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02 December 2011
When dealing with buy-out and cross-border transactions, lenders often encounter financial assistance issues in relation to a proposed guarantee and security package, which may result in the proposed guarantee and/or security being refused or granted with limitations.
A report prepared recently for the Department of Justice suggested amending several of the rules governing Norwegian private and public limited companies, including the financial assistance regulations. If the proposal is adopted, part of the uncertainty that exists in relation to the extent of the financial assistance limitations will be removed – to the advantage of lenders.
The financial assistance rules are primarily relevant to lenders in the context of share purchases rather than asset purchases.
In a buy-out transaction, the purchaser will often be a shell company with no assets (other than the shares in the target), and the lender will often look to the target group's assets for security to support the purchaser's borrowings. Typically, the lender will require a guarantee from the target (and members of the target group), supported by security over some or all of the target's or its group's members' assets to secure the purchaser's borrowings. Further, the purchaser's borrowings are often serviced by upstreaming moneys from the target group. If this is done by loans rather than the payment of a dividend, this constitutes financial assistance.
The existing Norwegian financial assistance rules lay down prohibitions for a company to make assets available, grant a loan or put up security in connection with the acquisition of shares in the company or shares or units in its parent company (including the ultimate parent company). In this regard, all financial assistance in relation to the acquisition (including the payment of transaction costs and repayment of existing indebtedness) is prohibited.
The report suggests that this prohibition be amended so that a company may make assets available, grant a loan or put up security in connection with the acquisition of shares in the company or shares or units in its parent company (including the ultimate parent company) within the limits of the assets which the company may use for the distribution of dividends, and only if adequate security is furnished for the claim for repayment or recovery. The company's financial assistance shall be based on reasonable commercial terms and conditions, and may be used only in relation to fully paid-up shares.
The report also suggests that financial assistance in relation to the acquisition of shares on the terms as described above be approved by both the company's board of directors and the shareholders' meeting.
If the proposed amendment is adopted, a lender may, within the limits described above, require the target group to make assets available, grant a loan or put up security to support the purchaser's borrowings.
In cross-border financing transactions, the borrower will often be a corporation with subsidiaries in various jurisdictions. The lender, which will typically require some form of financial support from the subsidiaries (eg, upstream payments, guarantees and/or security) will often have to take cross-border security. Many legal issues may arise in relation to the taking of cross-border security, one of which is the financial assistance limitation.
According to the existing regulations, a Norwegian subsidiary may make assets available, grant a loan or put up security for the obligations of a shareholder or a party closely related to the shareholder, or of a shareholder in another company in the same group, only within the limits of the assets that the subsidiary may use to distribute dividends and only if adequate security is furnished for the claim for repayment or recovery.
Such limitations shall not apply to a loan, guarantee or security for the benefit of a parent company or another company in the same group - subject, however, to the qualification that such exception applies to a Norwegian parent and its group companies, and to a parent company or other group company based in a country which is a party to the European Economic Area (EEA) agreement and which is subject to equivalent or stricter legislation than the Norwegian financial assistance legislation.
The Norwegian preparatory works state that when comparing the legislation of another EEA member state to the Norwegian legislation, it should be considered whether the foreign legislation protects the intentions of the Norwegian rules, including the prohibition against weakening the company's capital. However, a lawyer qualified in Norway may not carry out the comparative study which the legislation calls for, and no authoritative comparative study appears to be available.
The practical solution in many cross-border transactions is that the subsidiary issue a guarantee and put up security "to the extent permissible by law", leaving any uncertainty to be decided by a court in the future, if necessary.
The report suggests removing the existing uncertainty by excluding the comparative law criteria, and thus including all parent companies and group companies based in an EEA country. It further suggests that the regulators be afforded the possibility to include companies that are based outside of the EEA.
If the proposed amendment is adopted, the lender may require a Norwegian subsidiary to make assets available, grant a loan or put up security to support the foreign group company's borrowing (within the limits described above), and without including the limitation language in the guarantee and security documentation.
If credit or security is granted in contravention of the financial assistance rules, the transaction will be invalid. However, if security has been furnished, the invalidity may not be invoked against a contracting party which showed due care and acted in good faith when the security was furnished. A financial institution cannot expect to be considered to have acted in good faith if the rules are breached.
For further information on this topic please contact Paul Sveinsson or Kristin Trægde Hauger at Arntzen de Besche Advokatfirma AS by telephone (+47 23 89 40 00), fax (+47 23 89 40 01) or email (firstname.lastname@example.org or email@example.com).
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Kristin Trægde Hauger