, who (for Norwegian AIFs) must be a credit institution (i.e. a bank) or an investment firm regulated by the Norwegian Securities Trading Act. The depository shall, inter alia, keep oversight with the fund's cash flow, that investors' subscriptions are received, and that all assets are booked in accounts of the fund.
The fifth point of interest, legislated through regulation to the Act, is that a manager, during the 24 months period following acquisition, more or less is prohibited from facilitating, supporting or instructing any distribution, capital reduction, share redemption or acquisition of own shares of target. The foregoing applies if either (a) target's net assets, pursuant to the last annual accounts are, or following such distribution would become, lower than the amount of subscribed capital plus reserves that cannot be distributed subject to statutory regulation; or (b) such distribution exceeds target's profit for the previous fiscal year plus any subsequent earnings/amounts allocated to the fund, less any losses/amounts that must be allocated to restricted funds subject to statutory regulation. These limitations on distribution do, however, not apply on a reduction in the subscribed capital, the purpose of which is to offset losses incurred or to include sums of money in a non-distributable reserve, provided that the amount is not more than 10% of the subscribed capital. The uncertainty to what degree these so-called anti asset stripping provisions will affect a PE fund's ability to conduct debt-pushdowns in connection with leveraged buyouts notwithstanding, it seems safe to assume that any limitation upon a target's capacity to make distributions post-acquisition most likely will affect the planning and execution of appropriate PE capital structures going forward.
Aabø-Evensen & Co
About the author
Ole K Aabø-Evensen assists industrial investors, financial advisors, private equity funds, as well as other corporations in friendly and hostile take-overs, public and private mergers and acquisitions, corporate finance, securities law and other corporate matters. Ole has extensive practice from all relevant aspects of transactions, both nationally and internationally, and is widely used as a legal and strategic advisor in connection with follow-up of his clients’ investments. Aabø-Evensen is also the author of a 1,500 pages Norwegian textbook on M&A and numerous articles on mergers and acquisitions in various international publications. In an annual independent peer review, published by Norway’s leading financial newspaper Mr Aabø-Evensen has several times been named as Norway's No 1 M&A lawyer. Ole is a former partner and head of corporate legal services and M&A with KPMG in Norway.
Aabø-Evensen & Co
About the author
Harald Blaauw advises on general corporate and commercial law, mergers and acquisitions, stock exchange and securities, and transactional-related matters. He has particular experience in takeover bids, private acquisitions and corporate litigation, and a large part of his work is of a cross-border nature. Prior to joining the firm, Mr. Blaauw worked as an attorney at Curtis, Mallet-Prevost, Colt & Mosle LLP (New York) and Wiersholm (Oslo), after clerking at the Supreme Court of Norway (Oslo). Mr. Blaauw is admitted to the Bar of New York and the Bar of Norway, and received his education from University of Pennsylvania Law School, the Wharton School of Business (Corp. Finance), American University in D.C. (Intl. Law) and University of Bergen Law School.