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“What” are you buying? The regulation varies depending on what type of company you intend to acquire – public or private companies, listed or unlisted. The “how” is equally important – are you purchasing the business as shares of the company or through assets in the company? Will your existing foreign (non-Danish) company be the direct owner or will you establish a new Danish based company to act as the buyer? In this article, we will provide you with an overview of the general aspects of buying a company in Denmark, mainly focusing on acquisition of private companies.
- In Denmark, there is no specific regulation for mergers and acquisitions of private, non-listed companies. Mergers and acquisitions of private companies are generally regulated by the Danish Companies Act, Danish Sale of Goods Act and other special regulation, such as the Danish Competition Act among others. The Danish Securities Act and Danish regulated markets’ rules (e.g. Nasdaq OMX) regulate acquisitions of publicly traded companies with securities traded in these markets. As a rule, there is a high level of freedom of contract in Denmark.
- Typically, a business can be acquired through the purchase of the business’ shares or assets. In the matter of an acquisition of shares, the liabilities and assets will usually remain with the target business. Therefore, consent from business suppliers, customers, etc. is generally not necessary. However, in an acquisition of assets the rights and liabilities of the target business will be transferred to the buyer. It is therefore generally necessary to obtain consent from suppliers, customers, etc. where a purchase of a business’ assets takes place.
- The legal and authorized representatives of the parties involved in the acquisition should sign the purchase agreement. There are no other formal requirements for the purchase agreement to be legally binding. Furthermore, there is no need for notarial stamps or the similar.
- A company acquisition is usually documented in a purchase agreement. However, in the pre-negotiation phase or even prior to the negotiation , the parties may want to enter into a non-disclosure agreement (NDA) in order to protect the confidentiality of the exchanged information throughout the negotiations or for that matter during the due diligence procedure (carried out by the potential buyer). Other pre-contractual documents may also be used as manifestation / affirmation of the parties’ understanding and valuation of the transaction (e.g. a letter of understanding, memorandum of understanding, or letter of intent). The parties will typically choose not to let such an initial memorandum be legally binding. On some rare occasions however, legally binding memorandums do occur.
- The seller can be held liable for pre-contractual or misleading statements under Danish law – consequently, the wording in pre-contractual documents is therefore important. It is vital that the discussed terms by which the parties will be contractually bound by, are clearly and properly determined.
- In other jurisdictions, we know the “Entire Agreement” clauses, which state that nothing apart from of the purchase agreement is to be considered when construing the agreement. I.e. no previous drafts, e-mail exchanges between the parties is taken into consideration if a dispute occurs. Nevertheless, please note that the Danish courts tends to disregard such “Entire Agreement” clauses almost entirely. So in effect, correspondence between the parties prior to signing the purchase agreement, can indeed be considered as relevant documentation in a Danish court.
- Besides the closing (and sometimes post-closing) covenants, the most relevant parts of a purchase agreement of a business are typically; the seller’s representations and warranties, the buyer’s due diligence and lastly pricing and liability limits. In recent years, we have seen an increase in so-called warranty and indemnity insurance (W&I). In other words, the parties are to a wider extent more likely to secure insurance cover against (potential) breach of warranties.
- Representations and Warranties are negotiated on a deal-by-deal basis. The buyer will usually have a duty to perform due diligence before making a purchase (the “caveat emptor” principle). Therefore, the buyer will usually seek express contractual protection in form of warranties and indemnities. The seller will typically try to guarantee its obligations through a provision of a guarantee from the parent company or a third party. Another possibility is to agree to retain part of the purchase price after closing the acquisition as a guarantee.
- Based on the buyer’s duty to perform due diligence, the seller is generally exempted from liability for claims that the buyer was aware of or should have been aware of, had the buyer carried out a reasonable investigation of the target company. It is worth mentioning that for Danish companies, it is possible to obtain basic corporate information including published annual reports, at the Danish Business Authority website.
- Depending on the size of the target company, it is recommended having a professional adviser conduct legal due diligence for you (the buyer). We at Ret&Raad International pride ourselves in bring experienced in conducting legal due diligence for potential buyers of Danish companies. Before commencing the due diligence procedure, we work closely with our clients ensuring that the Due Diligence report includes exactly what you as a client needs. Most often, we agree on providing a so-called “red-flag” Due Diligence Report, in which we highlight the most crucial non-beneficial (or negative) findings. Findings, that could have a material negative impact on the target company. From experience, this could be anything from the target company’s lack of rights to use the Intellectual Property Rights (IPR) that they have based their business on. Or it could be a latent pension payment liability under a collective bargaining agreement – which could result in a substantial fine and a large payment in arrears to the employees. Ret&Råd will always provide you with our recommendations on how a negative finding best should be dealt with. For example, one way of handling a negative finding is to have the seller agree to indemnify the buyer for any loss incurred. Another is simply to use the negative finding as leverage to reduce the purchase price.
- Danish purchase agreements of private companies usually contain limitations on liability either in the form of (1) caps/maximums (total amount payable under the warranty/indemnity), (2) minimum baskets (claim is not payable unless the threshold/basket is exceeded), (3) de minimis thresholds (buyer cannot claim for breach unless each breach exceeds a certain amount), as well as (4) time limitations/time barring.
- Warranty and indemnity insurance (W&I insurance) is becoming increasingly popular, not only in Denmark, but also in other markets, for example in USA and Asia. The purpose of W&I insurance is to cover financial loss in case a party suffers from a breach of the representations and warranties given in connection to the purchase of the target company. Both parties, the seller and the buyer, can take a W&I insurance. Sometimes, the cost of the W&I insurance is shared amongst and can be negotiated by the parties.
- In a transfer of shares transaction, employees of the targeted company will continue their employment (conditions unchanged) after the closing. In an asset or business transfer, however, employees in the target company will be automatically transferred to the buyer, i.e. the employment rights and obligations agreed in employment contracts, including pensions and other benefits and collective bargaining agreements will be transferred automatically to the buyer/new employer. Financially, this automatic transfer of employee obligations is a part of the transaction that is often underestimated compared to the potential negative financial impact it can have. Therefore, the transfer should be thoroughly examined during the Due Diligence process. Executive managers reporting to the board of directors will not automatically be transferred on unchanged “employment” terms, but will require a separate agreement with the new employer (buyer).
- The target company of an asset deal has a duty to inform the employees (or their representatives) affected by the transfer of assets or business. Furthermore, the company must consult its employees when the company has at least 35 employees.
- In an acquisition of shares, it is possible for a shareholder holding more than 9/10 of the shares (and an equivalent part of voting rights) in the target company to redeem the minority shareholders’ shares in the target company (a so-called “squeeze-out”). In effect, the majority shareholders will hold all shares following the squeeze-out of the minority shareholder(s).
- The most common mechanism to set a price on Danish private M&A are “locked-box” and “closing account” mechanisms. In a “locked-box” scenario, the price is fixed in the purchase agreement at signing, and calculated based on an historical balance sheet at a pre-signing date (“locked box balance sheet”). In a “closing account” scenario, the price may be adjusted based on the closing accounts after the closing date. As a third option, a so-called “Earn-Out” pricing mechanism is used when the parties do not manage to reach an agreement on a fixed purchase price. An “Earn-Out” will typically consist of i) a fixed minimum price – typically the buyer’s valuation of the company, combined with ii) a maximum variable purchase price based on the following 1-3 years’ performance of the company. i) and ii) combined would typically correspond to the seller’s valuation of the company. Having at least a partial Earn-Out as part of the price mechanism is quite common.
- The actual Payment for an acquisition may be in the form of cash, assets or shares, and is generally not regulated under Danish law.
- A transaction can be subject to merger control at national and EU level, taking in to account the competition rules and turnover thresholds. In such cases, a condition for closing the transaction is that the authorities are notified and approve the transaction (“regulatory filing”). Moreover, there are specific industries that require notification/approval from the authorities, e.g. the energy business, residential real estate, national security and the weapon industry.
- Typical post-closing covenants include non-competition clauses (typically 2-3 years duration) and non-solicitation provisions in relation to salaried employees (up to 6 months duration). Worth noting is that the Danish courts have previously reduced the extend of non-compete clauses in purchase agreements, if the extend is considered “unfair” concerning geography, industry and time period. As a result, we do not recommend non-competes in excess of 2 years. Under Danish employment law, clauses on non-solicitation of employees are generally invalid. However, in the specific situation of an acquisition, there is a (compliant) possibility to agree to a 6-months non-solicitation of employees-clause.
- Non-compliance with closing obligations may entitle the aggravated party to terminate the agreement.
- There are no stamp duties on the transfer of shares in a Danish company. The transfer of property /real estate however, is subject to a stamp duty payable (usually by the buyer). Except for shareholdings of less than 10 %, a transfer of shares in Danish limited liability companies is tax exempt for entities subject to corporate taxation. In a transfer of assets, companies subjected to corporate taxation on their capital gain are taxed at a rate of 22 %. There is no VAT on the transfer of shares. A transfer of assets is generally subject to Danish VAT of 25%. However, if the transferred assets constitute a business (which is typically the case in M&A), the transfer is exempt of VAT.
- In a share purchase, there are no immediate Danish tax consequences for the foreign company acquiring shares of a Danish company. On the contrary, when purchasing assets in a Danish company, a foreign acquiring company that continues the target company’s business activities in Denmark, will usually be regarded as being permanently established in Denmark – therefore the income generated by the foreign acquiring company (with permanent establishment) will be taxable in Denmark.
Also read our article “Different options for buying a company in Denmark“.