There are several ways to finance the purchase of real estate companies, but one particularly practical method—explicitly permitted under the Norwegian Companies Act—is for the target company being acquired to provide security for the acquisition financing. Section 8-10 of the Norwegian Companies Act governs this and sets out strict requirements for both the process and the conditions under which such financing is allowed.
In this blog, we’ll explore how property investors can navigate these regulations, secure financing, and structure transactions in compliance with Norwegian law. We’ll break down the legal requirements, exemptions, and practical steps to ensure a secure and compliant investment process.
Section 8-10 of the Norwegian Private Limited Liability Companies Act – What does the law say?
Section 8-10 of the Private Limited Liability Companies Act regulates a target company's ability to provide financial assistance in acquisitions by allowing the pledging of the target company’s assets as security.
Before the legislative amendment in 2020, companies were prohibited from providing financial assistance for the acquisition of shares in another company. However, under specific conditions, the law now permits such transactions.
When Company A seeks to acquire another company (the target company), it requires financing to complete the acquisition. Financing can be secured against its own assets, but a practical solution in real estate transactions is for the buyer to obtain security/a pledge over the target company's assets (the property) by following certain procedural requirements set out in the Act.
Also read: Investing in property: Private ownership vs. Company structure
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Limitations on financial assistance
The Act specifies that financial assistance is limited to the target company's free equity. Since such an acquisition results in the formation of a corporate group, the assistance is calculated based on the most recently approved annual financial statements or an interim balance sheet. If an interim balance sheet is used, it must be registered and published by the Register of Company Accounts.
Requirement for commercial terms
The law mandates that financial assistance must be provided on commercial terms, meaning the assistance must be market-based. In practice, this requires the buyer to pay a guarantee fee to the target company. While the exact percentage varies, a market standard of approximately 0.5% appears to be established. This guarantee fee is typically paid quarterly, annually, or in full when the security arrangement is terminated.
Procedural requirements – A brief overview:
- Board Statement: The board of the target company must confirm that the security arrangement is in the company's best interest.
- Credit Assessment: The board must conduct a credit evaluation of the buyer.
- General Meeting Approval: The general meeting of the target company must approve the board’s resolution and statement.
- Registration with the Register of Business Enterprises: The financial assistance must be registered before the pledge can be established as security.
Which board should approve the security arrangement?
A frequently asked question is whether the existing or the incoming board should approve the security arrangement. Both buyers and sellers generally prefer that the incoming board makes this decision. A common solution is for the target company to register a blank pledge document in favor of the buyer’s lender (typically a bank) before the transaction closes. This document does not create an actual security interest until the loan is disbursed. The buyer then prepares the necessary documentation under Section 8-10, which is submitted to the lender for approval.
Upon completion of the share transfer, a new board is appointed in the target company, which then proceeds with the required formalities as outlined above.
Foreign buyers and the EEA restriction
Section 8-10 requires that the acquiring company is “domiciled in an EEA state.” This can present challenges for foreign investors. A common solution is to establish a holding structure in which a Norwegian private limited liability company (AS) acquires the target company. This does not prevent a non-EEA parent company from financing the transaction. Typically, loans and agreements with banks are arranged at a higher level in the corporate structure than in the acquiring company, which is generally unproblematic.
Conclusion
Section 8-10 of the Private Limited Liability Companies Act allows for security arrangements in acquisitions but imposes strict procedural and commercial requirements. Thorough assessment and proper structuring of the transaction can ensure a smooth and legally compliant execution.
Magnus Legal have experience in helping real estate companies and developers with property acquisitions and sales. Our lawyers are available to provide expert advice and assistance to ensure a secure and efficient financing process.
INVESTING IN PROPERTY IN NORWAY?
Our property lawyers are happy to help. Contact us today!
