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Denmark Repeals Shareholder Loan Restrictions: Implications for Acquisition Finance Transactions

Writer's picture: Carsted RosenbergCarsted Rosenberg

Updated: Feb 12


Following an consultation by the Danish Business Authority in 2024, the Danish Parliament has as of 1 January 2025 repealed the stringent rules governing shareholder loans in the Danish Companies Act (S. 210-212), and consequently increased the flexibility in terms of up-stream shareholder loans. This client briefing from Carsted Rosenberg provides a short overview of the changes and their implications for Danish companies and subsidiaries, especially in the context of acquisition finance transactions and structuring.


The Previous Regime

Under the now repealed regulations, Danish companies were only permitted to provide up-stream loans to shareholders or management members under rather strict conditions. These conditions included:


  • Available Reserves: The loans had to be covered by the company's free reserves, meaning funds that were available for distribution as ordinary dividends.


  • Market Terms: The terms of the loans had to correspond to standard market conditions, complying with the arm's length principle (and thereby opening a discussion about what exactly the prevailing market terms were and for which market they would apply).


  • Authorisation: A general meeting resolution or a specific authorisation from the general meeting of the shareholders was required to authorise the loans.


  • Reporting: The company had to have filed its first annual report with the Danish Business Authority. Specific exemptions existed for parent companies and standard business transactions.


The New Landscape

The abolition of these specific rules means that companies will, as of 1 January 2025, be able to provide up-stream loans or their equivalents to their shareholders and management (including those in parent companies) without needing to fulfil the previous conditions. Importantly, the requirement for a general meeting decision will also be removed.


Important Considerations

While this change offers greater flexibility, it is must be understood that other regulations still apply. Most importantly, the rules regarding financial assistance and the general capital protection rules within the Companies Act remain in force. This means:


  • No Financial Assistance: The proceeds of the up-stream loans must not be used for the financing of any acquisition of the shares in the subsidiary and it remains relevant to duly separate funds to avoid any tainting by comingling funds to avoid inadvertently running foul of the general prohibition.


  • Company Interest: Any financial assistance to shareholders or management must still be in the company's best interest.


  • Management Responsibility: Directors retain the duty to ensure any such loan is reasonable and justifiable given the company's financial position.


  • No Undue Advantage: Assistance cannot be designed to unfairly benefit certain shareholders or management at the expense of others or the company itself.


  • Documentation: For validity, loan agreements between the Danish company and the sole shareholder must be duly documented unless they are on usual terms or as part of a continuous business relationship.


Tax Implications

It should be noted that the repeal of these specific company law rules does not change the tax treatment of shareholder loans. Consequently, loans to physical shareholders with a controlling interest will continue to be taxed as salary or dividends. It is therefore imperative to obtain proper tax advice to avoid the potential adverse consequences.


Oversight and Auditing

With the repeal of the special conditions, the Danish Business Authority (DBA) will no longer specifically monitor shareholder loans for compliance with these now-repealed sections. However, the DBA will continue to oversee compliance with the remaining financial assistance restrictions and other capital protection rules, and may still check the correct recording of loans in annual accounts. Similarly, while company auditors no longer need to verify compliance with the previous shareholder loan rules, they will still need to address issues like missing tax withholding and ensure proper balance sheet presentation of receivables from related parties.


Criminal Liability

Previously, management members could risk criminal liability for granting unlawful shareholder loans. While the DBA will likely not pursue cases relating to loans granted before 1 January 2025, even if they were technically unlawful under the previous rules, this does not mean such loans are now retroactively legal. It merely reflects a change in enforcement practice.


Implications for Acquisition Finance Transactions

The repeal of the specific rules and restrictions on shareholder loans in the Danish Companies Act has several potential implications for acquisition finance, primarily related to structuring and funding options:


Potential Benefits and Increased Flexibility:


  • Alternative Structures: Acquisitions can involve complex financing structures, sometimes utilising shareholder loans as part of the funding mix. The removal of the previous restrictions could permit new alternative structures, by freeing up other funds to finance the acquisition, provided it remains within the guardrails of the remaining regulations.


  • More Funding Options: Companies may now have greater flexibility in how they finance acquisitions. They might be able to use up-stream shareholder loans more freely as a component of the overall financing package for an acquisition, potentially opening up new avenues for funding. This could be particularly relevant for smaller or medium-sized enterprises (SMEs) where access to traditional bank financing might be more limited.


  • Increased Bargaining Power: The increased flexibility in financing could give acquiring companies more bargaining power in negotiations with sellers. They may be able to offer more attractive deal structures, potentially including a larger proportion of vendor financing or other forms of shareholder-related funding.


  • Simplifying Elements of Transactions: Reducing corporate administrative burdens by removing the need for specific shareholder loan approvals at general meetings could potentially speed up the acquisition process by reducing complexity and the necessary steps to be completed for the desired outcome, thereby allowing companies to close deals swifter and more efficiently.


Potential Challenges and Considerations:


  • Circumvention Risk: Even with the financial assistance prohibition remaining in place, there is still a risk that up-stream loans could be used to indirectly circumvent the rules. This requires careful analysis of the loan's purpose and the parent company's financial activities to ensure legal compliance and avoid comingling of funds.


  • Increased Scrutiny of General Capital Protection Rules: While the specific shareholder loan rules are gone, the general capital protection rules remain. This means that any up-stream loans will be subject to enhanced scrutiny to ensure they are in the best interests of the company as a whole and do not unfairly disadvantage other stakeholders. This could lead to more complex legal analysis and due diligence in acquisition financing transactions.


  • Emphasis on Board Responsibility: With the removal of the shareholder approval requirement, the responsibility for ensuring the legality and appropriateness of acquisition financing structures falls squarely on the board of directors. Boards will need to be particularly diligent in their decision-making and ensure they have robust processes in place to assess the risks and benefits of different financing options. The careful board would obtain independent legal advice to ensure compliance and best practice.


  • Lender Concerns: Lenders may be more concerned about financing structures that involve substantial shareholder loans, as these could potentially weaken the company's financial position. This could lead to stricter lending terms or higher interest rates.


  • Tax Implications Remain: The tax implications of shareholder loans remain unchanged. Careful consideration must be given to these aspects, as they can significantly impact the overall cost and structure of the transaction.


Our View

The repeal of the specific shareholder loan rules in Denmark presents both opportunities and challenges for acquisition finance. As pointed out in our earlier client briefing on the proposed repeal of the shareholder loan restrictions, the loosening of the restriction on upstream shareholder loans in Denmark can be a beneficial tool for financial investors, as shareholder loans can provide investors with access to additional pools of liquidity. The removal of specific shareholder loan restrictions offers businesses greater flexibility in managing their finances, by deploying up-stream and down-stream shareholder loans. However, this deregulation comes with continued responsibilities and the legal challenges remain. While it offers greater flexibility and potentially simplifies deal structures, it also places a greater emphasis on the board's responsibility and requires careful consideration of the general capital protection rules. The underlying principles of acting in the company's best interests, ensuring financial prudence, and avoiding undue advantage remain. The assessment of legality may, in some respects, be more complex now, given that it relies on more general and potentially more subjective principles of company law. Businesses should carefully review their internal policies and procedures regarding related party transactions to ensure ongoing compliance. Most importantly, it is necessary to ensure due documentation througout to document compliance and for the careful board of directors to obtain independent legal advice on shareholder loan transactions.


Further Information

Carsted Rosenberg is available to provide legal guidance on navigating these changes and ensuring your business remains compliant with all applicable regulations. Contact us for a consultation to discuss your specific circumstances.


This briefing is intended to provide general information on corporate finance in Denmark It is not intended to provide definitive legal or tax advice. No legal, tax or business decisions should be based solely on its content. The briefing does not necessarily deal with every important topic and is not designed to provide legal or other advice. It shall not be used as a substitute for legal advice and none may be inferred. It is only intended for general information on matters of interest. While we endeavour to represent the information as accurately and correctly as possible, we cannot accept any responsibility for any errors or omissions.


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