Business acquisition in Finland

Business Acquisition in Finland - our concept

In the course of years we have represented a broad range of individuals and companies pursuing business opportunities through mergers and acquisitions, most recently within e-commerce, metal industry and wealth management. We have worked as inhouse lawyers and seen a lot of outstanding- but also mediocre legal work performed by lawyers, let lone reputable firms. We decided not to deliver the same kind of quality and not to deliver unnecessarily lengthy reports which lack proper analyze. A client has the right to get answers – proper opinions- for his money.

M & A approach

We have in the past few years seen a foreign acquisition culture penetrate this market. In most cases this means unnecessarily lengthy agreements and extensive due diligences. Such practices have their justification provided they serve the best interests of the client but that is unfortunately not always the case. In a jurisdiction like Finland you could achieve the same level of protection with less paperwork and more analyzing. That may, however, not always be in the interest of the service provider.

I have assumed a different approach where I get personally involved and perform almost all the work needed in an acquisition process. Thus the client gets the benefit of our past experience and does not have to satisfy with work performed by fairly inexperienced associate lawyers. This approach has proven successful and we have recently been involved in several mergers and.  Now, this approach naturally signifies that I get totally wrapped in the process and have to decline other engaments. On the other hand I am completely aware of  all the details of the process and thus have a competitive edge to  a lawyer who works only part time with the acquisiton. Many of our clients have authorized us to disclose our involvement in the respective mergers and acquisitions. We are pleased to inform you about our past engagements.

Finland as the acquisition target country

The process of acquiring a company is seen in many jurisdictions as something complicated and time-consuming. This does not apply to the Nordic countries let alone to Finland. We have a culture of transparency, openness and minimal form requirements. Our legal culture has minimized red tape which fact facilitates business dynamism.

Lower transaction costs

The Finnish transaction and legal costs are competitive and mostly lower than in the majority of western countries. We encourage our clients to structure the deal in accordance with the Finnish legal tradition in order to minimize the costs. Of course you may want to do an acquisition process in the same way in every country or do it more extensively in order to cover your back. Our approach has been particularly suitable in the acquisitions of small and medium sized companies where the owner makes the decisions and does not need to justify his actions to others.

Be a demanding client

It goes without saying that the extent of a lawyer’s involvement in across border acquisition is dependent on the instructions of the client. Yet, this basic fact is often forgotten and lawyers serve standard solutions to their clients, solutions which unfortunately in some cases are extensive and expensive without giving any real help to the client’s decision making. The objective which the parties’ attorneys will be expected to achieve is the legal transfer of ownership from seller to buyer of either the shares or the assets of the business as appropriate. The client has every right to expect his attorney to identify risks and pitfalls and to give advice to protect the client’s interests rather than make lengthy DD-reports  and extensive translations without analyzing the underlying facts.

Take us earlier onboard and save in transaction costs

An experienced lawyer’s input into the commercial aspects of the transaction should be substantial as the legal facts do have financial implications. The moment at which the client instructs the lawyer in cross border transactions should be carefully considered. It is often unfortunate if the client sees the lawyer as nothing but a  a contract drafting tool. In such cases the client will instruct the lawyer at a relatively late stage in proceedings, maybe after most of the deal has been negotiated. We have seen cases where little could be done and most of the advisor’s time was consumed in trying to mend the errors already made and create structure in the DD-process and deal. It is, however, impossible to isolate the legal aspects from the commercial aspects and it is therefore we prefer to be involved as early as possible in the negotiations.

Företagsköp i Finland

FÖRETAGSKÖP I FINLAND

Inledning

Företagsöverlåtelser i ett annat land, i detta fall i Finland, är relativt komplicerade affärshändelser. Då är behovet av entydiga avtal stort, bl.a. sekretessavtal, letter of intent, köpavtal och olika sidoavtal. Förhandlingsprocessen som leder fram till de olika avtalen kan vara omfattande beroende på avtalsintresset, branschen och hur väl objektbolaget har skött sina räkenskaper och sin interna och externa dokumentation. De finländska köpebreven följer svensk modell och är relativt korta - åtminstone i jämförelse med de anglosaxiska avtalen. Tack vare riskkapitalföretagen och de internationellt orienterade advokatbyråerna har köpavtalen dock tenderat att bli längre och längre under de senaste åren.

För ett tjugotal år sedan var det i mindre företagsköp vanligt att säljaren inte gav några andra garantier än möjligheten för köparen att bekanta sig med målbolagets räkenskaper. Läget har sedermera radikalt förändrats och i dag ges omfattande garantier köparen till fromma.

Språket

Ett företagsköp i Finland är hur lätt som helst att genomföra: lagarna är i det stora hela de samma, Finland var ju en del av Sverige ända till 1809 och folk vid kusterna talar svenska. Dessutom råder en stor avtalsfrihet på just sådana här transaktioner. Visst är det så men skenet kan bedra. De gemensamma nordiska lagberedningarna till trots så har Finland faktiskt utvecklats isär från Sverige i drygt 200 år.

Att Finland var en del av det svenska riket, att svenska talas vid kusten och att institutionerna är de samma eller liknande som i Sverige kan vagga en i en felaktig trygghetskänsla. Eftersom Finlands förvaltning är tvåspråkig finns alla lagar, förordningar och andra viktiga dokument också på svenska. Dessutom definieras och beskrivs de språkliga rättigheterna och skyldigheterna närmare i språklagen och myndigheterna betjänar allmänheten på både finska och svenska.

Trots de många likheterna skall man vara på sin vakt. Det juridiska språkbruket har sedan statssamhörigheten upphörde utvecklats på finländska villkor och utvecklingen har inte nödvändigtvis varit exakt densamma som i Sverige.

Om verksamheten är omfattande så kan man inte utgå ifrån att samtliga avtal och handlingar i målbolaget skulle vara skrivna på svenska även om företaget är beläget i svenskbygderna. Oberoende av områdets och ägarnas språk så opererar företagen på finska och ofta på engelska och därför är det viktigt att revisorerna och juristerna som går igenom due diligence materialet behärskar finska. Den uppenbara avsikten med en due diligence inför ett företagsförvärv är att köparen önskar information om målföretaget och då måste man kunna ta del av den ekonomiska informationen och likaväl förstå sig på företagets avtal.

Oberoende av stadgandena i språklagstiftningen så kan det på vissa orter vara en avgörande fördel att kunna förhandla med myndigheterna på finska. De svenska resurserna på myndighetssidan är ibland rätt begränsade och då kan processen påskyndas genom att handlingarna uppsätts på finska och att kontakten till myndigheterna sker på finska.

Juridiken

En viktig fråga är om företagsöverlåtelsen ska avse aktierna eller substansen (inkråm). En aktieöverlåtelse betyder att bara aktierna eller andelarna i bolaget säljs. Väljer man att köpa aktierna så förblir målföretaget oförändrat och dess avtal t.ex. leveransavtal, kundavtal, distributionsavtal m.m. fortbestår. Detta underlättar ofta transaktionens genomförande men innebär också vissa risker eftersom bolaget kan innehålla dolda förpliktelser.

Vid en substansöverlåtelse är förvärvsobjektet endast affärsrörelsen eller de enskilda tillgångarna och skulderna enligt specifikationen i avtalet. Substansöverlåtelsen innebär att varje tillgång måste överlåtas för sig. Köparna upplever ofta substansförvärvet tryggare men kan dock ibland överraskas av bl.a. arbetsrättsliga yrkanden och påföljder. I och med att Finland blev medlem av EU har dessa arbetsrättsliga frågor reglerats avsevärt hårdare än tidigare.

På samma sätt som i Sverige råder låneförbud i företagsöverlåtelser: det innebär att köparföretaget inte får betala köpeskillingen med målföretagets egna medel. Regeln gäller både penninglån och ställande av säkerhet till förmån för köparen. Däremot är man mera liberal med kundfinansieringen och har än så länge inte ställt krav på mängden av skulder i förhållande till eget kapital (debt equity ratio). En mycket vanlig teknik innebär att ett finskt holdingbolag köper aktierna i målföretaget och dessa två fusioneras senare. Fusion som absorption d.v.s. holdingbolaget som det övertagande bolaget tar över målbolaget och på detta vis kommer amorteringarna och räntekostnaderna av akvisitionspriset sist och slutligen att bäras av verksamheten i målbolaget.

Såsom i alla internationella transaktioner är vissa områden mera nationellt styrda än andra: en svensk köpare borde aldrig lita på sitt eget omdöme bl.a. på skatte-, fastighets-, arbets- och hyreslagstiftningens områden. Till skillnad från Sverige är t.ex. fastighetsöverlåtelserna ogiltiga om de ej bestyrkts av ett offentligt köpvittne. Regeln är tvingande. Här kommer vi väldigt nära det kontinentaleuropeiska notariesystemet.

Lokalkännedomen

Vi har upprepade gånger agerat på svenska huvudmäns vägnar som jurister och förmedlare mellan två kulturer. Förmedlarens roll går knappast att överdriva i all synnerhet i de fall när målföretaget är ett mindre fåmansbolag. Detta accentueras om säljarna är äldre företagare eller om de opererat bara på den finska marknaden.

Salvén& Wuorenpää har under åren utvecklat ett tillvägagångssätt som våra kunder har varit med om att forma. Vi strävar inte efter att göra allt själva utan agerar som svenska huvudmannens outsourcade juridiska avdelning och söker de bästa lokala medhjälparna till olika sysslor och uppdrag. Vi ser helt enkelt till att våra huvudmän får kontakt med kvalificerade bokförare, rekryterare, bankirer mm. Nätverket som vi byggt upp under åren står våra svenska huvudmän till förfogande.

Efter att många stora finländska advokatbyråer grundat stora enheter i Sverige har vi fått allt fler efterfrågningar av enskilda personer och mindre svenska byråer som helst använder sig av sådana finländska kontakter vilka inte konkurrerar om deras kunder på den svenska marknaden. För att bättre kunna betjäna kunderna i Sverige har vi skaffat faciliteter i Stockholm för att där kunna förhandla och inleda samarbetet. Det har visat sig vara uppskattat av klienterna.

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Business acquisition in Finland

LEGAL ASPECTS IN BUSINESS ACQUISITIONS IN FINLAND

This is a quotation from my previously published article about business acquisitions in Finland. For further information about M&A cases you can contact me via http://www.salvelex.com.

Finland as the acquisition target country

The process of acquiring a company is seen in many jurisdictions as something complicated and time-consuming. This does not apply to the Nordic countries let alone to Finland. We have a culture of transparency, openness and minimal form requirements. Our legal culture has minimized red tape which fact facilitates business dynamism. Mergers and acquisitions in Finland are generally regulated by the Finnish Companies Act along with special regulation on areas such as tax law, competition law, provisions on the rights of employees, etc.

The Finnish legal system is based on the Scandinavian and continental European tradition of written law. The Finnish contract law is based on the idea of freedom of contract. Although you do not necessarily need lengthy anglo-saxon type contracts in Finland you should still be very clear as contracts that do not contain clear terms may be disputed. A business person hardly wishes it to be left to the judges to decide what is enforceable. Courts interpreting the badly drafted contracts are constantly facing the difficulty of deciding the rights of parties who have expressed themselves incompletely. A number of rules is used in Finland to guide the court in the process of interpreting and determining an ambiguous expression. At the end of the day the court will have to consider a contractual provision as an expression of free will and at the same time our courts are likely to try to reconstruct the original intention of the parties in that specific contractual context.

Type of acquisition

One of the first decisions to be reached by the buyer and seller in an acquisition process is whether the purchase will go forward as a business acquisition (the assets of the business) or a share acquisition. Many buyers prefer a business acquisition as it often comes with the opportunity to pick and choose the assets that are acquired, and to avoid any hidden liabilities which may reveal themselves later on. The sellers of a company mostly prefer to get rid of any potential future liability offered by a share sale.

There are many factors influencing the choice between business acquisition and share acquisition, and the buyer and seller often have conflicting interests. Almost without exception the seller prefers a straight forward transfer of title due to tax and liability reasons. The buyer prefers a business purchase for the ability to choose assets, and for the tax advantages from the buyer's viewpoint. The Finnish fiscal system grants a good base cost of assets for tax purposes, and income tax relief in the form of capital allowances and depreciations on the price paid for certain assets e.g. plant and machinery. Labor issues need to be scrutinized carefully as employees enjoy certain rights in connection with a takeover, whether this occurs as an acquisition of assets, shares or otherwise. For instance, an acquirer of assets succeeds in the liabilities towards employees.

At the end of the day the bargaining power of the parties will determine how the transaction proceeds.

How to structure the deal

During the pre-contract period the parties often enter into a letter of intent setting out the main terms according to which the parties have agreed to proceed, and the seller may grant the buyer a period during which it has the exclusive right to negotiate the purchase. A confidentiality agreement is almost always entered into between the buyer and seller, obliging the buyer to keep confidential information about the business that may disclosed during the pre-contract stage of the transaction, and usually also obliging both seller and buyer to keep the fact of the proposed deal itself a secret.

Supported by the letter of intent and a possible exclusive bargaining right, the buyer will proceed to acquire as much information as possible about the target business.

The due diligence process inevitably leads into the drafting and negotiation of transaction document (purchase agreement). It is normally prepared by the buyer's attorneys and contains protection for the buyer in the form of representations and warranties - and indemnities that the seller agrees to give with respect to the object company.

Due diligence of a Finnish company

when going through the target business, the buyer is trying to protect itself by ensuring that the company is worth the contemplated purchase price, and by requesting representations and warranties from the seller in areas where there may be potential liabilities of both hidden or clearly visible nature. The buyer's accountants prepare a report covering the commercial activities of the business, its management structure and employees, profitability and taxation. The legal investigation will be customized due to the objectives and past of the target business, but it always covers the target company's most important contracts, financial arrangements, premises, and company law matters. A careful buyer pays special attention to the quality of assets he purchases and meticulously verifies if the change of ownership terminates or entitles to terminate any important agreements. An acquisition of assets usually means that only the rights and liabilities agreed upon between the parties are transferred. So it is very important to obtain consent from customers and suppliers.

Reps and Warranties - Liability issues

The buyers' due diligence investigations provide a certain amount of information and endeavor to ensure that that the target company is worth the purchase price. Yet, there is usually not time enough for a full investigation, and a buyer of shares takes the risk of hidden liabilities in buying the shares. The representations and warranties included in the acquisition agreement therefore provide a way of redress for the buyer if the company turns out to be worth less than the buyer expected. If a warranty proves to be false, the buyer is entitled to indemnities.

Warranties and indemnities are an essential post-contract exposure for the seller, a risk that may cost a lot of money. It is therefore logical for the seller to try to limit the extent of this possible liability. The seller should make complete disclosures during the due diligence as it will not be in breach of warranty in relation to matters which have been fully and fairly disclosed. The disclosure letter therefore qualifies the warranties. The seller will also negotiate time limits on its liability in the share purchase agreement itself. The seller can usually expect to be free from the worry of further liability after a period of 1-3 years for most matters. Tax and environment related warranties are, however, substantially longer.

IPRs in mergers and acquisitions in Finland

INTELLECTUAL PROPERTY AND DUE DILIGENCE

Intellectual property may be  valuable let alone the core asset of the target company. Consequently IPRs should not be taken lightly in the DD-process. I always recommend that all trade marks, designs, copyrights and patents which are to be included in the transfer should be listed  in an appendix to the agreement. The buyer should request warranties with regard to the following matters:

(a)    that  the object company  is the owner of the IPRs;

(b)   that those rights are valid and enforceable;

(c)    that the seller has not granted any person a right to the IPRs;

(d)   that the IPRs are not  registered in the name of the seller or any other third party (a.g. a sister company);

(e)    that the operation of the business does not infringe the intellectual property rights of any other person.

I have seen a case where the IPRs were not included in the deal; they were registered in the name of the seller and not in the name of the object company. This was very unfortunate and a proper DD should have revealed it. That error became very costly as the target was a product development company.

In this context I can’t help underlining another aspect ; some essential IPRs may be licensed to the  target company. Therefore the buyer is well advised to ensure that it receives the benefit of all license contracts entered into between the seller and third parties which are important to the business. One we have used  is to assign the benefit of contract. The buyer should, however, check  in the DD whether or not the terms of the contact prohibit assignment or require the consent of the other party. One may also ask the seller to warrant this provided that the seller is ready to give such a warranty.

LETTER OF INTENT

LETTER OF INTENT (LOI)

You may call it a letter of intent or a memorandum of understanding or a MOA or a LOI… it still serves the same purpose.

As the parties have reached an agreement on the basic terms of the transaction, they usually draft and sign a letter of intent or memorandum of understanding before proceeding to negotiate a full agreement. One argument in favor of a letter of intent is that even if it is not legally binding in Finland, it creates an explicit moral obligation which most business people will take fairly seriously. It also serves as a negotiation agenda and states the basic terms of the understanding and makes it more difficult for misunderstandings on already agreed points. If the parties want to make a binding commitment at this stage it should state so and be called a precontract. Then again: why do this, you could as well draft the final contract in such a case.

You sometimes hear arguments against executing a letter of intent: e.g. that it doubles the time of the acquisition negotiation, that it weakens the seller’s negotiating position etc. Sellers are often keen to make a LOI and have an indication of the purchase price. Sellers often feel that it is a statement of moral commitment and shows the willingness of the buyer.

The most important thing with respect to a LOI is to be sure that the document is precisely as binding or non-binding as you want. Yet, even if the letter of intent says to be non-binding, a course of conduct (true intent in Finnish practice) by the parties treating it as binding may result in a court doing likewise.

Usually a letter of intent will cover the basic elements of the transaction,

·         the price,

·         the form of payment,

·          provisions of protection e.g. escrow or pledge arrangements, important employment agreements etc,

·         provisions prohibiting the seller from negotiating offers form any other party

·         other: indemnification, non-competition, even some representations and warranties.

In case of a publicly owned company the execution of a LOI, depending on its wording, may rise an obligation to make a public disclosure at this stage. So be careful.

My experience of the Finnish M&A market is that you have to find a good balance in drafting your LOI. Too much  legal substance in it may scare off a small or medium sized  Finnish party and then again  a good LOI serves as a perfect agenda for further negotiations.

PLANT AND MACHINERY IN ACQUISITION

Schedule

A schedule of the items of plant and machinery which are part of the sale is usually attached to the acquisition agreement. A buyer who wishes to purchase all of the assets needed to run the business may seek to safeguard itself by providing that plant and machinery  ‘used in the business’ are to be transferred,  including but not limited to those items listed in the schedule. Thus items forgotten or omitted from the schedule by will stillbe included in the sale.

Insure the plant and machinery

The buyer will normally assume risk on the plant and machinery when the acquisition agreement is executed and should get insurance cover from this date, even if completion is delayed.

Warranties

As a buyer you should ask to include the following warranties as to the condition of the items of plant and machinery:

(a)    they are in a proper state of repair and condition and in satisfactory working order;

(b)   they have been properly and regularly maintained

(c)    they are adequate for (and not surplus to) the need of the business.

(d)   they are not dangerous, obsolete or in need of replacement;

The seller should be careful before agreeing to these warranties and try to restrict any liability to major defects.

Mergers and acquisitions in Finland; what can go wrong?

In the past few years I have seen many great cross border acquisitions; most of them great successes. But it’s worthwhile to have a look at  missed opportunities and learn a lesson of the past failures. I have tried to summarize what usually goes wrong.

1)      A business acquisition is a major investment and decisions for such large projects need to be properly validated to minimize the business risks involved. This is not a legal issue but why acquire a company if you are not convinced of the profitability. You would be surprised how often these kinds of studies and validations are neglected even by multinational companies. We were recently able to prevent  such a tragic mistake from happening by being able to show that the business was no longer profitable in Finland due to changes in the legal and subsidiary framework.

2)      Tax considerations are sometimes poorly dealt with by small and medium sized companies. You should bear in mind that when acquiring shares in a company there is an added layer of complexity which arises from the fact that the buyer is acquiring an entity with a tax history and attached liabilities. As the tax climate hardens buyers should conduct thorough due diligences regarding their targets’ tax affairs and be sure to negotiate appropriate indemnities and warranties as part of any deals. This goes also with the target company’s compliance related to value added tax (VAT ) and other indirect taxes.

3)      When planning the fiscal aspects of your financing you should not always trust past experiences.  Many countries are working to increase tax revenue, shore up their tax bases and curb aggressively financed M&A transactions. In many countries e.g.  the non-deductibility of  interest has emerged as a common legislative means of eliminating the tax benefits of cross-border debt financing structures. Today’s truth may not be that of tomorrow.

4)      The buyer should cover all its legal bases and get a thorough assessment of possible legal risk. I have seen cases with costly and large due diligence reports consisting of copies of the due diligence  material. Little do they serve the buyer’s interest if there is no assessment. A clear analysis of the existing employment contracts is also vital as the Finnish labour laws can become a costly affair for the buyer.

5)      Try to persuade your counterpart to acquire knowledgeable legal advice as well. It saves a lot of the buyer’s time and money if the seller is represented by a business-minded professional who knows his trade.

It is money well spent to have appropriate advisors at one’s side to help avoid pitfalls by tackling them early on at the negotiation table. The earlier the better  - and  usually a lot less costly.