BAHR Dispute Resolution Insight - 02/23

Dispute Resolution Insight

OPENING STATEMENT

The second quarter is always hectic, with many hearings taking place after Easter, and preparations for the hearings starting just over the summer break.

We are also preparing our fall seminars, with both directors’ liability and arbitration on the agenda. We are really looking forward to seeing clients and colleagues at these events.

This second quarter has also seen several important and interesting decisions from the Norwegian Supreme Court in commercial cases. One of these concerned third party funding of an opt-out class action against two home alarm system providers for compensation for alleged competition law infringement. Another was the recent decision concerning right of first refusal in de-merger situations. BAHR’s newsletter on the competition infringement case can be found here.

In June, Oslo District Court also rendered its (first instance) decision in the NOK 1.7bn directors’ liability case against the former CEO and Chairman of the Board of Directors of a large listed Norwegian company. The claims against them failed.

Since the financial crisis in 2007, directors’ liability cases have become common in Norwegian courts. BAHR has conducted a comprehensive study of the available case law on directors’ liability from the enactment of the current Private Limited Liability Companies Act and the Public Limited Liability Companies Act of 1999. Interestingly, contractual counterparties (such as suppliers and service providers) and customers together make up the largest group of claimants in such liability lawsuits. Further, the study shows that there is a strong correlation between the number of bankruptcies in the Norwegian market and lawsuits filed against directors.

You can read more about the study and the results in our first article. We will also elaborate on the study and how to mitigate the exposure in our upcoming seminars on directors’ liability in Bergen on 24 August and Oslo on 31 August.

The scope of the directors’ duties and issues to consider are constantly developing. Today, most businesses rely on some sort of digital solution as part of their operation. The consequences of a breach of a company’s digital systems or infrastructure can be paralysing and result in significant losses for the company. Recent developments from the US and signals from government bodies on this side of the Atlantic indicate that now is the time to put cyber security on the board room agenda.

You can read more about this and the Norwegian perspective in our second article on directors’ liability in the event of a cyber breach.

Our third article concerns tax disputes. Nobody likes to meet the government in court. Having an opponent with almost unlimited resources seem very ‘David v. Goliath’. However, the government is not always right, and in the third article we provide some key insight into usual issues that arise in tax disputes.

I hope that this Dispute Resolution Insight provides an interesting read, and take the opportunity to wish all our friends, clients and colleagues a nice and dispute-free summer.

Skaldebø-Rød Head of Dispute Resolution

E: atska@bahr.no

M: +47 922 87 727

Atle

TRENDS IN DIRECTORS’ LIABILITY LAWSUITS BEFORE THE NORWEGIAN COURTS

BAHR has conducted a comprehensive study of the entire Norwegian body of case law on directors’ liability since the enactment of the Companies Acts in 1999, in total more than 330 judgments.

The study shows a drastic surge in the number of lawsuits brought against directors in the aftermath of the 2008 financial crisis – a number that has remained high since. A likely driver for the continued pressure on directors may be the most important finding of the study: where a suit is brought, directors are held personally liable in 50 percent of the cases.

In this article, we discuss the latest developments in directors’ liability through the key insights provided by the study: who are the typical claimants? On which grounds do they base their claims? And, crucially, how can a director’s exposure be mitigated?

About the study

The study conducted by BAHR is a complete review and analysis of all published judgments by the Norwegian courts in directors’ liability lawsuits since the current Private Limited Liability Companies Act (Nw. aksjeloven) and the Public Limited Liability Act (Nw. allmennaksjeloven) (together the Companies Acts) entered into force in 1999. The two acts have similar rules on directors’ liability.

Directors’ liability – the basics

Although there are few formal requirements as to directors’ qualifications and competence under Norwegian law, directors are nevertheless expected to comply with statutory and non-statutory requirements, with non-compliance potentially resulting in directors being held personally liable for vast amounts.

According to Section 6-12 of the Companies Acts, the board of directors of Norwegian limited liability companies has the overall

responsibility for managing the business of the company. This entails that directors are consistently put in a position where decisions that may entail a risk of being held personally liable for damages must be made.

Under Norwegian law, the statutory basis for bringing a claim for damages against a director is set out in Section 17-1 of both of the Companies Acts. The provisions incorporate the general principle of liability in negligence in the field of Norwegian company law and are thus considered references to the general culpa principle in Norwegian tort law. The decisive criteria for a director to be held liable is that he or she has acted in breach of a duty incumbent on the director or omitted to act according to his or her duties. Such breach or omission may result in an economic loss for the company (or third parties), and the director may be held personally liable for the loss. Generally, a director is held liable if he or she could and should have acted differently in the relevant situation.

Given the personal nature of the liability, a directors’ liability claim may have severe consequences for directors and, in the extremes, lead to personal financial ruin. At best, and regardless of how ill-founded a suit may be, defending a claim is an unpleasant, bothersome, and time-consuming process for the directors involved.

Strong correlation between the number of lawsuits and underlying bankruptcies

The number of directors’ liability lawsuits was relatively limited in the first decade after the Companies Acts entered into force. Our analysis shows that there was a sharp increase in the number of lawsuits brought before the Norwegian courts in 2008 and 2009. This increase is likely linked to the financial crisis, as litigation against directors is, naturally, at its most frequent where the company in question has gone bankrupt and has no funds to cover outstanding claims.

Our study shows that the number of lawsuits filed against directors after the company has gone bankrupt is more or less proportional to the number of directors’ liability lawsuits per year. As the financial crisis led to a surge in bankruptcies, it is only logical that more claimants tried to bring legal actions against

the directors personally to recover their losses.

This is illustrated by the line chart below, where the total number of directors’ liability lawsuits in the period from 1999 to 2023 is represented by the orange line (there are no published judgments from before 2003) and the number of underlying bankruptcies in directors’ liability lawsuits in the same period is represented by the yellow line.

As the chart shows,, the number of directors’ liability lawsuits has remained high and stable since 2008, also in the years after Norway otherwise recovered in the aftermath of the financial crisis. The financial crisis likely led to an increased awareness of the duties of directors, and how their acts and omissions correspond to these. There is little doubt that the awareness of the possibility to seek coverage from directors, both when the company has gone bankrupt, or as a safeguard when the company is struggling and in risk of bankruptcy, is increasing.

Since the financial crisis, the total number of bankruptcies in Norway has remained relatively stable at a high level – just as the total number of directors’ liability lawsuits. Although there is no strict correlation

Bankruptcies in directors’ liability lawsuits (1999–2023)

between the number of directors’ liability lawsuits and bankruptcies in the Norwegian business sector, we see that the number of lawsuits concerning directors’ liability being brought is influenced by developments in Norwegian business in general.

We see the emergence of a trend in which the number of lawsuits brought against directors, the proportion of underlying bankruptcy cases and the number of judgments in favour of claimants follow each other, all of which increased sharply in the wake of the financial crisis.

Typical errors and omissions argued in directors’ liability lawsuits

Our study also gives interesting insight into which errors or omissions claimants most typically argue as basis for claims.

The Companies Acts contain a number of duties that the board of directors must comply with. Although the duties are incumbent on the board as a collective body, each individual director has a personal responsibility for the proper fulfilment of his or her duties. Any breach of a standard of

conduct incumbent on a director, or omission to act accordingly, may, in theory, give rise to liability. While the lawsuits included in our review are based on a wide range of purported breaches, some types of breaches are more frequent than others.

Most of the directors’ liability lawsuits are based on allegations of failure to fulfil a contractual obligation, often in the context of the duty of disclosure and the duty of loyalty. A typical example is an allegation that the board of directors have failed to inform a contracting party or investor of the company’s weak financial position and that this has caused a loss to the contracting party or investor because the investment would not has been made if they were aware of the company’s situation.

Breach of fiduciary duties and the statutory requirement of maintaining an adequate level of equity and liquidity are also high on the list of alleged breaches. The former is a legal standard, entailing that the board is responsible for the proper management of the company, and is often used as a supplement to a more specific norm that is allegedly breached. The requirement of maintaining adequate levels of equity and

Alleged breaches of directors´duties

BreachofcontractDailyoperationDutyofdisclosureSufficient equity Loyaltyobligations BreachofaccountingprovisionsIllegaldividendorloansNeglectedoversightActingforpersonalgainSaleof shares

liquidity is the counterpart to the shareholders of a limited liability company not being liable beyond their investment in the company and implies an obligation to ensure at all times that the company’s assets net of liabilities are adequate in light of the risks and scale of the business. It also requires that the company has sufficient liquid assets to cover current liabilities. In lawsuits where this requirement is invoked, the claimant’s argument will typically be that the board should and could have taken action to save the company from bankruptcy.

The typical claimants

To understand the trends in directors’ liability lawsuits, we must also look at the argued basis for liability in the context of who the claimants typically are.

Both the company itself, its shareholders, creditors, and others may freely file a lawsuit against a director based on an alleged breach of duties or omission to act. Although directors’ liability can arise in several different situations, the profile of the claimant can say a lot about the case itself. While our review shows that different categories of claimants seek to pursue

claims against directors, some categories are more recurring than others.

Many lawsuits are brought by the company’s contractual counterparties, which include both suppliers and service providers (20%) and customers (22%). Suppliers and service providers often file lawsuits where goods or services have been supplied with deferred payment. Then, prior to payment, the company enters bankruptcy, and the supplier seeks to take action against the directors personally. These claims are often based on alleged breach of the requirement of adequate equity and liquidity as well as the duty of disclosure – and, more generally, a fiduciary duty. The supplier will often also argue that there is a breach of the contractual obligation the company had to pay for the goods or services.

In lawsuits filed by companies’ customers, the situation is often similar – but reversed. A customer has paid for goods or services, but the company enters bankruptcy prior to delivery, or the goods/services are defective.

Shareholders are the third largest group of claimants (17%). The basis for lawsuits filed

Claimants in directors’ liability lawsuits

by shareholders varies more, but include declaration of consent, unlawful distributions, competing business, breach of the principle of equal treatment and abuse of authority. However, a common theme is management and disclosure of information regarding the company’s financial situation, typically where the board fails to provide sufficient and/or correct information prior to a shareholder injecting additional equity into the company, and where the shareholder would not have injected the funds had the information been shared.

More than 50 percent risk of being held personally liable if a lawsuit is filed BAHR’s study has revealed that on average and over the lifespan of the current Companies Acts (24 years), more than half of all directors’ liability claims have resulted in personal liability for the defendant directors. This means that – statistically speaking - a directors’ liability claim decided upon by the courts, will succeed over 50 percent of the times.

Accordingly, and generally speaking, the risk of being held personally liable under the Norwegian rules on directors’ liability is not insignificant.

Mitigating the exposure

While the findings from BAHR’s comprehensive study may raise concerns for the directors of Norwegian companies, there are several ways in which the exposure can be mitigated.

The ground rule is, obviously, to act in compliance with statutory and non-statutory requirements that are incumbent on the board of directors. As a starting point, every director must have a comprehensive understanding of his or her duties and aim to always act accordingly. In addition to examining the requirements in the Companies Acts, directors will benefit from ensuring that they have access to proper legal, economic and, if relevant, scientific expertise. It is crucial to be able to identify challenging situations, and to obtain proper guidance to ensure that the board of directors handles such situations prudently. Needless to say, it is always better to ask for proper advice before a potential breach or omission to act has occurred.

Having adequate compliance programs and procedures is important to mitigate the exposure to liability for significant damages in directors’ liability cases.

However, even with the best efforts, it is not always possible to avoid a lawsuit. Therefore, having a proper directors’ liability insurance, that covers both legal costs and the potential responsibility for damages, is absolutely recommended.

Jan B. Jansen Partner

E: jbj@bahr.no

M: +47 934 94 30

Jan is admitted to the Supreme Court with a practice focused on tax litigation (in particular matters under the Petroleum Tax Act), oil and gas disputes, insurance and professional liability matters. Jan has acted as legal counsel in numerous cases regarding directors’ liability and related insurance coverage.

Mathilde Lund Meltvedt Managing Associate

E: mamel@bahr.no

M: +47 48 00 12 29

Mathilde is part of BAHR’s dispute resolution team and litigates cases in arbitration as well as before the ordinary courts. She has broad experience with disputes within commercial law and the energy sector and has liability and contract law as her areas of expertise. Previously, Mathilde worked as a deputy judge in Oslo District Court, where she, among other things, mediated and settled a large number of complex commercial disputes. She currently specialises in directors’ liability cases and has experience with this area of law both as legal counsel, lecturer and as a judge.

Andrea Dahlum Senior Associate

E: andah@bahr.no

M: +47 905 07 137

Andrea is part of BAHR’s Corporate M&A group. She is currently on leave to write her PhD thesis at the University of Oslo. The subject is directors’ liability from a comparative perspective. For her master’s degree dissertation, Andrea conducted a comprehensive study of the entire Norwegian body of case law on directors’ liability since the enactment of the Companies Acts in 1999 up until 2017, which has later resulted in the publication of a legal textbook about directors’ liability in practice. The study Andrea conducted in 2017, which a team from BAHR has later updated and elaborated on, forms the basis of this article.

DIRECTORS´ AND SENIOR EXECUTIVES´ LIABILITY FOR CYBER BREACHES

In a time of rapid technological development, we have seen an increase in cyberattacks and cyber breaches. For businesses, going digital is therefore not without risks and recent cases overseas and signals from European government bodies indicate that now could be the time to put cyber security on the board room agenda. So, what is the status and how does it look from a Norwegian perspective?

Increased digitalisation

Because of growing digitalisation, the likelihood of cyberattacks and privacy- and data breaches increases. Most businesses incorporate some sort of digital solution as part of their daily operation, and for the vast majority IT systems are an integral part of the business throughout the company.

Cyberattacks can therefore be paralysing to the daily operation of businesses, as well as making sensitive personal or commercial information available to competitors or the public. This could in turn inflict losses on customers, consumers, partners or suppliers. Such loss or damage will in most cases be subject to breach of contract provisions or statutory liability for the company suffering the data breach, for example under the GDPR. In some cases, there might even be grounds for significant penalties or fines.

The economic consequences of a cyberattack or data breach can thus be significant, resulting in substantial losses also for the company suffering the cyber-attack or data breach. In the wake of such events, questions will be asked as to whether it could have been avoided, and if so, whether someone

can be held responsible. This prompts the question: Could corporate directors and senior executives of Norwegian companies be held personally liable if their company fails to adhere to adequate cyber security protocols?

The international backdrop

Recent legal proceedings in the United States and warnings from regulatory bodies, such as those in the United Kingdom, suggest that inadequate efforts to ensure digital security could result in personal responsibility for directors and senior executives.

In the United States, two recent cases warn that shortcuts on digital security could lead to personal liability and even criminal liability for corporate directors and senior executives. In October 2022, in a potential landmark case for the United States, the former Chief Security Officer of Uber was found guilty of criminal obstruction for failing to report a cyber breach to the authorities. Following the Uber judgment, the Federal Trade Commission (FTC) has announced new legal proceedings against the CEO of Drizly, an online alcohol delivery

service, due to a cyberattack that exposed the personal information of 2.5 million customers.

Even though the mentioned cases undeniably put cyber security on the board room agenda, they are based on facts that perhaps make them less typical in a Norwegian context. In the Uber case, information about the cyber breach was deliberately concealed from the FTC, despite the company already being under investigation by the FTC for an earlier breach two years prior. In the Drizly case, the company and CEO had been aware of earlier security protocol issues yet chose to publicly claim to have appropriate protection in place while not taking sufficient steps to implement basic cyber security measures. Such aggravating factors could have prompted the authorities to target corporate directors and senior executives personally.

Despite not necessarily being representative of how most companies would act upon suffering a cyberattack, the cases from the United States underline the importance of adequate measures and protocols and serve to encourage directors to bring cyber security into the board room.

The Norwegian perspective

There have not been any similar cases against directors or senior executives of Norwegian companies. However, there is no getting around the fact that directors and senior executives risk facing both civil and criminal liability in case of absent or grossly insufficient cyber security measures.

As mentioned above, the consequences of a cyberattack or data breach relating to third parties will in most cases be subject to contractual or statutory regulation. Director’s liability actions following such incidents will likely be brought by shareholders or the company itself, seeking to recover loss suffered by the company due to e.g. halt in production, damages paid to contracting parties, or penalties or fines imposed by the authorities.

Civil liability

As mentioned in our previous article Trends in directors’ liability lawsuits before the Norwegian courts, the board of directors has an overall responsibility for managing the business of the company. With digital solutions and IT systems becoming integral to businesses across all levels, directors and

senior executives shoulder a pivotal responsibility in building a robust digital foundation for the company. Furthermore, the escalation in both the frequency and impact of cyberattacks warrants a prioritisation of cyber security within the company, reinforcing the importance for directors and senior executives to address this critical concern. This will at least include ensuring that the company has and maintains security measures that are compliant with government regulations and/or applicable standards and recommendations. Such regulations may include GDPR which among other things, imposes an obligation on companies that process personal information to ensure that the information is adequately protected. Additionally, there are several recommendations from both government agencies, such as the Norwegian National Security Authority, and several large IT and telecom providers that should be observed.

The board of directors and CEO of both public and private Norwegian companies could be held personally liable for damages caused intentionally or negligently through the operation of the business. Thus, cyber security is not solely the responsibility of the CTO or the IT-department but will also fall under the responsibility of the board of directors and CEO — as the cases from the United States show.

Norwegian case law grants the directors significant leeway when it comes to commercial considerations and the interest of the company. Provided that the directors actually made such considerations in the

first place, this could result in courts holding back somewhat on their review of the board’s considerations of appropriate measures for a specific company. The key questions will therefore be whether the senior executives and board of directors made relevant considerations and took appropriate measures to protect the company against such breaches in advance and ensured that adequate security policies were incorporated and maintained by the company.

In the event of a cyberattack or data breach, the board of directors and senior executives should be expected to deal with the incident in accordance with applicable standards and recommendations. Failure to do so might expose the board to shareholder scrutiny and liability action.

Criminal liability

The threshold for imposing criminal liability on directors in the event of cyberattacks and data breaches are considerably higher than for civil liability. Imposing criminal liability will require gross lack of judgment, in which a director through either actions or omissions grossly disregarded his or her office for the company with intent or negligence, for example by showing a clear disregard for the company’s need for cyber security measures.

If the director or senior management has shown gross misconduct or wilful disregard for their office, the criminal provisions open for both fines and in aggravating circumstances imprisonment. Both are

available punishments for directors and senior management of public and private Norwegian companies. Such gross lack of judgment could also include failure to ensure appropriate cyber security protocols being implemented. Cyber security is not solely the responsibility of the CTO or the IT-department. The CEO and directors should therefore have a keen eye on the company’s actions in relation to cyber security — both before and after a potential breach.

Cyberattacks against listed companies

In addition to the risk related to general civil and criminal liability, directors and senior executives in companies listed on the Oslo Stock Exchange (OSE), Euronext Growth Oslo or other stock exchanges, should consider whether information regarding an ongoing or prior cyberattack constitutes inside information and if so, what should be disclosed to the market. There are several recent examples of cyberattacks against listed Norwegian companies, and directed at companies listed on OSE, where information regarding the attacks was considered inside information and as such disclosed.

If the information related to a cyberattack is regarded as inside information, the company must immediately initiate its internal guidelines for handling inside information. This includes the duty to inform the market as soon as possible, if the company, on its own responsibility, does not decide to delay the disclosure. Therefore, cyberattacks could result in gruelling dilemmas for the

directors and senior executives, as it may not always be in the company’s or its shareholders’ interest that all information about the attack is disclosed to the market immediately. For instance, an immediate disclosure might, in certain situations, escalate the ongoing attack, make the company vulnerable for new attacks or make any ongoing defence or investigation more difficult. As such, directors and senior executives in listed companies should therefore also ensure that adequate measures are taken with regards to inside information if a cyberattack happens, to avoid liability.

Outlook

Presumably most Norwegian businesses that rely on digital solutions as part of their daily operation have made some considerations as to the company’s need for cyber security and have put in place adequate measures to prevent cyberattacks or data breaches. With the increased risk of such events and increased attention from regulators and law enforcement authorities, now could be a good time to ensure that systems and policies are sufficient and suited for the company’s operation.

Given that cyberattacks can inflict significant losses on the company and its contracting parties, the directors should also ensure that both the company’s and directors’ insurance correspond to the possible liability to which they are exposed, as well as consider whether adequate limitation of liability clauses are implemented in high-risk-contracts.

Atle Skaldebø-Rød Head of Dispute Resolution

E: atska@bahr.no

M: +47 922 87 727

Atle is admitted to the Supreme Court and has extensive experience across a broad range of complex commercial disputes. His practice includes post-M&A, directors’ liability, shareholder disputes, company law, financial reporting and marine insurance as well as special forms of judicial proceedings, such as enforcement proceedings, preliminary injunctions and securing of evidence.

Andreas Busch Managing Associate

E: anbus@bahr.no

M: +47 46 91 08 58

Andreas represents clients in a wide range of commercial disputes. His practice includes litigation and arbitration concerning corporate matters and complex contractual disputes e.g. within the energy sector, as well as directors’ and professional liability cases. Andreas also has extensive experience with special forms of judicial proceedings such as securing of evidence and injunction proceedings.

Fredrik Andreas Stenstadvold Senior Associate

E: frste@bahr.no

M: +47 932 85 216

Fredrik works in BAHR’s dispute resolution team and acts as counsel in a wide range of commercial disputes, inter alia, tax litigation, post-M&A, corporate law, and liability. In addition, Fredrik has previous experience working in BAHR’s finance and capital markets team. Before joining BAHR, Fredrik was a research assistant under the department of civil procedure, a summer law clerk of the Supreme Court and a trainee at the Office of the Attorney General (Civil Affairs).

TAX LITIGATION IN NORWAY

Disputes with the government can be a necessary evil when doing business. Tax disputes are often litigated in Norwegian courts. They typically represent a significant economic value for the taxpayer, but the opposing party is a ‘Goliath’ with unlimited recourses. Even the largest corporations can feel small when facing the tax authorities in court. Below we explain the nature of a tax dispute and some important elements to consider from the taxpayer’s perspective.

Tax disputes in a nutshell

A tax dispute can be a lengthy, complex, and costly affair for the taxpayer. For a period of up to five years after the filing of the annual tax return (ten years in grave cases), the tax authorities may challenge the position of the taxpayer. The process is often initiated by a tax audit followed by a formal notice of reassessment, and the tax authorities will typically argue that an item of income is taxable or that a cost item is not deductible. The tax authorities are highly competent and have several specialist departments handling various kinds of corporate taxation issues, such as the Oil Taxation Office, the Section for Large Enterprises, the Section for Transfer Pricing and the Unit for International Cases.

Prior to finalizing the reassessment, the tax authorities will inform the taxpayer of the factual and legal basis for the proposed changes. Thereafter, the taxpayer is given the opportunity to submit comments and objections. Subsequently, the tax authorities will, unless they are convinced by the taxpayer’s arguments, prepare a draft decision which is submitted to the taxpayer for further input before a formal reassessment decision may be made. The period leading up to such reassessment decision can last years, and it is not uncommon that the tax authorities throughout this process demand detailed information and factual clarifications from the taxpayer. Hence, the process can be lengthy, costly and resource-demanding.

Should the taxpayer disagree with a reassessment decision, it has the right to appeal to the independent Tax Appeal Board. The Tax Appeal Board has its own secretariat where case handlers new to the dispute will review the appeal and make an independent recommendation before a final decision is reached by the Tax Appeal Board. There are however some drawbacks. The taxpayer is normally not allowed to argue its case before the Tax Appeal Board in person, as the case handling is normally only in writing. Further, the Tax Appeal Board does

not currently have the resources necessary to handle its case load in an efficient manner and has been repeatedly heavily criticised by the Parliamentary Ombud for Scrutiny of the Public Administration for an unacceptably slow case handling.

Instead of such appeal process before the Tax Appeal Board, the taxpayer may challenge the legality of the reassessment decision in the court system. In Norway there are no specialised tax courts or administrative tribunals, so the case will be handled by generalist judges (handling everything from criminal cases to large commercial disputes) in the ordinary courts.

Before bringing a tax dispute to court, either directly or after an appeal to and decision from the Tax Appeal Board, the taxpayer should be aware of two special principles limiting the courts’ ability to overturn a tax reassessment decision.

Exclusion of evidence

The general rule under Norwegian law is that a party to a dispute can submit whatever evidence she or he deems necessary to enlighten the court of the relevant facts of the case. This principle is of course subject to certain basic limitations, e.g. a requirement that the evidence must be relevant and proportionate, and not subject to legal privilege or other specific exceptions.

The specific nature of tax disputes raises the question of what new evidence can be introduced in litigation, and how the courts consider such evidence. A special principle in tax cases is that the action as a main rule must be based on the same facts and evidence that was available to the tax authorities at the time when the reassessment decision was made.

The relief sought (“the claim”) in tax disputes is normally that the decision from the tax authorities is invalid (based on incorrect facts or an incorrect interpretation of the law). Taxpayers are obligated to

provide complete and correct information to the tax authorities before any tax assessment decision is made. This separates tax cases from other administrative decisions where the government normally has the main responsibility to investigate the facts relevant before reaching a conclusion. For this reason, the Supreme Court has held that a tax decision as a starting point cannot be invalid as a consequence of not being based on facts that the taxpayer should have brought to the tax authorities’ attention before the administrative decision was made. Hence, a basic principle when arguing tax cases in the court system is, as formulated by the Supreme Court in Rt. 2006 at 404 (Invensys) section 38, that

“there is generally no room to assert new factual grounds as objections to a tax decision after the administrative procedure has been concluded. The legal review must be based on the same factual basis that was available to the tax authorities.” (our translation)

Hence, it is very important for a taxpayer to provide sufficient evidence for facts which support the case at the administrative stage of a tax dispute and thereby avoid the risk of later having any ‘new’ evidence or facts excluded in the court proceedings.

Fortunately, the principle is not without important exceptions. The taxpayer is always free to supplement the factual arguments that have previously been presented with new evidence, provided that the taxpayer cannot be blamed for not presenting such evidence during the administrative process. For example, if a taxpayer has provided extensive documentation that an object is a business asset (so that costs connected to the asset is deductible), the taxpayer is normally free to provide additional information and evidence substantiating that the asset is used in the taxpayer’s business. Further, the principle will never prevent the taxpayer from

presenting new evidence needed to contradict any new evidence the tax authorities relies on in court.

On this point there is an important difference between judicial review (courts) and administrative review (the Tax Appeal Board). When appealing to the Tax Appeal Board, the taxpayer is, unlike in the court system, always free to provide any new evidence. Thus, the rule on exclusion of evidence should play an important part in the taxpayer’s decision on whether to bring a case directly to court instead of filing an appeal to the Tax Appeal Board. If there is potentially new evidence to be explored, it could be more beneficial to file an appeal. On the other hand, if the facts are clear and the outcome of the case is dependent on a pure matter of law, going directly to court may be the best alternative.

Limited judicial review of discretionary assessments

Certain parts of a tax decision may be subject to limited judicial review by the courts. This is typically the case where the tax authorities have carried out a discretionary assessment, for example concluded on an arm’s length transfer price or a valuation of specific assets. In such cases, the courts can always control whether the discretionary assessment is based on the correct understanding of the facts, a correct interpretation of the law and that the result is not manifestly unreasonable or otherwise a result of an abuse of authority. However, within these limits, the court cannot overturn the discretionary assessment (specific pricing/valuation).

The significance of this limitation on the authority of the courts should however not be exaggerated. If the taxpayer’s arguments are structured correctly, the court can in reality set aside more or less any tax decision with which it disagrees. Further, in transfer pricing disputes, it is important to note that the Supreme Court has held that the courts

can always try whether the discretionary assessment is based on a correct interpretation and application of the OECD Transfer Pricing Guidelines.

That said, in cases involving a discretionary assessment by the tax authorities, it is particularly important to consider whether an appeal to the Tax Appeal Board (which may freely overturn any discretionary assessment in the original decision) is a better (first) choice than the ordinary court system.

Reflections

Tax cases can involve significant values, be complicated and comprehensive and raise technical and economical issues and special

principles limiting ordinary judicial review by the courts. The fact that the opposing party is the government and that the subject matter relates to the taxpayers’ “contribution to society” might (but should not) put the taxpayer at a disadvantage vis á vis the government. At the same time, companies will sometimes have no other choice than to challenge unlawful tax decisions with large economic significance in open court.

BAHR has extensive experience with successful representation against the tax authorities and can provide meaningful insight to the fundamental “dos” and “don’ts” in the process.

Simen Skjold Søgaard Partner

E: sss@bahr.no

M: +47 900 21 287

Simen is admitted to the Supreme Court and rejoined BAHR as partner after six years at the Office of the Attorney General (Civil Affairs) in April 2022. Simen represents clients in all forms of commercial disputes with a particular focus on tax and VAT litigation and matters involving public authorities.

Linnea Cecilia Gule Senior Associate

E: ligul@bahr.no

M: +47 412 99 517

Linnea focuses on corporate and shareholders’ disputes and general contractual disputes, often within the marine sector. Recent cases include representing a shipowner in a complex litigation concerning a long-term LNG (bunkers) supply agreement and acting in a high-profile oil taxation dispute against the tax authorities. Linnea also has considerable experience assisting clients in mediation, in and out of court.

Julian Davidsen Associate

E: judav@bahr.no

M: +47 976 19 125

Julian joined BAHR in 2022 and is an associate in the firm’s tax group. He has experience in managing conflicts between taxpayers and tax authorities at both the administrative and judicial levels, with a particular emphasis on petroleum taxation and transfer pricing issues.