Our point of view

Nordic Market Newsletter 1/2013

21 February 2013


The proxy advisory industry to develop its own Code of Conduct

Rules about active investor participation (particularly in the US) often require institutional investors to vote actively in shareholders meetings world-wide. Given the far-flung shareholdings and the impracticality of becoming au fait with all issues raised in investee companies, they typically outsource this role to proxy advisors. However, there has long been a concern, particularly in smaller European countries, such as those in the Nordic region, that proxy advisors may be wielding disproportionate influence over corporate governance and creating market distortions. Anecdotal evidence has suggested knee-jerk, one-size-fits-all voting patterns and conflicts of interest.

The role of proxy advisors was discussed in the 2011 EU Corporate Governance Green Paper, and is one of the issues to be dealt with during 2013-2014 according to EU:s Corporate Governance Action Plan, launched in December 2012. Following responses to its March 2012, Discussion Paper on the proxy advisory industry, the European Securities and Markets Authority (ESMA) has, however, concluded that there is no clear evidence of market failure in relation to how proxy advisors interact with investors and issuers. However, ESMA identified several areas where a coordinated effort of the proxy advisory industry would foster greater understanding and assurance of what stakeholders should expect from proxy advisors. This will help investors and issuers foster effective stewardship and robust corporate governance and ensure efficient markets.

Accordingly, ESMA is now encouraging the proxy advisory industry to develop its own Code of Conduct, and has drafted a set of principles by way of guidance. As there is a perceived lack of transparency in the proxy advisory industry, these focus on increased disclosure on the part of proxy advisors.

  • If a proxy advisor is in a conflict of interest position (either because it is providing services both to investor and issuer or because it is owned by an institutional investor/listed company to whom, or about whom, the proxy advisor may also be providing advice), it should disclose both the conflict and the steps taken in order to mitigate the conflict.
  • Proxy advisors should provide investors with information on the systems and the processes they have used in making their recommendations, enabling investors to assess the accuracy and reliability of the advice.
  • The main characteristics of the methodology and the nature of the specific information sources of the proxy holder should be disclosed to the client investor and, if appropriate, to the public. This allows stakeholders to better assess the accuracy and reliability of the proxy holders’ advice.
  • Proxy advisors should be aware of the local market, legal and regulatory conditions to which issuers are subject and disclose whether/how these conditions were taken into due account in the proxy advisor’s advice.
  • If a proxy advisor chooses to have a dialogue with issuers, the proxy advisor should disclose to investors the nature and outcome of such dialogue.
    ESMA will review progress on the development of a Code of Conduct within two years of the publication of its Final Report (i.e. by December 2014) and may reconsider its position if no substantial progress has been made by that time.



Delayed annual accounts, accounting fraud and auditor issues
In a widely-remarked case in 2004, the Swedish Supreme Court held that a failure by a limited liability company to present annual accounts within the prescribed time can constitute accounting fraud. As a company’s financial earnings and position cannot be assessed without the annual accounts and given the importance for market participants of timely publication of annual accounts, intentional delay in presentation of annual accounts currently constitute fraud. Inevitably, given the myriad reasons for delay in filing accounts and the administrative nature of the failure, it was widely considered overly harsh to equate delay with fraud.

Accordingly, on 20 December 2012, the Swedish Government submitted a proposal that “accounting fraud” of this nature (or which is otherwise minor) may only be prosecuted if there are special public interest reasons. The Government’s proposal intends to reduce the severity of the criminal penalties for late filing of annual accounts, so that a short delay in the presentation of annual accounts will not lead to prosecution. Although this is to be recommended, we are somewhat concerned that there is a risk that the “public interest” exception may leave considerable uncertainty, as to who may be prosecuted more severely.

Board members’ personal liability
The Government has proposed to reduce the time that board members and shareholders may be personally liable for the company’s debts. The proposal aims to make it easier for entrepreneurs to start afresh when their companies become insolvent.

A board member or a shareholder may become personally liable for the company’s debts where he or she fails to take the necessary actions, such as presenting a balance sheet for liquidation purposes, when the company has less than 50 percent of its share capital left. This liability currently lasts ten years. It is now proposed that a claim for personal liability must be brought within three years from when the debt arose, but may always be brought within one year from when the debt at the latest should have been paid. If the claim is not brought within the mentioned time limits, the personal liability will cease. The amendments are proposed to enter into force on 1 May 2013.


The Svea Court of Appeal has recently ruled in a case involving a sale of shares. The case is particularly interesting because disputes concerning business transfers through share sales and disclosure in connection thereto are rarely brought before the general courts. Given the lack of case law and precedents concerning breach of warranty and the disclosure process in Swedish share sale transactions, we think that this case may change some advisers’s views. It may also influence the willingness of sellers of shares to give warranties concerning information given to a buyer.

The court construed a relatively strict disclosure obligation under the SPA which could have far reaching consequences such as the removal of limitations on liability or invalidity of specific provisions on remedies. Although, there are some important lessons for practitioners, we think that the terms of the SPA are not particularly representative of high-level M&A transactions and the outcome may have been different with a more structured disclosure process and clearer documentation.

The case concerned the acquisition by a major car-park operator of all the shares of a company with a portfolio of parking lots at a price of about SEK 100 million. During the due diligence process, the buyer had requested a list of the 15 largest loss-making contracts. The seller had neglected to include the single largest loss-making contract in the list produced (although the seller argued that the buyer was otherwise aware of the loss-making contract). A warranty in the purchase agreement stated that the seller had not concealed any relevant information about the company and that the due diligence material did not contain factual inaccuracies. The buyer claimed a reduction to the purchase price as a result of breach of this warranty.

It is a common feature of Nordic contract law that share transfers are covered by the Sale of Goods Act and that a buyer accordingly must put the seller on notice of any potential defect in the goods delivered within a reasonable time. Under the Swedish Sale of Goods Act, failure to do so can act as a bar to claims, if the seller has not been grossly negligent in the run-up to the purchase. Whilst it is not uncommon to eliminate or vary this obligation and the consequences by contract, this was not done in this case.

It was common ground that the buyer had not given notice to the seller regarding the breach of warranty in time. In order to avoid the bar on claims, the buyer argued that the seller had been grossly negligent in its breach of the information warranty (i.e. failing to provide a correct list of loss-making contracts).

The Court of Appeal concluded that, even though the buyer may have received information about the loss-making contract through other means, the failure of the seller in response to a direct question from the buyer to list the biggest loss contract among the 15 largest loss contracts constituted a breach of the information warranty. Moreover, it was not just negligence (“not just a mental lapse”) but it was grossly negligent such that the deadline for notification of faults did not apply. Accordingly, the buyer was entitled to a reduction of the purchase price.

This case raises a variety of lessons for buyer and seller.

First is the question of gross negligence. Previous case law has tended to require a level of fault akin to intentional dishonesty or reckless disregard. Naturally, the issue tends to be fact-specific. The ruling is not very elaborate about the seller’s behaviour or how it constituted gross negligence. It is worth noting in this context that a finding of gross negligence often has many other implications under a share purchase agreement, such as the removal of limitations on liability or invalidity of specific provisions on remedies. On one hand, we think that this ruling could be used to argue that a much higher standard applies to a seller to make appropriate disclosures to warranties given on a share sale. However, this could be a situation where a tough case makes bad law – that the court was willing to stretch the concept of gross negligence so the buyer would have a remedy that would otherwise be barred.
Second, we think that sellers should be much more cautious concerning general information warranties, because broad information warranties are difficult to qualify and impose extensive disclosure obligations. Given the amount of information typically provided in a due diligence process, it is very difficult to verify compliance with a broad information warranty. If failure to provide information in the format required by the buyer constitutes gross negligence this magnifies liabilities considerably and in unpredictable ways. Disappointingly, the court did not enter into any discussion of the standard of disclosure which is required by law in order effectively to qualify a seller’s warranty undertaking.

Third, buyers must be very careful to understand the obligation to conduct a post-closing review of the target and to inform the buyer of a potential “lack of conformity”. A buyer must consider whether to insist that the duty to report problems or the consequences of failure to do so be qualified by contract.
On the whole, the case indicates the need to separate the due diligence process from the disclosure process. Sellers need to be aware that unless specifically stated in the contract (as is often the case) warranties are not qualified by information generally disclosed in the due diligence process. More care must be taken to consider each warranty in detail and specifically inform the buyer of any facts or information which is inconsistent with that warranty and to document how the information or facts were provided.


The Swedish Securities Council has issued the following statements:

Exemption from mandatory bid obligation
Henrik Kvick AB was exempted for its pro-rata share subscription and issue guarantee in a contemplated share issue in Net Gaming Europe AB.
Mark Hauschildt was exempted when subscribing for shares in a non-cash issue in AllTele Allmänna Svenska Telefonaktiebolaget (AllTele). Hauschildt’s votes and shares were to be disregarded at the resolution of the general meeting of shareholders as is normal practice.

Patrik Brinkmann Von Druffel-Egloffstein was exempted when acquiring shares in a directed share issue (in settlement of a claim) in the financially troubled Wiking Mineral AB.

Other exemptions
Getupdated Internet Marketing AB was granted an exemption from the obligation to submit an offer document to the Swedish Financial Supervisory Authority within the required four weeks’ period. The period was prolonged to sex weeks because it occurred in the days between Christmas and New Year.
A bidder was granted permission to exclude shareholders in Switzerland holding 4.17 per cent of the shares in Servage AB. The Swiss shareholders held more than an insignificant part of the total number of shares in the company (three per cent). However, considering the limited number of shareholders and that they had other possibilities to respond to the bid and to avoid being adversely affected, an exemption from the takeover rules in question was granted.

Non-cash issue’s impact on the consideration in a mandatory bid
The Swedish Securities Council concluded that Mark Hauschildt’s acquisition of shares in the preceding non-cash issue of AllTele should not be taken into account for the purposes of assessing the lower limit for the consideration in a mandatory bid. It was held that the consideration may not be lower than the volume-weighted average price for AllTele’s shares during the 20 trading days preceding the date of the publication of the request for the extraordinary general meeting where the terms and conditions for the transaction which may result in a mandatory bid is launched.

“Demerger” of Creades
Several questions arose in connection with the “split” of Creades AB. Creades intended to submit an offer to its shareholders to redeem a maximum of 30 per cent of issued shares, paying for these with shares in a newly established subsidiary of Creades, Sedarec. The principal owner of Creades, Biovestor, had committed to transfer all its redemption rights to another principal owner, Pan Capital. The redemption procedure would result in an increase in Biovestor’s share of voting power, mainly because it would not exercise its redemption right, but also because its sale of redemption rights entitled other shareholders to redeem more shares than they would otherwise do if Biovestor had only refrained from exercising its rights.

No mandatory bid obligation for Biovestor arose because the increase in voting power was not the result of measures taken by Biovestor itself. Neither refraining from exercising redemption rights nor selling such redemption rights in the market (entitling other shareholders to redeem more shares than they otherwise would be able to do) gives rise to a mandatory bid obligation.

Furthermore, the Securities Counsel considered whether it is compatible with good stock market practice not to organise a listing of the Sedarec share. However, given that conversion is optional (i.e. the shareholders in Creades may elect whether or not to become shareholders in the unlisted Sedarec) this is not incompatible with good stock market practice, provided that shareholders are clearly informed and given sufficient time to consider their options.

Statements of a target’s board of directors
The board of directors in Rottneros AB had initially recommended a bid launched by Arctic Paper SA. Shortly after the bid was announced, it became clear that shareholders representing more than 10 per cent of the shares and votes did not intend to accept the offer. The board of Rottneros subsequently published additional information concerning the bid, including their views that full synergies might not be achieved if shareholders representing more than 10 per cent of the shares did not accept the offer. It was not clear whether this meant that the recommendation had been withdrawn or not. Two days before the expiry of the initial acceptance period, a supplement to the offer document was published, which stated that shareholders who had accepted the offer had the right to withdraw their acceptance within two days in accordance with applicable rules.

The Swedish Securities Council’s statement on the matter said that the board of directors should have formulated the second statement more clearly (relating to shareholders not intending to accept the offer), taking into account the purpose of the takeover rules and good stock market practice.
As concerns the assertion that two working days for withdrawal of an acceptance is too short, the Swedish Securities Council stated that it would raise the issue with those responsible for the applicable regulation.


Corporate Law

A Danish legislative proposal seeks to facilitate company start-ups in Denmark
Although attempts were made the 2010 Danish Companies Act to provide for more informal and cost-efficient incorporation procedures for new companies, the Danish Business Authority now considers that the reforms did not go far enough.

The Companies Act significantly reduced the minimum capital required in order to establish a private limited liability company (ApS) from DKK 125,000 to DKK 80,000. It also allowed postponement of the payment of part of the share capital, although at least DKK 80,000 and any premiums must be paid-up immediately.

As the 2010 reforms did not significantly increase the number of new ApS companies, the Danish Business Authority has now drafted a new legislative proposal to further simplify and facilitate start-ups. It will further reducing the minimum capital requirements for an ApS from the current DKK 80,000 to DKK 50,000, by allowing postponement of up to 75 per cent of any premium payment, and, perhaps most significantly, by introducing a new type of private limited liability company.

Entrepreneur Companies
The new vehicle is called an “Entrepreneur Company” (in Danish “Iværksætterselskab”) (“IVS”). The IVS is a private limited company, which is required to have a share capital of only DKK 1 on incorporation. The significantly reduced capital requirement is replaced by a “save-up-method”, which compels the company to transfer 25 per cent of yearly profit to the statutory reserves until the reserves together with the share capital reach the minimum capital requirement of DKK 50,000 applicable to ApS’.

When the IVS’ shareholders’ equity reaches a minimum of DKK 50,000 the shareholders are then able to convert the IVS to an ApS at a shareholders’ meeting.

The IVS aims to meet the needs of entrepreneurs, by addressing the problem of raising capital (which is often unnecessary for low-capital tech businesses) but preserving a limited liability company structure. Should the bill be passed we should not be surprised to see entrepreneurs paying the price of lower capital with an obligation to give personal guarantees for corporate credit, thereby undermining limited liability.

The legislative proposal will be introduced to the Danish Parliament at the end of February 2013.

Recent Danish legislation aims to equalise the gender composition at management levels
On 14 December 2012 the Danish Parliament adopted a law revising the Danish Companies Act and the Danish Financial Statements Act, which will apply to State-owned public limited companies, Danish public limited companies listed in an EU or EEA Member State and large public and private limited companies.

- Changes to the Danish Companies Act
The affected companies are required to set concrete targets and implement a policy in order to achieve a greater balance between men and women at management level.

The new rule requires the supreme governing body to set target figures for the proportion of the under-represented gender in the supreme governing body (no quota is imposed) and that the central governing body to draw up a policy to increase the proportion of the under-represented gender in the other management levels.

If a parent company, preparing consolidated financial statements for the group, sets target figures and draws up policies for the group as a whole, subsidiaries are not required to set target figures and draw up a policy themselves.

- Changes to the Danish Financial Statements Act
The affected companies must include a statement in their annual report describing the company’s gender policy and reporting the target figures and current status. If the target figures have not been met, the company must explain why.

The changes come into force on 1 April 2013. Before then Danish companies should ascertain whether they are subject to the new rules and take appropriate steps to comply with the new regulation.

Capital Markets

bankTrelleborg - A Supreme Court ruling on prospectus liability
In a recent judgment the Danish Supreme Court has found that the Danish bank, Sydbank A/S, was liable for damages to three shareholders due to lack of information in a prospectus. The judgment clarifies certain important aspects of prospectus liability in Denmark.

In the spring of 2007 the local savings bank (in Danish “sparekasse”) sparTrelleborg was converted into a bank under the name of bankTrelleborg A/S. As part of the conversion the holders of guarantee capital were offered either to have their capital redeemed or converted into shares in bankTrelleborg, at a price of DKK 250 per share. In that connection, the bank prepared a prospectus directed at the guarantee holders. Several chose to convert their guarantee capital into shares.

Less than a year after the conversion, Sydbank acquired bankTrelleborg at a price of DKK 97.27 per share. At the time of the acquisition, bankTrelleborg A/S did not meet the minimum capital adequacy requirements set by the Danish FSA and the acquisition was hence part of a rescue plan that would enable bankTrelleborg to continue banking operations. Shortly after, bankTrelleborg merged with Sydbank as the continuing bank.

Three shareholders who had subscribed for shares in bankTrelleborg in 2007 sued Sydbank claiming that they would not have subscribed for shares but for deficiencies in the prospectus.

The main points of the dispute concerned a pledged deposit account had mistakenly been included in the bank’s available funds and the failure to mention that the pledge was a breach of significant loan arrangements granted to bankTrelleborg. The pledge enabled the certain loans to be reclaimed by the creditors. Accordingly, the prospectus gave misleading information regarding the bank’s cash position and funding at a time when the bank in fact did not meet the minimum capital adequacy requirements. The Supreme Court considered that the missing information was material in the context of a prospective investor assessing the bank.

The Supreme Court emphasized that the bank had chosen to prepare the prospectus without external verification, notwithstanding that the bank had not previously prepared a prospectus and that the misleading/lacking information could easily have been discovered. As a consequence, the bank had acted negligently. Further, the Supreme Court stated that when a prospectus lacks material information it can be presumed that the share subscription would not have occurred if this information had been included in the prospectus. Accordingly, Sydbank was liable for damages to the three shareholders.

The case is seen as a trial case for other shareholders and guarantors and Sydbank is facing claims iof about DKK 180 million in a pending class action claim.

It is instructive to compare the bankTrelleborg judgment to the previous leading Supreme Court judgment on prospectus liability, the Hafnia judgment, where the issuer was not held liable.

In the Hafnia judgment it was relatively clear from the prospectus that Hafnia – a leading Danish insurance company that went into liquidation shortly after the share issue – was facing severe financial problems and could become insolvent. Further, the information lacking in the prospectus was not considered material and did not bring about the subsequent Hafnia liquidation. In other words there was no basis for liability or causal relation compared to the bankTrelleborg case where the deficiencies were material, easily discoverable and directly led to the lack of liquidity and thus the main cause for the downfall of the bank.

Consequently, the new judgment from the Supreme Court should from our point of view not be seen as a tightening up of prospectus liability in Denmark but more as a clarification of when and how an issuer is liable for damages.


Higher penalties in the Danish antitrust legislation
As per 1 March 2013, those in breach of the antitrust rules on restrictive practices (cartels) will face higher penalties and longer prison sentences Prison sentences of up to 6 years can be imposed, while economic penalties for companies for fundamental breaches will start at DKK 20 million.

Based on experience from other countries on the deterrent effects of whistleblower leniency programs, the Danish Competition and Consumer Authority will offer reduced sentences to cartel participants to encourage exposure and reduce the desire to participate in cartels at all. Leniency for participation in a cartel covers either immunity from fines (dismissal of all charges) or reduction of fines. Remember, that only the first party to approach the authorities about a specific cartel may be granted leniency.