A Ministry of Justice working group has proposed radical amendments to the regulation of Finnish limited liability companies. A complete revision of the Finnish Companies Act (expected to enter into force on 1 July 2006) is expected to give a further boost to the Finnish private equity industry. The new Act would allow much more flexibility for structuring investments into Finnish portfolio companies, for example, by enabling more flexible valuation adjustments and anti-dilution structures, by increasing possibilities to create new classes of shares and other equity instruments, by allowing more flexible distribution of funds, and by abolishing many of the rather detailed procedural rules.
The means proposed by the working group to achieve the above goals include, among other things, emphasis on the non-mandatory nature of the Act and the elimination of several formalities. In addition, many new options and alternatives will be introduced. Concurrently, the general principles of corporate law are emphasized. The Ministry of Justice working group is also striving to clarify the structure of and the concepts used in the Act, as well as to make it compatible with the International Financial Reporting Standards (IFRS).
The emphasis on flexibility means a significant increase in the choices and alternatives available in the structuring of M&A transactions, both by industrial companies and by private equity investors. The completely revised regulation of shares and share capital under the proposed Act is particularly relevant in this respect. The new Act is based on the idea of completely separating shares from share capital ("truly non-par value shares"). Under the current system, companies having shares without a nominal value retain the link between shares and share capital in the form of a book-value equivalent, which for all legal purposes has the same function as the nominal value. Under the new system, the ratio of share capital per share would have no legal relevance whatsoever.
The new system would allow companies to issue new shares without changing the share capital, or vice versa, in almost any scenario. Separation of shares and share capital would enable, for example, the introduction of anti-dilution provisions by adjusting only the number of shares without any effect on the share capital of the company. In other words, there would be no need to make any payments to the company for this purpose.
In relation to the above, even though stated as a separate item, the working group proposal includes a provision for booking some or even all of the equity invested into the unrestricted (distributable) equity of the company instead of the restricted share capital. The unrestricted equity investments facilitate, among other things, post-investment downward adjustments of the share price, creation of equity buffers for repurchasing shares from departing employees despite accumulated losses, and, in general, more flexible repayment of capital in most situations.
Also the provisions on mandatory liquidation, which have sometimes under the current Companies Act resulted in undesirable situations, are proposed to be amended. Mandatory liquidation will no longer be triggered by the decrease of equity, but only by insolvency. The new Companies Act imposes an express requirement that the company remains solvent after each distribution of its assets. While this proposed requirement has faced criticism as being too vague, it is generally assumed to have been in effect already under the current Companies Act. There have so far not been any express provisions to this effect.
Regulation of shares will also be liberalized under the proposed provisions to the Companies Act. No limits on the voting rights and powers between different share classes are being proposed in the new Act. Under the current provisions, a specific "one-to-twenty" rule is applied. In addition, current provisions on non-voting preference shares are suggested to be significantly simplified by removing any requirements on granting such shares with specific preferential economic rights. The abolition of nominal value also allows the use of transformation clauses whereby shares may be transformed into shares of other classes in ratios other than one-to-one.
It is proposed that the Board of Directors may be given greater powers than previously with respect to deciding on the issuance of shares or increase of share capital. Most of the current limitations on Board authorizations are expected to be removed, including the current 20% maximum limit for the increase of share capital or number of shares that the Board of Directors may decide by prior authorization from the general shareholders’ meeting. Formalities concerning the subscription and payment of shares are also expected to be reduced under the proposed new Companies Act.
Of the general principles specifically underlined in the reform, the principle of equal treatment of shareholders is perhaps the most important. Even though the range of measures permitted under the new Act is expected to be significantly broader than currently, no such measure may be used that would unjustly favor any shareholder to the detriment of other shareholders. The relevance of this principle must, therefore, be taken carefully into account in structuring M&A transactions. The same applies to the principle of the protection of creditors.
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