DENMARK: An Introduction to Corporate/M&A
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The M&A market in Denmark at the beginning of 2023 is surprisingly strong, with a deal volume – in both numbers and size – that does not seem to have decreased materially compared to what could be expected when taking into consideration the current situation in the global economy.
Significant liquidity and a relatively solid and less volatile general financial situation in Danish companies, combined with experienced buyers and sellers who know how to mitigate risks in troubled waters, form the basis of interesting deals to be made. However, Denmark and the rest of the Nordic countries, of course, are all subject to global fluctuations and the general uncertainty of the world.
The main issue in deals made right now and in recent months is the valuation. While valuation and price are obviously always important topics, the alignment of expectations and balance between the parties when it comes to what to promise and what to demand, respectively, is challenged by the economy in general – and the interest rates, inflation and uncertainty in particular.
While buyers seek to commit sellers to keep delivering continuously increasing revenue streams and profits, as has been seen on a global scale for a number of years, the sellers struggle to continue to make such promises, as the future is very unclear. At the same time, buyers’ funding costs have increased significantly, making those same requirements necessary to meet. These conflicting interests entail an increase in deals where the parties can identify a number of synergies, but simply cannot settle on the price and valuation.
This issue is more relevant than ever, as is the classic topic of sharing the risk of financial trends outside of the parties’ control; despite these well-known disadvantages, an increase in earn-out solutions can therefore be seen.
Green Transition, Renewable Energy and Supply Security
Substantial M&A, joint venture and project development activities in Denmark have been created by the global green transition and climate target plans, CO2 emission reduction targets by 2030 and 2050 and the current energy crisis, all on a Danish and European level. The activities concern onshore and offshore wind, solar, biogas, geothermal energy and power-to-X, for example.
Within the biogas sector, this trend is showcased by the Danish government’s notable decision to expand the national gas grid with a new gas pipeline to the islands of Lolland and Falster, which is currently being constructed and has created opportunities for various stakeholders in the market. Furthermore, the biogas sector is maturing and is being consolidated amongst fewer, but bigger, players in the market.
An increasing focus on supply security, especially for energy, renewables and critical minerals, is generally a significant driver of M&A activities for players in the renewable energy sector and industrial businesses.
The global green transition, renewable energy and supply security will continue to drive certain M&A activities in 2023 and beyond. In additon, the complexity of M&A transactions will increase towards 2030 as industrial players look to reach 2030 CO2 emission reduction targets and increase their supply security.
Despite Denmark having a civil law legal system, M&A deals for private, non-listed companies in Denmark are mainly unregulated. Instead, under Danish law, there is a high degree of freedom of contract, which gives the parties optimal possibilities to bargain and create the terms as they desire – thereby also securing a speedy process. M&A for private companies, however, are still subject to some general regulation and principles, such as in the Danish Companies Act and the Danish Sale of Good Acts, as well as more specific regulation, which could be the Danish Competition Act, the Danish Act on Transfers of Undertakings, etc.
M&A in Denmark are subject to the caveat emptor principle, meaning that the buyer should make reasonable investigations and that the responsibility for potential defects reasonably disclosed in the target company generally lies with the buyer, unless the seller has acted fraudulently. On the other hand, the seller has an obligation to loyally inform the buyer about relevant issues in the target company. As a consequence of these general principles, and in order to lower the parties' risks, despite the standard process with information disclosed in a VDR and due diligence (and always subject to the size of the deal), W&I insurance is becoming more and more popular on the Danish M&A market.
A notable Danish topic to be aware of is that the wording in pre-contractual documents, drafts and emails can be of higher importance than in many other jurisdictions. Thus, even with an “Entire Agreement” clause in a final agreement, a Danish ruling would likely disregard such clause to a high extent and take into consideration the parties’ actions and exchanges prior to signing the final agreement if a dispute occurs.
Danish Foreign Direct Investment (FDI) Rules
The Danish Investment Screening Act, which is an implementation of the EU's framework for the co-ordination of FDI screening, entered into force in 2021 and has now been in force for more than one year. The interpretation of the new rules and the application in M&A transactions is maturing, with the buy-side and sell-side now considering this new regulatory framework a natural part of the M&A project planning and execution. Buy-side, sell-side and target companies are co-operating in the preparation of the FDI approval application to make sure that the governmental approval process will not delay transactions.