Private placements and equal treatment - Finanstilsynet's experience from thematic supervision

In light of ongoing debates on equal treatment of shareholders, it is relevant to note the experiences of the Financial Supervisory Authority of Norway (FSA) following their thematic review of the largest investment firms and Oslo Børs, and handling of inside information in selected listed companies. Private placements can lead to discussions about discrimination and abuse of power. We provide a summary of the FSA's experiences and take a closer look at how issuance practices should be structured in the future.

The equal treatment rule in the Norwegian Securities Trading Act establishes the legal standard that issuers of listed financial instuments must treat the holders of their listed instruments on a non-discriminatory basis. Discriminatory treatment may nevertheless be accepted if it is objectively justified on the basis of the company's and the owners' mutual interests. Similar equal treatment principles are included in company law and Oslo Børs' rules for companies on Oslo Børs, Euronext Expand and Euronext Growth Oslo, and Oslo Børs may sanction breaches of their rules.

Private placements have long been the predominant alternative for capital issues in listed companies in the Norwegian market. In private placements, selected shareholders or other persons are offered to subscribe for shares. Private placements thus entail a deviation from the main rule in company law that existing shareholders have preferential rights to subscribe for shares in cash issues in the same proportion as they own and may lead to dilution of the ownership of existing shareholders.

The decision to set aside preferential rights is made by the general meeting by a majority as for an amendment to the articles of association (2/3), based on the board's proposal, which must be objectively justified in the company's interest. Apart from this, the Companies Act does not contain any special conditions for waiving preferential rights. Any limitations on the general meeting's majority to decide to set aside the preferential rights will be based on the rules on abuse of authority, according to which the majority shall not make decisions that are likely to give certain shareholders or others an unreasonable advantage at the expense of other shareholders or the company. If a private placement is to be decided by the board pursuant to an authorization from the general meeting, the board must assess whether there are sufficient objective reasons to deviate from the preferential rights within the framework of the authorization. In our experience, the use of private placements in restructuring processes may involve major discussions related to minority protection, discrimination and abuse of power, and may, for example, lead to demands for an extraordinary general meeting, investigation or legal action.

The FSA has carried out review of Oslo Børs and the largest investment firms, and handling of inside information in connection with the implementation of private placements in selected listed companies, and examined the conduct of the arranger and the company, including assessments of alternative forms of capital raisings, advices provided by investment firms, handling of inside information and maintenance of insider lists. In brief, the findings of the FSA's in particular concern the following issues:

• Listed companies should consider alternatives to a private placement and document their assessments, particularly if a private placement leads to greater dilution. Investment firms and other advisors involved should help ensure that the decision-making basis for the listed company is satisfactorily balanced and informed. The board should ensure that it conducts good and well-informed discussions of forms of issue, and record its discussions.
• Investment firms must inform and  advise the listed companies of their obligation to treat shareholders equally. Investment firms must inform on alternative forms of issue other than private placements to listed companies, and the arranger must document that such information and advice has been provided.
• Thorough assessments must be made of when inside information arises in capital raising processes. Listed companies should consult with the investment firm and legal advisors in the assessment.
• Those obliged to draw up an insider list must improve the maintenance of such lists. It must be ensured that all fields in the insider list are completed. It is worth noting that the FSA has announced that it will in future consider imposing a fee in cases of clear breaches of the requirements related to insider lists.
• If several investment firms are engaged as facilitators in the same issue process, a coordinated and common set-up is expected for the information that can be shared with potential investors in connection with market soundings.

Read more in FSA's report: Private placements and equal treatment of shareholders

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