Capital raising – the board’s role and responsibilities

We increasingly see that raising capital forms part of many companies’ strategies. This applies, for example, to growth companies that must often complete key development milestones before revenues materialise, or to companies that make acquisitions settled in shares. Raising new capital may also be necessary to finance specific investments, or because the company no longer has sufficient equity and/or liquidity.

1. Shareholders’ interests

The board must facilitate a private placement on acceptable terms for existing shareholders, and within the framework of the Limited Liability Companies Act’s requirements on equal treatment and proper case handling. A key question is often whether shareholders’ statutory pre-emptive rights should be set aside, and if so, on what grounds.

In many private placements, some—but not all—existing shareholders are able to participate. At the same time, the subscription price can have a significant impact on how value is allocated among shareholders. New investors may also enter, and they typically do not want to pay too much. The board can therefore find itself in a complex negotiation situation, and board members may in practice also have divergent interests. In such cases, an independent valuation can be a useful point of reference.

A central issue is the size and parameters of the issue. This is primarily a financial assessment, but from a legal perspective I would especially highlight the importance of the minimum subscription amount (the “minimum amount”). The minimum amount should not be set so low that the company still lacks a realistic basis for continued operations—at least until the next phase or value milestone. A well-considered minimum amount helps ensure that investors are committed on equal terms and can make it easier to raise capital. The minimum amount should therefore be carefully considered and properly substantiated in the board’s proposal.

2. Approaching potential investors – duty of disclosure

If an investment bank or broker (“manager”) is used, they will often assist with information materials and outreach to potential investors. However, the board and existing shareholders will often take an active role in the process and have a duty of care in that respect. Liability may arise if investors have not received sufficient information. This is a balancing exercise: you want to present the company attractively, but you must also ensure that the information, taken as a whole, is not incorrect, incomplete, or misleading, and that material facts are disclosed.

A prospectus is often not prepared because the offer falls outside the scope of the prospectus requirement. Nevertheless, Norwegian law imposes requirements on the information provided to existing and new investors. Even where no prospectus is required, general principles of liability in damages and duties of loyalty apply, and the board may incur liability under section 17-1 of the Limited Liability Companies Act in the event of incorrect or misleading information.

There is limited case law on the board’s duty to provide information. In HR-2022-2484-A, the Supreme Court carried out a concrete overall assessment and concluded that the information was materially correct on key points, even though it contained some errors of judgment. The starting point is a duty to provide correct information on factual matters, but not every error or omission gives rise to liability. The prospectus rules were considered to provide a relevant frame of reference for the type of information investors normally need to make an informed assessment, but the informational needs must be assessed specifically in each case. Forecasts and expectations about the future are typically uncertain, and the investor generally bears that risk—provided the communication is not misleading and material assumptions and risks are sufficiently explained.

The case concerned professional investors. It remains an open question whether the assessment would have been as lenient if the investors had been less experienced individuals. This will depend on a concrete assessment, where factors such as the parties’ relative bargaining power may be relevant.

3. Practical steps to reduce legal risk in capital increases

• Obtain an independent valuation from a reputable financial adviser as a basis for subscription prices and terms.

• Seek to achieve the greatest possible consensus among existing shareholders before deciding on a capital increase. If not everyone agrees, ensure that well-informed shareholders within each interest group are involved.

• Ensure that investors receive adequate supplementary information. Even where no prospectus is required, the prospectus requirements can provide guidance on the disclosure duty in private placements. At a minimum, an information memorandum should provide a balanced description of the business, financial position and prospects, the rights attached to the shares, and a clear risk section addressing the most significant risk factors.

• If the company approaches investors who cannot be regarded as professionals, it may reduce risk to bring in at least one relatively experienced investor—preferably as a “lead investor”—who carries out the level of review and analysis normally expected of professional investors. This does not relieve the board of its responsibility to ensure that the information, taken as a whole, is correct and not misleading.

• It is advisable to establish a digital data room containing documentation for investors’ review (due diligence). This also provides traceability as to what information the company has made available. In early-stage companies, the information base will often be limited.

• Be balanced in presenting the company as an investment opportunity. Forward-looking scenarios should be tied to clear assumptions and weighed against key uncertainties.

• Presentations should also describe the company’s current and future competitive advantages. How the company differentiates itself can be decisive for success in a competitive market. Clear information on how the company intends to develop a technological or other advantage also allows investors to assess key investment assumptions.

This article is intended for general discourse and does not constitute legal advice. Assessments of legal matters, including investor information, marketing and any requirements for the prospectus must be made specifically in each individual case.