Ordinarily, the employer will step in and pay 80 % of the salary up until day 14 (sick pay), save for a statutory deduction equivalent to approx. one day’s pay. From day 15 onwards, compensation to the employee will be paid by the State.
In the present situation and to avoid employees with Covid-19 symptoms infecting others, the Swedish Government has decided that employees will receive compensation from the State for the statutory deduction, and that employers carrying the cost for sick pay during the period until day 14 will also receive State compensation. Additionally, employees will only have to present a doctor’s certificate after 21 days (the normal period being 7 days).
The Government has imposed new legislation implying that if trade unions/employees and an employer are able to agree to reduce working hours by either 20, 40 or 60 %, then the employer may reduce the salary paid to employees by 4, 6 or 7.5 %, respectively, and be compensated by the State for a part of the salary. Compensation from the State is available in respect of a monthly salary which does not exceed SEK 44,000. Support will be limited to a period of six months, which may be extended for an additional three months. The new legislation aims at capturing the situation where an employer suffers from temporary and serious financial difficulties which could not reasonably have been foreseen or avoided. The employer’s business must be viable from a long-term perspective in order for support to be available, and it falls upon the employer to show that it is likely that the preconditions for support are met. Companies that recently paid out dividend or are planning to pay-out dividend or similar payments may not be eligible for state support.
The new provisions entered into force on 7 April 2020 but apply retroactively from 16 March 2020. They will apply throughout 2020.
The Government has proposed an amendment to the new scheme for state supported temporary short-term work. According to the proposal, employers may reduce employees’ working hours by 80 % and simultaneously reduce the employees’ salaries by 12 %. The amendments are proposed to apply for three months as of 1 May 2020.
In order to mitigate against temporary liquidity problems experienced by companies as a result of Covid-19, new temporary rules on payment deferral of certain taxes and employer’s social security contributions have been adopted by the Swedish Parliament. The new rules entered into force on 30 March 2020 and can be applied retroactively as from 1 January 2020.
The payment deferral includes payments of preliminary taxes on salary, employer’s social security contributions and VAT for a maximum of three months during January – September 2020. Additionally, payment of VAT which is accounted for on an annual basis from and including 27 December 2019 up to and including 17 January 2021 may also be deferred. The deferral may be granted for up to twelve months. Interest expense of currently 1.25 % (per 12-month period) and a deferral fee of 0.3 % per commenced calendar month is levied on the deferral amount up until the due month. The Government has proposed a decrease of the interest. The interest expense and deferral fee are not tax deductible. Deferral of payment may be used by any company, provided that it does not have substantial tax debts or mismanage its financials.
The obligation to submit tax returns every month applies even if companies have been granted a deferral of payment.
New rules on temporary reduction of employer’s social security contributions, to the effect that only old-age pension contributions remain payable, have been adopted. After the reduction, the social security contributions payable amount to approx. 10 % instead of approx. 31 %. The reduction will be available for up to 30 employees and in relation to that part of the salary of the employee which does not exceed SEK 25,000. The rules apply to salaries paid during the period 1 March 2020 – 30 June 2020.
Similar relief for those who are self-employed have also been adopted.
The Swedish Parliament has also adopted a temporary change to the rules on accrual funds for the self-employed and individuals owning shares in Swedish partnerships (Sw. handelsbolag). The new rules mean that 100 % of the taxable profit for 2019 up to SEK 1 million may be allocated to an accrual fund and will be available for set-off against future losses. The rules apply to financial years ending in 2019.
Business insurance policies in the Swedish market are generally aimed at protecting against business disruption when such disruption is caused by damage to property. In other words, such policies do not typically cover the occurrence of an epidemic, but they may sometimes contain provisions regarding disruptions caused by barricades or similar obstructions put up by the police or by the emergency services. Some companies may also have taken out special insurance for disruptions caused by epidemics. These policies would generally cover disruptions caused by actions by authorities aimed at curtailing the spread of a contagious disease, although it will be important to review and understand the specific conditions under which cover is triggered.
Many companies are now reviewing key agreements with a view to ascertaining whether the current situation amounts to force majeure. Epidemics such as Covid-19 may under certain circumstances be considered as a force majeure event. Under Swedish law, there may be additional grounds to invoke in the absence of a force majeure provision or when such a provision cannot be invoked. An overall assessment needs to be made of the particular agreement considering all relevant circumstances. On vinge.se you can read more about this in the article Possible contractual objections under Swedish law as a result of Covid-19
Payment for deliveries to customers who may be expected to face liquidity problems should be secured – and if this is not possible, it is advisable to review whether the delivery can be stopped, or whether access to any goods delivered can be curtailed or the goods repossessed. Depending on the nature of the customer’s financial difficulties and the contents of the contract, it may be possible to require advance payment, or security in respect of further deliveries. If there is a bankruptcy risk, it will be important to factor in mandatory claw-back legislation into any such arrangement.
If there are indications that a supplier is facing financial difficulties, it will be important to secure necessary comfort, such as agreeing that payment will be made only on full delivery of the goods, and/or to look for alternative suppliers.
A large number of companies and employees will almost certainly be severely impacted by the disruptions taking place as a result of the Covid-19 pandemic. The new challenges will impact companies’ compliance risks, which are likely to be different and, to a certain extent, increased. Employees who are under pressure, or scared of losing their jobs, may cut corners trying to hit performance targets. When an individual faces financial or other difficulties, the risk of misconduct (including, inter alia, the risk of fraud, embezzlement and bribery) may be increased. At the same time, social distancing and travel restrictions may make compliance with laws and rules harder to monitor.
As countries and economies reopen, there will most likely be increased pressure on companies and employees to jump-start business and the moving of goods and services. Such pressure may in turn create incentives to circumvent processes and procedures as temporary ‘emergency measures’ for the revitalisation of the business and economy. However, Covid-19 is highly unlikely to be accepted as justification for a company to violate anti-corruption or other laws, or for an employee to engage in misconduct. To best protect the company as well as its employees, an assessment should be made of what additional compliance risks that have arisen as a result of the pandemic. In addition, previously identified risks may need reevaluation and compliance measures in place prior to the outbreak of the pandemic may need to be updated to meet the new risk exposure. In order to ensure that employees and business partners are well prepared for the compliance related issues they might encounter during the course of business, it may be necessary to provide updated compliance training specifically adapted to the new or reevaluated risks.
In addition, companies should remind its employees and business representatives that, regardless of the challenging times, compliance measures may not be circumvented. A clear tone from the top will exemplify integrity and compliant behavior and resonate throughout the organisation. Employees and business partners should be encouraged to ask questions when faced with challenging decisions or uncertainty pertaining to compliance and a reporting mechanism through which employees and business partners can anonymously report alleged misconduct is recommended.
Maintaining internal compliance procedures, as well as identifying and mitigating new risks, even in times of major disruption, is crucial. The liability of a company involved in criminal misconduct may include large fines, forfeiture of profits, debarment from public procurement and significant negative publicity. The criminal liability for individuals, such as employees, members of management and board members, may include fines or imprisonment. Covid-19 has changed many things, but one thing it has not changed is the responsibility for compliant business activities.
Both landlords and tenants are looking at the potential impact of the Covid-19 situation on their commercial lease agreements. There may be discussions as to whether the tenant’s obligation to pay rent may be affected by reference to the situation falling within any force majeure clause contained in the agreement, whether it may be mitigated by reference to the principles in Section 36 of the Swedish Contracts Act or whether it might be reduced by reference to provisions in the Swedish Land Code or general principles of contract law. If tried by courts, the answer is likely to vary depending on a number of circumstances, in particular the actual contents of the contract and the existence and contents of Government or local authority restrictions affecting the use of the premises.
For sectors especially affected by the Covid-19 outbreak, e.g. hotels and restaurants, the Swedish Government has adopted a regulation of state aid to landlords agreeing to a temporary discount for fixed rental costs in vulnerable sector (17 April 2020). In short, the regulation implies that the state carries 50 % of the costs for a discounted rent, but at most up to 25 per cent of the original fixed rent. Thereby, a discounted rent is subsidised for the landlord. The landlord will be eligible for the compensation for a discounted rent during the period from 1 April until 30 June 2020, provided that a specific agreement regarding the discount has been concluded prior to 30 June 2020. Applications for compensation may be made with selected County Administrative Boards from 1 July 2020 until 31 August 2020.
Companies with financing arrangements should closely monitor their compliance with certain financing terms. For instance, financial covenants are typically measured on quarterly or semi-annual test dates based on certain financial ratios. A breach of financial covenants may be identified before, on, or after the relevant test date. Financial covenants can either be maintenance covenants (i.e. applying at all times) or incurrence covenants (applying only upon the occurrence of a specific event, e.g. raising of additional financing). The latter are unusual in Swedish credit agreements but more common in bond terms.
Possible pro forma adjustments (which can be both negative and positive for the ability to meet the financial covenants) in relation to synergies, acquisitions, disposals etc. should be considered if a breach is expected. Costs etc. incurred as a result of or to address Covid-19 effects could be deemed extraordinary items which can be added back to EBITDA. It is important to be mindful that definitions can include caps and other restrictions in relation to extraordinary items.
Some financing arrangements include so-called equity cure provisions, i.e. a pre-agreed manner for remedy of financial covenant breaches within a certain period of time after they occur. These typically require additional equity or subordinated financing.
Material adverse change (“MAC”) clauses are common in financing agreements and generally aim to target the occurrence of an event or events which is/are likely to affect the ability to make payments when due or otherwise significantly deteriorate the financial condition of the borrower. Historically, MAC clauses have seldom been used to terminate loans, but the effects of Covid-19 could potentially change this practice.
Financing arrangements often include termination events in relation to (i) insolvency and insolvency proceedings, which could apply not only to the borrower but also to other group companies and (ii) cessation of business, meaning that if the borrower or a group company ceases to conduct business, this could constitute an event of default. This may be especially relevant for companies in certain business areas more affected by Covid-19, such as the travel or hospitality industry.
Cross default or cross acceleration clauses are common in financing agreements. In short, a cross default clause means that, if there is an event of default in another financing arrangement, this triggers a termination right also under the relevant agreement. A cross acceleration clause would require that the relevant other creditor has accelerated the other financing arrangement.
Financing arrangements often contain clauses in relation to force majeure and market disruption which may need to be considered, as these could affect the obligations of the lenders to provide the required services under the financing agreement.
The outbreak of Covid-19 has raised questions about the possibility of physical attendance at upcoming AGMs. Even though an AGM is not formally covered by the government's ban on public gatherings (maximum 50 persons), the ban should, as far as possible, continue to be complied with. The ban must be seen in light of its overall purpose to prevent the spread of infection and should be regarded as indicative of what is appropriate. According to the general advices published by the Swedish Public Health Authority, measures must be taken to prevent the spread of infection and therefore meetings should, if possible, be postponed if the meeting requires participants to meet physically or, as another alternative, be carried through digitally. This also applies to companies and associations that organize general meetings. Other measures to prevent the spread of infection may be to mark distances on the floor where queues are formed and to offer the possibility of hand washing with soap and water.
It is worth noting that companies are required under the Swedish Companies Act to hold their AGM for approval of the annual accounts for 2019 by 30 June 2020 at the latest. Postponing the AGM until late June may be an option to consider for some companies.
The Swedish Parliament has on 3 April 2020 decided to adopt a temporary law amendment to reduce the number of physical participants at general meetings. The law amendment allows the Board of Directors, without prescription in the articles of association, to carry out advance voting (so‑called postal voting where votes are submitted in advance to the company through mail/e‑mail) and proxy collection (where the company prefills who will act as proxy). The regulation came into force on 15 April 2020 and applies to general meetings that take place after the entry into force, regardless of the date of notice.
In light of the reduction of the meeting restriction to 50 persons and the Swedish Public Health Authority’s latest instructions, another temporary law amendment will enter into force on 1 June 2020 and will allow for general meeting is conducted entirely without physical attendance by allowing the Board of Directors to decide that advance voting is compulsory. The regulation applies to general meetings that take place after the entry into force, regardless of the date of notice.
You can read more about this in the article Update regarding the implications of Covid-19 for upcoming AGMs on vinge.se.
The Swedish Corporate Governance Code (the "Code") contains requirements regarding advance notice of the date of the AGM (paragraph 1.1), the attendance of members of the Board of Directors at the AGM and other general meetings (paragraph 1.2) and the preparation of a proposal for chairman at the AGM (paragraph 1.3). Due to the measures taken to limit the ongoing spread of infection, the Swedish Corporate Governance Board (the "Board") has decided that the three provisions in the Code stated above do not need to be complied with in the prevailing circumstances, which means that it does not constitute any deviation from the Code to not comply with the abovementioned three rules. These special applications apply throughout the full year of 2020.
It is worth noting that the Board's special applications do not affect the duty of the Board of Directors and the CEO to be prepared and able to provide information to the shareholders and make necessary decisions at the AGM.
In addition to the above, listed companies should continue, as far as possible, to take appropriate measures to prevent the spread of infection by limiting the number of physical participants at the AGM. Proposed measures include announcing that neither food nor refreshments will be served at the AGM and that the CEO's speech be cancelled or greatly reduced. Companies can also choose to broadcast the AGM via video link or to make the CEO speech available to shareholders on their website.
Listed companies have a continuous duty immediately to disclose inside information, i.e. information of a precise nature which, if made public, would be likely to have a significant effect on the company’s share price. The effects of Covid-19 on operations and profitability can potentially be considered inside information. This may be relevant, for example, if parts of the company's operations must be discontinued or a substantial contract is terminated. If the company's result is more generally adversely affected by Covid-19, it must also be considered whether it is necessary to issue a profit warning. In this regard it is important to consider whether the results will deviate significantly from what the company has announced previously.
M&A processes have been affected to a large extent due to Covid-19. Above all, valuations of businesses have become more difficult, resulting in pending deal discussions slowing down or transactions being postponed or aborted. There has also been a difficulty in securing debt financing of the purchase price which has dampened activity. The M&A activity is not expected to come to a complete standstill, instead businesses in certain industries will presumably benefit from the crisis. For well capitalised buyers reduced stock prices could also create new M&A opportunities.
For example, the market for W&I insurances has been affected. Insurers are though still willing to underwrite policies but in some cases with exclusions for Covid-19 and its effects. Certain financing-out conditions and considerations paid in the form of earn-outs are to be expected. Additional parts of the M&A-process like due diligence, regulatory matters and conditions precedent are also affected by the outbreak of Covid-19 which you can read more about on vinge.se in the article M&A in Sweden and the impact of Covid-19.
The outbreak of Covid-19 and the governmental measures adopted to curb the spread are also impacting competition authorities around the world. While most competition authorities are still carrying out merger control investigations and accepting notifications, they are adjusting their modus operandi. Many authorities have their staff working remotely and in-person meetings are no longer being organised. Traditional physical submissions are being replaced by new electronic filing systems. In some jurisdictions, review periods have also been suspended.
The timeline for the submission and review can be expected to be longer than usual. Notably, difficulties in obtaining feedback from third parties (i.e. competitors and customers) in connection with market investigations may cause delays in the review process. As a result, competition authorities may increasingly use the full review period or extend the review process to the extent possible by, e.g. declaring notifications incomplete or sending information requests which may stop the clock.
The European Commission (the “Commission”) has announced that it is encouraging merging parties to delay notifications to the extent possible. Contributing factors to this approach are the difficulties the Commission may face in collecting information from third parties and limitations in terms of access to information and databases for Commission staff, all of whom are working from home. Nevertheless, the Commission currently accepts and reviews non-complex notifications and has resumed its review of complex cases. The Commission may nevertheless be less willing to allow formal filings in cases requiring more complex probes or detailed feedback from the market.
The approach of national competition authorities in the EU varies across jurisdictions. As mentioned above, all periods and timelines for merger reviews are currently suspended in a few jurisdictions, e.g. Denmark, France and Spain. In Sweden, the Competition authority has not announced any adjustments to its operations.
In the United States, the Federal Trade Commission has declared that early termination of the Hart-Scott-Rodino Act waiting period will be provided on a more limited basis and later in the process than has historically been the case. The U.S. authorities have also indicated that they expect to revise existing timing agreements for complex transactions.
The competition authorities are facing unprecedented challenges due to the Covid-19 outbreak. The situation and governmental measures in place may change quickly in each jurisdiction. Against this background, it is important to closely monitor developments in the jurisdictions where merger control filings are contemplated; significant delays are possible. It is important to ensure that these potential issues are taken into account in transaction documents, e.g. regarding deadlines for the filing of merger notifications or potential longstop provisions.
For any urgent needs that have emerged due the Covid-19 situation, government authorities, regions, municipalities and other entities that are subject to the rules on public procurement, may enter into agreements with suppliers directly, without conducting a formal tender procedure. This is due to an exemption in the public procurement legislation which may be invoked if the purchase is absolutely necessary due to extreme urgency brought about unforeseeable events, and there is no time for conducting a formal tender procedure.
For companies facing problems with liquidity due to the current situation, a company reorganisation may be an option. The purpose of the company reorganisation is to give an illiquid company some relief in order to deal with its financial situation. In this way, the company may avoid having to resort to liquidation or bankruptcy. To initiate a company reorganisation, the company needs to submit an application to the court, specifying inter alia the reasons for its financial difficulties and its proposed measures to turn the situation around. By means of the court’s decision to initiate company reorganisation, payment of all unsecured debts that arose before the decision is suspended. The creditors of the company are prevented from initiating any enforcement measure against the company, including filing for bankruptcy with regard to such debts. Furthermore, parties contracting with the company cannot terminate their agreements due to actual or anticipated payment difficulties. The salaries of the company’s employees will be covered by the national wage guarantee, although that is limited to a certain period and a maximum amount. As regards tax that has mainly been incurred before the date of the application to initiate reorganisation, such tax is part of the unsecured debt and will therefore also be part of a future proceeding concerning composition. During the reorganisation, the company also has the opportunity to negotiate a composition with its creditors. A composition means that the unsecured debt of the company that existed at the time of the court’s decision can be reduced to a level which the company can manage to pay. A composition agreement is enforced by a court order and is binding upon all the affected creditors. A company reorganisation can be terminated by the court, either if the purpose of the reorganisation has been achieved or if it is deemed that the reorganisation cannot be successful.
A number of initiatives have been presented by the Swedish Government and the Swedish Central Bank, Riksbanken, to avoid credit supply problems and support business. These include:
Some other measures have also been taken, including, but not limited to, the following:
Maria-Pia Hope, CEO Vinge, Managing Partner Stockholm
Anna Palmérus, Managing Partner Gothenburg
Rikard Azelius, Managing Partner Malmö