The European Lawyer

Sweden Banking/Finance

11 Mar 2010

International Acquisition Finance - Sweden

Editors: Advokatfirman Hammarskiöld & Co - Per Gustaf Ekbom and Peder Grandinson

1. MARKET
The Swedish market for acquisition finance does not differ much from other European countries. Primarily the borrowers are private equity sponsors in connection with huge, large and midsized acquisition transactions, predominantly through private transactions and buy-outs from the stock exchange. On the borrower side the main players are, as said, private equity sponsors e.g. EQT, Nordic Capital, Triton and Altor. On the lender side, the Swedish commercial banks have a strong position in local transactions based on many private equity sponsors taking the view that funding shall be local, i.e. if it’s a Swedish transaction then the senior debt shall primarily be provided by participants on the Swedish market. This view has also led to a presence in Sweden by a number of foreign commercial banks, both in the market as such by providing senior financing from abroad albeit with a local flavour, and through local representation offices or branches in Sweden. Transactions entailing junior debt or mezzanine debt have also attracted a number of Nordic and European mezzanine and second lien lenders where such positions have not been taken by the commercial banks.

Until the credit crunch on the market during the second half of 2007, the commercial banks tended to provide full financing packages, including senior debt, junior debt and mezzanine debt in various tranches and through various sources. The extremely borrower friendly environment in the early and mid 2000s resulted not only in pressure on margins, but also on a higher leverage ratio, a willingness by banks to provide junior and mezzanine financing as well. Further, a somewhat more lenient position was taken by the lenders with respect to documentation provisions and terms for the financing. Although Sweden has, this far, not severely suffered in the credit crunch, it is notable that from the second half of 2007 and continuing, the commercial banks have taken a more conservative view of the leverage ratio and also on providing full packages of financing, including junior and mezzanine debt. This has led to the independent providers of junior financing and mezzanine financing returning as substantial players in the market and also to the revival of equity kickers and mezzanine financing entailing warrants.

2. DOCUMENTATION
To a certain extent, local transactions on the Swedish market have been strongly influenced by, in particular, the London market and the use of LMA based documentation. Today it is market practise, and has been since almost ten years, that more elaborated and complex financing documentation is drafted in the English language, typically on the basis of LMA documentation. It shall, however, be noted that the documentation is made “on basis of” LMA documentation -adjusted and adapted to Swedish specific circumstances and the local environment. This has resulted in that, bilateral transactions or transactions which are not intended to be syndicated outside of Sweden but rather be kept as club deals, are made by using somewhat shorter and simplified documentation adjusted for the Swedish legal environment. The choice of Swedish law as governing law in the financing documents is commonly accepted on the Swedish market, whereas with syndication including lenders from other jurisdictions, English law is required in order to facilitate the syndication process and making potential participants in the financing feel comfortable with the governing law and dispute resolution provisions. This also applies to junior and mezzanine documentation but with a higher level of acceptance of Swedish law in the financing documents given the strong link to warrants or other equity instruments tied to the financing as such.

Ancillary documentation in terms of intercreditor agreements and subordination agreements follow the same rules as above i.e. typically drafted in the English language but with Swedish law as the governing law in transactions with a less international flavour. Regarding security documentation, (c.f. below) it is typically required that the security documentation follows the laws of the jurisdiction where the security is located or, with share pledges, the jurisdiction of incorporation of the company in which the shares are pledged.

3. ACQUISITION/FINANCING STRUCTURES
Leaving aside industrial acquisitions, i.e. where one operating industrial company acquires another operating company on the market, and focusing on private equity sponsored transactions, the typical acquisition structure does not differ much from what is seen in other European countries. For the sake of this presentation, let’s leave aside the underlying tax/equity structure and focus on Swedish acquisitions as such. The basic structure is that a newly established Swedish limited liability company (Sw. Aktiebolag) is used as an acquisition special purpose vehicle (SPV). The SPV is used as the bid company for acquiring the shares in the target company. The acquisition debt is then borrowed by the SPV from its lenders, or at a higher level, by the company or companies owning the SPV. Refinancing of working capital through revolvers, guarantee facilities and the like is typically done in such a way that both the SPV, the target, and possible subsidiaries further down in the structure are original borrowers or acceding borrowers depending on how the transaction is structured. On what level the financing is made available, is strongly connected to the possibility for the respective borrower to provide security or collateral for its own and other companies obligations towards the lenders. Limitations resulting from financial assistance rules in the Swedish Companies Act (Sw. Aktiebolagslagen 2005:551) limit the possibilities for an acquired company to provide security or collateral for acquisition debt as well as ordinary debt incurred by superior companies in the group (c.f. below).

As indicated above, a carefully prepared acquisition and financing structure will also open for the possibilities to establish a structural subordination if that is desired by the lenders. Structured subordination can be obtained in two ways, either by building a chain of companies where the more junior debt comes in at a higher level and vice versa, or by establishing a subordination by having the target company or its possible subsidiaries as direct or acceding borrowers with respect to working capital or refinancing of existing debt in connection with an acquisition. This will then enable the relevant companies to provide security, not only for its own debt, but also to establish that, for example working capital facilities made available to the target company, or other operating companies within the acquired group, have priority over acquisition debt provided to the SPV. When creating the adequate acquisition/financing structure ringfencing issues are typically also taken into account and the documentation crafted to establish a ringfencing by limiting loans out, repayment of debt and negative undertakings with respect to disposals or pledges so as to preserve and maintain a sustainable security package with the assets of the target group well covered.

4. REGULATED TARGETS
Pursuant to Chapter 24, Section 1 of the Swedish Securities Market Act (Sw. Lagen om värdepappersmarknaden 2007:528), permission from the Swedish Financial Supervisory Authority must be obtained before a buyer can acquire, directly or indirectly, a “qualified holding” in a company which is under the supervision of the Swedish Financial Supervisory Authority. Companies under the supervision of the Swedish Financial Supervisory Authority include, among others, stock exchange operators, clearing organizations, banks, insurance companies and financial institutes. A holding is “qualified” if it represents ten percent or more of the share capital or ten percent of all the votes in the company, or if the holding results in a significant influence over the company’s management. Permission from the Swedish Financial Supervisory Authority must also be obtained before a buyer can make acquisitions resulting in an increase in the qualified holding so that it reaches 20, 33 or 50 percent of the share capital or of all the votes in the company, or so that the company becomes a subsidiary. The financing of acquisitions of such regulated targets require certain special treatment with regard to the structuring of the financing. For example, when it comes to the percentage of the equity kickers, warrants, etc, the thresholds for what constitutes a qualified holding must be borne in mind. Further, the enforcement of security under the facilities may require permission from the Swedish Financial Supervisory Authority following an ownership assessment.

5. LISTED TARGETS
The acquisition of a Swedish listed target is a delicate operation that requires careful planning and structuring. Public takeovers in Sweden are governed by the Swedish Act on public takeovers on the stock market (Sw. lagen om offentliga uppköpserbjudanden pa aktiemarknaden 2006:451) (the “Takeover Act”), which is based on the Directive 2004/25/EC on takeover bids. The Takeover Act stipulates inter alia that a public offer may only be made if the bidder has undertaken to follow the takeover rules of the stock exchange where the shares in question are listed and contain rules regarding mandatory offers and defence measures. The more detailed rules regarding how a public takeover shall be carried out are contained in the takeover rules of the stock exchange in question. For targets listed on the OMX Nordic Exchange this means the OMX Nordic Exchange Stockholm AB Takeover Rules (the “Takeover Rules”). Pursuant to the Takeover Rules, the offeror may stipulate conditions for fulfilment of the offers. Such conditions must be drawn up in a manner which makes it possible to objectively determine whether or not a condition is fulfilled. A public offer will normally be conditional upon reaching acceptance for the offer from holders of more than 90 percent of the shares. If the 90 percent threshold is reached, this will allow the offeror to “squeeze out” the remaining minority as the Swedish rules on mandatory redemption of minority shares set out in the Swedish Companies Act can be used. Further, if the offeror is relying on external financing for the implementation of the offer and the lender has stipulated conditions for providing the financing, the offer shall, normally, be made conditional on receiving such financing. The conditions stipulated for payment of the loan must be drawn up to meet the objectivity criteria and shall be reproduced in full, both in the press release relating to the offer and in the offering document. All of the aforementioned issues require careful planning, documentation and a financing structure adapted to the bid process and in particular sustainable and suitable “certain funds provisions”. The certain funds provisions seen on the Swedish market do not differ much from what is generally seen in other European countries. However, given the stringent Takeover Rules, it must be clear from the bid what conditions (if any) are applicable to the availability of the financing for the bid. Needless to say, this has a direct impact on the wording and application of the certain funds provisions.

6. MEZZANINE DEBT AND INTERCREDITOR ARRANGEMENTS
As indicated in the introduction above, it is commonly seen that several tiers of financing are obtained. This can be achieved either through one and the same source with different tranches, through one and the same source with different agreements and arrangements and, more common, by different providers of funds providing different levels of financing. During the heydays in the mid 2000s, the commercial banks were willing to provide entire packages entailing all levels of financing, including second lien and mezzanine debt and not only senior and junior debt. However, since the summer of 2007, the situation has reverted to the more traditional situation where junior, mezzanine and, in certain instances, second lien financing is obtained through separate sources. The technique used to create different levels of financing is typically contractual i.e. the subordinated nature of the various junior, mezzanine or second lien financing is established through the documentation and, in particular, tied together in an intercreditor agreement containing adequate subordination provisions. Through a subordination in the junior debt document itself (and we will use the expression ‘junior debt document’ as a summary name for all financing that is not senior) and in the intercreditor agreement, the contractual relation as between the parties is established. In addition thereto, a structural subordination can be obtained by making the subordinated financing available on a different level from the senior financing, thus through the structure and contractual provisions creating an even stronger subordination of the providers of junior debt.

The ranking between the creditors also needs to be reflected in the security package, where the junior lenders are typically granted the same security as the senior lenders to the extent possible taking into account financial assistance rules and other limitations in applicable legislation. Also the right to the security, including ranking, holding the security and taking enforcement actions, is regulated through the intercreditor agreement with supplementary provisions in the relevant security document on how to treat the security upon enforcement and following discharge of the senior debt (c.f. security below). The junior or mezzanine debt or charges are typically structured so as to be subordinated in payments during the term of the transaction. An equal subordination and ranking applies to the security provided to the junior lender or the mezzanine lender. In contrast, second lien transactions on the Swedish market have so far been structured so that the rights of the second lien lender is pari passu with the senior lender as long as there is no event of default. In a default situation, however, the rights of the second lien lenders are subordinated to the rights of the senior lenders.

Finally, a few words with respect to high yield bonds. The use of high yield bonds on the Swedish market has been very limited and has only been successful in a few transactions. The limited use is primarily a result of limiting rules in the Swedish Companies Act. High yield bonds are consequently used on a higher level in the transaction structure where the issuer of such bond is a non Swedish entity. The proceeds from the high yield bond issue are then channelled down through the structure and used as acquisition proceeds.

7. EQUITY KICKERS
Mezzanine financings typically entail equity kickers to the mezzanine lenders in one form or the other. Since the entry into force of the new Swedish Companies Act in 2006, certain new opportunities as to equity like instruments have arisen. However, the traditional method for providing equity kickers is to provide warrants to subscribe and purchase shares or to subscribe for shares at a predetermined price being the quota value of the shares, which typically is a relatively small amount. This gives the opportunity for the mezzanine investors to participate in the value development of the company and, in connection with an exit, either to exercise the warrant and sell shares or sell the warrant instrument as such. The economic outcome of both alternatives will in all material respects be the same. The other traditional alternative is a convertible debt instrument where the lender has the right to convert into shares at certain times and for certain prices. A pure convertible debt instrument is a feasible means of equity participation equity kicker, albeit not as easily handled and clear cut as the pure warrant. As a consequence of the new Swedish Companies Act, it is now possible to issue other instruments tracking the result or the economic development of the company. This was previously prohibited under Swedish law, or at least only possible to a very limited extent, whereas the new legislation permits the issuance of such instruments. Such instruments can accordingly be structured more or less as a share, i.e. a loan amount is provided but the development on the interest or the amount repayable is made variable and tracking the actual development of the share in terms of dividends payable, or the value development of the company. The calculation methods for obtaining the same value participation as for the shareholders can be quite complicated but are feasibly obtained. The tax treatment of such instruments is somewhat unfavourable if the investors and the company are both Swedish entities, but a correct structuring will mitigate negative tax effects to a certain extent. The method of tracking the economic development of the company into the value of certain loans can also be used to structure shareholder loans to exactly follow the development of true equity investments in the company.

8. SECURITY
The security structures are typically tailored to provide as much security as possible for the various lenders, taking into account financial assistance and upstream issues that always arise in acquisition financing structures. Before going into the various kinds of security available, it is worthwhile to address the financial assistance rules under Swedish law. The Swedish Companies Act contains restrictions concerning up-stream loans and granting of securities. The first is the prohibition of upstream loans in chapter 21 which prohibits loans in favour of a shareholder in the company including the parent company, which rule also applies to the granting of security. From this general rule there is an exemption to the effect that, as long as this is within a group of companies in the meaning of the Swedish Companies Act, such a loan is permitted. In short, the permitted group is those companies which are directly or indirectly owned by a parent company within the EU. In reality, this means that any Swedish company can grant security for its own debt, for debt of its parent or sister companies’, including guarantees. However, the general prohibition for securing acquisition debt needs to be observed. The second prohibition in chapter 21 is, as aforementioned, the absolute prohibition to grant security for acquisition debt. This means that a Swedish limited company cannot provide security for acquisition of its own shares or shares in a superior company. With respect to acquisition debt, the group in the Swedish Companies Act’s meaning comprises the ultimate parent company in Sweden.

Additional restrictions follow from chapter 17, regulating the use of the company’s funds and setting out dividend restrictions, etc. The effect of those provisions is that even though an upstream security may be permitted, if it is given for the obligations of a parent company or a sister company, the value of such security or guarantee is limited to what the company could have paid out as dividend at the time when the security was provided. The effect of this is clearly that, although a grant of security upstream or an upstream guarantee is permitted, it may be limited as to its value. In order to avoid liability for directors, shareholders or others of the company in connection with providing security, an analysis as to the permissibility of providing certain security needs to be undertaken. No borrower should grant, and no lender should request, security that would not be regarded as permitted under Swedish law. Although this view is commonly shared on the market, the Swedish security documents always include limitation language to the effect that the value and applicability of any security is limited to what may be provided under the Swedish Companies Act. The effect of this limitation language is not to make the non-permitted security permitted, but rather to state that all parties are aware of the fact that certain limitations may apply and if any security is granted in excess of what is permitted then there is no personal liability for the directors or others participating in providing such security.

The security available in acquisition financing transactions is primarily share pledges in the target or subsidiaries, pledge over inter-company loans, security over real estate owned by the borrower, pledge of trade receivables, business mortgages over the operations of the companies, and trade mark pledges.

8.1 Share pledges
Share pledges are an outright pledge of the shares by the owner of such shares to the lenders. The share pledge typically also comprises dividends to be paid (if this is allowed) and voting rights. Typically, dividends may be paid to the pledgor, unless and until an event of default is declared and voting rights may also be exercised by the pledgor unless and until an event of default has been declared. In those circumstances, the pledgee notifies the company of an event of default and makes them aware of the fact that no dividends may be paid other than to the pledgee. As to the voting rights, the share pledge is typically accompanied by a voting power of attorney with an obligation for the pledgor to renew such power of attorney on a yearly basis. Perfection of the pledge of the shares is effected by handing over the shares to the pledgee, by notifying the company of the pledge and by noting such pledge in the share register of the company. When it comes to so-called VP companies where no share certificates are issued and ownership of shares are evidenced by electronic book entries only, the pledge is perfected by notification to the relevant bank or stock broker keeping the electronic account of such shares.

8.2 Pledge of mortgages over real estate
Security over real estate is obtained through pledge of mortgage certificates in the relevant real estate. In this case too, the mortgage certificate is delivered to the pledgee and the pledgee is registered in the land registry as holder of such mortgage certificate.

8.3 Pledge over inter company loans
Pledge of inter company loans is created through a pledge and notification to the inter company debtor of such pledge. In order to perfect such pledge the debtor must be instructed to pay directly to the pledgee.

8.4 Pledge of trade receivables
Likewise with pledges of trade receivables, the pledge is created through a pledge agreement. Notification to the underlying debtor is required to obtain perfection and hence borrowers are relatively reluctant to provide this kind of security since they do not want to involve their trading partners in the security structure.

8.5 Pledge of general business mortgage
A general business mortgage certificate can be obtained through the Swedish Companies Registration Office. A security in assets which would not be possible to otherwise create, and in cash of the company is thus obtained. However, given the order of priority and the limited value of such pledge, borrowers are relatively reluctant to provide such security, in particular since stamp duty is levied on the issuance of the business mortgage certificates (c.f. below).

8.6 Pledge of trade marks
A pledge over trade marks is also available and can be obtained through an ordinary pledge agreement. Perfection is obtained through registration at the Swedish Patent and Registration Office of the pledgee’s rights. Pledges over EU trade marks can also be obtained.

The creation of the various types of security interests described above does not give rise to any stamp duty or other taxes. It shall however be noted that, with respect to trade mark pledges, a registration fee of a nominal amount is required. With respect to mortgage certificates and business mortgage certificates, a stamp duty of two percent is levied when such a certificate is issued. However, no stamp duty is levied as a consequence of the pledge itself. In addition to the requirements described above, no filings, registrations or notarisations are required in Sweden for the creation of security.

9. CORPORATE THIN CAPITALISATION RULES
In a strict sense, thin capitalisation rules do not exist under Swedish law. There is, however, a doctrine of piercing the corporate veil should a company be under capitalised for its intended purpose. This is based on old court cases where directors or shareholders of the company have been held liable for the company’s obligations following thin capitalisation and does not truly relate to thin capitalisation in the context of financing transactions.

In addition, the rules in chapter 25 of the Swedish Companies Act prescribes the compulsory liquidation of a Swedish limited liability company if the actual share capital, due to losses, is less than half of the registered share capital and the share capital is not restored within certain time limits. Personal liability for shareholders is remote provided that the provisions of the Swedish Companies Act are not violated by such shareholder(s).

10. FINANCIAL ASSISTANCE
The general prohibition of the granting of loans and providing security are referred to above. Those provisions clearly limit the possibility for a financier to get access to the target company’s assets and cash flow, to the extent the financing relates to acquisition of the shares in the target company, or in a company superior to the target company. Certain means of debt push down and restructuring exist and open up possibilities, however, each such restructuring or debt push down must be analysed individually. The most common way to obtain a more favourable security structure, and direct access to the target company’s assets and cash flow, is to merge the target with the bid company as quickly as possible after the closing date. The result of such merger is that the bid company, being the surviving entity, assumes all rights, assets and liabilities of the target company which is dissolved. Such merger can be obtained through a relatively simplified procedure as between a parent company and its wholly owned subsidiary.

11. DIRECTORS' LIABILITY
Typically under Swedish law, the directors of a Swedish limited liability company shall, provided the Swedish Companies Act or other applicable legislation is not breached, not be personally liable for the result of the company’s operations. However, if e.g. the rules regarding compulsory liquidation are not adhered to, then a personal liability for the directors of the company may arise. The same applies if the dividend restrictions and financial assistance rules are not adhered to, resulting in a liability for damages to third parties as well. In addition it shall be noted that breach of prohibitions regarding upstream loans and guarantees in chapter 21 of the Swedish Companies Act is a criminal offence.

12. LENDERS' LIABILITY
No specific rules exist with respect to lenders’ liability under Swedish law. Also, case law is scarce on this topic but some examples exist with respect to liability for lenders in connection with breaching the rules in the Swedish Companies Act regarding upstream guarantees or providing security for acquisition debt. In those cases, liability has been imposed on lenders where they have cooperated in the structuring of transactions breaching the prohibitions and based the financing on such non permitted collateral.

13. LEGAL OPINIONS
The use of legal opinions does not differ in Swedish transactions from other European jurisdictions. The legal opinion typically covers corporate existence, due authorisation, due execution, validity and enforceability of the transaction documents. Qualifications and limitations are typically accepted with respect to bankruptcy issues and also certain aspects of financial assistance rules. Generally, there is a common view on the contents and limitations of legal opinions in financing transactions in Sweden.

14. POST-ACQUISITION RESTRUCTURINGS
As mentioned above, the limiting provisions of the Swedish Companies Act restrict the granting of certain securities and guarantees for acquisition debt. However, a post-acquisition restructuring can to a certain extent alleviate such concerns given that the restructuring is correctly done. Various debt push down techniques can then be used to obtain a better collateral structure. However, as also mentioned above, merger techniques can be used to obtain a better post acquisition collateral structure.

With respect to squeeze out procedures, such procedures can be initiated once one shareholder holds more than 90 percent of the capital and the votes of the company. The procedure can be time consuming but after achieving a 90 percent holding, the purchaser can be granted advance access to the remaining shares in the company and can then run the company as if it was wholly owned by said shareholder.

15. DEBT RESTRUCTURING
A debt restructuring is typically done outside of court and prior to bankruptcy. The only way to obtain a debt restructuring through court proceedings is through a company reorganisation (Sw. företagsrekonstruktion), which is a solvent restructuring of a company intended to avoid a bankruptcy situation. The company itself, or a creditor, can apply for restructuring. Such application or decision for restructuring is normally an event of default under the financing documents and treated as an insolvency for all purposes of termination and accessing collateral. In this context it shall be noted that once an application for debt restructuring has been filed, no creditor can take access to or enforce security without the permission of the court. Hence, the loan and security documentation is structured to enable as early a termination as can possibly be obtained in order to access the collateral prior to any company reorganisation or application for company reorganisation.

Leaving the company reorganisation aside, a debt restructuring absent, insolvency, can be obtained in such way as the parties agree. This may entail extension of repayment periods, debt/equity swaps or other actions which the parties may agree upon.

If a Swedish company becomes insolvent, and declared bankrupt, a receiver in bankruptcy is appointed who in all respects represents the bankrupt estate after the declaration of bankruptcy. A financing agreement is typically accelerated prior to the bankruptcy or directly in connection with the declaration of bankruptcy. The holders of collateral can then enforce the collateral, access collateral and dispose of it as they deem appropriate, taking into account mandatory Swedish rules as to enforcement of security e.g. over real estate. Once a company is declared bankrupt, no enforcement actions can be taken without consulting the receiver in bankruptcy. The declaration of insolvency shall not affect the validity of the collateral provided that it is correctly structured and all perfection requirements properly fulfilled. However, a bankruptcy situation may result in a somewhat more time consuming enforcement process.

16. ENFORCEMENT OF SECURITY
Once the facility agreement is accelerated, the creditors of the lenders acting through a security agent can access and enforce against the collateral. Absent bankruptcy, security can be enforced against in such way as the secured party deems appropriate. There is, however, an obligation for the secured party to account for any surplus from a sale of collateral in excess of the secured obligations. Further, the secured parties have a general obligation to also take into account the interests of the entity providing the collateral.