In Finland, the first half of the year 2008 was relatively active within the M&A field. However, according to the weekly magazine, Talouselämä, during the second half of the year 2008, the number of the published deals was decreased by 18 % compared to the year 2007. Also KPMG Finland stated that the entire year underwent substantial calming as during January - September 2008, only 444 deals were made which equals 12 % drop compared to 2007. Thus the decrease in volumes was noticeable from the year 2007 as the effects of the current financial turbulence were beginning to emerge.
In Finland, generally speaking, so far the credit crunch has mainly affected only the financial sector, but during the second half in 2008, its influence was expanding to other industries as well. Larger buyout activity dropped off dramatically, while mid-market deals still went ahead. For instance the paper industry saw notable downsizings in 2008. Also, the real estate as well as building sectors went through drastic change - in practice the real estate deals dropped almost to zero as the foreign real estate investors vanished from the Finnish markets. In 2008 the deals became smaller, also if measured with the EUR value of the businesses sold. The combined turnover of the five biggest companies sold in autumn 2008 was only 1.6 billion euro while the figure in 2007 was 3.4 billion euro. Deals in all sizes were still made, but as the year went on, the processes were delayed. On the bright side, the year 2008 showed the rise of industrial buyers - the less private equity deals have been made, the more active industrial buyers have been in M&A sector. The Finnish industrial corporations are generally in good shape and thus can finance the deals from their own balance sheet.
In regard of M&A, which is one of the main focus areas of our firm, the effect of the credit crunch has been moderate, as most investments in Finland fall below the EUR 500 million threshold. Still, the Finnish market has experienced a significant slowdown in regard of deals where a substantial part of the consideration is externally financed. Further, the year 2008 showed that a signing does not always mean a definite agreement, while many deals that were already signed, were not closed as the external finance was not available and alternative sources of funds had to be found. Also the private equity investors had to come up with new means of financing their deals - it was not uncommon that the financing package included a refinancing obligation already after 6 to 12 months from the original investment.
The market situation in 2008 had an effect also on the deal documentation from a legal perspective. The terms and conditions became more neutral compared to 2007 and stricter representations and warranties were required before committing to a deal. On the other hand, the sellers also became increasingly wary of price bargaining and preferred to wait rather than settle for a compromise on the perceived value of a target and as a result, no such prices as in 2007 were reached. Furthermore, the limitation of liability clauses became more neutral compared to the year 2007, when it was not rare to have extremely low limitations of liability. In addition the lack of external finance put pressure on the deal documentation, as it became evident that the standard condition precedent clauses for financing could be triggered. In order to secure the syndication, the banks required stricter covenants and more favourable financing terms. Among other things, restructuring, refinancing and market flex clauses, which allowed increasing the margins, become more common.
Regulatory insight: New Corporate Governance Code in Finland
The year 2008 did not bring any major legal reforms for M&A sector in Finland. However, a new corporate governance code was accepted with new insights.
A new Corporate Governance Code for Listed Companies ("Code") was first published and approved on 20 October 2008. The main objectives of the new Code were to offer an internationally competitive corporate governance code for Finnish companies, to achieve more transparency in governing bodies and to improve international investors' access to information regarding the Finnish corporate governance system. This last objective was due to the fact that the number of foreign shareholders in the Finnish listed companies is one of the highest in Europe. Below we will introduce the most significant changes included in the Code that mainly relate to the board of directors of a company and certain committees thereunder.
The new Code no longer states the amount of board members required, but instead, the number of the directors needed to enable the board to take care of its duties in an efficient manner as well as to take cognizance the needs of the company operations and the development stage of the company. Thus, no requirement for minimum amount of board members is set. Interestingly, also the equality between men and women is reflected in the Code: both genders need to be represented in the board even tough the new wording of the Code does not constitute a requirement to setting of quotas for the genders.
In the new Code, also the independency requirements are specified. A board member is not independent from the company, if the director belongs to operative management of another company, and the two companies have, or have had during the past year, a customer, supplier or cooperation relationship significant to the other company. The same holds true if the board member has during the past three years been, a partner or an employee of the company's present auditor, or the board member is a partner or an employee in an audit firm that has been the company's auditor during the past three years. Also the fact that a private or legal person is a related party to a director needs to be evaluated as a circumstance, which may compromise the independency of said director.
Further the appointment and independency requirements of the audit and nomination committees were specified. The board of directors shall be responsible for the duties of the audit committee or assign them to another committee in case it elects not to establish an audit committee. According to the new Code, at least one member shall have expertise in accounting or auditing. Further, all members of the audit committee are required to be independent from the company. In order to provide more objectiveness, the Code goes even beyond this, requiring that at least one of the members shall be independent of significant shareholders. Also the majority of the members of the nomination committee shall be independent of the company as the Nomination Board controls and supervises the operative management of the company. Neither the managing director nor any other executive director be a member of the nomination committee.
In conclusion
During the year 2008 we saw a rise in public M&A activity and insolvency services, coupled with a rise in asset purchase deals and lower value midmarket-deals. We expect that the high M&A volume seen in 2007 is unlikely to be repeated for a few years and thus undoubtedly the credit crunch will have far-reaching impact on the Finnish M&A market. It is likely that the difficulties in getting financing for the M&A deals will continue as the financial turmoil will not to normalize until next year and global uncertainty will continue.
Ari Kaarakainen, Partner
Attorneys at law Borenius & Kemppinen Ltd
Ari Kaarakainen advises on banking and corporate finance as well as on M&A related questions. Prior to joining B&K, Mr. Kaarakainen worked as a legal adviser for the Helsinki Chamber of Commerce and at various corporate finance functions at Leonia Bank (now Sampo Bank), including as a lawyer and as a credit analyst. During 1997-1999 he worked as a legal counsel at the New York branch of Leonia Bank.
Mr. Kaarakainen is a member of the board of directors for Finnish subsidiaries of international companies. He also lectures at the University of Helsinki and for business organisations on financial law. He holds a master of business administration from Columbia University in New York in addition to his law degree. Mr. Kaarakainen has been a B&K partner since 2006 and also heads the firm's Transactions practice group.
Established in 1911, Borenius & Kemppinen is one of the largest and most experienced law firms in Finland and is a leading provider of corporate services. Seamless cross border legal services are provided in Estonia, Latvia and Lithuania through law firms associated with the Borenius Group.
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