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” / “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
- Tax matters
- Governmental regulations, filings and compliance
- 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.
- 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.
8.1. 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.
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.
8.3.3. 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.
8.4. 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.
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