Issuer's guarantee to investment banks
In the last few years, a number of new companies have been listed on Euronext Growth. In such processes, the investment banks have been given an important role, in particular in the assessment of whether the company is suitable for listing and in connection with an arrangement for raising new capital.
The investment banks' work and assessments will to a certain extent depend on information and assistance from the issuer. This is an important part of the reason why the investment banks ask for a guarantee from the issuer that covers any claims that may be brought against the investment banks as a result of the investment banks' work and role in connection with the transaction.
However, Norwegian law restricts to which extent the issuer may provide such a guarantee.
Restrictions on the issuer's opportunity to provide a guarantee to the investment banks
The starting point is that an investor cannot claim compensation from a limited company for failure to provide information in the prospectus, etc., and that the limited company also cannot indemnify the investment banks for any such liability.
This rule is the result of a balancing of interests, in which the legislator has let the consideration of certainty that the company's equity is real to outweigh the interests of each individual investor. Investors who believe they have suffered losses are instead referred to bringing claims against those having formulated the subscription basis or marketed the securities, typically the company's board or the investment banks. This also increases the investment banks' interest in a guarantee or other form of security from the issuer.
We are sometimes asked why providing such security has now become an issue, when it has not been the case before. The reason is that Euronext Growth allows the listing of private limited companies (Nw: aksjeselskap or AS), and that the rules on such guarantees are different for private limited companies and public limited companies (Nw: allmennaksjeselskap or ASA). In Section 10—7 (4) of the Public Limited Liability Companies Act (Nw.: allmennaksjeloven), a public limited company is given explicit legal basis that allows the issuer to provide a guarantee to the investment banks in connection with a share issue. No similar rule applies to private limited companies. This issue is therefore relevant when you want to list an issuing private limited company that has not yet been converted into a public limited company.
Possible solutions – conversion into a public limited company
We are often asked how the company and the investment banks can follow these rules, and ensure that the investment banks receive the required protection.
The most common solution is for the private limited company to be converted into a public limited company. In that case, the converted private limited company falls under the exemption in the Public Limited Liability Companies Act. This is a fairly simple process, but it should be started in time so as not to delay the listing process. Formally, the conversion is adopted by the private limited company's general meeting, following a proposal from the board.
If a private limited company is to be converted into a public limited company, it should be aware of a number of differences between the two company types. A public limited company must have at least NOK 1 million in share capital, and in connection with the conversion, a statement and auditor's confirmation must be prepared confirming that the company has coverage for the company's registered share capital. We sometimes see that companies that have had significant development costs have to adjust the company's share capital to meet this requirement. Furthermore, the company's shares must be registered in a securities register, which is not the case for a private limited company. This last requirement can take several weeks to get in place, and can sometimes be a practical challenge for companies with a dispersed, international shareholder structure. The requirement must in any case be met before listing, but if the purpose of the conversion is to be able to provide a guarantee to the investment banks, this means that the registration must take place early on in the process. For companies that intend to apply for listing it is also worth noting that all its shareholders must also have Norwegian securities register (VPS) accounts. If the company has a wide-spread shareholder structure, or international shareholders, this is also something that can take time to facilitate in part because of internal approval requirements within each shareholder and in part for KYC reasons.
A public limited company must also have at least three board members, and the general manager cannot be a member of the board. A public limited company must have a general manager. Furthermore, there are requirements for gender balance among the board members of a public limited company, and there are a number of other administrative requirements. A public limited company must, for example, convene a general meeting with 21 days' notice if the company's shares are listed, and 14 days' notice if the company's shares are not listed, compared to a seven day notice requirement for non-listed private limited liability companies. A public limited liability company will also not have access to certain simplified administrative rules that apply to private limited companies. An important difference in practical terms is also that a public limited company will be regarded as a large company for accounting purposes, and therefore may have to change its accounting practices.
On the other hand, a public limited company, in contrast to a private limited company, will be able to carry out public offerings. The company also retains its name unless the general meeting decides otherwise (other than the suffix AS being changed to ASA), and it also retains its original company registration number.
Possible solutions – other measures
As a consequence of the above, a conversion from a private limited company to a public limited company is quite often not desirable, at least not at the time of listing. At other times, for reasons of time, it is desirable to find alternative solutions for the investment banks' guarantee, pending the conditions for conversion. The question then becomes what other solutions exist.
- An alternative would be to obtain owner guarantees instead of the limited company providing a guarantee. Whether this is relevant in the individual situation depends on the ownership composition, financial implications and willingness of the owner(s).
- Another alternative may be that the guarantee is provided by a subsidiary or partly owned company, which is not a Norwegian private limited company, and therefore not subject to the special Norwegian rules that place restrictions on the private limited company's ability to provide the necessary guarantee commitments. However, such a solution must be considered specifically, and there is reason to exercise caution with solutions that mean that the Norwegian limited company in reality is encumbering a subsidiary or partly owned company with an obligation that must be considered to reduce the net value of the equity contribution the Norwegian company receives in the share issue.
A solution that is sometimes chosen is to convert a Norwegian subsidiary of the issuing company from a limited company to a public limited company, and let this subsidiary provide a guarantee to the investment banks. Such a solution is legally viable, and may be appropriate in situations where you want to get started with the listing process, but for other reasons do not want to convert the issuing company yet. This solution will, however, require a corporate benefit assessment in the guarantor subsidiary.
- There are also adequate insurance solutions. One solution is the traditional POSI product (Prospectus Offering of Securities Insurance), which protects the board of the company, the subscribers and investment banks from possible prospectus liability in connection with listings. The use and availability of POSI is currently quite limited in Norway, despite the fact that it is normally cheaper than a BBI insurance, and will often provide adequate coverage. The other solution, BBI (Bookbuilder Insurance), is an insurance solution tailored to supplement issuer guarantees, so that the investment banks are indemnified for losses occurring in connection with the transaction. While we do see the use of these products, our experience is that the insurance solutions require a lot more time and resources to put in place than ordinary W&I insurance, and that the issuing company should therefore start exploring insurances early on in the process if that is the preferred solution.
Common to such insurance solutions is that the costs associated with such solutions will have to be referred to and included as public offering costs, to the extent that they are borne by the Norwegian issuing company. The net increase in equity for the Norwegian private limited company must therefore be calculated after deduction of such insurance costs.
Please do not hesitate to contact us if you have any questions about how these challenges can be solved in the most practical manner in your specific situation. We have practical experience with the various solutions described above, and can assist with both the practical implementation and an overview of advantages and disadvantages in each situation.