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.

Mergers and acquisitions in Finland; lawyer's role and costs

Lawyer’s role in an acquisition in Finland

It goes without saying that the extent of a lawyer’s involvement in an acquisition depends on the instructions of the client and consequently varies a lot. I have recently been involved in a couple of acquisitions which were very different from each other both in structure and the size of the deal. Yet, these two acquisitions highlighted the role of the lawyer and made me realize that different clients may have totally opposite needs when choosing their legal advisers.

1.      Client’s objective

The objective which the parties’ lawyers will be expected to achieve is the legal transfer of ownership from seller to buyer of the shares of the target company. The client will also expect his lawyer to identify risks of a legal nature and to seek to protect him from those risks as far as possible. As the objective is so clear it’s worth considering why the instructions of clients vary so much. The first idea that crosses your mind is that the client would simply like to achieve this objective at the lowest possible cost. This is not, however, always the case.

2.      Client’s motives

Many clients, in particular owners of family owned companies, are straightforward and seek to make the acquisition process as simple as possible and at the lowest possible costs. This is possible in Finland as we belong to the continental legal tradition with written laws based originally on Swedish law. So if you want to make the paper work lighter it can be done as much of the  contractual relationship will be covered by the law anyway. So why pay for something that you get for free?

Having said that you may still have valid grounds to make the documents more extensive. An international company often has a protocol for mergers and acquisitions and always does the documentation exactly the same way. This may be due to the corporate policy or their bankers’ requirements. This approach should not be taken to the extreme. I once had a German multinational as counterpart and they had pushed the corporate requirements so far that they did not care about the laws of the object company. It was most unfortunate – for them.

For a multinational company it is important that all acquisitions are done more or less the same way irrespective of the country. This makes the management of the subsidiaries and affiliates easier. One of the reasons to make a very extensive documentation may be a corporate one: once the decision maker uses one of the largest law firms in the country he cannot be blamed if the deal goes sour. After all the decisionmaker in question has done everything within his power. Fair enough but this approach can be counter productive, and now I am not talking about the legal fees. I have in the past seen cases where the documentation has been so extensive that not even the drafting lawyer could make sense of it. This risk is enhanced by the fact that legal teams dealing with acquisitions seem to become larger and larger by the day and produce more and more documentation. A skilled client should be specific about what he expects. One is sometimes surprised how much material is produced with very little or no analysis.

3.      Commercial Issues

The lawyer’s input into the commercial aspects of the transaction varies a lot in practice. The stage at which the client instructs the lawyer seems to be equally as variable. These two factors often go hand in hand. Unfortunately the client sometimes sees the lawyer’s role as excluding the commercial side of the transaction, and then instructs the lawyer at a relatively late stage in proceedings. There are sad stories about due diligences made and substance of the deal having been  negotiated without the advice of the lawyer.

The reality is, however, that it is nearly impossible to isolate the legal aspects from the commercial aspects and therefore we prefer to be involved as early as possible in the parties’ negotiations. This is vital if the lawyer is expected to give taxation advice in relation to the acquisition. The way the acquisition is structured has substantial impact on the client’s tax position; if the client makes contact too late, it may be impossible to choose the most tax-effective method. We do not wish to see that our client enters into any binding commitments too early and see to that all negotiations are subject to formal contract.

4.      Coordination

A function which our clients often ask us to carry out is to coordinate the various professional advisers involved in the proposed acquisition. The acquisition “team” most typically includes feasibility study makers, accountants, surveyors and environmental auditors and patent agents. If  a publicly  listed company is involved, the team will be much larger and enhanced with corporate finance and merchant bankers.

You simply cannot exaggerate the significance of the coordination and this concerns also the legal advisors. The team leader or the coordinator should be totally committed to the case: we have in the past seen mediocre results by large reputed firms due to bad coordination. A legal team often consists of a group of lawyers, some of them with less experience than the others. If the team leader has not time enough to meticulously coordinate the case, you will get outstanding individual performances and the total outcome will at its best be mediocre. 

Time is of essence so the earlier we get involved the easier and less costly the process will be. Equally important for the client is to have a strategy: i..e. a clear and outspoken vision of what he expects to be done, to what extent and at what cost.