World Law Group member firms recently collaborated on a Global Venture Capital Guide that covers more than 30 jurisdictions on investment approval processes, typical investment sectors and investment structures on Venture Capital deals (and more!).
The guide does not claim to be comprehensive, and laws in this area are quickly evolving. In particular, it does not replace professional and detailed legal advice, as facts and circumstances vary on a case-by-case basis and country-specific regulations may change.
This chapter covers Sweden. View the full guide.
1) In your jurisdiction, which sectors do venture capital funds typically invest in?
Between 2012 and 2017, International Corporate Transactions (ICT) and Life Sciences accounted for 78% of venture capital investments in Sweden. In 2018, those sectors together with consumer products, services, and retail accounted for 91% of the total venture capital investment volume in Sweden.
Between 2007 and 2019, the investment distribution by sector was as follows:
· ICT (41%)
· Biotech and healthcare (30%)
· Consumer goods and services (10%)
· Business and services (7%)
· Energy and environment (7%)
· Other* (5%)
*Other includes Agriculture, Chemicals and Materials, Construction, Financial and Insurance Activities, Real Estate & Transportation.
2) Do venture capital funds require any approvals before investing in your jurisdiction?
No approvals are required before investing in Swedish entities.
3) Are there any legal limitations to an offshore venture capital fund acquiring control or influencing the business, operations, or governance of an investee entity?
Generally, there are no significant legal restrictions that would prevent foreign and/or offshore venture capital funds from acquiring control or exercising influence over a Swedish entity. However, certain residency requirements apply to Swedish limited liability companies. A managing director (CEO) and deputy managing director of a limited liability company must reside within the European Economic Area (EEA). At least half of the company’s board members must also reside within the EEA and the same rule applies to the deputy board members, if any. If all members of the board of directors are residing outside of Sweden the company must have a representative in Sweden who can accept service of process on behalf of the company. This representative must be registered in the Swedish population register.
Please note that the abovementioned requirements concern residency, and not citizenship. It is possible to apply for an exemption from the residency requirements with the Swedish Companies Registration Office.
4) Would an investor be required to undertake an antitrust analysis prior to investment? When would such a requirement be triggered?
Although there are no statutory requirements to undertake an antitrust analysis prior to an investment, such analyses are usually necessary in practice, as both the Swedish Competition Act (Sw. Konkurrenslagen (2008:579)) and the EU’srules on competition include provisions on concentrations between undertakings that must be complied with.
A concentration between undertakings must be notified to the Swedish Competition Authority if (1) the combined aggregate turnover in Sweden of all of the undertakings concerned for the preceding financial year exceeded SEK 1 billion, and (2) at least two of the undertakings concerned had a turnover in Sweden the preceding financial year that exceeded SEK 200 million for each of the undertakings. If the aggregate turnover requirement according to point 1 is fulfilled but the individual turnover does not exceed the threshold set forth in point 2, the Swedish Competition Authority may require a party to a concentration to notify the concentration where particular grounds exist for doing so.
A concentration that is examined by the Swedish Competition Authority shall be prohibited if it would significantly impede the existence or development of effective competition within the country as a whole, or a substantial part thereof. In its review, the Swedish Competition Authority will especially take into consideration whether the concentration results in a dominant position being created or strengthened. If it is sufficient to eliminate the adverse effects of a concentration, the Swedish Competition Authority may, instead of prohibiting a concentration, issue an order to a party to the concentration to, for example, divest an undertaking or a part of an undertaking, or take some other measure which has a favorable effect on competition.
5) What are the preferred structures for investment in venture capital deals? What are the primary drivers for each of these structures?
Venture capital deals are primarily structured through issuances of, and subscriptions for, preference shares which entitle the security holders to certain rights that ordinary (common) shareholders are not entitled to (e.g., dividend and liquidation preferences, usually up to an amount corresponding to the invested amount plus, sometimes, added interest).
Investments in convertible loans which may be converted into shares when certain conversion events occur are relatively uncommon but can sometimes serve as an alternative or a supplement to a preference share financing.
The average life of a venture capital fund is estimated to be three to seven years.
6) Is there any restriction on rights available to venture capital investors in public companies?
Generally, there are no significant restrictions on rights available to venture capital investors in Swedish public companies.
7) What protections are generally available to venture capital investors in your jurisdiction?
Venture capital investors normally protect themselves by entering into a shareholders' agreement with the other shareholders or a majority of them. Such agreements offer protection in relation to how the investee entity is run, financed and eventually disposed of. Protection is also given by the articles of association, which is a mandatory document for all Swedish limited liability companies. Typical protections for investors in shareholders’ agreements (and to some extent in the articles of association) relate to:
· dividend preferences;
· liquidation preferences;
· voting preferences;
· entitlements to board representation and to influence major decisions of the company;
· non-compete obligations for key employees and founders;
· limitations on share transferability (e.g., pre-emption rights and/or right of first refusal);
· drag-along and tag-along rights; and
· anti-dilution and exits.
8) Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?
Generally, no significant challenges are associated with obtaining W&I insurance as a venture capital investor in Sweden. The utilization of W&I insurance in Sweden started around ten years ago and has increased during the past five years, although venture capital transactions only account for a relatively small portion of the overall volume of transactions in the market.
9) What are common exit mechanisms adopted in venture capital transactions, and what, if any, are the risks or challenges associated with such exits?
The choice of exit mechanism is primarily based on the expected return on the investment, the expected length of the exit process, and the available exit opportunities. The following figures are based on information from the Swedish Private Equity and Venture Capital Association.
Between 2007 and 2019, the main exit routes for venture capital by value were trade sale (38%), public offering (19%), and write-off (12%), while the main exit routes by number of companies were trade sale (26%), other means (22%), and write-off (13%).
10) Do investors typically opt for a public market exit via an IPO? Are there any specific public market challenges that need to be addressed?
See Question 9.
The main challenge with an exit through an IPO lies within the listing procedure as the transaction process normally takes longer, and involves significant costs for auditors, financial and legal advisors, registration and marketing.
Want to Learn More?
The objective of this publication is to serve as a Q&A-style multi-jurisdictional guide to venture capital law in countries where WLG member firms have offices. The guide intends to provide a high level overview of the venture capital market, including key sectors, preferred investment structures, regulatory approval requirements, limitations on acquisition of control in portfolio companies, restrictions on investment, investor protection, and exits; and hopes to provide readers the benefit of the shared global knowledge and local insights among the WLG member firms.