Apr 7, 2025
Financial instruments between equity and debt in Norwegian corporate law
In Norwegian corporate law, there are several financing solutions that lie at the borderline between traditional equity (share capital) and pure debt (ordinary loans). These financial instruments, regulated in the Companies Act and Public Limited Companies Act, chapter 11, allow companies to raise capital in more flexible ways than through ordinary share capital or bank loans.
This article provides an overview of the various financial instruments available for limited liability companies and public limited companies, as well as subordinated loan capital as a supplementary form of financing.
Main Types of Financial Instruments
The Companies Act and Public Limited Companies Act regulate four main types of financial instruments that can help finance the company's operations:
Loans with a right to demand issuance of shares or with conversion rights to shares
Loans with special terms
Subscription rights shares
Standalone subscription rights
All these forms of financing have in common that they give the lender or rights holder the opportunity to become a shareholder or increase their shareholding in the company under certain circumstances, while initially representing less risk than direct share investments.
Until 2006, only public limited companies could utilize all four forms of financing, while private limited companies were not allowed to issue subscription rights shares and standalone subscription rights. However, after a legislative change in the fall of 2006, private limited companies can also use these forms of financing, which has been particularly beneficial for startups and in venture capital investments.
Loans with a Right to Demand Issuance of Shares or with Conversion Rights to Shares
What are Convertible Loans and Warrants?
The Companies Act and Public Limited Companies Act § 11-1 provide two main types of loans with share rights:
Convertible loans (exchange loans): The lender is given the right to convert the loan into shares, offsetting the claim against the company with the share capital.
Warrants (loans with subscription rights): The lender is given the right to subscribe for new shares with an additional contribution while the claim against the company remains.
Advantages for Lender and Company
For the lender, the main advantage of such loans is that they initially take on less risk than with direct share investments. The lender retains creditor status with the rights that entail, and usually has a claim for interest return. At the same time, they have the option to become shareholders if it proves to be economically advantageous.
For the company, the advantage is that the interest for loans with option rights often lies below the market rate for ordinary loans. The company may also benefit from using warrants as incentives for their executives, which is not uncommon in practice.
Differences between Private Limited Companies and Public Limited Companies
In private limited companies, the right to demand issuance of shares cannot be separated from the claim. In public limited companies, however, there is no such prohibition, which means the subscription right can have independent economic value as it can be traded separately from the loan.
Decision-Making Process
The decision to take up convertible loans and warrants must be made by the shareholders' meeting with a majority as for amending bylaws (two-thirds majority). The shareholders' meeting determines the conversion rate, and the lender will usually exercise their right to conversion if the share price at the redemption point exceeds the conversion rate.
Loans with Special Terms
Characteristics
The Companies Act and Public Limited Companies Act § 11-14 allow companies to take out loans with interest that depends wholly or partially on:
The dividend that is distributed, or
The company's result
The law does not differentiate between ordinary loans and subordinated loan capital, so the provision covers both types as long as the interest is tied to dividends or results.
Benefits and Risks
For the lender, there is potential in the arrangement, as one would typically get a better return on their funds than with an ordinary loan if the company performs well. If the company performs poorly, however, the lender takes a greater risk than with an ordinary fixed-rate loan.
For the company, the arrangement is advantageous because it prevents having to pay high interest in difficult times. When the company performs well, it is considered an acceptable price that the lender, who has provided risk capital, is rewarded with a higher interest.
Decision-Making Process
The shareholders' meeting is competent to decide that the company takes out loans with special terms, with a majority as for amending bylaws. The shareholders' meeting can also authorize the board to decide on loan uptake.
Subscription Rights Shares
What are Subscription Rights Shares?
A subscription rights share is a financial instrument consisting of:
An ordinary share, and
A subscription right that, at a future date, gives the holder the right to demand issuance of one or more shares against a contribution
Subscription rights shares establish a contractual obligation for the company to issue shares when the shareholder demands it, and to carry out the necessary capital increase.
Advantages for the Company and Investor
For the company, the use of subscription rights shares can ensure that financing through the supply of new share capital can happen over a longer period. However, the financing method is uncertain from the company's perspective, since the rights holder is not obliged to use the subscription right.
For the investor, the right to become a shareholder holds value if there is reason to expect a rise in the company's stock value. In practice, the right will only be exercised if the consideration to be paid for the new shares is below the market value of the share at the exercise point.
Decision-Making Process
Subscription rights shares can only be established by the issuance of new shares through a capital increase. The shareholders' meeting must make a decision with a majority as for amending bylaws, since the decision leads to a future capital increase, thus amending bylaws.
Standalone Subscription Rights
What are Standalone Subscription Rights?
A standalone subscription right is a financial instrument that provides the right to demand the issuance of new shares in the company, where the right is neither tied to a loan (as with convertible loans/warrants) nor to a share (as with subscription rights shares).
Issuing standalone subscription rights involves the company undertaking a contractual obligation to issue shares when the rights holder demands it and to conduct the necessary capital increase.
Practical Application
The allocation of subscription rights is practiced not only as a financing arrangement but also as an incentive arrangement for leading employees (options). For the rights holder, the right to become a shareholder can be advantageous if the company's shares increase in value.
The right holds value for the holder if the market value of the share exceeds the consideration required to exercise the subscription right.
Decision-Making Process
The shareholders' meeting must make a decision on issuing standalone subscription rights with a majority as for amending bylaws. The decision must indicate the consideration to be provided for the subscription rights.
Subordinated Loan Capital
Characteristics
Subordinated loan capital is a form of financing where the lender agrees to subordinate to all of the company's other creditors in case of bankruptcy. At the same time, it is assumed that the lender will have full coverage before shareholders receive a portion of the company's net assets in the event of liquidation.
This intermediary position between ordinary debt and equity is typically reflected in a higher interest rate than for ordinary loans. Legally, subordinated loan capital is treated as a loan, and the loan amount is to be repaid without deduction for loss share or addition for gain share.
Legal Regulation
Subordinated loan capital is not specifically regulated in the Companies Act or Public Limited Companies Act. Rights and obligations between the company and the lender must therefore be assessed based on an interpretation of the loan agreement. The contribution and reduction of subordinated loan capital occur independently of the company law's rules on share capital.
It follows from the general rules of the Companies Act regarding the board's competence that the board has the authority to take such loans. Accounting-wise, subordinated loan capital should be treated as debt, not equity.
Practical Application in Business
Financial instruments of the types described above are particularly useful in the following situations:
Start-ups: New companies may need flexible financing solutions where investors can provide financing with the possibility of later conversion to equity stakes.
Venture Capital Investments: Venture capital companies often invest using convertible loans or subscription rights to balance risk and return potential.
Recapitalization: Companies in financial restructuring can use financial instruments to convert debt to equity over time.
Incentive Programs: Standalone subscription rights are often used as part of compensation and incentive programs for senior management and key personnel.
Advantages of Financial Instruments
The main advantages of the discussed financial instruments are:
Risk Sharing: The instruments allow for a gradual transition from creditor position to owner position, which can reduce the risk for investors.
Flexibility: The company can tailor the financing solution to its specific needs and future outlook.
Incentive Instruments: Several of the instruments can be used as motivational factors for employees or strategic partners.
Liquidity Management: The company can ensure access to capital over time without having to issue shares immediately.
Summary
Financial instruments at the borderline between equity and debt provide Norwegian companies opportunities for flexible capital acquisition. Both private limited companies and public limited companies can now utilize all four main types of financial instruments regulated in the company legislation.
Each instrument has its unique characteristics and areas of use, but common to them all is that they give the lender or rights holder an opportunity to become a shareholder or increase their ownership under certain circumstances. This makes the instruments valuable tools in the companies' financing strategies, especially for growth companies and in situations where traditional equity or debt financing is not optimal.
