Strong Activity Throughout 2021

A strong level of mergers and acquisitions activity was demonstrated in Q1 2021 and continued throughout the year. According to Baker Tilly International, global mergers and acquisitions activity reportedly reached USD5.9 trillion, the highest in more than a decade. Similarly, a total of 471 Norwegian deals were announced through Mergermarket in 2021, with a disclosed value of EUR41,817 million. By comparison, Mergermarket announced 329 Norwegian deals in 2020 (with a disclosed value of EUR26,481 million).

There were record-high 82 listing activities on the Oslo Stock Exchange and Euronext Growth in 2021(of which 61 were on Euronext Growth), although the listing activity declined towards the second half of the year.

A significant portion of Norwegian mergers and acquisitions activity is still dominated by private equity firms, with approximately one out of three deals made in Norway over the past 12 months involving a private equity firm.

2022 Activity

Despite the threat of growing inflation and market volatility associated with the geopolitical situation in Europe, the mergers and acquisitions activity in Norway has shown resilience through the first half of 2022. The record-breaking IPO activity experienced in 2021 is over, but the mergers and acquisitions activity remains relatively strong in first half of 2022, with 253 Norwegian deals announced through Mergermarket (compared to 261 first half 2021).

It is expected that mergers and acquisitions activity in Norway will remain relatively strong for the remainder of 2022, owing to the resilient Nordic and Norwegian economies, intraregional activity, an optimistic deal pipeline, and sufficient capital available on the financing and equity markets. As a result of the aforementioned factors, Norway and the Nordic region are currently among the safest investment regions in the world. Going forward, Norwegian businesses should remain highly attractive targets for US and European private equity investors.

Norwegian private equity markets include all types of transactions that can be found in mature markets across the globe.

According to the registered data available on Mergermarket, 89% of the deals made in the last 12 months (LTM) were private, as opposed to public deals.

Historically, most exits have taken the form of trade sales to industrial investors or secondary sales to other private equity funds, rather than IPOs. However, as mentioned in 10.1 Types of Exit, private equity-backed IPOs have seen a significant increase in 2021, and Euronext Growth has become a popular exit option for private equity investors in favourable market conditions.

In 2022, deal activity has mostly been driven by the technology, services and construction sectors, as well as an increase in aquaculture activity.

Mergers and acquisitions activity in Norway has historically been dominated by deals involving the oil and gas and supply industries. Recent decline in oil prices and the green shift have dampened the deal activity within this sector. Nevertheless, the oil price has recently increased and stabilised, in conjunction with the current geopolitical turmoil in Europe, which has increased demand for fossil fuels. As a result, it is anticipated that deal activity within the oil and gas industry, and, in the near future, deals in the supply industry will increase.

ESG

Across industries, companies scoring high on environmental, social, and governance (ESG) are more active than others. Mergers and acquisitions are and will continue to be influenced by ESG considerations, including in selection of targets, due diligence, valuation, deal financing and post-closing considerations such as integration and corporate governance. The Government Pension Fund of Norway has announced that it will accelerate divestments from companies that do not meet key ESG metrics.

in line with recent years cross-border transactions have remained strong. Approximately 50% of deals with Norwegian targets have been cross-border.

Upstream Financial Assistance

Previous laws prohibited private limited liability companies from providing upstream financial assistance in connection with acquisition of their own or their parent companies' shares. Since 1 January 2020, this no longer applies to buyers who are already members of the same group as the target or have become members in connection with the acquisition if they are domiciled within the EEA. There remain certain procedural rules that must be followed, and the assistance must be granted on a normal and commercial basis.

Ownership in Bank or Life Insurance Company

Norway has a long-standing administrative practice that restricts any single shareholder from owning more than 20–25% of a Norwegian bank or life insurance company (or financial groups comprising such entities), unless the shareholder is itself a financial institution.

As of 11 March 2020, the EFTA Surveillance Authority (ESA) concluded that the ownership ceiling practice violated the EEA Agreement that exists between Norway and the EU. The Norwegian Royal Ministry of Finance objected to ESA's decision, awaiting the outcome of a civil claim brought before the Norwegian courts. In February 2021, the Norwegian authorities were acquitted in the civil claim on the grounds that there was no cross-border element in the case, and that the restriction was legal.

The outcome was unexpected, and it is unclear whether the Norwegian authorities will change their approach in the light of the outcome. If the ESA decision is upheld and followed by Norwegian authorities, it would open up the possibility of complete takeovers of all types of Norwegian financial institutions, including by private equity funds, subject to the relevant authority determining that such acquirers are suitable for such ownership stakes.

Withholding Tax on Interest and Royalty Payments

With effect from 1 July 2021, a standard 15% withholding tax will apply on interest paid to related parties who reside in low-tax jurisdictions (countries where the effective tax rate is lower than two thirds of the Norwegian tax rate on corresponding income). From 1 October 2021, the same applies to royalties and rental payments for certain physical assets. The withholding tax is imposed on gross earnings, meaning that the earnings are be taxable even if the recipient is operating at a loss. Exemptions apply pursuant to certain tax treaties that stipulate lower tax rates.

Brexit Tax Implications

One of several Brexit tax implications is that, effective 1 January 2021, the exemption method for investments in UK entities by Norwegian investors are conditional on the investor owning at least 10% of the shares in the UK entity for a minimum of two years. Otherwise, dividends and capital gains are taxable. The exemption method is no longer applicable for UK investors in Norwegian entities. This implies that dividends from Norway to UK are subject to withholding tax, limited up to 15%.

Interest Limitation Regime

As of 1 January 2019, the Norwegian interest limitation regime has been amended. As a result of the regime, interest payable on external (third-party) debt within consolidated group companies is subject to the same interest deduction limitation regime as interest paid to related parties. The group definition includes all companies that could have been consolidated had IFRS been applied.

The rules only apply if the annual net interest expenses for all companies domiciled in Norway within the same group exceed NOK25 million, and only if the debt/equity ratio for the total consolidated equity of Norwegian entities within the group is higher than the equity ratio for the entire consolidated group (ie, higher ratio of debt in Norway), in which case all net interest expenses exceeding 25% of the company's taxable EBITDA will not be deductible but have to be carried forward.

EU Directives and Regulations

The EU has issued several directives, regulations and/or clarifications regarding the capital markets in recent years relating to market abuse, takeover rules and prospectus regulations. In order to comply with its obligations under the EEA Agreement, Norway must adopt and implement these in some form. The revised EU Transparency Directive (as amended through Directive 2013/50/EU) has not yet been fully implemented in Norway. Notably, the disclosure obligation provisions are expected to be implemented in the second half of 2022 or in the early part of 2023. On 1 March 2021, the Market Abuse Regulation (EU) No 596/2014) came into force in Norway.

Public Service Sectors

On the left of the political spectrum in Norway, there is some scepticism about private players profiting from public service sectors, such as healthcare and pre-schools. As a result, these sectors are subject to a constant risk of regulatory change. There have historically been fewer transactions within these sectors, and this trend continues today.

General

Most Norwegian private equity transactions involve limited liability companies. Thus, the main company-specific legislation that regulates M&A transactions are the Private Limited Liability Companies Act and the Public Limited Liability Companies Act. Depending on the deal in question, other general legislation supplements the aforementioned – mainly the Contracts Act, the Sale of Goods Act, the Accounting Act, the Taxation Act, the Employment Act and the Competition Act.

Listed Targets

The regulatory framework differs significantly for listed and non-listed targets. For non-listed targets, the parties are quite free to agree on the terms of the sale and transaction agreements. For listed entities, a comprehensive and mandatory set of rules apply as further set out in the Securities Trading Act and the Securities Trading Regulations, supplemented by rules, regulations, guidelines and recommendations issued by the Oslo Stock Exchange.

Norway has inter alia implemented (with some exceptions) the EU Prospectus Regulation, the Market Abuse Regulation, the Markets in Financial Instruments Directive, the Markets in Financial Instruments Regulation, the Takeover Directive and the Transparency Directive. These rules inter alia contain offer obligations and disclosure obligations that dictate the sales process; see 7. Takeovers.

Government Ownership and Control

The Norwegian government is a major owner in the Norwegian economy through significant holdings in many listed companies, and non-listed entities through investment companies such as Investinor and Argentum. Through two government pension funds, the Government Pension Fund Norway (GPFN) and the Government Pension Fund Global (GPFG), the government invests heavily in foreign and domestic companies. In some areas, such as the retail sale of alcohol, the government retains a monopoly

Norwegian law does not generally restrict foreign investments, but restrictions apply in certain sectors, such as power and energy (particularly hydropower, oil and gas) and finance (including financial, credit and insurance institutions). Furthermore, the Norwegian investment screening regime empowers the authorities to screen foreign direct investments of a qualified stake in Norwegian businesses on grounds of national security.

This regime is increasingly important for investors outside of Norway, and at least one prominent transaction was blocked in 2021. The regime is quite new in Norway and it is difficult to ascertain whether or not the target and buyer in question may become subject to the regime.

AIF

Norway has implemented the EU Alternative Investment Fund Manager Directive (AIFMD) through the Norwegian Act on the Management of Alternative Investment Funds (the "AIF Act"). The AIF Act applies to managers of alternative investment funds (AIF), defined as collective investment undertakings that are not undertakings for collective investment in transferable securities (UCITS), and which raise capital from a number of investors with a view to investing that capital for the benefit of those investors in accordance with a defined investment policy.

In implementing AIFMD in Norwegian law, most of the provisions of the AIF Act apply only to the AIF manager (and not to the AIFs per se), but the obligations of the manager indirectly cover the activities of the AIF. A licence requirement applies to all AIF managers at the outset, meaning that they are subject to the full scope of the AIF Act and will be supervised by the Norwegian Financial Supervisory Authority of Norway (FSAN). However, pursuant to the AIF Act, so-called sub-threshold AIF managers may register with the FSAN and will, as registered AIF managers, only be subject to the anti-money laundering regime and certain disclosure obligations to the FSAN. To qualify for the sub-threshold registration exemption, the AIF manager cannot manage AIFs whose assets under management in total equal or exceed an amount equivalent in NOK to:

• EUR500 million, when the portfolios consist of unleveraged AIFs that have no redemption rights exercisable during a five-year period following the initial investment; or
• EUR100 million, for AIFs other than those mentioned above.

However, note that sub-threshold AIF managers may not market their AIFs to retail investors or passport their services into other EEA member states.

The FSAN supervises authorised and registered AIF managers in Norway.

Acquisition of control

A notification requirement applies to the acquisition of control of non-listed companies with a certain size as well as listed companies. In addition, if an AIF's voting share of non-listed companies reaches, exceeds or falls below 10%, 20%, 30%, 50% or 75%, the manager must notify the FSAN as soon as possible – and at the latest within ten business days.

Further, certain AIF investments involving the acquisition of control of non-listed companies of certain sizes or of listed companies are subject to anti-asset-stripping provisions limiting distributions, capital reductions, share redemptions, and the acquisition of own shares for a period of 24 months following the acquisition. There are other provisions of the AIF Act that also apply, but the aforementioned often impact private equity funds.

From 1 August 2021, the implementation of the relevant EEA regulations in the AIF Act also made it possible to establish European venture funds (EuVECA) and social entrepreneurship funds (EuSEF) in Norway. The ELTIF Regulation is yet to be implemented, but is expected to be sometime during 2022.

Looking ahead, the European Commission proposed, on 25 November 2021, a number of legislative amendments to the AIFMD, referred to as the AIFMD II Proposal. The draft directive proposes a variation of changes, largely in respect of loan origination, delegation, liquidity risk management, data reporting and depositaries.

In particular, the expansion of loan originating funds is seen as a positive development in relation to the current regulatory limitations related to financing activities in Norway. According to the AIFMD II Proposal, the following activities should be included in complementary services that AIF managers can provide: (i) loan origination (even if, in practice, it is the AIF itself which originates loans), and (ii) the servicing of securitisation special purpose entities. AIFMs with a MiFID top-up licensc are also proposed to be authorised to provide two additional ancillary services, namely benchmark administration and credit servicing. The AIFMD II is expected to be implemented in Norway in 2024/2025 at the earliest.

Merger Control

In accordance with Norwegian merger regulations, companies must notify the Norwegian Competition Authority (NCA) of mergers, acquisitions and agreements whereby they acquire control of other companies, if the combined annual turnover of the undertakings concerned exceeds NOK1 billion and at least two of the undertakings have an annual turnover exceeding NOK100 million in Norway.

A standstill obligation for a minimum of 25 business days applies to transactions triggering the notification requirements. A notice of concentration can be ordered by the NCA within three months of the final agreement or acquisition of control, even if it falls below the turnover thresholds, if the NCA has reason to assume that competition will be affected or if other particular factors require further consideration.

Concentrations exempted from the notification requirement may be notified voluntarily if the parties wish to clarify whether the NCA intends to intervene prior to completion. If the transaction requires merger clearance at EU level, the EU rules suspend and absorb Norwegian requirements.

Anti-bribery, Sanctions and ESG

In the first half of 2022, the surge in sanctions against Russia and Russian nationals by Norway, the EU and the US, as well as Russian countermeasures to those sanctions, have impacted the attention bidders have paid to sanctions issues during due diligence.

With respect to ESG issues, on 1 July 2022 the Norwegian Act relating to enterprises' transparency and work on fundamental human rights and decent working conditions entered into force (Transparency Act). The Transparency Act intends to promote companies' respect for fundamental human rights and decent working conditions, and to ensure transparency within supply chains. It is likely that compliance with the Transparency Act will soon be a focus of legal due diligence processes.

The level of due diligence typically conducted in the Norwegian market is a red flag-focused, at least when conducted by the buy-side. If sell-side requests a vendor due diligence (VDD), which is usually the case for structured sales processes, a more detailed VDD may be conducted, particularly in relations to financials.

Due diligence is usually conducted by a legal, financial and tax team. Sometimes, separate teams are engaged for other key areas depending on the transaction. Other than business specific issues, key areas of focus for legal due diligence in private equity transactions include:

• GDPR;
• anti-trust;
• anti-corruption;
• environmental, social and governance (ESG); and
• regulatory matters.

There has been an increase in focus on ESG, anti-corruption, and trade sanctions for target groups operating in high-risk jurisdictions. The impact of COVID-19 remains a key focus in 2022, primarily for financial due diligence, but also for legal due diligence since abuse of public COVID-19 grants has triggered clawback requirements restricting dividends and repayment of shareholder loans in fiscal years where financial assistance has been provided.

In Norway, the use of artificial intelligence (AI) tools for due diligence is not yet the norm, for instance, because most of these AI tools have not yet been fully trained in the Norwegian language. While these tools are rarely intended to replace a traditional form of due diligence, they can be useful in gaining early access to information that could be of importance.

Vendor due diligence (VDD) is a common feature for private equity sellers if the exit follows a structured sales process. In that case, it makes sense to conduct a VDD to identify and clean up any material findings prior to transaction start-up. In addition, presenting a VDD report to potential bidders means they will have detailed information early on, allowing them to make an informed offer within a tight timeframe. It may also provide some level of comfort related to the business of the target company.

In cases where VDD reports have been prepared, advisers will often rely on the report and will often be instructed by their clients to conduct buy-side due diligence only on a confirmatory or "top-up" basis (ie, to verify or further explore the findings highlighted in the VDD report).

The final buyer and finance provider are often offered VDD reports for reliance.

Private equity funds in Norway typically acquire companies through private share purchase agreements as well as shareholder agreements applicable to joint investments by the fund, any co-investors, and management shareholders. Prior to entering into the share purchase and shareholders' agreement, the parties typically enter into a term sheet and non-disclosure agreement.

Compared to auction sales, the terms of the acquisition in privately negotiated transactions are generally quite similar. In auction sales, the transaction agreement typically contains fewer conditions precedent, as bidders will use this as a tool to make their bid more appealing to the sellers. For public deals, the acquisition is typically carried out by a pre-acceptance form with material shareholders followed by a public offering.

In public deals, a transaction agreement describing the terms and conditions for submitting the offer is quite often entered into with the target. Approximately two-thirds of all voluntary offers approved by the Oslo Stock Exchange from 2008 to 2021 were made on this basis (including completed and uncompleted offers). A buyer may opt for squeeze-out if 100% control is desired, but cannot be obtained through voluntary offers; see 7.6 Acquiring Less than 100%.

Norway's locally domiciled private equity funds are usually structured as a partnership (indre selskap (IS) or komandittselskap (KS)) or limited liability company (aksjeselskap (AS)). The "indre selskap" partnership model shares the most similarities with the common-law domiciled limited partnerships, which are the predominant legal structure for private equity funds. Both of the above-mentioned partnership models are referred to as limited partnerships in the following.

In a limited partnership, the general partner manages the fund and the limited partners are the investors. The general partner is usually owned through a private limited liability company set up for that particular fund and acts for the limited partnership in all external matters.

Historically, funds managed by Norwegian-based advisors have predominantly been established under foreign jurisdictions, usually in Guernsey or Jersey. A recent trend has been to establish funds in the Nordic region (often Sweden) or in other onshore jurisdictions like Luxembourg.

Acquisitions

In Norwegian acquisitions, the private equity-backed buyer entity (the acquisition vehicle) is almost exclusively structured as a Norwegian private limited liability company (aksjeselskap), set up as a single purpose vehicle (SPV) for the transaction (BidCo).

The structure between the limited partnership and BidCo varies depending on whether the fund is organised under Norwegian law or under another law.

Often, a fund organised under a foreign jurisdiction will set up:

• a foreign holding structure that is incorporated and tax resident outside of Norway; and,
• a Norwegian structure held by the foreign holding structure.

Acquisition Structure

Depending, inter alia, on the transaction financing model and other commercial factors, the Norwegian acquisition structure usually consists of either only BidCo or also a set of holding companies (MidCo and/or TopCo).

If organised under Nordic law, a one-tier structure is normally applied where the investment is made by the limited partnership through a set of Norwegian holding companies.

The choice of acquisition structure is usually determined by which structure would allow for the most efficient return on investment upon exit. This depends – in addition to tax efficiency in respect of the acquisition, duration of investment and exit (such as rules on deductibility of interest, withholding tax, VAT and thin capitalisation) – on a number of factors, including financing, governance structure, the existence of co-investors, risk exposure, corporate liability, disclosure concerns, and regulatory requirements. Normally, if external financing is obtained, a structure that provides a single point of enforcement of the pledge of shares in BidCo for the finance provider is applied (eg, a BidCo, MidCo and/or TopCo structure).

The private equity fund itself is rarely involved in the documentation of the transactions. Most often, the designated investment team and in-house legal counsel of the fund manager are involved, particularly in the initial stages of negotiation, but outside legal counsel normally leads the process. Smaller deals and add-on acquisitions require the investment team to rely to a great extent upon outside legal counsel.

General Trends

In Norway, private equity deals are normally financed by a combination of third-party debt financing and equity. During the past few years, the equity portion has increased, particularly in deals that were highly leveraged. The proportion of debt varies based on, among other things, the fund's track record, the size and robustness of the deal, the credit risk, the business sector, the fund's relationship with the banks involved and the future prospects of the target group in terms of creating revenues, profits and debt service capacity. Therefore, on a general basis, it is difficult to say that the proportion of debt financing for private equity transactions equals x. However, it is rare to see the starting leverage going beyond 60% in the current market.

In addition, there has been an increase in the role of bond issues and direct lending in the capital structure (either replacing bank debt or in a pari passu or super-senior structure). This is due to the fact that both domestic and foreign investors have become aware of the advantages of Norwegian bond market as well as how to structure direct lending in accordance with Norwegian legal framework.

Leveraged Buyouts

In leveraged buyouts, debt financing is generally provided to the acquiring entity (BidCo) to finance the acquisition, and sometimes also to the target group to refinance existing debt and finance general corporate or working capital requirements. Typically, banks will not accept co-investors or management investing directly in BidCo due to their requirement for a single point of enforcement in connection with pledge of shares in BidCo, which is one of the reasons why there is usually a holding company above BidCo.

Acquisition Debt

Term loans, bonds, or direct lending are commonly used to finance acquisition debt as well as refinancing the target group's existing debt. Generally, the group's working capital and corporate financing requirements are met through working capital facilities, such as revolving credit or overdraft facilities, which are often structured as senior debt. Any sponsor equity financing is often structured as equity and/or subordinated debt.

Provision of Funds

A private limited liability company may, under certain conditions and in accordance with certain procedures, make funds available and grant guarantees or security in connection with the acquisition of shares in the company itself or in the company's direct or indirect parent.

Hence, both BidCo's acquisition debt and the target group's refinancing debt may now be secured by a pledge of BidCo's shares and its shares in the target, along with guarantees and security provided by the target group.

Banks and other lenders now require fewer financial covenants than before, although financial covenants required by banks in the Norwegian market are still more extensive than what is customary, for example, in the London market. The leverage ratio covenant is almost always required, and it is often supplemented by either the interest cover ratio covenant, cash-flow cover ratio covenant or an equity-based covenant – whereas capital expenditure (capex) covenant is seldom seen in the Norwegian market.

There is a higher degree of flexibility from banks in relation to other covenants, such as restrictions on acquisitions and sale of assets, etc; however, there is still more strictness than is customary in the London market. In bond issues, there are often only incurrence covenants, and the most used covenant in these tests is the leverage ratio covenant, but bonds with financial maintenance covenants have been seen – such as in the form of a leverage ratio covenant or minimum liquidity covenant.

It is not uncommon for sellers to require an equity commitment letter to provide contractual certainty of funds from a private equity-backed buyer.

In most Norwegian private equity deals, the fund holds a majority stake. In recent years, minority stakes in listed companies have occasionally been acquired, but this has been a rare occurrence

Club deals or similar buy-outs involving a consortium of private equity sponsors are not common in Norway. Most often, this is due to the typical deal value not reaching a level that would require the funds to spread risk across other private equity funds, which is more often done to, inter alia, avoid exceeding investment concentration limits or similar restrictions.

Co-investment by other investors alongside the fund is, however, quite common. These co-investments are typically made by both external co-investors and existing limited partners alongside the general partner of the fund in which they have already invested.

Primary Consideration Structures

The predominant form of consideration structure used in private equity transactions in Norway is locked box accounts. Completion accounts are, however, not uncommon, and sometimes a fixed purchase price is applied. For auction processes, locked box accounts are by far the most common, as it is easier for sellers to compare bids if they use a locked box account rather than a completion account.

In Norway, earn-outs or other forms of deferred consideration are sometimes applied, but is not a very common feature of private equity transactions. If the parties struggle to agree on the purchase price, earn-out is sometimes used to bridge the gap.

A private equity-backed buyer often requires selling members of management to re-invest a substantial portion of their proceeds, in which case, settlement in part is made by the establishment of sellers' credits documented by promissory notes and not entirely by cash transfers. Furthermore, a private equity-backed buyer may more often than industrial buyers offer earn-out or other forms of deferred consideration, especially when investing in start-ups. A private equity-backed seller almost always asks for a clean exit and will therefore resist accepting deferred consideration.

Escrow

The use of escrow arrangements is rare in private equity deals, regardless of whether the seller or buyer is a private equity player, especially since most private equity deals now include warranty and indemnity (W&I) insurance.

Leakage Provisions

Whenever locked box accounts are applied, leakage provisions are usually also included, regardless of whether the seller is backed by a private equity firm, although leakage provisions may be more refined in a private equity deal. Additionally, the locked box accounts on which the deal is based are usually audited, or at least partially audited, and are usually covered by a warranty.

In a completion accounts mechanism, the transaction agreement specifies the preliminary purchase price payable by the buyer at completion. The preliminary purchase price is usually based on an estimate of the completion accounts balance sheet, and is subject to a "true-up" adjustment post-transaction to reflect the final agreed values as shown in the completion accounts. The final completion accounts are rarely audited.

The private equity-backed buyer rarely provides any security if the consideration payable by the buyer includes a deferred consideration element; however, certain undertakings in relation to the operation of the target group after completion may be agreed upon in relation to earn-out mechanisms.

In Norway, locked-box consideration structures are commonly used in private equity transactions. Interest on the locked-box amount is normally applied and predominantly in auction processes, usually at 4–5%, depending on inter alia cash flow of the target group in the relevant period.

Normally, leakage is not charged with interest.

Separate dispute resolution mechanisms for locked-box consideration structures are not common. For completion accounts structures, a separate dispute resolution mechanism is almost always used to resolve disagreements.

In private equity transactions, conditions precedent relating to regulatory approvals, such as no intervention by the NCA or FDI (if relevant), is almost always included. Other typical conditions precedent include:

• no material breach occurring in the period between signing and closing; and,
• due diligence specific findings, such as key third-party consents.

Material adverse change clauses (MACs) are sometimes included in private deals, but their use has declined significantly in recent years. In public takeovers, MACs are usually included; in the period 2008–21, 75 out of 89 voluntary offer documents approved by the Oslo Stock Exchange contained a MAC.

The transaction agreement of W&I-insured deals, which do not undergo an auction process, sometimes includes a right for the buyer to terminate the agreement if new circumstances arise during the period between signing and closing which are not covered by the W&I insurance, unless the seller compensates the buyer for any downside.

It is highly unusual for private equity-backed buyers to accept “hell or high water” undertakings to assume all of the antitrust or other regulatory risks.

In conditional deals with a private equity-backed buyer, a break fee in favour of the seller is uncommon in private deals. For public deals, 26 out of 82 voluntary offer documents approved by the Oslo Stock Exchange in the period 2008–20 contained provisions for break fees (26 out of the 45 offers that resulted in a transaction agreement).

In private deals, there are no specific legal limits on break fees, if applied. That is also the case for public deals if the sellers are asked to pay a break fee. However, for target companies, Norwegian company law is not entirely clear as to the extent to which the target can pay a break fee. According to the Norwegian Corporate Governance Code – particularly relevant for listed companies – the target company should be cautious of undertaking break-fee liabilities, and any fee should not exceed the costs incurred by the offeror. The market level of break fees is in the range of 0.8% to 2% of the transaction value.

Norwegian private equity deals rarely use reverse break fees.

In the case of a private equity-backed buyer or seller, the right to terminate the acquisition agreement is triggered if the conditions precedent for the benefit of the seller or the buyer are not met or waived within the agreed long-stop date. Otherwise, there is limited right to terminate. There are certain Norwegian background law principles that cannot be set aside in a transaction agreement and may, in principle, trigger termination rights, but these are reserved for cases of fraud, gross negligence or wilful misconduct, which are highly unusual.

In Norwegian private equity transactions, a private equity-backed seller is hesitant to accept any deal risk and usually requires a clean exit. It is also the case if the buyer in the same transaction is backed by private equity. Therefore, a private equity-backed seller normally resists accepting indemnities, and the warranty catalogue is usually insured under a W&I insurance. If the deal is not insured (which is uncommon for private equity-backed sellers), a private equity-backed seller usually only agrees to give fundamental warranties whereas an industrial seller usually provides more comprehensive warranties, regardless of whether the deal is insured. In auction processes, the number of conditions precedent is usually limited to no material breach, regulatory approvals and necessary third-party consents.

The main limitations on liability for the seller are linked to buyer's knowledge, financial thresholds (basket, de minimis and total cap) and time limitations; see 6.9 Warranty Protection.

As W&I insurance has become the norm in private equity deals in recent years, warranties provided by private equity-backed sellers are usually comprehensive. This does not significantly differ where the buyer is also private equity-backed.

The following are the customary financial limits on warranty liability:

• de minimis – 0.1–0.2%;
• basket – 1–2% of purchase price; and
• total cap – 10–30% of purchase price.

In W&I-insured deals, the de minimis threshold is usually closer to 0.1%, and the basket is closer to 1%. A private equity-backed seller will usually not accept a total cap of more than 10–15% unless the deal is W&I-insured; in this case, no recourse against the seller will apply.

The following are the customary financial limits on warranty liability:

• general limitation period – between 12 and 18 months (24 months in case of W&I insurance);
• tax warranty limitation period – five years (seven years in case of W&I insurance); and
• fundamental warranties – three to five years.

Management co-investors are usually obligated under the existing shareholders' agreement to provide the same warranties as the fund. Limitations on warranty liability are usually the same as those set out above.

Full disclosure of the data room is typically allowed against the warranties, meaning that the buyer is considered to have knowledge of information presented fairly in the provided information. Exceptions are often accepted for fundamental warranties.

The following protections are typically included in acquisition documentation:

• pre-completion undertakings by the sell-side to secure continuation of the operation of the target group in accordance with past practice and to forbid shares issues and similar between signing and closing; and
• post-completion obligations such as non-compete and non-solicitation undertakings for a period of 12–36 months. However, private equity-backed sellers very rarely accept non-compete or non-solicit undertakings, especially not international private equity sponsors.

If accepted, the application of such covenants are usually limited only to the relevant fund(s) making the divestment and their portfolio companies (and not the portfolio companies of other funds managed by the same managers).

Private equity-backed sellers rarely accept indemnities in order to secure clean exits. Management co-investors sometimes provide indemnities, which is also the case for non-private equity sellers – however, they are normally treated equally as the private equity seller.

W&I insurance is becoming very common on the Norwegian private merger and acquisitions market, having grown from four insured deals in 2012 to approximately 90 in 2020. This is particularly common in private equity deals, particularly if the seller is backed by private equity, to facilitate a clean exit. Approximately 70% of the insured deals involve private equity players, but W&I insurance is becoming increasingly popular also for industrial players.

For public deals, W&I insurance brokers report an increased use of W&I insurances where warranties are provided.

Escrow arrangements to back the obligations of a private equity seller are unusual, as this opposes the private equity sponsor's desire for a clean exit.

Litigation is not a common outcome of Norwegian private equity transactions. If a deal has been litigated, the most common cause has been a breach of warranty. The number of W&I insurance claims is, however, on the rise.

In the Norwegian market, the majority of public-to-private transactions are completed by industrial buyers rather than private equity buyers. There are, however, some recent successful examples of private equity public-to-private transactions, such as, EcoOnline ASA acquired by Apax Partners (2022), Mercell Holding ASA acquired by Thoma Bravo (2022), Bank Norwegian ASA acquired by Nordic Capital's portfolio company Nordax Group (2021), Ocean Yield ASA acquired by KKR (2021) and Adevinta ASA acquired by Permira (2021), which is indicative of the general expectation in the Norwegian market that the number of private equity-backed public-to-private transactions will increase in the near future, in light of the increase in number of IPOs on Norwegian marketplaces during the COVID-19 pandemic.

Companies incorporated under Norwegian law are subject to disclosure obligations to the issuer and regulatory authorities if the proportion of shares of a shareholder or other person's proportion of shares and/or right to shares reaches, exceeds or falls below any of the following thresholds: 5%, 10%, 15%, 20%, 25%, one-third, 50%, two-thirds and 90%. The thresholds are calculated for both (i) the voting rights and (ii) the capital of the target company.

In the case of non-Norwegian companies admitted to trading on a regulated market in Norway, the thresholds are determined in accordance with the applicable law in the country where the company was incorporated.

If, through acquisition (voluntary offer or otherwise), a person becomes the owner of more than one-third of the voting rights of a Norwegian company whose shares are listed on a Norwegian regulated market, that person is obligated to bid on the remaining shares (with a repeat trigger of 40% and 50%).

In the case of non-Norwegian companies that are admitted to trading on a regulated market in Norway, the threshold depends on the country of incorporation of the company.

The most common form of consideration in Norwegian takeovers is cash (as opposed to shares). It is estimated that approximately 80% of completed voluntary offers are cash offers. The remaining 20% of voluntary offers comprise shares or offers that include both shares and cash. Securities such as convertible bonds, warrants, and similar instruments are also permitted, but are rarely offered.

Mandatory offers require a full cash consideration option, but shares or other securities can be used as part or all of the consideration.

Most successful takeover offers in Norway are structured as a friendly offers, in which the offeror enters into a transaction agreement with the target and signs a tender agreement with key shareholders shortly before announcing the takeover. Out of 82 offers approved by the Oslo Stock Exchange in the period 2008–20, 67 (including both completed and non-completed offers) were recommended by the target board, and 45 out of these 67 offers involved the offeror and the target entering into a transaction agreement.

The Norwegian takeover regulations allow for a wide range of offer conditions in voluntary takeover offers. On the other hand, mandatory offers must be unconditional. In voluntary offers, both financing conditions and due diligence conditions are allowed, but they are rarely accepted by the target and principal selling shareholders, and therefore are less likely to be accepted. Among the most common conditions are the recommendation that the offer not be revoked, the conduct of business, MAC, regulatory approvals, acceptance rate, and conditions regarding corporate approvals, such as shareholder approval (if required).

An offeror may request for deal security measures such as no-shop/non-solicitation and a limited ability for the target to amend or withdraw its recommendation in a voluntary offer. In the event of a superior offer, the target board normally retains the option of withdrawing or amending its recommendation. It is permissible to chare break fees up to a certain level; see 6.6 Break Fees.

If an offer closes with less than 90% acceptance rate, repeat mandatory offer obligations may apply. Typically, additional governance rights beyond those triggered by the level of shareholding are not granted when the offeror completes the offer with less than 90% acceptance rate. In Norwegian companies, effective control of the company's operations and dividend levels is achieved through board control. Board control is achieved at more than 50% of the votes cast, and effective control over new share issues, capital structure changes, mergers and de-mergers is achieved at two-thirds of the votes cast.

In Norwegian companies, an offeror can squeeze-out remaining shareholders if they, the offeror, successfully acquires more than 90% of the target shares. A squeeze-out procedure usually takes one or two business days, with the consideration, as the general rule, being the cash equivalent in NOK of the tender offer price.

It is common for the principal shareholder(s) to obtain irrevocable commitments to tender and/or vote if the bid premium is acceptable. In most cases, these agreements are negotiated shortly before the announcement of an offer from a selected group of shareholders.

In most cases, undertakings provide the shareholder with the opportunity to withdraw if a superior offer is made. It is possible, however, to obtain unconditional undertakings if the principle shareholder(s) believes the offer is attractive.

Norway permits hostile takeovers. They are, however, not very common since they have historically proved difficult to complete. Friendly takeovers are more likely to be successful. In total, 66 out of 82 offers approved by the Oslo Stock Exchange were completed during the period 2008–20. Of these 66, only five were not recommended by the target board, while 22 had neutral recommendations. Furthermore, the target board did not recommend ten of the 16 non-completed offers.

Based on these statistics, it can be considered that voluntary offers are typically recommended by the target board, that the probability of success is higher for voluntary offers that are recommended, and that voluntary offers that are not recommended by the target board are rarely accepted. Historically, private equity-backed buyers have not been active in hostile takeover transactions in the Norwegian market.

Equity incentivisation of management is a common feature of private equity transactions in Norway. Portfolio companies' senior management members are usually expected to co-invest to ensure that their interests remain aligned with those of the private equity fund and that they are incentivised to create further value and maximise returns on successful exits. Other key personnel may be invited to participate in management incentive plans or to become additional employee shareholders.

The size of management's investment varies depending on whether it already holds shares that could be rolled over or whether it must inject capital. Management must have capital at risk in order to achieve a tax-efficient structure and typically subscribes at the same price as the private equity sponsor, although with different allocations of preference shares and ordinary shares. Selling members of management are often required to re-invest a significant portion of their sale proceeds (20–50%, or higher for key persons), always subject to negotiations and individual exceptions.

Any gains realised by management on re-investments are, in principle, subject to capital gains tax. If, however, management holds the initial investment through separate holding companies and re-invests through that holding company, tax would be avoided (or more precisely postponed until distributions are made from the holding entity).

It is important both for management and for the private equity fund that management's investment is made at fair market value. Otherwise, for instance, in relation to exit bonus arrangements that are commonly used, any benefit achieved by management on the (re)investment would give rise to income tax as opposed to tax on capital gains (income tax is higher) for the management in question and also trigger payroll tax for the employer entity of up to 14.1%.

At fund level, incentivisation of key personnel is commonly equity-based. The AIF Act imposes remuneration restrictions for AIF managers.

The private equity fund and any co-investor's investment (the institutional strip) is typically comprised by a mix of ordinary and preference shares, with a significantly higher percentage of preference shares. The opposite is normally the case for the management equity participation strip, but there are many variations in this – sometimes management is asked to invest partly in the institutional strip and partly in the management equity strip, and there are variations depending on the level of importance a person is deemed. Sometimes the institutional strip also comprises shareholder loans; however, due to taxation reasons, such loans are not commonly used.

The terms applicable for the preference shares normally entitle the private equity fund to receive its entire invested amount plus a predefined return on the investment (the preferred return) before ordinary shares are entitled to distributions. Once the preferred return (including interest and investment amount) has been distributed, the remainder of the proceeds is allocated to ordinary shares. Since, normally, management is more heavily exposed in ordinary shares, base and high-case exit scenarios ensure a higher relative return on management's investment, while the opposite is the case where sales proceeds are not sufficient to entail any distribution of significance on ordinary shares.

Historically, incentive schemes aimed at management at portfolio company level have changed from option-based and bonus-based models to predominantly investment-based models; however, exit bonus arrangements (subject to employment tax as stated above) are also applied.

Management's investment is typically made in the Norwegian holding structure (TopCo or, if a MidCo level is in place, MidCo). For management participation, particularly for minority stakes, it is common to establish a separate holding management company (ManCo) co-owned and controlled (indirectly) by the private equity fund.

Members of management who co-invest are usually required to accept call options for their shares in the event that their employment in the target group is terminated. Leaver provisions are typically divided into:

• good leaver (eg, long-term illness, retirement, disability, death or involuntary termination without cause); and
• bad leaver provisions (eg, voluntary termination prior to exit, summary dismissal or material breach).

Sometimes, a third category is introduced: "intermediate" or "very bad" leavers. As a general rule, a good leaver will receive fair market value for the shares, whereas a bad or very bad leaver will be required to sell at a discounted price, typically the lower of cost and anywhere between 50% and 75% of fair market value.

Leaver provisions in Norwegian private equity deals are not always linked to a vesting model, but this is fairly common. When applied, the typical provisions are time-based, linked to the good leaver and/or intermediate leaver provisions and vary depending on how early the person in question terminates the employment. An up to a five-year vesting model is often used, with the underlying principle being that only the vested part of the shares may be redeemed at fair market value at each anniversary, while unvested shares may only be redeemed at a lower value.

Management shareholders are usually required to accept non-compete and non-solicitation provisions in addition to drag, lock-up and standstill, right of first refusal and leaver provisions including price reduction provisions triggered by leaver events. Non-compete and non-solicitation undertakings typically apply for a period of 12–24 months, although lately 12 months is more commonly applied than 24.

The non-compete and non-solicitation restrictions are usually included in the share purchase agreement (or other transaction agreement) and in the shareholders' agreement, together with other restrictive covenants. Certain regulatory limits on enforceability apply. As a general rule, such restrictive covenants are legitimate under Norwegian anti-trust regulations if the obligation lasts no longer than three years and the geographic scope of the clause is limited to the area in which the target has been providing the relevant products prior to the sale.

In addition, under the Norwegian Working Environment Act, non-compete clauses imposed by the employer entity require compensation for the employee and may not extend beyond a period of 12 months following the termination of employment. Exceptions may be agreed for the CEO.

It is not common for management shareholders to be granted minority protection rights beyond what is provided under the Norwegian company legislation. As a result of these provisions, minority shareholders enjoy certain rights – either by holding one share, or by representing a certain percentage of the share capital and/or voting rights. These rights include inter alia the right to bring legal action to render a corporate resolution void, the right to attend and speak at shareholder meetings, as well as certain disclosure rights. Some of these rights can, and sometimes are, waived by minority shareholders in the shareholders' agreement. There are, however, some that are invariable.

Many minority rights can be avoided to a large extent by introducing different share classes with and without voting rights and financial rights, as well as by incorporating leaver provisions into the shareholders' agreement. Pooling management investments into a separate ManCo that is controlled (indirectly) by the private equity fund also minimises the risk of minority protection.

Likewise, management is rarely granted anti-dilution protection, veto rights or any right to control or influence exits. In some cases, management is granted the right of board representation or an observer seat on the board, but in practice, this does not give management shareholders any influence or control over the portfolio company.

It is common for a private equity fund to control the portfolio company in its capacity as majority shareholder, pursuant to Norwegian company law, both due to its majority stake and also through the shareholders' agreement (or alternatively if the fund does not hold a controlling stake). As a consequence, the fund typically has information rights and controls the board and all major decisions including share issues, major acquisitions, changes to the business of the portfolio company or disposal of a substantial portion thereof, borrowing, business plans and budget, liquidation and exit/IPO procedures. The shareholders' agreement may also grant veto rights to the private equity fund, but this is unnecessary where the fund possesses a controlling interest.

According to Norwegian law, a company and its shareholder(s) are two separate legal entities, and neither is generally responsible for the obligations of the other. This applies regardless of whether the company and its shareholder(s) are a part of a subsidiary-parent structure or if the subsidiary is wholly owned. In general, the limitations on shareholder's liability under Norwegian law are robust.

There is a consensus among case law that piercing the corporate veil should be reserved for exceptional cases, and that the general rule would be to uphold the corporate veil even where the company is engaged in high risk business. In terms of the Norwegian Supreme Court piercing the corporate veil, there is no well-known example. There is, however, a risk that a shareholder (and especially a parent company) may be held liable for the environmental liabilities of its subsidiary under Norwegian environmental legislation.

In Norwegian private equity deals, the private equity fund typically imposes its compliance policies on its portfolio companies.

The target holding period for Norwegian private equity investments is usually three to five years, given that the fund typically has investors who want to see their money returned to them with capital appreciation within a reasonable period of time.

Previously, trade sales and IPOs were considered as the two most attractive exit strategies. In the Nordic countries prior to the COVID-19 pandemic, secondary sales had, to a large extent, replaced the IPO route in the Nordics, indicating that trade sales to industrial investors or secondary sales to other private equity funds were the most common exit mechanisms. However, in 2020, the number of private equity-backed IPOs increased to 23 in the Nordic region, compared to only five in 2019, and the number of private equity-backed IPOs in 2021 reached a record 56. Whether this increase is due to a change in trend or fuelled by opportunities sought during the market conditions in the same period remains to be confirmed, but the general perception seems to be that the number of private equity-backed IPOs will not reach 2021 levels anytime soon.

Some exits are conducted as "dual track" – ie, with an IPO and sale process running concurrently – but trade sale alone is clearly more common.

It is not uncommon for private equity sellers to reinvest upon exit, although this is not the norm. Such reinvestments are more common if the funds' initial ownership period has been in the short term, or if a significant upside is still expected to be generated from the business.

Institutional co-investors and management are usually required to accept drag mechanisms in Norwegian private equity deals in the shareholders' agreement applicable to the relevant investment. The typical drag threshold in Norwegian shareholders agreements ranges between 50% and two-thirds of the aggregate equity.

In the event of a subsequent exit or sale, the target shares are usually sold on a voluntary basis. Thus, actual use of the drag right is rare.

Institutional co-investors and management are generally offered tag rights in the event that the private equity fund sells its stake in the portfolio company. As for drag mechanisms, such tag rights are included in the shareholders' agreement applicable to the relevant investment. In Norwegian shareholder agreements, the tag threshold is typically set at 50% or more of the aggregate equity.

In an exit by way of IPO, the typical lock-up arrangement for the private equity seller is usually six to 12 months.

It is not customary for the private equity seller and target to enter into relationship agreements.