The Norwegian company legislation severely limits financial assistance from the company being the target in an acquisition to the acquirer. A formal proposal for changes to these financial assistance regulations has now been submitted to the Norwegian Parliament, after a hearing earlier this year. The changes will probably be passed and come into force next year. The changes proposed may make it easier than today for banks to finance acquisitions with the target company’s assets as valid security.
Written by Partner|Lawyer Stein Hegdal and Associate Sonja Lorentzen
What are the current financial assistance restrictions?
A target company may today not provide financial assistance for the benefit of its aquirer beyond such funds as may lawfully be distributed as dividend, cfr. section 8-10 of the Limited Liability Companies Act. As such, the current wording of section 8-10 in most cases effectively prohibits a company from granting security and providing guarantees in connection with an acquisition of shares in the company itself, or in its parent. Exemptions may today be granted upon application to the Ministry of Trade, Industry and Fisheries. In addition, a target company qualifying as a “property operating company” may provide its property as security according to an exemption regulation. This regulation does not open for use of other assets as security, like bank accounts and rental income.
What legislative changes are proposed?
The proposal introduces one general exemption to the limitation rules: Financial assistance to acquisition of the shares in a company may be rendered by that company, or its subsidiary, if the acquirer is part of the same group of companies or will become so through the acquisition. The exemption only applies to private limited companies, not to public limited companies, and also only if the acquiring company is domiciled within the European Economic Area.
What conditions for financial assistance will apply under the new legislation?
There are several conditions which must be fulfilled:
- The financial assistance must be on arm’s length terms. (The Ministry comments that this may include compensation or security for the financial assistance);
- The board of the assisting company must make a credit assessment of the receiving company;
- The board of the assisting company must prepare and sign a report on:
a) the background and the conditions for the financial assistance;
b) the compensation offered for the shares;
c) an assessment of the assisting company’s interest in providing financial assistance; and
d) an assessment of the consequences providing financial assistance will have on the assisting company’s capital and liquidity.
- The board of the assisting company must provide a statement, signed by the board members, that it is in the interest of the assisting company to render the financial assistance, and that the assisting company’s equity and liquidity will fulfil the legal requirements after providing the financial assistance;
- The report and statement of the board of the assisting company must be submitted to the Company Registry prior to the financial assistance being rendered;
- The assistance must be approved by the assisting company’s general assembly with at least two thirds majority prior to the providing of the financial assistance.
These procedures will apply to both private and public limited companies which are rendering financial assistance, but for the public limited companies the assistance must be within the limits for lawful dividend distribution.
What are the changes for financial assistance from property operating companies and development projects?
The conditions above will be new in relation to property operating companies, which are now governed by the exemption regulation. However, the present regulation’s exclusion for real estate development projects as security will no longer apply. This change may open new financing sources for such projects.
Both the possibility to apply for individual exemptions and the general exemption for property operating companies will be revoked if the proposal should become law.
Will the new rules on financial assistance also affect the requirements of auditing etc.?
Financial assistance which is covered by this group exemption will also be exempted from the requirements of section 3-8 of the Limited Liability Companies Act which require certain procedures to be followed for agreements between a company and its shareholders.
What will be the consequences of unlawful financial assistance?
The consequences of unlawful financial assistance will remain as today: any unlawful assistance will be rendered invalid. The lender’s rights according to any security being considered as unlawful financial assistance may only be exercised if the holder of the security was in good faith when the assistance was rendered.
When will the new legislation on financial assistance enter into force?
It is uncertain when the Parliament will decide on the proposal. The short autumn term of the Parliament is normally consumed by budget negotiations. New legislation on financial assistance should therefore not be expected until sometime next year.