The merits of Sweden as an investment destination

Investments from companies established in emerging markets have historically been on a low level, until the notable acquisition of Volvo Car Corporation from Ford by Geely.

Looking into which sectors attract foreign investments, the automotive industry has been important, with Ford's sale of Volvo Car Corporation to the Chinese Zhejiang Geely Holding Group and GM's sale of Saab Automobile to the Dutch Spyker Cars.

Other sectors that have attracted investments include financial, medical, IT, consumer, industrial companies in general and the service sector.

Conversely, Swedish and Nordic companies have been, and are, highly active in the pursuit of investments in emerging markets. They have a strong record of investment in sectors such as heavy industry, raw materials, mining and telecom.

Public M&A

Regulatory environment

Public offers for shares in companies listed on a Swedish regulated market are, as a general rule, governed by the Takeover Act, implementing EU-Directive 2004/25/EC. The Takeover Act is supplemented by, among other things, takeover rules issued by the relevant exchange, the statements and rulings by the Securities Council, the prospectus requirements in the Financial Instruments Trading Act, and general rules in the Companies Act. Since January 1 2010, public offers for shares in Swedish companies traded on the Swedish multilateral trading platforms First North, Nordic MTF or Aktietorget, are governed by takeover rules issued by the self-regulatory body the Swedish Industry and Commerce Stock Exchange Committee.

Recent developments in takeover rules

In relation to takeovers, revised Swedish takeover rules entered into force on October 1 2009. The revised rules include, inter alia, the following changes.

(a) A bidder is no longer permitted to offer a higher price for shares with multiple voting rights (A-shares). In certain limited circumstances, the Securities Council may however consent to a higher price being offered for the A-shares.

(b) If the bidder has acquired more than 10% of the target shares in exchange for securities in the six months preceding the offer or during the course of the offer, a securities exchange offer is required.

(c) Any debt financing that the bidder is relying on must not be subject to conditions that could themselves be made direct conditions to the offer (such as a condition relating to a material adverse change affecting the target).

(d) The use of equity derivatives that result in a financial exposure at or above the mandatory bid threshold (30% of the voting rights) may be contrary to good market practice and therefore criticised by the Securities Council. In most cases, the Securities Council will need to be consulted before acquiring cashsettled equity derivatives that would result in the relevant financial exposure.

(e) Possible offer announcements are only allowed if there has been a leak or it is expected that a leak may occur.

(f) If a bid is withdrawn (for whatever reason), the bidder and its concert parties cannot (except with the Securities Council's consent), within 12 months of the expiry of the acceptance period, make another bid for the same target or acquire a stake in the target that would require the bidder to make a mandatory bid.

(g) Stricter independence requirements have been introduced for financial experts in MBO situations. Very briefly, the expert providing the statement will not be considered independent if the target and the expert have agreed on a success fee, whether in respect of the statement or financial advice that the expert gives to the target for the purposes of the bid.

Private M&A

Regulatory environment

For private M&A, Sweden offers a refreshingly free and unregulated market, with the framework set by general rules in the Companies Act, Contracts Act and the Sales of Goods Act. Whereas the Companies Act governs internal affairs as well as external relations of a Swedish limited company, the Sale of Goods Act sets out the principles applicable to the sale and purchase of corporate entities. However, the application of the Sale of Goods Act is normally excluded by mutual agreement, since the parties to M&A deals typically prefer to negotiate their own framework for the deal. The Contracts Act contains rules on the formalities of a contract, including rules on when a contract should be considered void, or should be adjusted due to unfairness. In general, the legislative environment has a practical approach as regards private deals and is not unnecessarily burdensome with respect to formalities. Moreover, foreign acquirers will feel quite at home in the Swedish M&A process, which to a great extent has been inspired by and is under influence of Anglo-Saxon practices.

Recent corporate law developments

Many changes to the Companies Act and other acts regulating companies follow from the implementation of EU Directives. Accordingly, on July 15 2009, new rules applicable to financial institutions (inter alia banks, insurance companies, securities companies and fund companies) entered into force. These implemented the Directive on cross-border mergers of limited liability companies (2005/56/EC) with respect to such institutions. For limited liability companies other than financial institutions, Directive 2005/56/EC was implemented as from February 15 2008. Other changes follow from the EU's and the Swedish government's intention to decrease the administrative burden and costs for businesses. Accordingly, as of April 1 2010, the minimum share capital of private limited liability companies has been decreased from SEK100,000 (US$15,000) to SEK50,000 (US$7,500).

Competition law and merger control

A new Competition Act came into force on November 1 2008, introducing revised turnover thresholds for merger notifications and bringing the assessment in line with that undertaken under the EU Merger Regulation. The new Act also made it easier for the Competition Authority to take action against companies guilty of violating the competition rules. The Swedish Competition Act contains the same basic prohibitions as EU competition law against anti-competitive agreements and abuse of market dominance. These may be relevant in the due diligence context where previous or current violations of competition law by the target company may be identified.

In terms of merger control, the Swedish Competition Act provides for mandatory notification – provided the EU Merger Regulation is not applicable – to the Swedish Competition Authority of transactions where (1) the undertakings concerned have a combined turnover in Sweden exceeding SEK1 billion (US$150 million) and (2) at least two of the undertakings concerned have a turnover in Sweden exceeding SEK200 million (US$30 million). It has been estimated that these new thresholds will reduce the number of notified transactions by approximately 40%. With the old turnover thresholds, about 100 deals per year were filed. In 2009, 43 transactions were notified and 21 transactions were notified during the first five months 2010. It is most likely that the financial crisis has also contributed to the substantial decrease in filings.

Significant transactions and outlook

There is a great deal of speculation on the prospect of exits by private equity investors during 2011. Although the acquisition finance markets are opening up and activity has increased significantly over the past quarter, banks are still restrictive of which transactions to finance, the level of financing, and the terms and conditions offered for the financing. Parties are looking into alternative ways of financing the deal and structures with vendor financing have developed and become more common. The forms range from deferred payment of part of the purchase price to being structured like a traditional loan governed by documentation similar to that used in relation to bank financing. Vendor financing may also be in the form of hybrid capital (convertibles, participating loan etc.) giving the seller a part of the upside potential.

In addition, the Swedish corporate bond market has had an upswing in recent years with increased investor interest and increased volumes. And we are expecting to see more deals where shares issued by the buyer are a part of the consideration, both in public and private deals. Certain listed companies have mandates to issue new shares to be used as payment in acquisitions should the right opportunities arise. Also, private companies are able to use their own shares to acquire a target, which adds to the complexity since the parties must also agree on the value of the buyer in addition to the value of the seller.

Distressed deals have been on the agenda for quite some time now. However, even though we have seen an increased number of insolvency-related matters, such as refinancing and financial reconstructions, we have not seen a distinct increase in distressed M&A deals.

During the beginning of the financial crisis, we noted a revival of some 'old' techniques – such as earn-outs, retained minority shares, retention of purchase price and flip protection – as methods to bridge the gap in sellers' and buyers' valuation of target companies. Even though the M&A market has started recovering, these techniques are still being used on the Swedish market.

We have noted an increased interest in the care, healthcare and educational sectors, not least among private equity funds. One example is 3i's exit from Ambea, which was structured as a controlled auction and attracted several competing bidders. Other examples are EQT's and Providence's competing offers for the private educational company AcadeMedia, and Polaris Private Equity's acquisition of Pysslingen Förskolor och Skolor, a Sweden-based provider of educational services. Another sector attracting investment is the energy/cleantech sector. Example transactions include the listing of Swedish wind power company Arise Windpower (the first IPO on NASDAQ OMX Stockholm since the beginning of the financial crisis) and Opcon's and Barclay's public offers for Tricorona (a Swedish company engaged in inter alia investments and trading of certified emission reductions).

In the banking sector, the most publicised transaction during 2010 was the takeover by Carnegie of HQ Bank. Following a decision by the Swedish Financial Supervisory Authority to revoke all licences from HQ Bank and initiate a liquidation process, HQ Bank was acquired by Carnegie (which itself was the subject of a distressed sale following the revoking of its licences at the height of the financial crisis).

The landmark Swedish deal of 2010 was, however, the acquisition by Chinese Zhejiang Geely Holding Group of Volvo Car Corporation from Ford. This stands out as one of the boldest investments yet by a Chinese company in the West.

Oliver Schulte

Partner

Oliver Schulte is a partner at Mannheimer Swartling. His practice focuses on international mergers and acquisitions, company law, funds and investments and foreign direct investments. His sectors of expertise include, among others, the automotive, machinery and engineering industries.

Oliver Schulte practiced at Mannheimer Swartling's office in Berlin, Malmö and Frankfurt before joining the firm's team in Shanghai. He is a German-qualified lawyer (Rechtsanwalt, 1. Staatsexamen and 2. Staatsexamen) and graduated from the Goethe University Frankfurt am Main and served as a law clerk at The Higher Regional Court of Frankfurt (Oberlandesgericht Frankfurt). He is the author of various articles on mergers and acquisitions and corporate law matters.

Andreas Elving

Senior associate

Andreas Elving is a senior associate in Mannheimer Swartling's mergers and acquisition practice. He specialises in mergers and acquisitions and company law, and has experience on international and Swedish transactions.

Andreas Elving practiced at Mannheimer Swartling's office in Stockholm before joining the firm's team in Shanghai. He studied at the University of Uppsala (LL.M., 2001). After service as a legal aide in the European Parliament and in the Swedish courts, he joined Mannheimer Swartling in 2004 and has been a member of the Swedish Bar Association since 2007.