The Squeeze Out and Pricing under the Finnish Companies Act

By Tarja Wist and Charlotta Waselius

Alike many of its equivalents in other European countries the Finnish Companies Act provides for an obligation and right of the majority owner, holding more than 90 per cent of the share capital and total number of votes, to purchase minority holdings through a so called squeeze out procedure. The provisions on squeeze out have, however, been criticized, not only because they have not been harmonised with the take-over rules included in the Securities Markets Act (the "SMA") but also because they do not provide the acquiror with sufficient guidelines on the calculation of the squeeze out price. The right level of the squeeze out price has lately been determined in several arbitration proceedings, the outcome of which, however, is not always public. Furthermore, in May 2003, a working group, appointed by the Ministry of Justice, suggested the introduction of an entirely new Companies Act which would include new provisions addressing pricing of minority holdings in squeeze-out, aimed at eliminating the current uncertainties relating to pricing.

The price to be paid by the majority shareholder in a squeeze out procedure is to be determined under the Companies Act. The only guideline that the Companies Act provides for the pricing of the minority shares is that the price must be the fair market value of the shares. If the majority shareholder and the minority shareholders do not reach an agreement on the price, the price is to be determined by an arbitration court. The Companies Act provides that the arbitrators must take into account all relevant details of each individual case when determining the squeeze out price, without, however, specifying what these details are.

The regulation of the squeeze out price in the Companies Act resembles but, nevertheless, differs substantially from the regulation of the SMA, concerning pricing of mandatory offers for minority holdings, which according to the SMA, must be made by a shareholder whose holding in a public limited company exceeds an equivalent of a voting participation of two-thirds. Alike with the Companies Act, the SMA stipulates that a mandatory offer price must be the fair market value of the minority shareholders shares. However, unlike the Companies Act, the SMA provides the majority shareholder instructions as how the fair market value is to be determined. According to the SMA, when determining the fair market value of the shares for the purpose of the mandatory offer price, the following must be taken into consideration:

1. the volume weighted average price paid for the shares of the target company on the Helsinki Stock Exchange during the preceding twelve (12) months prior to the emergence of the obligation to launch a mandatory offer (the so called "12-month rule")
2. any higher price paid by the offeror for shares of the target company during the above twelve-month period; as well as
3. any other special circumstances (which have not been defined in the SMA, but has generally been considered to comprise circumstances connected to the target company, such as, for example, mergers, demergers, share splits, other changes in the target company’s share capital etc.).

The above guidelines for establishing the fair market value under the SMA do not apply, directly or by analogy, when determining the squeeze out price under the Companies Act. However, because of the seeming similarity of the regulation of the price under the SMA and the Companies Act and because a mandatory offer often time wise coincidences with a squeeze out procedure, arbitrators chosen to determine the squeeze out price often pay attention to the pricing of the immediately proceeding mandatory offer. This is usually the offeror’s position, whereas the minority shareholders who may have rejected the mandatory offer, because of in their view too low a mandatory offer price, often choose to challenge the price in the subsequent squeeze out procedure. This tendency is enhanced by the SMA lacking particular provisions on disputing of the mandatory offer price, leaving any disputes to be settled or solved in time, to money consuming litigation proceedings in the general court.

Another interesting difference between the pricing regime under the SMA and that under the Companies Act is the lack of so called "top up" provisions in the Companies Act. Namely, under the SMA, if the consideration offered in the mandatory offer exceeds that offered under a voluntary public tender offer, preceding the mandatory offer, the majority shareholder is obligated to pay the difference in the prices to each shareholder who has accepted the voluntary offer. This difference in prices, the so-called top-up, is payable in cash. However, the Companies Act contains no corresponding provisions with regard to a squeeze out -procedure. Hence, it might be argued that a minority shareholder obtaining a better price for the shares in an arbitral proceeding than that offered under the mandatory offer, is put in a more favourable position with regard to those who accepted the lower price offered in the mandatory offer and that the Companies Act, thus, should contain a top-up provision corresponding to that of the SMA.

In the current unharmonised and perhaps incomplete legal regime, arbitrators requested to determine the squeeze out price face many challenges. First, the arbitrators must respond to the question whether the pricing of a voluntary tender offer or a mandatory offer would have relevance for the squeeze out price and, if so, to what extent. This question is particularly challenging if the share has been liquid or the market very volatile, both of which may undermine the relevance of the 12-month rule.

Secondly, the arbitrators must decide at what point of time the fair market value shall be determined for the purposes of the squeeze out price and whether the laps of time since an earlier voluntary tender offer or mandatory offer would need to be taken into account in the squeeze out price.

While many of these questions are open and have not been addressed in juris prudence, some general principles have, as well, been established and recommended in legal doctrine:

1. the fact that the shares, are minority shares and may thus not have any significant commercial value should not have a value decreasing impact; and
2. the fact that the shares of the target company, may have particular value to the offeror because of synergies or other business related reasons should not have a value increasing impact.

Because of the recent activity in the Finnish take-over market, and because take-overs regularly are completed through a squeeze out procedure whereby minority shareholders are, through an arbitration proceeding initiated by the acquiror, forced to give up their shares, guidance and pricing may be sought from recent arbitral awards.

As a general trend it may be noted that, with regard to squeeze outs that have been preceded by a mandatory offer, the arbitrators have often followed the pricing of the mandatory offer. However, there have been instances where the arbitrators have set the squeeze out price at a higher level than what was offered by the majority shareholder in the mandatory offer.

In a recent arbitral tribunal ruling in September 2003 relating to the takeover by Telia, the Swedish telecom company of Sonera, the former Finnish telecom company, the arbitral tribunal ruled that the squeeze out price should be set at a level approximately 15 per cent above the mandatory offer price.

With respect to the importance of timing, the arbitral tribunal ruled that

1. the squeeze out price should be set on the basis of circumstances prevailing at the time of publication of the squeeze out request, except in cases where the majority shareholder wrongfully delays the squeeze out request or otherwise aims to decrease the value of the shares; and that
2. the squeeze out price for publicly quoted shares should be based on the market value of the shares on the stock exchange, however, with the exception for cases where the shares have not been subject to a sufficient level of trading and a reliable determination of the market price, thus, cannot be made.

The arbitral tribunal found that there had been sufficient level of trading in Sonera shares and ruled that the squeeze out price should be based on the volume weighted average price of Sonera shares on 9 December 2002, the day when Telia announced its squeeze out request. Accordingly, the arbitration tribunal ruled the new squeeze out price to be EUR 5,78 instead of EUR 5 initially offered.

A reform of the Companies Act is currently under consideration and it is expected that in such connection the current legal regime for squeeze out procedures would be simplified and clarified. It has been suggested, among other things, that a difference would be made between pricing of shares that have been subject to a mandatory offer under the SMA and other shares. The working group appointed to prepare the reform has proposed that if the squeeze out procedure has been preceded by a mandatory offer under the SMA, the squeeze price should primarily be determined in accordance with the provisions of the SMA concerning the mandatory offer price. However, the longer the period between the mandatory offer under the SMA and the squeeze out procedure is, the less relevant is the price of the mandatory offer when determining the squeeze out price. On the other hand, the fair market value for shares that have not been subject to a mandatory offer (in practice, usually unlisted shares) would, according to the working group’s proposal, be, under an express provision of the Companies Act, determined in accordance with their fair market value immediately prior to the commencement of the arbitral proceeding, i.e. at the time of the publication of the squeeze out request.

A realistic expectation is that the legislative reform, spreading some light over the vague rules currently regulating the pricing of shares subject to squeeze out, will be finalised in 2005 or, more presumable in 2006. One should also bear in mind the possible changes in the Finnish take-over legislation, including the squeeze out procedure, the eventual implementation of the proposed EU takeover directive may entail.