CONTRIBUTED BY OLE K. AABØ-EVENSEN AT AABØ-EVENSEN & CO
The current state of the Norwegian M&A market
Entering 2020, Norway became hit by a "black swan" – COVID-19, spreading from China around the globe and by mid-March 2020 resulting in countries having to close down their borders, airports, restaurants, schools, kindergartens, etc, in an attempt to stop or at least curb the virus from infecting everyone. During the first quarter of 2020, the Norwegian M&A market fell by 18.1%, compared with the first quarter of 2019. This trend continued throughout the first half of 2020. As a result, the M&A volume in H1 2020 was down approximately 34.1% compared to the same period in 2019. Per end of the third quarter of 2020, there was a 19.3% decrease in number of announced transactions compared with the same period in 2019.
Despite the slowdown, there still seems to be plenty of capital to be deployed, and we believe that deal volumes are likely to return once the impact of the coronavirus is better known. We have already started to see some market improvements at least within certain market segments.
Throughout 2020, industrial players continued to take a large stake of the total M&A volume, and per end of Q3 2020, nine out of the ten largest disclosed Norwegian M&A deals for 2020 had industrial or strategic investors on the buy side, which is two more than for the 2019 deal count. Per Q3 2020, only one out of the ten largest Norwegian M&A deals involved financial sponsors either on the sell side or on the buy side.
Private equity sponsors were increasingly active during the first three quarters of 2020. Compared to 2019, the Norwegian market increased 18.7% in number of transactions involving private equity sponsors (on either the buy or sell side), and at the same time, the average reported deal sizes for deals involving private equity sponsors decreased significantly. The market continued to be driven by new investments and add-ons. During 2020 the number of private equity exits was slightly down compared with the same period in 2019, while the number of private equity new investments and add-ons increased.
Per Q3 2020, the sectors with the highest level of activity were TMT, industrials, services and the consumer sector. These four sectors together represented 60% of deal volume in this period. The construction sector and the energy sector were also quite active during the first nine months of 2020.
For most other sectors, market volatility, social distancing and the shut-down in travelling combined with expectations of recessions halted most of the activity from foreign bidders into the Norwegian market during Q2 2020. Since the outbreak of COVID-19, it seems as if the financial services and the oil and gas sectors have taken the largest relative hit in deal activity.
Still, we remain fairly optimistic for 2021 since the deal pipeline continues to be relatively strong, with an increasing number of respondents planning to divest parts of their business operations in the next couple of years. We also expect the coronavirus panic to fade in the coming months due to the vaccines now starting to be dispatched throughout the world, which may indirectly also result in some new attractive transaction opportunities coming to the surface.
News and current legal issues expected to have an impact on doing M&A deals in Norway
The most imminent expected changes to the law that may have an impact on doing M&A deals in Norway are certain amendments to the Norwegian takeover rules proposed by a government-appointed committee in a report issued early in 2019 concerning the rules governing voluntary and mandatory offers, with a particular focus on the current Securities Trading Act's limited regulation of the pre-offer phase.
In its report the committee proposes, inter alia, a new requirement that a bidder must carry out certain preparations before it announces that it will launch an offer to acquire a listed company. The committee also proposes new content requirements for the notification that a voluntary offer will be made, including information on matters of importance for the market's assessment of the offer and for the formation of the price. It is proposed to clarify that the Norwegian Takeover Supervisory Authority (now Oslo Stock Exchange) shall publish such notifications immediately. Furthermore, a new requirement proposed is that the bidder must present a voluntary offer no later than four weeks from the publication of the notice announcing that an offer would be issued. At the same time, it is proposed that the Takeover Supervisory Authority may grant an exemption from this deadline in special cases. The committee proposes that the minimum length of the offer period in voluntary offers shall be extended from at least two to at least four weeks.
The existing main rule that the offer price under a mandatory offer must correspond to the highest consideration paid or agreed by the bidder in the last six months before the mandatory offer obligation being triggered, is proposed to be continued. However, the committee proposes a separate regulation setting out rules for calculating the offer price in cases where there is a need for an exception from the above main rule or where it is not possible or reasonable to use the main rule for calculating the offer price. In this regard, it is also being proposed that the offer price should be adjustable if the Takeover Supervisory Authority considers that (i) the stock prices during the period in question have been kept at an artificial level, (ii) the stock purchase which is the basis for the offer price was not carried out on normal “commercial” terms, or (iii) the mandatory offer obligation is being triggered in connection with a restructuring of a company in severe financial distress. In cases of adjustment of the offer price where the stock prices have been kept at an artificial level, or where the stock purchase which is the basis of the offer price was not made on normal “commercial” terms, the committee proposes that the adjusted offer price shall be calculated on the basis of a three-month volume-weighted average stock price.
One of the more controversial proposals by the committee is a new right for the accepting stockholders to revoke their acceptances for a period limited to three trading days after a competing offer is made and disclosed, provided that this occurs during the offer period for the original (first) offer. It remains to be seen if this proposal will be upheld by the Ministry that is currently reviewing the committee’s proposal.
It is currently unclear when the Parliament can be expected to adopt these amendments into Norwegian legislation. As of now, we do not expect the proposed changes to be implemented in Norwegian law until 2021 at the earliest. However, during H1 2020, the Ministry issued a bill and a draft resolution to Parliament. In this bill the Ministry follows up on the committee’s proposal for a regulation setting out rules for calculating the offer price in cases where there is a need for an exception from the above main rule, or where it is not possible or reasonable to use the main rule for calculating the offer price. In its proposed bill and draft resolution, the Ministry argued that it anticipated the Covid-19 virus situation, ongoingly, might create special circumstances under which there may become a need for determining the mandatory offer price based on other principles than what follows from the existing legislation. The Ministry further proposed to abolish the alternative under which the Takeover Authority may resolve that the mandatory offer price should be adjusted to the current “market price”. Instead, the Ministry proposed to replace the “market-pricing” alternative with a more balanced rule set out in a separate regulation. Finally, the Ministry stated that it will return to the committee’s other proposals in a new and separate bill and draft resolution issued at a later date.
From 1 January 2020, the Norwegian Parliament approved amending the limited liability company legislation with the aim of easing Norwegian AS companies’ ability to provide financial assistance in relation to the acquisition of shares in such companies or their respective parent companies. They did this by first introducing an exemption from the dividend limitation rule applying to an AS company. However, this exemption rule will only apply if the bidder (as borrower) is domiciled within the EEA area and is part of, or after an acquisition of shares will form part of, a group with the target company. In such situations, the financial assistance may now also exceed the target company’s funds available for distribution of dividends. However, this group exemption will not apply if the target company is a Norwegian ASA company.
Second, from the same date, the requirement for the buyer (as borrower) to provide "adequate security" for its repayment obligation will no longer be an absolute condition for obtaining such financial assistance from the target company. Having said that, due to the requirement that such financial assistance has to be granted on normal commercial terms and conditions, it cannot be completely ruled out that a bidder also in the future still may have to provide some sort of "security" for being allowed to obtain financial assistance from a Norwegian target company. Nevertheless, as long as it can be argued that the acquisition is in the target company’s best interest and such financial assistance can be justified in the absence of any security, after 1 January 2020 it will now be possible for a target company to grant financial assistance to a bidder without such security. Note that in order for a target company to grant such financial assistance, certain formalities will still need to be observed.
At the end of 2020, the Government announced that the Market Abuse Regulation (MAR) will be implemented into Norwegian law with effect from 1 March 2021. Currently, to prevent prejudice or harm to legitimate business interests during a negotiation and planning phase, a listed target may decide to delay disclosure; provided, however, that: postponement does not mislead the public; the inside information is kept in strict confidence between the parties; and the Oslo Stock Exchange is informed about the target’s decision to delay disclosure. Following the implementation of MAR, a listed target company’s decision to delay disclosure of inside information will be amended with effect from 1 March 2021. In this case an issuer, after such date, only has to notify the Oslo Stock Exchange about its decision to delay disclosure after the relevant information has been disclosed to the market.
Finally, note that due to the Covid-19 situation, the Government in 2020 implemented certain temporary emergency legislation, relief programmes and other initiatives that may affect M&A deals entered into while the current pandemic is ongoing. Most of these temporary emergency legislation and relief programmes have, however, now expired and others are postponed. As the Covid-19 situation continues into 2021, some of the now expired temporary emergency legislation may, however, be reintroduced at a later stage.