1. Liberalization of the financial assistance rules is expected
The Ministry has received a number of comments to the proposal during a hearing process, proposals which are now being considered by the Ministry. It is expected that the Ministry will forward a proposal for amendments to the Norwegian parliament this year, aiming for the new rules to enter into force 1 January 2017. The final proposal will most likely provide for liberalization of the fairly strict rules, but the final scope of such proposed changes is not yet known. We will distribute further updates as the legislative work progresses.
2. The current legislation
2.1 A target company may in practice not render financial assistance to its buyer
Today, section 8-10 of the Norwegian Limited Companies Act (the “Act”) effectively prohibits a company from granting security and providing guarantees in connection with an acquisition of shares in the company itself or its parent. Thus, limited liability companies being the target of an acquisition may in the outset not be guarantors or provide security for the loan financing the acquisition in question.
Security rendered in violation of the act will be invalid. Any payments received from execution of security will have to be repaid if so claimed by the guarantor, or even more practical, by its bankruptcy estate.
2.2 Exemptions in the act itself
The Act provides for two main possible exemptions:
2.2.1 Exemption by application
The Ministry may on application grant exemptions from section 8-10 of the Act, including permitting properties and other assets to be provided as security. The criteria for getting an exemption are that there is little or no risk for other creditors to suffer any loss, in practice that there are no other creditors. It normally takes two to three months to get a response to an application.
2.2.2 Exemption for “Property companies”
Regulation No 1336 of 30th November 2007 allows property companies to provide their properties as security for a loan financing the acquisition of the company itself, if the company
(i) has no other activity than ownership and operation of property,
(ii) has no other creditors than the lender(s) or creditors who have accepted the security and creditors for normal operating cost,
(iii) has no employees other than a CEO, and
(iv) is wholly owned by the buyer,
and provided that the buyer is a Norwegian limited liability company.
The regulation does not give exemption for other assets than the properties.
The limitation on activity excludes property companies where development projects are being planned or are being undertaken. Regular adaption of premises to tenants’ requirements is however considered to be within “ownership and operation”, and do not make to security invalid.
2.3 The limitations in the act do not apply to refinanced debt
The prohibition on financial assistance does not apply to that part of a loan which is used by the borrower or the target company for refinancing of existing debt or for operating purposes.
There is usually some debt to refinance in most real estate acquisitions and financings. It is therefore common practice to establish security in all available assets, but provide a limitation clause in the facilities agreement and the security agreements, to the effect that guarantees and security are only valid to the extent allowed by the financial assistance regulations of the Norwegian Limited Companies Act.
3. Valid security in the assets of the borrower and its shareholder
The financial assistance limitation rules do not limit security rendered by the borrower itself and its shareholder. A lender may thus obtain security in the shareholder’s shares in the borrower, the borrower’s shares in the target companies, the borrower’s bank accounts and the borrower’s monetary claims against the target companies.
If a cash pooling system has been established, whereby the target company or companies have monies standing to the credit of accounts held by the borrower, such monies will be the property of the relevant target company until the borrower has acquired a legal right to the monies (which may be as repayment or interest on inter-company loans or as dividends or group contribution).
In accordance with the Financial Collateral Act a lender will be entitled to either sell the shares in the borrower and the target companies, or exercise all shareholder rights, without any conditions having to be fulfilled or steps taken, other than notice of an event of default having been given. This will, if required, give the bank actual control over the assets of the target companies very quickly.
A lender’s access to propert insurance payments is secured through the Norwegian Insurance Agreements Act, regulations by which the mortgagee is a composite insured by law.
Through pledge of shares, mortgage in properties and being composite insured, a lender will have control over the most important assets of the borrower, and also protection against other creditors’ execution or bankruptcy.
4. Subsequent refinancing must have a separate and independent commercial reason
It is assumed that security provided in connection with a subsequent refinancing of an acquisition loan will be considered as financial assistance violating the regulations, unless such refinancing has a separate and independent commercial reason. Normally also at least one year will have to pass between the original financing and the refinancing.