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Trends and climate
What is the current state of the M&A market in your jurisdiction?
During the second half of 2016, deal activity increased in Finland, although the number of reported deals was still down (210) compared to the second half of 2015 (245 deals). Overall, 2016 showed a decline of 23% compared to 2015 (as reported by Comset on February 3 2017). At the same time, Finnish start-up investments broke a new record by reaching €383 million in 2016 – a growth of 42% (based on statistics compiled by the Finnish Business Angels Network and the Finnish Venture Capital Association on private investments and venture capital investment in Finnish companies).
According to PwC’s 20th CEO Survey 2017, Finnish chief executive officers view the future in slightly more positive terms than their foreign peers. In addition, large-scale orders, increased industrial production and investment in machinery and equipment indicate that the future is rosier than it has been over the past few years, although change is still slow, as indicated by a modest gross domestic product increase of 1.4% (based on an Aktia Bank report of March 13 2017).
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?
Low interest rates and the strong cash positions of industrial buyers and investors continue to drive deals. It remains to be seen whether the interest rates will increase and whether this will have a dampening effect on international deals. Over the past 12 months, Chinese buyers have been active in both public and private deals in Finland. However, increased scrutiny by Chinese authorities of the outflow of overseas investment funds may slow down outbound investments by Chinese buyers; it remains to be seen whether this will affect Chinese investments in Finland.
It is possible that Brexit, and in particular the period before the June 2016 vote, had a negative impact on Finnish cross-border deal activity. It is likely that nationalistic populist movements, both abroad and in Finland, have given rise to concern in relation to deal activity (eg, in the form of increased regulation).
Are any sectors experiencing significant M&A activity?
There has been significant growth in mergers and acquisitions in various parts of the IT industry, as well as in the areas of healthcare, veterinary services and online education-related solutions. The real estate M&A market continues to be strong.
Are there any proposals for legal reform in your jurisdiction?
What legislation governs M&A in your jurisdiction?
In general, Finnish M&A transactions are governed by national legislation and EU regulation. The main national legislation includes:
- the Contracts Act (228/1929);
- the Sale of Goods Act (355/1087);
- the Companies Act (624/2006);
- the Employment Contracts Act (55/2001), in particular relating to transfer of employees in an asset purchases or transfers of undertaking;
- the Competition Act (948/2011) with respect to merger control and non-compete agreements; and
- the Investment Control Act (172/2012), which monitors foreigners’ corporate acquisitions in Finland.
In addition, the following regulations should be observed when dealing with publicly listed companies:
- the EU Market Abuse Regulation (596/2014);
- the Securities Market Act (495/1989);
- the Helsinki Takeover Code; and
- the Corporate Governance Code.
How is the M&A market regulated?
Except for in relation to publicly listed companies and the regulation governing transfers of undertakings from an employment law perspective, the M&A market is not specifically regulated.
Are there specific rules for particular sectors?
Transactions in the financial sector, other regulated industries and certain other sectors considered to be of great national interest (eg, defence, security of supply and functions fundamental to society) are or may be subject to specific regulation or authority approval.
Types of acquisition
What are the different ways to acquire a company in your jurisdiction?
The most common way to acquire a privately held company is through either a share purchase or an asset purchase. Alternatively, buyers may participate in auction processes arranged by or for the sellers, but these have become less frequent during the past one to two years.
Public deals are usually carried out as friendly takeover offers. The buyer may buy shares in the target before or after the bid is made, but such purchases may affect the price and type of consideration to be offered in the bid. While hostile bids remain rare, they are permitted subject to the same regulations as friendly bids.
An acquisition may also be carried through as a merger, but this is fairly uncommon.
Due diligence requirements
What due diligence is necessary for buyers?
There is no mandatory requirement to conduct due diligence reviews in M&A transactions, but this has become the norm. Due diligence reviews are typically conducted by the relevant professional advisers (eg, legal, financial, tax and technical advisers) as a combination of document reviews and Q&A sessions with the target’s management.
While there is no requirement to carry out due diligence, a buyer’s decision not to conduct a due diligence review despite the seller having given it the opportunity to conduct one may affect the buyer’s ability to file a claim against the seller for a warranty breach if the basis for the claim would have been disclosed in the data room and the seller did not withhold relevant information.
What information is available to buyers?
In addition to the information disclosed by the seller in the data room, the buyer may take advantage of relevant information available in public databases. The articles of association, financial statements and target’s details (eg, registered address, board, managing director, representation rights, share capital and information on registered floating charges) are available at the Patent and Registration Office. The Title and Mortgage Register contains relevant information on real property.
In addition, public companies will make available interim reports, information required under the company’s disclosure obligations and minutes of shareholder meetings.
What information can and cannot be disclosed when dealing with a public company?
If a public company’s board has received a serious takeover bid and the board deems that bid to be in the interests of shareholders, the Helsinki Takeover Code provides that the target’s board allow the bidder to conduct a due diligence review concerning the target. In such cases, the board must see to it that confidentiality and insider issues are properly agreed with the bidder.
The target may also, in certain cases, disclose inside information to the bidder. However, use of this inside information by the bidder is prohibited. If the bidder receives inside information during the due diligence process, the bidder can neither make public the bid nor purchase shares outside the bid before the received inside information has been made public.
How is stakebuilding regulated?
A bidder for shares in a listed target may, during or after the offer period and at any time determined by the bidder, buy shares or other securities subject to the bid outside the bid. However, the bidder must afford equal treatment to all holders of the securities subject to the bid. Stakebuilding can be achieved either by making acquisitions through the stock market or through privately negotiated transactions. However, trading in securities based on inside information is prohibited in Finland.
The bidder must further make a disclosure to the Financial Supervisory Authority and the target when its direct or indirect holding in a public target reaches, exceeds or falls below 5%, 10%, 15%, 20%, 25%, 30%, 50%, 66.67% or 90% of the votes or shares. However, written disclosure must be made without delay no later than the next trading day after the holding has triggered a threshold, after which the target must publish the information.
The disclosure requirements also apply to acquisitions made by entities that the bidder controls and parties with whom the bidder has reached an agreement or mutual understanding with a third party with respect to the use of the voting rights in the target held by the third party. Warrants, convertible bonds and other share subscription rights, as well as cash and physically settled derivatives, are also included in the calculation of the bidder’s shareholding.
In a takeover bid the offer price should equal, at minimum, the highest price paid by the bidder (or any related party) during the six months preceding the day on which the voluntary offer was made public, unless there are special circumstance that give rise to an adjustment of such price. In relation to acquisitions during the tender period in a bid and nine months thereafter, an immediate top-up payment to shareholders which have already accepted the bid is required if the price of such acquisitions exceeds the offer price.
If the thresholds for mandatory bids (ie, acquisitions) lead to a stake equal to or exceeding 30% of the votes in the target, the bidder must make a mandatory bid in accordance with the Securities Market Act.
What preliminary agreements are commonly drafted?
The parties to a transaction commonly enter into confidentiality agreements and often other preliminary agreements, such as letters of intent, memorandums of understanding or term sheets covering key aspects of the transaction (eg, price, exclusivity, non-solicitation, deal structure, process, timing and key terms of the transaction).
In case of a public target, before the launch of the bid it is common for the target and the bidder to enter into a combination agreement, and to seek an irrevocable undertaking from major shareholders to accept the bid.
What documents are required?
In a share purchase, the main document is the share purchase agreement. In an asset purchase, the main document is the asset purchase agreement.
Several other documents are also usually prepared in addition to the relevant purchase agreement, such as:
- employment or service agreements, which are often renegotiated with management and key employees, and are not usually necessary in either share or asset deals;
- a transitional service agreement if the target or business is dependent on services provided by the seller group after closing;
- a shareholders’ agreement if the seller remains a shareholder in the target or if there are multiple buyers or certain financing agreements; and
- other ancillary agreements where necessary (eg, an escrow agreement or documentation with the insurer in case of warranty and indemnity insurance).
In a public takeover, the bidder must submit a written offer to the target’s shareholders and publish a tender document. The tender document must be pre-approved by the Financial Supervisory Authority.
Which side normally prepares the first drafts?
In cases where the seller runs an auction or structured sales process, the seller usually prepares the first draft. Otherwise this varies on a case-by-case basis. If one party has a significantly stronger negotiation position, that party may be keen to prepare the first draft.
In public takeovers, all bid documentation is prepared by the bidder.
What are the substantive clauses that comprise an acquisition agreement?
A definitive agreement typically includes the following substantive clauses:
- transfer of shares or assets;
- the purchase price, including any adjustment mechanisms;
- conditions precedent, closing mechanics and covenants;
- the conduct of business between signing and closing;
- warranties given by the parties;
- indemnification obligations (including possible specific indemnities) and limitation of liability;
- non-compete and non-solicitation;
- governing law; and
- dispute resolution.
In addition, an asset purchase agreement will contain a detailed list of the relevant assets and liabilities to be transferred to the buyer, as well as a list of assets and liabilities excluded from the transfer.
What provisions are made for deal protection?
Private deals are often subject to an exclusivity agreement or undertaking under which the seller undertakes not to shop the company or business to third parties or entertain any negotiations regarding the same.
In a public deal, the target’s board should not agree to any contractual commitments (eg, an exclusivity arrangement limiting the company’s and the board’s possibilities to act). The Helsinki Takeover Coder further requires that boards should be careful in agreeing to pay break-up fees. However, limited commitments can be entered into by the board if there are justified reasons to do so and the board considers the bid to be a good alternative for the shareholders.
What documents are normally executed at signing and closing?
The following documents are commonly produced and executed at signing:
- corporate resolutions by the seller and buyer to approve and enter into the relevant share or asset transfer and any related agreements;
- a share purchase agreement or asset purchase agreement between the seller and the buyer regarding the transfer of the relevant shares or assets;
- a transitional service agreement, if applicable (often executed at closing);
- a shareholders’ agreement (in a share sale where there are multiple buyers or the seller remains as a shareholder in the target); and
- relevant financing agreements (or financing commitments are delivered).
The following documents are commonly produced and executed at closing:
- board resolutions of the target regarding the update of the target’s share and shareholder registers (in a share sale);
- a closing memorandum;
- a release of relevant security or guarantees;
- relevant corporate resolutions regarding, for example, the change of board of directors, signatory rights and the articles of association of the target (in a share sale);
- renewed employment or service contracts for the target’s management;
- resignation letters of resigning directors of the target (in a share sale);
- an escrow agreement, if a portion of the purchase price is put in escrow; and
- relevant supply or other ancillary agreements.
Are there formalities for the execution of documents by foreign companies?
No general formalities apply to the execution of documents by foreign companies under Finnish law.
Are digital signatures binding and enforceable?
Foreign law and ownership
Can agreements provide for a foreign governing law?
Yes. However, certain mandatory Finnish laws apply in relation to, for example:
- tax law;
- competition law;
- employment law; and
- legal transfer of ownership and third-party rights.
What provisions and/or restrictions are there for foreign ownership?
Under the Investment Control Act, a foreign buyer must apply for prior approval from the Ministry of Employment and the Economy for an acquisition resulting in the buyer holding more than one-tenth, one-third or one-half of the voting power (or corresponding dominant control) of either:
- a Finnish defence company; or
- companies or businesses holding a key position with respect to maintaining vital functions of Finnish society.
A ‘foreign buyer’ is defined as a person, entity or trust that has no place of residence within the European Union or the European Economic Area (EEA). The Investment Control Act also applies to an entity or trust that has a place of residence within the European Union or EEA and in which a foreign buyer (as defined above) holds:
- at least one-tenth of the voting power in the case of a limited liability company; or
- dominant control in the case of another entity or business.
The Ministry of Employment and the Economy approves acquisitions resulting in the control of these companies unless the acquisition endangers important national interests, in which case approval is made by the Council of State. Such interests include:
- national defence;
- the prevention of serious or permanent economic, social or environmental impacts; and
- citizens' general health and safety.
If approval is not granted, the buyer must decrease its ownership to less than one-tenth (or less than one-third or half) of the shares in the company, and can exercise the corresponding voting power only at a general meeting of the company's shareholders or other relevant corporate body.
Valuation and consideration
How are companies valued?
Companies are commonly valued based on their ability to generate income, such as discounted cash-flow models or earnings before interest, taxes, depreciation and amortisation in combination with a multiplier. Comparable valuations are often used when available.
What types of consideration can be offered?
Cash consideration is the most common form of consideration. Shares in the buyer, or a combination of shares and cash, are occasionally used as consideration.
What issues must be considered when preparing a company for sale?
The seller should prepare itself before putting a company or business up for sale. It should seek to ensure that it knows the business better than the buyer and should consider the following:
- establishing a deal team, including an external team with advisers;
- its tax position and structure;
- the merger control and antitrust aspects of the transaction;
- key contracts, including potential change of control provisions;
- understanding what assets will or can be sold in an asset deal, and any need for transitional services going forward; and
- ensuring that permits, licences and corporate housekeeping are in shape, or identifying what needs to be done.
What tips would you give when negotiating a deal?
A party to a deal should focus on why the deal should be made, as well as the key aspects of the transaction from the beginning, and should continue to keep the following points in mind while negotiating the terms of the transaction:
- understanding the deal breakers on both sides;
- understanding why the counterparty wants to do the deal and what their alternatives are;
- building leverage by having alternatives to the deal, and momentum or incentive to execute the deal rapidly;
- maintaining a solution oriented approach, if possible, and stay patient; and
- making the best of initial documents – it may be easier to achieve goals before committing to the deal.
Are hostile takeovers permitted and what are the possible strategies for the target?
Hostile takeovers are permitted in Finland, but they have remained rare and unsuccessful in practice. When considering defensive actions, the target’s board must always assess whether the actions are in the best interest of the shareholders generally. The target’s board should convene a shareholders’ meeting to address any actions that may frustrate the bid (eg, dilutive new share issuances). Actions benefitting only some shareholders (regardless of them holding a majority stake) at the cost of the target or other shareholders are generally prohibited under the Companies Act. This prohibition may apply to, for example, underpriced targeted share issuances or the sale of strategic assets.
Other defence strategies include soliciting new competing bids by friendly bidders (ie, white knights) for the company’s shares or assets.
The target’s board must issue a statement about the bid, including a well-founded assessment of:
- the bid;
- its impact for the holders of the securities in the target;
- the bidder’s plans for the target; and
- their impact on the target.
The target board’s statement is often vital for the success of the bid, and a decision not to recommend the bid may be detrimental to its outcome.
Warranties and indemnities
Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?
Warranties are often heavily negotiated, but the type and detail of the warranties included in the purchase agreement depend on, among other things:
- the size of the transaction;
- the target and the relevant industry;
- due diligence findings; and
- whether the relevant transaction is negotiated with only one potential buyer.
The warranties tend to be less extensive in an auction than when negotiating with only one potential buyer. A warranty and indemnity insurance covering the warranties may also influence their scope. Typically, the warranties given cover the following main areas:
- corporate organisational matters and ownership of shares (or assets, in case of an asset deal);
- financial matters, including correctness of the accounts;
- employees and employee benefits;
- IP rights;
- real estate; and
- environmental matters.
Limitations and remedies
Are there limitations on warranties?
It is common for the seller to strive to limit warranties other than the fundamental warranties (eg, ownership of shares in a share sale) in various ways. Limitations may be structured in one of the following ways:
- qualifying warranties by the seller's knowledge so that the buyer assumes the risk for unknown breaches of warranties;
- materiality qualifiers excluding the seller’s liability for minor breaches in the form of monetary de minimis and basket caps;
- time limitations for the indemnity obligation (or a specific survival period for warranties but the former is preferable); or
- the buyer’s actual knowledge of a breach (based on disclosed information) at signing barring the buyer’s right to make a claim.
What are the remedies for a breach of warranty?
The non-breaching party can seek the following remedies for a breach:
- close if the breach entitles the buyer to cancel the deal (or to renegotiate key terms); or
- make a claim for losses after closing.
It is common that a definitive agreement limits the buyer’s remedies after closing to indemnification and that the indemnification is treated as a reduction of purchase price.
It has also become increasingly common for indemnity insurance to be taken to provide cover for losses arising out of warranty breaches.
Are there time limits or restrictions for bringing claims under warranties?
At the outset, the time limits for claims under warranties can be freely agreed by the parties and they are often fiercely negotiated. The time limit for bringing a claim usually varies between 12 and 24 months, with increased periods for bringing claims under fundamental warranties as well as tax and environmental warranties.
Tax and fees
Considerations and rates
What are the tax considerations (including any applicable rates)?
Transfers of shares are subject to transfer tax payable by the buyer on the purchase price of the shares. The transfer tax base also includes any debt or liabilities of the acquired entity (towards the seller or a third party) assumed by the buyer based on the transfer agreement, provided that the assumption of the debt or liabilities accrues to the benefit of the seller.
A transfer of shares in ordinary Finnish limited liability companies is subject to a transfer tax at a rate of 1.6%, while transfers of shares in real estate companies, housing companies and real estate holdings are subject to transfer tax at a rate of 2%.
Assets other than real property and shares are not subject to transfer tax. The sale of real property, including land plots and any buildings located on them, is subject to transfer tax at a rate of 4% of the purchase price payable by the buyer.
Income received from the disposal of shares constitutes part of a Finnish limited liability company's business income, taxable at the rate of 20%, unless the participation exemption applies. The purchase price and any sales-related expenses are generally deductible for tax purposes on disposal. Any loss on disposal of the shares is deductible from the taxable business income, unless the participation exemption applies to the sale.
Non-residents are generally not subject to tax in Finland on capital gains arising from the sale of shares in Finnish companies.
Income received from the disposal of assets constitutes part of a limited liability company's business income taxable at the rate of 20%. The purchase price and any sales related expenses are generally deductible for tax purposes on disposal. Any loss on disposal of the assets is therefore in practice deductible from taxable business income.
Value added tax can be payable on an asset sale if the transfer is not considered as a transfer of a going concern.
Exemptions and mitigation
Are any tax exemptions or reliefs available?
If both the seller and the buyer are non-Finnish tax residents, the sale is exempt from transfer tax. However, this exemption does not apply to the transfer of shares in real estate companies, housing companies or real estate holding companies. The sale of shares listed on a qualifying stock exchange is generally exempt from transfer tax.
There are no specific exemptions for an asset sale, and the transfer of Finnish real property is always subject to transfer tax.
Finnish limited liability companies' capital gain on the sale of shares forming part of their business income is exempt from tax for under the participation exemption regime, if the following requirements are met:
- The shares that are sold are part of the seller’s fixed assets.
- The seller has owned the shares continuously for at least one year.
- The seller has owned at least 10% of the share capital in the company whose shares are sold.
- The company whose shares are sold is:
- a Finnish company;
- a company resident in the European Union (as specified in the EU Parent-Subsidiary Directive (90/435/EEC); or
- resident in a country with which Finland has concluded a tax treaty.
- The company whose shares are sold does not qualify as a real estate or housing company, or a company whose activities that mainly consist of owning or managing real property.
The participation exemption regime does not apply for the benefit of a private equity company (a Finnish company whose main activity consists of venture capital investments) or certain financial institutions (eg, savings banks and mutual insurers).
There are no tax exemptions with respect to an asset sale.
What are the common methods used to mitigate tax liability?
Please see above.
What fees are likely to be involved?
A buyer should expect to pay fees to lawyers, auditors, investment bankers and possibly other advisers. Except for real estate deals or deals subject to merger control, the buyer does not normally need to pay fees to public authorities (except for fees and expenses in relation to a possible acquisition vehicle).
Management and directors
What are the rules on management buy-outs?
No specific rules apply to management buy-outs in relation to private limited liability companies. However, the Companies Act requires that the management act with due care and promote the interests of the company and its shareholders (the principle of duty of care and loyalty).
In case of a public takeover bid, the equal treatment requirement should be interpreted to include an obligation to offer the same type of consideration to all target shareholders, including management shareholders. Further, the Helsinki Takeover Code states that the management should be free from secondary influences. If the management has material connections to the bidder or interests relating to the bid, or if a member of the board is (directly or indirectly) personally involved in the launching of the bid, the board must ascertain whether such person is in all respects able to act independently and impartially in the interests of the company and its shareholders. The board must, in relation to its statement regarding the bid, inform the shareholders of all disqualifications of the members of the board and their material connections to the bidder or to the completion of the bid as well as how these disqualifications have been taken into account when evaluating the bid. Aspects of insider trading and disclosure of acquisitions of shares in the bidder may also need to be considered.
What duties do directors have in relation to M&A?
In general, directors have a duty of care and loyalty towards the company (as referenced above) and must comply with the principle of equal treatment of shareholders.
If a public company receives a takeover bid, its board is generally required to take active steps to ensure that the best possible outcome is achieved for the shareholders. The interests of shareholders require that the board of directors evaluate the bid and its consequences, and also compare the bid to other alternatives, which might include:
- continuing the company’s operations as an independent company in accordance with a predetermined strategy; or
- implementing some kind of structural re-organisation.
The target’s board may also seek competing bids. However, there is no obligation to seek a competing bid. If a potential alternative purchaser is known to the board, it would be justified for the board to consider whether it would be in the interests of the shareholders to approach such other party.
The target’s board must draft and make public a statement regarding the bid after the board has evaluated the bid as set out above. The board must recommend that the shareholders either accept or refuse the bid. The statement must also include the board’s assessment of the strategic plans set out by the bidder in the tender document and their impact on the target’s operations and employment. The statement must be issued as soon as possible, but no later than five business days before the bid expires.
Consultation and transfer
How are employees involved in the process?
Employees need not consent to an asset sale. The seller or buyer must inform the employees or their representatives of the asset sale if the seller (before the sale) or the buyer (after the sale) has 20 or more employees in Finland.
Employees need not consent to a share sale. No information or consultation obligation applies in connection with a share sale.
What rules govern the transfer of employees to a buyer?
Employees are automatically transferred to the buyer on purchase of a business and retain their existing terms of employment.
What are the rules in relation to company pension rights in the event of an acquisition?
All employees participate in statutory pension schemes, and some employers also arrange supplementary pension provisions for key employees. Pension schemes are typically arranged through a pension insurer, and the employer is only liable to pay the pension insurance contribution to the relevant pension insurer. The relevant pension insurer to which the pension contributions have been paid by the employer must pay retired employees’ pensions.
If an employee is transferred as a part of a business transfer, the transferee must arrange equivalent pension benefits for the employees.
Other relevant considerations
What legislation governs competition issues relating to M&A?
Mergers and acquisitions are subject to merger control under the Competition Act. An M&A transaction, or a concentration for purposes of the Competition Act, is subject to control if both:
- the combined worldwide turnover of the parties to the concentration exceeds €350 million; and
- the turnover generated in Finland of each of at least two parties to the concentration exceeds €20 million.
Are any anti-bribery provisions in force?
There is no specific anti-bribery act or law under Finnish law, but bribery is prohibited under the Penal Code (39/1889, as amended), in addition to under specific regulation concerning, for example, civil servants.
What happens if the company being bought is in receivership or bankrupt?
If a company is in bankruptcy or falls into bankruptcy, it is unlikely that a buyer will wish to buy the company itself. A more likely scenario is that the buyer will seek to purchase select assets from the bankruptcy estate and leave the liabilities in the estate.