SWEDEN Law and Practice Contributed by: Corinne Ekman, Mikael Nagy and Joacim Kanstedt, Gernandt & Danielsson Advokatbyrå KB
• employees and pensions; • tax; • compliance, permits, etc; • sanctions and anti-money laundering (AML); • litigation; and • disclosed information. The level of negotiation and extent of the reps and warranties differs depending on the target company, its industry and its stage of devel - opment, with more extensive warranties often seen in later-stage funding rounds. A Swedish representations and warranty catalogue is typi - cally less extensive than what is seen in the US. Further, disclosure letters are not common in Swedish VC investments. Forms of Recourse With regards to recourse, it is typically the founders and all or some of the other existing shareholders, depending on the situation, that give the representations and warranties to the investor in the investment agreement, severally and not jointly and on a pro rata basis. If and to what extent the company itself can provide, and be held liable for warranties, is subject to legal debate in Sweden. The prevailing view is that a company cannot be held liable to its investors (ie, in their capacity as subscribers of shares in the company) in connection with a new issue of shares, as the protection of the company’s creditors is prioritised over that of its inves - tors. However, it is common that the investment agreements are drafted so that the company also stands behind the warranties (sometimes with the caveat, to the extent legally permis - sible) and that any claim will be compensated by the issuance of new shares at quota value (compensation shares), in which case all share - holders must have agreed to such issuance of shares (given that the arrangement dilutes the other shareholders in benefit of the indemnified
investor). It is also not uncommon in Swedish investment agreements that existing sharehold - ers are allowed to indemnify a claim by transfer of existing shares or a combination of cash and existing shares (due to the fact that the founders or other existing shareholders may not have the liquidity to satisfy a claim in cash, as the invest - ment is received by the company). Liability for warranty breaches is usually limited by both time restrictions and monetary caps. Further, in Swedish-style transactions, it is com - mon practice that the warrantors are exempt from liability concerning issues that were (fairly) disclosed during the due diligence process, irrespective of whether the investor had actual knowledge of those issues. Covenants and Undertakings The investment agreement will include inter alia investor safeguarding covenants regarding the operation of the company’s business between signing and closing (which is to be conducted in its ordinary course of business), steps to be taken at closing by the company and exist - ing shareholders (eg, undertakings to ensure valid issuance of the new shares) and condi - tion precedents such as FDI approval(s) as well as consents from counterparties in relation to any change-of-control clauses (in each case if required)). Further, the investor is safeguarded through restrictive covenants in the shareholders’ agree - ment (such as non-compete and non-solicit, as well as customary confidentiality clauses).
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