The Norwegian Limited Companies Act (the “Act”) severely limits the possibility a target company has to provide financial assistance in connection with the acquisition of it, and the Trade Ministry recently issued a consultation paper, proposing to ease those limitations. The possibility to provide financial assistance within an existing group of companies is today much less restricted, and the proposal aims to regulate financial assistance in acquisition situations in a similar way. However, it introduces some procedural requirements which may become challenging if maintained.
This newsletter gives a brief overview of the effect an act as now preliminary proposed, will have on the ability of target companies to provide financial assistance to a third party acquiring that target company.
Current legislation
Financial assistance by a target company is by section 8-10 of the Act limited to means which may be distributed as dividend according to applicable legislation, and requires the acquiring company to provide security for any claim for restitution or reimbursement by the target company. As such, the current wording of section 8-10 in practice effectively prohibits a target company from granting security and providing guarantees in connection with an acquisition of shares in the target company itself or its parent. Any financial security granted in violation of the current provision is, according to the explicit wording of the law, invalid and any payments received from enforcement of such security will have to be repaid if claimed by the pledgor or guarantor, or, more practical, by its bankruptcy estate.
Exceptions to this limitation includes individual exemptions upon application to the Ministry, or the target company qualifying as a “property company” under Regulation no 1336 of 30 November 2007, allowing the property company to provide the property as security.
The proposed changes
The Ministry now proposes the following changes to section 8-10 and accompanying regulations:
- (a) A general exemption for target companies which are to become part of a group through an acquisition, similar to the exception for companies already part of a group. The possibility to apply for individual exemptions and the general exemption for property companies will accordingly be revoked.
- (b) More extensive requirements as to the target company’s board of directors evaluation of the financial assistance. Financial assistance is only permissible if the disposition is in the interest of the target company and defensible by reference to the target company’s liquidity and solidity. This must be summarised in a report which needs to be prepared and signed by the board prior to providing financial assistance.
- (c) The report will also need to be submitted to the Norwegian Register of Business Enterprises prior to the provision of financial assistance, for publication (as already required for public limited liability companies, as regulated by the Norwegian Public Limited Liability Act section 8-10).
We note that the Ministry has proposed that the liberalisation shall apply to private as well as public limited companies. We trust that the final proposal will take into account the provisions of article 64 of the Directive 2017/1132/EU, and that at least listed public companies will not be permitted to provide financial assistance in connection with the acquisition of shares beyond its distributable reserves.
Consequences of the proposed changes
The proposal, if adopted in its current form, will entail extended ability to provide financial assistance in connection with acquisition, in exchange for stricter requirements as to board evaluation and increased transparency.
Financial assistance regulations have up till now distinguished between target companies which are to become part of a group through an acquisition, and companies already part of a group. The proposed changes to section 8-10 will to a lesser degree distinguish between these two situations.
The Ministry motivates the proposed general exemption partly by the target company continuing to be subject to other limitations in the Act concerning, inter alia, equity requirements, related party regulations and group transaction regulations. In real estate transactions, the general exemption will lead to greater clarity for the parties involved in the acquisition and acquisition financing, as they will no longer have to consider whether a target company is a “property company”, and thereby covered by the exemption regulation. On the other hand, the buyer of a “property company” will need to adhere to the new procedural and administrative requirements, which are less of an issue under the current legislation.
Neither will it any longer be necessary or possible to resort to the (often time consuming) application process with the Ministry for individual exemptions. This will facilitate the planning of acquisition transactions but on the other hand, compliance with the procedural requirements may prove challenging. The proposal sets out that the board of the target company must prepare, issue and register a report, including an evaluation and a statement that the financial assistance is in the interest of the company, before such financial assistance is rendered. In practice, solutions for handling these difficulties will certainly be found.
However, the wording is somewhat ambiguous. In the consultation paper, the Ministry has stated in its comments to the proposal that the report to be submitted to the Norwegian Register of Business Enterprises must also have been made public prior to the financial assistance being provided. This seems highly impractical and does not necessarily follow from the proposed text. It would be strongly preferable if the Ministry proposed – or clarified that its proposal is for - a regulation which allowed for the report to be issued and sent for registration simultaneously with the providing of security, and that the publication of the report may be done post completion.
The Ministry intends to submit a formal proposal for this and other changes to the Act to the Norwegian Parliament during spring 2019, after having evaluated responses to the consultation paper. One must thus expect that the formal proposal to change the law will differ from this preliminary proposal. We will keep you informed of further development in the legislative process.