A brief overview of guarantees and collateral for acquisition finance transactions in Denmark in question and answer format.
Related Company Guarantees
Restrictions on the provision of related company guarantees in Denmark? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?
The provision of upstream guarantees in the form of guarantees for obligations of direct or indirect shareholders of the guarantor, cross-stream guarantees in the form of guarantees for obligations of sister companies of the guarantor, and downstream guarantees is subject to the existence of appropriate corporate benefit, usually in the form of a plausible and reasonable benefit to the group of companies of which the Danish guarantor forms a part. Guarantees form a common element of cross-border transactions and the conditions precedent will usually include a board resolution where the corporate benefit is discussed and approved in connection with the approval of the transaction and the finance documents. It should be noted that the general prohibition against financial assistance from the target applies. A Danish company may neither directly nor indirectly make funds available, or grant loans or security, including guarantees, for its shareholders or management, including the management of its parent company. The term ‘parent company’ includes any company that exercises dominant control over the company and applies to public limited companies, partnerships, private limited companies and companies with an equivalent corporate form. While the Danish Companies Act only applies to Danish companies, the Danish Business Authority has taken the unusual position that the provision of financial assistance by foreign subsidiaries of a Danish target company to finance the acquisition of shares in the Danish target company constitutes a circumvention of the Danish prohibition on unlawful financial assistance. This position tends to be more strictly applied that in other EU jurisdictions. The management is therefore obliged to ensure that the foreign subsidiary of a Danish company complies with the Danish financial assistance regulations, irrespective of whether this would be permissible in the foreign subsidiary’s jurisdiction. It is a matter of legal debate as to whether the extraterritorial reach of unlawful financial assistance extends to foreign parent companies. Notwithstanding the general prohibition on financial assistance, the Danish Companies Act does allow a target company to provide financial assistance in connection with its own takeover in certain limited circumstances. In practice, lawful financial assistance within the meaning of the Danish Companies Act is rarely used. Instead, market participants prefer a debt pushdown, whereby funds are made available to the target company to finance an extraordinary dividend distribution post-acquisition, which in turn is used to repay the acquisition debt on the BidCo level.
Assistance by the Target
Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?
The Danish Companies Act operates with a strict financial assistance regime, which in general prevents a company from providing financial assistance in connection with the acquisition of itself or its parent company. In essence, a Danish company is not permitted to advance loans or otherwise make funds available to a potential buyer in connection with an acquisition of itself or its parent, or guarantee or provide any security for any loans used to acquire itself or its parent company (an acquisition debt). The restriction prevents a target company from providing any form of upstream security or guarantee. Any security or guarantee provided in breach of the restriction will be void if the beneficiary (ie, typically the financing banks) was or should have been aware that the relevant security or guarantee constituted unlawful financial assistance. To avoid this, it is customary to insert limitation language in the relevant facilities agreement specifying that any security or guarantee granted shall not secure or guarantee any acquisition debt and will be deemed not to have been granted or issued if this would otherwise constitute unlawful financial assistance. Unlike a number of other jurisdictions, Danish law does not provide for any kind of subsequent ‘whitewash’ procedure and acquisition debt will continue to be characterised as acquisition debt irrespective of when it was incurred and irrespective of any intermediate refinancing. Notwithstanding the general prohibition on financial assistance, the Danish Companies Act does allow a target company to provide financial assistance in connection with its own takeover in certain limited circumstances if the target company presents a written report at a general meeting on the reason for the proposed financial assistance; the company’s interest in providing financial assistance; the conditions on which the financial assistance is provided; the consequences of the financial assistance for the company’s liquidity and solvency; and the price to be paid by the third party for the shares in connection with the acquisition of the company. The general meeting must resolve to provide the financial assistance with a qualified majority. The financial assistance must not exceed what is reasonable, taking into account the company’s financial position, and such financial assistance is in any circumstance limited to that part of the company’s funds that would otherwise be available for dividend distribution. In addition, the report prepared by the target company’s central governing body must be published through the filing system of the Danish Business Authority. In practice, lawful financial assistance within the meaning of the Danish Companies Act is rarely used. Instead, market participants prefer a debt pushdown.
Types of Security
What kinds of security are available for acquisition finance in Denmark? Are floating and fixed charges permitted under Danish law? Can a blanket lien be granted on all assets of a Danish company? What are the typical Danish exceptions to an all-assets grant?
The ordinary forms of security available include share pledges, guarantees, fixed and floating charges (including intellectual property rights), mortgages over real estate, account pledges, and assignment over receivables (including insurance proceeds). Danish law generally recognises two different forms of security interests: mortgages and pledges. A mortgage is a non-possessory security, which comes in the form of either a fixed mortgage over a specific asset or a floating mortgage (a charge) over a number of non-specified assets within a certain group of assets. Fixed mortgages will often be taken over the following assets: real estate, vehicles, chattels, intellectual property rights, and certain electronic, registered securities (dematerialised securities). Floating mortgages/charges can only be granted in respect of certain business inventory (eg, inventory, operating machinery, tools, vehicles) and receivables originating from the mortgagor’s business. The floating charge will encompass future acquired assets, as it only crystallises upon an event of default. A pledge is a possessory form of security where the pledgee (or the pledgee’s representative) either takes possession of the asset (chattels, negotiable securities, etc) or notifies the debtor of the security (receivables, non-negotiable shares). The pledge is granted on the basis of a pledge agreement between the pledgor and the pledgee specifying the asset being subject to the pledge and the additional terms of the pledge. The following assets will often be pledged: chattels, receivables and physical securities (shares, promissory notes, etc).
Requirements for Perfecting a Security Interest
Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?
Unless the security is a registered security, security is usually perfected by giving notice or by taking possession of the asset. For security in the form of a pledge, there is neither a registration requirement nor an applicable registration fee. The security in the form of a mortgage is granted by way of an electronically filed mortgage, which may either specify the loan being secured and the terms of the loan (an ordinary mortgage) or just specify the amount that is being secured, in which case the terms of the loan follow from an underlying loan agreement (an owner’s mortgage or an indemnity mortgage). The mortgage itself must be registered with a central register for the security to be perfected. Depending on the asset used as security, the mortgage will have to be registered with one of: the Land Register (real estate); the Car Register (certain vehicles); the Chattels Register, sometimes referred to as the Persons Register (chattels, intellectual property rights, business inventory and receivables in relation to a floating mortgage, etc); or the VP Securities services (electronic registered securities). In general, an official registration fee of 1,660 Danish krone plus 1.5 per cent of the nominal value of the mortgage is payable upon registration.
Renewing a Security Interest
Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?
Once a security has been registered and paid, there is no renewal procedure. The registration remains in place and is publicly filed in the register. For share pledges, the pledge is noted in the share register maintained by the company. It should be noted that where the security is granted to a syndicate, it would be prudent to update the list of the syndicate members on a regular basis when there are changes. In practice this usually happens in connection with a refinancing and the parties tend to reply on the parallel debt mechanism in combination with equitable assignments.
Stakeholder Consent for Guarantees
Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a Danish company?
No. If a company has employed an average of 35 or more employees over a three-year period, the employees may elect to seek representation in the supervisory board. This means that half of the supervisory board members may be elected by the employees. The representatives will function as ordinary members of the supervisory board and no special consents are required over and above the consent of the supervisory board in general.
Granting Collateral through an Agent
Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?
While concepts such as parallel debt are considered valid but formally unregulated under Danish law, they have hitherto not been tested before the Danish courts. The general consensus among the leading banking and finance law firms, however, is that a parallel debt structure should withstand judicial scrutiny. Likewise, the concept of a trust is generally not recognised under Danish law. However, pursuant to recent legislative changes, the concept of a security trustee has been introduced in the Danish capital market with the 2018 Capital Markets Act. The registration with the Danish FSA applies only in the context of bond issues. The Scandinavian market tends to rely on Nordic Trustee, a specialist provider, as the prevailing market standard, unless a bank has been appointed as security agent.
Creditor Protection before Collateral Release
What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?
The Capital Markets Act, Chapter 4 covers the obligations and the duties of the security representative. The terms and conditions are usually set out in the bonds or in an associated agreement. The parties, including the security representative, are bound by these terms and individual bondholders cannot independently exercise the rights assigned to the security representative. The security representative is statutorily obliged to represent the collective interests of the bondholders. The relationship is governed by the finance documentation in place, together with the statutory provisions, and is supervised by the Danish FSA as the regulator.
The application of fraudulent transfer laws in Denmark.
Denmark is a very creditor-friendly jurisdiction. Fraudulent transfer is regulated in section 283 of the Danish Penal Code. It predominantly arises in insolvency cases in relation to the sale of secured assets without consent of the secured party or acts that reduce the creditors’ ability to seek adequate redress in the assets of the company. This may include the unlawful distribution of assets at an undervalue, unusual transactions before the insolvency decree, undue preference granted to certain creditors and early prepayments of claims before their due date. It does however require the commensurate mens rea within the meaning of the penal code (ie, there needs to be a clear intention to commit fraudulent transfer to incur criminal liability). More often, the insolvency trustee will identify unusual transactions within the hardening period, which may or may not be challenged for the benefit of the insolvent estate. In recent developments, artificial intelligence is applied to assist detecting unusual transactions in addition to the investigation by the insolvency trustee. Fraudulent transfer is therefore rarely invoked in large-scale transactions, as this is usually handled within a civil law context by the insolvency trustee pursuant to the clawback rules in the Danish Insolvency Act.
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