The European Lawyer

Denmark Banking/Finance

4 Feb 2012

International Acquisition Finance - Denmark

Editors: Plesner - Jacob Bier, Thomas Maaberg Hansen and Lotte Franck Dyrlund

1. MARKET
The Danish acquisition finance market has in recent years been buoyant and has generally experienced a huge growth in the volume and value of leveraged acquisitions involving Danish targets or bidders. This trend has included multi billion euro transactions such as TDC, Copenhagen Airports and ISS in 2005 and 2006, transactions in the €1-2 billion range including Chr. Hansen, Falck, Danske Traelast (DT Group) and EAC Ingredients, and numerous smaller transactions. Danish targets include publicly listed as well as private companies, including subsidiaries or divisions of publicly listed companies. Buyers are primarily corporates and private equity funds, including both very large international funds (such as KKR and Blackstone), regional Nordic funds (such as EQT and Nordic Capital), Danish funds, as well as many other Nordic and European funds active in the Danish market.
Since the liquidity crises started affecting the market in August/September 2007, activity has been somewhat reduced primarily due to the fall in very large (multi billion euro) private equity driven transactions, where financing is currently not easily available. Transactions up to approximately €1 billion still occur (for example EQT’s acquisition of Dako in late 2007), often financed through, or with the participation of, primarily Nordic banks, including Nordea, Danske Bank, Svenska Handelsbanken or SEB, or through club deals involving usually up to three such regional banks.

Strategic transactions by industrial buyers are less affected. Recent examples include British American Tobacco’s acquisition of the cigarette activities of House of Prince (a €3 billion transaction announced in February 2008) as well as Carlsberg’s and Heineken’s joint bid for UK Scottish & Newcastle (a €12.8 billion transaction announced in January 2008).

For quality transactions by strategic buyers or private equity funds, financing still seems to be available except, as mentioned, for the very large multi billion euro private equity driven transactions. Terms, however, seem to have changed in favour of the lenders.

2. DOCUMENTATION
In an acquisition financing there are no specific requirements under Danish law as to the form of the facilities agreement and other finance documents (save where statutory forms are required for registration purposes of certain security). The use of the LMA standard has therefore become widespread and is today the preferred choice of large Danish law firms and financial institutions. Also the individual terms of the LMA standard are often referred to as a reference for preferred definitions or as a template for guidance where parties disagree on specific provisions or issues.

Due to the recognition by the Danish courts of the international private law concept of party autonomy and the implementation in Denmark of the Convention on the law applicable to contractual obligations (the Rome Convention), Danish parties are generally free to agree which law should govern the acquisition finance documents to which they are a party. In large acquisition finance transactions where a future syndication is contemplated, English law is often chosen as the governing law of the facilities agreements and the intercreditor agreement and accordingly the language of such documents will be English. On the other hand, Danish law is often chosen as the governing law of security documents where security interests are created over Danish assets and in respect of facilities agreements in smaller acquisition finance transactions involving only Danish parties and where a future syndication is not contemplated. 

3. ACQUISITION/FINANCING STRUCTURES
Acquisition finance structures in Denmark are to a large extent similar to structures used in connection with acquisitions in other European jurisdictions.

Typically, the equity investor will establish a Danish purchase vehicle (a ‘NewCo’) in the form of a Danish private limited company (an ‘ApS’). Like public limited companies (‘A/S’) the ApS limits shareholders’ liability to the capital investment, but requires less formalities than an A/S (for example there is no requirement for having a board of directors) and also a smaller minimum capital is required. However, if the intention is to list NewCo, an A/S should be chosen as an ApS can not be listed.

There may be numerous reasons to choose a Danish incorporated purchase vehicle. One driver is the possibility of tax consolidation between the Danish purchase vehicle and the Danish target and its Danish subsidiaries thereby allowing tax deductible expenses (such as interest) in the Danish purchase vehicle to be set off against taxable income in the Danish target group.

Danish rules on thin capitalisation and other (newly introduced) tax limitations on interest deductibility may, however, limit the amount of interest that can be deducted in capital income, see section 9 below.
While acquisition debt is still sitting at NewCo level, only the shares in target and in NewCo itself (and other assets of NewCo or its parent, if any) can serve as security for the acquisition debt as Danish provisions on financial assistance prevent target and its subsidiaries from issuing guarantees or provide security for the acquisition debt. In addition the acquisition debt owed by NewCo will be structurally subordinated to the creditors (secured as well as unsecured) of target and its subsidiaries.
In order to avoid structural subordination issues and to optimise the lenders’ security position, a debt push down of debt from NewCo to target (group) is often effected. To the extent adequate free reserves are available at target level, dividends can be up-streamed to the purchase vehicle allowing NewCo to repay acquisition debt and at the same time the debt push down will facilitate that target and its Danish subsidiaries can provide security with their own assets for debt pushed down at target level and below.

The dividend payment from target to NewCo is tax exempt as long as NewCo holds a minimum 15 per cent ownership interest (from 2009: 10 per cent) in target and such ownership interest is not reduced (by sale or otherwise) within the first 12 months following the acquisition of shares in target. An EU domiciled owner of the Danish NewCo will likewise, subject to the same ownership threshold, be able to receive dividends without such dividends being subject to Danish taxation. In order to avoid taxation of a gain in connection with an exit, NewCo must hold its shares in target for a minimum of three years.

In connection with debt push down, Danish provisions on interim dividends facilitate that the debt push down can be effected (in principle) immediately after the acquisition of target and the drawdown under the acquisition facility for such purpose, however, limited to the amount of distributable reserves then available at target (group) level.

In order for such interim dividend to be paid, target’s articles of association must authorise or be amended (with simple majority) to authorise the board of directors to adopt a resolution to pay interim dividends and such authorisation in the articles of association must be registered with the Danish Commerce and Companies Agency (the ‘DCCA’) no later than one day prior to the dividend distribution. In addition, the first annual report of the relevant company must have been rendered and the resolution passed by the directors must be supported by an interim balance sheet, reviewed and countersigned by the company’s auditor, disclosing that adequate means are available for the distribution. The directors must prepare a statement to the effect that the interim dividend does not exceed what may be justified taking into account the financial position of the company and (in parent companies) of the group.

It should be noted that additional rules apply where the interim dividend is to be made by a Danish listed company, including inclusion of certain information in the offer document, where it is the intention to make interim dividend payments within the first 12 months following the completion of the tender offer.

4. REGULATED TARGETS
Pursuant to Danish law an acquisition of a qualified interest of 10 per cent or more of the shares or the voting rights in a Danish financial undertaking (ie a bank, a mortgage-credit institution, an investment company, an investment management company or an insurance company) or a financial holding company is subject to notification to and approval from the Danish Financial Supervisory Authority (the ‘Danish FSA’). Further, any subsequent acquisition of shares which increases the holding of shares and/or voting rights up to more than 20, 33 or 50 per cent or results in the financial undertaking or the financial holding company becoming a subsidiary of the purchaser must be notified to and approved by the Danish FSA. Finally, any contemplated disposal of an existing share holding with the effect that the holding of shares and/or voting rights falls below any of the above-mentioned limits must be notified to the Danish FSA.

In order to obtain the required approval, an application must be filed with the Danish FSA prior to the contemplated acquisition. Upon receipt of such application and any additional information required from the Danish FSA, including but not limited to ‘Fit & Proper’ applications from the future board of directors and members of the management board of the financial undertaking to be acquired and information on the ultimate holders of the shares, the Danish FSA will generally have three months to decide whether or not an approval will be given. Where a potential purchaser is from a country outside of the EU with which the EU has not entered into an agreement in respect of the above, ie where the country of the potential purchaser does not allow EU-based entities to perform the activities described above in respect of a domestic financial institution, the processing of the application may be suspended by the Danish FSA and negotiations with the country concerned may instead be initiated.

An acquisition of a qualified interest of shares or an increase of an existing holding of shares and/or voting rights will only be approved by the Danish FSA where such acquisition or increase will not conflict with the requirement for a proper and diligent management of the financial undertaking or financial holding company in question. Where shares are acquired without a prior approval having been obtained, the voting rights attached to such shares may be suspended or cancelled by the Danish FSA and other injunctions may possibly also be levied on the purchaser.

5. LISTED TARGETS
An offeror offering to buy a publicly listed company may offer cash, other shares or securities or a combination of these as consideration for the target’s shares. Where cash is offered, there is no obligation on the offeror to include in the offer document any guarantee or assurance from a financial institution that the offeror will have sufficient cash available to satisfy the offer in full. However, an offer cannot be made subject to a financing condition, and the offeror is required to state in the offer document, how the offeror intends to finance the acquisition. This means in essence that the offeror is required to have certain funds available prior to announcement of the offer. Certain funds require that the offeror with its lenders and equity providers have signed legally binding commitment documents, under which the lenders and equity providers will provide the required finance subject only to the conditions in the offer document being fulfilled or waived by the offeror.

Usual offer conditions include that the offer is subject to a specified level of acceptances, often set at a level which will give the offeror a controlling interest in the target and/or the right to squeeze-out any shareholders that have not accepted the offer. Controlling interest is usually obtained, once the offeror has acquired more than 50 per cent of the shares and voting rights of the target company. As mentioned in section 14.2 below 90 per cent of the share capital and voting rights in the target are required so as to enable the offeror to exercise its legal squeeze-out rights under the Danish Public Limited Companies Act. Offers may be made subject to other conditions, for example, no material adverse change, obtaining necessary competition clearances and other regulatory approvals.

By obtaining control over more than 50 per cent of the shares and voting rights in target, the offeror will in most instances gain control over the future cash flow of the target, including the control over the payment of dividends. 

Structural changes including merger and demergers require control of two-thirds of voting rights and shares in the target company, and if structural changes are required as an integral part of the financing, the offer document should require acceptances of at least two-thirds of the shares and votes as a condition for closing of the public offer.

Once an offeror has acquired 90 per cent of the shares and voting rights in target, the offeror will need to be able to finance acquisition of the remaining shares as the minority shareholders are entitled to be bought out mirroring the squeeze-out rights that the offeror has under the Danish Public Limited Companies Act.

6. MEZZANINE DEBT AND INTERCREDITOR ARRANGEMENTS
A large number of acquisition financings in the Danish market are structured with different layers of financing including senior debt, mezzanine or second lien debt, and in certain cases also through issuing of debt instruments (bonds).

Under Danish law a creditor can contractually agree to be subordinated to other creditors and as it is common in other jurisdictions, such subordination of the mezzanine lenders or note holders will be effected through the terms of an intercreditor agreement. The intercreditor agreement will normally contain usual provisions whereby limitations are made on the mezzanine lenders’ (and inter-company creditors’) access to accelerate against the obligors or to enforce any (second ranking) security provided in support of the mezzanine debt for as long as the senior debt is outstanding (standstill and blockage periods). Normally, the intercreditor agreement will also contain turnover provisions. Attention must, however, be given to subordination provisions regarding inter-company debt. The risk is that where target (and its subsidiaries) agrees that its inter-company claims are subordinated to the acquisition debt, this could potentially result in a violation of Danish provisions on financial assistance. The same issue applies in respect of waterfall provisions and indemnity clauses. Usually the issue will be dealt with through adequate limitation wording in the intercreditor agreement.  

An agreement on ranking of debt will always be subject to mandatory rules of insolvency and the regime of preferential claims.

Another point for attention is the security agent provisions (whether contained in the facilities agreement(s) or in the intercreditor agreement). Danish law does not recognise the concept of a trust and therefore special care must be given to the agency terms to ensure that the security agent is adequately appointed to hold and enforce security on behalf of the lenders.

Where the second lien creditors are bond holders represented by a bond agent who has executed the intercreditor agreement on behalf of the bond holders, care must be shown by the senior lenders to ensure that the bond agency provisions clearly appoint the bond agent as duly and irrevocably authorised to represent and act on behalf of the bond holders. Otherwise there could be a risk that individual bond holders are not bound by the terms of the intercreditor agreement.

The use of bonds in acquisition financing is in general more complex than other second lien financings such as mezzanine debt.

Under an administrative ruling of 24 February 2006 from the Danish FSA, companies that issue bonds may be subject to either a banking or a saving institution licence. This is generally the case where a company in connection with an issuance of bonds:

• receives deposits or other funds to be repaid (eg where corporate bonds are issued. Subordinated debt is, however, not considered ‘other funds to be repaid’);
• grants loans at its own expense (eg where the proceeds of the bonds are used to provide an inter-company loan to a subsidiary); 
• receives the funds to be repaid from the public (eg where the bonds are listed on a regulated market); and
• the activities in respect of the funds to be repaid constitute a significant part of the company’s normal activities (ie where the issuance of bonds constitutes 25 per cent or more of the company’s (and not the group’s) total debt).

Where all four conditions set out above are met, a banking licence will be required, whereas a saving institution licence will be required, where a company does not grant loans at its own expense, but meet the remaining three conditions set out above.

The consequences of the above rules should therefore be taken into consideration where a company contemplates to issue bonds as part of an acquisition financing.

7. EQUITY KICKERS 
Equity kickers are usually associated with mezzanine capital, which is typically unsecured high yield debt, which is subordinated to the company’s senior debt. Mezzanine debt is more expensive because of the increased risk for lenders. Mezzanine debt holders will, therefore, often require a higher interest payment or a right to acquire or convert debt into equity in the company at a favourable rate. Common techniques used in providing equity kickers are warrants to subscribe for shares, conversion rights for debt and/or an interest rate that is linked to the income or performance of the borrower.

8. GUARANTEES AND SECURITY
8.1 Guarantees
In Danish acquisition financings the obligations of a borrower under the facilities agreement are normally guaranteed by its material subsidiaries and where relevant, its parent or sister companies. It is standard market practice that such guarantees are irrevocable and unconditional and are given in addition to any security interests created in favour of the lenders. The guarantees are normally given as primary obligor guarantees and can be called on demand. In addition, it is normal that the guarantees remain in full force and effect until all amounts outstanding under the facilities agreement have been fully repaid.

As mentioned elsewhere, Danish provisions on thin capitalisation (controlled debt), financial assistance and corporate benefit may limit such guarantees from a Danish guarantor.

8.2 Security
Where assets are located in Denmark, security interests may, depending on the asset in question, be created either by way of unregistered pledges or registered security. Where security interests are created by way of unregistered pledges, no specific requirements apply as to the form of the document and no stamp duties, registration fees or the like are payable. Registered security on the other hand, is established using one of the standard forms published by the Danish Ministry of Justice, all of which are typically governed by a set of standard terms and conditions. A fee of 1.5 per cent of the secured amount (+ DKK 1,400) is payable in connection with the registration of a registered security (save for listed shares).

Due to the high costs involved, borrowers often refuse to grant registered security in acquisition financings or alternatively the secured amount is reduced.

In order for the secured parties to be secured against creditors and bona fide contractors of the pledgor, certain acts of perfection must be carried out. Where such acts are not carried out prior to or immediately following utilisation under the facilities agreement, the security interests will be subject to a hardening period (typically three months). In addition to the perfection requirement, an identification requirement exists under Danish law, pursuant to which security can only be granted in assets that are clearly identifiable, save where the security is given by way of a floating charge or where the mortgage is given in respect of operating fixtures and equipment in rented property.

In the following the most common types of security used in Danish acquisition finance transactions will be described.

8.2.1 Unlisted Shares
A security interest in unlisted shares is created by way of a security agreement. The relevant act of perfection is the giving of notice to the issuer of the shares of the security interest created. Where share certificates are issued (except such that are non-negotiable according to the articles of association of the issuer), the secured parties must also take possession of the certificates. Finally, the issuer is under an obligation to record the pledge in the share register of the issuer.

8.2.2 Listed Shares
Danish listed shares are registered electronically in a deposit with the Danish VP Securities Services. A security interest in the shares is created by registration of a security in the deposit in which the shares are registered, which is also the relevant act of perfection. Since all communication with the Danish VP Securities Services generally takes place through an account holding institution, notice of the pledge must be given to the relevant account holding institution, who is obliged to request registration thereof with the Danish VP Securities Services without delay. In addition to the registration, it is standard market practice that a separate security agreement is entered into between the pledgor and the secured parties which regulates the general terms and conditions of the pledge.

8.2.3 Receivables and Bank Accounts
Security interests in receivables (eg trade receivables, rights under leasing contracts and inter-group debt) and bank accounts are also created by way of security agreements. Apart from notifying the debtor and/or the account holding bank of the security interests created, the secured parties must control the cash flow generated by the receivables and (in case of bank accounts) the pledgor must be deprived from making any withdrawals or otherwise disposing over the bank accounts in any manner which would conflict with the security interests created. In order to control the cash flow from the receivables, it is often agreed that the receivables must be paid into a pledged account.

For practical reasons the secured parties often accept that the pledgor remains in control of the cash flow from the receivables or dispose of the bank accounts until the occurrence of an event of default, where notice is then served. In such cases the security interests will be voidable until perfection is effected, and the secured parties will therefore not be protected against the creditors and/or bona fide contractors of the pledgor in the period between creation of the security interests and perfection thereof. Moreover, the security interests will be subject to a (typically three months) hardening period pursuant to the Danish Bankruptcy Act starting from the day of perfection.

8.2.4 Real Estate
A security interest over a real estate is created by registration of one of the following mortgage types:

• legal mortgage;
• owner’s mortgage; and
• indemnity mortgage.

Owner’s mortgage deeds are most commonly used in Denmark in acquisition financing since different ranking security interests can be granted to different lenders in relation to the same owner’s mortgage deed and because payment of the 1.5 per cent registration fee can be avoided where an existing owner’s mortgage deed is used in the acquisition financing. Hence, only this type of mortgage deed will be described in the following.

An owner’s mortgage deed creates a security interest in the real estate for a fixed amount in favour of the owner of the real estate. Since the owner of the real estate is both the mortgagor and the mortgagee, no security interest is created under the owner’s mortgage deed itself. However, security interest in the real estate will be created where the owner’s mortgage deed subsequently is pledged to a lender under a separate security agreement.

In order to be secured against creditors and bona fide contractors of the pledgor, an owner’s mortgage deed must be registered with the Danish land register and the secured parties must take physical possession of the original owner’s mortgage deed.

On 8 June 2006 a bill on digital registration of mortgage deeds was passed by the Danish parliament, pursuant to which all present paper-based mortgage deeds and all future mortgage deeds shall be digitalised. The digitalisation process is expected to commence in the fall of 2008. After digitalisation has been effected, security interests in owner’s mortgage deeds will no longer be created through the establishment of a separate security agreement, but will be created through registration of the security interest with the Danish land register.

8.2.5 Chattel and Intellectual Property Rights
Security interests in intellectual property rights are created in the form of a registered mortgage deed (underpant), while security interests in chattel are created either in the form of a registered mortgage deed (underpant) or in the form of an unregistered pledge (haandpant).

8.2.5.1 Registered Mortgage Deed
As is the case with real estate, security interests in intellectual property rights and chattel can be created through the establishment of a legal mortgage deed, an owner’s mortgage deed or an indemnity mortgage deed. Where an owner’s mortgage deed is established, a separate pledge thereof must (as long as the owner’s mortgage deed has not been digitalised) be executed for creation of a security interest. Due to the identification requirement mentioned in section 8.2 above, a list clearly identifying the relevant intellectual property rights and/or chattel covered by the (owner’s) mortgage deed must be attached thereto, save where a floating charge is used.

The relevant acts of perfection in relation to an owner’s mortgage deed is registration thereof with the Danish register of chattel mortgages (Personbogen) and in addition the secured parties must take physical possession of the original owner’s mortgage deed.

8.2.5.2 Unregistered Pledge
An unregistered pledge over chattel, on the other hand, is created by way of a security agreement. The relevant act of perfection is deprivation of the pledgor’s physical possession of the chattel. In order to be valid, the deprivation must be effective, meaning that the pledgor, in reality and not just formally, must be deprived from disposing over the pledged asset. Where a third party is in possession of the chattel (eg a lessee pursuant to a lease agreement), such party must be notified about the pledge and must agree not to redeliver the chattel to the pledgor or any other third party without the consent of the secured parties.

8.2.6 Floating Receivables Charges and Floating Company Charges
As from 1 January 2006 two different types of floating charges have been permitted under Danish law. A floating receivables charge (fordringspant) can be created over the entire portfolio of receivables and future unsecured debts resulting from the sale of goods or services by a company or a floating company charge (virksomhedspant) can be created over the following types of assets:

• unsecured claims resulting from the sale of goods and services;
• inventories of raw materials, semi-manufactured products and finished goods;
• motor vehicles which have never been registered with the Danish central register of motor vehicles or with a similar foreign register;
• operating fixtures and equipment;
• livestocks; and
• goodwill, domain names and intellectual property rights.

The two types of floating charges can not be registered at the same time.

8.2.7 Negative Pledge (pantsætningsforbud)
A negative pledge can be registered in relation to chattel in the Danish register of chattel mortgages, subject to payment of a fixed fee of only DKK 1,400.

As is the case with registered mortgage deeds, a negative pledge over chattel is created by using a standard form published by the Danish Ministry of Justice. The negative pledge will only prevent a company from mortgaging the assets specifically mentioned in the negative pledge without the consent of the secured parties and only to the extent such (conflicting) security interests are filed for registration in the Danish register of chattel mortgages. Only certain assets such as unsecured claims resulting from the sale of goods and services, operating machinery, tools and equipment can be covered by the negative pledge.

8.3 Limitations on Security
8.3.1 Financial assistance
A Danish public or private limited company may not provide security or give guarantees in connection with the acquisition of shares in itself or in its direct of indirect parent company, to the extent that such parent company is incorporated under the laws of any EU or EEA member state. Therefore, where a guarantee or security is provided in respect of acquisition debt, the obligations of the relevant Danish company must be limited to the extent required for the same not to constitute unlawful financial assistance within the meaning of the Danish Public Limited Companies Act and the Danish Private Limited Companies Act.

The Danish rules on financial assistance do not apply in respect of non-acquisition debt or in respect of downstream and cross-stream guarantees and security.

8.3.2 Corporate benefit
To the extent that part of a credit facility is used solely for corporate purposes (ie non-acquisition debt), up-stream, downstream and cross-stream guarantees and security can be given without limitations. However, in order to avoid a potential director’s liability, it is standard market practice in Denmark that a Danish public or private limited company giving an up-stream or cross-stream guarantee or security will request corporate benefit limitations inserted in the document, whereby the guarantee and/or security will be limited to an amount equal to the equity of the security provider and/or guarantor.

8.3.3 Thin Capitalisation
Pursuant to Danish law, interest deductions on controlled debt (ie debt from companies within the same group and debt to financial institutions secured by companies within the same group) may be reduced if a company’s debt-to-equity ratio exceeds 4:1 and the controlled debt exceeds MDKK 10. Therefore, a borrower may sometimes use thin capitalization as an argument against the granting of security or a guarantee from another group member, where the giving of such security or guarantee would bring the company in a thin capitalization situation.

8.4 Other Issues
As mentioned in section 6, the concept of trust is not recognised under Danish law. Parallel debt wording used in other jurisdictions also not recognising the trust concept is from a Danish law point of view a pro forma arrangement and is thus likely not to be recognised by the Danish courts. Therefore, where a credit facility is syndicated, the relevant act of perfection applicable to different types of security must be repeated each time a new lender enters the syndicate. It is possible that the serving of a notice to a security agent acting on behalf of all lenders is sufficient as the relevant act of perfection in respect of the transfer, provided always that the security agent remains security agent and itself a lender under the facilities agreement. However, there is currently no Danish case law on this specific subject.

9. CORPORATE THIN CAPITALISATION RULES AND OTHER  INTEREST DEDUCTIBILITY LIMITATIONS
A Danish company may deduct net financing expenses for tax purposes, however, subject to three main limitation tests; (i) thin capitalization test (4:1), (ii) the asset test (cap rule) and (iii) the EBIT test.
When determining whether a company’s net financing expenses shall be reduced for tax deduction purposes, the thin capitalization test is applied first.

According to the thin capitalization test interest deductions on inter-company debt and debt guaranteed by group companies (controlled debt) may be reduced if the company’s debt-to-equity ratio exceeds 4:1 and the controlled debt exceeds MDKK 10. Interest expenses that are reduced applying the thin capitalization test are not included when applying the asset test (cap rule) and the EBIT test.

Secondly, the asset test (cap rule) is applied to net financing expenses exceeding MDKK 20.5. According to the asset test (cap rule) only net financing expenses of an amount currently corresponding to 7.0 per cent of the tax value of the company’s assets minus certain financial assets are deductible for tax purposes.

Finally, the EBIT test is applied - also on net financing expenses exceeding MDKK 20.5. According to this rule the company’s net financing expenses may only reduce the taxable income by 80 per cent.
As appears, the asset test (cap rule) and the EBIT test only apply to net financing expenses above MDKK 20.5. Net financing expenses below MDKK 20.5 are consequently always deductible unless limitations apply pursuant to the thin capitalisation test.

10. FINANCIAL ASSISTANCE
A Danish private or public limited liability company may not lend money, provide security or otherwise make its assets available (including through a guarantee) in connection with an acquisition of shares in the company itself or its Danish, EU or EEA incorporated (direct or indirect) parent company. It is currently the position of the DCCA that this also applies to foreign subsidiaries of a Danish target. There are no whitewash procedures available in Denmark.

Other than in connection with acquisition debt there are no financial assistance restrictions on a subsidiary lending money to its parent company or guaranteeing or securing its parent’s debt as well as there are generally no restrictions on downstream support. However, as further described in section 8.3.2, corporate benefit limitation wording is often included in the relevant finance documents for protection against potential director’s liability.

In order to obtain access to target’s cash flow and assets, a debt push down is often implemented whereby debt is pushed down at target (group) level, allowing for target and its subsidiaries to give security by its own assets (see section 3).

A merger between (an acquisition debt borrowing) NewCo and target as an alternative to debt push down is typically not seen in Danish acquisition financings. While good arguments can be put forward for why such post-acquisition merger should offer adequate protection of creditor interests given the mandatory procedure followed in connection with corporate mergers, the DCCA has in a number of rulings refused to give effect to such merger taking the view that it would violate the Danish provisions on financial assistance. This position by the DCCA has so far not been tested before the courts.

11. DIRECTORS’ LIABILITY
Members of the board of directors of a Danish public limited or private limited company are liable to pay damages if they, due to wilful misconduct or negligence, in the performance of their duties have caused the company, its shareholders, creditors or another third party to suffer a loss.

In order to avoid a potential liability, the board of directors must at all times ensure that the rules set out in the Danish Public Limited Companies Act and Private Limited Companies Act are complied with. As a consequence thereof, the board of directors must, inter alia, ensure that the Danish provisions on financial assistance are not violated.

The board of directors has a continuing obligation to ensure that the company’s financial position is sound in the context of the company’s operations and that the company does not take any actions that would endanger the financial position of the company. This means, inter alia, that the board of directors must procure that the interests of the creditors and shareholders of the company are not jeopardized by any actions taken by the company. As a consequence thereof and as mentioned in section 8.3.2 corporate benefit limitations are normally inserted in a facilities agreement where a security or a guarantee is given by a subsidiary in support of a credit facility to its parent.

12. LENDERS’ LIABILITY
It is standard market practice in Denmark, that lenders renounce their liability to the effect that they shall not be held liable for losses incurred due to, inter alia, breakdown of or lack of access to IT systems or damaged data in such systems; failure of its power supply and telecommunications; acts of God; war and terror; strikes, lockouts and blockades and other circumstances reasonably outside the lenders’ control and even in some cases liability for gross negligence. The latter exemption can, however, prove hard to uphold and is likely to be set aside under Danish law where the loss is incurred due to reckless behaviour on part of the lenders.

In addition to the above, a lender knowingly participating in a violation of the Danish rules on financial assistance described in section 10 above and a lender enforcing a security interest prior to expiry of the one week notice period described in section 16.1 below may be held liable for a loss caused thereby.

13. LEGAL OPINIONS
Where a Danish company is a party to an acquisition finance transaction as an obligor, a Danish legal opinion regarding the corporate capacity of such Danish company to execute the acquisition finance documents to which it is a party as well as the legality, validity and enforceability of such documents will be required from the lenders as a condition precedent for utilization of the credit facility. In many transactions the above will be covered in one single opinion typically issued by the lenders’ legal counsel. However, in some transactions two separate opinions are issued; a corporate capacity opinion issued by the legal counsel of the Danish company and an enforceability opinion issued by the lenders’ legal counsel. Reliance on Danish legal opinions is often restricted to the finance parties as of primary syndication.

As is also the case in other jurisdictions, Danish legal opinions are based on a number of assumptions including, inter alia, the genuineness and authenticity of all signatures, the correctness of all corporate documents and the enforceability of finance documents under foreign law, and are subject to a number of qualifications, including general carve outs in respect of insolvency treatment.

Specific Danish law qualifications may also include carve outs on contractual terms to the extent that these are unreasonably burdensome or have a penal character, parallel debt provisions in acquisition finance documents or which attempt to make one or more provisions of such documents several from other provisions therein where this would substantially affect or change the substance of such documents and reservations in respect of the enforceability of guarantees. Where security is provided, specific Danish law qualifications may in addition include qualifications in respect of voidable security interests to the extent that these are not perfected without undue delay following advance of any part of a loan and in respect of the rights of enforcement of the secured parties following from statutory provisions in the Danish Administration of Justice Act. Finally, qualifications are often made where a security agent is appointed as holder of security on behalf of future finance parties and on withholding tax where the lender is related to the borrower.

14. POST-ACQUISITION RESTRUCTURING
14.1 Common Techniques; Preferred Legal Forms
The debt push down model is, as previously mentioned, often used in connection with an acquisition financing as a method for the lenders to obtain security over the assets owned by target. Restructuring by way of merging the target and NewCo has so far been rejected by the DCCA who finds such merger to be a violation of the Danish rules on unlawful financial assistance. When applying the debt push down model, the amount of distributable reserves in target is obviously an important factor as this determines the amount of debt that can be repaid and thereby in the end is decisive for the amount of the acquisition debt that can be pushed down at target level.

As a method of increasing the distributable reserves in target, a model involving the establishment of a topco company whose sole purpose is to hold shares in the NewCo has been introduced from time to time. The acquisition debt will be advanced to the topco company rather than NewCo and (part of) the loan proceeds will be applied towards subscription of shares in the NewCo in connection with a capital increase. For the purpose of increasing the distributable reserves in target (which would access the push down of a greater portion of debt), the model suggests that NewCo and the target companies are merged. Following such merger the distributable reserves of the surviving entity may be revalued upward in the accounts provided that the IFRS principles have been adopted for the surviving entity’s account prior to the date of the merger account. This would facilitate distribution of a greater dividend from target (the surviving entity) than if no merger had been made. As no acquisition debt is placed with NewCo, the merger and subsequent distribution should not constitute a violation of the Danish rules on unlawful financial assistance. Despite of this, the DCCA has questioned the lawfulness of the method. Further, it is probably arguable whether the revalued reserves in the accounts can actually be used for distribution.

14.2 Squeeze-Outs
Pursuant to Danish law a shareholder holding more than 90 per cent of the shares in a Danish public limited company and a corresponding proportion of the voting rights can force the remaining shareholder minority to sell their shares (squeeze out) by paying them a redemption price for the shares. The squeeze out is subject to the consent of the board of directors. Where such consent is not obtainable from the existing board, the board may be dismissed and a new board may be elected by the majority shareholder. The right to squeeze out may be exercised in both listed and unlisted companies.

A squeeze-out based on the above rules is initiated by the majority shareholder by requesting the minority shareholders to transfer their shares to it within a period of four weeks. Where the minority shareholders do not make such transfer before expiry of the four week period, an official notice must be published in the Official Gazette (Statstidende) by the majority shareholder requesting the minority shareholders to make a transfer of the shares within a period of not less than three months. Where the shares on expiry of such additional period still have not been transferred, the majority shareholder can deposit the redemption price and simultaneously therewith register itself as owner of the shares in the share register of the company. If share certificates are issued, these must also be cancelled and substituted by new certificates issued in favour of the majority shareholder. Where the parties can not agree on the redemption price this will, at the request of the minority shareholder, be determined by an expert appointed by the court.

Since a squeeze out based on the above rules can be rather time consuming, squeeze outs have earlier been initiated based on an alternative provision in the Danish Public Limited Companies Act pursuant to which a squeeze out right can be inserted in the articles of association of a company. Where the articles of association contain such right, a squeeze out can be completed within few weeks. The content of this rule was, however, subject to great debate in 2006 when a majority shareholder (Nordic Telephone Company ApS) holding only 88.2 per cent of the shares in the Danish tele company, TDC A/S, tried to squeeze out the remaining minority shareholders by inserting a squeeze out right in the articles of association of the company. In U.2007.2546Ø the Danish Eastern High Court established that the protection of minority shareholders set out in the rules described in sections 14.2.1 and 14.2.2 above can not be departed from by the insertion of a squeeze out right in the articles of association of a company. Following the above court ruling the practice of the Danish Commerce and Companies Agency has been altered to the effect that a new squeeze out right in the articles of association of a company will only be registered where the conditions set out in sections 14.2.1 and 14.2.2 are fulfilled.

15. DEBT RESTRUCTURING
15.1 Arrangements with creditors
15.1.1 Out of court, voluntary
Under Danish law any out-of-court arrangements with a company’s creditors may only be made voluntarily following agreement with the creditors involved. In Denmark such arrangements with creditors are normally only made with the creditors having the largest claims as it is not always possible in practice to make a voluntary arrangement involving all creditors.

As a consequence, there are no coercive measures to ensure that all creditors are included in an out-of-court arrangement.

On the other hand, large creditors are very often prepared to accept voluntary arrangements because such voluntary arrangements in general include all other large creditors and that it is ensured that the relevant creditors are treated equally.

15.1.2 In court, compulsory
An arrangement with creditors can be made in court as a compulsory arrangement in accordance with the provisions in the Danish Insolvency Act.

Pursuant to the Danish Insolvency Act claims cannot be reduced to less than 10 per cent unless specific circumstances give reason to such further reduction or the creditors give their consent. It is not unusual that the bankruptcy court grants an exemption from such minimum provision.

The compulsory arrangement with creditors entails that the bankruptcy court decides with the acceptance of a minimum number of the creditors (see below) that the compulsory arrangement executed as presented to and accepted by the creditors and that the bankruptcy court thus forces the remaining creditors to be comprised by the same arrangement.

The Danish Insolvency Act stipulates that at least 60 per cent of the creditors participating in the voting must vote in favour of the compulsory arrangement. In addition, the creditors accepting the compulsory arrangement must also represent certain diminimis amounts of the total debt subject to the compulsory arrangement.

15.2 Suspension of payments
Completion of a compulsory arrangement as described in section 15.1.2 above does not require that a suspension of payments has first been filed with the bankruptcy court, but in many instances the arrangement is carried out after a suspension of payments has been filed. Where the court grants a suspension of payments, a supervisor will be appointed to provide assistance during the suspension of payments. The first task of the supervisor is to immediately contact the creditors.

Initially, a suspension of payments is granted for three months, however, the bankruptcy court may extend the period for up to maximum one year. A Danish suspension of payments arrangement can be compared to Chapter 11 procedure.

16. ENFORCEMENT OF SECURITY
16.1 General
Upon the occurrence of a (declared) event of default under a facilities agreement the security interests created under Danish security documents become enforceable. Apart from court fees usual in litigation in Denmark, no stamp or registration or similar charges are payable in connection with such enforcement.

Where security is created by way of an unregistered pledge (haandpant), the secured parties must pursuant to the Danish Administration of Justice Act generally give one week’s (eight days) written notice by registered mail to the pledgor requesting the pledgor to fulfil its obligations under the facilities agreement before the pledged collateral can be auctioned or sold by way of private sale or otherwise enforced against. Where the security is granted by way of a third party security such third party must likewise be granted one week to remedy the default itself or to convince the actual debtor of remedying the default. The one week’s notice period does not apply where the secured parties are likely to suffer a loss if not allowed to enforce immediately.

Where, on the other hand, security is created by way of a registered owner’s mortgage deed (underpart), no notice period applies before enforcement can be initiated cf. U.1987.879Ø. In such cases execution can be levied on the basis of the registered owner’s mortgage deed itself provided that the size of the debt and its due date are acknowledged by the debtor or is evident from the circumstances. Should this not be the case, a court ruling or another foundation on execution must be obtained by the secured parties before execution can be levied.

The statutory enforcement procedures in respect of different types of Danish security will be described below. Other methods of enforcement, such as a private sale, can, however, always be agreed between the pledgor and the secured parties.

16.2 Enforcement of different types of security
16.2.1 Unlisted shares
Has a default not been cured prior to the lapse of the one week period mentioned in section 16.1 above, unlisted shares can be sold by order of the court. The sale will then be effected as an auction sale arranged by the court and the shares will be sold to the highest bidder.

16.2.2 Listed shares
Listed shares on the other hand, can upon expiry of the one week notice period mentioned in section 16.1 above, be sold at its listed price through a securities dealer, or if specifically agreed in the security agreement, the secured parties may disregard the above notice period and procure immediate realisation (straksrealisation). Where the secured parties as part of their enforcement take title to the shares, this does not trigger a mandatory bid under the Danish takeover code.

16.2.3 Receivables and Bank Accounts
Where a default has occurred, receivables can either be sold by order of the court subject to expiry of the notice period mentioned in section 16.1 above or the receivables can immediately following the occurrence of such default, be collected by the secured parties as they fall due.

Amounts standing to the credit of pledged bank accounts can be collected by the secured parties where a declared default has not been cured prior to expiry of the one week notice period mentioned in section 16.1 above, or, where specifically agreed in a security agreement, the secured parties can, without giving any notice or otherwise following any specified procedure, procure immediate realisation (straksrealisation) of the bank accounts by setting-off any obligations owed by the pledgor or by collecting the pledged monies directly from the account bank without obtaining any judicial settlement or order.

16.2.4 Chattel and intellectual property rights
Chattel subject to an unregistered pledge may be sold by order of the court where a default has not been cured prior to expiry of the notice period mentioned in section 16.1 above.
Enforcement of registered mortgage deeds over chattel and intellectual property rights on the other hand, is effected by levying execution in the collaterals. If the mortgagor, after execution has been levied, still does not fulfil his obligations, the collateral may, subject to certain limitations, be sold by order of the court and the proceeds of the sale used to cover the outstanding payments.

16.2.5 Real estate
A mortgage deed on a real estate is enforced by taking possession and/or by auction sale of the real estate. The two enforcement types can be combined, and secured parties who have levied execution with the purpose of selling the real estate by order of the court may therefore, until the auction takes place, take possession of the real estate and collect any proceeds from it.

16.2.5.1  Taking possession of the real estate
Subject to certain restrictions, secured parties can enforce a mortgage over real estate by taking possession of the real estate, and thereafter collect any proceeds of the real estate, such as rental income.

Before possession can be taken over real estate, the secured parties must, however, file a written application with the court. The mortgagor must be informed of the secured parties’ intention of taking the real estate under possession and be given a two week’s grace period to fulfil its obligations. Where more than one mortgagee intends to take possession of the real estate, the right of possession will belong to the mortgagee with the highest ranking priority.

A mortgagee’s right to take the real estate under possession does not hinder another mortgagee from levying execution over the real estate and requesting it to be sold by order of the court. If this happens, the right of the first mortgagee to take the real estate under possession will cease.

16.2.5.2   Auction sale
A mortgage in real estate also entitles the secured parties to require the real estate sold on auction following an enforcement event by levying execution against the real estate. Execution can as a general rule only be levied 14 days after the due date of a payment which has not been made, and as soon as execution has been levied the real estate can be requested sold by order of the court.

16.2.6 Floating company charges and floating receivables charges
Receivables (under both floating receivables charges and floating company charges) can be sold by order of the court where a creditor after expiry of the notice period mentioned in section 16.1 above still has not fulfilled its obligations under a facilities agreement. All other types of assets covered by a floating company charge on the other hand, are enforced by levying execution against the assets. Where a debtor, after execution has been levied, still does not fulfil its obligations, the assets may be sold by order of the court.