The Finnish acquisition finance market may be divided into two main markets. The market for domestic SMEs is dominated by local banks, with the OP Group and Nordea having the highest market shares, whereas for public takeovers and other more substantial transactions – as well as for any transactions involving large international companies (such as Kone, Nokia, UPM, Fiskars, Kemira or Wärtsilä, for example) – the banking market is much larger and involves all major European banks and non-bank lenders.
In the domestic market, new crowdfunding platforms (eg, Groundfunding Oyj) and non-bank lenders have provided alternative sources for financing for SMEs, but their lending levels are still relatively modest.
When the COVID-19 pandemic hit the Finnish market in the spring of 2020, the M&A levels dropped and many transactions were aborted. This, together with the general uncertainty, halted the acquisition finance market as well. However, the market revived surprisingly quickly, and in the autumn the market was back to normal again. In particular, the takeover market has been extraordinarily dynamic in the past 24 months.
The COVID-19 crisis affected the Finnish acquisition finance market mainly through its impact on the M&A market and on the national economy generally. The Finnish banks survived the crisis well and their capital adequacy levels and, accordingly, their ability to provide financing have remained good, which also supports the market. The overall level of insolvencies has so far not increased, and the banks have suffered material credit losses primarily in the retail sector.
In terms of covenant breaches, Finnish banks have generally acted reasonably and shown willingness to negotiate, extend loans and provide additional finance. Given the uncertain outlooks, banks have, however, become more cautious and selective in terms of the transactions which they finance and the security which they can accept.
The Finnish government has provided support to the businesses that suffer from the COVID-19 crisis primarily in the form of state-guaranteed loans and state guarantees issued by its two financial vehicles, Business Finland and Finnvera. Also this support has been available for the financing of acquisitions by industrial buyers during the crisis.
For SMEs and domestic transactions, the finance documents would typically be governed by Finnish law.
Large international companies operate globally and also finance their operations internationally by means of commercial papers, bonds or syndicated lending facilities. In these cases, the finance documents would most often be governed by English law (the impact of Brexit on the governing law yet to be seen).
In Scandinavian cross-border transactions, the finance documents may also, albeit more rarely, be governed by Swedish or Norwegian law, depending on the acquirer’s and the bank’s domicile.
In finance transactions with international banks, LMA-based finance documents are regularly used.
For domestic transactions, no similar standard exists, and there is more variety in the form of the documentation. For smaller transactions, the banks would tend to use their own standard forms of agreement, whilst for larger and more complicated transactions, the documentation would be produced by an external law firm and often be closer to the LMA template.
There are no requirements relating to the language of the finance documents. English is widely used in all transactions having an international dimension or involving international (whether Finnish or foreign) companies.
In purely domestic transactions, the documentation would typically be in Finnish.
In finance transactions with international banks or other lenders, a legal opinion of an external Finnish counsel is usually required. A typical legal opinion would address the capacity of the borrower and other obligors to enter into the finance documents and perform their obligations thereunder, due approval and execution, and the legality, validity and enforceability of the finance documents as well as questions such as governing law and jurisdiction. A Finnish legal opinion would typically be qualified by bankruptcy laws and other laws affecting creditors’ rights, including claw-back provisions of Finnish law.
Critical questions in legal opinions often concern the scope and application of the financial assistance rules in the relevant transaction, and Finnish legal opinions tend to include a qualification addressing this consideration. Other typical Finnish law questions calling for specific qualifications include the borrower’s right to use its pledged bank accounts, the risks relating to deferred perfection of other security interests as well as questions concerning the enforceability of the subordination provisions in the intercreditor agreement.
In smaller domestic transactions, legal opinions are rarely used, and banks often rely on their own knowledge of Finnish law and their own checks of the obligors’ due capacity, approval and execution of the finance documents.
In acquisition finance, senior loans would typically be secured by full recourse loans, which are made available to the borrower subject to the completion of the acquisition transaction, the granting and perfection of the agreed security and the fulfilment of other conditions precedent. Substantial loans would normally be syndicated.
The senior loan facilities include acquisition finance facilities and working capital facilities, which usually are refinanced in connection with the acquisition. The acquisition facilities are secured by the assets of the borrower, such as the shares of the target and the borrower’s bank accounts, whereas the working capital facilities may also be secured and guaranteed by the target and its subsidiaries.
Finnish M&A and acquisition finance transactions are typically structured to include one, two or even more special acquisition companies, often referred to as bidcos and topcos. To obtain structural seniority to other financing, the senior facility is usually raised by a bidco, as the entity closest to the target.
The typical holding company acquisition structure is very much a product of the restrictions that apply to upstream security and guarantees (see 5.4 Restrictions on Upstream Security, 5.5 Financial Assistance and 5.6 Other Restrictions) and aims at facilitating a post-transaction merger between the target and the bidco. While the financial assistance provisions prohibit the target from assisting a bidco in servicing the acquisition facility, a bidco would in the merger assume all assets and liabilities of the target and thus become able to use the target’s former assets to service the loan.
Whilst the above structure is a norm in acquisition finance transactions where the acquirer is a private equity firm, it is less common in transactions involving industrial buyers who are able to finance small and medium-size acquisitions through their existing banking facilities and debt programmes and who usually seek to consolidate the target in their existing operations.
Whilst the senior facility enjoys the highest ranking among the facilities and would typically be secured by all available assets, the mezzanine facilities rank junior and are either unsecured or enjoy a secondary ranking security. The secondary ranking of the security may be obtained as a contractual undertaking in the intercreditor agreement or, if enforceability in relation to third party creditors is sought, by means of granting an individual secondary ranking security interest over the encumbered assets. Mezzanine facilities may also be structurally subordinated to the senior facilities and raised by a holding company higher up in the acquisition structure.
PIK loans – ie, mezzanine loans where the accrued interest is periodically added to the capital – have been used, for example, in acquisition structures where the sellers reinvest a part of the sales proceeds back in the company.
Bridge loans are short-term loans designed to fill a temporary financing gap, in particular, in connection with acquisitions which are intended to be subsequently financed by a syndicated facility or by the issuance of bonds or other securities. In public takeover transactions, where the certain funds requirement applies, bridge loans are particularly useful.
Typically, bridge loans are secured loans and not syndicated. Given the short term of a bridge loan and its purpose, the conditions to draw down and any covenants are typically limited, and no prepayment restrictions apply.
The Finnish domestic bond market has been in decline through 2020 and issuance volumes are generally low.
Investment grade industrial buyers may finance their acquisitions by issuance of new bonds under their existing Eurobond programmes. In these cases, the bonds are typically unsecured and subject to similar terms and conditions that apply to the other bonds issued under the programme.
In other cases, bond financing is only used in larger acquisitions where the tighter interest margins in the bond market, as compared to banking lending, override the issuance and documentation costs.
Until very recently, private placements and loan notes were rarely used in acquisition finance in Finland. However, this has changed in connection with the emerge of non-bank lenders and alternative lending.
The structures used by non-bank lenders often deviate from the traditional bank lending structures and may vary from simple secured loan notes to highly sophisticated structures making use of technics traditionally seen in securitisation and asset-based financing.
Asset-based lending structures are most commonly used in real estate acquisition finance, where the underlying real estate and the rental income deriving from the real estate are collateralised to serve as security to the loan, and the loan is limited to the collateral by means of non-recourse financing. Large real estate holdings may further be separated into different sub-portfolios, and the acquisition facility be divided accordingly into several loans, each secured by, and limited to, a given sub-portfolio. This structure makes it possible to separate high-risk assets from other assets and to set a higher interest cost on the loan financing the high-risk assets.
The Finnish real estate market is well suited for asset-based lending because both housing and commercial real estate is largely held through real estate companies. In housing companies and so-called mutual real estate companies, the articles of association provide for a mutual structure whereby each shareholder is entitled to possess a certain part of the company’s real estate. This right of possession also includes the right to rent and to receive and dispose of the rental income. As the rental income, therefore, belongs to the shareholder, and not the real estate company, the rental income may also be used as security to the acquisition facility, and the restrictions on upstream security do not apply (see 5.4 Restrictions on Upstream Security, 5.5 Financial Assistance and 5.6 Other Restrictions).
Intercreditor agreements are designed to arrange the priorities among the creditors of the borrower and other obligors under the finance documents, and to regulate the order, the so-called waterfall, in which any proceeds are paid to the creditors, both in the normal course prior to a default and after a potential enforcement.
Under an intercreditor agreement, all intercompany loans and receivables between the borrower and other obligors would be subordinated to any claims of the financiers, including any mezzanine or subordinated debt provided by external financiers. Key elements of an intercreditor agreement also include the authorisation of the facilities agent to represent all financiers and to co-ordinate any enforcement actions as well as an undertaking by the financiers not to seek enforcement in their own right.
To address legal considerations relating to upstream security (see 5.4 Restrictions on Upstream Security, 5.5 Financial Assistance and 5.6 Other Restrictions), intercreditor agreements also include provisions, so-called limitation language, limiting the liabilities of the obligors (other than the borrower) as may be required by the applicable laws.
In bank/bond deals a key element of the intercreditor agreement is the regulation of the priorities among the bank lenders and the bond lenders. Often the banking facility is provided as a bridge loan, which is intended to be fully repaid from the proceeds of the bond issuance, and the claims under the banking facility have a senior ranking until the repayment. The bond lenders would in such case elevate to the senior position once the bridge loan is repaid and the security is handed over.
Hedge counterparties are included as parties to the intercreditor agreement. Whereas the ranking of the hedging liabilities is always a matter of negotiation between the finance parties, it is common that the claims of the hedging counterparties rank equal to those of the senior creditors.
In leveraged transactions, in particular in the private equity market, the security package would typically include everything that there is to have, including a pledge of the shares of the target and its subsidiaries, any intercompany loans between the borrower and obligors, bank accounts and potential M&A insurance receivables. In addition, a business mortgage would typically be registered over the target’s all assets.
In real estate transactions, the security package would also include real estate mortgages and a pledge of any shares of real estate companies owned by the target, as well as a pledge of the rental income deriving from the target’s real estate holdings.
It is also possible, while less common, to grant security over patents and other transferrable registered IP rights as well as over other specific assets of the target company.
The applicable form requirements depend on the type of security. For a pledge of shares, bank accounts or loans and receivables, no specific form requirements exist, and a duly executed written pledge agreement including an appropriate pledge undertaking by the pledgor in favour of the pledgee(s) would suffice to meet any form requirements.
One of the few substantive requirements of a pledge agreement is, however, that the beneficiaries of the pledge should be the actual creditors, whilst the security agent may well act as their representative and hold the pledged assets on their behalf.
A real estate mortgage is created by means of a pledge of an electronic mortgage certificate in favour of the security agent. Whilst the electronic mortgage certificate is in a standard electronic form, no form requirements apply for the pledge agreement, as explained above.
For business mortgages, no electronic mortgage certificates exist. Instead, the security documentation would include a standard form promissory note which is registered against the encumbered company and pledged in favour of the security agent. Again, no specific form requirements apply for the pledge agreement.
For the pledge of shares, bank accounts or loans and receivables, no registration requirements (or possibility) exist. In order for the security interest to be enforceable in relation to third parties, including bankruptcy creditors of the pledgor, specific perfection measures are, nevertheless, required. These include, in the case of shares and other movable property, the transfer of the possession of the share certificates or such other movable property from the pledgor to the security agent or its representative, and in the case of bank accounts, loans and receivables, a notification of the pledge to the bank or, respectively, debtor. Ideally, such instruction should provide that any withdrawals from the bank accounts must be authorised by the security agent and, respectively, that any payments under the pledged loans or receivables should be made to the security agent. This requirement is often not feasible in operative companies and is not always fully complied with.
To have a duly perfected real estate mortgage, an electronic mortgage certificate must be registered in favour of the security agent in the Title and Mortgage Register of the Land Register. The registration application may be submitted electronically by the party holding the title to the real estate.
A business mortgage is perfected by first registering a standard form promissory note, signed and executed by the encumbered company, in the Business Mortgage Register maintained by the Finnish Patent and Registration Office, and by then delivering the registered promissory note to the possession of the security agent or its representative. The registration application may be filed by the company or, subject to due authorisation by the company, by, for example, the security agent. To meet the possession requirements for perfection, the registration application usually provides that the promissory note, once its registration is completed, must be delivered directly to the security agent.
The pledge of patents and other registered IP rights is perfected by means of registration in the relevant register maintained by the Finnish Patent and Registration Office.
There are two main Finnish law considerations relating to upstream security: financial assistance and corporate benefit. These are addressed in 5.5 Financial Assistance and 5.6 Other Restrictions, respectively.
Financial assistance is defied by Finnish companies law as the granting of a loan, funds, or a security for the purpose of financing the acquisition of shares of the company or of its parent company.
Financial assistance is strictly prohibited, and no “whitewash” procedures apply. However, there is an exemption for loans granted to the company’s personnel for the purpose of their purchases of shares in the company, provided that the total amount of such loans does not exceed the amount of the distributable funds of the company.
The strict financial assistance rules effectively prohibit the target company and its subsidiaries from providing security for the acquisition facility. This restriction calls for a clear separation between the acquisition facility from the working capital facility, which the target may freely guarantee and secure.
A post-acquisition merger of the target and the bidco, which effectively allows the use of the target’s assets to service the bidco’s acquisition loan, as discussed in 3.1 Senior Loans, is, however, generally allowed and not deemed to breach the financial assistance provisions. This is due to the statutory merger process providing for a separate legal framework for creditor protection.
Under Finnish companies law generally, the corporate benefit requirement is applied to each group company individually, and a benefit only to the parent company would not justify transactions by its subsidiaries.
The target company would have obvious benefits in granting security for a working capital facility which is made available to it in connection with the finance transaction. The question remains, however, whether and to what extent also the subsidiaries of the target have access to the working capital facility and have corporate benefit in guaranteeing and granting security for the whole facility, as usually is required by the lenders.
Enforcement of a pledge of shares, bank accounts or loans and other receivables is quite straightforward under Finnish law. Typically, the pledge agreement would grant the security agent wide discretion to choose the most adequate means of enforcement and allow the security agent to independently enforce the security interest by means of private or public sale of the shares, withdrawal of the funds deposited on the bank accounts and collection or sale of the loans and receivables, as appropriate. To balance this right, the security agent would have an obligation also to observe the reasonable interests of the pledgor. This obligation entails that the security agent would have to act fairly and make reasonable efforts to obtain a fair market price for any items sold. Any excess realisations proceeds would have to be returned to the pledgor.
The security agent’s right to independently enforce a pledge would be upheld also in bankruptcy proceedings against the pledgor, subject to the bankruptcy administrator’s right to step in in some cases. However, in corporate reorganisations proceedings, which aim at rehabilitating the company, enforcement is generally prohibited.
Enforcement of a real estate mortgage, on the other hand, is more complicated and much more time-consuming, as it presupposes an enforceable judgment against the borrower and an enforcement process before the enforcement authorities.
Business mortgage is enforced only in the event of liquidation of the encumbered company by means of a voluntary winding-up process or bankruptcy proceedings. When distributing the assets, a business mortgage ranks behind any rights of pledge or mortgages and entitles the mortgagee only to 50% of the available proceeds, while the remaining 50% is distributed to the unsecured creditors.
Two types of guarantees are most commonly used in acquisition finance transactions. In the private equity market, all companies of the target group would typically be required to (cross) guarantee each other's obligations under the working capital facility provided.
Secondly, in the event of the structuring of the acquisition through a special purpose holding company (bidco), a parental guarantee is often required to secure a bidco’s obligations under the acquisition facility. Such parental guarantee would be issued by the holding companies further up in the structure (topcos) or, where the ultimate purchaser is an industrial group, the main entity of the purchasing group.
Upstream guarantees are restricted by the prohibition against financial assistance and the requirement for corporate benefit of the target and each of its subsidiaries, as in the case of upstream security.
Accordingly, the financial assistance provisions prohibit the target company and its subsidiaries from guaranteeing the acquisition facility, and the subsidiaries’ capability to guarantee the target’s obligations under the working capital facility is subject to each subsidiary deriving sufficient corporate benefit from the working capital facility.
No requirements for guarantee fees exist, nor are they common in Finnish acquisition finance transactions. The general view in the market is that a guarantee fee alone would not be sufficient to justify corporate benefit.
As a civil law jurisdiction, Finland does not have equitable subordination rules in its companies or insolvency laws. Events of unfair favouring of a shareholder-creditor are addressed based on the claw-back provisions in the insolvency laws and the provisions of the companies law concerning liability of directors and shareholders.
The Finnish claw-back provisions may be applied in bankruptcy, in corporate reorganisation proceedings and in the event of an unsuccessful enforcement attempt against the debtor. The applicable hardening period is calculated from the filing of an application for the first of any such event.
The general grounds for claw-back apply for any actions taken by the insolvent debtor within the hardening period of five years. The application of these general grounds presupposes that such action is inappropriate and that the parties are aware of this. In arm's-length acquisition finance transactions between unrelated parties, this is seldom the case.
However, specific claw-back provisions apply for the repayment of debt within the hardening period of three months. These provisions may be applied where the repayment is premature or substantial with respect to the total assets of the debtor or if the payment is made by unusual means of payment, except where the payment may be deemed ordinary in the circumstances.
Also a payment obtained by means of enforcement may be avoided where the enforcement is effected within the hardening period of three months.
In acquisition finance transactions the highest claw-back risk relates, however, to the security, which often is not fully perfected before an event of default has occurred. Under the specific provisions on claw-back of security, a security given within the hardening period of three months may be avoided where the grant of such security had not been agreed upon when the secured indebtedness was incurred or where the requisite measures for perfecting the security interest were not taken within a reasonable time after the indebtedness had been incurred.
No stamp tax or duty is levied on finance transactions or on any security, including mortgages.
In the event of enforcement, the sale of shares is subject to transfer tax at the rate of 1.6% of the sales price, or 2% for shares in real estate companies. The sale of real estate is subject to transfer tax at the rate of 4% of the sales price.
Interests paid to non-residents of Finland are exempted from withholding and source tax. To qualify for this exemption, the recipient of the interest must provide sufficient proof of non-residency.
There are no express thin-capitalisation rules in Finland, but the deductibility of interest expenses is limited under a separate regime.
Under this regime, interest expenses are fully deductible from interest income, whereas the remaining amount (the net interest expense) is fully deductible only up to EUR3 million for a fiscal year, or EUR500,000 in the case of interests paid to group companies or on a loan backed or guaranteed by a claim against a group company. Interest amounts exceeding such caps are deductible only to the extent that they do not exceed 25% of the debtor’s taxable income before interests and depreciations for the fiscal year.
The above regime does not apply to banks, investment firms, insurance companies or other companies operating in the financial industry or, subject to certain requirement, to interests on loans financing long-term public infrastructure projects, or where the debtor can prove that the debtor’s equity ratio is equal to or higher that the consolidated equity ratio of its ultimate parent company.
No specific regulatory or other requirements apply for the financing of acquisitions of regulated entities.
The conditions of the financing should, however, make reference to the applicable ownership control filings with the competent authorities and other similar requirements. Also, the security structure should be designed to cater for any specific restrictions that may apply with respect to the types of security available or otherwise.
Under the Finnish takeover code, a certain funds requirement applies, and the bidder is under an obligation to ensure, before the announcement of the takeover bid, that the bidder has certain funds available to pay the cash offer price and that it can reasonably undertake any requisite measures to disburse any other type of consideration, such as shares or other securities.
In practice, this means that the facility agreement for the financing the acquisition must be agreed upon before the takeover bid may be announced. The finance agreement may, however, include regular conditions for draw down. Any such conditions must be appropriately reflected upon in the conditions of the takeover bid.
All relevant considerations have already been addressed.