On January 1, 2020, amendments to the Norwegian Companies Act came into force that may have a significant impact on financing the acquisition of property-owning companies, including operational real estate.
Prior to the amendments – aksjeloven and allmennaksjeloven § 8-10 – legislation set forth several conditions for a company’s ability to grant a loan or otherwise provide financial assistance in connection with acquiring shares in the company or its parent. For example, the financial assistance needed to be within the company’s dividend capacity (distributable equity) and repayment of the assistance had to be satisfactorily secured. As these conditions are often difficult to comply with in practice, to a large extent these provisions served to prohibit such assistance.
A general exception applied for real estate companies, who were entitled to mortgage their real estate as security for the purchaser’s acquisition of shares in the company or its parent. This mortgage right has been widely used in the transaction market since the exception regulations were adopted in 2007.
The definition “real estate companies” required that the company’s single activity consisted of ownership and operation of real estate. This meant that if the company owned a building under development or construction, it normally fell outside the definition. Such companies were consequently subject to the general financial assistance limitations in the same way as other businesses. Other conditions also existed for satisfying the real estate company definition alongside certain limitations, i.e. that the real estate company could not pledge any of its other assets for the acquisition financing.
“Amendments to the Norwegian Companies Act may have a significant impact on financing the acquisition of property-owning companies, including operational real estate.”
Tightening the rules?
The recent amendments to the Companies Act have been adopted to ensure a company’s increased ability to provide financial assistance, typically by granting security over its assets for the purchaser’s acquisition financing. For real estate, however, the amendments imply a tightening of the financial assistance ability as the exception regulations were simultaneously repealed at the turn of the year. The general if more lenient new provisions will also apply for real estate companies.
The main rule continues to be that the financial assistance cannot exceed the company’s distributable equity. However, this condition does not apply if the acquiring entity is a party to the same group as the target company, or will be so as a consequence of the acquisition, and is resident in a EU/EEA country. Such a group exception is not applicable for public limited companies and is only for private limited companies.
Following the amendments, there is no longer any definite requirement that the company shall receive satisfactory security for providing the financial assistance. However, the provisions stipulate that the assistance shall be provided on ordinary commercial terms and principles. This implies that there should be a reasonable balance in the contractual relationship with respect to the parties’ performance and, consequently, that satisfactory security may still be necessary. In any event, it’s assumed that the company must receive an arm’s length guarantee provision for the financial assistance.
In addition, the company’s dividend capacity may now be calculated on the basis of an interim balance sheet rather than the annual accounts only, as was the case prior to the amendments. Financial assistance may only be provided following the registration and announcement of the interim balance sheet in the Register of Business Enterprises. This part of the amendments has not yet entered into force. Financial assistance must still be resolved by the general assembly, with a majority for changes to the company’s articles of association. The receiver of the financial assistance needs to be subject to a credit rating as previously.
Moreover, requirements for a board of directors’ statement to be given in connection with the assistance have been expanded. For example, the statement must contain an assessment of the company’s interest in implementing the relevant transaction or disposition, and of the consequences for the company’s equity and liquidity. It should also include a confirmation from the board that it is in the company’s interest to provide the assistance and that requirements with respect to sufficient equity and liquidity are satisfied. The statement has to be signed by all directors and attached to the notice of general meeting, and be notified to the Register of Business Enterprises before provision of the financial assistance.
In real estate transactions, i.e. acquisitions and disposals of real estate companies, it’s a well-established market practice to create a mortgage over the subject property to the benefit of the purchaser’s bank prior to completing the acquisition. Such pre-registration of a mortgage right enables the purchaser to have loan proceeds available prior to, and thus pay the full share purchase price at, the closing date. Before the amendments to the financial assistance provisions this was permitted pursuant to the exception regulations and did not require any statement or other activity by the company or seller.
Confusion in the market
The amendments have led to a degree of confusion. Some people take the view that the preparatory works of the amendment assumed that the directors’ statement described above must be given by the board of the target company prior to completing the transaction, i.e. effectively the seller’s representatives. If this is the case, there is good reason to believe that most sellers and their directors will be reluctant to contribute in this way for the purchaser’s financing as it will expose them to liability. An interpretative opinion to confirm the correct understanding of the amendment has been requested from the Ministry of Trade and Industry and is expected soon.
Assuming the Ministry will confirm that view, Norway’s national real estate associations have recommended a procedure by which:
Prior to closing, the seller/company registers an empty mortgage (accommodation bond).
- At closing, the purchaser elects a new board that issues the statement and enters into the necessary agreements with the bank to release the loan proceeds.
Pending clarification of the amendments and in advance of completing real estate transactions, it’s recommended that purchasers, sellers and closing agents clarify with the banks involved how to deal with the new financial assistance requirements.
In any case, these amendments are likely to make the process of obtaining external financing of real estate acquisitions more extensive and time consuming. Due to the lapse of exemption regulations, banks may also be inclined to require security not only in the property but also in the company’s other assets for the acquisition financing. The real estate sector should be conscious of these issues.
“ The process of obtaining external financing of real estate acquisitions is likely to become more extensive and time consuming.”