Norway International Update – Q3 2022

The M&A market in Norway is likely to be fairly active for the remainder of 2022, with a significant number of sales mandates in the pipeline. Deals are continuing to close and new deals come in. We mentioned in our previous newsletter and Norway M&A and IPO trends and insights H1 2022 report that significant transaction activity was likely to continue despite market volatility, with the availability of capital and strong appetite from private equity and corporate investors continuing, and this remains true at the time of writing. However, uncertainty remains with continuing interest rate increases and increasing inflation. Buyers across the spectrum have also become more wary of surging energy prices and decreasing consumer spending power, and the companies this affects.

We are seeing fewer large auctions and structured M&A processes, with a greater number of “one-to-one” negotiations, strategic partnerships and reinvestments. Timelines for processes have commonly lengthened, with parties at the table in less of a rush to conclude, but still having a desire to reach an agreement. Some are also growing through mergers, in which both the buyer and the seller is able to structure a deal and capitalise on the strategic benefits and continue to grow, without requiring significant cash investment. The appetite for significant spending has waned, but the strategic imperative to consolidate in the market has not. Buyers are also focusing more on “safer bets” in terms of acquisition targets, with cash flow generating businesses, in sectors such as energy (and in particular oil and gas), mining and food production, more attractive than high growth cash consumptive businesses, such as technology sector and startup businesses. Good assets may still attract similar valuations to 2021, while less attractive assets in the same sector are receiving lower valuations, a typical indicator of a challenging market environment.

Looking too far beyond the horizon with predictions on dealmaking activity in Norway is a risky game, with interest rates, inflation and energy prices making the coming months harder to predict. However, corporates continue to focus on long-term strategy and growth and private equity firms in the Nordics and further afield still hold significant dry powder with a mandate to invest. Overall, 2022 should turn out to be a good year for dealmaking – not a record high like 2021, but still positive and particularly robust given the global atmosphere.

The anticipated pipeline of companies looking to list that we referred to in our previous updates in Q2 and Q1 has yet to come to fruition. Continued volatility in the market caused by geopolitical tensions and macroeconomic factors, declining valuation and underwhelming post-IPO share price performance has led to further IPO postponements. The momentum carried from a record IPO year in 2021 has been dramatically slowed, in line with most major markets around the globe and in the Nordic region. In Q3 we have seen five listings across the Oslo Stock Exchange and Euronext Growth, with two of the three main board listings being uplistings from the Euronext Growth, reflecting an expected trend caused by the fact that a number of the issuers that listed on Euronext Growth stated an intention to uplist to the Oslo Stock Exchange within 12 months, which is strengthened by the poor liquidity on Euronext Growth. There are a number of companies that had intended to IPO in 2022, many of which are using the market downturn to push ahead with IPO-readiness preparations, so as to be well positioned to take advantage when the appetite and more favourable market conditions for IPOs returns.

Continued postponements should result in a healthy pipeline of potential listings when the current uncertainties and volatility subside, but predicting when this might be remains extremely challenging. With tightened market liquidity, investors are becoming more selective and are refocusing on the companies’ fundamentals instead of just “growth” stories and projections, with a stronger appetite for companies that show sustainable profits and free cash flows, in sectors such as energy. With the current energy crisis in Europe, we have seen a surge in oil prices and an increased appetite for fossil fuels and ancillary businesses, with drilling companies in particular more active recently in Norway.

Since the Norwegian Parliament decided to proceed with a full-scale demonstration project for CO2 handling in 2021, we have seen increased interest and several concrete project plans for CCS in Norway. Throughout 2022 Norway has become a first-mover in large-scale CCS and an important player in building a market for CCS in Europe. Through its objective to reduce emissions, this nascent industry is considered an important contributor to the energy transition and to climate change solutions.

To make CCS a viable and cost-effective industry, the Norwegian government has decided to cover 2/3 of the total costs in the first phase of the demonstration project, “Longship – capture and storage of CO2”. The so-called Northern Lights project is part of the infrastructure in Longship, with a designated project of common European interest (PCI) status. Northern Lights’ open-access storage infrastructure offers companies across Europe an opportunity to store their CO2 safely and permanently underground. The storage capacity will be around 5 million tonnes of CO2 per year in phase 2. The Norwegian continental shelf is well suited for CO2 storage, and it has significant geological potential for storing CO2 beyond this. Longship is currently in the construction phase and will start capturing and permanently storing CO2 from the second half of 2024. The project is paving the way for other future projects by providing a blueprint and lessons learned, by creating new industrial and commercial opportunities, and by helping create a viable market for CCS. The authorities have stated that it is committed to following up the Norwegian Longship project and invest in CCS to cut emissions and create new industry and jobs.

The government has also demonstrated strong support for CCS by facilitating additional projects. During Q3 it granted another two exploration permits for the storage of CO2. Furthermore, the government has proposed a financing solution that has enabled the construction of a carbon capture project at the waste incineration plant at Klemetsrud in Oslo, which will be the world’s first waste-to-energy plant with CCS. The project has since received financing from three new commercial actors. This is a positive sign regarding a growing commercial interest for CCS, which is crucial for the development of this technology.

High electricity prices continue, and forecasts remain unchanged. Thus, the government is looking at various solutions to reduce the price trend. Faster license processing for alternative energy sources as well as grid development, financial support for businesses, and export restrictions on electricity, are some of the measures that are being discussed or are already in the process of being implemented.

An urgent need for new projects that generate renewable energy has led the government to implement measures to reduce license processing times. For example, it has introduced measures regarding grid facilities and substations, including a “fast track” scheme for license processing of small and/or simple cases.

Although state aid to companies is initially prohibited, ESA and the European Commission have opened up the possibility of state aid to companies affected by high electricity prices through a temporary crisis support framework. This has led to a package put forward by the government including loan guarantees and a new energy subsidy scheme during a transition period. It is believed the schemes can support around 20,000 businesses in areas with particularly high electricity prices. The government is working on the details of the schemes, which will eventually be presented to parliament and take effect during Q4.

The government indicated throughout the summer that it may be relevant to regulate power exports out of Norway when storage capacity is low. The most concrete measures have concerned a control mechanism, which activates when the water level reaches a certain threshold. The measure will therefore affect situations that are abnormal or highly critical. However, it is uncertain how this will be implemented in practice, as well as the obstacles that may arise in connection with EEA regulations. The government’s focus appears to have shifted towards the need for security of supply, rather than preventing a rise in prices.

Recently, the government proposed to introduce a so-called economic rent tax (Nw. grunnrenteskatt) on fish farming and land-based wind power, as well as an increase in the economic rent tax on hydropower and an extraordinary tax on wind and hydropower. The proposal is largely due to assumed extraordinary income in these industries and the government’s desire to distribute profits from natural resources better. The purpose is to tax the extraordinary income that can be generated from natural resources.

The economic rent tax is in addition to general corporation tax and other taxes. With the current composition of the Norwegian parliament, there is reason to believe that the proposals will be implemented, despite the fact that they involve a considerable tax increase for the industries concerned. In total, the proposals are expected to increase tax revenues by approximately NOK 33 billion annually.

The proposals are listed as follows:

Water power

• Increase in the economic rent tax, effectively from 37 to 45 per cent.
• Income from the sale of guarantees of origin is included in the economic rent tax base for hydropower from 2023.
• Small hydropower plants (less than 10,000 kVA) do not pay economic rent tax and are not affected by the proposal.
• Entry into force from 1 January 2023.

 Onshore wind power

• Introduction of economic rent tax with an effective rate of 40 percent.
• Applies to wind power plants that are subject to a licence, i.e. wind power plants that have more than five turbines or an installed output of 1 MW or more.
• Income from power production is determined as a general rule on the basis of spot market prices. An exception is being made for power production that is sold through existing power agreements with a fixed price entered into before 28 September 2022, where the power production is valued at the contract price.
• The proposal is submitted for consultation before the end of the year.
• Entry into force from 1 January 2023.

High-price contribution for wind and hydropower

• Introduction of high-price contributions, which implies that the owner of a power plant is charged when the power price exceeds NOK 0.7/kWh.
• The fee is 23 per cent of the part of the price that exceeds NOK 0.7/kWh and is calculated hour by hour per price range.
• Based on actual prices and applies to all production in the power plant.
• Entry into force for hydropower subject to economic rent tax: 28 September 2022.
• Entry into force for wind power plants that are subject to licensing under the Energy Act and hydropower of at least 1 MW: 1 January 2023.
• Hydropower plants with less than 1 MW and wind power plants with fewer than five turbines or a total installed output of less than 1 MW, are exempted from the fee.

On October 1 2022, the Norwegian Government submitted a plan of action consisting of 35 items with measures to prevent and combat social dumping and work-related crime. The plan aims to secure and support safe, responsible and organized working life, among other things by strengthening an organized working life, strengthening employees’ rights and preventing exploitation of employees. A number of measures in the plan will have legal consequences if they are implemented, both in working life in general and in particular for, among other things, the construction and cleaning/sanitation industry, which are considered to be industries with a high risk of social dumping and work-related crime. The government has not specified a timeframe for implementation of the measures. As a result, there is no imminent need to prepare for potential changes.

Noteworthy among these measures is the fact that the government wants to make it more attractive for employees to organize and for businesses to enter into collective agreements, by increasing the employees’ tax deduction for trade union dues, giving organized businesses greater freedom to act, for example, using contracted labour (subcontracting). The government is also considering an expansion of the collective right of legal action to more areas, such as in the event of a breach of the principle of equal treatment and the rules on temporary employment.

As part of strengthening employees’ rights and avoiding the use of loose forms of affiliation, such as independent contractors, the government wants to clarify the term ‘Employee’ in the Norwegian Employment Act and to introduce a rule of presumption that employee status should be taken as a general rule unless it is more likely that there is an independent contractor relationship. Furthermore, the government wants to ensure clear and predictable working conditions in accordance with the corresponding EEA Directive and consider possible legal amendments relating to employees’ rights in the event of bankruptcy, to avoid the bankruptcy scheme being exploited at the expense of employees’ rights. The government also wants to strengthen the rules on the generalization of collective agreements to ensure compliance with pay and working conditions by considering an expansion of the joint and several liability and by strengthening the Norwegian Labour Authority’s capacity, control activities and possibility to act against crime.

In order to prevent the exploitation of employees, the government also wants to establish an approval scheme for staffing agencies, so that consumers and purchasers can make informed choices and choose responsible staffing agencies. For the same reason, the government wants to establish national responsibility requirements for all public procurement. These requirements will initially apply to public enterprises and include the construction and cleaning/sanitation industries and are intended to be gradually extended to additional industries.

In recent months, the situation in the Norwegian real estate market has been uncertain, and this has intensified following Norges Bank’s most recent interest rate hike, which was approved on 22 September. The central bank has indicated a further interest rate hike will happen in November.

At the end of Q3, the transaction market has largely come to a halt. In the first half of 2022, transaction values were just over NOK 50 billion, and the values are unlikely to increase in the current half year. This is in stark contrast to the situation in recent years, with a peak in Q4. Due to the interest rate outlook, many projects are put on hold or cancelled. Even if the interest rate flattens out and gradually dips, the market does not expect the level to be much lower in the long term than it is today.

Norway is currently experiencing near full employment, commodity shortages and high costs. Inflation has reached levels not seen since the 1980s. A possible relative advantage for real estate investments versus other asset classes is the “inflation hedging” achieved through a full and uncapped CPI adjustment in the lease contracts. In this respect, the Norwegian real estate market stands out, also internationally, with a particularly high proportion of contracts with such full CPI adjustment.

At the same time, key real estate agents and legal advisers, such as Wiersholm, have several mandates they will continue to work on. Among other things, we see that several transactions involving development properties are mature, and many players are now working on projects that will be realised two to five years ahead, when the market situation will presumably have improved. Among these are properties that are going out of public ownership in order to stimulate housing construction, as well as construction of units that can meet other public needs.

The reduced activity we are now experiencing may therefore necessitate some larger transactions towards the end of the year. There are several mandates to complete, and some players also have budgets to reach – which in itself may lead to process acceleration.

Environmental, social and governance (ESG) regulations continue to expand, both in scope and complexity. ESG considerations are now mainstream, affecting all companies regardless of sector and size.

The Norwegian Transparency Act, which imposes mandatory obligations on approximately 9,000 Norwegian and foreign companies concerning the safeguarding of human rights and decent working conditions, entered into force on 1 July 2022. Since then, we have seen that many of the companies subject to it have implemented new procedures to ensure compliance with the novel legal obligations. Other companies are also facing a new reality in which they are expected to disclose human rights-related information to customers that are subject to the act. The effects of the new Transparency Act are therefore immediate and even broader than its scope would suggest.

The EU’s work on sustainable finance continues to evolve with developments in several of the sustainable finance legislations. For the EU Taxonomy, we expect draft technical screening criteria for the last four environmental objectives to be published by the EU Commission in the final quarters of 2022, to be applied from 1 January 2023. The adoption of new technical criteria is likely to imply an expansion of the taxonomy to further sectors, such as fisheries. With regards to the Norwegian implementation of the Taxonomy Regulation, it is expected that this will occur before the year-end, with the Norwegian Act on disclosure of sustainability-related information in the financial sector coming into force.[1] On 8 September, the Norwegian government published a Taxonomy-website, which contains information about the Norwegian implementation of the legislation. As part of this, the Norwegian government is working on assessing and clarifying current Norwegian issues arising from the implementation of the EU Taxonomy.

[1] Full name:  Act on the disclosure of sustainability information in the financial sector and a framework for sustainable investments (Nw: Lov om offentliggjøring av bærekraftsinformasjon i finanssektoren mv)

In line with the majority of central banks, the Norwegian central bank, Norges Bank, increased its policy rate by 0.5 percentage points to 2.25 per cent on 22 September. This continues the increase from zero rate a year ago and comes with projections for a further increase to 3 per cent by the end of 2022. 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 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.

The Norwegian bond market remains open for established and regular issuers, but it is challenging for new issuers, both in terms of market availability and pricing. If the current situation continues, we expect an increased requirement for visibility of funding in M&A transactions before closing and that financing transactions as a result may become more complex and time consuming, with high focus on lowering execution risks.

Following the Russian invasion of Ukraine, extensive sanctions – both economic and diplomatic – have been implemented. For businesses and industries, the most important sanctions consist of i) trade embargoes, ii) sector-based sanctions, and iii) individual sanctions. In order to be binding on Norwegian companies/persons, EU sanctions must be implemented in Norwegian law. Sanctions are implemented in Norwegian law in the form of regulations under the Norwegian Sanctions Act. The sanctions againston Russia are included in a separate “Ukraine regulation”.

Following the Russian invasion of Ukraine, extensive sanctions – both economic and diplomatic – have been implemented. For businesses and industries, the most important sanctions consist of i) trade embargoes, ii) sector-based sanctions, and iii) individual sanctions. In order to be binding on Norwegian companies/persons, EU sanctions must be implemented in Norwegian law. Sanctions are implemented in Norwegian law in the form of regulations under the Norwegian Sanctions Act. The sanctions againston Russia are included in a separate “Ukraine regulation”.

As of October 2022, the European sanctions can be summarised as follows:

Sector-based sanctions have been introduced in finance, energy (including oil), transport, technology, defence, multi-purpose goods, raw materials and other goods and in the maritime industry; 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.

The EU has adopted eight sanctions packages and is consecutively considering adopting new measures. The eighth sanctions package was adopted on 6 October 2022 and includes, inter alia, a prohibition on providing maritime transport, as well as technical assistance, brokering services or financing or financial assistance related to the maritime transport, to third countries of crude oil or petroleum products which originate in or are exported from Russia. There will however be a price cap derogation from the prohibition, which allows the provision of such transport and services if the oil or petroleum products are purchased at or below a pre-established price cap. The price cap is not yet established, but will be determined by the coalition of countries that undertake to implement it. Furthermore, additional import bans on Russian products are introduced, including on steel products, wood pulp and paper. The EU has also introduced a new listing criterion, which will allow it to sanction persons who facilitate the infringements of the prohibition against circumvention of sanctions. The EU’s summary of the eight sanctions package is available here.

We also see that the EU Council has decided to prolong many of the existing sanctions. This means that we can expect the sanctions against Russia to continue to expand, both in scope and in time.

The Nordic Marine Insurance Plan is a set of marine insurance conditions that are prevalent in the industry, especially in the Nordic market. A Revision Committee revises the Plan regularly. In October 2022, the new version of the Nordic Marine Insurance Plan was launched. It will enter into force on 1 January 2023.

Reflecting a general trend in the shipping community, the new version pays increased attention to ethical, social and environmental considerations. The updated rules governing the choice of repair yard following a casualty encourage ESG-friendly alternatives. For example, tenders from repair yards with a poor ESG record may be disregarded.

Perhaps the most significant change in the new version of the Plan is the overhaul of the loss of hire insurance conditions. These have been altered on several points, although the amendments generally represent clarifications and slight adjustments rather than a rupture with the past. It is also noteworthy that the new version of the plan clarifies the lead insurer’s rights and authority in order to enhance the administrative benefits of having a lead insurer, and that the time limit for the assured to notify the insurer of a casualty was extended from six to twelve months.

Increased share taxation for natural persons

Share dividends and capital gains are taxed at the ordinary tax rate of 22 per cent. However, the basis for taxation is adjusted by a factor of 1.6, resulting in an effective tax rate of 35.9 per cent. With effect from 6 October 2022, the “adjustment factor” has increased to 1.72. Thus, the effective tax rate on capital gains and dividends is now 37.84 per cent.

Proposal for resource rent on aquaculture

The Ministry of Finance is proposing to introduce a resource rent tax on aquaculture at an effective rate of 40 per cent from 1 January 2023. The production of salmon, trout and rainbow trout are covered by the proposal. Only the largest operators will pay resource rent tax, as a tax-free allowance of between 4,000 and 5,000 tonnes are granted.

The resource rent tax is proposed to be a cash flow tax, which means that revenues and investments are taxed on an ongoing basis in the year in which they are earned/incurred. Revenues from salmon are established on the basis of a norm price, and revenues from trout and rainbow trout are based on the actual sale prices. Corporate tax is calculated before resource rent tax on aquaculture. Resource rent-related corporate tax is deducted from the basis for resource rent tax (similar to the taxation of petroleum and hydropower). An effective resource rent tax rate of 40 per cent implies that the formal resource rent tax rate is set at 51.3 per cent. Including corporate tax, the total effective marginal tax is 62 per cent. Negative resource rent income can be carried forward with interest and deducted from positive calculated resource rent income in subsequent years.

Proposal for resource rent tax on onshore wind energy

The introduction of a resource rent tax on onshore wind energy has been proposed at an effective rate of 40 per cent from 2023. Revenues from energy production are determined on the basis of spot market prices. In addition, the proposal provides for an exemption on energy production sold through existing fixed-price agreements entered into before 28 September 2022. Similar to the resource rent tax on aquaculture (and hydropower and petroleum), the resource rent tax is designed as a cash flow tax, meaning that revenues and investments are taxed on an ongoing basis in the year in which they are earned/incurred. Negative resource rent income can be carried forward with interest and deducted from positive calculated resource rent income in subsequent years.

Proposal for increased resource rent tax on hydropower

The Ministry of Finance has proposed to increase the effective resource rent tax rate on hydropower from 37 per cent to 45 per cent, with effect from the 2022 fiscal year.

Working group to review the Norwegian tax system

The government has nominated a working group to review the tax system. The date for the group to present its recommendations has been postponed from 1 November 2022 to 16 December 2022.

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.

Wiersholm recently won an award at the Financial Times Innovative Lawyers Europe Awards 2022 for the category “Innovation in overcoming barriers to finance” for the firm’s work on Norway’s first-of-a-kind full-scale carbon capture and storage chain (CCS) project. The annual FT Innovative Lawyer Awards Europe celebrate law firms, clients, in-house legal teams and legal service providers who are passionate about driving innovation in the legal sector. This year’s awards received 428 submissions and nominations were received from 96 law firms and 34 in-house legal teams.

The “Innovation in overcoming barriers to finance” award recognises the Wiersholm team, led by Sondre Dyrland, for its work assisting the Norwegian government (Ministry of Petroleum and Energy) and the Northern Lights joint venture on different elements of the renowned carbon capture and storage project “Longship.”

Longship is a full-scale carbon capture and storage (CCS) project that will involve the capture of CO₂ from industrial sources, as well as transport and safe storage of CO₂, to be undertaken by Northern Lights. Phase one of the project will be operational in 2024 with a storage capacity of 1.5 million tonnes of CO₂ per year. For phase two of the development, the ambition is to expand capacity with another 3.5 million tonnes to meet the increasing market demand for these services in the coming years.

Sondre Dyrland and his team supported the Ministry of Petroleum and Energy in developing the concept and contractual framework for the world’s first complete value chain for commercial CCS, the Longship project, which was labelled by previous prime minister Erna Solberg as Norway’s largest ever industrial climate project. As legal advisors to the Northern Lights joint venture, the Wiersholm team has assisted in developing new contractual concepts, mechanisms and solutions for the commercial storage of CO₂.

Wiersholm was the only Norwegian law firm to be shortlisted for FT Innovative Lawyers Europe Awards 2022.