Financing for the acquisition of fishing boat shipping companies

In practice, we have seen that there is less focus on possibilities and limitations in the regulations in Section 8-10 of the Limited Liability Companies Act relating to acquisition financing with security in the assets of the target company, typically the fishing vessel and belonging quotas, in connection with the purchase of fishing boat shipping companies. In the following, a review of the rules with regard to such acquisition financing is therefore provided.

The Limited Liability Companies Act’s rules on acquisition financing

Over time, the Limited Liability Companies Act has contained limitations on a limited liability company’s ability to provide financial assistance in connection with the acquisition of shares in the company itself. The Act specifically mentions the alternatives of “giving credit”, “providing security” and “making funds available” in other ways as the special forms of financial assistance. In practice, the option of providing security is most often the relevant option.

As a starting point, the effect of dispositions being made in violation of the rules is invalidity. The pledgee, normally a bank, can thus risk that the pledge will not stand. Due to the serious consequence of invalidity and the large financial values involved, it is thus very important that these waters are navigated correctly.

Brief overview of the rules of the Limited Liability Companies Act

According to the main rule, the amount of the aid (typically the security) must be within the amount that Fishing Boat Shipping Company AS can distribute as dividends. A very practical group exception has now been introduced, which means that there are no specific amount restrictions on the financial assistance provided by Fishing Boat Shipping Company AS. The group exception applies if, after the acquisition, the Buyer owns more than 50% of the shares in Fishing Boat Shipping Company AS (and thus establishes a group with the Buyer as the parent company and Fishing Boat Shipping Company AS as a subsidiary as a result of the share takeover). The new rules thus entail a significant expansion and softening of the possibilities for the target company (Fishing Boat Shipping Company AS) to provide financial assistance in connection with acquisitions.

The Act’s terms on security from the Buyer for claims for restitution from Fishing Boat Shipping Company AS if the bank claims Fishing Boat Shipping Company AS to be under the security has in practice been the biggest obstacle to being able to make use of the financing options. The other key change is that this requirement for security from the Buyer has now been lifted. Fishing Boat Shipping Company AS’ financial assistance shall however be provided on “ordinary business terms and principles”, i.e. at market terms. The standard is how independent parties would have priced the services. In the event of a loan from Fishing Boat Shipping Company AS to the Buyer, market rate interest conditions have to be agreed, which take into account the risk of loan becoming default. In the event of a security, market rate guarantee provisions have to be agreed, which take into account the risk of the security becoming assumed.

The board of Fishing Boat Shipping Company AS will prepare a more detailed statement and special declaration related to the assistance. The board’s statement and declaration shall be sent to the Register of Business Enterprises before the financial assistance is provided. In this way, both re-examination and publicity can be secured from the assessments of the board. Anyone who wishes can order a printout of documents registered in the Register of Business Enterprises. The board should therefore be careful about entering trade secrets and other sensitive information into the statement.

The main purpose of preparing such special statement and declaration from the board is inter alia to increase the likelihood of the board actually carrying out a thorough assessment. Furthermore, a written statement from the board may facilitate the assessment of a potential future claim for directors’ liability for affected creditors. Finally, the purpose is to provide the general meeting with a sound basis to carry out a business-like and well-informed decision based on a sound basis. The latter is naturally most relevant to companies with a spread-out ownership structure, where not all shareholders are on the board.

Increases the liability of the board

A special topic is whether the new rules have increased the risk of board members incurring directors’ liability. The changes involve a significant softening of the rules on financial assistance in acquisitions when a group relation is established as a result of the acquisition. To allow such softening, a significant responsibility is placed on the board through the statement and declaration that will be submitted.

It may be difficult to say with certainty that it is in Fishing Boat Shipping Company AS’ interest to provide security for the financing of the acquisition of the company. The risk of the buyer’s breach of the acquisition loan with the bank’s following accession of the security that has been provided by Fishing Boat Shipping Company AS for the buyer’s debt is also a difficult assessment.

As it is now required that all competent board members must explicitly and in writing decide whether dispositions are in the company’s interest, it is natural to assume that it will be easier to argue for directors’ liability if the board’s decision is not based on sound assessments. It is therefore very important that the board does a thorough job of assessing any security, and ensures that the board minutes state which prerequisites the assessments are based on. If a board member disagrees with the assessment of the majority, it is also important that the person concerned ensures that this is recorded in the board minutes to avoid liability, as the directors’ liability shall be assessed individually and not as a collective responsibility.

Greater flexibility for financing in connection with generational change

Financing is often a challenge in the event of a generational change in fishing boat shipping companies due to the very high values of quotas. Very few will be able to finance buyouts of a significant share of the shipping company based on a valuation of actual values. If there are several inheritors or inheritor branches where everyone will not or do not want to continue on, the transfer at (approximately) full values will often be necessary or desirable out of consideration of the shareholders that will not continue on.

To obtain sufficient financing, one possibility could be to offer security in the shipping company’s assets, potentially also a loan from the shipping company. In this way, the new rules especially could be utilized in connection with an implementation of generational changes, and thereby secure the possibility of implementing the transition that would otherwise be difficult to implement due to the large values. If the buyer is a limited liability company owned by one or several of the inheritors, and the acquisition implies that the buyer becomes the owner of more than 50% of the shares in the shipping company, the limitations relating to amounts stating that the financing assistance has to lie within the profit framework (the group exemption). In this way, the new rules can contribute to securing financing with the help of security in the vessel and quotas, so that the shareholders who will not continue on can be bought out at a value that can be financed by the buyer and that can be accepted by the seller (withdrawing shareholders).