Frequently asked questions

Commercial Real Estate Transactions

What are the most common conditions precedent (CP) to closing of a commercial real estate transaction?

The most common CP is that the property isn't significantly damaged between signing and closing, for the simple reason that this is the only CP in the template on which almost all transactions are based. Otherwise there is a pretty clear trend of limited to no CPs with material deal risk in Norwegian commercial real estate transactions.

Is the use of W&I insurance common in Norwegian commercial real estate transactions?

Yes and no. W&I insurance isn't uncommon, but it's not an instrument used that often. W&I insurance is usually a handy tool in transactions where the seller requires a clean exit, e.g. when a real estate fund winds down or a foreign investor exits a fully owned SPV.

What kind of due diligence is normally carried out in a Norwegian commercial property transaction?

Buyers normally carry out financial, technical and legal due diligence, mostly using external advisors. Depending on the type of buyer, financial due diligence is sometimes done by the buyer itself. Environmental due diligence is also quite common, and political due diligence is starting to gain a fothold (particularly in development cases).

Does the Norwegian commercial real estate market have any special characteristics?

Unlike Sweden, Norway has few listed real estate companies (under ten), so real estate exposure is largely obtained through investment in are made in unlisted companies, usually SPVs owning a single property. For the same reason, there is a well established project finance industry in Norway (for setting up syndicated investments), which accounted for over 40% over the transactions carried out in 2021 (being the last "normalised" transaction year prior to the invasion of Ukraine and subsequent interest rate spike).

Do commercial real estate transaction processes always follow the same playbook or does structures differ?

Despite real estate being a somewhat less liquid asset class, real estate transactions in Norway often progress at a quite fast pace and a structured sales process has typically taken between one to three months to complete (from launch to closing) between domestic investors. To a certain degree this has contributed to foreign investors being out-competed because most are not used to or set up to handle this pace. A transaction process typically starts with the launch of an information memorandum (IM) or similar and a subsequent bidding process (open or closed/auction), with the seller and the highest bidder entering a term sheet to govern the continued transaction process. This is normally followed by the buyer's due diligence, often with a parallell negotiation of the SPA, signing of the SPA and then closing of the transaction according to an agreed closing memo.

Purchase price mechanisms in Norwegian commercial real estate transactions - locked box or closing balance sheet?

Closing balance sheets - locked box is very rarely seen in real estate transactions.

Any local market practices regarding the purchase price that international investors should be aware of?

Yes, as sellers save a potentially significant capital gains tax through selling the shares of an SPV (rather than the real estate itself, which often triggers a substantial capital gains tax), it is market practice the seller gives a purchase price deduction to compensate the buyer for a lost opportunity to increase the real estate's accounting and tax value (if the buyer had bought the real estate directly), based on the present value of such lost opportunity.

Any usual indemnities?

If target has participated in a previous demerger, then target can be held liable for the unfulfilled obligations of other entities that participated in the demerger, limited to the net worth of what target received through the demerger. Sellers normally indemnify buyers from any such liability. Sellers also normally indemnify buyers from any loss incurred due to non-payment of receivables that increase the purchase price (thus "bought" by the buyer).

Any established levels for seller liability caps?

The thresholds are labeled as in M&A-transactions. While the cap amounts are subject to negotiation, for quite some time market practice dictates a "de minimis" amount and basket (tipping) amount corresponding to 0,1% and 1% of the agreed property value, respectively, and a total liability for warranty breaches corresponding to 10% of the agreed property value. Fundamental warranties are usually carved out of all of these limitations except for the global cap, which normally corresponds to the highest amount of the purchase price and 20% of the agreed property value. The global cap amount is more regularly subject to negotiation, particularly with 100% equity buyers.

Is the warranty catalog usually subject to negotiation?

Yes, but not that often and not extensively. Most due diligence findings are typically resolved through seller deliverables or obligations before or after closing, or reflected in the purchase price (as a deduction based on present value) or indemnified by the seller.

Any established time limitations for warranty claims?

Time limits for warranties are subject to negotiation, but are usually five years for fundamental warranties and 18 months for other warranties.

How is closing typically carried out?

Closing often happens in physical meetings, particularly in big ticket deals, but it's becoming increasingly common to carry out closing via digital platforms like Zoom or Teams. The process typically includes a preparatory "dry run" by the lawyers, followed by a formal meeting to confirm that all closing conditions have been fulfilled and to present closing documents. After closing conditions are met, the buyer sends a confirmed payment instruction to its bank. The meeting may conclude after the bank acknowledges receipt of the payment instruction, with closing documents held in escrow—usually in a secured location or with the seller's lawyer—until the seller confirms payment receipt, at which point the documents are released to the buyer. It's becoming less usual for the parties to continue the closing meeting until receipt of payment is confirmed by the seller.

Are there any restrictions on using the property as collateral for the buyer's debt financing in connection with a real estate transation?

Yes, the Norwegian Private Limited Companies Act contains a paragraph which limits the target's possibility to provide financial assistance (e.g. use the real estate as collateral) in connection with acquisition of shares in the target, e.g. a as part of the purchaser's debt financing of a transaction. If the transaction leads to the formation of a corporate group, which is normally the case, such financial assistance is permitted subject to a corporate approval process, including board and general meeting approcal, a thorough credit assessment and a detailed report justifying the transaction's impact on the company's capital and liquidity.

Investments in Norway

Can a foreign investor acquire 100% of a Norwegian business?

As a main rule - yes. There are no restrictions in corporate law concerning the ownership to ownership of a Norwegian business or company, but companies that operate certain types of business may be subject to specific ownership limitations pursuant to relevant sector legislation, for example ownership to financial institutions. Investors that are subject to sanctions regimes will have to consider whether the relevant sanction regime restricts the ability to invest. Otherwise, any foreign investment may require FDI screening, require competition filings etc.

How is a typical foreign investment in Norway structured?

Other than that most BidCos and Targets are limited liability companies in their company of incorporation, there are no particular structure that is more common than other. For foreign investors/buyers, the choice of acquisition vehicle will mostly be driven by tax structuring, in particular for private equity sponsors or global corporations with advanced tax structures. Depending on the acquisition financing structure and the desired post-deal debt structure, the buyer may introduce several layers of Norwegian or foreign entities on top of the Bidco.

Are foreign investor subject to equal treatment as regards share classes and other rights pertaining to stock ownership?

Yes. There are no domestic rules in Norway that entails that ownership rights depend on a shareholders´ country of incorporation or residence.

What are the most common forms of Norwegian companies?

In Norway as in most other countries, the two key forms of incorporation is as a limited liability company or as a partnership in which the partners/owners are personally liable for the company´s obligations. The limited liability (AS or ASA suffix) is by far the most common form of incorporation.

Are there any restrictions on what currency can be used to pay for an investment in Norway?

No. There is contractual freedom as to what currency a buyer shall pay for an asset. In addition to NOK, the most common currencies used as payment in M&A transactions are EUR and USD. When subscribing for new shares in a Norwegian limited liability company, the company(issue) will usually have a strong preference for receiving contributionfor the new shares in NOK, unless the company are raising the new funds for the purpose of paying for investments to be paid in another currency.

Can a Norwegian company borrow in currencies other than NOK?

Yes.

Is there a stamp duty on acquisition of shares in a Norwegian LLC?

No. Currently, the only document fee payable in Norway is on the acquisition of real estate, but for real estate transaction purposes, this is usually avoided by organizing the ownership of the property through a "single purpose vehicle" (usually an LLC) whose shares are traded instead of the property itself.

What are the typical dispute resolution mechanisms in agreements related to investments in Norwegian entities?

There is no clear rule. Norwegian law is common, with both ordinary courts or arbitration as the venue. When a Norwegian investment is traded between parties who are both foreign, the parties often choose foreign jurisdictions as the governing law and also foreign dispute resolution mechanism. The use of arbitration as a dispute resolution mechanism is particularly relevant in transactions between parties residing in different jurisdictions, due to the relative ease of enforcement of arbitration awards under the New York Convention and the ability to agree on the necessary level of confidentiality for the process.

Corporate law and financing

What is the difference between a rights issue and a private placement?

In a rights issue, the deviating main rule of the Norwegian Companies Act is that all existing shareholders are offered to subscribe for shares in the company in the same proportion as they already own shares (preferential rights). For example, if you own shares corresponding to 5%, you have preferential rights to subscribe for 5% of the new shares that are issued. In a private placement, the preferential rights of existing shareholders are waived in order to offer new shares to a specific selection of existing shareholders or investors who do not already own shares. This is permitted as long as the majority of shareholders who make the decision have objective reasons to deviate from the general rule.

Why does preferential rights only apply in issues by cash contribution?

According to the Limited Liability Companies Act, the preferential rights only apply if the company raises equity in the form of Norwegian kroner (only Norwegian kroner constitute cash contributions in the sense of the Limited Liability Companies Act). Thus, there is no preferential right for existing shareholders to participate in issues where contributions for shares are made with settlement in other means of value, including e.g. money in foreign currency, real estate, shares, movable property, intellectual property rights, etc. The legislator's reasoning for this is that it would be impractical to have a preferential right in connection with issues of contributions in kind, since contributions will often be made by transferring an asset to which only the investor in question has access, e.g. real estate or a ship. Contributions in kind must also be valued at a monetary value in Norwegian kroner before it can be provided to the company as a contribution in an issue. In such cases, the board of directors is obliged to account for and declare that the value of the specific contribution in kind is at least equal to the total value of the shares the company will issue in the share issue. Any issue where contributions in kind are to be made must therefore be a private placement, as the valuation of the contribution must be made prior to the general meeting's decision.

Are there any restrictions in the Limited Liability Companies Act on the use of private placements?

A private placement requires that two-thirds of the shares and share capital represented at the general meeting vote to waive the preferential rights of existing shareholders, i.e. the same majority as is required for all capital increases. The Norwegian Companies Act does not allow for advance waivers or general exceptions from the preferential rights in the company's articles of association - any disregard of the preferential rights is therefore subject to a specific assessment by the general meeting. However, the general meeting may authorize the board of directors of the company to resolve on private placements, but in such situations the general meeting must specify in the authorization that the board of directors has the right to waive the preferential rights of existing shareholders.

In addition to the majority requirement mentioned above, there is also a requirement that a private placement must be objectively justified in the company's interest. This follows indirectly from the rules on abuse of authority in the Limited Liability Companies Act.

In which cases will a private placement typically be objectively justified?

Private placements are very practical, usually for commercial reasons. For example, a company may be in a process where the company wants to engage a new strategic partner/investor that can further develop the company's business. A practical example is situations where the company wants to issue shares to key employees in line with a share incentive program with the purpose of establishing an incentive for key employees to further develop the company's business. In such contexts, the commercial interest in deciding on a private placement will often be objectively justified in the company's interest.

Another practical example is situations where the company has an acute need for capital. In these situations, it is often time-critical that the company raises equity quickly to ensure liquidity in the company. In such cases, private placements to persons or companies that are able to provide the company with rapid financing will often be in the company's interest. In such situations, the principle of equality may be fulfilled by offering the non-participating shareholders a repair issue so that those who wish to participate can still do so, see section 2.7 below.

What are the advantages and disadvantages of a private placement compared to a rights issue?

A private placement can usually be decided and implemented in less time than a rights issue. In addition, in a private placement, the company will usually have greater predictability as to how much equity will actually be raised, since the terms of the issue are often negotiated and the investors commit themselves before a general meeting is convened. In a rights issue, the company will have less certainty about who and how many of the existing shareholders will participate in the issue.

The main disadvantage of private placements compared to rights issues is that the non-participating shareholders' ownership interests in the company will be diluted.

In private placements, the non-participating shareholders will be "diluted", but what is the difference between ownership dilution and value dilution?

In a private placement, existing shareholders will primarily be diluted by reducing their ownership stake when new shares are issued that they are not allowed to subscribe for. This is called ownership dilution. For example, if you own 5% before the private placement, your ownership stake will be diluted, as you will own a smaller proportion of all shares after the private placement. This is often called organizational dilution, since the influence of existing shareholders in voting at general meetings will be weakened as a consequence of there being more shares that can vote. For shareholders who have rights related to maintaining a certain ownership stake, e.g. if a minority shareholder falls below 10% and thus cannot block compulsory redemption, this can be of great importance.

Even if existing shareholders are diluted in terms of ownership, this does not necessarily imply a dilution in terms of value . In a share issue, the company is provided with equity capital of which the non-participating shareholders also receive a share. Provided that a private placement is made based on a valuation that reflects the company's market value, the issuance of more shares and the provision of more capital will not in itself have any effect on the value of the shares. If the subscription price per share is lower than the market value of the shares (e.g. by the company giving a discount to a new investor), the consequence will be that all existing shares will also become less valuable. For example, if a company before a private placement is worth NOK 10 million and the company has 10 shareholders (where each shareholder owns 1 share), each share will be worth NOK 1 million. If the company decides on a private placement against five new investors at NOK 500,000 per share (50% discount), the value of the company after the share issue will be NOK 12.5 million. The original shareholders' value share will thus be reduced to NOK 833,333.33 per share.

How can an ownership dilution for the non-participating shareholders be remedied or avoided in a private placement?

One of the ways to repair dilution after a private placement is for the company to carry out a repair issue. In a repair issue, the shareholders who did not have the opportunity to participate in the private placement will be offered to subscribe for new shares in the company in a number that allows them to maintain their proportional ownership interest as it was before the private placement. In this way, the existing shareholders will be placed as if the private placement did not take place. There are no rules in the Limited Liability Companies Act regarding access to repair issues - the starting point is therefore that the initiative for such a remedial exercise must first be proposed by the board of directors before a decision is made by the general meeting with a two-thirds majority. At the same time, the terms of the private placement will often prevent the implementation of a repair issue as described above. This will, for example, be relevant in cases where the private placement is subscribed for by an investor who subscribes for shares corresponding to 1/3 ownership interest and where it is an agreed condition that the investor shall maintain such ownership interest. In such a situation, the private placement will be prevented precisely by this condition, because the result of the private placement could be that the investor's ownership interest falls below 1/3.