Norway International Update – Q4 2022

Norway, much like the rest of the world, has witnessed a very uncertain M&A market in 2022 and seen a dramatic fall in M&A deal activity in 2022 when compared with 2021, although this could be seen as a normalization and a return to pre-pandemic activity levels (eg 2019 and early 2020) and toward historical averages, and there still is high activity in several sectors. Macro factors and geopolitics are changing rapidly and into new territories, and this does of course also affect the M&A market. Interest rates continue to increase – in Norway, most recently up to 2.75 per cent on 15 December – and inflation remains high. Buyers across the spectrum have also become more wary of surging energy prices and decreasing consumer spending power, and the companies this affects.

There are plenty of projects in the pipeline and plenty of cash in the hands of private equity and large corporates but banks are more cautious and funding has become more expensive. There are now added hurdles that make deals less attractive and people are more cautious, which has led to more postponements, taking additional time to consider options and a greater focus on preparation, planning and project management.

Looking ahead, there is also a need for a recalibration of expectations on the sell side, with a reset in valuations likely to be a significant driver of M&A activity in 2023. To some extent, there is a ‘waiting game’ where some are waiting for one or two deals to successfully close, thereby confirming a new pricing point. The new year is likely to see valuations marked down thereby setting the tone for the year. The same deal drivers exist as those 12 months ago, with good opportunities remaining, and a possible catch-up effect from 2020 and 2021 which could see significant M&A activity, especially in highly attractive sectors and particularly if macro factors and geopolitical factors stabilise.

Nordic Buy Out Forum 2022 highlights (separate article)

Throughout 2022, continued volatility in the market and the knock-on effects have caused a significant number of postponements. In Q4 we have seen 10 listings across the Oslo Stock Exchange (4) and Euronext Growth (6), double the number of listings in Q3. As 2022 comes to a close, pre-Christmas there have been 32 total listings, 14 of which were on the Oslo Stock Exchange. A number of these have been uplistings from the Euronext Growth, an increasingly common route to a main board listing. There were a number of large listings planned across 2022 which continue to be in planning mode and are postponements rather than cancellations. Much like the M&A market, plans continue to be made, but processes are slowing down, with many companies waiting to see a few listings successfully complete and see the adjusted valuations materialise. There is also significant planning activity for public-to-private processes. In particular, there are several structured public to private processes, where the board or shareholders of listed companies are initiating processes to attract potential bidders and delistings. But again, progress has slowed from where some may have anticipated.

These continued postponements should result in a healthy pipeline for 2023, and if everything that is currently in planning progresses into listing processes, the market will be very busy and we should expect to see a number of the large deals happen. However, predictions remains extremely challenging. Continuing the story of much of this year, there has been a shift away from “growth” stories after the heated activity from 2020 and 2021, with greater focus on companies that show sustainable profits and free cash flows, in sectors such as energy. The capital markets in Norway continue to see high activity from oil and gas and ancillary businesses, with drilling companies in particular being highly active within capital raisings and new listings in 2022. We have seen an increase in emergency capital raises and rights issues, which larger discounts reflecting the difficulty in raising funds at or close to market value. New investors are difficult to attract and existing investors may struggle with lower valuation as a result of lower share prices on the stock exchange.

In 2020, the Norwegian government decided to open the areas Sørlige Nordsjø II (SNII) and Utsira Nord (UN) to applications for offshore renewable energy production. SNII is a bottom-fixed offshore wind project, while UN is suited to floating offshore wind projects. On 6 December 2022, the Norwegian Ministry of Petroleum and Energy (Ministry) confirmed that the areas will be announced for tender by the end of Q1 2023. Exclusivity to the phase one area of SN II (1500 MW) will be awarded to one entity or consortium alone. UN will be divided in three equal areas of 500 MW. In addition, the Ministry announced two consultation papers with prequalification criteria for SNII (phase one), qualitative criteria for UN, as well as an explanation of the state subsidy regimes the government envisages giving in the two projects, as well as the auction processes for both areas. The deadline for providing input to the consultation papers is 6 January 2023.

The prequalification criteria for SNII means that potential applicants who want to participate in the auction for a license must meet several requirements in order to participate in the auction. The design of the prequalification criteria entails that the prequalification in practice works as a first step in the award competition. The prequalification requirements relate to capacity to implement the project (technical competence, financial strength, HSE, experience, realistic concept and development plan), sustainability, and positive local impact. Further, the criteria relating to sustainability and local impact are divided into various sub-criteria. The criteria for positive local impact relates to, among other things, the extent to which the project contributes to competence development in the offshore wind supplier industry, and whether the applicants have a plan for how they will contribute to small and medium sized businesses gaining experience with various parts of the offshore wind development. The criteria for sustainability essentially relates to the size of the wind farm’s climate and environmental footprint. The Ministry has indicated that there will likely be a cap on the number of applicants who will be successfully pre-qualified.

The government does not propose an investment contribution scheme for developers in the first phase of SNII. The goal is to build SNII using as little state subsidy as possible. However, the government proposes a support model based on a two-way contract for differences (CFD) with a support period of 15 years. This is a model where the state guarantees a fixed price for the power. If the market price is lower than the strike price, the state pays the price difference. If the market price is higher than the strike price, the company pays the state the surplus amount.

With regard to UN, acreage will be awarded according to a comprehensive checklist of qualitative criteria. The applicants receive points based on how well they score within each topic. The criteria relate to innovation and development, competence, capacity to implement, and financial strength. The purpose of the criteria is, among other things, to ensure that the cost level for floating offshore wind is reduced, and to ensure that areas are awarded to mature projects.

Like SNII, the goal is to build UN using as little state subsidy as possible. Nevertheless, the government has confirmed that state subsidy will be given to the offshore wind projects at some point in the licensing process, as floating offshore wind is still an immature technology compared to bottom-fixed offshore wind. However, the Ministry has not decided whether they will go for investment support or CFDs, and has asked for input on these two alternatives in the consultation round.

In the course of Q4, the Norwegian government has passed changes to the rules governing part-time employment and contracted labour. The changes are based on the government’s aim that permanent and full-time positions represent the majority of the Norwegian labour market.

The government has decided to establish full-time employment as the main rule in Norway. This legal step does, however, not entail any legal restrictions on the right to employ part-time. Such considerations remain under the employer’s managerial prerogative. Going forward, however, the legislation will as of 1 January 2023 impose a duty on the employer to document and discuss with the employee representatives, prior to any part-time recruitment, their use of and need for part-time employment. Further, as a measure to limit the use of part-time employment, the government has adopted changes to the rules on the preferential right to an extended position for part-time employees upon new employment in the business. Part-time employees will from now on gain preferential rights to extra shifts, rather than the employer reaching out to on-call services, and gain a preferential right to an extended position rather than the employer making use of contracted labour. However, the current limitations to the preferential right, implying that the part-time employee must be qualified for the position/work and that the preferential right will not be of significant disadvantage to the business, will still apply.

Further, the government has adopted several changes to the rules regarding contracted labour, which will most likely come into force in April 2023. First, the government has decided to legislate the elements that are included in the demarcation between contracted labour and contract work. This implies more restrictive rules compared to current law, in that several of today’s contract work agreements, and especially staffing contracts, now will be regulated by the rules of contracted labour. This particularly applies to staffing contracts that take place within the business’ core and main activity. Second, the government has adopted several changes that will imply more restrictive rules on contracted labour from staffing companies:

• A statutory prohibition of contracted labour from staffing companies targeting the construction industry in the Oslo area.
• The annulment of the access to contracted labour for work of “a temporary nature” according to sections 14-12, cf. 14-19 second paragraph letter a) of the Employment Act, typically project-related use of contracted labour. This implies that future use of contracted labour from staffing companies will be reserved for work as a temporary replacement for another person or persons, or based on a written agreement with a trade union carrying the right of nomination (i.e. trade unions with more than 10,000 members). However, the government has adopted a rule that statutory exceptions can be made for health personnel and consultants and advisers possessing special expertise, hired for clearly defined projects.
• The Act’s time limit in terms of when contracted employees may claim permanent employment is reduced from four to three years. The three year-rule will apply both when the contracted labour is warranted by section 14-12 first paragraph of the Employment Act and by agreement with the employee representatives in accordance with section 14-12 second paragraph.
• Establishment of an approval scheme for staffing companies in order to ensure that the staffing companies on the labour market are serious. The Labour Inspection Authority will supervise the approval scheme, and is granted the authority to give orders and make individual decisions.

Simply put, one could sum up the transaction activity in Q4 as being “next to nothing”, across all segments and investments in the commercial real estate market. However, there is still much work to be done, especially related to:

• Development of existing investments including zoning/re-zoning and structuring of JV-projects
• Refinancing, renegotiations etc. of all kind of loans, bonds and other financial instruments
• Restructuring and transactions both with and without development potential, where parties have aligned price expectations and financing terms.

Some other expectations are:

• The Norwegian policy interest rate is likely to rise by a further 50 bps during 2023, but a fair amount of this has already been anticipated, and is therefore already accounted for by parties bidding for new projects. The CPI will likely stabilise, but it remains far in excess of the objective of 2% annual increase, both in 2023 and 2024.
• The rental market will cool down, but due to low supply, the situation is expected to be significantly better than during earlier crises. The rental prices are in many segments expected to approximately follow the CPI going forward, i.e. a further increase during 2023.
• Yield levels have risen from 2021, maybe as much as 1.00 % and in some segments even more

Looking to the future, as the inflation rate is cooling down and optimism is slowly returning (stock exchange rates indicate this already), it could be assumed that the current market instability will phase out during 2023 and 2024. When all is said and done, however, the war in Ukraine remains the decisive factor, and if a resolution can be found or if the conflict escalates.

Environmental, social and governance (ESG) considerations have played a key role for corporates, regulators and investors in 2022. The European Union’s (EU) work on sustainable finance continues to evolve with developments in several of the pieces of sustainable finance legislation. The EU has adopted a classification system for “sustainable economic activities”, referred to as the “EU Taxonomy”, which sets out a new method for reporting on sustainability performance. Reporting obligations will apply to large public interest entities with more than 500 employees. Norwegian implementation of the Taxonomy Regulation is expected to take place in 2023, not before year-end as previously anticipated by the Norwegian Government.

Another piece of upcoming legislation from the EU is the Corporate Sustainability Reporting Directive (CSRD), which represents both an amendment to and an extension of the existing Non-Financial Reporting Directive (NFRD). The CSRD is a new directive obliging all large companies and all companies listed on regulated markets (except listed micro-enterprises) to report on their climate and environmental impact, and requires the audit (assurance) of reported information. According to the European Commission, the reporting standards will be consistent with the ambition of the European Green Deal and with Europe’s existing legal framework, the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation. The Council gave its final approval to the CSRD in November.

In line with the majority of central banks, the Norwegian central bank, Norges Bank, has increased its policy rate several times this year, most recently on 15 December to 2.75 per cent, ending (for 2022) the continued increases from zero rate in September 2021. This, in combination with increased inflation, high electricity and energy prices, global political uncertainties and the war in Ukraine have had a significant impact on the availability of funding in the Norwegian markets, both through bank lending market and the Norwegian bond market.

The real estate market has been particularly affected and the last half year we have seen scheduled financings being withdrawn or scaled down and lenders have become far more selective, as well as prices having moved up. The oil and gas and broader energy industry has been less affected, given their high prices and record volumes. In addition, financing of infrastructure projects has to date been less impacted than other sectors.

We have continued to see more banks shifting focus away from the oil and gas sector, as well as offshore and oil service, reducing the financing alternatives for companies that may not be in a position to replace these with some of the international banks that have otherwise increased their presence.

Going into the new year, the expectations are that parts of the real estate sector and the retail industry will face financing challenges that may result in an increased number of restructurings.

ESG has continued to attract increased attention by banks and borrowers during 2022 and has become the “rule rather than the exception”.

Although the Norwegian bond market has been impacted by the central banks’ increase in policy rates, increased inflation and the current global political uncertainties, the market remains open for established and regular issuers. For new issuers, the market continues to be challenging, both in terms of market availability and pricing. There have been certain new bond issues in the fourth quarter, particularly by issuers within renewable and energy, however, many potential issuances have been put on hold pending improvement of the market conditions. We expect a slow start in 2023, noting that there are market participants looking to launch deals quickly if a window opens.

Throughout 2022 we have seen a change in the geopolitical power dynamics, particularly due to the Russian invasion of Ukraine in February this year. The EU has imposed a range of sanctions – both economic and diplomatic – in response to Russia’s invasion of Ukraine. The Norwegian Government has clearly stated that the Norwegian sanction regime will be in line with the EU sanctions with some minor exceptions, and these sanctions have been implemented in Norwegian law. Sanctions are implemented through the Norwegian Ukraine Regulation under the Norwegian Sanctions Act. For businesses, the most important sanctions consist of i) trade embargoes, ii) sector-based sanctions and iii) individual sanctions. The latest sanction package was adopted by the European Union on 6 October 2022. As of October, the European sanctions can be summarised as follows:

• Sector-based sanctions have been introduced in sectors such as finance, energy (including oil and gas), transportation, technology, defence, multi-purpose goods, raw materials and in the maritime industry. Recently, the EU introduced a price cap on oil that originate in or is exported from Russia. The price cap has been set at USD 60 per barrel. The measure aim to limit price surges and reduce Russia’s revenues and its possibility to finance its illegal war of aggression against Ukraine.
• A ban on imports of goods from Donetsk, Luhansk, Crimea and Sevastopol; and
• Individual sanctions aimed at 1206 individuals and 108 entities. These are mainly associated with the sanctioned sectors, as well as with Russia’s political and economic elite. The sanctions include freezing of the sanctioned parties’ funds, including a ban on making funds available to the sanctioned parties.

On 7 December, the European Commission proposed a ninth package of sanctions on Russia. According to the President of the European Commission, Ursula von der Leyen, the proposed package includes, amongst other things, sanctions against three additional banks and new export controls and restrictions. Furthermore, 200 additional individuals and entities are intended to be added to the sanctions list. The European Commission has not yet announced when the ninth package of sanctions is expected to be adopted.

Another development concerning the illegal war of aggression against Ukraine, is President von der Leyen’s proposal to establish a specialised tribunal to prosecute Russian war crimes committed in Ukraine.

Iran is the second most sanctioned country in the world in 2022. Since September, there have been an increasing number of sanctions imposed by the EU against Iran in response to the serious human rights violations committed by the Iranian authorities against peaceful demonstrators. Norway has adopted EU’s sanctions against Iran, which are included in the Iran Regulation.

As a result of the ongoing war in Ukraine and e.g. the damages caused on Nord Stream I and II, there has been an increased awareness in Norway concerning security threats. Due to the surge in hybrid warfare, the private sector must prioritise security work in order to reduce risk for companies, society and, in particular, the valuable assets that private companies control.

The National Security Act aims, inter alia, to prevent, detect and counter activities threatening national sovereignty and security. Several new companies have been made subject to the Act because they (i) handle classified information, (ii) control information, information systems, objects or infrastructure which are of vital importance to fundamental national functions, or (iii) engage in activities which are of vital importance to fundamental national functions information. Such companies are subject to strict security compliance obligations. Furthermore, companies, which deliver goods and services in classified procurements, may have experienced or will experience the imposition of stricter security obligations in relation to these.

In October 2021, the Norwegian Government issued a consultation on possible amendments to the National Security Act’s rules on ownership control. The proposed changes include an expansion on the FDI filing obligation to new categories of companies, a lowering of the investment thresholds that trigger a filing, and the introduction of a notification deadline and stand-still obligation. Input was submitted prior to 10 January 2022 and a total of 28 institutions, companies and associations provided input. It is uncertain when the legislative process will move forward.

The digitalisation of Norwegian society and the adoption of new technology generally represents security challenges and risks. According to the Norwegian National Security Authorities’ national digital risk picture assessment for 2022, there has been an increase in the number of attempts to compromise Norwegian businesses this year. Three sectors in particular have been exposed to various types of cyber attacks: technology companies, research and development and public administration bodies.

Exit-taxation

On 29 November 2022 the Government presented new rules on exit-taxation. When a taxpayer ceases to be considered a resident for tax purposes in Norway they become liable to taxation on shares as though the shares were realized (“Exit-tax”). The payment of such tax liability can however be postponed. Previously, the liability to pay exit-tax would become nulled after 5 years. The 5-year rule is now revoked, and therefore the liability to pay Exit-tax will now only be nulled if the taxpayer becomes resident in Norway for tax purposes again.

Proposed changes from the Tax Committee

Previously, the government nominated a working group (the “Tax Committee”) to review the tax system. On December 19 the Tax Committee, chaired by professor Ragnar Torvik, presented its report to the Minister of Finance. This report recommends a series of changes to the Norwegian tax system. Note however, that these proposed changes have not been legislated yet, and are at this stage merely recommendations. Whether these proposed changes will be legislated or not in the future, is uncertain. Some of the propositions are as follows:

Participation exemption method

Shareholders who are limited liability companies (and certain similar entities) resident in Norway for tax purposes (“Norwegian Corporate Shareholders”) are largely exempt from tax on dividends distributed from the Company, pursuant to the Norwegian participation exemption method (Nw. fritaksmetoden). However, unless the Norwegian Corporate Shareholder holds more than 90% of the shares and the voting rights of the company, 3% of the dividend income distributed to the Norwegian Corporate Shareholder is taxable as ordinary income at a rate of 22%, resulting in an effective tax rate of 0.66% (22% x 3%), the “three percent rule”.

In order to achieve a more equal treatment of dividends and capital gains, the committee proposes to extend the scope of application of the so-called “three percent rule” in the participation exemption method to also include capital gains. The committee also proposes that the rate be increased from 3 to 5%.

Liquidation as dividends

Currently, liquidation of a company is treated as a realisation. As a result, payments from the liquidation of a company are taxed as capital gains, and not as dividends. For foreign shareholders, this classification has created an opportunity for tax planning and adjustments, as foreign shareholders are generally only subject to Norwegian withholding tax on dividends, and not on capital gains.

The committee believes it is unfortunate that foreign shareholders have the opportunity to avoid Norwegian withholding tax on dividends through adaptations to these rules. The committee therefore proposes that these payments on liquidation are treated as dividends instead of gains. Withholding tax on interest and royalty payments 

From 1 July 2021, Norway introduced withholding tax on interest payments. A Norwegian debtor is liable to withhold 15% tax on gross interest payments to the extent the creditor is both (i) a related party to the issuer and (ii) tax resident in a low-tax jurisdiction. A “related party” is a company or other legal entity which controls, is controlled by, or is under common control with, the issuer. “Control” means the direct or indirect ownership of 50 % or more of the issued share capital or voting rights. Further, a “low-tax jurisdiction” is a jurisdiction in which the effective taxation of the overall profit of the company is less than two thirds of the effective taxation such company would have been subject to if it had been resident in Norway. A recipient and beneficial owner of interest payments affected by the withholding tax may however be protected by a tax treaty, typically reducing the tax rate on interest payments.

The committee believes that the scope of withholding taxes should be expanded. The committee recommends that the scope of withholding taxes on interest, royalty and rental payments for certain physical assets be extended so that they are no longer limited to payments to low-tax countries. Furthermore, the committee recommends that the current exception rule for payments to companies that are genuinely established and conduct genuine economic activity within the EEA be repealed, and replaced by a net taxation method that ensures that companies subject to withholding tax within the EEA are given the right to deduct costs associated with the income subject to withholding tax.

Tonnage-tax scheme for shipping companies Companies within the tonnage-tax scheme for shipping companies are exempt from taxation of more precisely defined shipping income, and must instead pay a tonnage tax (in addition to tax on net financial income). The purpose of the shipping tax scheme is to prevent the relocation of Norwegian shipping companies.  The majority of the committee proposes that the shipping-tax scheme be repealed. It is emphasized, among other arguments, that tax subsidies can divert resources towards activities that are relatively less economically profitable.  Repayment of paid-in capital The committee believes that there is a need to consider changes to the rules on taxation of repayment of paid-in capital. The main problem with the current rules is, in the committee’s view, that the tax position is linked to paid-in share capital and the premium on the individual share, regardless of the change of ownership and the buyer’s input value of the share.  The committee outlines a proposal for regulatory measures which means that the tax position paid-in capital is set to the share’s proportional share of paid-in capital in the company. According to the proposal, whether a distribution should be classified as repayment of paid-in capital must be decided upon the company’s decision on distribution. Such a rule means that there will be no need to keep track of payments and distributions linked to the individual share.

VAT

The majority of the committee proposes that the current VAT rules that give exemption and reduced rates to certain industries or consumers be repealed, and introduce a general rate of 25% VAT that applies in all circumstances.

A new Financial Contracts Act will enter into force in Norway on 1 January 2023, which entails regulatory changes for firms that enter into different types of financial agreements with Norwegian costumers. The scope of the Financial Contracts Act is extended to cover investment services and agreements on individual pensions. Changes worth noting for foreign lenders is a new obligation to decline loan applications from borrowers that are not deemed creditworthy, which replaces the current obligation to advise the customer against entering into the loan agreement. Further, a new general chapter regarding the firms’ obligations is provided, which contains a new general provision on burden of proof. Most of the act is however made defeasible when dealing with professionals, with some few exceptions (e.g. the obligation for lenders to credit rate their customers). Foreign lenders and other firms that enter into financial agreements with Norwegian costumers should review their customer contracts to ensure that the new requirements are complied with.

In November, the Norwegian Financial Supervisory Authority (the “NFSA”) published an updated Circular Letter regarding the Norwegian anti-money laundering legislation, which replaces Circular Letter 8/2019. The Circular Letter reflects the NFSA’s interpretation and practice, and it includes updates on matters relating to inter alia business risk assessment and customer due diligence measures. The Circular Letter is available here: Circular Letter no. 4/2022 (Norwegian only).

Also in November, the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime (Økokrim) and the Norwegian Police Security Service (PST) published a national risk assessment for 2022. The risk assessment is available here: Nasjonal risikovurdering 2022 (Norwegian Only). In the report, money mules, so-called neo-banks and foreign cryptocurrency exchangers are highlighted as high-risk with regard to money laundering.

To mitigate the build-up of debt in vulnerable households, the Norwegian Ministry of Finance (the “MoF”) has set requirements for financial institutions’ credit standards. The current lending regulation entered into force on 1 January 2021 and shall apply until 31 December 2024. The MoF has adopted amendments to the regulation, which will take effect on 1 January 2023. The regulation will now also cover loans with other collateral than real estate (such as car loans), and lenders must adapt their credit standards for loans with other collateral by 1 July 2023. Further, the requirement on debt-servicing ability has been amended. Lenders must now ensure that the customer has sufficient funds to cover regular expenses after an interest rate increase of at least 3 percentage points (the current requirement is 5 percentage points), but the customer must, however, be able to be to cover expenses if the interest rate was 7 percent. The current regulation includes a separate loan to value limit (LTV) of 60 percent for loans with a secondary dwelling in Oslo as collateral. This separate LTV limit will expire on 31 December 2022.