Structure and process, legal regulation and consents
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
Acquisitions are most commonly structured either as a share sale or a sale of business. Even where a business is sold, it is occasionally carved-out into a newly established limited liability company prior to the transaction, and the new company is then sold to the buyer. Structuring a private transaction as a merger is generally uncommon. Instead, the acquired company is often merged with the buyer following the completion of the transaction.
The transaction process varies somewhat depending, among others, on how the transaction is structured, the field the company operates in, as well as whether any regulatory approvals are required to complete the transaction. A typical transaction process usually involves parties entering into a confidentiality or non-disclosure agreement (NDA) followed by the buyer’s due diligence. During due diligence, parties usually begin negotiations on the transaction agreement followed by signing. Depending on the conditions precedent, the timing between signing and closing is usually some weeks or months, depending on, inter alia, whether any authority approvals are required. The whole transaction process usually takes some months.
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
The laws primarily governing private acquisitions and disposals are the Finnish Companies Act and the general Finnish contract law principles. If one of the transaction parties is a publicly listed company, the Market Abuse Regulation (No. 596/2014) and Finnish Securities Markets Act may also apply, especially as regards insider information. In addition, the Finnish Competition Act or the EU Merger Regulation, if the thresholds for turnover are exceeded, often apply either by imposing an obligation to notify the transaction to the Finnish Competition and Consumer Authority or the European Commission, as applicable. If the transaction is between competitors, exchange of competition sensitive information is usually subject to applicable competition laws and regulations. Finally, depending on the target or the acquiring company’s business, the Act on Monitoring Foreign Acquisitions in Finland and sector-specific legislation may apply.
The acquisition agreement does not need to be governed by Finnish law, although this is often the case. However, in the case of a sale of a business, certain transfers of assets, for example a transfer of real estate, require that such ancillary transfer agreements are governed by Finnish law to satisfy the statutory requirements of such agreements. In cases where the transaction is carried out as a merger, the provisions of the Companies Act apply to the merger.
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
Finnish law does not generally make a distinction between legal and equitable title, and full title to shares or business passes normally upon the completion of the transaction agreement in accordance with the terms of the agreement. However, the transfer of shares needs to be notified to the target company in order for the transferee to exercise his or her voting rights attached to the shares.
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
Generally, each shareholder must agree to the sale in order for the buyer to acquire such shareholder’s shares. Where there are multiple sellers, the rights and obligations of the seller are often governed by a shareholders’ agreement containing tag-along and drag-along rights. In such case, an individual shareholder is contractually forced to sell, usually upon the occurrence of a triggering event such as a sale of the company, substantially on the same terms as the other shareholders. The Companies Act provides a squeeze-out right to a shareholder owning more than 90 per cent of the company’s shares and votes to redeem the remaining shares for a fair price. Where a squeeze-out right exists, the minority shareholder is also entitled to demand the majority shareholder to redeem his or her shares. The redemption price is the ‘fair price’ preceding the initiation of the squeeze-out procedure, which, in the case of a dispute, will be finally resolved in statutory arbitration.
Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
As a starting point, the parties are contractually free to allocate the liability for any assets or obligations between themselves, for example the seller may indemnify the buyer against certain liabilities. In the case of a share purchase, the company continues to hold its assets and liabilities as before the transaction, and thus any prior liabilities remain with the target. In an acquisition of a business, the parties can generally agree which assets and liabilities are included in the transaction and which are excluded. However, there are some liabilities for which the transferee can be liable under mandatory law towards third parties.
For instance, the buyer may become liable for environmental damage and be obliged to remediate any polluted land, although the remedial obligation lies primarily with the party having caused the environmental damage. Where the seller is bankrupt or has ceased to exist, the liability may fall on a party to whom the activity that caused the environmental damage was transferred if the transferee knew, or should have known, at the time of the transfer of the damage or the risk of it.
Additionally, it is currently unclear whether the liability for past infringements of competition law follows in the acquisition of a business. The new Finnish Act on Compensation of Damages Related to Infringement of Competition Law is silent on the issue. Currently the only case on the matter, the ‘Asphalt cartel’, is on appeal in the Finnish Supreme Court, which submitted a request for a preliminary ruling to the European Court of Justice in December 2017. In the lower courts, the District Court of Helsinki applied the principle of financial succession, under which the liability for infringement of competition law transferred to the buyer, whereas the Court of Appeals held that there is no such general rule in Finnish law that would result in a third party’s liability for another’s infringement based on financial succession. The Finnish Supreme Administrative Court on the other hand has confirmed in a recent ruling from 2018 that administrative penalty payments can, based on the principle of financial succession, be imposed on the acquiring company for infringements on competition law committed by the acquired company prior to the acquisition.
As regards consents or notifications, in share purchases, consents are often requested from the company’s main contracting counterparties whose agreements provide for a change of control right triggered by the transaction. In business purchases where the contracts need to be assigned to the buyer, the contracting party’s consent must normally be obtained to effectively transfer the contract, except in cases where the transaction is structured as a merger and the assets and liabilities automatically transfer under law. Finally, municipalities have the right of pre-emption in connection to transfers of certain real property located within the municipality, which can be triggered in connection to a sale of business involving a transfer of real property.
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
Save for the possible approval under the Competition Act or the EU Merger Regulation, the Act on Monitoring Foreign Corporate Acquisitions in Finland may become applicable where the target company operates in the field of defence or dual-use goods, or is otherwise considered vital to the functioning of the society and a foreign buyer acquires a controlling stake of 10 per cent or more in the company. Under the Act, a non-Finnish buyer is considered as foreign if the buyer is domiciled outside the EU or European Free Trade Association (EFTA), or more than 10 per cent of the acquirer’s shares (or equivalent control) is held by a person outside the EU or EFTA. However, even EU and EFTA buyers are considered ‘foreign’ if the acquisition concerns the defence or dual-use goods sector. Acquisitions in the defence or dual-use sector must always be notified and approved beforehand by the authorities. In other cases, an advance notification is voluntary, but the Ministry of Economic Affairs and Employment may examine the acquisition later on where no advance notification was made. The Act is quite open-ended and gives the Ministry substantial leeway in determining which companies may be considered to be vital to the functioning of Finnish society.
In addition to the above, there are various sector-specific regulations that may become applicable to a specific transaction. For instance, changes of ownership in credit institutions require notification to the Finnish Financial Supervisory Authority, which can, under certain limited circumstances, reject the credit licence if the buyer fails to meet the set criteria for owners of a credit institution.
Finally, a government bill issued in June 2017 aims at introducing temporary merger control rules for the social welfare and healthcare sectors. Pursuant to the proposal, the main rule is that all concentrations where at least one party provides social welfare or healthcare services in Finland must be notified to the Finnish Competition and Consumer Authority. Thus, in contrast to the general Finnish merger control rules, the proposal does not contain any turnover thresholds. It has been proposed that the obligation would expire on 1 January 2020. However, there has been some indication that the requirements would be made permanent thereafter. Furthermore, it should be noted that the temporary merger control rules are prepared in connection with the regional government and social and healthcare reform and thus dependant on the successful and timely implementation of this reform.
Are any other third-party consents commonly required?
Third-party consents are generally not required under law. If the buyer issues shares as a consideration, the share issue requires an approval by the shareholders (unless the board has been previously authorised to decide on a share issue). In addition, should the articles of association of the target company include a redemption or a consent clause triggered upon the transfer of shares to a third party, waivers to the right of redemption or consent for the transfer of shares may need to be sought. The redemption clause generally gives the other shareholders or the company the right to redeem the transferred shares. In cases of a consent clause, the board of directors of the target usually needs to consent to the transfer before the transferee can exercise his or her voting rights in the target company. Third-party consents may also be sought from the target’s agreement counterparties if they have a right to terminate their agreement upon a change of control. Finally, if the target has received public subsidies such as research grants, such grants often contain a change of control provision to which a waiver may be sought.
Must regulatory filings be made or registration fees paid to acquire shares in a company, a business or assets in your jurisdiction?
The most common mandatory regulatory filing is the competition notification under the Competition Act (or under the EU Merger Regulation). If the target is a defence industry company, an advance approval under the Finnish Act on Monitoring of Foreign Acquisitions is required. The cost of a decision is €2,000 per decision for the year 2018. See question 6.
The acquirer is also required to pay and file a notification of the Finnish transfer tax in the case of a share purchase or acquisition of real estate. Additionally, if the buyer decides, for example, to change the composition of the target’s board of directors or amend the articles of association, the changes need to be notified and registered with the Finnish Trade Register, with the notification fees generally being in the region of €100.
Advisers, negotiation and documentation
In addition to external lawyers, which advisers might a buyer or a seller customarily appoint to assist with a transaction? Are there any typical terms of appointment of such advisers?
The buyer and seller usually engage their own external financial advisers, such as an investment bank and an accounting firm to assist in the transaction process and negotiations and to carry out financial due diligence, respectively. In addition, a management consultant firm or some other expert may be appointed to carry out due diligence on the target’s business. Depending on the field the target operates in, there may also be other advisers such as environmental advisers or technical advisers. The terms of appointment vary depending on the adviser, the financial adviser usually being entitled to a success fee of some percentage if the transaction is completed.
Duty of good faith
Is there a duty to negotiate in good faith? Are the parties subject to any other duties when negotiating a transaction?
Contract negotiations are generally understood as an opportunity for the parties to assess whether they wish to enter into an agreement, and thus the mere engagement in negotiations does not very easily lead to a liability. However, contract negotiations may not be conducted in a manner that misleads or otherwise causes damage to the other party. The party whose trust or justified expectations created by the negotiations have been violated may under some circumstances be entitled to compensation, such as where the other party has consciously misled the other party. In essence, this constitutes a duty akin to negotiating in good faith. Liability for violations of the duty to negotiate in good faith could arise, for example, due to unnecessarily prolonged negotiations where the counterparty had no genuine intent to enter into an agreement, or owing to unacceptable negotiation methods such as giving false information.
What documentation do buyers and sellers customarily enter into when acquiring shares or a business or assets? Are there differences between the documents used for acquiring shares as opposed to a business or assets?
The main agreement covering the transaction is a share purchase agreement or business purchase agreement depending on how the transaction is structured. The agreements are quite similar in their structure and provisions, although, for instance, representations and warranties vary to certain extent to take into account the transaction structure. When a business is acquired, the parties normally need to enter into separate transfer agreements concerning, for example, transfers of real estate and intellectual property rights, whereas in a share purchase, such assets are automatically included in the transfer. Prior to giving the buyer access to a data room, the parties have normally entered into a confidentiality agreement or a NDA. The NDA usually terminates upon the parties entering into a definitive transaction agreement replacing the confidentiality provisions of the NDA.
Closing of the transaction is usually recorded in a separate closing or completion memorandum acknowledging the fulfilment (or waiver) of any conditions precedent and recording the steps taken at closing.
Are there formalities for executing documents? Are digital signatures enforceable?
Generally, there are very few formalities required in private M&A transactions in Finland. Contracts can generally be executed in any form, including digital or oral, if not otherwise regulated, and notarisations are not generally required. However, certain contract types that have been deemed more prone to ambiguities or that are connected to some public interest are subject to formalities, such as the requirement of being in written form (or the equivalent digital form) or the requirement of witnesses. The most common contract types with such requirements are a sale of real estate, land lease agreements and arbitration agreements. Parties to an agreement may also agree on certain formalities for executing their agreements, such as that all amendments need to be in writing.
In the absence of specific formal requirements under Finnish law, as is usually the case with share or asset purchases, digital signatures are enforceable. However, the use of digital signatures remains unusual. Usually, the parties will sign the contract either in person or through a power of attorney. In the case of foreign parties, digitally scanned signatures are often used and exchanged between parties to evidence the signing of the agreement.
Due diligence and disclosure
Scope of due diligence
What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?
The exact scope of the due diligence varies depending on the type of transaction and on the industry the target operates in. The scope of due diligence normally covers commercial, financial, legal and tax matters. Environmental or technical due diligence may also be carried out by a relevant adviser, if relevant. Generally, due diligence is carried out through a review of documents stored in a virtual data room (VDR) operated by one of the internationally recognised VDR service providers complemented by management interviews and possible site visits. Vendor due diligence (VDD) or similar reports are usually produced by the seller in an auction process, whereas such reports are seldom prepared in the absence of the wider solicitation of purchasers. The eventual buyer is usually given reliance on the financial VDD report substantially on the same terms and limitations as the seller, whereas reliance is not as commonly given to legal reports, often titled ‘legal guidance reports’, prepared for the sales process.
However, even where the buyer is given reliance on the VDD report, the buyer normally needs to carry out its own due diligence, especially to take into account any events having occurred between the date of the VDD report and the transaction date, to address any matters excluded in the VDD as well as due to the fact that the representations and warranties of the buyer are normally qualified by the information disclosed in the data room.
Liability for statements
Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?
Generally, the transaction agreement provides that the buyer is not relying and the seller is not giving any implied or other representations and warranties other than as expressly stated in the agreement, and the parties have not relied on any such statements when entering into the agreement. Thus, the parties may generally limit their liability for any such pre-contractual statements absent fraud or other special circumstances such as intentional concealment of a material fact.
However, under some circumstances, a party may face liability by giving false information or by knowingly withholding information that would be required not to make a statement misleading. Furthermore, the contract may be found valid, but its contents may be interpreted differently. Under some exceptional circumstances, the contract may also be adjusted to meet the other party’s justified expectations where the other party has issued misleading statements.
The requirement of sufficiently extensive disclosure arises also under the Finnish Sale of Goods Act and the Finnish Code of Real Estate. The parties’ bargaining positions and expertise are important determining factors of the extent of the disclosure obligation. In the M&A context, where agreements are entered into between sophisticated parties using their respective professional advisers, the liability threshold for pre-contractual misleading statements can be considered to be higher.
Publicly available information
What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?
The publicly available information generally consists of the articles of association, a trade register extract, an extract of business mortgages and the annual accounts of the company. These documents provide some limited fundamental information on the company, such as the names of the members of the board of directors, number of shares outstanding and any options registered as well as information on any consent or redemption clauses restricting the transfer of shares of the company. In addition, anyone may request from the company and obtain a copy of the company’s shareholder register and depending on the company, there may be more information that the company has itself decided to make available, for example through its website. Finally, the company has an obligation to keep an updated register of its beneficial owners from 1 January 2019 onwards and to register its beneficial owners with the Finnish Trade Register no later than 1 July 2020. Once registered with the Finnish Trade Register, the information will become publicly available.
Impact of deemed or actual knowledge
What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?
As a general rule, the buyer cannot claim compensation for a matter the buyer knew or should have known, save for situations where the seller has expressly agreed to indemnify the buyer for such matter. Generally, a buyer’s right to make a claim under a Finnish share purchase agreement is connected to a concept of ‘fairly disclosed’, meaning that the buyer’s right to make a claim is limited to the matters or risks not sufficiently disclosed in the data room or in other disclosure material. Similarly, pursuant to the Sale of Goods Act, which may apply in the absence of an agreement to the contrary, a buyer may not generally rely on a defect that he or she knew or should have known of at the time of entering into the agreement.
Pricing, consideration and financing
How is pricing customarily determined? Is the use of closing accounts or a locked-box structure more common?
Both closing accounts and locked-box structures are used in Finland depending on the type of transaction and the parties involved. The locked-box mechanism is often used in auctions, especially if involving private equity, owing to the certainty concerning the purchase price, although buyers may prefer the use of closing accounts.
Form of consideration
What form does consideration normally take? Is there any overriding obligation to pay multiple sellers the same consideration?
In private transactions, the most common consideration is cash. In some cases, shares of the buyer are also used as a consideration, for example if the transaction is structured as a merger or share exchange. The type of consideration can vary between sellers (eg, paying some sellers in cash and some in shares). However, for a merger to be tax-neutral, the amount of cash consideration is limited to 10 per cent of the amount recorded in the surviving company’s share capital in relation to the share consideration (the remaining part to be paid in shares of the surviving company). Thus, tax issues may in practice limit the use of different considerations between sellers. A more common way in private transactions is that the buyer requires that some sellers reinvest a part of the sales proceeds to the shares of the buyer or another company, for example as a management investment where some sellers remain employed by the target or the buyer.
Earn-outs, deposits and escrows
Are earn-outs, deposits and escrows used?
Earn-outs and escrows are occasionally used, especially in smaller transactions where the future cashflows can be harder to estimate or involving a higher risk of claim and recovery. The use of earn-outs is limited due to the difficulties relating to the conduct of business during the earn-out period, and computing the parameters based on which the earn-out is determined. This is especially true in situations where the target is merged into or otherwise integrated with the buyer (eg, issues in determining the standalone earnings before interest, taxes, depreciation and amortisation (EBITDA) of the now merged target). Escrow arrangements have to some extent been replaced by the use of M&A insurance, which is widely used in the Nordic countries. In addition to earn-outs or escrows, an additional or deferred purchase price component conditioned on the occurrence of a future event; for example, the target renewing an important customer agreement within a specific time may occasionally be used.
How are acquisitions financed? How is assurance provided that financing will be available?
Where debt financing is used, the financing is usually obtained from either one or a consortium of banks. The assurance for financing depends generally on the type of the buyer, that is, whether the buyer itself has sufficient assets against which performance and recovery can be sought. In cases where the buyer is an ‘empty’ holding company, a parent company guarantee from an operating parent company is often used to guarantee the fulfilment of the obligations of the holding company. In the case of a private equity buyer, the assurance can consist of executed term sheets and commitment letters from the senior lenders assuring that financing will be available as well as an equity commitment letter from the fund. The type of assurances used depends somewhat on whether the buyer is a domestic or a foreign buyer. Finally, the transaction agreement may contain representations from the buyer that it has the necessary funds to complete the transaction.
Limitations on financing structure
Are there any limitations that impact the financing structure? Is a seller restricted from giving financial assistance to a buyer in connection with a transaction?
The Companies Act explicitly prohibits a limited liability company from granting any loan or other assets or security for the purpose of a third party acquiring shares in the target or in its parent company (share issues to employees being a limited exception). However, following the completion of the transaction, there are certain methods through which the target’s assets can be used as security. The target can be merged into the buyer, resulting in the assets of the target and buyer merging and any security interests thereafter also covering the target’s assets. An alternative method is the buyer refinancing the acquisition debt following closing. There are no specific minimum waiting periods, but any such structure implemented to circumvent prohibitions under mandatory law may be construed as being invalid by a court. In addition, in the case of groups of companies, granting a security or providing financing to other companies in the same group needs to be assessed from the viewpoint of the individual company and must fulfil the requirement of corporate benefit. As such commitments can impair the financial stability of the company, it may violate the rights of creditors of the company or the rights of its shareholders.
Financing structures are also substantially affected by tax considerations, such as the Finnish earnings stripping rules. The current rules, applicable until the end of tax year 2018 when replaced by more stringent rules, apply only to interest on related party debt included in the relevant company’s business income source. ‘Related party’ is roughly defined as one party exercising controlling influence over the other party, or a third party exercising influence over both previous parties, via significant ownership or voting power. Certain external debt may also be treated as related party debt, for example if the debt is back-to-back financed by a related party or a related party has given any kind of receivable as collateral for the debt. Where the earnings stripping rules apply, the company is generally entitled to deduct net related party interest expenses up to 25 per cent of tax-EBITDA or up to a safe harbour of €500,000 per tax year. Exceeding the safe harbour threshold will cause the limitations to apply also on the part below it. Interest expenses for which deduction has been denied, may be carried forward indefinitely.
The current earnings stripping rules will be tightened significantly as of tax year 2019, when the EU Anti-Tax Avoidance Directive becomes applicable. The new rules are expected to introduce a new limitation, barring deductions for net external interest expenses to a higher of a maximum of €3 million or the 25 per cent of tax-EBITDA rule. Also the definition of related party is likely broadened in order to make more loans qualify as related debt, which is subject to stricter limitations. The new earnings stripping rules should also apply within all income sources, with significant practical effects especially on holding companies and real estate companies, many of which have so far been taxed under the personal income source and therefore been outside the scope of the limitations. Finally, with respect to debt push-downs, the Finnish Supreme Administrative Court has taken a negative stand against such arrangements, denying interest deductions in two high-profile cases in 2016. Under the circumstances in the said cases, the shares of the target company were acquired from a third-party seller and then transferred through several internal transactions within the group to the Finnish branch of a foreign group company. In both cases, the Finnish branch had very limited activities and was established only shortly before the sale and was almost entirely or entirely financed with debt. The Tax Administration has construed the rulings as applying not only to debt push-down arrangements carried out using branches but also to those carried out using special purpose vehicles (limited liability companies).
Conditions, pre-closing covenants and termination rights
Are transactions normally subject to closing conditions? Describe those closing conditions that are customarily acceptable to a seller and any other conditions a buyer may seek to include in the agreement.
The conditions for closing depend on the structure of the transaction as well as the business the target operates in. The most common closing condition is the requirement for the buyer to obtain the necessary authority approvals (generally a competition law clearance) to complete the transaction. Other conditions precedent may include, for instance, obtaining or transfer of other applicable licences or permits, third parties consenting to the transaction in the case of a change of control rights and the seller’s warranties being correct in all material respects on the closing date.
What typical obligations are placed on a buyer or a seller to satisfy closing conditions? Does the strength of these obligations customarily vary depending on the subject matter of the condition?
Generally, the obligations to satisfy the closing conditions is the same for all closing conditions. Normally, the party responsible for the fulfilment of the condition is required to use his or her best or reasonable commercial efforts to achieve the condition, and the other party is required to provide reasonable assistance to the other party (eg, providing the necessary information for the competition notification). In cases where competition approval is required, the buyer is generally obligated to make the necessary filings as soon as practicable, and within a specified number of days at the latest.
Are pre-closing covenants normally agreed by parties? If so, what is the usual scope of those covenants and the remedy for any breach?
Transaction agreements generally include pre-closing covenants concerning, inter alia, the conduct of business between signing and closing, and the parties providing assistance to each other to achieve the fulfilment of the closing conditions.
Can the parties typically terminate the transaction after signing? If so, in what circumstances?
Parties’ right to terminate the transaction after signing is normally governed by the transaction agreement. Occasionally, a party is given the right if the other party materially breaches the agreement, or there is a material breach of the seller’s representations and warranties that cannot be remedied by the seller within a set time period. Usually, the transaction agreement also stipulates a long-stop (or drop-dead) date by which the satisfaction of the conditions precedent and the closing of the transaction will need to occur, after which the agreement will automatically terminate.
In the absence of an express agreement, the validity of the agreement is dependent on the specific characteristics of the agreement in question and must be determined on a case-by-case basis. Generally, a substantial breach is required to terminate a transaction agreement. Negligence or intent is not necessarily essential in the determination of the substantiality of the breach, but rather the effect and importance of the matter to the other party.
Are break-up fees and reverse break-up fees common in your jurisdiction? If so, what are the typical terms? Are there any applicable restrictions on paying break-up fees?
Break-up fees and reverse break-up fees occur fairly seldom in Finland in private transactions, but can occasionally be encountered, especially if the transaction involves a foreign party. The use of excessive break-up fees may also in some cases be limited by the fiduciary duties of the board or the equal treatment of shareholders.
Representations, warranties, indemnities and post-closing covenants
Scope of representations, warranties and indemnities
Does a seller typically give representations, warranties and indemnities to a buyer? If so, what is the usual scope of those representations, warranties and indemnities? Are there legal distinctions between representations, warranties and indemnities?
The seller typically gives at least limited warranties to a buyer. In auctions, the warranty package given by the buyer tends to be more limited, but this has changed somewhat owing to the use of warranties and indemnities insurance having become more common.
Fundamental warranties normally included in almost all transactions include the seller’s title to the shares, the power and authority to enter into the agreement and the capitalisation of the target (all shares being fully paid and duly issued). In addition, common warranties include warranties concerning, inter alia, financial statements, assets, contracts, intellectual property rights, taxes and environmental liabilities. There is no clear distinction in Finland between a representation and a warranty. The fundamental warranties are generally not subject to any limitations, while other warranties are usually subject either to materiality or de minimis thresholds and time limitations.
With respect to known liabilities, the seller may give the buyer a specific indemnity concerning a known but contingent matter, such indemnity occasionally being capped to a certain monetary amount depending on the underlying matter.
Limitations on liability
What are the customary limitations on a seller’s liability under a sale and purchase agreement?
The seller’s liability is generally limited to breaches of the seller’s warranties or covenants (eg, non-compete), and the warranty breaches are further subject to the buyer’s knowledge or what the buyer would have known based on the disclosure material and the seller’s specific disclosures. The maximum liability of the seller generally varies depending on the transaction value. The maximum liability of the seller is usually 10 per cent to 30 per cent in larger transactions, and can reach 100 per cent of the purchase price in smaller transactions. Usually, the agreement also contains a basket and de minimis applicable for breaches of warranties. The buyer’s right to make a claim under the agreement usually expires after 12 to 24 months from the completion of the transaction excluding some liabilities, such as taxes, where the expiry is often linked to the applicable statute of limitations.
In addition, there are various other limitations that can be applicable such as the buyer’s obligation to mitigate damage, limitations to recovery where the recovery would have been possible under an insurance policy in effect prior to the transaction or reducing the buyer’s claim with the applicable tax rate where the loss is tax-deductible.
Is transaction insurance in respect of representation, warranty and indemnity claims common in your jurisdiction? If so, does a buyer or a seller customarily put the insurance in place and what are the customary terms?
The use of representation and warranty insurance has become increasingly common during the past few years, especially in transactions involving private equity sponsors. In the case of auctions, the seller often handles the initial contacts with the insurer and the insurance is then ‘flipped over’ to the buyer. On other occasions, the insurance is often procured by the buyer. The insurance coverage generally provides coverage for breaches of representations and warranties, but certain matters, for example criminal liabilities, tax matters and any forward-looking statements, are normally excluded.
Do parties typically agree to post-closing covenants? If so, what is the usual scope of such covenants?
The parties generally agree to some post-closing covenants. The most typical post-closing covenants concern confidentiality or publicity. In addition, non-compete and non-solicitation covenants are often included in transaction agreements, the maximum time for non-compete being three years.
Are transfer taxes payable on the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
Transfer tax is generally payable if the assets to be transferred include Finnish real estate or shares and if at least one of the parties (seller or buyer) is a Finnish tax resident. If the target of the transfer is a Finnish real estate or shares of a real estate (holding) company, the transfer is subject to transfer tax even if both of the parties are non-Finnish tax residents. Transfer tax may also be payable on foreign securities, if more than 50 per cent of the assets of the company, directly or indirectly, comprise Finnish real estate and if at least one of the parties (seller or buyer) is a Finnish tax resident.
The applicable tax rates are 1.6 per cent for securities, 2 per cent for shares in real estate (holding) companies and 4 per cent for real estate. The tax is generally calculated on the purchase price and the value of any other consideration. The transfer tax is customarily paid by the buyer.
Corporate and other taxes
Are corporate taxes or other taxes payable on transactions involving the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
As a starting point, the gain from the transaction is taxable income of the seller company and it is taxed at the current corporate income tax rate of 20 per cent. However, a transfer of shares may be tax exempt under the Finnish participation exemption regime, if the shares constitute fixed assets belonging to the business income source of the seller and the seller has owned at least 10 per cent or more of the target shares for a consecutive period of at least 12 months. This exemption does not apply to transfers by firms that are characterised as ‘private equity firms’ within the meaning of the Business Income Tax Act or to transfers of shares in real estate (holding) companies.
A transfer of business is generally exempt from value added tax, provided that the transfer comprises an independent business and the transferee continues the business as a going concern.
Finally, if more than 50 per cent of the shares of a company are transferred to a new owner in a share sale, the target company loses its right to carry forward any losses from the same and previous tax years. However, an exception from the Finnish Tax Administration may be applied for. Separate rules apply to mergers and demergers.
Employees, pensions and benefits
Transfer of employees
Are the employees of a target company automatically transferred when a buyer acquires the shares in the target company? Is the same true when a buyer acquires a business or assets from the target company?
Pursuant to the Finnish Employment Contracts Act, when a business or a part thereof is transferred, all employees belonging to that business shall automatically transfer with it. However, the employee subject to the transfer or excluded from the transfer may dispute his or her status in court proceedings. In the case of a change in the ownership of the shares in the company, there is no change to the employment relationship, and the employees continue to be employed by the target company as before.
Notification and consultation of employees
Are there obligations to notify or consult with employees or employee representatives in connection with an acquisition of shares in a company, a business or assets?
A share purchase does not generally have any effect on the employees or employment contracts, and therefore does not generate any consultation or information obligations on the part of the employing entity, although as a practical matter the employees are normally informed of the change of ownership.
In the case of a transfer of a business, companies employing at least 20 employees on a regular basis have a duty to notify the affected personnel or their representative in accordance with the provisions of the Finnish Act on Co-operation within Undertakings (ACU) and to provide them with information regarding:
- the time or intended time of transfer;
- the reasons for the transfer;
- the legal, economic and social consequences to the employees owing to the transfer; and
- the planned measures regarding the employees.
Each party to the transfer has an independent duty to inform the affected employees or their representative. According to the ACU, the information must be provided to the affected personnel by the transferor in good time before completion of the transfer and by the transferee no later than one week after the completion of the transfer. In practice, however, the transferor and the transferee may handle the duty to notify the affected personnel simultaneously prior to the completion of the transfer. The transferee must, in addition, provide the employees or their representative an opportunity to ask further questions and to answer any questions. However, there is no duty to negotiate.
Transfer of pensions and benefits
Do pensions and other benefits automatically transfer with the employees of a target company? Must filings be made or consent obtained relating to employee benefits where there is the acquisition of a company or business?
In the case of a business transfer, where the employees who are part of that business transfer automatically by operation of law, all rights and obligations transfer as such to the transferee. The transferee must provide the transferring employees with the same pension and other benefits as of the date of transfer. Because pension benefits are customarily provided through a subscription of an insurance, the transferee will need to subscribe to a new pension insurance or include the transferring employees in an existing pension insurance as of the date of transfer.
As a share purchase does not generally have any effect on the employees or their employment contracts, the employees will continue to be entitled to the same pension and other benefits as prior to the acquisition.
Update and trends
What are the most significant legal, regulatory and market practice developments and trends in private M&A transactions during the past 12 months in your jurisdiction?
The M&A market has continued to be active in the past 12 months with substantial activity especially in the social and healthcare, IT, construction and real estate sectors. Companies operating in the social welfare and healthcare sector have actively been acquiring market shares as a result of the forthcoming Finnish social and healthcare reform. Continued low interest rates and the abundance of capital in the markets is positively affecting deal activity. However, increased protectionism and the threat of trade conflicts on a global level may negatively impact M&A in the future.