The current state of the Swedish corporate/M&A market
The outbreak of Covid-19 came as a shock for the economies and financial markets throughout the globe, Sweden being no exception. When the pandemic reached Sweden in early March 2020, the Swedish business society focused on understanding the impact the new virus would have on the economy and society in general. The M&A market initially dropped sharply as ongoing deals were cancelled or paused, and the uncertainty of what the future would look like made dealmakers reluctant to pursue new deals. M&A activity in the first and second quarters (179 deals/MEUR 5,614) shrank 58% by value compared to the same period for 2019 (249 deals/MEUR 13,307).
In line with global trends, the Swedish M&A market experienced a strong recovery in the second half of 2020, and for the full year the deal volume rose 3% to 438 deals from 426 deals for 2019, while the value dropped slightly from MEUR 29,485 in 2019 to MEUR 24,254 for 2020. Also, the Swedish venture capital market had a solid year and grew in value with a total investment amount of MUSD 3,301 (MUSD 3,030 in 2019), and Sweden continues to be the fourth largest VC market in Europe after the UK, Germany and France.
Dealmakers’ response to the pandemic and the restrictions limiting international travel, by applying new tools and processes, appears to have had a positive impact on inbound investment into Sweden. International investment represented 50% of the total value for 2020 compared to 42% in 2019, according to data from Merger Market. Also, Sweden’s strong reputation as a leading hub for technology companies is likely to benefit from the shift to digital.
As repeatedly discussed also in international media, the Swedish corona strategy has differed in some respects from that of many other European countries. No general lockdowns were imposed, and our primary schools have mostly remained open during the pandemic. Like in most countries, the Swedish Government has undertaken several measures to mitigate the effect of the pandemic on individual businesses and the economy as a whole, and many such support measures are still in force. As a short-term effect, it can be noted that bankruptcy filings have remained on similar levels, or even decreased, compared to recent years. The longer-term effect of the pandemic and the Swedish corona strategy on the economy is still to be revealed. Increased financial difficulties can be expected when the Government’s support regimes come to an end, followed by increased insolvencies and potentially more distressed M&A activities. However, currently the market appears to be optimistic for 2021, and in the two first months the deal volume was almost in line with 2020, but with the value still being down from MEUR 1,347 in 2020 to MEUR 955 for the current year.
Two new regulations of interest for the Swedish corporate/M&A market
The remaining part of this introduction will focus on two new regulations that can be expected to have an impact on the Swedish corporate/M&A market, namely the reintroduction of SPAC (Special Purpose Acquisition Company) listings on Nasdaq Stockholm, the leading operator for equity listings in Sweden, and a new legislation in relation to investments in security-sensitive activities.
Listings of SPACs continue to be a hot trend. Particularly in the US, but also in some other European countries, the listing of SPACs has been increasing significantly. On 1 February 2021, the listing rules for Nasdaq Stockholm were updated to enable SPAC listings. The new rules are now in line with the listing rules for Nasdaq’s US marketplace. It can be noted that the Stockholm listing rules did contain provisions regarding “acquisition companies” that could have been used for the listing of SPACs, but such rules were removed early in 2020.
A SPAC is a shell company which is established, capitalised and listed with a vision to acquiring one or more operating companies. A listing of a SPAC will be carried out in two steps: firstly, the SPAC without any operation is listed, and secondly, when the acquisition of a target company is to be conducted, a normal listing process will take place.
The general rule and requirements apply for a SPAC, save for that the conditions of historical financial information and business operations do not apply. A prospectus must be prepared when listing a SPAC, and the other listing requirements must also be met.
According to Nasdaq’s Nordic Main Market Rulebook, at least 90% of the proceeds from the initial public offering shall be deposited in a blocked account and within 36 months the acquisition(s) shall occur with a value of at least 80% of the deposited account. The acquisition(s) needs to be approved by a majority vote at the shareholders’ meeting. Until the acquisition(s) has been completed, the shareholders shall be provided the opportunity to redeem their shares against their pro rata part of the deposited cash remaining. When a transaction agreement for an acquisition is signed, the SPAC must initiate a full listing procedure, and the acquisition may not be completed until Nasdaq Stockholm has confirmed that the SPAC, combined with the target, fulfils all listing requirements.
As the listing of SPACs has just recently been reintroduced, it is too early to conclude how SPACs will be structured and operated in the Nordics. However, given the fact that the possibility has been reintroduced, Nasdaq clearly seem to believe that there is a potential market for SPACs in the region, and spokespersons for Nasdaq Nordic have indicated that we could expect to have up to five SPACs or more listed in Stockholm before the summer.
Now moving on to a new initiative to monitor and protect Sweden’s security-sensitive businesses. The Swedish Parliament passed amendments to the Swedish Security Act in the late autumn of 2020 that came into force on 1 January 2021. These amendments cover a broad range of sectors and affect both Swedish and foreign investors who are contemplating investing in security-sensitive activities and entities.
The legislation generally covers “activities of importance for Sweden’s national security”, which include both military and civil activities. Services such as airports, power plants and information systems for electronic communication, as well as services that could be of fundamental importance to Sweden’s national security, have been identified as potentially falling inside the scope of the legislation. Other sectors have also been mentioned as potentially being captured.
The new rules make it mandatory to engage in a security assessment and consultation process, with the consultation authority being the security police (Sw. SÄPO) or the armed forces (Sw. Försvarsmakten), depending on the sector involved. Moreover, the rules also apply to all “disposals” or “transfers of ownership”, which means any kind of transfer, albeit one can expect that transfers not leading to a substantial ownership change will not be scrutinised in full by the authorities. The only express exemptions are sales of shares in public companies (not necessarily listed companies even though this must be the intention) and sales of real estate.
The rules apply equally to domestic and foreign investors and operators if the business concerned is of importance for Sweden’s national security.
The operator of the security-sensitive activities shall perform a safety protection assessment and a suitability assessment before initiating a transaction. Should the assessment establish that the transfer is unsuitable from a security protection perspective, the transfer shall not be completed. Should the assessment instead establish that the transfer is suitable, the operator is obliged to consult with the consultation authority. The authority can only review a specific transaction, i.e. it is not possible to get advance rulings or guidance, and the authority is mandated to issue injunctions against the parties and, ultimately, prohibit the transfer. This right also applies if consultation has not been undertaken, and in such case the authority can at any time declare the transaction null and void. Given the potential number of transactions which are subject to mandatory notification, it is important to factor in a rather long review period when structuring a transaction.
To conclude, the rules may have a major impact on both foreign and Swedish investors contemplating to acquire Swedish companies conducting security-sensitive activities and Swedish operators contemplating to divest all or parts of their business. It may be a somewhat burdensome exercise for many operators to seek to determine whether their business is to be considered security-sensitive as the rules are somewhat vague as to scope. Investors and operators of a business to which the rules’ application is unclear may choose to carry out the mandatory self-assessment and consultation as a precautionary measure in order not to risk the harsh consequences of a transaction being null and void should they be found to have been in violation of the rules.