Norwegian savings banks have traditionally been organised as independent foundations whose equity essentially consisted of ownerless capital build up of retained profits. In 1987 the Savings Banks Act was amended to enable savings banks to bring in capital from the market, by issuing primary capital certificates, from 1 July 2009 termed “Equity Certificates” (ECs)[1]. The capital brought in by this means counts as Core Tier 1 capital under the provisions governing capital adequacy. Equity certificates have been issued by 27 of 112 savings banks. 20 of these EC savings banks are listed on the Oslo Stock Exchange. The savings banks have also been given the opportunity to convert to private limited companies, still being savings banks as long as at least 10 percent of the shares are controlled by a savings bank foundation. As of 1 July 2012 there are three Norwegian savings banks organised as limited companies, including the largest Norwegian bank, DNB, alone having about 40 percent of the deposits in the Norwegian market.

Ownership of the EC savings bank’s capital
The EC Savings banks core capital consists of one “ownerless” part and the Equity Share Capital, the latter being owned by the EC holders. The ownerless capital is divided into different funds; mainly the Basic Fund, the Gift Fund and the Compensation Fund. The Equity Share Capital consists of the Equity Certificate Capital, the Premium Fund and the Equalisation Fund.

Issuance of EC
A resolution to issue ECs requires a two-thirds majority vote by the savings bank’s Committee of Representatives. This is the same majority as is required for changing the bank’s articles of association. In addition it might be required two-thirds majority acceptance from the EC holders in the Committee, if this is noted in the bank’s statues.

If ECs are issued at a price exceeding book value, this premium is added to two separate funds, the Premium Fund and the Compensation Fund. The premium is divided between the funds based on the Equity Share Capital and the ownerless capital relative sizes compared to the bank’s total equity capital after the issuing of new ECs.

The Premium Fund counts as core capital under capital adequacy regulations. In the event of liquidation of a savings bank, EC holders are entitled to the Equity Certificate Capital, the Premium Fund and the Equalisation Fund (more details below) provided all of the bank’s creditors have received full settlement.

The Premium Fund and the Equalisation Fund can, with permission of The Financial Supervisory Authority, be used to finance bonus issues of ECs.

The Equalisation Fund
The Equalisation Fund is designed to stabilize EC holders’ cash dividends. The share of retained earnings that the Committee of Representatives can allocate to the Equalisation Fund cannot exceed the Equity Share Capital share of the bank’s total equity capital. The permitted allocation to the Equalisation Fund is reduced by whatever amount is distributed as cash dividends.

The Equalisation Fund counts as core capital under capital adequacy regulations. Cash disbursements (dividends) from the Equalisation Fund to EC holders can only be made when warranted by the bank’s capital adequacy ratio.

Distribution of losses - priority
The order of priority applying to a savings bank’s capital base is illustrated in the chart below. The Equalisation Fund, the Savings Bank’s Reserve and Gift Fund would be the first items to be written down (proportionally) in the event of a deficit in the bank. Afterwards the Premium Fund and the Compensation Fund shall be written down (proportionally). In other words, all other reserves in the bank – including those to which EC holders have no ownership rights – must be exhausted before the Equity Certificate Capital is depleted.

Dividend – dividend policy
Dividend on ECs can be distributed from the bank’s profit for the year, or from retained earnings, and must be commensurate with prudent and sound business practice. Consequently, savings banks cannot guarantee a fixed future dividend on ECs. The size of the dividend will depend on the savings bank’s operating results and dividend policy. However, the part of the profit to be paid out as EC dividend or allocated to the Equalisation Fund shall be equal to the Equity Share Capital’s part of total equity. However the maximum amount of dividend and paying to gifts is 60 percent of the same year operating results without permission of the Financial Supervisory Authority.

EC holders’ influence
The equity certificates confer limited influence in the committee of representatives; a minimum of 20 per cent and a maximum of 40 per cent of the representatives are elected by the equity certificate holders. However, equity certificate holders may achieve greater influence. The committee of representatives can by changes to statues decide that a two-thirds majority of the representatives elected by the equity certificate holders is required to pass certain resolutions particularly affecting the holders. This applies inter alia to any reduction or increase of equity certificate capital and to any resolution in favour of a merger or conversion to limited liability status.

Merger
For ECs issued before 1 July 2009 EC holders representing at least two-thirds of the Equity Share Capital may in connection with merger decide to demand redemption of their ECs at market value. In the event of failure to reach an amicable agreement, the market value will be fixed by an appraisal under the rules of the Juridical Assessment Procedure Act (Act of June 1, 1917). Under this arrangement the redemption value of the ECs would be determined by a judge and two, or alternatively four, experts in this field. These banks may, alternatively, have changed their statues, requiring a two-thirds majority of the representatives elected by the equity certificate holders to accept a merge.

For ECs issued after 1 July 2009 the committee of representatives with two-third majority may decide a merge. These banks may in addition have changed their statues, requiring a two-thirds majority of the representatives elected by the equity certificate holders to accept a merge.

Restrictions on major holdings
The same rules governing significant holdings apply to equity certificates as to shares. See the Financial Institutions Act section 2(b)-17.

Taxation
Taxation of Norwegian ECs follows the same rules as for taxation of Norwegian shares. Norwegian tax rules relevant to persons and entities which for tax purposes are not regarded as residents of Norway (foreign EC holders), are summarized below. Foreign EC holders’ tax liabilities in their home country or other country will depend on applicable tax rules in the relevant country.