Cross-Border M&A and Company Law in Iceland

CROSS-BORDER M&A AND COMPANY LAW IN ICELAND – SELECTED TOPICS –

Cross-border M&A and Company Law in Iceland – selected topics © BBA Legal ehf. – May 2017 COPYRIGHT NOTICE IMPORTANT DISCLAIMER: M&A transactions vary greatly and so do the legal issues which might arise in relation to the transactions. This document is neither meant to give exhaustive information on the issues which are addressed in it nor does it address all the issues which might arise in any given M&A transaction in Iceland or in the operations of the various different companies. This document describes certain legal issues as at the date it is published but it should be noted that the laws and regulations referred to in this document may have been amended since its publication. Nothing in this document shall be construed as constituting legal advice.

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EDITORS’ NOTE BBA was the first law firm in Iceland to build its practice exclusively on servicing the business sector. This is and has always been our main focus.

As a result, BBA has been a leading firm for a number of years in the field of mergers and acquisitions, capital markets, banking and corporate finance, bankruptcy law, PFI projects and general corporate and commercial law on the Icelandic market. This is confirmed by the firm’s top tier ranking in the respective fields by all the major ranking companies.

Due to our level of expertise and good reputation we have been entrusted by our local and international clients to provide advice on many of Iceland’s biggest and most complicated financing and M&A deals, as well as the country’s most important PFI projects.

Höskuldur Eiríksson BBA Höfðatorg, 19th floor Reykjavik Iceland Tel: +354 550 0500 Fax: +354 550 0505 Email: hoskuldur@bba.is URL: www.bba.is

Höskuldur joined the firm in 2007 and became a partner in 2014. Höskuldur obtained an LL.M. degree in International Banking & Finance Law from University College London (UCL) in 2011 and has also been a parttime lecturer on M&A transactions in one of the local universities. He has been involved in a number of cross-border, as well as domestic, financing and M&A transactions and regularly advises a variety of domestic and foreign clients on such transactions as well as other corporate matters.

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Baldvin Björn Haraldsson

BBA Höfðatorg, 19th floor Reykjavik Iceland Tel: +354 550 0500 Fax: +354 550 0505 Email: baldvin@bba.is URL: www.bba.is

Baldvin Björn is one of the two founding partners of BBA. He has been a member of the Icelandic Bar Association since 1994 and became a member of the Paris Bar in 1998 after having obtained a DESS and a Troisieme Cycle degree in International Business Law from ILERI in Paris. Baldvin Björn has actively advised clients throughout his career in M&A, Financing, Energy Law and PPPs and has been involved in many of the largest M&A deals in Iceland in recent years.

He advised the UK Deposit Guarantee Fund and HMT in their legal proceedings in Iceland relating to the Icesave deposits. Baldvin Björn is the Chairman of the French-Icelandic Chamber of Commerce.

CONTRIBUTING LAWYERS Höskuldur Eiríksson Partner Editor Baldvin Björn Haraldsson Partner Editor

Anna Björg Guðjónsdóttir anna@bba.is

Bjarney Anna Bjarnadóttir bjarney@bba.is

Sara Rut Sigurjónsdóttir sara@bba.is

Stefán Reykjalín stefan@bba.is

Tómas M. Þórhallsson tomas@bba.is

Þorsteinn Ingason thorsteinn@bba.is

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Cross-border M&A and Company Law in Iceland – selected topics -

ABOUT THIS DOCUMENT The purpose of this document is to provide a practical overview of selected topics concerning cross-border M&A transactions involving the acquisition of an Icelandic company (a “Target”) or its business by a non-Icelandic investor (an “Investor”). The intention is not only to give potential Investors a general idea about legal issues related to the acquisition itself but also to describe, in general terms, the legal environment applicable to the Target. The purpose is to give Investors an idea about the legal environment they are entering into when acquiring a Target, whether the plan is to maintain the Target’s operations in Iceland or relocate abroad sometime after closing of the acquisition.

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TABLE OF CONTENTS PART I: M&A TRANSACTIONS IN ICELAND 1 Deal structures 10 1.1 Asset Purchase 10 1.2 Share Purchase 11 1.3 Cross-border Mergers 13 1.4 Cross-border merger or re-domiciliation pursuant to the European Company Act 16 2 Documentation 17 3 Due diligence 17 4 Acquisition of listed companies 18 4.1 Mandatory takeover bids 20 4.2 Voluntary takeover bids 20 4.3 Announcement of a takeover bid 21 4.4 Delays for submitting takeover bids and their term of validity 21 4.5 Purchase price and conditions relating to takeover bids 21 4.6 The Offer Document 22 4.7 Competing Bids 23 4.8 Revocation of takeover bids 23 4.9 Effects of a failed takeover bid 23 4.10 Obligations of the Board of the Target Company 23 4.11 Opportunities for the bidder to conduct due diligence 27 4.12 Undertakings from existing shareholders 27 4.13 Break fee arrangements 27 4.14 Submission of the takeover bid and the Offer Document 27 4.15 Duties of the bidder following the submission of the takeover bid 28 4.16 Rights of the bidder after the expiry of the takeover bid 28 4.17 Duty to disclose the results of the takeover bid and changes in significant proportions of voting rights 29 4.18 Squeeze-out 29 4.19 Takeover bid timetable 30 4.20 Merger and removal from trading of the Target Company’s shares 30 4.21 Failure to submit a bid 30 5 Acquiring the business of a listed company rather than the company’s shares 33 5.1 Disclosure requirements concerning an asset acquisition 33 5.2 Asset purchase agreement and shareholder consent 34 6 Post-acquisition dissolution and distribution of assets 35 6.1 Dissolution of a Private LLC which has no liabilities 35 6.2 Liquidation by a winding-up committee 35 7 Issues related to the financing of an Acquisition 36 7.1 Financial assistance 36 7.2 Taking security in Iceland – types of security and how they are perfected 37 7.3 Enforcing security in Iceland 37

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8 The Icelandic legal system 9 The Icelandic Courts 10 Constitutional safeguards and the European Convention on Human Rights 11 EEA/EU law 12 Law on Foreign Investment and the right to own real property 13 Incentives for foreign investment 14 The Icelandic Tax System 15 Insolvency law 16 Contract law 17 Competition law 18 Company law 18.1 Types of companies 18.2 Establishing a limited liability company in Iceland 18.3 Residential requirements 18.4 Shares, share certificates and share registry 18.5 Shareholder rights 18.5.1 Shareholders’ meetings 18.5.2 General shareholder rights 18.5.3 Voting at shareholders’ meetings 18.5.4 Provisions granting rights to specific groups of shareholders 18.6 The Board 18.6.1 The number of directors and the election process 18.6.2 The term of the Board, resignation from the Board, etc.

18.6.3 The election and role of the chairman 18.6.4 General duties of Directors 18.6.5 Specific duties 18.7 Annual statutory filings 19 Employment law considerations 19.1 Legal status of employees in the event of a transfer of undertakings 19.2 Legislation regulating the employment relationship 20.1 Background 20.2 Recent developments 20.3 Definition of cross-border movement of capital 20.4 Definition of foreign entities 20.5 Disclosure requirements for cross-border movement of foreign currency 20.6 Lending and borrowing 20.7 Derivatives 20.8 New Investment

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PART I M&A TRANSACTIONS IN ICELAND 1 Deal structures

M&A transactions in Iceland are typically structured as asset purchase deals, share purchase deals (or a combination of both) or concluded by way of statutory merger. Share purchases are by far the most common method used in Iceland. The transaction structure has a significant impact on various aspects of the transaction, such as tax, and some of these aspects will be discussed briefly below. The discussion in this section assumes that the Target is not a listed company. Public takeovers of listed companies are however discussed in section 4 of this document.

The choice between an asset acquisition, share acquisition or statutory merger in any given transaction will depend on a variety of factors and should be assessed on a case-by-case basis.

Accordingly, Investors should seek professional advice at an early stage to determine the best structure for their proposed investment in a Target. Whether a deal is structured as an asset purchase, share purchase or a statutory merger, the parties must, among other things, be aware of their obligations towards the Target’s employees according to Act No. 72/2002 on Legal Status of Employees in the Event of Transfer of Undertakings (the “TUPE Act”), which are discussed in section 19.

1.1 Asset Purchase

An acquisition of assets involves the acquisition of the assets owned by the Target and which are used in carrying on the business of the Target.

Usually, all, or substantially all, of the assets are acquired, or at least the main asset of the Target which defines its business. (a) Advantages Cherry picking assets and liabilities: One of the main advantages of an acquisition of assets is that the Investor has the opportunity to “cherry pick” which assets and liabilities will be assumed, aside from those which are automatically assumed under the TUPE Act. The assets and liabilities which are to be taken over must therefore be carefully defined in the asset purchase agreement.

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Security for Acquisition Finance: Another advantage for the Investor in asset acquisitions is that he can use the acquired assets as security for the acquisition finance he requires for the purposes of the acquisition. (b) Disadvantages Third party consents: Depending on the nature of Target’s business, it can be quite complicated to complete an asset acquisition deal since, in many cases, the transfer will require numerous third party consents, or at least notices to third parties. The general rule is that the transfer of contracts, licences, permits, etc., requires approval.

Registration and tax or other public fees: Generally, transfer of ownership of assets does not need to be publicly registered. However, the transfer of certain types of assets, such as vehicles, vessels and real estate should be publicly registered and this can lead to stamp duty and payment of fees to the public authorities. The transfer of real estate owned by a legal entity is subject to payment of a stamp duty of 1.6% of the transfer price.

Double taxation of the purchase price: See item d) below. (c) Corporate authority Generally, the board of directors (a “Board”) of the Target has the corporate authority to sell the assets of the Target without shareholder approval. However, the Act on Private Limited Liability Companies (those companies hereinafter referred to as a “Private LLC”) and the Act on Public Limited Liability Companies (those companies hereinafter referred to as a “Public LLC” and the Acts regarding each of these types of companies hereinafter collectively referred to as the “Companies Acts”), the Target’s articles of association (“Articles”), or any other instrument by which the Board is legally bound, may provide otherwise. Additionally, if the transaction concerns a significant part of the Target’s assets, it would be considered good corporate practice to seek the approval of the shareholders at a shareholders’ meeting or at least to present such transactions to the shareholders. (d) Tax From a tax perspective, asset transfers are relatively straightforward from both the Investor’s and the seller’s points of view. The seller is subject to taxation of any capital gain proceeding from the sale. In general, the transfer of assets only

directly affects the seller of the assets. As a general rule, the transfer triggers taxation of any gain, calculated as the difference between the consideration for the assets and the acquisition price for the assets less any depreciation deduction. In certain cases, and subject to certain conditions, the seller can re-invest the proceeds without taxation by acquiring new assets within two years from the sale and in effect defer the taxation on the capital gains.

Whether the Investor will be subject to Icelandic taxation on future gain depends on the location of the asset after the transfer, i.e. whether the asset will be transferred cross-border or if it will continue to be located in Iceland. For example, income (capital gain) associated with permanent establishments (branches) or immovable property is taxable in Iceland. For tax purposes, Icelandic branches of foreign companies are generally treated like Icelandic incorporated companies except that they are not taxed for worldwide income; only for Icelandic-sourced income. A branch can deduct a part of the overhead costs of the non-resident company against its taxable income in Iceland subject to general transfer pricing principles.

From a tax perspective, the main difference between acquiring assets directly and acquiring shares in the Target concerns depreciation deductions. An asset purchase enables the Investor to take the assets with full bases, i.e. to get a step up in asset price thereby reducing the Investor’s future tax base. However, in share purchases, it can be a negative factor if the Target has a substantial amount of appreciated assets or assets that have been fully depreciated as the assets will have inherent untaxed gain for which taxes will likely need to be paid at some point.

The proceeds from an asset sale will most likely be used to repay creditors, if necessary, and the remainder distributed to the shareholders of the Target. Accordingly, in the end, the proceeds from the asset sale are generally distributed to the shareholders, possibly triggering an additional tax event, i.e. first at the level of the company and second when distributed to the shareholders. Therefore, the tax liabilities incurred by the Target and its shareholders in an asset sale generally result in the purchase price being slightly higher than that in share purchase deals.

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1.2 Share Purchase (a) Advantages Simplicity: One of the advantages of a share purchase is that it is relatively easy to define the business being acquired in the share purchase agreement, as opposed to in an asset purchase agreement, which is more complicated in this respect.

Limited third party consent: In the absence of “change of control” clauses in contracts, licences, etc., a share purchase has the advantage that it generally does not require any third party consents and the rights and obligations of the Target remain intact.

No stamp duty or fees: No stamp duty or other fees are payable on the transfer of shares.

Tax treatment: No double taxation. See further in item d) below. (b) Disadvantages All liabilities assumed: The fact that the Target is sold inclusive of all its liabilities, known and unknown, e.g. tax liabilities, is generally disadvantageous to the Investor. Due to this, Investors occasionally insist that certain assets or liabilities are carved out prior to closing.

More extensive due diligence, representations and warranties: The fact that all assets and liabilities are acquired in an acquisition of shares results in a need to conduct a more extensive due diligence. Furthermore, careful thought has to be put into the negotiations of representations, warranties and indemnifications in the share purchase agreement to mitigate the risk of undisclosed liabilities.

Transfer restrictions: Unless provided otherwise in the Target’s Articles, or in an agreement between the shareholders of the Target or other stakeholders, shares are usually freely transferable. However, there can be several obstacles to acquiring shares in the Target, e.g. pre-emptive rights of the Board or other shareholders, security interests over the shares, tag- and drag-along rights and other obligations, etc.

Security for acquisition financing and financial assistance: According to the Companies Acts, neither the Target nor its subsidiaries can provide acquisition finance or grant guarantees or security over their assets in respect of acquisition financing. The Investor can of course grant security over the acquired shares in the Target but not in the Target’s assets.

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(c) Tax Like asset transfers, the tax issues involved in share purchase are relatively straightforward.

The selling shareholders are subject to taxation of any capital gain proceeding from the sale. The Target will be subject to taxation of its income in Iceland as are other resident companies. The Investors will not be subject to taxation of the share purchase itself but, as shareholders in the Target, they will be subject to taxation of any capital gain proceeding from the shares, such as dividend and disposal of shares.

A 20% tax is withheld at source for dividend payments made to individuals and an 18% tax for those made to non-resident companies. The company paying the dividends is obliged to withhold and return withholding tax.

Special rules apply to inter-company dividend and disposal of shares in limited liability companies. A 20% tax is withheld for dividends payments to local limited liability companies which is not consolidated with the paying entity. Domestic limited liability companies do however receive a refund after filing a tax return for the relevant year as the dividends are fully deductible. Proceeds of dividend and disposal of shares in Icelandic companies can be deducted from taxable income of foreign limited liability companies domiciled in any EEA or EFTA country or the Faroe Islands. These companies need to file a tax return in Iceland, declare the taxable income, i.e. dividend or gain from disposal of shares, and then they can deduct the same amount. The tax base will therefore be zero and any tax already paid, reimbursed.

The tax liability of a non-resident shareholder can ultimately depend on whether tax treaties provide for relief from double taxation of income. As of 2017, 45 tax treaties are in place.

The withholding rates for dividend income of non-residents are in general 15% for individuals and companies that do not reach the minimum shareholding according to the relevant treaty.

Several countries have treaties that provide for 0% tax on corporate shareholders with a minimum ownership of 10%, such as Denmark, Finland, the Netherlands, Norway, and Sweden. Non-residents can apply for a partial or full tax exemption and/or reimbursement of taxes already paid, from the Internal Revenue Directorate, on the basis of provisions in tax treaties. In the absence of tax treaties, domestic tax rules apply. Capital gains from the disposal of Icelandic shares is in most cases not subject to domestic taxation if a tax treaty applies.

An acquisition of shares only directly affects the shareholders selling the acquired shares of the Target. The shareholders would be taxed on the difference between the purchase price of their shares and the acquisition price of the buyer. (d) Squeeze-out If the Investor acquires more than 90% of the shareholding or the voting rights of the Target, the Investor and the Board of the Target have the advantage of being jointly entitled to require all other shareholders to sell their shares to the Investor (a “Squeeze-out”). If an agreement is not reached on the redemption price, court-appointed appraisers will determine the price.

The minority shareholders also have an independent right to have their shares in the Target redeemed if the Investor acquires more than 90% of the shareholding and more than 90% of the voting rights in the Target.

1.3 Cross-border Mergers

Compared with share and asset transfers, cross-border M&A transactions have been rare in Iceland. The main reason for this is probably the fact that Act No. 90/2003 on Income Tax (the “Tax Act”) did not provide for tax-neutral cross-border mergers within the EEA or EFTA states until 2013. The Act’s requirement that taxes on unsold assets which had been transferred cross-border be paid immediately most likely caused companies significant difficulties and prevented them from utilizing the merger option.

In 2007, Directive 2005/56/EC on cross-border mergers of limited liability companies (the “Merger Directive”) was implemented in the Companies Acts. According to the Companies Acts, a cross-border merger is a merger that occurs between companies domiciled in at least two Member States of the European Economic Area (the “EEA”), a Member State of the Convention establishing the European Free Trade Association and the Faroe Islands, or countries specified in regulations created by the relevant Ministry. One of the objectives behind passing the Merger Directive was to harmonize the rules on cross-border mergers between limited liability companies domiciled in the EEA area but governed by the countries’ respective national legislation. Therefore, the framework and structure are clear for the process of cross-border mergers between companies located in the EEA, which is a significant advantage.

Upon a cross-border merger, shareholders in the Icelandic company or companies participating in the merger who have voted against the merger at a shareholders’ meeting, are entitled to require the Icelandic company to redeem their shares, provided that they make their demand within a month after the shareholders’ meeting. (a) Merger with a “limited liability company” The provisions of the Companies Acts concerning mergers apply to the dissolution of a limited liability company without liquidation. These provisions apply either by entirely merging the company with another limited liability company by means of takeover of assets and liabilities, i.e. merger by absorption, or by merging two or more limited liability companies into a new limited liability company, i.e. merger by formation of a new company. The Merger Directive defines a “limited liability company" by inter alia referring to Article 1 of EU Directive No. 68/151/EEC (the “First Company Directive").

The discussion in this section 1.3 focuses on scenarios where the intention is to merge an Icelandic company with a pre-established foreign company (the “surviving company”) or where an Icelandic company and a foreign company are merged by the formation of a new foreign company. (b) Joint merger schedule Once the Boards of the merging companies have approved the merger, a joint merger schedule must be prepared (the “Merger Schedule"). The Merger Schedule shall include information and provisions concerning the cross-border merger. The Merger Schedule shall be published in the Icelandic Official Gazette a month prior to the date of the general meeting, during which the cross-border merger is or is not approved. (c) Explanatory statement by the Boards The Board of each merger company shall prepare an explanatory statement in which the Merger Schedule is explained and substantiated.

The statement must address the economic and legal reasoning on which the Merger Schedule is based, as well as the decision on payment for the shares, including any special difficulties related to that decision. It must furthermore contain information on the effects that the merger will have on shareholders, creditors and employees. If all shareholders of the company agree unanimously at a shareholders’ meeting,

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the decision can be made not to produce this explanatory statement. In this case, the Registry of Enterprises must be sent a copy of the minutes of the meeting, as well as an audited joint balance sheet and profit and loss account for the merger companies. (d) Audited joint balance sheet and profit and loss account The Boards shall procure that an audited joint balance sheet and profit and loss account are prepared which show the assets and liabilities of the merger companies in their entirety and the changes which the merger is considered to entail.

They shall also procure a draft opening balance sheet of the new/surviving company post-merger. The joint balance sheet and profit and loss account for the companies shall be based on a date of settlement which may not be more than six months prior to the date of signature of the Merger Schedule. Companies that fall under the scope of Article 87 of Act No. 2/2006 (essentially, companies that have had their shares or bonds admitted to trading on a regulated market in the EEA), and that have published interim accounts which have been made available to all shareholders, can decide not to produce an audited joint balance sheet and profit and loss account if all shareholders unanimously approve it at a shareholders’ meeting. In this case, the Registry of Enterprises must be sent a copy of the minutes of the meeting. (e) Expert’s report/Expert’s statement In each of the merger companies, an accountant or assessor (collectively referred to as an “expert”) must prepare a report on the Merger Schedule. The companies may rely on one or more joint experts. The report must contain a declaration specifying the extent to which the payment for the shares in the company that is to be taken over is fair and substantiated. It shall further describe, among other things, the methods used to determine the payment and assess whether the method was adequate. In case all shareholders in the merging companies approve, an expert report on the Merger Schedule is not required. However, an expert’s statement concerning the extent to which the merger may diminish the creditors’ possibilities for recourse in each company (the “Expert’s Statement”) is always required. (f) Notice to the Registry of Enterprises Within a month following the signature date of

the Merger Schedule, each merger company shall submit to the Registry of Enterprises a copy of the Merger Schedule certified by the relevant company’s Board. Simultaneously, the Expert’s Statement shall also be submitted to the Registry of Enterprises. The Registry of Enterprises shall then publish an announcement of the receipt of the merger documents in the Official Gazette in Iceland. In case the Expert’s Statement entails that the merger may diminish the creditors’ possibilities for recourse, the announcement shall contain information pertaining thereto and the creditors’ rights shall be brought to their attention. (g) Decisions concerning the merger The Board of the new/surviving company can make a decision on the merger, unless a shareholders’ meeting is needed for amendments to the Articles to take effect in respects other than those which pertain to the name of the takeover company. The board meeting approving the merger, or the decision of the shareholder (in the event that the takeover company has only one shareholder), may take place at the earliest a month following the publication of an announcement in the Official Gazette of the receipt of the Merger Schedule and the Expert’s Statement, but no later than four months following the publication. At that meeting, the Board must provide information on issues which are material, including material changes in assets and liabilities, from the date the Merger Schedule was signed and until that meeting is held. In case the merger is not approved on the basis of the Merger Schedule, or in case the board meeting is not held within the time-limit, the Merger Schedule is deemed to be dismissed. If a limited liability company is dissolved without being liquidated, so that it is completely merged with another limited liability company which owns all of the shares in the company which is taken over, the Board of the company which is absorbed can take the decision on the merger. The rules regarding merger by absorption are similar to the ones applicable to merger by formation of a new company. (h)Creditors with claims against the Target Should the Expert’s Statement stipulate that the creditors’ possibilities of recourse will be diminished by the merger, creditors holding claims which have been established prior to the publication of a notice of the Merger Schedule in the Official Gazette, and for which no special securi-

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ty has been placed, can state their claims in both companies within a month from the decision of a merger. Demands can be made for payment of stated claims which have fallen due and it may also be required, with certain exemptions, that satisfactory security be placed for stated claims which have not fallen due. Owners of securities that carry special rights shall not be provided with fewer rights towards the takeover company than they had in the company which is taken over.

However, this may not be the case if a meeting of the holders of such securities, should such a meeting be required by law, has approved the changes in rights, the holders have individually approved the changes, or the holders have the right to require the company which is taken over to redeem their securities. (i) Dissolution of the Target and the transfer of the Target’s rights and obligations to the new/ surviving company The Target will be considered fully dissolved, and all rights and obligations transferred to the takeover company, when i) the merger has been approved in every merger company; ii) if a new company is formed, a shareholders’ meeting has been held within two weeks to vote directors, accountants, or inspectors, if the vote was not performed immediately after the shareholders’ meeting approving the merger and iii) particular claims under the Companies Acts have been settled. When these conditions have been fulfilled, the shareholders in the takeover company, who receive their payments in shares, will become shareholders in the new company according to the Companies Acts. (j) Notice of the decision of merger The Board of each merger company shall give the Registry of Enterprises notice of the approved merger within two weeks following the full implementation of the merger by dissolution of the Target. The new/surviving company may give notice of the merger for and on behalf of both companies. (k) Certificate of completion Upon completion of all necessary pre-merger acts and formalities, the Registry of Enterprises will forthwith issue a certificate thereon to the Target. The Registry of Enterprises registers the implementation of the cross-border merger for the Target when the Registry of Enterprises has received a notification from the competent authority in the relevant EU Member State where

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the new/surviving company is incorporated, stating that the implementation of a cross-border merger concerning the surviving company has been registered. The legal procedure of a merger in accordance with the above, from the decision of each merger company to begin the merger process until the Registry of Enterprises registers the execution of the merger, should not take more than approximately 2 months. This time estimate does not include delays in documentation or delays exceeding the minimum legal time frame. (l) Employees’ participation Act No. 86/2009 on Employee Participation in Cross-Border Mergers of Limited Liability Companies implements the minimal rules of Article 16 of Directive 2005/56/EC on cross-border mergers of limited liability companies with regard to employees’ right of participation. With the exception of the aforementioned Article 16, the Directive was implemented by Act No. 54/2007, which amended the Companies Acts that did not include any provisions on employee participation. (m) Tax The general rule is that taxable gain is calculated when shareholders exchange their shares for shares in another company. Limited liability companies can however benefit from the full deduction which has been described before.

Icelandic law contains an exemption from that principle in cross border mergers, legalized in 2013. If a limited liability company is liquidated by completely merging it with another limited liability company domiciled in another EEA or EFTA Member State or the Faroe Islands, and the shareholders of the former company are only paid with shares in the latter company as consideration for their share in the liquidated company, then the change as such does not constitute taxable income for the shareholder giving up shares. In such mergers of limited companies, the receiving company assumes all legal tax obligations and rights of the liquidated company as of the balance sheet date according to the Merger Schedule. We note that, at the end of 2013, a change was made to the Tax Act. According to Article 51(2) of the Tax Act, a crossborder merger as defined above is not subject to taxation for the Investor if the target company is totally acquired by the takeover company, including all assets, liabilities and stockholder’s equity. Further, the payment for the shares in the

target company can only be settled with shares in the takeover company. Accordingly, no cash payment would be permitted for the shares in the target company.

For the company being liquidated, the assets, rights, claims and obligations acquired and transferred shall be deemed to be disposed of for tax purposes. Taxable income shall be calculated based on the difference between the market value at the time of the merger and the company´s acquisition price (tax basis) taking account of prior depreciation. Such unrealised capital gains deemed to have been realised for the Icelandic entity will be taxed when merging cross-border with a limited liability company in another Member state of the European Economic Area, EFTA state or the Faroe Islands.

However, a tax deferral for up to five years will be granted upon request.

1.4 Cross-border merger or redomiciliation pursuant to the European Company Act

As noted above, Iceland is a member of the EEA, and therefore Council Regulation (EC) No. 2157/2001 on the Statute for a European Company dated 8 October 2001 (the “SE Regulation”) applies in Iceland through Act No. 26/2004 on European Companies (Societas Europaea or SE’s) (the “European Companies Act”). Although European Companies and the solutions provided for in the SE Regulation are only available to a limited number of companies and have not proven to be a popular option in practice, we would like to point out that this is an alternative option to a cross-border merger on the basis of the Companies Acts which we would be happy to provide further information on if requested to do so. A European Company may be registered in any of the Member States of the EEA and may be formed in any one of the five following ways: (i) A European Company formed by Merger (through acquisition); (ii) A European Company formed by Merger (through formation of a new company); (iii) Creation of a Holding European Company; (iv) Creation of a Subsidiary European Company; (v) Transformation of an existing entity into a European Company.

One of the major advantages to the setting up of a European Company is that the registered

office of a European Company may be transferred to another Member State, and such transfer shall not result in the winding-up of the European Company or in the creation of a new legal person. The ability to move a European Company’s registered office around EEA jurisdictions may seem like an attractive option in some instances. However, a move of registered office is not straightforward and there are significant administrative and other substantive hurdles to be overcome before the relocation of registered office can be achieved.

2 Documentation

Traditionally, Icelandic transaction documentation is relatively short and simple. However, during the years prior to the collapse of the Icelandic banking system in 2008, which saw the participation of many Icelandic investors in substantial M&A transactions abroad and an increasing investment of foreign investors in Icelandic companies, Icelandic parties have to some extent become accustomed to a higher level of sophistication in transaction documentation. In various circumstances, the English-style standard of documentation has become the norm. As an example, Icelandic parties are now quite used to working with forms published by Practical Law (PLC) and similar documentation.

Usually, the parties will initially sign a letter of intent, heads of terms, a term sheet or some other form of initial documentation, which is generally subject to significant conditions, in order to be sure that there is actual interest in completing the transaction and in setting out the primary terms and conditions. The asset purchase agreement or share purchase agreement is generally subject to Icelandic law and quite often based on a simplified and localized PLC template. Generally, closing does not occur simultaneously with signing and the agreement is usually signed well in advance of closing, subject to certain closing conditions such as financing, regulatory approvals, final findings of due diligence, etc. Act No. 50/2000 on the Sale of Goods (the “Sale of Goods Act”) applies to share purchases and asset purchases (excluding real estates in relation to which a special Act applies) to the extent that the parties have not negotiated otherwise. Therefore, the parties would be well advised to consider carefully stipulating the rights and remedies that they would want to have applied to their contract in order to avoid Icelandic courts resolving disputes based on the Sale of Goods Act, and the court’s interpretation

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of certain subjective standards contained therein, which would not always lead to a conclusion to which either party would have been willing to assent in the beginning. It is furthermore noted that parties are free to select the laws applicable to a transaction as well as the dispute resolution mechanism applicable to the transaction.

3 Due diligence

Depending on the size of the Target, the complexity of its operations and the scope of the exercise, due diligence exercises can be expected to take from 3-8 weeks from the date on which documents are made available until the first draft of the due diligence report (the “Report”) is delivered. The data rooms are quite often virtual data rooms where solutions from Merrill DataSite or similar VDR ’services are used, but physical data rooms are also not uncommon.

There are no statutory or other restrictions applicable to the access of data rooms. The Target will generally require potential investors and their advisors to sign some form of a nondisclosure undertaking. Understandably, the findings in due diligence exercises vary greatly but, among Icelandic companies, especially companies which are not listed on a regulated market, comments made in respect of a lack of good corporate governance seem to be relatively common. When BBA conducts due diligence on Targets, our Report highlights those issues identified during the due diligence which we consider to be of particular importance, and matters which we consider of the nature that they should be specifically reported. When we evaluate the importance of issues presented in our Report, we base our findings on our own knowledge and judgment as lawyers, in some cases after having consulted with the directors of the relevant Target. The highlighted issues can be found in tables at the end of each chapter of our Report and are divided into categories following our legal analysis of their severity. The issues highlighted in our Reports are divided into three categories in accordance with their severity based on the following:

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Gravity

Description of severity High – Under the first degree of severity we place issues we believe are important for the Target to react to promptly. Such issues should in most cases be dealt with on a Board level as soon as possible and the relevant chief executives informed of the issues.

Medium – Under the second degree of severity we place issues that we urge the Company to react to within the next 3 to 6 months. Such issues are often dealt with on a Board level and the relevant chief executives informed of the issues.

Low – Under the third degree of severity we place issues we recommend that the Target amend in order to comply with standards of good corporate governance and to ensure that the internal structure of the Target is in appropriate order.

In some instances, the nature of a highlighted issue is such that the Target can by no means make amendments or remedy the situation. In such instances, we still consider it necessary to raise those issues, despite the Target’s lack of means to react.

4 Acquisition of listed companies

The Icelandic OMX Nordic Exchange (the “OMX”), which is part of the NASDAQ OMX Group Inc., is the only stock exchange operating a regulated market in Iceland. Following the financial crisis in 2008, many companies were removed from the stock exchange. However, in recent years a number of companies have had their shares admitted to trading on the OMX and a number of other companies have expressed their intentions to do the same. The market has therefore recovered substantially. As noted before, Iceland is a member of the EEA and, as a result, the applicable legislation on takeovers of listed companies should in many respects be similar to the rules and procedures that apply in the Member States of the European Union. There are two types of takeover bids: voluntary takeover bids and mandatory takeover bids. These rules and procedures are set out in Chapter X (Takeover) of Act No. 108/2007 on Securities Trading (the “Securities Act”). The main aspects of these rules and procedures are described in the following sections.

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4.1 Mandatory takeover bids

If a party has directly or indirectly gained “control” of a company which has obtained admission to trading for a class of securities on a regulated market (the “Target Company”), that party must make a takeover bid to other shareholders in the Target Company, i.e. a bid to purchase their shares in the Target Company. This bid must be made no later than four weeks after the party knew or could be expected to have known about a mandatory bid obligation, or after a conclusion on the obligation to make a takeover bid had been reached. In this context, “control” means that the party concerned and the parties “acting in concert” with that party i) have acquired a total of at least 30% of the voting rights in the Target Company, ii) have the right, based on an agreement with other shareholders, to control at least 30% of the votes in the Target Company or iii) have acquired the right to appoint or dismiss a majority of the Board. Parties are deemed to be “acting in concert” if they have close connections by agreement (whether this agreement is formal or informal, written, oral or otherwise) to acquire control or prevent a takeover, or by being otherwise connected through marital status or control by ownership of shareholding, as further described in the Securities Act. The mandatory bid requirement is imposed on the person acting in concert who, by increasing his holding, causes the threshold specified above to be reached. If the person acting in concert who increases his shares is not the leading party in the partnership, the Financial Supervisory Authority (the “FME”) may, in exceptional cases, decide that the mandatory bid obligation should be transferred to the leading party. The FME may permit others to launch a bid, either alone or jointly with the person required to make a mandatory bid under this paragraph, provided that an application to such effect is submitted no later than two weeks after the person required to make the mandatory bid knew, or should have known, about the obligation, or when a ruling on the mandatory bid obligation was available.

In such an event, the persons shall be liable in solidum for the bid and its performance.

The FME may grant exemptions from mandatory bids if special circumstances so warrant. The FME may set conditions for such exemptions, e.g. concerning the time limit which the party in question shall have to dispose of holdings in excess of permitted thresholds, and the treatment of voting rights during that period. An application for such an exemption must be submitted no later than two weeks after the person knew 20

or should have known about the obligation to make the mandatory bid, and no later than two weeks before a ruling on the mandatory bid became available.

4.2 Voluntary takeover bids

Chapter X (Takeovers) of the Securities Act also applies to voluntary takeover bids. Voluntary takeover bids are bids made to all shareholders of the Target Company in question, without any mandatory takeover bid being required under the Securities Act. In the case of a voluntary takeover bid, a bidder is not required to observe the provisions of the Securities Act which apply to mandatory takeover bids concerning the offer price and the form of consideration which must be offered (described in section 4.5 below). Any party can make a voluntary takeover bid at any time, whether or not such party is a shareholder in the Target Company. The party submitting such a voluntary takeover bid is free to limit and condition the bid to a certain part of the shareholding or voting rights, provided that the bid does not trigger a mandatory takeover bid obligation. Such a limited bid must provide all shareholders or holders of voting rights with the option to sell their shares or voting rights in direct proportion to the amount of their shareholdings or voting rights. The voluntary takeover bid may also be conditioned on certain objectives being met. Voluntary takeover bids are therefore generally subject to the same regulatory environment as mandatory takeover bids, save as regards any delays for the submission of the takeover bid, the conditions for the validity of the bid, the revocation of the bid, and such other issues as indicated in the Securities Act. A voluntary takeover bid can be directed at only a certain part of the shareholding or voting rights of the Target Company, on the condition that the bidder does not, pursuant to such a limited takeover bid, acquire “control” of the Target Company, in which case the bidder will be required to make a mandatory takeover bid for the acquisition of all the remaining shares.

Should the voluntary takeover bid contain, from the start, an offer for all remaining shares in the Target Company, the bidder shall not be required to make a mandatory takeover bid, even if he acquires “control” through the voluntary takeover bid, provided that he has observed the provisions of the Securities Act which apply to mandatory takeover bids concerning the offer price and the form of consideration which must be offered (described in section 4.5 below).

4.3 Announcement of a takeover bid

A bidder must notify the regulated market in question, without any delay, of a decision to make a takeover bid. This is to ensure market transparency and integrity for the securities of the Target Company, of the bidder or of any other company affected by the bid, in particular in order to prevent the publication or dissemination of false or misleading information. The bid validity period must be a minimum of four weeks and a maximum of ten weeks. The takeover bid must furthermore be presented to the employees of the relevant companies. The FME may require a party contemplating a takeover bid to provide, within a specified time limit, a public account of his intentions, if the FME believes that rumors of an impending takeover bid are having an unnatural impact on the price formation of the Target Company’s securities (“put-up or shut-up”).

If it is publicly disclosed that a party intends to make a takeover bid, the party must issue a final decision on whether he intends to make a takeover bid within six weeks. If such a decision is not made within this time limit, this constitutes a public declaration that the party does not intend to make a takeover bid. If a party declares publicly that he does not intend to make a takeover bid, that party and any party acting in concert with him are prohibited from making such a bid for six months from the time that the declaration was issued or take any action which could make him, or a party acting in concert with him, subject to the obligation to make a mandatory bid.

The FME may grant exemptions from the time limits provided for above if special circumstances so warrant.

4.4 Delays for submitting takeover bids and their term of validity

A mandatory takeover bid must be made within four weeks from the date on which a shareholder or a group of shareholders achieve “control” over the Target Company. Voluntary takeover bids can, however, be submitted at any time, by any party (cf. however the limitations discussed above). Takeover bids, whether voluntary or mandatory, must be valid for a minimum period of four weeks and can be valid up to a maximum period of ten weeks, unless another bid for all the shares of the Target Company (a “Competing Bid”) is made public during the term of the takeover bid, in which case the date of termination of the takeover bid, provided it is not revoked, is extended to be the same date of termination

as is applicable for the Competing Bid. The FME may also extend the period of validity of a takeover bid if there are valid reasons for such action. The bidder is permitted to amend his takeover bid during its term of validity, provided that the amendment results in the takeover bid being on more favourable terms for the shareholders than the initial bid. If changes to the takeover bid are made when less than 2 weeks are left of its period of validity, then the period of validity will be extended for a period of at least two weeks after the amended takeover bid has been made public. The phrase “more favourable terms” provides for the possibility that the takeover bid can be amended on terms other than price and still be considered to be on “more favourable terms”.

4.5 Purchase price and conditions relating to takeover bids

A bidder must make all shareholders of the same class of shares an offer on the same terms.

The purchase price of a mandatory takeover bid must be equivalent to the highest purchase price paid by the bidder (or parties acting in concert with him) for the shares of the Target Company during the six months prior to the takeover bid being made. The purchase price offered must, however, in no case be lower than the latest transaction price for shares in the Target Company in question the day before the bidding obligation arose or notification was given of the proposed takeover bid. Should the bidder or connected parties pay a higher price than the price indicated above during the period of validity of the takeover bid or during the three months following the expiry of the takeover bid, the shareholders who have accepted the original takeover bid must receive a supplemental payment corresponding to the difference. In a takeover bid, the bidder may offer other shareholders in the undertaking in question payment in cash, shares conferring voting rights, or both.

If the bidder does not offer liquid shares which are admitted to trading on a regulated market as payment, cash must also be offered as an option.

The same applies if a bidder, or party acting in concert with the bidder, has paid for at least 5% of the undertaking’s shares in cash during the six months immediately preceding the triggering of a mandatory bid obligation and during the offer period. The FME may grant exemptions in this respect if exceptional circumstances so warrant.

If a bidder intends to pay for shares in cash, a

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credit institution licensed to operate in the EEA must guarantee payment. The FME may however approve a guarantee from a credit institution outside the EEA. If payment is made by other means, the bidder must take suitable measures to ensure that he can meet his obligations under the bid. The settlement of shares acquired must be made no later than five business days after the expiration of the period of validity of the bid. The FME may grant exemptions in this respect if exceptional circumstances so warrant.

The FME may adjust a bid price either upwards or downwards under exceptional circumstances provided that the principle of equal treatment of shareholders is observed. If a bidder or offeree requests that the FME review a bid price, the bidder or issuer shall bear the cost resulting from the valuation. In the event of cost incurred by the FME, that cost shall be paid according to a tariff approved by the FME’s board and published in “Stjórnartíðindi” (the Official Gazette).

If an external valuator carries out the valuation, the bidder or issuer shall pay for the valuation as invoiced by the valuator.

As regards the currency of the purchase price, the Securities Act does not seem to prevent the takeover bid from being submitted in currencies other than the Icelandic Krona (“ISK”), irrespective of whether the bid is a mandatory or a voluntary takeover bid. As noted above, the price offered in a mandatory takeover bid must be equivalent to the highest price paid by the bidder. This entails that the price offered in voluntary takeover bids does not have to be the highest price paid by the bidder. Accordingly, when submitting a voluntary bid, a bidder may offer a lower price.

4.6 The Offer Document

A takeover bid must be followed by the publication of a document containing details of all aspects of the takeover bid, financial and otherwise (the “Offer Document”). The Offer Document must be published in one or more daily newspapers in Iceland no later than four days prior to the date the takeover bid takes effect.

The content required in the offer document is detailed in the Securities Act. In summary, the Offer Document should contain information on the Target Company, the bidder, the terms and conditions of the takeover bid, acceptance procedure for shareholders, financial information on the Target Company and forward-looking statements for the Target Company. The offer document must be approved by the FME prior to it

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being made public. If substantial changes occur to the information contained in an Offer Document after it has been made public, or if the Offer Document does not meet the requirements stipulated in the Securities Act, the FME may require that further information be made public within seven days. Generally, the Offer Document has to be in Icelandic. However, the FME may grant permission for the Offer Document to be in English if special circumstances warrant.

An Offer Document which has been approved in one EEA state and meets the conditions set out in the Securities Act will be accepted as fully valid in Iceland. However, the FME may request that further information be added to the Offer Document in the case of matters which apply specifically to Iceland. These matters have to do with formalities which need to be observed regarding the acceptance of an offer and settlement for acquired shares, as well as tax matters relating to the offer. As indicated above, voluntary takeover bids may be conditioned upon the bidder reaching certain objectives specifically indicated in the takeover bid, such as the bidder obtaining certain ownership or voting power percentage (the bidder is permitted to require that he obtains at least more than 90% of the voting power of the Target Company for the takeover bid to be valid). In relation to voluntary takeover bids, we note that the Offering Document must contain information on “Any other conditions to which the bid may be subject, including under what circumstances it may be revoked.”

We note that in relation to voluntary takeover bids, the authorization for the relevant bidder to condition such a bid should not be interpreted too restrictively. The conditions for the bid must be clearly disclosed in the Offer Document and they generally have to be objective so that the determination of their fulfilment is not left solely to the bidder’s discretion. The Offering Document is subject to the approval of the FME and it is likely that any abnormal and unreasonable conditions would not be approved. The FME has approved Offering Documents in which some subjective conditions are stipulated for a takeover bid. A “material adverse effect” condition has previously been approved, but this is always subject to evaluation by the FME. The following is an example of such a clause which the FME has approved: “there having been no adverse change or deterioration in the business, assets, actual or contingent liabilities, financial or trading positions or prospects of any member of the [Target] group which is in any case material

in the context of the [Target] group taken as a whole”. We further note that any revocation is subject to approval by the FME but that, if the FME has already approved a condition of a bid, it would seem unlikely that it would not approve a revocation based on that condition not being satisfied.

4.7 Competing Bids

Should another party place a Competing Bid, the period of validity of the initial takeover bid, provided it is not amended or revoked, will be extended to the date of termination of the Competing Bid. If the initial takeover bid was a conditional voluntary bid, shareholders who have accepted the initial takeover bid may withdraw their acceptance at any time during the period of validity of the initial takeover bid. This applies if the bidder has not publicly announced, before the announcement of the Competing Bid, that he has waived all conditions set forth in the takeover bid or that all such conditions have been fulfilled. A voluntary takeover bid may be revoked if the Competing Bid is comparable to, or more favourable than, the takeover bid.

4.8 Revocation of takeover bids

A mandatory takeover bid cannot be revoked except under Force Majeure. A voluntary takeover bid can be revoked if: a) a Competing Bid is made on comparable or more favourable terms; b) a condition to which the takeover bid is subject, and which is stated in the offer document, is not satisfied; c) the Target Company increases its share capital; or d) other special circumstances so warrant.

The FME must approve the revocation of a bid and the revocation of the bid must be made public.

4.9 Effects of a failed takeover bid

The Securities Act does not limit the ability of the bidder to make a new takeover bid if his original takeover bid fails and does not set any time restrictions in that respect.

4.10 Obligations of the Board of the Target Company

The Board must consider the interests of the Target Company itself in all its actions and must not deny the Target Company’s shareholders an op-

portunity to take a decision on the bid. From the time a decision on a bid for shares in the Target Company is made public, or the Board becomes aware that a bid is imminent, and until the result of the bid is made public, the Board must not take any action which may influence the bid except with prior authorization of a shareholders’ meeting. This applies, inter alia, to decisions on: a) Issuing new share capital or financial instruments of the Target Company or its controlled undertakings; b) Acquisition or sale of own securities or securities of controlled undertakings; c) Merger of the Target Company or its subsidiaries with other undertakings; d) Acquisition or sale of assets or anything else which could have a significant impact on the activities of the Target Company or its controlled undertakings; e) Agreements not falling under the undertaking’s normal course of business; f) Significant changes in the terms of employment of management; g) Other decisions which could have equivalent implications for the activities of the Target Company or its subsidiaries.

The Board may, however, seek alternative bids without the approval of a shareholders’ meeting. A shareholders’ meeting must also confirm or approve any decision taken before the beginning of the period specified above, if the decision has not yet been partly or fully implemented and does not fall under the normal course of the Target Company’s business. The Board must prepare and make public a report setting out its reasoned opinion of the bid and its terms. Individual members of the Board must also disclose whether they, or persons financially connected to them, intend to accept the bid. The opinion must include the views of the Board on the bidder’s strategic plans and what implications the Board believes the bid may have on the Target Company’s interests, the employment of its management and personnel and the locations of the Target Company’s places of business. If the Board receives an opinion from employees’ representatives prior to the publication of the report on the effects of the bid on the employment of company personnel, that opinion shall be appended to the Board’s report.

The same obligation is incumbent on the Board of an issuer having its registered office in Iceland which has had a class of securities admitted to

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trading on a securities market in a state within the EEA, but not in Iceland. If opinions vary among Board members concerning the bid, this must be specified in the report. If members of the Board are parties to the bid, are acting in concert with the bidder, or have significant interests at stake in other respects concerning the outcome of the bid, this must be mentioned in the Board’s report, and these same Board members cannot participate in the making of’ said report. The term “significant” is a subjective term and is therefore always subject to interpretation. Accordingly, it would have to be interpreted in light of the relevant bid and all relevant circumstances e.g. if an individual Board member is a party to the takeover bid.

If Board members, or parties acting in concert with them, are parties to a bid or ineligible in other respects to discuss the bid, and as a result the Board does not constitute a quorum, the Board shall have an independent financial undertaking (an “Investment Bank”) assess the bid and its terms. It is very important for the Board to note that other circumstances can justify that an Investment Bank is retained to this effect, even if the Board is validly constituted.

In takeovers, complex situations can sometimes arise which put the Board in a situation where it is uncomfortable and sometimes unethical for the Board members to submit their opinion on the takeover bid. In such cases, the prudent way to proceed is to retain the services of an Investment Bank. When the retention of an Investment Bank is required to evaluate the takeover bid, the Investment Bank assumes all the duties and obligations of the Board in evaluating the takeover bid and will, in fact, write the opinion of the Board. The duties imposed upon the Investment Bank are to submit an opinion on: “the views ... on the offeror’s strategic plans and the effects of implementation of the bid on the company’s interests, on the jobs of its management and personnel, and the locations of the company’s places of business...“.

In cases where the Board chooses to retain the services of an Investment Bank, without being required to do so, the extent to which the Investment Bank assumes the role of the Board in relation to the evaluation of the takeover bid will always be the subject of negotiation between the Board and the Investment Bank. The Investment Bank could assume only the role of estimating the monetary value of the Target Company and leave the Board to submit its opinion on other issues. It might however be argued that when

the Board has decided that it is in a position that makes it prudent to seek the assistance of an Investment Bank, the Board should refrain from giving its opinion on individual aspects of the takeover bid and retain the Investment Bank to do so. As for the opinion of the Board pertaining to the bidder’s specific strategic plans and the effects of implementation of the bid on the Target Company’s interests, no further guidelines are to be found in the Securities Act. On a general note, such an opinion of the Board should take into account different aspects of the relevant bid and should evaluate the bid both generally and more specifically, e.g. in relation to its effect on its employees (both key and general). The Board (or the Investment Bank) must examine whether any acquisitions or sales are being prepared by the Target Company and which of these might be executed during the term of the takeover bid. In many cases, such sales or acquisitions will have to be submitted before a meeting of the shareholders. In cases where this is not necessary, the Board or the Investment Bank will have to assess the possibilities of such actions being executed during the validity period of the takeover bid, and include such assessment in the price valuation of the Target Company. As the Board or the Investment Bank must submit its opinion on all aspects of the takeover bid, including the Offer Document, the financing of the takeover bid must also be taken into consideration. If the intention of the bidder is to inject the acquisition facility into the Target Company post-takeover, the Board or the Investment Bank should submit its opinion on the terms thereof, to the extent that the terms thereof are deemed to affect in some way the financing or the operations of the Target Company. The Board’s report must be made public at least one week prior to the expiry of the period of validity of the bid. If the bidder amends the bid the Board must, within seven days of the date when the amended bid is made public, prepare and make public a supplement to its report setting out the Board’s opinion on the amendments in question. The main duties of the Board are to safeguard the interests of the shareholders. Neither the Board nor individual Board members can let their own interests guide their actions or inactions but shall at all times be guided by the interests of the shareholders.

Obviously, the Board must also take into consideration the interests of the Target Company.

However, should these interests conflict with the interests of the shareholders, the interests of the Target Company should be secondary to those

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of the shareholders. When the bidder is also a shareholder, the bidder’s interests as such shall also be taken into consideration, to the extent that his interests as a shareholder do not conflict with his interests as bidder, in which case the Board shall let the interests of the remaining shareholders take priority. The Board also has to take into consideration the interests of the employees of the Target Company, and shall to this extent introduce the Offer Document to the employees and appendix the opinion of the representatives of the employees to the Board’s opinion of the takeover bid, if the employee opinion has been given to the Board in a timely manner.

The Icelandic rules on the Board’s duties in these instances are the result of the implementation of Commission Directive No. 2004/25/ EC of 21 April 2004 on takeover bids (the “Directive”) into Icelandic legislation on takeovers.

Clause 9 of the Directive prevents the Board from taking actions “which may result in the frustration of the bid” during the period described in Clause 9.2 of the Directive (period from the time the Board of the Target Company receives information regarding a potential takeover bid and until the results of the bid are made public or the bid lapses – the “Period”). The Directive further states in its preamble the following: “It is necessary to protect the interests of holders of the securities of companies governed by the law of a Member State when those companies are the subject of Takeover Bids or of changes of control and at least some of their securities are admitted to trading on a regulated market in a Member State”. The Icelandic rules can be construed as being more restrictive than the text of the Directive indicates, as regards the permitted actions of the Board during the Period. According to the Icelandic rules, the Board cannot undertake any actions which “may have an impact on the bid”, without the prior authorization of the relevant Target Company’s shareholders’ meeting. In order to explain which actions might be construed as having “an impact on the bid”, the relevant provisions of the Securities Act indicate examples of decisions that might have an impact on the bid, among which are: “acquisition or disposal of assets or anything else which could have a substantial impact on the activities of the company or its subsidiaries“.

When examining these provisions, the question arises whether acquisitions or disposals of assets that have a substantial impact on the activities of the Target Company are always construed as having an “impact on the bid”. When these provisions are read in the context of i) the 26

rationale behind the rule as stipulated in the provisions, ii) the text of the Directive, as well as iii) the whole text of the provisions, it seems that an acquisition or disposal of assets will always, irrespective of whether such acquisition or disposal has a substantial impact on the activities of the Target Company, have to have a separate “impact on the bid” in order to fall under the obligation of the Board to submit such decisions to the discretion of the shareholders. The question then arises whether the requirement that an action have an “impact on the bid” is supposed to prevent the Board from taking actions that were already discussed and contemplated before the Period, and which are clearly actions that would, if taken, benefit the shareholders of the Target Company in question. This relates to the question of whether the Board has to let the interests of the bidder override the interests of the shareholders of the Target Company. BBA has issued a Legal Opinion in relation to a certain transaction concerning these rules stating inter alia the following: a) if the actions contemplated by the Board cannot be regarded as actions specifically taken in order to prevent the bid from being accepted by the shareholders; and b) if such actions, when taken, are generally regarded as being in the interest of all shareholders of the Target Company; and c) if such actions have been contemplated by the Board before the Period; and d) if such actions of the Board are not extraordinary when due regard is given to the general modus operandi of the Board of the company in question, then e) such actions will generally not be construed as having an “impact on the bid”.

The duties of neutrality of the Board cease to exist once the results of the takeover bid have been made public, i.e. when it has been announced how many shareholders have tendered their shares. When a takeover bid has been submitted, the Board should try to ensure that all communications from the Board are made towards all shareholders and not only some of them, and that announcements in relation to the takeover bid sent to the bidder (irrespective of whether the bidder is a shareholder or not) should be sent to all shareholders.

For further information on the general duties of the Board, we refer to section 18.6 of this Document.

4.11 Opportunities for the bidder to conduct due diligence

The general rule is that a bidder may secretly conduct a due diligence. In fact, it could be argued that work in relation to due diligence would have to be done in secret so that this would not affect the price of shares and day-to-day business of the Target Company. In relation to the conduct of due diligence, it would be prudent for the Board of the Target Company to have the relevant bidder enter into a confidentiality agreement. In relation to such an agreement, such restrictions as standstill provisions pertaining to dealing of the Target Company’s shares may be entered into. The Board of the Target Company is under no duty to provide the same information to a competing bidder. However, please note that the Board should always safeguard the interests of the Target Company and the decision of the Board in relation thereto will not be based on an objective standard as this is not possible. The Board would have to take several factors into consideration prior to making its decision in relation to the provision of information to a competing bidder. These include financial capability of the party seeking to conduct a due diligence review, desirability of having the competing bidder conducting such review, etc. However, on a general note, non-provision of the same information to a competing bidder, who has acted in good faith, could be looked at as giving an advantage to one bidder vis-a-vis another, to the disadvantage of the Target Company subject to the takeover bid. We note that, in light of the duties of the management and/ or Board of a Target Company towards the Target Company, the management and/or Board should not produce information to be used by a third party without the Board of the Target Company having agreed to such distribution of information beforehand.

4.12 Undertakings from existing shareholders

Soft undertakings are permissible as these would presumably only apply if no other offer is made.

As regards hard undertakings, if the relevant shareholder cannot withdraw from the undertaking, this could trigger a mandatory takeover bid as such undertaking indeed could lead to thresholds being met. Such undertakings would not need to be approved in advance by the FME and there are no restrictions on the number of shareholders from whom such undertakings may be obtained. The Offer Document should contain the same conditions as the undertakings.

4.13 Break fee arrangements

Icelandic law does not specifically address break fees in relation to takeover bids. The general rule is that a Target Company may enter into a break fee arrangement with the bidder, provided that this would be in the best interest of the Target Company. We note however that, as break fees are not addressed specifically under Icelandic law, there is no maximum amount of such fees. Such fees would not be considered financial assistance.

4.14 Submission of the takeover bid and the Offer Document

The bidder must publicly announce that he intends to submit a takeover bid as soon as a decision to this regard has been reached and the FME can demand that a person either puts-up or shuts-up within a specified time limit, as mentioned before.

The bidder must, in the case of a mandatory takeover bid, and can, in the case of a voluntary takeover bid, submit a takeover bid to all other shareholders of the Target Company as soon as practicable after the Offer Document has been accepted by the FME. The Securities Act does not seem to impose upon any party intending to make a voluntary takeover bid the obligation to do so within a certain period after the decision to make the voluntary takeover bid has been published, whereas a mandatory takeover bid has to be made within four weeks from the date on which the mandatory takeover duty arose.

In this respect, the Securities Act is not clear.

However, according to the Offer Documents we have reviewed in relation to previous takeovers, it seems that in practice voluntary takeover bids are usually submitted within four weeks from the date the decision was made. A notice of an Offer Document has to be published in one or more daily newspapers issued in Iceland no later than four days prior to the effective date of the bid, provided that the approval of the FME has been obtained. The notice shall state where the Offer Document, which can be made electronically accessible, can be obtained. Concurrently, the offer document must be sent to the registered shareholders in the Target Company at the Bidder’s expense. The offer document shall also be presented to the employees of the Target Company. In other respects, there are no limits contained in the Securities Act on the usage of electronic means of communication and information distribution in relation to the Offer Document.

As previously mentioned, if the takeover bid provides for payment in cash, the payment must 27

be guaranteed by a credit institution licensed to operate in the EEA (the “Financing Guarantee”). Should the takeover bid provide for payment in shares which have not been admitted to trading on a regulated market, cash must be offered as an option. The Securities Act does not address whether or not the Financing Guarantee shall be unconditional. As noted above, the authorization for the relevant bidder to condition a takeover bid should not be interpreted too restrictively. It should be noted as a general remark that the more conditions put forth in a bid, the more possibilities the bidder has to revoke his takeover bid and, accordingly, the odds are that a shareholder is more reluctant to accept such a takeover bid. This point should rather be regarded from another perspective, i.e. that the financing of the takeover bid could be subject to the same conditions as set forth in the relevant Offer Document, which the Bidder could be prohibited from changing without the prior written acceptance of the financing party and a breach of such obligation would make the funding or the Financing Guarantee non-binding for the financing party. As regards the means by which financial institutions can obtain security in relation to financing of a voluntary takeover bid, relevant facts and circumstances would always have to be taken into consideration and, accordingly, each such bid would be dealt with by a financial institution on a case-by-case basis.

4.15 Duties of the bidder following the submission of the takeover bid

The bidder can always improve his takeover bid, however small such an improvement might be.

If amendments are made to a takeover bid when less than two weeks remain of its offer period, the period will be extended to remain valid for at least two weeks after the amended bid is made public.

When the bidder is a shareholder in the Target Company, the bidder must refrain from participating in any acts of the Target Company which are related to the evaluation of the takeover bid or which could substantially affect the decisions of other shareholders as to whether or not the takeover bid is accepted. If the bidder has representation within the Board, the Board members who are closely connected to the bidder should refrain from participating in any actions of the Board relating to the evaluation of the takeover bid.

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4.16 Rights of the bidder after the expiry of the takeover bid

In order for the bidder to acquire effective control of the Target Company, the bidder must acquire more than 2/3 of the shareholding and the voting rights of the Target Company. If this is achieved, the bidder enjoys the ability to amend the articles of association of the Target Company in most respects without the intervention of other shareholders. The bidder will therefore, in many cases, make his voluntary takeover bid subject to him obtaining more than 2/3 of the shareholding and of the voting powers of the Target Company. If the bidder does not acquire the minimum shareholding indicated in a voluntary takeover bid, to which there is no minimum acceptance condition, the bidder can enforce the purchase of shares against shareholders that have tendered their shares, if the bidder declares that he has waived the condition of minimum shareholding indicated in the takeover bid. Should the bidder improve the takeover bid, he can enforce the purchase of shares from a shareholder who agreed to the initial takeover bid. Such a shareholder is however entitled to choose between the initial and the improved takeover bid. In relation to an offer becoming unconditional as regards the acceptance level, although a takeover bid may be conditioned upon a certain percentage of shares being reached, the takeover bid is binding during the entire bid validity period. Accordingly, shareholders are able to accept the takeover bid during the entire validity period of the takeover bid, notwithstanding the conditioned percentage being reached or not.

4.17 Duty to disclose the results of the takeover bid and changes in significant proportions of voting rights

The bidder must publish information on the results of a bid in a notification to the regulated market in question within three business days of the expiry of the bid validity period. From the commencement of the bid validity period, and up to the point at which information on bid results is made public, the rules on i) notification requirements, ii) the duty of insiders to investigate and to give notification and iii) the notification of management’s transactions do not apply, provided that the transaction in question relates to the acceptance of a takeover bid. The exception does ’not apply in the case of trading with a person other than the person submitting the takeover bid. However, once information on the

results of a bid has been published, persons required to give notification shall publish notices of thresholds prior to the closing of the following business day after the results of a bid became public, and primary insiders must send to the compliance officer a notice of their transaction within a single business day, after which the issuer shall notify the FME of the transactions on the same day. In the case of a voluntary takeover bid, the notification must state whether the conditions put forward in the bid have been met and, if not, whether the bidder intends nonetheless to pursue his bid or to revoke it. Conditions may only be waived within three business days from the end of the bid validity period.

4.18 Squeeze-out

Should the bidder manage to acquire more than 90% of the shareholding or the voting rights of the Target Company, the bidder and the Board are jointly entitled to require all other shareholders to sell their shares to the bidder and/ or parties acting in concert with the bidder (the “Squeeze-out”) by sending the remaining shareholders a notice in the same manner as would apply to a call for an Annual General Meeting in which they are encouraged to sell within four weeks of such a notice. We emphasize that it is not enough to have acquired either more than 90% of the shareholding or more than 90% of the voting rights to exercise the Squeeze-out right, i.e. it is a dual test.

The terms of the Squeeze-out and the basis of the evaluation of the redemption price shall be included in the notice. Should the bidder utilize the Squeeze-out within three months from the expiry of the takeover bid, the purchase price of the takeover bid shall generally be considered to be a fair redemption price, unless the bidder or parties acting in concert with the bidder have paid a higher price or offered more favourable terms for shares of the Target Company during the offer period (in which case the bidder should amend the takeover bid correspondingly) or during the three months following the conclusion of the offer period. Shareholders who accepted the original offer shall be paid a supplemental payment corresponding to the difference. A minority shareholder has an independent right to have his shares redeemed if the bidder or parties acting in concert with the bidder acquire more than 90% of the shareholding and more than 90% of the voting rights. If a shareholder requires redemption within three months from the end of the offer period, the price offered

in the bid is considered a fair price, unless the bidder or parties acting in concert with the bidder have, during the bid validity period or during the three months following the end of the bid validity period, paid a higher price than the price offered in the takeover bid, in which case the higher price will apply. If the shares are not transferred in accordance with the above, their value shall be deposited into a custody account in the name of the relevant party and, from that time, the bidder shall be considered the rightful owner of the shares and the securities of the previous owner annulled. If a Squeeze-out takes place following the expiry of the three-month deadline, and the bidder and the remaining shareholders do not agree on the redemption price, the price will have to be evaluated by two court-appointed independent appraisers. The decision of the evaluators can be appealed to the general courts. The possibility of a squeezeout in relation to a company which has been removed from trading on a regulated market can take place on the basis of the Companies Acts, which is materially the same as described above and is further described in section 18.5.4 of this Document.

4.19 Takeover bid timetable

The following table shows a possible timeline from the date when the takeover limit is exceeded or a firm decision to make a takeover bid is made, assumed to be day 1, and with the assumption that the bid validity period starts at day 28 and lasts for 28 days. Furthermore, the below assumes that ownership of the shares is transferred on the settlement date. This table is not intended to be exhaustive.

4.20 Merger and removal from trading of the Target Company’s shares

The bidder may decide to merge the Target Company post-takeover with a special purpose vehicle (“SPV”) which is in many cases formed for the acquisition of the Target Company and into which the acquisition facility has been injected. Should the Target Company be the surviving entity, such a merger only needs to be approved by the Board of the Target Company, unless a minimum of 5% of shareholders in the Target Company request that such a decision is made by the shareholders, in which case a shareholders’ meeting will decide upon the merger. The decision to remove the Target Company’s shares from trading on the relevant regulated market must be made at a

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shareholders’ meeting. Although there are, to the best of our knowledge, no legal provisions which expressly remove this decision from the scope of authority of the Board, the market practice has been that the Board of the relevant Target Company makes a proposal for removal from trading to a shareholders’ meeting which makes the decision. A decision to remove the Target Company’s shares from trading is a major decision for the Target Company which can affect the rights of shareholders and diminish the liquidity of the shares. For these reasons, and to protect the Board from being exposed to liability towards shareholders, the decision should be taken at a shareholder level. Should the Articles of the Target Company not contain a provision whereby the Target Company’s shares shall be admitted to trading on a regulated market, such a decision could be made with a simple majority of votes of the shareholders as the Companies Acts do not mention such a decision as requiring the consent of 2/3 of the votes. If, however, the Articles of the Target Company stipulate that a qualified majority must accept removal from trading on a regulated market or that the removal itself requires a change in the Articles (e.g. if the Articles themselves stipulate that the Target Company shall be admitted for trading on a regulated market), a qualified majority (2/3) of the shareholders must approve of the decision. Upon being removed from trading on a regulated market, the shareholders could freely trade (subject to general conditions and requirements thereof) the shares of the Target Company and would no longer be subject to the takeover rules as described above. The OMX has certain powers in relation to takeovers of companies which have had their shares admitted to trading on a regulated market, namely (apart from being the recipient of notifications of the Target Company in the procedure) in relation to the removal from trading of the Target Company post-takeover. The removal from trading of a Target Company from the OMX requires a notification thereof from the respective Target Company with a four-week notice. An issuer who has had its securities admitted to trading in a regulated market may submit a written request for the securities to be removed from trading. A stock exchange shall accept such a request upon receipt of a written reasoning for the request.

A stock exchange may decide not to remove the securities from trading if such an action would be likely to cause significant damage to investors’ interests or have a negative impact on the integrity of the market. To the best of 30

our knowledge, no guidelines or case law are available on what would constitute “significant damage” or how and on what basis the OMX would determine that the removal from trading would “have a negative impact on the integrity of the market”. A stock exchange may also decide to publish the reasoning of the issuer, in part or in full. However, an issuer may always have its securities removed from trading if they are admitted to trading in another regulated market. According to the OMX, the agreement between issuers and the OMX relating to the admission of the relevant shares to trading on the OMX must typically be terminated with a sixmonth notice. The OMX subsequently advertises the removal from trading of the shares of the Target Company.

4.21 Failure to submit a bid

If a party required to submit a mandatory takeover bid fails to put forward a bid within the time limit, or within four weeks of the time that the FME rules that a mandatory takeover bid obligation exists owing to parties acting in concert, the FME may cancel all the voting rights held by the parties in question in the Target Company. In such circumstances, these shares shall not be included in calculations of the proportion of share capital represented by voting rights at shareholders’ meetings. The same applies if a party does not fulfil the conditions set by the FME as a condition for approving that party’s request to be exempt from an obligation to make a mandatory takeover bid for a specific period of time. This also applies if a party, who has announced that he does not intend to make a takeover bid following a demand from the FME to “put up or shut up”, has acquired a shareholding during the six-month period following his announcement which would make him subject to a mandatory bid requirement.

The FME shall notify the undertaking in question of the invalidity of voting rights. Once this has been effected, the parties in question must sell any portion of the holding in excess of the authorized thresholds. The FME will set a deadline for this purpose, which shall be a maximum of four weeks. If the holding has not been sold by the specified time, the FME may impose per diem fines on the party in question.

The FME may also set conditions for the exercise of voting rights by a party required to make a mandatory bid or cancel his voting rights before the time prescribed in the preceding paragraph if special grounds so warrant.

Days from triggering takeover obligation Day 1 - without delay

Comments Notification to the regulated market in question.

Day 1 (or when the Board be-comes The Board must not take any action which may influence the bid aware of an imminent Bid) - 56 + 3 except with prior authorization of a shareholders’ meeting. business days Day 1-28

The Offer Document must be approved by the FME prior to it being made public.

Submission of takeover bid to other shareholders (Note: this is expressly applicable to mandatory bids but also assumed (in practice) to be the case for voluntary bids.

Day 28 ÷ 4 days

A notice of an offer document shall be published in one or more daily newspapers issued in Iceland.

The FME may cancel all the voting rights held by the parties in question in the undertaking in case of failure to submit a man-datory takeover bid.

Changes can be made to the takeover bid.

Last day changes can be made to the takeover bid without hav-ing to extend the bid validity period for at least another two weeks from the date of publishing of the amended takeover bid.

Last date for the Board to publish its opinion (together with employee opinion).

Last possible day for lapsing of a bid.

The maximum deadline, which the FME can set for parties who have failed to submit a mandatory bid to sell any portion of the holding in excess of the authorized thresholds, expires.

The bidder shall make public information on the results of a bid in a notification to the regulated market in question.

The settlement of shares taken over must have taken place on or prior to this date.

After this date, a notification of Squeeze-out (i.e. four weeks after 9/10 of shares is acquired) shall be communicated to oth-er shareholders in the same manner as applies to convening annual general meetings (at least one-week notice depending on Target Company’s Articles), as appropriate, encouraging them to transfer their shares to the bidder within four weeks.

Day 28

Day 28-56 Day 42

Day 49 Day 56 Day 56

Day 56 + 3 business days Day 56 + 5 business days Day 56 + 5 business days

5 Acquiring the business of a listed company rather than the company’s shares

To our knowledge, a transaction has never been made in Iceland where a listed company has sold all or substantially all of its assets, despite the fact that this is a possible alternative to a takeover of a Target’s shares from a legal perspective.

The following paragraphs will touch upon certain issues concerning an asset acquisition.

5.1 Disclosure requirements concerning an asset acquisition

The Investor would not be subject to any disclosure requirements in respect of an asset acquisition. However, an asset purchase agreement would be subject to disclosure on behalf of the Target. In this respect we note that, according to the OMX’s Rules for Issuers of Financial Instruments (the “Listing Rules”), an issuer must publish an announcement on an acquisition or sale of a company (subsidiary) if the transaction is likely to influence the share price of the issuer. Different kinds of transactions can be consid-

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ered price-sensitive and there can be different ways to evaluate the transactions. Under normal circumstances, the OMX considers a transaction to be price-sensitive where any of the following apply: a) the target entity represents more than ten percent of the disclosing company’s consolidated revenue or assets; b) the target entity represents more than ten percent of the disclosing company’s consolidated equity capital; or c) the consideration paid for the target entity represents more than ten percent of the disclosing company’s consolidated equity or more than ten percent of the total market value of the disclosing company’s shares if its total equity capital is lower than the market value of its securities.

Furthermore, the Listing Rules stipulate that if a company undergoes substantial changes, either over a short period of time or in its business activities in other respects, to such a degree that the company may be regarded as a new undertaking, the company shall disclose information about the changes and consequences of the changes. An evaluation of the change in identity is made on an overall basis. The criteria for evaluating whether there has been a change in identity typically include changes in the ownership structure or assets. When a change in identity occurs, it is important that the securities market receives such information immediately. The information must be equivalent to what is required pursuant to the rules applicable to prospectuses and, accordingly, a detailed information memorandum should therefore be prepared (an “Information Memorandum”). This rule applies even though the company is not obligated to prepare such a prospectus pursuant to legislation or any other regulation. Information must be provided within a reasonable time. The Listing Rules do not specify what would constitute a “reasonable time” in this respect but, as a frame of reference, we note that according to our information the deadline to publish an Information Memorandum under Norwegian rules under similar circumstances is within 20 trading days after the asset purchase agreement has been entered into.

The OMX may also decide to give the shares of the Target an observation status if the OMX is of the opinion that the change in operation is such that it can be compared with the admission

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to trading of a new company. The fulfilment of the requirements for admission to trading can, in such cases, be questioned and the OMX may initiate an examination comparable to that conducted for an entirely new company applying for admission of shares to trading on the OMX. In conjunction with a planned change in identity, the OMX should be contacted in advance so that issues regarding the shares continued trading or their delisting may be administered as smoothly as possible. The requirement to contact the OMX beforehand is further outlined in the Listing Rules which stipulate that if the company intends to disclose information which will have a highly significant effect on the price of the securities, the company shall notify the OMX prior to disclosure. If the company intends to disclose information that is assumed to have a highly significant effect of the price of the securities, it is important that the OMX receive the information in advance in order to consider if any measures need be taken by the OMX. One result might be that the OMX briefly suspends trading and cancels pending orders in order to provide the market with the possibility to evaluate the new information.

5.2 Asset purchase agreement and shareholder consent

The general principle concerning decision making with respect to issues which are very unusual for the operations of a Target, or issues which have major financial implications for a Target, is that the Board must generally refer such issues to a shareholders’ meeting. In order to minimize litigation risk, we would always make that recommendation when a company is selling all its assets, i.e. that such a decision is made at a duly convened shareholders’ meeting, especially since such a sale might require an amendment to the corporate objectives of the Target in question, as described in the Articles (such an amendment requires the consent of 2/3 of the shareholders’ votes). If the Investor already is or becomes a shareholder of the Target prior to an asset acquisition, Icelandic laws also contain a requirement that a shareholders’ meeting accept any sale to the Investor of the Target’s assets, if the value of such assets represent at least 1/10 of the Target’s share capital on the date of the asset acquisition. The same applies to asset sales to board members, the CEO and some connected parties. In a direct asset acquisition, exactly what assets and liabilities the Investor would acquire would depend on the terms and conditions of

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an asset purchase agreement. Following an asset acquisition, the shareholders of the Target would be likely to dissolve the Target and distribute its assets, i.e. the proceeds from the sale, to its shareholders. In practice, this would render any warranty or indemnity claim pursuant to the asset purchase agreement of little value.

The Investor could, however, seek to negotiate provisions which would set in place mechanisms that would preserve the ability of the Investor to enforce such warranty or indemnity claims or to obtain shareholder guarantees. Such measures might entail escrow arrangements or other measures designed to guarantee such claims.

For the purposes of the asset acquisition, and to mitigate any existing risk of litigation from shareholders of the Target, the Board would also need to obtain a specialist report (the “Specialist Report”), prepared by a certified accountant, which would contain a declaration stipulating that the payment received by the Target corresponds to the value of the assets being sold.

The Specialist Report must accompany the call for a shareholders’ meeting at which an asset purchase agreement is to be discussed. In this respect, we note that for the purpose of making an evaluation of how much all the assets of a listed company are worth, and therefore how much a purchaser seeking to acquire all of the assets would have to pay in order for there to be a correspondence between the asset and the payment, a specialist would most likely simply look to the market price of the shares rather than perform an independent valuation of each of the assets. The Specialist Report would, however, always need to evaluate the consideration for the assets in question, if such a consideration is made in a manner other than cash. The Specialist Report shall be ready at least three weeks prior to the shareholders’ meeting should such a report be required.

Whether or not a Specialist Report is required with regard to the asset purchase agreement (assuming that consideration for the assets is cash) depends on whether or not the Investor is already a shareholder of the Target. In any event, an Information Memorandum must be prepared.

Since the effects of an asset acquisition would, from the Target’s perspective, likely be considered contrary to its purpose according to its Articles or leading to a change in its purpose, the Target would have to obtain a qualified shareholder approval (2/3 majority) to carry out the transaction, as described above.

6 Post-acquisition dissolution and distribution of assets 6.1 Dissolution of a Private LLC which has no liabilities

If the Target is a Private LLC, or has been converted into a Private LLC post-acquisition, the simplest procedure to formally dissolve the Target would be to send a declaration to the Registry of Enterprises and request de-registration from the registry. The shareholders must declare that all the liabilities of the Target have been paid up and that the Target has been dissolved. Further, the declaration shall be signed with every shareholders’ name, id. no. and address. The declaration must be delivered to the Registry of Enterprises within two weeks from the date on which it was signed. The following conditions must be met in order for de-registration to take place: a) The Directorate of Internal Revenue (RSK) shall have received all tax returns for previous years, as well as for the year of dissolution, and RSK levied appropriate taxes. The tax returns for the year of dissolution shall be audited based on available documents when the application is made. The final profit and loss account shall explain any sale of assets, and any difference between market value and book value in relation to a distribution to shareholders. The final balance sheet must stipulate assets and equity available for distribution after debts have been paid. b) A company which has been on a list of employers paying salary must have submitted all dues related to salaries and given notification that it has ceased operations. c) A company which has been in operations subject to VAT must have delivered all VAT-reports until the end of its operations, including in relation to the sale of assets and must have requested de-registration from the VAT-register. d) The company must have delivered all applicable information under Tax Act. RSK will request such information as it deems necessary. e) The company must have paid all pay-as-youearn tax on capital gains and given any further information that RSK may deem necessary. f) Annual accounts must accompany tax returns. g) The company must be debt free according to its final balance sheet.

The Registry on Enterprises will seek a declaration from the Bureau of Customs and Taxes con-

firming that the Target does not owe any state or municipal dues. The shareholders are directly, jointly and without limitations liable for all debts of the Target, whether due or not, or disputed or not, from the time the declaration is given. The decision to dissolve the Target has to be made at a shareholders’ meeting. Any assets left in the Target could be distributed to its shareholders.

6.2 Liquidation by a winding-up committee

The other option for Private LLCs, and the only option for Public LLCs, is for the shareholders of the Target to decide to liquidate the Target.

The board of directors of the Target must immediately have a balance sheet and a profit and loss account prepared for the Target. It shall be accompanied by a written opinion from a state authorized public accountant on whether the assets of the Target are sufficient to pay all of its debts. If the accountant’s opinion reveals that the Targets assets are sufficient to pay all of its debts, the shareholders shall elect a winding-up committee (2 to 5 members). At least one member of the winding-up committee shall be a district court attorney, an advocate to the supreme court of Iceland or a state authorized public accountant. The Companies Registry shall be notified of a decision on the liquidation of the Target and the election of the Winding-up Committee. The Companies Registry shall authorize the function of the winding-up committee and, once that authorization has been obtained, the winding-up committee will take over the rights and duties of the Target’s board of directors and manager(s). The winding-up committee shall then send out an announcement in the Official Gazette concerning the liquidation of the Target, along with a call to creditors to lodge their claims against the Target to the winding-up committee within two months of the time of the former appearance of the announcement. The judicial effects of such a call for claims shall be the same as those applied to the bankruptcy administration of the estate of a private limited company.

When the deadline to file a claim has passed, the winding-up committee shall make a list of claims and provide an opinion as to whether and to what extent it believes that claims should be accepted. If the winding-up committee cannot accept a claim as it has been filed, it must notify the relevant party and summon him specifically to a meeting which shall be held to discuss the filed claims. If no objections are raised to the winding-up committee’s decision at that

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meeting, its decision shall be considered final.

If objections are raised which cannot be settled at the meeting, the winding-up committee shall refer the dispute to the district court. As soon as this meeting is over, and when sufficient assets have been sold, the winding-up committee shall pay recognized claims against the Target. It shall also reserve sufficient amounts for disputed claims. When payment has been made and a sufficient amount set aside for disputed claims, the winding-up committee shall prepare a distribution proposal and the Target’s final accounts.

The winding-up committee shall summon the shareholders to discuss the proposal and the accounts and, if no objections are raised, the winding-up committee shall make payments and transfer assets to the shareholders in accordance with the proposal. If the work of the winding-up committee is not completed within a year as of its obtained authorization, the winding-up committee shall give the Companies Registry an account in writing of the reasons therefore and thereafter twice a year until it completes its work.

Once the winding-up committee has completed its distribution to the shareholders it shall notify the Companies Registry of the completion of its work, deliver the Target’s final accounts, the distribution proposal and other records and shall advertise the conclusion of the process in the Official Gazette.

7 Issues related to the financing of an Acquisition 7.1 Financial assistance

The financial assistance rules in Iceland are based on the original Second Company Law Directive 77/91/EEC from 1976. That Directive was amended a couple of times and has now been repealed by Directive 2012/30/EU, also called Second Company Law Directive. Despite the changes to financial assistance rules in EU law, there have not been any changes in the Icelandic Companies Acts regarding financial assistance for the past 20 years. It should also be noted that the Second Company Directive only applies to Public LLCs but that the Icelandic parliament has decided that the same rules on financial assistance apply for both Private and Public LLCs. According to the relevant provisions of the Companies Acts a LLC “may not grant credit in order to finance the purchase of shares in the LLC or its parent Company, irrespective of whether the parent company is a private or a public LLC. Neither may a Private Limited Company contribute funds nor place security in connection with

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such purchases.” This provision goes further in prohibiting financial assistance than the original Second Company Law Directive it is derived from. According to Article 23, subparagraph 1 of the original Second Company Directive there is no direct mention of “parent company” as it only states that: “A company may not advance funds, nor make loans, nor provide security, with a view to the acquisition of its shares by a third party.” The arguments for this ban on financial assistance are that it is unacceptable that a limited company can finance a third party purchase of the company itself or of its parent company by contributing funds. It has also been argued that the interests of creditors, shareholders and company funds can be circumvented if a company’s funds are used in relation to transactions in its own shares. Hence, a company cannot finance its own takeover neither with funds nor security from its subsidiary according to Icelandic Law. It should be noted that a leading academic has questioned whether this would apply to foreign parent companies. Having said that, and as earlier explained, the rules on financial assistance are not as clear as they should be and are open to interpretation especially considering that the Companies Acts also contain the following provision: “The provisions of para. 1 and 2 do not apply to credit and contribution to a parent Company and security for the obligations of a parent Company.”

It is quite clear that the two provisions underlined above are in contradiction to one another.

On the one hand there is an objective ban on financial assistance (grant credit, contribute funds or place security) and on the other hand it is stated that this does not apply to credit and contribution to a parent company and security for the obligations of the parent company. A leading academic of Company Law is of the opinion that the last mentioned subparagraph does not change the fact that there is an objective ban on financial assistance. His argument is that the objective of the legislation was to prohibit financial assistance. He is, however, of the opinion that a subsidiary can grant a loan or security to a parent company as long as it is not done with the purpose of financing share purchase of the parent company. There is, however, nothing that prohibits funds gathered by dividend payments, in connection to reduction of share capital or regarding winding-up of a company to be used to

finance purchase of shares in the parent company. That would not be considered an infringement of the financial assistance rules.

7.2 Taking security in Iceland – types of security and how they are perfected

The taking of pledges and how pledges are perfected is mainly governed by Act No. 75/1997 on Contractual Pledges (the “Pledge Act�) but certain general principles of law also apply. The taking of security differs between the types of assets that are intended to be pledged as security and the assets can broadly be grouped into two categories: assets that are subject to public registration requirements, e.g. real property, vehicles and vessels, and assets that are not subject to any registration requirements. There are similar requirements regarding the perfection of pledges over assets in each category. Pledges can also be categorized by the types of pledges and there are three categories that are most applicable to this discussion, i) non-possessory pledges where the pledgor retains possession of the pledged asset, ii) possessory pledges where the pledgee, or a third party, takes possession of the pledged assets for the purposes of perfecting a pledge and iii) floating charges, that can be described as being a sub-category of non-possessory pledges, where a charge is placed over a collection of assets. The type of pledge desirable to be used depends on the type of assets that are to be pledged and on the intentions of the pledgee and pledgor. It is, for example, technically possible to pledge inventory under all the types of pledges but only when using a floating charge is the inventory, as it stands at each time, pledged. This is, however, not applicable to all assets and only one type of pledge may be applicable to a certain asset type.

Non-possessory pledges over assets which are subject to public registration requirements are usually perfected by registering the pledge in the relevant public registry, e.g. the registry of real property, registry of vehicles, etc. It is uncommon that such assets are pledged with any type of pledge other than non-possessory pledges. Non-possessory pledges over assets which are not subject to any registration requirements are perfected by different means.

Pledges over general claims are perfected by notification to the debtor of the pledge but the pledges may be perfected by registration.

Possessory pledges are usually only perfected once the pledged asset has been removed from the possession of the pledgor and possessions

must be kept from the pledgor while the possessory pledge is in effect. The possessory pledge is most commonly used when pledging securities and deposit accounts.

Floating charges are a type of non-possessory pledge where the pledge is perfected by registration but, as per the example above, there might be additional requirements. The pledges required to be registered are registered in the movable property register of the magisterial district of the pledgor.

7.3 Enforcing security in Iceland

The enforcement of security depends on the type of pledge taken and on the asset which is pledged. The pledgee can, in certain cases, enforce security without any outside involvement but, in most cases, the assistance of a district magistrate may be required to handle the enforcement. In those cases, the means of enforcement are forced auction. The assistance of the district magistrate is required when enforcing pledges over e.g. real property, vehicles, vessels, aircraft and inventory. This process can be lengthy and may require the initiation of a court case against the pledgor prior to enforcement being possible. Enforcing pledges over securities depends on the process prescribed in the pledge agreement but that can include the appropriation of the asset, third party sale or a forced auction.

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PART II THE ICELANDIC LEGAL ENVIRONMENT This section describes in brief terms the Icelandic legal system and certain areas of law. Those areas of Icelandic law, which are considered to be of particular relevance and importance, are discussed in more detail in other sections of this document.

8 The Icelandic legal system

Iceland is a republic and has a tripartite system, i.e. an executive branch, a legislative branch, and a judicial branch. The Icelandic parliament (Alþingi) is a unicameral legislature and parliamentary elections are held every four years.

The legal system is a civil law system and is very similar to other Nordic legal systems. The main sources of law are the Constitution and statutory legislation from Alþingi as well as rules and regulations from the executive branch. Other sources of law are mainly court precedents and customary law. Due to the country’s small size, the case law in Iceland with respect to commercial disputes has not been highly developed.

However, as a result of the financial crisis in 2008, a substantial number of commercial cases have been dealt with by the Icelandic courts which has aided in the development of useful court precedents concerning commercial disputes.

Iceland is a member of numerous multi-national organizations such as the UN, OECD, NATO and OSCE and, as further discussed in section 11, Iceland is a member of the EEA and therefore Icelandic law is heavily influenced by EU law.

9 The Icelandic Courts

The Icelandic court system is comprised of two levels, i.e. district courts (eight in total) and the Supreme Court. Almost every judgment of the district courts can be appealed to the Supreme Court. District court cases are usually heard by one judge but the more comprehensive and/or more complex cases are heard by three judges, who may be assessors who are specialists in the relevant field. Supreme Court cases are heard by a minimum of three judges but larger and more complex cases are heard by five.

The most important cases are heard by seven judges and those instances are relatively rare.

After a court proceeding is initiated before a district court, the delivery of its judgment can

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generally be expected in approximately 12-16 months, while proceedings before the Supreme Court could take up to a year. There is neither a constitutional court nor a specialized commercial court in Iceland. All cases are therefore heard by appointed judges of the general courts. It is also common practice to refer disputes to the Nordic Arbitration Centre of the Icelandic Chamber of Commerce. If the parties agree to submit a dispute to arbitration, the decision of the arbitration will be final and binding and enforceable according to Icelandic law.

The cost of court proceedings in Iceland is relatively low, compared to costs in other countries. According to procedural laws, the general rule is that the party who loses the case shall pay the opposite party his litigation cost. The awarded cost is generally based on an estimate from the judge and generally there seems to be substantially less cost awarded by the courts than the actual cost incurred.

In May 2016, the Icelandic parliament passed a bill establishing a third judicial level into the court system. Effective, as of 1 January 2018, a court of appeals will be in place, in between the district courts and the Supreme Court.

10 Constitutional safeguards and the European Convention on Human Rights

The Constitution contains certain fundamental safeguards, such as the principal of equality, the right to peaceful enjoyment of property, etc. The Constitution provides, among other things, that no one may be obliged to surrender his property unless required by public interest, that such measures must be provided for by law and that full compensation must be paid. Iceland has also enacted the European Convention on Human Rights which provides similar rights and protections.

11 EEA/EU law

Iceland is a member of the European Free Trade Association (EFTA) and is one of the EFTA countries party to the EEA Agreement. The EEA Agreement provides, among other things, for the inclusion of EU legislation covering the four freedoms, i.e. the free movement of goods, services, persons and capital, throughout the EEA. The EEA Agreement however does not cover the Common Agriculture and Fisheries Policies (although the EEA Agreement contains provisions on various aspects of trade in agricultural and fish products), Customs Union, Common Trade Policy, Common Foreign and Security Pol-

icy, Justice and Home Affairs (even though the EFTA countries are part of the Schengen area), or the Monetary Union (EMU).

12 Law on Foreign Investment and the right to own real property

According to the Constitution, the right of foreign parties to own real property or shares in business enterprises may be limited by law. As a general rule, foreigners and non-residents are not permitted to own real property in Iceland but the Minister of Interior may grant exemptions to e.g. a party who has the right to conduct business in Iceland and wishes to acquire the right to own or use real property in direct connection with his business activities. Additionally, exemptions apply to parties who enjoy rights under the EEA Agreement or the Convention establishing EFTA and these parties can therefore acquire real property without the permission of the Minister of Interior.

The main limitation on ownership in Icelandic companies regards fishing operations and owning or running enterprises engaged in fish processing. As a general rule, non-residents, including EEA residents, may not own more than 25% of the share capital (in some instances up to 33%) in such companies. Furthermore, only Icelandic citizens and other Icelandic entities and parties domiciled in the EEA, EFTA or the Faroe Islands are allowed to own energy exploitation rights relating to waterfalls and geothermal energy for uses other than domestic use and to produce or distribute energy. Additionally, non-residents (except residents and legal entities of the EEA area and the Faroe Islands) are not permitted to own more than a 49% share in Icelandic airline companies.

13 Incentives for foreign investment

The government of Iceland has been keen to attract foreign investment to Iceland and has even established a public-private partnership called Promote Iceland which, among other objectives, aims to attract foreign investment.

Certain incentives have been put in place to encourage foreign direct investment which include certain derogations from taxes and charges or which come in the form of training aid and lease of land. The purpose of the incentives for initial investment in Iceland is to promote initial investment in commercial operations, the competitiveness of Iceland and regional development. However, the incen-

tives do not apply to investments in companies which provide services on the basis of legislation on financial undertakings, insurance operations or securities. For further information on these incentives, as well as further information on doing business in Iceland, please visit Promote Iceland’s web page, www.invest.is.

14 The Icelandic Tax System

Compared to other countries’ tax systems, the Icelandic tax system is relatively simple and effective. In the last few years, the emphasis has been on further simplifying it, reducing tax rates, broadening the tax base and concluding more double taxation treaties, the purpose of which is to increase competitiveness of Icelandic corporations and to attract foreign investors. The Icelandic tax system is comprised of direct and indirect taxes. Resident companies are subject to income tax on their worldwide income.

Income tax on limited liability companies is 20% and 36% on partnerships and other legal entities other than limited liability companies. Capital gains are added to other taxable income and are taxed at the regular corporate rate. Additional tax is levied on certain companies which carry out financial activity, such as financial institutions, insurance companies, banks and other financial organizations. Under certain circumstances, resident limited liability companies are not subject to taxation of income proceeding from the disposal of shares and dividends. Capital gains from the disposal of shares and dividends can be deducted from taxable income of limited liability companies, provided that the shares are in Icelandic companies; or in foreign companies if the taxable company demonstrates that the profit of the foreign company’s operation has been taxed under comparable rules to the rules prevailing in Iceland, and that the profit is subject to a tax rate which is not lower than the general tax rate in any OECD, EEA or EFTA country or the Faroe Islands. Group companies’ rules, such as anti-avoidance, thin-cap, transfer pricing and CFC-rules, apply to Icelandic companies.

A 24% value-added tax is levied on any sale of goods or services, with various exceptions such as all export sales and services to foreign entities rendered outside of Iceland. An 11% value-added tax is levied on the sale of certain goods and services, such as the sale of hotels and other accommodations and the sale of hot water, electricity and fuel oil used for domestic and commercial heating.

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15 Insolvency law

An Icelandic company that is in significant financial difficulties has several options available to it according to Icelandic insolvency law.

Firstly, it may seek to be granted a moratorium by a district court. A moratorium can initially be granted for up to three weeks and after that there is a possibility of two extensions of three months each. The legal effects of a moratorium are mainly that the company is barred from making dispositions concerning its property or to assume financial obligations, unless the moratorium assistant has given his approval in advance. A second option for a company may be to seek composition with its creditors. A composition agreement is essentially an agreement on settlement or relinquishment of debts concluded between a debtor and a certain majority of his creditors, which is subsequently confirmed by the courts. It is an arrangement which, if approved, would result in the relevant company being able to obtain a full legal discharge of the claims of composition creditors by making payment in the form, and in the amounts, provided for under the terms of the composition agreement. Composition creditors are creditors who hold claims against the company that are affected by the composition.

Those claims include most general claims, but certain priority claims, secured claims and subordinated claims are excluded. Lastly, the Board of a company may have a duty to surrender the company’s estate for bankruptcy administration in certain cases, i.e. if the company becomes insolvent and it is not considered likely that it will become solvent within a short period of time and creditors can also petition for bankruptcy proceedings if certain criteria are met.

16 Contract law

Icelandic contract law is largely based on the principle of freedom of contract. The Sale of Goods Act, which would otherwise apply to the purchase of shares and most assets (excluded are e.g. real estate), can be deviated from by contract so that the parties are largely free to negotiate terms, including the consequences of breach of contract. It should, however, be noted that according to Article 36 of Act No. 7/1936 on contracts, agency and void legal instruments (the “Contracts Act”) an agreement can be set aside in part or in whole, or amended, if it is considered to be unfair or contrary to good business practice to apply it in accordance with its wording. It is relatively rare that the courts

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use this article to set aside or amend contracts and they are less likely to do so in cases where the contracting parties are companies who have had legal advice in the process. Parties are, in general, free to negotiate which law is the governing law of a contract and which jurisdiction shall be applicable in an event of a dispute. Iceland has implemented the Lugano Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (2007/712/EC). Therefore, similar rules on jurisdiction and enforcement are applicable in Iceland as those which apply in the EU Member States.

17 Competition law

Icelandic rules on competition matters are based on the Competition Act No. 44/2005 (the “Competition Act”) and notifications of mergers, as defined in the Competition Act, may need to be given to either the Icelandic Competition Authority (the “ICA”) or to the European Commission (the “Commission”). We note that only a single competition authority will have jurisdiction to examine a merger, so merger notification will only be sent either to the Commissioner or to the ICA. The conclusion as to which competition authority will have jurisdiction depends on the turnover of the merging companies and where that turnover is generated. The ICA will examine a merger if: a) the combined turnover of the undertakings in question in Iceland is ISK 2 billion or more; and b) at least two of the undertakings participating in the merger each have a minimum annual turnover of ISK 200 million in Iceland.

The Commission must however be notified of the merger if it has an “EU dimension” within the meaning of the EC Merger Regulation No. 139/2004, cf. Article 57 of the EEA Agreement.

Mergers are considered to have an EU dimension if: a) the combined worldwide turnover of all the merging firms is over EUR 5 billion; and b) each of at least two of the undertakings concerned has EU-wide turnover of more than EUR 250 million.

If a merger falls below this threshold it will still have an EU dimension if:

a) the combined aggregate worldwide turnover of all the undertakings concerned is more than EUR 2.5 billion; b) in each of at least three Member States, the combined aggregate turnover of all the undertakings concerned is more than EUR 100 million; c) in each of at least three Member States, the aggregate turnover of each of at least two of the undertakings concerned is more than EUR 25 million; and d) the aggregate EU-wide turnover of each of at least two of the undertakings concerned is more than EUR 100 million, unless each of the undertakings concerned generates more than two thirds of its aggregate EU-wide turnover in one and the same Member State.

If the ICA believes that further investigation is warranted due to the impact of the merger, the undertakings in question shall be notified within 25 working days from the delivery of the merger notification. This time limit begins on the first working day following the receipt of the merger notification. If the undertaking in question receives no notification from the ICA within the above established period, the ICA cannot annul the merger. If the undertaking in question is sent a notice concerning further investigation of the merger, a decision of annulment shall be made no later than 70 working days from the day when the ICA received the merger notification. If it is necessary to obtain further information, the ICA may extend this time limit by up to 20 working days. In the event that the ICA fails to make a decision on whether to annul or establish conditions for a merger within the time limits prescribed, the ICA can neither annul the merger nor make it subject to conditions.

Following the receipt of a merger notification by the Commission, where applicable, the general rule is that the Commission has an initial period of 25 working days to undertake a formal investigation. At the end of this Phase I process, the Commission will usually reach one of the following decisions: i) grant an unconditional clearance; ii) grant a conditional clearance; or iii) launch a Phase II investigation which involves detailed in-depth investigation. The EC Merger Regulation provides for a standard Phase II investigation period of 90 working days. If the parties offer commitments, this Phase II time period is automatically extended to 105 working days, unless the parties offer commitments of less than 55 working days from the start of Phase II. The general deadline for offering commitments

is 65 working days from the start of Phase II. The Phase II timetable may also be extended by up to 20 working days in complex cases at the request of the parties (if requested within 15 working days of the start of Phase II) or at any time by the Commission with the consent of the parties.

There are also procedures for the Commission to stop the clock if the parties have not supplied information required by the Commission for its investigations. In some cases, this can result in a significantly lengthier review process. Following a Phase II investigation, the Commission will either clear the merger (often subject to conditions) or prohibit it.

18 Company law 18.1 Types of companies

There are several types of companies in Iceland but Private LLCs (i. einkahlutafĂŠlag) and Public LLCs (i. hlutafĂŠlag) are the most common and economically important types of business organizations. Other structures include partnerships, partnerships limited by shares, cooperative societies, businesses run by the self-employed and branches of foreign limited companies.

18.2 Establishing a limited liability company in Iceland

It is fairly simple to establish a new limited liability company in Iceland and the time frame can differ from a few days to a few weeks depending on a number of factors. Private LLCs have a minimum share capital of ISK 500,000 and Public LLCs a minimum of ISK 4,000,000. A Private LLC can be owned by a single shareholder but Public LLCs must have at least two shareholders.

BBA also offers its clients pre-established Private LLCs for purchase. This option often saves our clients time and money.

18.3 Residential requirements

As a general rule, pursuant to the Act on Private LLCs, the founder (or at least one of them if there are more than one) of a Private LLC must be a resident of Iceland, and the same applies to the majority (or half if there is an equal number) of the founders of a Public LLC, pursuant to the Act on Public LLCs. The same residency requirements (and the exemptions therefrom) apply to CEOs and to at least half of the Board. Despite this general rule, there are general exemptions in place which provide, among other things, that companies whose registered office is in one of the EEA countries can freely form limited companies in Iceland and serve as board members and CEOs. 41

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18.4 Shares, share certificates and share registry

Private LLCs do not issue physical shares and the ownership of shares in a Private LLC is only evidenced by a share registry which is maintained by the Board of the relevant Private LLC. Public LLCs must, however, issue shares within a year from their establishment and they can be either physically or electronically registered pursuant to Act No. 131/1997 on electronic registration of rights of title to securities. Shares in Public LLCs are securities and their transfer is governed by the rules on transfer of securities, whereas shares in Private LLCs are not considered securities.

18.5 Shareholder rights 18.5.1 Shareholders’ meetings

The highest corporate authority is the shareholders’ meeting. Annual General Meetings are, as the name indicates, held annually and at those meetings certain actions are required to be made, such as the election of the Board, auditors, etc. The Board can furthermore call for extraordinary shareholders’ meetings.

18.5.2 General shareholder rights

(a) General principle of shareholder equality The Companies Acts provide for a general principle of equality. Thus, for example, the Companies Acts provide that, provided that the Articles of a company ’do not contain provisions on different share classes which enjoy different rights, all shares enjoy an equal right comparative to the amount of shares. (b) General right to vote The Companies Acts stipulate that each share shall carry a vote (provided that the Articles can contain provisions concerning a class of shares that carries an increased voting power or does not carry any votes). (c) General right to attend shareholders’ meetings Each shareholder has a right to attend shareholders’ meetings and has the right to speak at such meetings or to have a representative attend in his place and to have an advisor present. (d) Right to have a matter discussed at a shareholders’ meeting Each shareholder has the right to have a matter brought up for discussion at a shareholders’ meeting. (e) Call for shareholders’ meetings and agenda The call for shareholders’ meetings must be in accordance with the Articles of a company and any shareholder who so requires can have a writ-

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ten call for a meeting, provided that he holds a minimum of 5% of the issued share capital in a company, or a lesser percentage if so stipulated in the relevant Articles. A call for a meeting must be sent 1-4 weeks before a meeting if the Articles do not provide for a longer time period. The call for a meeting must contain certain minimum information, including information concerning the agenda of the meeting, and if a proposed change to the Articles is to be discussed, the subject of such proposals must be stipulated.

Items which are not on the agenda will not be discussed unless all the shareholders agree or where certain limited exceptions apply. (f) Right to information Provided this can be done without causing the company considerable damage in the opinion of the Board, the Board and CEO must, if so requested, provide information on matters which are important for the company’s accounts or its position in general, or which could influence the position of shareholders with regards to matters which the shareholders’ meeting is supposed to deal with. (g) Remuneration policy A company that is required by law to appoint an accountant is also required to adopt, and get shareholder approval for, a remuneration policy, which shall, among other things, deal with options, incentive schemes and severance agreements. (h) Business with related parties A number of provisions of the Companies Acts are intended to restrict transactions with related parties. These include the provisions which concern the actions of the CEO and supervision by the Board and provisions which prevent the Board, the CEO and others representing the company from taking actions which are intended to procure (or likely to result in) improper interests of certain shareholders, or others, at the expense of other shareholders or the company.

The Board and the CEO are not allowed to adhere to shareholders’ resolutions if they violate law or the Articles. The Companies Acts further stipulate that an agreement between a company and a shareholder, a parent company of a shareholder, a member of the Board (members hereinafter referred to individually as a “Director”) or a CEO of the company, with the value of at least 1/10 of the company’s equity at the time of signing of the agreement is not binding for the company unless it has been approved at a shareholders’ meeting. In relation to such agreements, the Board is required to get a specialist’s

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report on the value of payments rendered and received by the company. There are certain exceptions to this requirement which will not be listed here. (i) Liability for damages Finally, it is worth mentioning that the Companies Acts contain provisions concerning the liability of founders, Directors, accountants and others who have caused the company damage to pay damages to the company. (j) Right to initiate legal proceedings to contest validity of decisions A shareholder, a Director or a CEO can initiate court proceedings to contest the validity of a resolution of a shareholders’ meeting which he believes is illegitimate or violates the Companies Acts or the company’s Articles, and have it annulled.

18.5.3 Voting at shareholders’ meetings

(a) General resolutions – simple majority The general rule is that to pass a resolution at a shareholders’ meeting, a simple majority of the votes cast is sufficient. (b) Election of the Board The Board is elected at a meeting of the shareholders. However, the Articles of companies can provide for the right of either government bodies or others to appoint one or more Directors to the Board but the majority of the Board must always be elected at a shareholders’ meeting.

The election process and other issues regarding the Board is further discussed in section 18.6. (c) Changes to the Articles – increased majority A decision relating to an amendment to a company’s Articles shall be made at a shareholders’ meeting, unless the Board has authority to amend the Articles according to certain provisions of the Companies Acts. A decision to amend the Articles requires the approval of a minimum of 2/3 of the votes cast and also the approval of shareholders controlling at least 2/3 of the share capital in respect of which votes are wielded at the shareholders’ meeting. In certain instances (concerning the option to have only electronic shareholders’ meetings and concerning electronic communication between the company and the shareholders), it is also a condition for amendments of the company’s Articles that shareholders controlling a quarter of the share capital do not cast votes against the decision. A decision shall in other respects meet further requirements which may be provided in the company’s Articles in addition to the special provisions of the Companies Acts, discussed below.

(d) Other decisions which require a special majority or unanimity The approval of all shareholders is required in order for decisions on the following amendments to a company’s Articles to enter into force:

deem his shares. If the parties cannot reach an agreement on the price, it shall be determined within 3 months by court-appointed appraisers.

Their appraisal can subsequently be challenged before the courts.

i. to reduce shareholders’ right to the payment of dividend or to other allocation of funds from the company for the benefit of others than shareholders; ii. to increase shareholders’ liabilities toward the company; and iii. to limit shareholders’ authority to control their shares (dispose of or pledge them) or to obligate shareholders to be subject to redemption of their shares in instances other than at the dissolution of the company.

ii. Redemption when a single shareholder owns more than 90%

A decision relating to an amendment to a company’s Articles which reduces the shareholders’ right to dividend or other payment out of the company’s assets (in instances which do not fall within item i. above) will be valid only provided that shareholders controlling over 9/10 of the share capital, in respect of which votes are wielded at a shareholders’ meeting, approve. A decision relating to amendment to a company’s Articles which deranges the legal relationship between shareholders will be valid only provided those shareholders who are to be subject to a reduction of rights approve.

18.5.4 Provisions granting rights to specific groups of shareholders

(a) Restriction on majority power at shareholders’ meetings The Companies Acts contain a general principle concerning the use of power at shareholders’ meetings and provisions which stipulate that the shareholders’ meeting cannot adopt a resolution or make a decision which is intended to procure (or likely to result in) improper interests of certain shareholders, or others, at the expense of other shareholders or the company. (b) Redemption rights i. Redemption rights on refusal to approve a sale of shares In cases where the Articles contain provisions which require an approval from the Board to make a transfer of shares effective, and where such approval has been refused by the Board, the Companies Acts provide that the shareholder in question can require the company to re-

If a single shareholder owns more than 90% of the shareholding and corresponding voting power, he can jointly, with the Board, decide to redeem the shares of the remaining shareholders and, similarly, the minority can require the other shareholders to redeem their shares. Similar provisions concerning the purchase price as discussed above apply to such redemptions. iii. Redemption as an alternative to dissolution Shareholders who own 1/5 of the shares or more can demand a court resolution to liquidate the company if shareholders have intentionally misused their position in the company or participated in a breach of the relevant Companies Act or the Articles of a company. However, the company can demand that, instead of being liquidated, the shares of the shareholders demanding liquidation are redeemed for a price, and within such a time period as determined by the court. iv. Redemption upon a merger The Companies Acts provide that shareholders who have voted against a merger can require that their shares are redeemed if the merger is approved by the requisite majority of shareholders. (c) Right to demand dissolution of a company As mentioned above, shareholders who own at least 1/5 of the shares can demand the dissolution of a company under certain strict circumstances which relate to the intentional misuse by shareholders of their position or participation in a violation of the provisions of the Companies Acts or the company’s Articles. (d) Postponement of the confirmation of the annual accounts If shareholders who control at least 1/3 of the share capital demand it in writing at an annual general meeting, the decision to confirm the annual accounts of the company and allocation of its profits can be postponed for a minimum period of one month and a maximum period of two months. This is intended for the minority to have

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more time to consider the matters and obtain further information. (e) The right to demand an extraordinary shareholders’ meeting Shareholders who control at least 1/20 of the share capital can demand an extraordinary shareholders’ meeting which shall be called within 14 days of a written demand relating thereto. (f) Right to demand an investigation The Companies Acts provide that shareholders who have at least 1/10 of the shareholding can, in certain circumstances, resolve to have an investigative committee appointed by the minister to investigate certain aspects of the company’s operations, its books or accounts, etc. (g) The right to demand a special dividend Shareholders holding a total of at least 1/10 of the share capital may, at an annual general meeting, provided that a company’s Board has been advised thereof, require an annual general meeting to decide upon the allocation of a sum as dividend amounting of up to a quarter of the remainder of the annual profit when the loss of previous years has been met, and after deducting an amount which must be contributed to a reserve fund in accordance with laws or the company’s Articles or which cannot be allocated as dividend for other reasons. It is, however, not permissible to require allocation of more than the equivalent of two per cent of the company’s equity capital and reserves (equity). (h) The right to influence the election of one of the company’s auditors According to Act No. 3/2006 on Annual Accounts, if shareholders, who control at least 1/10 of the share capital in a company that is obligated to elect auditors, so demand at an annual general meeting, the Board shall ask the registry of annual accounts to appoint one auditor to take part in the work of the auditors that have been elected until the next annual general meeting.

The registry of annual accounts decides whether there is a reason to accept this request and appoints an auditor in instances when considered applicable.

18.6 The Board 18.6.1 The number of directors and the election process

A company must have at least three members on the Board (except in Private LLCs with fewer than five shareholders where the Board may consist of a single Director and one reserve Director). The Articles can stipulate how the voting process for Directors shall take place. If no spe-

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cial voting procedure is stipulated in the Articles, a Majority Election between individuals (see below) shall take place, which could result in the majority being able to exclude the minority from getting any candidate elected, but shareholders representing at least 20% of the share capital (or 10% in Public LLC that have 200 or more shareholders) can in such instances demand a Proportional Election (see below), and, in case of Public LLCs, a Multiplication Election (see below) which cannot be applied to Private LLCs. Companies that have more than 50 employees on average and a Board that consists of at least two board members must have at least one member of each gender and, in companies with a Board comprised of more than three board members, it must be ensured that each gender comprises at least 40% of the Board. The same applies to reserve members of the Board.

Below is a short explanation of the different election mechanisms referred to above: i. Majority Election: There can either be an election between individuals or lists. A shareholder can use his votes as many times as the number of directors to be elected, e.g. if he has 10 votes and there are supposed to be 5 directors, he can use these 10 votes five times.

This is particularly beneficial to the majority since, for example, if there are supposed to be 5 directors and there are 7 candidates, the majority can use all its votes for the 5 they want.

The minority would have no chance of getting a specific director of its own choosing elected. ii. Proportional Election: There can either be an election between individuals or lists and the method used is different between the two scenarios. If it is an election between lists, the number of votes for each list is written down below its name, below that half of the number, then 1/3, etc.

Example:

List A List B 1000 600 500 300 333 200 If we are, for example, electing 4 directors, you find the 4 highest numbers. In this example, List A gets 1000 votes and list B gets 600.

If there are 4 directors to be nominated, list A would get 3 and list B would get 1. List A would get the first director, since 1000 is the greatest number. List B would get the second

director, since 600 is greater than List A’s next number i.e. 500. List A would also get the last director since 333 is greater than 300.

If electing between individuals, the shareholder can divide his votes in any proportions he chooses between the candidates and divide them between the same number of individuals as are supposed to be elected, or fewer. Therefore, a shareholder, if he wants to put special emphasis on a certain candidate getting elected, could decide to use more of his votes to get that particular candidate elected. In this scenario you can only use your vote once. An example of this procedure would be a company electing 3 directors. The majority controls 51% of the votes. In this scenario, the majority would always get 2 out of the 3 if the majority has used 26% of the votes for one candidate and 25% for the other, no matter how the minority votes. iii. Multiplication Election: There can only be an election between individuals, i.e. it is not possible to elect between lists. The value of each vote shall be multiplied by the number of directors to be elected and each shareholder can divide his votes in the proportion he chooses and can divide them among as many individuals as are to be elected or fewer. If, for example, there are 5 directors, each shareholder gets a fivefold number of votes.

Example: A company has 5 directors and there are 900 shares, each with 1 vote. In this case, the minority would have to control at least 151 votes to be sure to get one candidate elected.

The minority would have 151*5 = 755 votes (751 votes being sufficient to get one candidate elected).

Whether a Proportional Election or a Multiplication Election is used, the minority would have to control 16 2/3% of the votes to be sure to get one candidate elected and 33 1/3% of votes to get 2 out of 5 directors elected.

18.6.2 The term of the Board, resignation from the Board, etc.

A company’s Articles can stipulate the duration of the term for the Board but the term must in any case come to an end at the end of the company’s annual general meeting (“AGM”), held four years after the beginning of the term. This does not prevent sitting board members from being re-elected or re-appointed. A member of the Board can resign at any time during the term and the general rule is that a party which has ap-

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pointed a board member can dismiss him, and a shareholders’ meeting can always dismiss board members it has elected and have another election. If a board member leaves the Board during a term, its reserve director, if one has been elected, takes his place. If there is no reserve director, the other board members should call for an election or appointment of a new director for the remainder of the term. The remaining board members can, however, decide to postpone the election until the next AGM if the Board can still form a quorum.

18.6.3 The election and role of the chairman

The Board elects a chairman (“Chairman”), unless the company’s Articles provide that a shareholders’ meeting shall elect the Chairman. The company’s CEO cannot also be the Chairman of its Board. The Chairman calls Board meetings, either at his own initiative or at the request of other Directors. He is also generally responsible for opening shareholders’ meetings, directing the meeting and directing the election of a chairman for the meeting. The Chairman chairs Board meetings, is the proper recipient for subpoenas and other notices directed to the company and is generally the contact person between the Board and the CEO. The Articles can provide that the Chairman has a deciding vote at Board meetings and they, as well as the Board’s rules of conduct, can provide that the Chairman has certain other duties.

18.6.4 General duties of Directors

Provisions of the Companies Acts relating to general directors’ duties are not detailed and there are limited court precedents. The Companies Acts do not contain any general statements of directors’ duties, but one can gather what these duties include from various provisions of the Companies Acts, the limited precedents that exist and from some scholarly literature.

The directors of a company have, for example, a duty to act within their powers and to exercise independent judgment. Icelandic company law includes both the Duty of Care and the Duty of Loyalty. (a) Duty of Care The main principle consists in going about your duties with the care that a person in a similar position would reasonably believe to be appropriate under similar circumstances.

In the decision making context, the duties of

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directors are mainly of a procedural nature, i.e. a duty to make decisions in good faith and in an informed manner. Should directors generally proceed in the manner described above, it can be considered unlikely that Icelandic courts would examine the substance of such decisions.

Very limited precedents exist regarding this issue but legal scholars have stated that the standard would be similar to the business judgment rule (in Anglo-Saxon law).

If decisions are procedurally sound and without elements of self-interest of directors, it is very unlikely that such decisions would be considered to constitute a breach of the Duty of Care (as stated before). A standard similar to the waste standard (as defined in US law) has not been defined by the Icelandic courts but the threshold would probably be lower in Iceland than in the USA for the courts to rule that a decision was so disastrous that, by taking it, the directors had breached their Duty of Care. (b) Duty of Loyalty A director has a general duty to put the interests of the company first. If the interests of the company conflict with the interests of certain parties (e.g. himself or the shareholder that appointed him), the interests of the company should generally prevail.

The Duty of Loyalty imposed upon directors consists mainly of a prohibition concerning self-dealing. A Director may not participate in the handling of a matter relating to the preparation of an agreement between the company and himself, legal action against himself or the preparation of an agreement between the company and a third person or legal proceedings against a third person if he has considerable interests to safeguard and which might be in conflict with the company’s interests. A Director is bound to disclose information about such incidents. Further, a company’s director may not make any arrangements which are obviously suited to acquire improper interests for specific shareholders or others at the expense of other shareholders or the company. This rule is intended to hinder the general self-dealing of directors by providing that directors cannot participate in the handling of certain matters and that disinterested directors generally handle all decision-making by companies. This, however, does not prevent problems from occurring. The concept “considerable interests” has neither been defined in the law nor in court precedents.

18.6.5 Specific duties

The role of the Board is to operate the company, along with the CEO, and make sure that the company’s organization and operations are sound. The CEO is responsible for the company’s daily operations but the Board gives him general or specific instructions and oversees the CEO’s actions. Generally, the Board must follow resolutions and instructions given by the shareholders’ meetings.

18.7 Annual statutory filings

Corporations and registered branches of non-resident entities must file an annual income tax return, irrespective of whether or not they have any taxable income. The official filing time is before the end of May but if the filing is done by a professional service (audit) company the filing time is extended until September. Every LLC in Iceland is required to elect an auditor or inspector and have its annual accounts audited.

For Public LLCs, a state-authorized public accountant must perform a full-scale audit. Publicly listed companies must elect two auditors, one of whom must be a state-authorized public accountant.

19 Employment law considerations 19.1 Legal status of employees in the event of a transfer of undertakings

The Icelandic labour market is mainly regulated by collective bargaining agreements. There are provisions of minimum rights, such as minimum wages, maximum working hours, paid holidays, paid sick leave, maternity and paternity leave as well as a duty for employers to insure their employees, to name a few. Iceland has historically had low unemployment rates and a rather flexible and well educated workforce. EEA citizens do not have to apply for a visa to be able to work in Iceland but there are currently some restrictions on non-EEA citizens gaining work permits in Iceland. The TUPE Act applies to the legal status of employees in any transfer of an undertaking, or part of an undertaking, to another party as a result of a legal transfer or merger.

The TUPE Act was passed to adopt Council Directive 2001/23/EC on the approximation of the laws of the Member States relating to the same matters. The rules of the TUPE Act apply to all transfers of undertakings, regardless of whether the undertakings are private or public.

When assessing if a “transfer of an undertaking” has taken place, several factors need to be taken into consideration. Issues such as whether the

business in question retains its identity, the type of business that is being transferred, whether or not the business’s real estates and movable properties are transferred, the value of its intangible assets at the time of the transfer, if the majority of employees are transferred to the buyer, the similarities between the operations before and after the transfer, and whether the buyer retains the seller’s customers are all factors that help in determining whether or not a transfer of an undertaking within the meaning of the act is considered to have taken place. It is, however, important to note that an overall assessment needs to be carried out when evaluating the situation. In cases where the rules of the TUPE Act apply, the rights and duties of the seller (i.e. the party that ceases to be the employer in respect of the undertaking) according to an employment contract or employment relationship effective on the date of the assignment shall remain in force and be transferred to the buyer (i.e. the party who, by reason of the said transfer, becomes the employer). This includes obligations that arose before the date of transfer and still exist on the date of transfer, e.g. unpaid salary. The buyer shall also continue to observe the terms and conditions of collective agreements on the same terms applicable to the seller under that agreement, until the date of termination or expiry of the collective agreement or the entry into force or application of another collective agreement. The transfer of an undertaking is not in itself justification for dismissal of employees and the seller and the buyer are prohibited from dismissing employees due to a transfer, both before and after the transfer takes place.

Dismissal of employees in relation to a transfer may only take place for economic, technical or organizational reasons entailing changes in the workforce. It should be noted that certain specific rules apply to undertakings that are subject to bankruptcy proceedings in relation to the items discussed above. In the event of a transfer of an undertaking, the parties to the transfer shall inform the employees’ representatives, or the employees if there is no such representative, in reasonable advance of matters relating to the transfer. This includes matters such as the date of the transfer, the reasons behind the transfer, legal, economic and social effects of the transfer for the employees and whether measures are envisaged in relation to the employees. The parties to the transfer shall consult with the employees if they foresee taking measures in relation to the employees for the purpose

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of reaching an agreement in relation to these measures. An employer, regardless of whether it is the buyer or seller, who either intentionally or negligently violates provisions of the act is liable for damages in accordance with general rules.

19.2 Legislation regulating the employment relationship

As an employer or business owner in Iceland, there are certain rules that must be taken into account in relation to personnel administration.

There are numerous acts that regulate employment relationships in Iceland. The most noteworthy are Act No. 80/1938 on Trade Unions and Industrial Disputes, Act No. 55/1980 on Working Terms and Pension Rights Insurance, Act No. 19/1979 respecting Labourers’ Right to Advance Notice of Termination of Employment and to Wages on Account of Absence Through Illness and Accidents, Act No. 88/1971 on 40 Hours Work Week and Act. No. 30/1987 on Holiday Allowance.

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CAPITAL CONTROLS 20.1 Background

Following the collapse of the Icelandic banking system in October of 2008, it was deemed necessary to put in place restrictions on foreign exchange transactions and capital movements to and from Iceland. Subsequently, the Icelandic Parliament approved Act No. 134/2008 on the amendment of the FX Act. Pursuant to the FX Act, the CBI was granted the authority to issue rules which suspended or limited foreign exchange transactions and capital movements to and from Iceland.

The CBI issued the first rules, No. 1082/2008, on 28 November 2008. The rules were repeatedly amended and re-issued until the Icelandic Parliament approved Act No. 127/2011 on the amendment of the FX Act and transposed the CBI rules in force at that time into the FX Act. The FX Act has subsequently been amended several times.

The purpose of the FX Act was to restrict or to stop, on a temporary basis, certain types of cross-border capital movements or foreign exchange transactions related thereto which, according to the estimation of the CBI, cause serious and substantial monetary and exchange rate instability.

20.2 Recent developments

The capital controls had substantially affected cross-border M&A transactions in Iceland after their imposition in 2008. A number of exemptions were however introduced with respect to direct foreign investment to encourage foreign investors to invest in Iceland despite the general restrictions, and many investors were sufficiently reassured by these exemptions to invest in Icelandic companies. The capital controls were always supposed to be temporary to ensure stability in Iceland but lifting them proved to be a complex and sensitive challenge. In June 2015, the Icelandic government introduced certain steps intended to be taken in 2015 and 2016 which were designed to lift the capital controls in Iceland. On 14 March 2017, new rules on foreign exchange no. 200/2017 took effect and with them, the restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency were largely lifted. Households and businesses are, in general, no longer subject to the restrictions regarding, among other things, foreign exchange transactions, foreign investment, hedging, and

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lending activity as well as the requirement to repatriate foreign currency.

The rules provide for general exemptions from nearly all of the restrictive provisions of Act No. 87/1992 on Foreign Exchange (the “FX Act”). However, there are still restrictions in place regarding derivatives trading for purposes other than hedging; foreign exchange transactions carried out between residents and non-residents without the intermediation of a financial undertaking and in certain instances, foreign-denominated lending by residents to non-residents. Various foreign exchange transactions and capital transfers, which have so far been subject to exemptions by the Central Bank of Iceland (the “CBI”), will only be subject to a disclosure requirement.

20.3 Definition of cross-border movement of capital

The FX Act defines cross-border capital movements as both capital movements to and from Iceland and as capital movements between foreign and domestic entities. This means that any transfer between domestic and foreign entities constitutes a cross-border capital movement, irrespective of whether the transfer has any “cross-border” aspect.

20.4 Definition of foreign entities

A foreign entity, as defined in the FX Act, is i) a natural person who has his legal residence outside of Iceland or ii) a legal entity (a) which is not incorporated in Iceland, (b) is not domiciled in Iceland or (c) which does not have its place of effective management in Iceland. Branches of foreign entities established in Iceland are not considered foreign entities under the FX Act. The definitions of domestic and foreign entities in the FX Act entail that legal entities which are incorporated, domiciled or have their place of effective management in Iceland are considered domestic entities.

20.5 Disclosure requirements for crossborder movement of foreign currency

The following cross-border movement of foreign currency shall be reported to the CBI: 1. Payments of interest, indexation, contractual instalments, and prepayment and retirement of loans and other debt obligations.

2. Dividend payments.

3. Investments in securities, unit share certificates, mutual and investment funds, money market instruments, other negotiable

financial instruments, monetary claims, and other comparable claims in foreign currency.

4. Importation and exportation of securities.

5. Deposits to and withdrawals from accounts with financial undertakings in Iceland, including cash withdrawals.

6. Foreign direct investment, including longterm lending.

7. Residents’ purchases of real estate abroad.

Foreign exchange transactions taking place between residents and non-residents and involving domestic currency as a constituent of the transaction is permitted through the intermediation of a financial undertaking. Such transactions shall though be reported to the CBI. Same applies for investments in foreign currency.

20.6 Lending and borrowing

Borrowing and lending in domestic and foreign currency between residents and non-residents is permitted except for foreign currency loans from residents to non-residents that are disbursed to a bank account with a financial undertaking in Iceland and allocated, directly or indirectly, to: a. Investments in bonds or bills issued in domestic currency and electronically registered pursuant to the Act on Electronic Registration of Title to Securities. b. Deposits in domestic currency with deposit institutions in Iceland that bear annual interest of 3.00% or more. c. Investments in unit share certificates of funds that invest in bonds or bills issued in domestic currency and electronically registered pursuant to the Act on Electronic Registration of Title to Securities, or that own domestic currency deposits held at deposit institutions in Iceland, if cash and deposits bearing annual interest of 3.00% or more constitute 10% or more of the funds’ assets. d. Investments in the equity of a company that invests or allocates funds, directly or indirectly, in the manner described in Items a-c.

Upon receipt of confirmation from the CBI that the loan is not for the above-mentioned purposes, such loans are permitted.

CBI that transactions involve hedging, provided that a foreign exchange imbalance exists over the duration of the derivative contract. The hedging shall reflect the foreign exchange imbalance and contracts shall be amended accordingly if the premises for them change; i.e., underlying assets are sold or debts settled prior to maturity.

The CBI may revoke the confirmation if it concludes that the premises for the hedging no longer exist. Derivative transactions are subject to the condition that the contracts may not be transferred, directly or indirectly, to a third party prior to maturity

20.8 New Investment

The new rules from the CBI, no. 200/2017, do not affect parties’ obligations in connection with investments undertaken using new inflows of foreign currency. Such investments must be reported within three weeks of the date on which the new inflows of foreign currency are converted to domestic currency. Funds released upon the sale of a new investment do not require confirmation from the CBI; however, the CBI shall be notified of the sale.

The FX Act defines a New Investment as any investment made after 31 October 2009 pursuant to an influx of foreign currency which is converted into ISK via a domestic financial institution. Therefore, in order for an investment to be considered a New Investment, it is a criterion that a foreign exchange transaction occurs whereby foreign currency is sold for ISK at a domestic financial institution. Funds on foreign currency accounts with domestic financial institutions deposited prior to 31 October 2009 do not constitute an influx of foreign currency.

20.7 Derivatives

Derivatives transactions with financial undertakings in Iceland for the purpose of hedging against risk, where domestic currency is used in a contract against foreign currency is permitted, upon receipt of confirmation from the

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