Legal due diligence in Norway: key considerations for foreign investors

Compliance with the duty to investigate:

A buyer has a legal obligation to examine the object of purchase, cf. among others, the Norwegian Sale of Goods Act § 20. If the buyer fails to conduct investigations where the seller has urged this, matters that were not uncovered cannot, as a starting point, be claimed as defects (breach of warranty). Since due diligence has become so common in transactions, a buyer who has not conducted investigations may face the argument that defect claims are thereby precluded. In the Supreme Court case Rt 2001 p. 1178—the Bodum case—the Court concluded that the lack of due diligence did not prevent the buyer from making defect claims (warranty claims), but the judgment is specifically reasoned and assumes that lack of investigation can preclude such claims.

Avoid legal obstacles to enforcing defect claims:

A transaction agreement will often contain detailed rules about what constitutes defects and which defect claims can be made. There are usually minimum thresholds for how small claims can be made, as well as maximum limits for total liability. In the contractual framework, there will be clear restrictions on when and how large defect claims can be made. What is uncovered through due diligence, on the other hand, will not be subject to such limitations, and issues that cannot be remedied can be taken into account by the buyer in the pricing of the company.

The incentive to rectify is greatest before completion:

It is usually much easier to address what is uncovered before the completion of the transaction than what is discovered afterward. The seller will often go to great lengths to complete a transaction and will readily use their contacts and resources to remedy issues that are pointed out. After the transaction is completed and the money is paid, the seller's incentive to contribute diminishes significantly.

Practically difficult to enforce defect claims:

Even if the buyer has a legitimate defect claim, there may be both practical and legal obstacles to such claims. The seller, for example, may not be solvent, and initiating legal proceedings to succeed with a defect claim can be quite demanding. The costs associated with legal proceedings are substantial, and one will almost always have to account for a certain litigation risk.

Defect claims as obstacles to integration:

Once the transaction is completed, the buyer will usually wish to integrate the new company into their existing business. A dispute related to defect claims will often be an obstacle to integration, especially in cases where some of the sellers work in the acquired company and may even be intended for key roles post-integration. For external parties, it also appears disorganized and unprofessional if the buyer does not have an overview of issues that must be handled before, during, and after the takeover—issues that could have been uncovered through proper due diligence.

Reducing the risk of objections:

In our opinion, the buyer's due diligence also benefits the seller. A well-conducted due diligence provides greater clarity about what is being sold, and the transaction's pricing generally becomes more accurate. The seller can consider the offered price and terms with a reduced risk of corrections due to defect claims.

Seller's due diligence:

Often, the seller will benefit from conducting their own due diligence of the company before the buyer begins their review. A seller's due diligence can identify weaknesses in the organization or operations that can be remedied before a potential buyer starts their investigations. In some cases, the seller may also wish to present their own due diligence report to potential buyers, making the target company more attractive by allowing them to easily gain an overview of the company.

Based on the arguments presented above, we believe the starting point should be that due diligence is conducted when purchasing a company. If the transaction is of low value, one should instead perform a limited and defined review of critical areas.

In this article, we have focused on company acquisitions. Due diligence is also conducted in connection with the acquisition of minority stakes, asset transactions, mergers, and other dispositions—and similar considerations as outlined above will usually apply in such situations. Due diligence is, of course, also performed in other areas, such as finance and tax.