Private Equity Transactions in Finland and Sweden
- Sweden
- 08/27/2007
- Roschier, Attorneys Ltd. - Sweden
In line with global trends, private equity transactions in Finland and Sweden continue to account for a large proportion of all transactions in the region. There are many international private equity funds that operate actively in the regional market such as CVC, the Bank of America, Industri Kapital, Nordic Capital, EQT and Altor Equity Partners.
Types of Private Equity Transactions
Buyouts
Private equity deals, or buyouts, in both Finland and Sweden usually refer to majority investments into relatively mature companies with established operations. Theses buyout transactions are most often implemented as private business or share purchases, or, if the target company is publicly traded, as public tender offers. To date, there have been few public tender offers by private equity buyers in both in Finland and Sweden.
Venture Capital
Venture capital transactions usually involve minority investments into seed- or growth-stage companies that need external financing in order to grow quickly. Therefore such transactions are usually made by issuing new shares or other equity-linked securities such as convertible bonds, and are implemented essentially as private placements.
“Going Private”
A recent market trend is to take a company from public ownership into private ownership. A general benefit of going private is the fact that the target company will no longer be subject to securities market laws, notably the duty to disclose any price-sensitive information. Another important benefit is strategic freedom, enabling the development of the company in the long term without the need to consider the reactions of the stock market in the meantime.
The participation by members of the board of directors (irrespective of whether they are managers of the company or external board members) in a ‘going private’ transaction are generally excluded, or kept to a minimum. This is because the board members have an obligation to act in the best interests of the company and its current shareholders. Board members need to carefully maintain equality between all shareholders and may not take any action which is likely to confer an unjustified benefit on any shareholder or any other person (such as a private equity investor or a member of management) at the expense of the company or another shareholder.
Basics of a Private Equity Transaction
Tax Considerations
A private equity transaction is generally accomplished as a purchase of shares for cash. Therefore, the transaction triggers capital gains taxation for the seller. A tax-neutral exchange of shares is not practically feasible in the case of private equity transactions. In regard to executive compensation, private equity transactions do not automatically trigger any immediate tax consequences. However, possible social security contribution obligations by the target company and golden parachute-related tax consequences of the executives should be determined on a case-by-case basis.
Purchase Agreements
In the case of a financing condition, the seller typically requires the private equity bidder to submit a binding term sheet or alike from the financing bank upon signing of the purchase agreement. Covenants to assist in raising financing are not market practice and we have not seen reverse break-up fees yet. An increasingly common phenomenon is that finance ‘walkaways’ are not accepted by sellers, which private equity bidders need to accommodate for in the current, very competitive bidding climate by providing evidence of a confirmed fund.
Private equity investors are typically focused on the purchase price mechanisms and try to avoid any unexpected cash-out elements. A common example is a provision on normal level of working capital to the effect that the private equity investor requires the working capital of the target to be within a normalized range, and any deficit to be deducted from the purchase price. Any other identified issues with an effect on the purchase price are also frequently taken into account in the purchase price mechanisms.
Exits
The expected investment horizon and type of exit affect tax planning. Key issues include the allocation of the purchase price between different assets and the resulting amortization of goodwill. Another important issue is a cost-efficient financing structure that fits into the investment period and exit strategy, and combines sufficient leverage with inexpensive debt financing without excessive covenants. A third important structural issue is a suitable incentive system for the management. A current trend seems to be to build increased flexibility into the equity and incentive structures, recognizing that not all investments will develop as planned when the investment is made.
Regulatory Limitations
There are no industry-specific regulatory schemes that would limit investments by private equity firms in particular neither in Finland nor in Sweden. Even in general, there are very few regulations limiting the ownership of companies in the mentioned countries. A few industries are subject to various licenses by the authorities, such as certain financial services and pharmacies. In addition, foreign investments in companies or businesses within the defense sector require clearance by the relevant authorities , where the acquisition would be cleared by the authorities unless it might endanger important national interests.
Issues in a Cross-border Private Equity Transaction
In a private equity transaction, the shares in the target company are typically acquired by a newly incorporated special-purpose vehicle using a combination of debt and equity financing. Normally, the bank providing debt financing will also insist that the existing indebtedness of the target group is refinanced at the same time. Thus, the bank will provide financing of both the acquisition and for general corporate or working capital purposes, including the refinancing of existing debt.
Under Finnish financial assistance rules, a Finnish limited liability company cannot provide, or grant security for, the financing of the acquisition of its own shares or shares in an up-stream member of the same group of companies. To mitigate the negative consequences of this prohibition, the available equity financing is generally, to the greatest extent possible, allocated to the financing of the actual acquisition. The debt financing is then divided into separate facilities, one (typically a term loan facility) being used to finance the balance of the purchase price for the target shares and secured only by a pledge over those shares and the rest (typically revolving/overdraft facilities) used for refinancing/general corporate purposes and secured by the assets of the target company or its subsidiaries (in each case subject to the further restrictions set out in the following paragraph).
The granting of loans or security by a Finnish limited liability company for the benefit of related parties is restricted unless certain express exemptions apply. In practice, the most important such exemptions are loans granted for the benefit of qualifying group companies and loans with qualifying commercial justification granted for the benefit of non-group companies. In addition to this (and regardless of the applicability of any such exemption), loans and security may only be granted where this is genuinely held to be in the best commercial interest of the granting company. Sufficient commercial benefit must in other words exist on a company level. The concept of ‘group benefit’ is not recognized.
‘Club Deals’
The most significant matters in a ‘club deal’ are related to the shareholders’ agreement, in which the “club deal” participants agree on the division of their rights and obligations, especially related to governance of the target company and the exit-related provisions.
Also of importance are the limitations imposed by confidentiality agreements to restrict private equity firms from combining influence. Therefore special consideration is given to the confidentiality agreements entered into by each party when implementing a ‘club deal’.
Outlook
The private equity market in the region has enjoyed a very strong year, especially in secondary buyouts, fuelled by the strong stock market sentiment, buoyant secondary buyouts and high liquidity of the debt market. The uncertainties on the financial markets that surfaced during the summer have also affected the private equity market in the region. The autumn will probably see a somewhat cautious market with some exits being postponed and the valuation levels being carefully assessed. However, with the strong fundraising during the spring and with the regional banks expected to return to the debt market, we will most likely see increased activities closer to year-end.
