Debt-to-equity conversion in Norwegian companies: key benefits and practical steps
In Norway, converting debt into equity offers a strategic alternative to traditional capital increases through cash contributions or asset transfers. This method can significantly enhance a company’s balance sheet, improve its capital position, and facilitate future financing by reducing the debt burden. For creditors, debt conversion provides a path to equity ownership, with accompanying shareholder rights and potential capital gains. This article explores the practical and legal framework for debt-to-equity conversions under Norwegian law, guiding you through each stage of the process and key considerations for a successful transition.
Why Convert Debt into Equity?
Equity capital increases in Norwegian limited liability companies (AS) are not limited to cash contributions, traditional non-cash contributions, or bonus issues. The conversion of debt claims into equity can benefit both the company and creditors, providing flexibility and strategic advantages.
There are several potential advantages to debt-to-equity conversions, including:
- Reduction of debt burden: This conversion lowers the overall debt load, strengthening the company’s balance sheet.
- Improving capital position: It may be essential for achieving adequate equity levels.
- Facilitating external financing: Improved capital structure can make the company more appealing to lenders.
- Corporate restructuring: This approach may support broader restructuring efforts.
- Granting shareholder rights: Creditors-turned-shareholders gain rights to dividends and voting in general meetings.
- Potential for capital gains: Should share values increase, creditors can benefit post-conversion.
How to execute a debt-to-equity conversion
The following is an overview of the typical process for regular Norwegian limited liability companies (AS):
- Debt validation: The debt must be legitimate and recorded on the balance sheet. Both company and creditor must agree to settle the equity commitment through debt offset.
- Board’s role: The board prepares and submits a proposal to the general meeting for the capital increase, including an offset arrangement. A statutory amendment proposal is also required since equity capital is enshrined in the company’s articles.
- Consideration as non-cash contribution: Debt conversion is treated as a capital increase with non-cash consideration, necessitating a board statement on valuation, verified by an auditor, with all documentation available for the general meeting.
- General meeting approval: A two-thirds majority is required for approval, with a possibility for a simplified decision if all shareholders consent (per Section 5-7 of the Companies Act).
- Subscription: Shares may be subscribed in the meeting minutes or later in a separate document, with offset typically executed on the same day as the general meeting's decision. Auditor verification of the offset is required.
- Registration: The capital increase must be registered with the Norwegian Company Register within three months, with the equity only officially increased upon registration.
Considerations for debt conversion
Subscription at par value
Under the Companies Act, shares cannot be subscribed below par. However, it is generally understood that, under Norwegian law, offsetting the full face value of the debt against the equity obligation may be permissible, even if the debt holds lesser value for the creditor. Existing shareholders should approve this.
Issuing new shares vs. revaluing existing shares
By default, equity increases are achieved through the issuance of new shares. However, revaluing existing shares may be an option if all shareholders agree.
Tax considerations
The tax implications of debt conversion, including potential capital gains or losses, should be carefully evaluated. Whether losses are deductible depends on specific rules, including intra-group and business connection requirements.
Corporate law support
Our team assists clients with corporate law matters, including equity capital increases. With efficient procedures, templates, and trusted auditor connections, we provide reliable support throughout the conversion process. This article provides only an overview; there are further specifications and exceptions under Norwegian law, so each business should assess its specific situation. For inquiries on this article or assistance with corporate or transactional matters, please feel free to contact the author.
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