This country-specific Q&A gives an overview of mergers and acquisition law, the transaction environment and process as well as any special situations that may occur in Finland.
It also covers market sectors, regulatory authorities, due diligence, deal protection, public disclosure, governing law, director duties and key influencing factors influencing M&A activity over the next two years.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Mergers & Acquisitions Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/mergers-acquisitions/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
Finland and the Nordic countries generally provide a very stable and predictable regulatory environment for M&A activity. The local process for private M&A deals is broadly similar to that of the UK or the US with relevant transaction documentation being drafted in English. The key legislation relating to M&A activity is modern, and allows for flexible design of transaction and holding structures.
The key laws relating to M&A in Finland are the Limited Liability Companies Act governing the type of limited companies that are most commonly used in Finland, and the Competition Act governing the local merger control approval process. The Act on the Monitoring of Foreigners' Corporate Acquisitions in Finland may become applicable in certain cases where there is an important national interest in the target company (e.g. defence industry). In addition to the above, there are relevant provisions in the local employment legislation in relation to transfer of business operations. Also various tax laws become relevant in an M&A context.
The key regulatory authorities for M&A activities in Finland are the Finnish Competition and Consumer Authority handling local merger control approvals, the Finnish Tax Authorities, and the Ministry of Economic Affairs and Employment, which handles the monitoring and approvals for foreign corporate acquisitions in certain sectors having important national interest.
The regulatory environment for M&A has remained quite stable with certain notable changes to tax and industry-specific regulations. Finland has recently imposed restrictions on the deduction of certain interest payments to affiliated entities for tax purposes. This has particular relevance to both new and existing cross-border financing structures (often implemented in an M&A context). Tax authorities are expected to increasingly scrutinise certain types of transaction structures, including those that involve shareholder loans between Finnish operating companies and offshore holding structures. The tax authorities are also very focused on transfer pricing and there is some high-profile tax litigation pending in this regard. Finland’s corporate tax rate was quite recently lowered to 20%.
What is the current state of the market?
M&A activity level during the last two to three years has been quite stable and there has been a significant flow of M&A deals in Finland, with a somewhat shifting mix in terms of public and private deals and key sectors. Deal flow has remained stable despite a number of macroeconomic challenges facing the Finnish economy, ranging from deteriorating productivity, high labour costs, and weak competitiveness of export-intense industries to the disproportionate influence of labour unions and stretched public sector finances.
The Nordic banks have weathered through the downturn relatively unscathed and access to bank financing has not been a significant bottleneck for M&A. Despite higher expectations, the Nordic high-yield bond market has been slow to expand to Finland and bank financing continues to be the prevalent form of acquisition and operative financing.
Which market sectors have been particularly active recently?
During the past year or so, we have seen a wave of unusually large industrial transactions, both public and private, and fewer sponsor-driven buy-side deals. The notable large industrial transactions include the recently announced USD 8.6 billion acquisition by a consortium led by Tencent of a majority stake in Finnish mobile game maker Supercell, the EUR 700 million acquisition by Fortum Corporation of a majority stake in the leading Nordic circular economy company Ekokem Corporation and the divestment by Terex Corporation of its material handling and port solutions business to Konecranes Plc for a consideration of approximately USD 1.3 billion.
In addition to large-scale industrial transactions, specific sectors have remained particularly active. During the last year, these include e.g. energy and infrastructure and real estate, where we have recently seen some unusually large portfolio deals come true. Mobile gaming and related services are also emerging as an increasingly active sector in Finland and the Nordic region with the continued inflow of significant foreign venture capital investment.
Despite the immediate dip in stock market valuations, it appears as if the outcome of the Brexit referendum will not have along-lasting chilling effect on IPO exits. In line with the trend that has been prevalent in the Swedish market and supported by the still healthy stock market valuations, we have seen some successful sponsor-led IPO exits, including Nordic Capital’s listing of Tokmanni, a nationwide discount retailer, and Intera Partners’ listing of Consti, a renovation and technical services provider, both on the main list of the Nasdaq OMX (Helsinki). The smaller-cap First North list of the Nasdaq OMX (Helsinki) also remains reasonably active.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
For the time being, we expect activity levels to remain quite high. It will be interesting to see whether there will be more large industrial transactions like the ones that we have seen this year. To ease public sector finances, the Finnish government is expected to continue to look for opportunities to divest some of its nonstrategic holdings.
All of the leading Finnish private health, elderly and social care providers are held by private equity, with KKR and Triton owning Mehiläinen, EQT owning Terveystalo, IK owning Attendo, Adelis Equity owning MedGroup and Intermediate Capital Group having acquired Esperi from CapMan. Investment in these sectors is driven by attractive demographics, as well as public budgetary pressures and the pending reorganisation of the public health care sectors that some believe creates new opportunities for increased outsourcing. The market is expecting that at least some of these sponsors will seek to exit their investments in the short to medium-term.
Further consolidation is also continuing in the health, dental and social care services, with the larger operators competing for add-ons of still independent clinics. A more recent phenomenon is the similar consolidation trend in the veterinary services market, with the rapid growth of pan-Nordic operators like Evidensia, held by EQT and Intera Partners.
The real estate market picked up in 2014 and has remained very active since, despite Finland’s modest macroeconomic indicators compared to other EU countries. The lack of good investment properties and low yield levels in Europe’s main market areas continue to drive investors to seek higher yields and spread risk in Scandinavia and Finland. Swedish and German investors have been particularly active also this year and this trend can be expected to continue.
The valuations of infrastructure assets, both regulated and unregulated, have reached unprecedented levels – a trend that is likely to spur further activity. These assets in a stable jurisdiction have proved highly attractive to international pension and infrastructure funds as they look for stable returns and geographic diversification in their portfolios.
In terms of entertainment, the mobile gaming sector continues to attract investment. In the wake of mega success of the likes of Supercell, there are hundreds of promising new gaming companies that have attracted top talent, including game studios such as Next Games, Snowprint, Small Giant Games, Ministry of Games, Dazzle Rocks and Traplight. Many of these companies are successfully raising capital from some of the leading venture capital funds in Asia, the US and Europe. Finland is known for its high concentration of expertise in mobile game development. We are also seeing an increasing amount of M&A in the gaming sector with smaller studios being bought out by their bigger rivals.
What are the key means of effecting a merger?
A transaction can be effected in a number of ways in Finland. Most private M&A transactions are structured as simple share acquisitions where the consideration is paid in cash or as a combination of the acquirer’s shares and cash. It is also possible to structure a transaction as a business acquisition, in which case the seller transfers and the acquirer assumes the related assets, liabilities, and employees pertaining to the business. In such case, it is possible to agree on the specific transferring assets and liabilities in more detail, but the applicable employment legislation provides that the employees belonging to the transferring business will transfer to the new owners of the business with their existing benefits and terms of employment.
In addition to the above, a transaction can also be effected by means of a corporate merger where the receiving entity gives either own shares or cash as merger consideration. A corporate merger is, however, often effected only after a share transaction has taken place, and it is also sometimes used in public merger and tender offer structures instead of private M&A transactions.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
With respect to private companies, all information registered in the Finnish Trade Register becomes publicly available. This information includes, e.g. the members of the Board of Directors, the Managing Director, other signatories, share capital and number of shares, etc. Also, the financial statements become available through the Trade Register after they have been adopted and filed to the tax authorities. Also, any person can require a limited liability company to provide the share and shareholder registers for review. In addition to the above, publicly listed companies are also subject to an ongoing disclosure obligation pursuant to the relevant securities law and stock exchange regulations.
In a public deal context, it is up to the Board of Directors of the target company to resolve whether they consider an offer received from an acquirer to be of serious nature, and therefore it being appropriate to allow a potential acquirer to receive more detailed information for diligence purposes.
To what level of detail is due diligence customarily undertaken?
Acquirer usually conducts at least financial, tax, and legal due diligence reviews in all relevant transactions whereas business, operational, environmental, pensions and insurance due diligence is done in cases where the target is sufficiently large or there are specific circumstances warranting such diligence. Transactions are prepared in a manner that closely reflects UK and US traditions and practices, and due diligence is customarily conducted by using one of the internationally known virtual data room providers. One distinguishing feature of the Finnish M&A landscape is that it is established market practice for all information included in the data room (that is 'fairly disclosed' – a concept defined in the relevant purchase agreement – rather than just the specific details set forth in a disclosure memorandum) to constitute disclosure material for purposes of qualifying the seller’s representations and warranties. This is something that foreign (non-Nordic) parties are not always used to and increases the importance of a high-quality data room process.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
The key decision making body in any limited liability company is the Board of Directors, which generally has the authority to resolve upon the disclosure of the target’s confidential information for due diligence purposes. If the target company is a contracting party in the transaction, the Board of Directors is also primarily responsible for deciding upon the transaction. However, if such transaction involves an acquisition or sale of a significant part of the company’s business operations or assets, then shareholder approval may also be required depending, e.g. on the articles of association of the target company.
What are the duties of the directors and controlling shareholders of a target company?
In a transaction concerning a private company, the role of the Board of Directors is usually quite limited. If a publicly listed target company is approached with a potential offer for the company’s shares, the Board of Directors has a duty to evaluate the seriousness of the approach. Depending on the offer, the Board of Directors may resolve to allow a potential acquirer to conduct due diligence investigations on the target, and potentially recommend the shareholders to either reject or approve the offer.
Do employees/other stakeholders have any specific approval, consultation or other rights?
The employees have only limited means of influencing or blocking M&A transactions, but they have certain general consultation and information rights relating to changes that may affect their rights or employment conditions. In business or asset transactions, the employees are generally entitled to be informed by both the seller and the acquirer of the transaction and its implications on their employment as well in advance as possible. Due to strict confidentiality requirements, this information is often given only just before the transaction becomes public.
What regulatory/third party approvals are required and what waiting periods do these impose, if any?
M&A transactions exceeding certain turnover hurdles must be notified either to the Finnish Competition and Consumer Authority or to the European Commission in accordance with the applicable national and EU merger control legislation. The national merger control process may take from one to four months depending on whether the matter can be decided in first phase investigations or whether the authorities consider that the matter requires further scrutiny in second phase investigations.
If the target company is engaged in a business that is of material national interest (including for example the defence sector or important infrastructure), then the Act on the Monitoring of Foreigners' Corporate Acquisitions in Finland may become applicable and the transaction may require the approval of the Ministry of Economic Affairs and Employment.
To what degree is conditionality an accepted market feature on acquisitions?
In transactions relating to private companies, the procuring of mandatory authority approvals is a standard condition precedent for the consummation of the transaction. Other conditions depend on the deal dynamics and competitiveness of each individual transaction, but may include conditionality upon the absence of a material adverse change or material breach of warranties, procuring of waivers for change of control provisions in material agreements, or availability of financing, although such conditions can be considered quite rare in light of recent market practice.
In transactions involving a public company, the target company and the offeror often enter into a combination agreement that governs the transaction process and includes the main terms of the offer. This agreement sets cooperation obligations for the parties (e.g. filings with authorities) and addresses deal security issues, such as conditions and prerequisites under which the target company’s Board of Directors will recommend the offer, non-solicitation undertakings, and procedures to be followed in case of a competing offer (e.g. right to match). However, this agreement should not prevent the target board from fulfilling its duty to always act in the best interest of the target company and its shareholders.
What steps can an acquirer of a target company take to secure deal exclusivity?
For private companies, the parties (target company and the main shareholders) are generally free to agree upon applicable exclusivity restrictions. Depending on the deal dynamics (e.g. whether the transaction process is structured as an auction) such agreements are sometimes used to provide sufficient comfort for the acquirer to spend the required resources on the due diligence and other preparatory actions. However, such agreements do not necessarily include any cost coverage or break fees to the acquirer, but only confirm that the target company will not engage in other negotiations during the exclusivity period.
In public transactions, the Board of Directors may relatively freely agree to negotiate and enter into contractual arrangements with the offeror provided that this is deemed to be in the best interest of the shareholders. However, the target company may not agree to any contractual arrangements that limit the target company’s and the Board of Directors’ possibilities to act, i.e. the exclusivity should not prohibit the Board of Directors from evaluating a potential competing offer and thereby from acting in accordance with its duty of care and loyalty in situations where the Board of Directors has received a competing contact or if the circumstances otherwise change substantially.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
As mentioned above, letters of intent or exclusivity agreements in Finland often do not include any cost coverage or break fees for the acquirer in the event that the seller decides not to proceed with the transaction. The parties often rely on a transparent process when engaging in a transaction in Finland.
In public transactions, the Board of Directors should only in very limited circumstances agree to a break fee. In practice, agreeing to a break fee may be justifiable in some situations provided that it is in the interest of the shareholders and the amount of the break fee is reasonable (in practice mainly compensation for costs).
Which forms of consideration are most commonly used?
In private deals, cash is the most common form of consideration. Share consideration is seen as an alternative in public merger and tender offer structures but even then it may be difficult to structure transactions to allow for tax-free share exchanges given that typically, even a limited cash component prevents such favourable tax treatment. Combining cash and shares may also create challenges with respect to the statutory equal treatment of shareholders.
At what stages of an acquisition is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
For private companies, there is no general obligation to disclose any acquisition in public. In transactions involving a public company, the disclosure obligations are governed by the applicable securities market legislation and stock exchange rules, and depending on the circumstances, the disclosure may become required, e.g. when the Board of Directors of the acquirer has decided upon the transaction or the relevant transaction document is executed.
Are there any circumstances where a minimum price may be set for the shares in a target company?
In general, parties are free to agree upon the consideration payable for shares. However, in case of a public tender offer, the offer consideration may need to correspond at least to the highest price paid by the offeror for any target shares during the six months preceding the announcement of the offer.
Is it possible for target companies to provide financial assistance?
The Limited Liability Companies Act currently prohibits the target companies from providing financial assistance for the acquisition of its own shares. This includes both direct funding and the provision of any assets or collateral for this purpose and, consequently, any finance documents executed in connection with the transaction customarily include required limitation language whereby possible acquisition financing is separated from other (e.g. working capital) financing, and the target companies do not guarantee or provide securities for the part of the financing package that is used for the acquisition of the target companies’ shares.
Which governing law is customarily used on acquisitions?
Transactions in Finland are customarily governed by Finnish law and due to the stable legal environment such governing law has not been an issue with international parties either. In certain circumstances acquisition agreements have also been executed under English law or some other governing law, if the parties feel more comfortable in using such alternative governing law.
What public-facing documentation is it necessary for a buyer to produce in connection with the acquisition of a listed company?
If the acquirer launches a tender offer for the acquisition of a listed company, such offeror must before the commencement of the offer period prepare and publish an offer document. Such offer document must be filed to the Finnish Financial Services Authority ('FFSA') and contain sufficient information enabling an informed assessment of the merits of the offer (such as background and reasons of the offer, presentation of the target and offeror, grounds for the pricing of the offer, other terms and conditions, etc.). The Ministry of Finance Decree on Offer Documents, the Helsinki Takeover Code issued by the Finnish Securities Market Association, and the standards and guidelines issued by the FFSA include detailed requirements on the contents of the offer document.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
There is no specific form or process (e.g. notaries or similar) required for the valid transfer of ownership in shares. The transfer is usually effected by the language of the share purchase agreement or a separate short form share transfer note confirming the transfer of ownership. In Finland, transfer tax will become payable in connection with the sale and transfer of non-listed shares and other securities in case at least one of the contracting parties is tax resident in Finland.
Are hostile acquisitions a common feature?
In the Finnish context, hostile acquisitions occur quite rarely. This is partly due to the shareholder structure in Finnish publicly listed companies where certain institutional investors (most notably local pension insurance companies) often hold significant stakes, which often results in quite low probability of any hostile offer being successful without the recommendation of the target company’s Board of Directors or the support of such pension institutions.
What protections do directors of a target company have against a hostile approach?
In a hostile context (i.e. where the offeror is not seeking the recommendation of the target company’s Board of Directors), the process typically involves a significant public angle and may accordingly involve defensive actions by the Board of Directors that relate to public communications. The target company may for example also assess the advantages and disadvantages of an early announcement of the offer or, in the case of a bear-hug approach, assess the possibility of invoking the 'put up or shut up rule', i.e. cause that the FSSA impose on the offeror a deadline for making an offer or announcing that an offer will not be made.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
In publicly listed companies, if the holdings of a shareholder (either alone or together with parties acting in concert with such shareholder) exceed 30% (or 50% in certain situations) of the total voting rights in a listed company the shareholder is obliged to launch a mandatory offer to acquire the remaining securities in the company. The obligation to launch a mandatory offer is, however, not triggered if the threshold has been exceeded by means of a voluntary tender offer made for all shares and securities giving entitlement to shares in the target (including acquisitions outside such offer that are executed during the offer period of said offer) any shareholder whose ownership exceeds 30% or 50% may become obliged to launch a tender offer for the remaining shares.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
Minority shareholders have several rights deriving from the Limited Liability Companies Act that depend on their ownership percentage in the company. For example, a shareholder with any ownership in the company can make counter-proposals at a general meeting of shareholders or block certain decisions that require individual shareholder consent. A holder of 10% of all shares in the company may require a special audit, an extraordinary general meeting of shareholders to be convened, or a minimum dividend to be distributed (such dividend being equal to at least 50% of the net profit of the financial period subject to availability of distributable reserves; however not in excess of 8% of the total equity).
Is a mechanism available to compulsorily acquire minority stakes?
The Limited Liability Companies Act provides for a squeeze-out mechanism including both a right for the minority owners to sell and the majority owner to purchase minority shares in a company in case one shareholder’s ownership exceeds 90% of the shares and votes in the company.