Sweden: The Return of the Participating Debenture

Last Updated: 20 September 1999
Article by Magnus Brorsson

by Magnus Brorsson

Ivar Kreuger and the Kreuger Group became during the 1920s the symbol for the Swedish dream of success and an international role. Kreuger played a global role in the finance world and did in fact finance several countries against monopoly rights for his match industries. What nobody knew was the dark secrets of the group; the fact that the group was blown up with the help of internal transactions and that the participating debentures were in practice nothing else than junk bonds. The proceeds from the business was not enough to pay dividends but required that new debentures were issued to acquire capital. The crisis became acute in February 1932 when the International Telephone and Telegraph Corporation demanded that the acquisition of the Swedish telephone company LM Ericsson (now Ericsson) should be canceled because of misleading representations. Ivar Kreuger was found dead, presumably by suicide, only a few weeks later. After that there was no rescue; most of the companies in the group were liquidated. Lenders to the parent company, Kreuger & Toll, received a 43 % distribution but shareholders and holders of debentures did not receive any distribution at all.

The Kreuger crash left deep wounds in the Swedish financial body. Also Swedish corporate law was heavily influenced by the horrors that was revealed after the crash as Swedish corporate law was aimed at the protection of investors. "Never again Kreuger" is the motto under which Swedish corporate law has lived for over 60 years.

One of the financial instruments used by Kreuger was the participating debentures. The Swedish analysis was that the participating debenture did not deserve to exist; it was an evil thing used by Kreuger to deceive people. Thus, it was forbidden. Now, more than 65 years after the death of Ivar Kreuger the participating debenture is making its return into Swedish corporate law.

The Swedish Corporate Act contains a restriction against raising certain types of cash loans. Unless otherwise stipulated in the provisions on convertible loans, a company may not raise a cash loan on terms that require that it be repaid with other than a nominal cash amount or a cash amount determined with reference to monetary fluctuations. On the other hand, corporations are permitted to raise loans against bonds or other debt instruments that carry the right to interest, the amount of which is dependent wholly or in part on the dividend paid to shareholders or the profit of the corporation. In a new governmental report (SOU 1997:22) it is proposed that the prohibition of loans that are to be paid back with an amount based on e.g. the assets in a winding up situation etc. (participating debentures) is abolished.

The return of the participating debenture also opens the backdoor for shares without voting rights, something which has been like a red rag to a bull to Swedish corporate law makers.

Repurchase and Sale of a Corporation’s Own Shares

The participating debenture was not the only victim of the Kreuger crash. On many capital markets an important role is often played by the corporations themselves. A Swedish company may, however, not repurchase or in any other way acquire its own shares. The Swedish rules in this respect are more restrictive than those of most other countries. The committee behind the above mentioned report states that a major reason for allowing the repurchase of own shares is that it can improve the opportunities to refund surplus capital to their shareholders and thereby contribute to a more efficient use of capital.

With respect to public companies, a relaxation of the restriction against share repurchases must be implemented within the framework of the second Company Law Directive of the European Union. Therefore, it is suggested that a public company may only repurchase it’s own shares within the framework of the company’s non-restricted equity and that the company’s total holding of its own shares may not exceed ten percent of all the shares in the company. It is also suggested that the decision to repurchase shares shall be made by the general meeting or, with the authorization of the meeting, by the board of directors. However, the committee does not think that the limitations according to the directive are sufficient. It is therefore suggested that the repurchase and the sale of repurchased shares shall follow largely the same routines as decisions to reduce or increase the share capital. This means inter alias that a two-third majority of the votes of the general meeting will be required for such a resolution to pass and that the meeting shall have access to the same information for its decision as it does in the case of reductions in the share capital. It also means that the shareholders shall have a preferential right to acquire repurchased shares when they are sold. If the shares are to be sold on the market, the same decision-making rules must be followed as for a direct placement.

The committee is of the opinion that the proposed rules are balanced between the financial considerations and the protection of shareholders and others that the committee thinks corporate law shall provide. It is to be seen whether such a restricted possibility is enough for the capital market and, indeed, whether the political decision makers are ready to go even this far, even though the committee has also proposed special rules intended to prevent a corporation from influencing its own stock price on the market.

When it comes to private companies it is proposed that a decision to buy its own shares may only be made by the general meeting. The committee thinks a major reason for a private company to repurchase its own shares is to facilitate changes in ownership. Since this might require the repurchase of a significant portion of the shares no limit for how many shares can be repurchased is suggested for private corporations.

Redemption of Minority Shares

The committee is also proposing a completely new chapter on the redemption of minority shares. The chapter completely changes how the procedure is regulated. It is, inter alias, proposed that parties who are displeased with an arbitration judgment may bring action before the Svea Court of Appeal. This would shorten the judicial process compared with today. Cases involving compulsory redemptions would thereby be concentrated within a single court, which would have more experience with these types of cases.

If a parent company alone or together with one or more subsidiaries owns more than nine-tenths of the shares representing more than nine-tenths of the votes of all the shares in a subsidiary, the parent company currently has the right to redeem the remaining shares from the other shareholders of the subsidiary. Those who own shares that may be redeemed have the right to have those shares redeemed by the parent company. It is important to note that "parent company" in this context (as in most cases in Swedish corporate law) means a Swedish corporation. However, it is now proposed that every shareholder — together with their subsidiaries if applicable — who owns more than nine-tenths of the shares in a corporation shall have the right and the obligation to redemption. This will make the redemption rules applicable also in an international context, since the new rules do not require that the majority owner is a Swedish corporation or that there be a group relationship at all.

No Rules About Mandatory Bids in the Swedish Stock Market

The committee has evaluated whether mandatory bid rules should be implemented in the Swedish stock market. By mandatory bid is in this context meant the obligation on the part of those who have acquired a certain percentage of the shares in a company to offer to buy the remaining shares as well.

The main argument to supports such mandatory bid rules is usually that a corporation’s minority shareholders should have a possibility to get out of a corporation in connection with a change in controlling ownership. Such a change carries with it the risk that the value of the corporation’s share will fall, because of which those owners who are displeased should be able to get out of the corporation on the same conditions as those who have sold their shares to the majority owner.

According to the committee this reasoning has been criticized for being based on the unfounded assumption that a change in controlling ownership is typically damaging to the corporation’s other shareholders. Because of this and other criticisms against mandatory bids, the committee has decided not to propose any such rules.

Other Proposals

Around 20,000 corporations are formed each year in Sweden. Almost all of these are formed according to the so called simultaneous procedure ( a simpler procedure originally intended as an axception from the normal procedure). The committee proposes that the successive, normal procedure is abolished because it has served its purpose

Swedish law currently permits only one exception to the principle of a share’s free transferability. In its articles of association, a corporation may provide that shareholders or others shall be entitled to redeem shares that have passed to a new owner, the so-called right of preemption. This possibility is proposed to be retained for both private and public companies. However, certain changes are proposed. Further, an opportunity to utilize a right of first refusal (internationally the most common way of dealing with these issues) is proposed.

It is also proposed that private corporations shall be entitled to implement consent clauses, which would create an opportunity for closed corporations to limit the transferability of their shares with a binding effect on the corporation.


The committee behind the report has been working on changes of the Swedish Corporation Act since 1990. Several of its proposals has already been adopted and there is no reason to believe other than that at least most of the new proposals will be adopted. The committee has suggested that the proposals made in the report shall be effective as of 1 January 1999.

It is the express end-goal of the committee to achieve an entire new Corporation Act. The amendments made this far has mainly concerned details, but details of great principle nature, such as the introduction a few years ago of the private and the public company (only the public company may raise capital from the general public, compare the British PLC and LTD). The work so far by the committee has also been aimed at adapting the Swedish law to the directives of the European Union. Even if those amendments carried some principle changes hard to swallow for some theorists, it remains to be seen if the justice department is willing to accept major principle changes such as the participating debenture and the repurchase of own shares when it is not forced by the EU to do it.

This article is based on the official report SOU 1997:22 "The Corporation’s Capital" (Sw: Aktiebolagets kapital) by the Corporate Law Committee appointed by the Government.

For further information, please contact us.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions