An extract from The Technology M&A Review, 1st Edition
Key transactional issuesi Company structures
The most typical forms of incorporation in Finland are the private limited liability company (Osakeyhtiö (Oy)) and the public limited company (Julkinen Osakeyhtiö (Oyj)).
Transactions, including technology M&A transactions, which involve private equity investors, are usually structured through one or more Finnish holding companies organised as limited liability companies, as driven by taxation and debt finance requirements or to help facilitate management ownership.
In technology M&A, buyers are often industrial companies rather than private equity companies, whereby acquisition structures often tend to be relatively simple, typically with no more than one holding company, or a buyer acquiring a target company directly due to the lack of external finance.ii Deal structures
Share and asset deals are the most typical deal structures in Finnish technology M&A transactions mainly due to tax reasons, as elaborated upon further below. Typical US structures such as triangular mergers are not contemplated by Finnish law; nor do they bring any tax or corporate law advantages.
Finnish technology M&A transactions tend to be based on one-on-one negotiations or, more seldom, structured auction processes, in which case corporate finance counsel typically leads the process.iii Acquisition agreement terms
Documentation in share acquisitions typically follows the framework of common law agreements with certain amendments to better fit the Nordic legal environment. In general, the documentation does not differ materially from the UK or US market standard, although the documents tend to be slightly shorter and certain legal concepts are interpreted differently due to civil law statutory reasons. Examples of differing interpretations include, for example, disclosure mechanics: in Finland, if a buyer has specific knowledge prior to closing, based on due diligence or otherwise, that a representation or warranty is inaccurate, it will usually not be able to claim for breach of that warranty after closing.
The conclusion of a definitive purchase agreement between the parties may be preceded by a letter of intent that outlines the contemplated acquisition. A Finnish-style letter of intent is typically not binding, except with regards to exclusivity and confidentiality terms.
While Finnish transactional documentation has generally been averse to broad conditions precedent, there are a few notable exceptions. Most technology companies in Finland have received Business Finland funding (state aid), meaning that clawback provisions always need to be taken into consideration in foreign acquisitions. Business Finland is typically able to claw back funding granted to a company retroactively in if an acquisition has not been granted consent by Business Finland, whereby the repercussions may be considerable. Due to this, the requirement of Business Finland consent is typically included as a condition precedent. Other typical conditions precedent include waivers of redemption or consent clauses contained in the articles of association of a target, as well as the requirement for consent for the transaction of the most important clients of a business.
Due to the covid-19 pandemic, there has also been a rise in the popularity of the material adverse change (MAC) clause. While this clause is frequently used in mergers and acquisitions in the US to provide a way out in cases where something materially unexpected happens in relation to the business being acquired, MAC clauses have been exceedingly rare in Finnish M&A. However, with the rise of global economic uncertainty, MAC clauses have started to be used more frequently, along with break clauses, force majeure clauses and other clauses catering to the decision-makers wishing for ways out in the event of rapidly escalating averse circumstances.
As to preferred purchase price mechanics, in share deals locked box mechanisms are a typical seller's preference, whereas on the buyer's side the preferred choice tends to be completion accounts. Earnout elements are also often seen in Finnish technology M&A transactions. In recent years, technology M&A transactions have generally been share acquisitions against cash or cash and share consideration, and this seems to also be the trend in 2020.
In recent years, warranty and indemnity insurance has started to be seen also in technology M&A transactions, although it is still relatively rare. It is also not a standard option for mid-market transactions due to pricing considerations and underwriters' often stringent due diligence requirements in order for IP warranty cover to be given.iv Financing
Technology M&A transactions in Finland tend to be overwhelmingly financed through equity, which is also a reason for the high share of industrial (non-private equity) buyers in this sector.
In the rare cases where external financing is used for a technology M&A transaction, senior secured bank debt is the most common source of debt funding. Small and medium-sized transactions are usually financed by Nordic banks.v Tax and accounting
There are various kinds of Finnish tax aspects that should be taken into consideration in relation to technology M&A transactions. The relevant tax considerations also vary depending on the structure and financing of each transaction and the scope of a transaction, for example whether a transaction concerns a share deal or an asset deal and the status of the parties either as individuals or corporations. In addition to the Finnish domestic tax legislation, the relevant income tax treaties concluded by Finland should also be taken into account.
The capital gains in relation to a transaction are generally taxable in Finland for Finnish tax-resident individuals and corporations and also for non-resident corporations having a permanent establishment for income tax purposes in Finland. Taxable capital gains in Finland on shares and assets are generally subject to the normal income tax rate (currently 20 per cent for corporations, and 30 or 34 per cent for individuals depending on the amount of the capital gain). However, capital gains realised on the shares of a Finnish company are, in general, not taxable income for non-resident corporations or individuals in Finland due to the various applicable tax treaty provisions. Capital gains realised on various assets other than shares might be taxable in Finland for non-resident individuals or corporations depending on the nature of the asset.
Certain capital gains arising from the sale of shares that are classified as fixed assets for Finnish tax-resident corporations are, in certain circumstances, tax-exempt under the Finnish participation exemption. For the participation exemption to apply, there are preconditions regarding the status of the seller, the nature of the ownership and the nature of the shares in question. If the preconditions are fulfilled, the respective capital losses are non-deductible in taxation.
Transfers of shares, securities and real estate in Finland are generally subject to transfer tax in Finland. The transfer tax is generally paid by the buyer. The transfer tax base consists of the purchase price and certain other contributions in connection with a transaction. The transfer tax rate for the shares of a Finnish company is 1.6 per cent. However, no transfer tax is payable in Finland for Finnish shares if both the buyer and the seller are not Finnish tax residents. In addition, no transfer tax is generally payable on the transfer of securities that are subject to trading on a regulated market or on a multilateral trading facility, subject to certain preconditions.
In general, the Finnish Accounting Act, as amended, and the related Accounting Decree are followed in Finland. However, the use of accounting standards as defined in the international accounting standards and the international financial reporting standards is mandatory for corporations whose securities are subject to trading on a regulated market in a country belonging to the European Economic Area and may also be used voluntarily by other corporations.vi Cross-border issues
A large number of Finnish technology M&A transactions have a cross-border element, and foreign ownership of Finnish technology companies continues to increase.
While the government generally views foreign ownership positively, the Act on the Monitoring of Foreign Corporate Acquisitions in Finland sets certain limits for foreign direct investment. The purpose of the Act is to monitor and, if deemed necessary, restrict the transfer to, or influence of, foreign organisations and foreigners. However, such restrictions are applicable only if key national interests, such as national defence, security of supply and other core functions of society, so require.
Under the Act, a corporate acquisition is deemed to occur when a foreign owner gains control of at least 10, 30 or 50 per cent of the aggregate number of votes conferred by all shares in a Finnish company. In sectors other than defence and dual-use sectors, the Act applies only to foreign owners residing outside the EU or the European Free Trade Association. Matters concerning the monitoring or approval of corporate acquisitions are handled by the Finnish Ministry of Economic Affairs and Employment.