M&A: Purchase And Sale Of Business Entities In Norway. A Guide To The Process And Legal Aspects Of Acquisition Of Norwegian Enterprises.

• Published date: 06 September 2023
• Subject Matter: Corporate/Commercial Law, Employment and HR, Litigation, Mediation & Arbitration, M&A/Private Equity, Corporate and Company Law, Employee Rights/ Labour Relations, Arbitration & Dispute Resolution, Shareholders
• Law Firm: Dalan Advokatfirma
• Author: Mr Svein Steinfeld Jervell

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:

1. Share purchase agreements (SPAs)
2. 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):...