Ownership restrictions in Norwegian banks and insurance companies to be assessed by the EFTA court – a takeover wave on the horizon?

Pursuant to long-standing administrative practice, no single shareholder has, as a main rule, been allowed to acquire more than 20/25 % of the total shares in a Norwegian bank or insurance company, unless the shareholder is itself a financial institution. In addition, in connection with establishment of a new bank or insurance company, at least three quarters of the share capital must be placed through a rights issue without preferential rights for existing shareholders.

After Norway entered into the agreement on the European Economic Area in 1994, ESA has addressed several issues with the Norwegian ownership control rules for financial institutions, as well as rules restricting investments by banks and insurance companies.

The ownership restrictions started out as an "ownership prohibition zone" between 10% and 90 % in the Norwegian Financial Institutions Act of 1988. After a reasoned opinion from ESA in 2001 challenging this legal framework, the ownership ceiling was increased from 10% to 25%. In 2009, Norway adopted legal provisions setting out suitability assessment of shareholders exceeding certain ownership thresholds (10%, 20%, 50%) in line with Directive 2007/44/EC, but – regardless – an ownership ceiling of 20 – 25 % for owners that are not financial institutions has been consistently practiced by the Ministry of Finance to this day.

This practice has effectively excluded, among others, private equity funds from acquiring above 25 % of the shares in Norwegian banks and insurance companies. It has also adversely affected the trading price of such companies' shares and restricted the available equity funding for new participants in the insurance and banking space, having a clear negative effect on potential innovation and competition in the financial industry and ultimately increasing incentives for such companies to redomicile out of Norway.

Historically, the ownership restriction was intended to ensure a financial industry independent from other industries, prevent corporate abuse of power by large owners and "bankier-banks", and to ensure effective supervision. The concept of "bankier-banks" alludes to banks with outsize owner(s) seeking to influence certain engagements of the bank.

These views – that still are held by the Ministry of Finance - were legitimate at some point in time, but modern prudential regulation of banks and insurance companies, as well as widely held corporate governance principles, include more appropriate and proportional tools to address such risks.

The Ministry of Finance has brought forward as a new supporting argument that banks and insurance companies with a wide shareholder base involves a lower level of risk but struggle to document this position, in particular in light of the fact that no other EU/EEA states seem to have based their practices on similar views.

Furthermore, banks and insurance companies established in other EEA states can provide their services in Norway on a cross-border basis or through a branch without having to contend with such restrictive rules on ownership in their home state. Paradoxically, there are examples of Swedish banks controlled by PE funds being approved as single owners of Norwegian banks.

The current infringement action was brought before the EFTA Court on 23 September 2024. The action came after a reasoned opinion on 11 March 2020 from ESA, concluding that the Norwegian ownership ceiling of 20-25 % in banks and insurance companies for acquirers that are not financial institutions is in breach of the EEA Agreement.

In the report for the hearing, the EU Commission supported the position of ESA, stating on the point of the ownership restriction that

"the CRD and Solvency II aim for full harmonisation and therefore do not allow the national authorities to apply additional criteria on top of those already set out in the directives is also valid for the thresholds by which these criteria are assessed. The general exclusion of acquisitions of shareholdings above 25 per cent has no foundation in EEA law and contradicts the legal recognition and reality of holding companies."

The EFTA Court is expected to give its decision in approximately 6 – 8 months. In our view, the court is most likely to find the ownership restriction to be in breach of the EEA Agreement. We do not expect the Ministry of Finance to change course before the decision.

An EFTA Court decision will be final and legally binding for Norway. Should the EFTA Court decide against Norway, the administrative practice of refusing owners to acquire more than 20/25 % of the total shares in established banks and insurance companies can be amended without any legislative steps. We doubt that the Ministry of Finance or the Financial Supervisory Authority will reject ownership applications above 20/25 % following such court decision (provided that the acquirers fulfil the suitability requirements), exposing the Norwegian government to lawsuits and claims for compensation of financial loss. 

Shareholders that have previously had their ownership applications rejected based on the ownership restrictions, may be entitled to compensation for financial loss. 

The statutory requirement effectively prohibiting shareholders above 25% in connection with establishment of new banks and insurance companies is not part of the current court proceedings. The legality of those provisions is, however, closely linked to the topics that the EFTA Court shall now decide and it remains to be seen whether the EFTA Court ruling will contain statements that may form basis for lawsuits for founding shareholders having been prohibited in the license letter from increasing their shareholding above 20/25% after commencement of the bank's business operations.

Private equity funds have several times been approved as qualified owners of Norwegian banks (up to 25 %), and in accordance with the above such funds and other non-financial institutions could now start looking at such potential targets as part of their deal flow.