1. CORPORATE TRANSACTIONS IN NORWAY
Norwegian legislation is in general neutral to whether the investment is done by a Norwegian or foreign natural or legal person. There are some exceptions for ownership and business operations in sectors regarded as important national interests, such as the power and energy sector and the financing sector.
The Norwegian legal system is a civil law system which means that if an agreement is not exhaustive on a topic and / or a situation that is not regulated in the agreement arises, the question will be regulated by the background law. The legal basis for corporate transactions in the form of buying and selling a corporate entity is:
- The Limited Liability Act of 1997
- The Public Limited Liability Act of 1997
- The Partnership Act of 1985
- The Contract Act of 1918 (applies to almost all contracts)
- The Norwegian Sales of Goods Act of 1988
- The Securities Trading Act of 2007 for companies listed on the Oslo Stock Exchange
- The Competition Act of 20014
As the number of unlisted public limited liability companies in Norway is small, the target company in most transactions are private limited liability companies. There are also acquisitions of partnerships (ANS/DA), internal partnerships and limited partnerships (IS/KS), but the frequency of this is rare compared to the acquisition of a private limited liability company. You can read more about Norwegian business entities in our separate article here. Below we will focus on the acquisition of a private limited liability company. You can read more about mergers of private limited liability companies here.
2. Acquisition of a private limited liability company
Buying and selling private limited liability companies raises several questions that needs to be addressed. There are no formal requirements on how to do a transaction or which documents has to be made, apart from the regulations in the Limited Liability Act for notification and approval of the share transfer. Read more about the regulation in the Limited Liability Act here.
Transactions are made with varying quality and thoroughness in documentation. There is no key to which steps a transaction must entail or in which order they have to be completed. Nevertheless, a certain practice for how share transfers are done has evolved in Norway. I will go through this practice below. You are not bound to follow this practice, but it is meant to safeguard important considerations in the transaction process for the seller and the buyer.
3. The prelude to a transaction
If the seller does not have a buyer already, finding a buyer is typically done through a structured auction where potential buyers are invited to join. The purpose with holding an auction is to gain interest from several buyers so there will be a competition as to who will be the buyer, and thus secure the seller the highest price.
A short teaser with information about the target company, and the fact it is for sale, made by a financial advisor, is usually the opening of the transaction. An information memorandum (“IM”) with further information about the target company will follow, often accompanied by a letter / memo describing how the seller wants the transaction process carried out. The sellers’ due diligence (Vendors’ due diligence “VDD”) will often be released at this stage if a report from this has been made.
If the seller and buyer have already found each other, the main terms of the agreement will usually be clarified and this part is skipped.
4. Non-Disclosure agreement – NDA
In most cases the seller will require the signing of a non-disclosure agreement (“NDA”) before they release information about the company. The purpose is to prevent misuse of the information.
An NDA should include regulation of: The parties, what information is regarded as confidential, what does the duty of confidentiality mean and the other parties’ right to use the information received. How breaches of the NDA will be handled should also be included. In Norway it is common that the seller presents a Non-disclosure undertaking (“NDU”) instead of an NDA. This is in principle the same in content, but note; the undertaking will only be taken by the buyer, not the seller.
Based on the information the buyer receives, the buyer must estimate the enterprise value (“EV”) and decide if they want to give an offer. The offer letter will normally hold reservations towards a completion of a satisfactory due diligence, and that certain specified conditions must be satisfactory fulfilled. The offer may be binding or non-binding.
6. Letters of intent
Letters of intent come in many forms; there is the ordinary letter of intent, the memorandum of understanding, heads of terms and terms sheet. I will here use the term letter of intent.
The purpose of the letter of intent is to set out the main commercial topics agreed on, or intended to be agreed on, and set the basis for further negotiations to a final agreement. Key topics in a letter of intent is typically: Parties, completion of satisfactory due diligence and timeframe for this, price and costs, conditions, timeline leading up to the transaction, choice of law and dispute resolution mechanisms, and responsibility to make the first draft of the purchase agreement. It should also be clearly defined if the letter of intent is binding for the parties or not.
An exclusivity provision may be included in the letter of intent. This may also be set up in a separate exclusivity agreement if so preferred. An exclusivity provision means that one of the potential buyers gets the opportunity to have exclusive negotiations with the seller for a certain period of time. An exclusivity agreement is binding for the parties and the buyer can claim damages if the seller breaches the exclusivity clause.
The use of break fees occasionally appears in letters of intent. In some situations this may seem too seller-friendly, but where the seller has granted one buyer exclusivity it may be reasonable that the buyer should compensate the seller for possible loss accrued through other buyers being left out of the auction due to one buyer’s exclusivity period.
7. Due diligence – DD
The goal with the due diligence (“DD”) is to verify the commercial assumptions made by the buyer at the preliminary stage, and identify potential risks in the company and the transaction to be made.
The scope of review will be defined by the buyer and a request list will usually be sent from buyer to seller. Based on the request list the seller will provide information to the buyer. This is usually done using a data room that is categorized in the same order as the request list. All parties and / or their advisors will receive login details to the data room, and the data room will be open in the period agreed upon for the due diligence to be completed. After this period the data room will be closed, and the information provided in the data room stored at e.g. a USB stick. This will be handed over to the buyer either at signing or closing.
Presenting physical documentation at the seller’s office still occurs in smaller transactions, but it is rare.
After the due diligence is completed, the buyer’s advisors will make a due diligence report so the buyer can review the facts and findings. The buyer can choose if they want a full and comprehensive report or a shorter red flag report. Which one to choose depends on the buyer’s need for complete and full information about the target company, as well as costs to advisors.
When the due diligence is completed, the parties are ready to start negotiating towards a final agreement. If there are several potential buyers that have made a due diligence, the seller will ask for a final binding offer together with a mark-up of the draft of agreement the seller has presented. The seller will then choose which buyer to go forward with. There are variations of this process.
8. Share purchase agreement – SPA
The share purchase agreement (“SPA”) comes in many forms and formats, but are usually built over the same framework.
For the purchase of shares in a company owning a property / business premises there is a standard estate agency terms agreement that is used in most cases (Meglerstandarden). The use of this contract will usually be included in the information provided in the preliminary period. Even though this is a standard agreement, there is always the need to tailor it to each specific transaction. The standard comes in Norwegian and English, and with and without closing agent.
9. Signing and closing
At signing, the agreement will be signed by the persons authorized to bind the seller and buyer. For Norwegian companies, the authorized signatories will be set out in the company articles and be registered in the Register of Business Enterprises. A proxy may be given from the authorized signatories. If a proxy is signed abroad for use in Norway, the signing must be witnessed and legalized by the Notary public in accordance with the Hague Legalization convention. If the signing of a proxy is done in Norway (this applies to both Norwegian and foreigners), the proxy may be witnessed by one attorney or two Norwegian residents.
At closing, both parties shall fulfil their obligations set forth in the agreement. Before closing, the parties should have prepared a unified closing memorandum where all stages necessary to close the agreement is listed (conditions precedent “CP”), including which documents must be presented, what is sufficient proof of payment of the purchase price etc. When closing is completed, both parties will sign the memorandum and it will serve as written record that both parties fulfilled their obligation at closing.