The Finnish private equity industry has maintained strong activity during the course of 2019, with deals being driven by low interest rates and the fair amount of capital available in the market. However, the threat of increased trade conflicts and the final outcome of Brexit may have a negative impact on the deal flow going forward. Although the overall outlook in the Finnish economy has been relatively stable for the past three years, the Finnish economy is expected to slow down in 2019 and 2020, with expected growth rates of 1.3% to 1.7% in 2019 and 0.5% to 1.5% in 2020, according to forecasts published by the major Finnish financial institutions.
According to recent statistics published by the Finnish Venture Capital Association, 2018 was an excellent year for Finnish private equity, with Finnish startups and growth companies receiving a record-breaking EUR1.5 billion worth of investments, from both Finnish and foreign investors. The investments received by Finnish startups in 2018 amounted to EUR479 million, EUR203 million of which consisted of venture capital investments. The number of buyouts in Finnish growth companies has also increased significantly. Finnish growth companies attract both domestic and foreign investors, but foreign investors are often involved in the largest deals.
On the other hand, the number of IPOs was low in Finland in the first half of 2019, with only two new companies being listed between January and June (Leaddesk and Aallon Group, both of which were listed on the First North list). A lack of a credible IPO alternative may have slowed down larger private equity transactions that would have been run in dual track mode.
Recent private equity M&A transactions in Finland have taken place across a wide spectrum of sectors. In addition to continued activity within the energy and infrastructure sectors, M&A activity within the IT services, fintech and other technology-related businesses has remained strong. The elderly care space, on the other hand, has been affected by negative Finnish media coverage, which has led to a decrease in deal activity within that sector this year. The failure of the previous government to complete the social welfare and healthcare reform caused general healthcare-related M&A activity to slow down.
Examples of major transactions in Finland in 2019 include the acquisition of a majority stake in Finnish mobile operator and telecommunications company DNA by Telenor, the acquisition of Finnish equipment rental company Ramirent by Loxam, and the merger between Finland-based technology services provider Tieto and Norway-based information technology company Evry.
The new Finnish interest limitation rules have had a significant impact on the use of leverage (on both a fund and holding company level), but also on feeder fund structures using, for example, profit-participating loans. Furthermore, the currently pending implementation of EU Directive 2016/1164 concerning anti-avoidance and hybrid mismatch entities may have an impact on private equity structures in cross-border situations, depending on the final government proposal to be published later in 2019. During the last three years, extensive discussions concerning the taxation of carried interest have also taken place, since the tax authorities have previously concluded that carried interest should be taxed as earned income of the manager. However, as a result of case law, carried interest can currently be taxed either as earned or as capital income of the manager, depending on the nature of the payment.
In general, Finnish M&A transactions are governed by national legislation and EU regulation. The main national legislation includes:
In addition, the following regulations should be observed when dealing with publicly listed companies:
The M&A market is not specifically regulated, except with respect to publicly listed companies and the regulation governing transfers of undertakings from an employment law perspective.
Under the Investment Control Act, a foreign buyer must apply for prior approval from the Ministry of Employment and the Economy for an acquisition that would result in it holding more than one-tenth, one-third or one-half of the voting power (or corresponding dominant control) of either a Finnish defence company, or companies or businesses that hold a key position with respect to maintaining the vital functions of Finnish society.
A ‘foreign buyer’ is defined as a person, entity or trust that has no place of residence within the European Union or the European Economic Area (EEA). The Investment Control Act also applies to an entity or trust that has a place of residence within the European Union or EEA and in which a foreign buyer (as defined above) holds at least one-tenth of the voting power in the case of a limited liability company, or dominant control in the case of another entity or business.
The Ministry of Employment and the Economy approves acquisitions resulting in the control of these companies, unless the acquisition endangers important national interests, in which case approval is made by the Council of State. Such interests include:
If approval is not granted, the buyer must decrease its ownership to less than one-tenth (or less than one-third or half) of the shares in the company, and can only exercise the corresponding voting power at a general meeting of the company's shareholders or other relevant corporate body.
Mergers and acquisitions are subject to merger control under the Competition Act. An M&A transaction, or a concentration for purposes of the Competition Act, is subject to control if both the combined worldwide turnover of the parties to the concentration exceeds EUR350 million and the turnover generated in Finland of each of at least two parties to the concentration exceeds EUR20 million.
At the outset, legal due diligence is conducted on an issues-only / red-flag basis. It is increasingly rare to obtain detailed reports, even in insured transactions – ie, where a warranty and indemnity insurance policy is obtained. The applicable materiality threshold and scope of the due diligence vary from time to time, depending on, among other matters, industry-specific aspects and the size of the target, as well as whether or not the transaction is insured. The key areas of focus are usually agreed separately between the buyer and the legal adviser, and typically cover areas such as corporate documentation, commercial agreements, financing, tax (unless there is a separate tax adviser), employment, disputes, regulatory aspects, real estate, environment and intellectual property rights.
From a procedural point of view, due diligence reviews are typically conducted by the relevant professional advisers (eg, legal, financial, tax, and business or technical advisers) as a combination of document reviews and Q&A sessions with the target’s management group. In addition to the information disclosed by the seller in the data room, the buyer takes advantage of the relevant information available in public databases (such as the articles of association, the annual accounts and other trade register information regarding the target).
As a rule, the due diligence material is usually provided through a virtual data room, and it is increasingly common that the data room is split into a general data room and a clean room, the latter of which includes information that is sensitive from either a business, technical or antitrust point of view.
Vendor due diligence has become a common feature in transactions involving private equity sellers. The vendor due diligence report is typically given on a non-reliance basis to the buyer and its advisers. Hence, separate release and non-reliance letters are typically entered into in connection with the disclosure of the vendor due diligence report. The buy-side legal adviser typically provides the buyer with reliance on the buy-side legal due diligence report, and, on a less frequent basis, on the buyer’s warranty and indemnity insurer or lenders.
The acquisition of a privately held company is typically carried out by entering into either a share purchase or an asset purchase agreement, with share purchases being used more frequently. Buyers may also participate in auction processes arranged by or for the sellers. Auction processes are more common when the seller has engaged an M&A adviser and the target is likely to attract multiple purchase candidates.
Typically, there are no material differences between the terms and conditions of a privately negotiated transaction and an auction sale, but the warranties tend to be less extensive in an auction sale than when negotiating with only one potential buyer. In an auction sale, the seller usually prepares the first draft of the agreement. “Stapled” warranty and indemnity insurance is increasingly being used in auction processes, whereby a seller-nominated insurance broker pre-packages an indemnity and warranty insurance policy that the buyer is expected to sign.
Public tender offers are naturally used in takeover bids made by private equity funds.
The private equity-backed buyer is typically structured through one or more special purpose vehicles, which are domestic or foreign limited liability companies, while the private equity buyer would, for instance, be directly involved in the equity commitment letter, if any. The structures of the transaction and the buyer are typically influenced by tax considerations.
Private equity deals are commonly financed through a combination of debt and equity financing, in line with international practices. Equity commitment letters as well as commitment letters from banks are commonly used to provide contractual certainty of funds, particularly in deals involving international sponsors. In highly competitive transactions with high-value targets, the certain funds requirements can go further and fully executed loan documentation may be required for submitting a valid bid. Most private equity deals are majority owned by the private equity fund, but there are of course private equity funds whose strategy it is to acquire minority stakes only.
Consortiums are common where the value of the target is high, and also where the industry sector of the target makes consortiums more useful, such as infrastructure assets where having (in particular domestic) pension funds in the consortium may increase the chances of a winning bid and also assist with public relations issues. Consortiums are quite rare in smaller and mid-sized deals. Co-investors are usually far more passive than the general partner but negative media coverage that is critical of private equity-backed companies, particularly in the healthcare sector, has caused co-investors to enforce their corporate social responsibility policies more strongly on companies in which they have invested.
Both completion accounts and locked box consideration structures are used in Finland, depending on the type of transaction and the parties involved. Usually the seller prefers the locked box structure instead of completion accounts, which tend to be more popular on the buyer side, especially in transactions that do not involve private equity investors. Earn-out structures are also used but to a lesser extent, and particularly in smaller transactions to bridge a potential gap in the valuations of the seller and the buyer. However, the use of earn-out structures is rather limited due to the challenges relating to the operation of the target during the earn-out period and the fact that it may be difficult for the parties to reach consensus with respect to the earn-out calculation mechanisms. Deferred or additional purchase price mechanisms are also sometimes used, and are often conditioned to the occurrence of a future event agreed between the parties.
For the purpose of compensating the seller for the target’s anticipated cash flow during the period between the locked box date and completion, it is rather common for the locked box price to be subject to an interest mechanism, which is calculated from the relevant locked box date until completion.
It is not very common for interest to be charged on the leakage.
Locked box consideration structures do not usually have specific dispute resolution mechanisms. In deals with completion accounts, it is almost a rule that there is a specific dispute resolution mechanism under which a dispute with respect to the completion accounts may be referred by either party for determination by an independent auditor. At the outset, either the locked box or completion accounts consideration structure is also subject to a general dispute resolution provision under the share purchase or asset purchase agreement, which often refers to arbitration proceedings as agreed between the parties.
The level of conditionality in private equity transactions depends on the target characteristics and the industry in which the target is involved, among other matters. Save for regulatory conditions, such as relevant competition law approvals or approval under the Investment Control Act, other completion conditions have been rare during the last few years with high deal activity. However, completion conditions are still agreed on in deals where the specifics of the case have call for them.
Material adverse change/effect provisions as conditions precedent have been very uncommon in the Finnish market.
In highly competitive deals, private equity-backed buyers do occasionally accept “hell or high water” undertakings, but it is not the norm in Finnish transactions.
Break fees are rarely used in the Finnish market but they do appear from time to time in highly competitive auctions, for instance in relation to breaches of “hell or high water” undertakings. With respect to public takeover bids, the Helsinki Takeover Code provides that a break fee (or reverse break fee) may be justifiable in some situations if (i) the acceptance of the arrangement and receiving the bid is, in the opinion of the board of directors of the target company, in the interests of the shareholders, and (ii) the amount of the break fee is reasonable, taking into consideration the costs incurred by the offeror in preparing the bid, among other things. A break fee to be paid by the target company due to a reason arising from the offeror is, on the contrary, not deemed justifiable.
The acquisition agreement usually provides very limited possibilities for either party to terminate the agreement. Such termination rights often relate to unsatisfied conditions precedent and/or other closing conditions, such as a party’s failure to fulfil a closing condition by an agreed date.
It is common for private equity sellers to use warranty and indemnity insurance and thereby exclude their liability under the seller’s warranties, except for in relation to intentional misconduct or fraud. Whether a seller is able to limit its liability in case of damage caused due by gross negligence (in addition to fraud and intentional misconduct) remains questionable under Finnish law. Based on their goal to distribute the sales proceeds to investors sooner rather than later, private equity sellers seek to limit the time in which a buyer is able to make a claim to a shorter period than in deals where the seller is not a fund.
At the outset, the parties are free to agree on the allocation of risk between themselves. With respect to risks identified by the buyer during the due diligence phase, the buyer should seek a specific indemnity as a buyer is generally not able to make a claim for a breach of warranty if they knew of the breach before entering into the agreement. In an asset deal, only the identified liabilities of the target will transfer from the seller to the buyer (except for certain potential unidentified liability, such as liability for environmental damage, which may transfer to the buyer under mandatory law). In a share deal, on the other hand, all prior liabilities of the target will automatically transfer from the seller to the buyer at the outset.
The seller’s liability is typically limited to breach of warranties and covenants under the acquisition agreement (please refer to 6.9 Warranty Protection below).
As warranty and indemnity insurance has become more common, deals with very limited warranties or fundamental warranties only are increasingly rare; warranties given by the management team only are less frequent for the same reason.
Typically, the warranties given cover the following main areas:
Typically, the seller strives to limit warranties other than the fundamental warranties (eg, ownership of shares in a share sale) in various ways. Such limitations may be structured in one of the following ways:
Regarding disclosure, it is market practice in Finland that a buyer’s right to make a claim under the acquisition agreement is limited by information that has been ‘fairly disclosed’, meaning that the buyer’s ability to present a claim against the seller for a warranty breach is limited to the matters or risk not sufficiently disclosed in the data room (or in other disclosure material).
The time limit for presenting a claim usually varies between 12 and 24 months, with increased periods for presenting claims under fundamental warranties as well as tax and environmental warranties. The max liability of the seller is typically somewhere between 10% and 30% of the enterprise value. As a general rule, the larger the enterprise value, the lower the percentage. The basket cap is typically approximately 1% of the enterprise value, and the monetary de minimis cap is typically approximately 0.1% of the enterprise value.
The acquisition agreement may include certain specific indemnity undertakings by the seller for certain risks identified by the buyer during the due diligence phase.
As discussed above, it has become increasingly common for the parties to take out W&I insurance in order to provide cover for losses arising out of warranty breaches. Therefore, it is more common for the private equity seller to give the warranties, while the W&I insurer is liable to compensate under the policy. Escrow arrangements, on the other hand, are unusual in deals with private equity sellers.
In general, litigation relating to M&A transactions in general and specifically private equity transactions is rather uncommon in Finland, and disputes are usually settled prior to proceeding to arbitration. Provisions that tend to be most commonly litigated include purchase price mechanisms, warranty breaches, possible additional purchase prices (such as earn-out) and breach of non-compete provisions.
Public to private transactions have become more common in recent years, with notable high-profile deals taking place in 2018-2019.
In one of the largest Finnish public to private transactions to date, Blackstone Group made a tender offer in 2017-2018 and acquired Finnish real estate investment company Sponda Oyj, with an enterprise value of EUR3.8 billion. Another notable transaction was CGI Group's bid in 2017 for Affecto, one of the biggest providers of business intelligence and enterprise information management solutions.
In 2018-2019 a consortium led by Chinese sportsware company Anta Sports made an offer to acquire Finland's Amer Sports in a deal that valued the target company at EUR4.6 billion.
Shareholders or persons comparable to shareholders must notify the listed company and the Finnish Financial Supervisory Authority (FFSA) of changes in shareholdings when the holding and/or the holdings of controlled entities exceed, fall below or reach the notification thresholds of 5%, 10%, 15%, 20%, 25%, 30%, 50%, 2/3 or 90% of the number of voting rights or shares in the company. The notification must be made in writing without undue delay, and no later than the next trading day after the shareholder has learned or should have learned of a transaction triggering the notification obligation.
An obligation to disclose major holdings may arise on the grounds of existing proportions of holdings and voting rights, or on the acquisition of a so-called long-position through financial instruments, or any combination of the above. The notification obligation may also arise without any specific measures taken by the shareholder if, for example, shareholdings are diluted due to an increase in the number of shares as the result of a share issue or a proportional holdings increase due to the annulment of the target company's own shares.
A company whose securities are traded on the Helsinki Stock Exchange is required to disclose regulated information in a manner that ensures fast access to such information on a non-discriminatory basis. The issuer must ensure the dissemination of information to the media so as to ensure that the information is published as extensively as possible in the home country and throughout Europe, where applicable.
A mandatory offer for all shares of the target company must be made if a shareholder acquires a stake that is equal to or exceeds 30% or 50% of the votes in the target company. The mandatory offer must be launched no later than one month after the date when the mandatory offer threshold was reached, unless an exemption from the mandatory offer obligation exists. There is no obligation to launch a mandatory offer if the relevant threshold has been reached by means of a voluntary offer for all shares of the target company.
Cash consideration is usually preferred by Finnish shareholders and is the most common form of consideration in takeovers. Shares in the buyer, or a combination of shares and cash, are occasionally used as consideration, but may give rise to additional regulatory requirements, such as the preparation of a prospectus.
A voluntary takeover offer may include offer conditions. With the exception of mandatory takeover bids, there is no specific legal regulation on the content of the conditions set on the completion of prospective bids, nor on the kind of conditions that are allowed on completion of voluntary public takeover bids. A mandatory takeover bid may be conditional only to the extent that necessary regulatory approvals are obtained.
According to the FFSA, the conditions should be sufficiently unambiguous for the holders of the target securities to be able to assess the probability of the fulfillment of the conditions, and so that the fulfillment of the conditions is not left to the offeror’s discretion. The conditions must also be fair in that shareholders are treated equally, and the rights and obligations of the offeror are balanced with the rights and obligations of the holders of the target securities. The offeror cannot appeal an offer condition unless the non-fulfillment of said condition is essential for the contemplated acquisition.
Frequently used conditions in voluntary public takeover bids include the condition that the offeror obtains the required authority approvals for the acquisition of the target company, and that the terms and conditions of such approvals are commercially acceptable to the offeror. The completion of the takeover may further be made conditional upon the offeror acquiring a certain ownership level – usually 90%, which is the so-called squeeze-out threshold. In certain circumstances, the conditions of the takeover may require a resolution by a general meeting of the target company. The offer may, for example, be conditional on achieving an amendment of the articles of association of the target company before completing the bid.
Prior to making a takeover bid public, the offeror must ensure the availability of the necessary financing. The availability of the financing may be agreed on a conditional basis, such as that no material adverse change takes place on the financing markets or in the target company, or upon the takeover bid being completed in accordance with its terms. Conditions and elements of uncertainty relating to the financing arrangements that are essential to the evaluation of a bid must be made public at the time the bid is disclosed.
Additional deal security measures may include, for example, break fees (as discussed in 6.6 Break Fees) or non-solicitation provisions if they are considered to be in the interest of the target company.
The Finnish Companies Act includes certain minority protection provisions according to which minority shareholders are given certain rights in relation to, for example, the decision-making of the company and the right to demand a minimum dividend (being at the outset one half of the profits of the company of the preceding accounting period). Such provisions apply to all limited liability companies, but the shareholders usually agree to deviate from such minority shareholder rights in the shareholder agreement to the extent this is enforceable under law. Furthermore, as an example, a shareholder having a holding in excess of 33.3% of the shares or votes can prevent all changes to the articles of association and any directed share issuances in deviation from the shareholders’ pre-emptive rights, as well as most mergers, demergers, share buybacks and other resolutions requiring a two-thirds majority.
The Finnish Companies Act offers a squeeze-out mechanism, according to which a shareholder owning more than 90% of the target’s shares and votes may redeem the remaining shares at a fair price. In such a squeeze-out situation, a shareholder is also entitled to require the majority shareholder to redeem his or her shares. The redemption price is the fair price preceding the initiation of the squeeze-out procedure, and is finally determined in statutory arbitration in the case of a dispute situation.
In order for a tender to be successful, obtaining irrevocable commitments from the principal shareholders of the target company may be conclusive and, thus, it is common to aim to ensure the involvement of the principal shareholders in the tender. Negotiations with shareholders are made before public disclosure of the offer. It should be noted that such shareholders will subsequently usually become subject to regulations on insider trading. The undertakings are usually conditional in a way that they provide an out for the shareholder if a better competitive offer is made by reserving the shareholder a right to attend to the competitive offer instead.
Hostile takeovers are permitted but are relatively rare in Finland, with most being unsuccessful in practice. The most notable hostile takeover offer dates back to 2008, when Nordic Capital made an unsuccessful offer for Finnish IT software company TietoEnator.
Equity incentivisation is a rather common feature of private equity transactions. The level of equity depends on the circumstances at hand, but generally management is allocated somewhere between 5% and 15 % of the ordinary equity. However, this amount may be even higher, especially in smaller deals.
It is rather common to structure management participation by using sweet equity pots. The equity allocated to management usually consists of either ordinary or preferred shares. Generally, management is allocated somewhere between 5% and 15% of the ordinary equity, but this may be even higher, especially in smaller deals.
Bad leaver provisions for management shareholders typically relate to situations where the relevant shareholder has materially breached the shareholder agreement, the company has terminated the management shareholder’s employment or service agreement on personal grounds stipulated under Finnish employment laws, or the management shareholder has decided to resign from the company. Good leaver provisions, on the other hand, typically relate to situations where the management shareholder’s employment or service agreement has ended or been terminated on other grounds, such as due to the death, retirement or disability of the management shareholder. Vesting provisions usually offer a linear vesting of the management’s shares during a period of approximately three to six years from the investment.
In a good leaver situation, the purchase price is usually determined based on the market value of the shares, whereas in a bad leaver situation the purchase price is usually established based on the original purchase price of the shares (or as a material discount) or market value, whichever is lower.
Restrictive covenants on the management shareholders (and the rest of the shareholders) are usually included in a shareholder agreement, and typically include provisions on strong share transfer restrictions, non-compete and non-solicitation undertakings, among others. Depending on the circumstances at hand, the non-compete and non-solicitation undertakings may become unenforceable if they are deemed unreasonable and extensive. At the outset, non-compete and non-solicitation undertakings lasting for a period of up to two years from the time when the party is no longer a shareholder in the company are usually deemed reasonable.
As mentioned in 7.6 Acquiring Less Than 100% above, the Finnish Companies Act includes certain minority protection provisions, according to which minority shareholders are given certain rights in relation to the decision-making of the company and the right to demand a minimum dividend (being at the outset one half of the profits of the company of the preceding accounting period), among others. Such provisions apply to all limited liability companies, but the shareholders usually agree to deviate from such minority shareholder rights in the shareholder agreement to the extent this is enforceable under law. Private equity investors often require the shareholder agreement to include certain anti-dilution provisions in order to secure their equity share. Veto and control rights, as well as rights of control over exit, are usually held by the private equity investors – please refer to 9.1 Shareholder Control below.
Typically, provisions on shareholder control are included in a shareholder agreement entered into between the shareholders of the target in connection with the transaction. Such provisions may include, for example, the right to appoint a certain amount of board members (including the chairman) and the managing director, the possibility for an exit, veto rights in relation to the commencement of litigation proceedings, the execution of new share issuances, and other financing arrangements of the target, among other matters.
At the outset, Finnish law does not impose any shareholder liability for the actions of the portfolio company and thus far the piercing of the corporate veil has only been linked to exceptional circumstances.
Larger private equity fund shareholders, such as insurance companies, have recently become more active in imposing their compliance policies on the portfolio companies, as discussed in 5.4 Multiple Investors.
The typical holding period for private equity transactions before the investment is sold or disposed of is around five to ten years. Dual track processes have become increasingly popular in recent years, and are sometimes even run in parallel during the whole process but, as discussed in 1.1 M&A Transactions and Deals, the number of IPOs has been in decline since 2018.
Although private equity IPOs do occur from time to time, most dual track processes have resulted in trade sales in recent years, and such process can currently also be considered the most common form of private equity exit. Private equity sellers occasionally reinvest upon exit.
Drag rights are typically included in a shareholder agreement entered into between the shareholders of the target in connection with the transaction. Typically, this would entail a shareholder being contractually forced to sell – eg, upon the occurrence of a triggering event such as a sale of the target – on substantially the same terms and conditions as the other shareholders of the target. Private equity sellers usually decide on the exit under the shareholder agreement and, as private equity sellers commonly have drag rights, they may indirectly utilise the rights even if they do not formally exercise them.
Tag rights are typically included in a shareholder agreement entered into between the shareholders of the target in connection with the transaction. Typically, this would entail a majority shareholder who is selling his or her shares being contractually forced to offer the remaining shareholders the possibility to also sell their shares in the target, on substantially the same terms and conditions as the majority shareholder.
The typical lockup term for a private equity fund is 180 days. Relationship agreements between the private equity seller and the target company are rarely seen in the Finnish market.