Originally published in IFLR the 2007 Guide to Mergers & Acquisitions
During 2006 there have been a few quite large transactions involving Finnish parties, but much of the M&A activity has taken place on the mid-sized market. Last year was also exceptional in that sense that there have been changes within the legal framework, which substantially effects the M&A market.
New Acts
One of the most essential laws for the business activities including M&A activity is of course the legislation concerning limited liability companies. As of September 1, 2006 there is a new Companies Act in force in Finland. In general the new Act aims to provide more flexibility. On the other hand the new Act emphasizes general corporate law principles such as the equality of shareholders. Although the accentuation of the general principles is a welcomed development, this can also expose the Act to more interpretation, endangering the predictability of the new regulation.
The new Act is abandoning the concept of nominal value of a share and it also allows conversion of shares to another class of shares having any voting ratio (not just 1:20, which was the maximum ratio allowed by the old Companies Act). The Act also allows the issuance of shares without consideration in certain circumstances. These changes do ease structuring investor protection mechanisms such as anti-dilution clauses. The new Act also provides the possibility to create different kinds of securities more flexibly. However, all this is subject to the fact that some of the tools and means given by the new Companies Act might still be from a tax point of view quite unpredictable, as the tax legislation has not kept up with the reforms on the corporate side.
M&A transactions, involving private equity investors are mostly highly leveraged with debt, and the banks financing the transactions are keen on having sufficient security. In addition, the acquisition vehicle is usually the legal entity taking the majority of the new debt, even though the trading company is generating the cash flow needed to pay the interests and, in particular, amortize the debt. However, the financial assistance provisions in the Companies Act prohibit the target company from providing security for the acquisition vehicle’s acquisition loans (or providing financing in general for the acquisition of the shares in the target company) and, of course, from amortizing such debt.
The new Companies Act also contains an express solvency requirement aiming at the protection of creditors. According to this provision, funds may not be distributed if, when making the distribution decision, the persons making the decision knew or should have known that the company was insolvent or that it would become insolvent as a result of such distribution of funds.
Securities Market Act
The provisions of the Finnish Securities Markets Act (495/1989) (the "SMA") has been amended as of July 1, 2006 in order to implement the Directive 2004/25/EC of the European Parliament and of the Council on Takeover Bids (the "Directive").
Under the amended SMA, a shareholder whose holding in a listed company exceeds 3/10 of the total voting rights attached to the shares of the company after the commencement of a public quotation of such shares, must make a public tender offer to purchase the remaining shares and other securities entitling holders thereof to shares in the company (the "Mandatory Bid"). A Mandatory Bid shall also be made when the shareholder’s proportion of the voting rights attached to the shares in a company (resulting from other circumstances than a mandatory bid) exceeds 5/10 after the commencement of a public quotation.
The mandatory offer price shall be the highest price paid by the bidder during the six (6) month period preceding the obligation to make the mandatory offer. If no such purchases have been made, the offer price shall be no less that the weighted average market price of the share in question during the three (3) month period preceding the obligation to make the mandatory offer.
SMA also contains detailed provisions on whose shares shall be included when calculating the proportion of the voting rights. In addition to the shares held by the relevant shareholder in organisations and foundations controlled by such shareholder, the proportion also includes, inter alia, the shares held by such third parties that act in concert with the relevant shareholder in order to exercise control over the target company.
The new takeover regime stipulates that, where the above voting rights thresholds are exceeded in connection with a voluntary bid, it would no longer be necessary to launch a subsequent mandatory bid. This revision to the takeover regime facilitates a faster transaction procedure by reducing the number of successive bids.
The obligation to launch a mandatory bid is triggered only by the shareholder’s own actions. In other words, the obligation does not come about if the proportion of voting rights increases purely due to the company’s or other shareholders’ actions (e.g. through the acquisition or redemption of own shares by the company).
The Finnish Financial Supervision Authority (the "FSA") may grant an exemption from the obligations set forth in the SMA (including the obligation to make a mandatory bid) if "specific grounds" for such exemption are present. The existence of specific grounds needs to be brought out in an application for the exemption. With regard to mandatory bids, specific grounds may be at hand e.g. in situations where the ownership arrangements are related to generational ownership changes. Specific grounds may also be present if the threshold triggering the mandatory bid obligation has been exceeded as a result of a share subscription where a third party shareholder has not subscribed for the allocated shares. This latter situation is comparable to other situations where the bid thresholds are exceeded by virtue of actions taken by some other party than the shareholder in question.
The Finnish Central Chamber of Commerce has established a new special body, due to the amended SMA. It is a panel addressing questions related to public takeovers. The panel can give non-binding recommendations primarily regarding company law issues that arise in connection with public takeover situations. These issues relate mainly to: (i) duties of the board of the target company, and (ii) the so-called "breakthrough rules" (i.e. restrictions on the transfer of securities provided for in contractual arrangements between the target company and its shareholders as well as holders of other securities, such as option rights).
However, it is expressly regulated in the amended SMA that the board of the target company is required to issue a statement regarding the offer.
With this new self-regulatory system, Finland has chosen not to implement Articles 9 ("Obligations of the Board of the Offeree Company") and 11 ("Breakthrough") of the Directive as such, but to regulate these matters through non-binding self-regulation, an option allowed by the Directive. The new panel is required to request a statement from the FSA regarding the matter at hand before making a recommendation.
Taxation
The Finnish Parliament approved a larger tax reform of the corporate taxation system in 2004, with most changes coming into force in the beginning of 2005. The changes include a decrease of the corporate tax rate to 26% and the tax rate for capital income to 28%, as well as changes in the taxation of dividends.
As part of the reform, capital gains derived from selling of certain shares by limited liability companies has become exempt from income taxation. The exemption concerns shares treated as the seller’s fixed assets (i.e. not financial assets), which the seller has owned for at least a year. The share ownership of the seller must also amount to at least 10% of the share capital of the company during such period. The new exemption does not concern shares owned by private equity firms or funds, but under certain circumstances it does extend to their acquisition vehicles. Hence, it is expected that the usage of structures with Finnish acquisition vehicles without foreign (e.g. Netherlands or Luxembourg) topcos as the ultimate parents will become more frequent.
Finnish private equity firms have preferred to set up their funds in Finland in the form of Finnish limited partnerships (in Finnish: kommandiittiyhtiö). However, when Finnish private equity firms have gained experience and a solid track record, and sought to attract international investors for their funds, the Finnish rules on the permanent establishments have caused significant problems. According to an older tax ruling, a foreign investor who is a limited partner in a Finnish limited partnership is deemed to have a permanent establishment in Finland. Hence, Finland asserts taxing right on the foreign investor in respect of its share of the income of the limited partnership. This ruling was a major impediment for foreign investors contemplating participation in Finnish private equity funds.
To make Finnish private equity funds more attractive for foreign investors, an amendment relating to taxation of non-resident partners was recently enacted. According to the new rules, effective as of 1 January 2006, a non-resident partner’s share of profits received through a Finnish partnership is taxed in the same way as it would be if the partner were a shareholder in the Finnish target company. If the non-resident partner’s share of the profits of a Finnish partnership includes capital gains (from other than real estate companies) or interest, the non-resident partner will not be taxed for such capital gains or interest in Finland. Dividends paid from Finnish sources included in a non-resident partner’s profit share of a Finnish partnership are subject to final withholding tax as set forth in the tax treaty between Finland and the investor’s country of residence (usually 0-15%).
The requirement for the applicability of the new relief provision to a non-resident partner is that the Finnish fund practises private equity / venture capital business in a manner defined in Finnish tax law, i.e. investments are made in private companies, and the fund aims to develop the business of the target companies and to sell the shares in target companies within a limited time-frame. It is not yet possible to evaluate the consequences of the new rules.
As to the plans for a new tax reform, which would specifically take into account the demands set by the new Companies Act, it is possible that such new reform will not be implemented before 2008.
Transactions
In 2006 private equity investors were active within the Finnish market, but some of the most notable transactions have been carried out by other financial or industrial parties. The largest transaction during 2006 was undoubtedly the Danske Bank’s acquisition of the banking business of Sampo Bank. A deal value of EUR 4.05 billion has been published.
Another notable transaction was when the Finnish state owned Kapiteeli Oyj was sold to Sponda Oyj, which is a Finnish listed real estate company with the largest owner being the Finnish state. The deal value was approximately EUR 950 million.
The private equity side is always interesting to follow, particularly if the private equity houses have been active in any specific business sectors. In 2006 there were a couple of deals in the health care sector. Funds managed by CapMan acquired the Tamro MedLab business from Tamro Group. Tamro MedLab sells, markets and imports healthcare products, laboratory products, diagnostics and biotechnical products and equipment. The funds managed by Capman have continued to build a Nordic healthcare group by subsequently acquiring two Swedish companies; SelefaTrade AB and Förbandsmaterial AB. In another interesting healthcare deal, Ratos AB purchased the health care section of Perlos Corporation, worth EUR 67 million.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.