By Tuomo Kauttu, Aliant Finland. A strategy for international M&A transactions in Finland requires analysis of three levels of regulatory development. Beyond local laws, it is useful to consider both Nordic and EU harmonization. This perspective applies not only to business executives who think in terms of markets, but also to lawyers, who are expected to think in terms of jurisdictions.
Nordic and EU Aspects
In the Nordic region, some countries are members of the European Union while others are not. Despite this distinction, the Nordic countries have a long tradition of harmonizing and modernizing legislation independently of the EU. As a result, the Nordics can be regarded as a single regional jurisdiction on certain relevant issues. Consistent with this approach, investors increasingly treat the Nordic region as a unified market, and this trend is likely to continue and strengthen.
In Europe, laws governing the acquisition of businesses have traditionally been almost exclusively national. Since 2004, however, rules on sizeable mergers and acquisitions have been harmonized under EU competition policy, beginning with the Merger Regulation (139/2004), the most important EU-level instrument for cross-border M&A. In March 2021, the Commission announced that the Merger Regulation would be revised, signaling further harmonization of competition law. The objective of the revision is to lower the threshold for national courts to refer merger cases that have an EU-wide dimension.
Although competition legislation is among the most harmonized areas of EU law, the degree of harmonization is not uniform across all Nordic countries. Nevertheless, the Agreement on Cooperation in Competition Cases between Sweden, Norway, Finland, Iceland, and Denmark enables the authorities in these countries to cooperate regardless of EU membership. The agreement was ratified in Finland on 29 November 2018 and in Sweden and Denmark in the same year, followed by Norway in 2019 and Iceland in 2020.
M&A transactions always raise a range of legal issues beyond competition law, and for smaller transactions the primary concerns are usually unrelated to competition rules.
While corporate laws have not been harmonized to the same extent as competition legislation within the EU, the Nordic countries have pursued their own harmonization efforts and have developed corporate laws through joint collaboration.
Among other initiatives, the Nordic countries have adopted the Nordic Corporate Governance Model. This model enables a shareholder majority to exercise effective control and assume long-term responsibility for the company they own. It is founded on the principles of equal treatment of shareholders and transparency. Although individual Nordic legal codes may appear to differ, on matters of substance the regulations rest on common concepts and principles and resemble one another to a significant degree.
EU rules establish a minimum set of common obligations but do not create fully codified legislation. Further harmonization is expected with Directive 2019/2121 on cross-border mergers, which revises Directive 2017/1132 on certain aspects of company law. The EU’s objective is to enhance the cross-border mobility of companies by introducing common rules that simplify the procedure for changing a company’s registered office within the EU.
Stock versus Debt
It is noteworthy that, in classifying corporate stock and debt, freedom of contract applies to a certain extent in corporate law matters.
In Finland there is no minimum share-capital requirement, and a corporation may create and issue shares, either in a single class or divided into two or more classes. A corporation may also issue convertible bonds and other shares that are more marketable and that allow it to raise funds at lower dividend or interest rates. Corporate law further permits a company to enter into agreements for the purchase of its own shares.
As an alternative to equity securities, capital transactions may be structured as secured or unsecured loans. Such loans may include clauses that allow the lender to participate in the growth of the business beyond the passive receipt of principal and interest. Although instruments relating to stock and loans can be almost identical in economic effect, preferred stock remains equity and is not debt.
Structuring the Transaction
In Finland, a share acquisition is generally simpler to implement than an acquisition of a business through an asset purchase. In practice, however, negotiation of the structure typically involves all factors that may influence the form of the deal and its objectives, and an asset purchase is preferred in many cases. When deciding whether to structure the acquisition as an asset or a share transaction, the parties should consider all relevant factors, including ease of implementation, tax consequences, and isolation from liability.
Generic contract principles are more or less the same across the Nordic countries, whether or not they are EU members. This is the most straightforward aspect of the analysis, although it still depends on questions of jurisdiction and applicable law. An M&A transaction raises concerns similar to those arising in cross-border transactions globally. Once an optimal structure has been identified in light of the parties’ differing considerations, negotiation of the price and other terms and conditions can proceed on a rational basis.
Beyond structuring the deal, the process often involves consideration of negotiation strategy, preparation of pre-deal due diligence, the exit of existing investors in the target company, and the handling of post-signing matters from the agreement through closing and post-closing events.There is no standard acquisition agreement that applies to all transactions. Nevertheless, a typical share or asset purchase agreement contains a large number of provisions covering definitions, purchase price, representations, liability, indemnification, confidentiality, governing law, dispute resolution, and many other matters. Some, though not all, of these typical provisions require additional consideration in an international context.
Choice of Law
The purchase price is generally paid in cash, stock, installment notes, assumption of indebtedness, or a combination of these. Each method raises difficult choice-of-law questions. For example, when payment is made with stock of the acquiring company, many of the related issues may be governed by the law of the buyer’s jurisdiction. Such legislation can have a significant effect on valuation, securities regulations, resale restrictions, shareholder-approval requirements, tax consequences, and restrictions on the subsequent transfer of the shares.
With regard to other terms and conditions of the acquisition agreement, questions of governing law and dispute resolution are always important when drafting an agreement for an international acquisition. Negotiations typically focus on a comparison between the courts or arbitration tribunals of the seller’s and the buyer’s countries, or alternatively on the choice of a neutral third jurisdiction. The parties may also agree on an alternative dispute resolution (ADR) provision. Because the buyer is generally more likely to bring claims, an ADR clause is usually favorable to the buyer.