The Year 2021

Bouncing back from the covid-19 pandemic, the year 2021 saw unprecedented M&A deal activity both in respect of private and public deals and an all-time record of nearly 30 companies listed on the Helsinki stock exchange.

The Year 2022

Deal flow remained strong during the first half of 2022. However, with a soaring inflation and interest rates remaining high, deal activity saw a marked decline during the latter half of 2022.

The Finnish weekly business magazine, Talouselämä, was notified of more than 640 deals in 2022, which was a moderate decrease of approximately 9% compared to the figures in 2021. In respect of investment activity of private start-up investors, following a new high reached in 2021, private external early-stage investors invested a total of EUR37 million into 248 companies, almost half of which were seed-funding investments. This was a marked drop both in volume and value compared to the previous year. In addition, according to statistics published by the Finnish Venture Capital Association, Finnish start-up and growth companies received a total of EUR1.8 billion in investments in 2022, a new record high.

The Year 2023 and the Outlook for 2024

The Russian war of aggression against Ukraine, high inflation, soaring prices and rising interest rates have caused economic turbulence and market volatility and are choking global growth. The direction M&A deal activity will take for the remainder of the year and the first half of 2024 is difficult to predict. There would seem to be plenty of dry powder available, but the value gap between sellers and buyers is yet to be bridged. High interest rates have also kept leveraged buyers at bay.

M&A activity within, for instance, the TMT sector, fintech and other technology-related businesses has remained strong during 2021 and 2022. However, the ongoing global political turbulence and economic uncertainties have markedly slowed down both private and public M&A activity, with no clear outlook for the better.

Examples of significant transactions in Finland so far in 2023 include the sale of Brown-Forman Finland Oy (owner of Finlandia vodka brand) to Coca-Cola HBC AG and the sale of Delta Auto to Hedin Automotive Oy.

Lower Turnover Thresholds Implemented in Finnish Merger Control rules

At the end of 2022, the turnover thresholds for merger control notifications were significantly lowered due to changes in the Finnish Competition Act. Prior to the changes, an M&A transaction or a concentration was subject to merger control if both the combined global turnover of the parties to the concentration exceeded EUR350 million and the turnover generated in Finland of each of at least two parties to the concentration exceeded EUR20 million. Following the changes, the turnover threshold for the combined turnover of the parties is now decreased to EUR100 million and determined solely on the basis of the turnover generated in Finland. The second turnover threshold, which concerns the turnover of each of at least two of the parties generated in Finland, was decreased to EUR10 million. According to the Finnish Competition and Consumer Authority (FCCA), these changes have resulted in a significant increase in merger control notifications filed with the FCCA.

Vigilance in the Monitoring of Foreign Corporate Acquisitions

Due to Russian aggression in Ukraine and the COVID-19 pandemic, the Ministry of Economic Affairs and Employment has recently been very vigilant regarding transactions related to national security or security of supply, as well as transactions in the healthcare sector. The Ministry of Economic Affairs and Employment follows public announcements in the media regarding transactions. If a transaction is not notified to the ministry, it may intervene even after the signing or closing of the transaction in cases where the ministry considers it necessary under the Act on the Screening of Foreign Corporate Acquisitions. Despite Finland’s positive attitude to foreign investments, it cannot be excluded that the Council of State could use the possibility to prohibit an acquisition if the target company is active in a sector critical for the defence, national security or security of supply.

Finnish Interest Limitation Rules

The Finnish interest limitation rules have had a significant impact on the use of leverage (on both a fund and at holding company level), but also on feeder fund structures using, for example, profit-participating loans.

During the few last years, extensive discussions concerning the taxation of carried interest have also taken place, as the tax authorities previously concluded that carried interest should be taxed as earned income of the manager. However, as a result of recent case law, carried interest is now taxed primarily as capital income of the manager, if the arrangement itself does not constitute tax avoidance. Accordingly, the legal form of the structure is normally upheld and carried interest is deemed as a return on investment.

EU Legislation

Furthermore, recent developments at the EU level have introduced legislation with respect to the reporting of cross-border transactions as well as taxation of hybrid transactions. The former provides an obligation to report cross-border transactions that have certain characteristics identified as potentially indicative of aggressive tax planning, and the latter imposes limitations to hybrid arrangements, where the tax treatment of income/expense differs between jurisdictions. 

In general, Finnish M&A transactions are governed by national legislation and EU regulation. The main national legislation includes:

• the Contracts Act (228/1929, as amended);
• the Sale of Goods Act (355/1987, as amended);
• the Companies Act (624/2006, as amended);
• the Employment Contracts Act (55/2001, as amended), relating to the transfer of employees in asset purchases or transfers of undertaking in particular;
• the Competition Act (948/2011, as amended) with respect to merger control and non-compete agreements; and
• the Act on the Screening of Foreign Corporate Acquisitions in Finland (172/2012, as amended), which monitors foreigners’ corporate acquisitions in Finland.

In addition, the following regulations should be observed when dealing with publicly listed companies:

• the EU Market Abuse Regulation (596/2014);
• the EU Prospectus Regulation (2017/1129);
• the Securities Market Act (746/2012);
• the Helsinki Takeover Code; and
• the Corporate Governance Code.

The M&A market is not particularly regulated, except in respect of publicly listed companies and the regulation governing transfers of undertakings from an employment law perspective. The key regulator with respect to foreign direct investment is the Ministry of Economic Affairs and Employment and the key regulator with respect to merger control is the Finnish Competition and Consumer Authority.

M&A transactions are subject to merger control under the Competition Act. An M&A transaction, or a concentration for the purposes of the Competition Act, is subject to control if both the combined turnover of the parties to the concentration generated in Finland exceeds EUR100 million and the turnover generated in Finland of each of at least two parties to the concentration exceeds EUR10 million.

Monitoring of Acquisitions by Foreign Buyers

Under the Act on the Screening of Foreign Corporate Acquisitions, a foreign buyer must apply for prior approval from the Ministry of Economic Affairs and Employment for an acquisition that would result in it holding more than one tenth, one third or one half of the voting rights (or corresponding actual influence) of a Finnish defence or security company. In addition, a foreign buyer may submit a notification to the Ministry of Economic Affairs and Employment for an acquisition resulting in the buyer holding more than one tenth, one third, or one half of the voting rights (or corresponding actual influence) of a company or business holding a key position with respect to maintaining vital functions of Finnish society.

A “foreign buyer” is defined as (i) a person, organisation or foundation not domiciled in an EU or EFTA (European Free Trade Association) member state; or (ii) any organisation or foundation domiciled within an EU or EFTA member state in which a foreigner or entity referred to above in (i) holds at least one tenth of the voting rights in the case of a limited liability company, or corresponding actual influence in the case of another entity or business. In case of Finnish defence companies, the definition of a foreign buyer also includes entities domiciled in an EU or EFTA member state (other than Finland).

Approving Acquisitions

The Ministry of Economic Affairs and Employment approves acquisitions resulting in the control of these companies, unless the acquisition endangers key national interests, in which case, the matter is referred for consideration to the Council of State. The Council of State may either approve the acquisition or, if necessary due to a key national interest, refuse to approve it. Such interests include:

• military national defence;
• national security and public order; and
• functions vital to society (including safeguarding critical infrastructure and security of supply).

The Ministry of Economic Affairs and Employment may impose conditions on an acquisition if it is necessary to secure key national interests. The conditions must be accepted by the parties to the acquisition.     

If approval is not granted, the buyer must decrease its ownership to less than one tenth (or less than one third or one half) of the shares in the company, and can only exercise the corresponding voting rights at a general meeting of the company’s shareholders or other relevant corporate body.

Anti-bribery, Sanctions and ESG Compliance

According to the Finnish Criminal Code (39/1889, as amended), giving or accepting a bribe in business is a felony and subject to a fine or imprisonment. This applies to a person in the service of a business, a member of the administrative board or board of directors, managing director, auditor, receiver of a corporation or a foundation engaged in business, a person carrying out a duty on behalf of a business, or a person serving as an arbitrator and considering a dispute between businesses, between two other parties, or between a business and another party. There is no separate legislation or guidance relating to anti-bribery in Finland in addition to the Criminal Code. No changes in the approach to anti-bribery issues have taken place in 2023.

The national general regulation regarding the implementation of UN/EU sanctions is the Act on the Fulfilment of Certain Obligations of Finland as a Member of the United Nations and of the European Union (659/1967). The sanctions imposed by the EU must be fully complied with in Finland. As the EU sanction regulations continue to be amended regarding Russia and Belarus, companies must observe the quickly changing lists in their actions, including M&A transactions.

According to the Accounting Act (1336/1997, as amended), certain large companies with over 500 employees must include a statement of non-financial information in their annual reports (ESG). The Accounting Act includes a reference to amended EU taxonomy regulation, which imposes a duty to include specific information regarding sustainability in these statements. The Corporate Sustainability Reporting Directive that entered into force on 5 January 2023 extends the obligation of large companies and SMEs to report according to European Sustainability Reporting Standards (ESRS). The new rules will need to be applied for the first time to reports concerning the financial year 2024. The directive will be nationally implemented primarily by amending the Accounting Act and the Auditing Act (1141/2015, as amended).

Scope and Areas of Focus

Legal due diligence is usually 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 depend 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, data protection and privacy, as well as intellectual property rights.

Procedures

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).

Data Room

As a rule, the due diligence material is usually provided through a virtual data room, and it is increasingly common for the data room to be 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 constitutes more or less common practice in transactions involving private equity sellers. The vendor due diligence report or fact book 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.

A privately held company is typically acquired by entering into either a share purchase or an asset purchase agreement, with share purchases being used more often. 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 several 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. That said, when warranty and indemnity insurance is used, the warranty catalogue offered by the sellers tends to be fairly extensive. 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 used in takeover bids made by private equity funds.

The private equity-backed buyer is typically structured through one or more SPVs, which are domestic or foreign limited liability companies, while the private equity fund 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, funds requirements can go further and fully executed loan documentation may be required for submitting a valid bid. Equity and debt funds are typically committed at the signing stage of the transaction.

In most private equity deals, the private equity fund buys a majority stake in the target, but there are of course private equity funds whose strategy 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 more passive than a general partner, but media coverage critical of private equity-backed companies, particularly in the healthcare sector, has caused co-investors to enforce their corporate social responsibility policies more strongly in companies in which they have invested.

Completion Accounts and Locked-Box Structures

Both completion accounts and locked-box consideration structures are used in Finland, depending on the type of transaction and the parties involved. Fixed price deals without locked-box structure are rarely seen. Locked-box structures became increasingly common during the last few years; however, the use of completion accounts has increased lately due to the recent economic uncertainty.

Usually, the seller prefers the locked-box structure to completion accounts, which tend to be more popular on the buyer side, especially in transactions that do not involve private equity investors. In a locked-box structure, the buyer usually requires that the seller covenants that the target operates its business in the ordinary course and that there is no leakage, ie, that the target does not pay any dividends or make other distributions to the seller between the locked-box date and closing (such distribution being known as “leakage”).

Earn-Out Structures

Earn-out structures are used to a lesser extent, but they do occur in particular 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. Earn-out structures were expected to become more prevalent due to the COVID-19 crisis but no significant changes have, so far, been seen.

Deferred or Additional Purchase Price 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.

Roll-Over Structures

Roll-over structures are seen from time to time, albeit rarely, since there is no specific roll-over tax relief in Finland. Therefore, any reinvestment by management would be made with after-tax proceeds.

Compensation

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 common for the locked-box price to be subject to an interest mechanism, which is typically calculated from the relevant locked-box date until completion.

It is not very common for interest or reverse 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, approval under the Act on the Screening of Foreign Corporate Acquisitions or, with respect to transactions closing after 12 October 2023, clearances under the EU Foreign Subsidies Regulation (Regulation (EU) 2022/2560), other completion conditions have rarely been included during the last few years with high deal activity. However, completion conditions are still included in deals where the specifics of the case call for them, for instance, necessary third-party consents from key contractual counterparties or relevant finance providers of the target due to change of control provisions, etc.

Material adverse change/effect provisions as conditions precedent are uncommon in the Finnish market.

In highly competitive deals, private equity-backed buyers do occasionally accept “hell or high water” undertakings. While such undertakings are not the norm in Finnish transactions, they have been used or accepted more frequently during the last few years of heightened competition for attractive targets. No  distinction is typically made  between merger control and foreign investment conditions for the purposes of such undertakings.

Break fees are rarely used in the Finnish market but they do appear from time to time, mainly 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:

• 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
• 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, however, 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. However, termination of the acquisition agreement is usually not automatic in the sense that the parties typically undertake to negotiate a new closing date, if relevant. A typical long-stop date is usually a few months from the initially planned closing date, and in most cases conditional on pending merger control/foreign investment processes.

Warranty and Indemnity Insurance

It is common for private equity sellers to use warranty and indemnity (W&I) insurance and thereby exclude their liability under the seller’s warranties. However, customary exclusions from the W&I insurance coverage include, for instance, warranty breaches caused by intentional misconduct, fraud or known risks, as well as forward-looking statements, criminal liability and environmental liability, plus certain tax liability. In addition, unless separate new breach coverage has been obtained, warranty breaches that have occurred and become known in the interim period between signing and closing are usually excluded from the W&I insurance coverage.

Limitation of Liability Due to Gross Negligence

Whether a seller is able to limit its liability in a case of damage caused due to 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.

Transfer of Risk

Buyer’s liability

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 the buyer 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 liabilities, 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.

Seller’s liability

The seller’s liability is typically limited to breach of warranties, conditions and covenants under the acquisition agreement.

As W&I 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:

• fundamental warranties, eg, corporate organisational matters and ownership of shares (or assets, in an asset deal);

financial matters, including correctness of the accounts;

• agreements;
• employees and employee benefits;
• intellectual property rights;
• litigation;
• compliance with laws and permits;
• tax;
• real estate; and
• environmental matters.

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 the following ways:

• qualifying warranties by the seller’s knowledge so that the buyer assumes the risk for unknown breaches of warranties (less so in insured transactions);
• materiality qualifiers excluding the seller’s liability for minor breaches in the form of monetary de minimis and basket caps; or
• time limitations for the indemnity obligation (or a specific survival period for warranties, but the former is preferable).

“Fair Disclosure”

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).

Time Limit

The time limit for presenting a claim usually varies between 12 and 24 months, with longer periods for presenting claims under fundamental warranties as well as tax and environmental warranties. The maximum 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. In deals where the enterprise value is based on high EBITDA multipliers, the de minimis caps are often adjusted downwards as the typical cap of 0.1% of the enterprise value could effectively bar relevant claims based on warranty breaches.

The acquisition agreement may include certain specific indemnity undertakings by the seller for certain risks identified by the buyer or disclosed by the seller during the due diligence phase.

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 (as opposed to warranties given only by the management), while the W&I insurer is liable to compensate under the policy. W&I insurance typically covers both fundamental and business warranties, with tax warranties covered from time to time.

A more recent development in the W&I insurance space is the occurrence of so-called “synthetic” warranty and indemnity insurance. For synthetic W&I insurance, the warranties are not given by the seller and, instead, a synthetic set of warranties is attached to the insurance policy. The wording of the warranties is therefore not dependent on negotiations between the seller and the buyer, but, assuming that it is a buy-side policy, between the buyer and the insurer.

Escrow or holdback arrangements, on the other hand, are unusual in deals with private equity sellers.

Litigation relating to M&A transactions in general and, specifically, private equity transactions is 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. Buyers are likely to be less reluctant to make claims against W&I insurers than against a portfolio company’s management.

Public-to-private transactions have become more common in recent years, with notable high-profile deals taking place in 2022-2023, such as the cash tender offer by Crayfish BidCo Oy for all shares in Caverion Plc (ongoing), the cash tender offer by Sega Europe Limited for all shares in Rovio Entertainment Plc (ongoing), the cash tender offer by Georg Fishcher AG for all shares in Uponor Plc (ongoing) and the cash tender offer by Otava Oy for all shares in Alma Media Plc (ongoing); in 2021–2022, the cash tender offer by Sapphire BidCo Oy for all shares in Basware Plc; in 2020–2021, the cash tender offer by PPG Industries, Inc for all shares in Tikkurila Plc; in 2019–2020, the cash tender offer by Telenor for all shares in DNA Plc; and in 2018–2019, the cash tender offer by Mehiläinen Yhtiöt Oy for all shares in Pihlajalinna Plc.

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 sportswear company Anta Sports made an offer to acquire Finland’s Amer Sports in a deal that valued the target company at EUR4.6 billion.

The role and actions/duties of the target company’s board of directors in a takeover is regulated in the Helsinki Takeover Code. If the board of directors considers the approach by a bidder to be of a serious nature, it shall swiftly examine the matter, evaluate the proposed bid and acquire sufficient and appropriate information to support its evaluation. The board of directors of the target company is at all times obliged to promote the interests of all shareholders of the target company and must seek the best outcome for the shareholders.

In a friendly takeover, the bidder and target company typically enter into a combination or transaction agreement in which the main terms of the offer and co-operation of the parties are agreed upon.

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 learnt or should have learnt about the 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 being taken by the shareholder if, for example, shareholdings are diluted due to an increase in the number of shares as a 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.

The Securities Markets Act provides for mandatory offer thresholds. A mandatory offer for all shares of the target company must be made if a shareholder acquires a stake that 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 on which 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.

When determining the size of the holding for the purposes of the mandatory offer obligation, the voting rights held by the shareholder are aggregated together with voting rights held by related parties of the shareholder and parties deemed to be acting in concert with the shareholder (eg, on the basis of an agreement or otherwise).

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 an information document or prospectus.

A general principle under the Securities Markets Act is that all shareholders of the target must be treated equally, meaning that the same consideration must be offered to all shareholders.

With respect to pricing of a voluntary offer, it is generally at the offeror’s discretion. However, where the offer is made for all shares and securities entitling to shares, the offer price shall be the highest price paid by the offeror (or a related party or person acting in concert with the bidder) during the six months preceding the announcement of the offer. Where the offeror has not made such purchases, no minimum pricing rule is applied.

In mandatory offers, the consideration offered must be at the least the highest price paid by the bidder (or a related party or person acting in concert with the bidder) for the securities during the six months preceding the commencement of the obligation to bid by the bidder.

The bidder may be subject to a top-up and compensation obligation in certain instances.

A voluntary takeover offer may include offer conditions. With the exception of mandatory takeover bids, there is no specific legal regulation of 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 fulfilment of the conditions, so that the fulfilment 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 may not invoke a condition set out for the implementation of the bid unless non-fulfilment of the condition is essential for the contemplated acquisition.

Frequently Used Conditions

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 on the offeror acquiring a certain level of ownership – usually more than 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.

Disclosure of Financing Arrangements

Prior to making a takeover bid public, the offeror must ensure the availability of the necessary financing. The availability of the finance 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 on 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.

If a bidder obtains more than 90% of the target’s shares and votes, the bidder has the right to squeeze out remaining shareholders at a fair price. In such a squeeze-out situation, a minority shareholder is also entitled to require the majority shareholder to redeem their 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 dispute.

A majority shareholder’s possibility to control a company’s board and operations is limited by minority protection provisions such as the right to demand a minimum dividend (being at the outset one half of the profits of the company of the preceding accounting period). A shareholder 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, de-mergers, share buybacks and other resolutions requiring a two-thirds majority.

The use of holding companies in third-party acquisitions has been widely accepted in Finnish taxation practice, and the prevailing view is that the deductibility of the interest on the acquisition loan generally cannot be denied by applying anti-avoidance rules.

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 that they provide an out for the shareholder if a better competitive offer is made, by reserving the shareholder’s right to attend to the competitive offer instead.

Equity incentivisation is a fairly 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.

Manager shareholders’ ownership of shares is usually subject to a vesting period whereby the shares allocated to the management vest over time. If a manager shareholder leaves the company before exit, it is likely that the maximum share of equity allocated to them will not have vested by the time of their departure. A manager shareholder’s shares are, further, usually subject to a redemption right, but not obligation, for the private equity fund, the other shareholders and the company.

“Bad leaver” provisions for manager shareholders typically relate to situations where the relevant shareholder has materially breached the shareholder agreement, the company has terminated the manager shareholder’s employment or service agreement on personal grounds stipulated under Finnish employment laws, or the manager shareholder has decided to resign from the company. “Good leaver” provisions, on the other hand, typically relate to situations where the manager 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 manager 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 lower of the original purchase price of the shares (or as a material discount) or market value.

Restrictive covenants on the manager shareholders (and the rest of the shareholders) are usually included in a shareholder agreement, and typically include provisions on share transfer restrictions and, subject to certain limitations, 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.

Non-compete covenants are further usually imposed in the purchase agreement but they may, as a rule, only apply to controlling shareholders. The maximum duration of non-compete covenants that can be considered permissible depends on the circumstances. Usually, they are considered justified for periods of up to three years if the acquisition includes transfer of goodwill and customer base as well as know-how. If know-how is not included, non-compete undertakings are, generally, justified for periods of up to two years.

In employment or service agreements entered into with management members, it has generally been deemed permissible to include non-compete and non-solicitation undertakings for the term of the agreement and a maximum period of 12 months after the expiry of the agreement. A non-compete obligation requires a particularly weighty reason related to the employer’s operations or the employment relationship. A non-compete undertaking does not bind the employee if the employment is terminated for a reason attributable to the company, for instance, if the company has terminated the employment due to financial or production-related reasons or for reasons arising from reorganisation of the company’s operations.

New Rules

The rules governing the use of non-competition clauses in employment agreements changed as of 1 January 2022, and these apply to all agreements as of 1 January 2023 even if the non-competition clause was concluded before 1 January 2022. Under the new rules, an employee is always entitled to compensation for a non-compete obligation that remains in force after the termination of the employment. The monthly compensation to be paid during the term of the non-compete obligation is equal to 40% of the employee’s monthly salary if the duration of the non-compete obligation is six months or less, and 60% of the employee’s monthly salary if the duration of the non-compete obligation exceeds six months. Under the new rules, the employer must observe a notice period before the employer may terminate the non-compete clause included in the employment agreement. The applicable notice period is two months if the term of the non-compete obligation is six months or less, and equal to a third of the term of the non-compete obligation if the term exceeds six months. Furthermore, the company may not unilaterally terminate the non-compete clause after an employee has terminated their employment.

Manager shareholders may, depending on the size of their shareholdings, enjoy certain minority protection 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. Those provisions apply to all limited liability companies, but the shareholders usually agree to deviate from the 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 but these are less common for manager shareholders. Veto and control rights, as well as rights of control over exit, are usually held by the private equity investors.

Typically, provisions on shareholder control are included in a shareholder agreement between the shareholders of the target. Such provisions typically include, for example:

• the right to appoint a certain number of board members (including the chairman) and the managing director;
• control over the 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 corporate veil has only been pierced in exceptional circumstances.

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. The number of IPOs in Finland saw a downturn in 2019 and 2020, during which the lack of a credible IPO alternative may have slowed down larger private equity transactions that would have been run in dual-track mode. 2021 saw record-breaking activity in relation to the number of IPOs, with eg, Kreate Group, Orthex Group, Sitowise Group, Puuilo and Virala Acquisition Company (the first Finnish SPAC) entering the main list. However, Finnish IPO activity slowed down markedly in 2022 and 2023 since record activity in 2021, with the number of IPOs halved in 2022 compared to 2021, and 2023 not having seen any listings into the main list by the end of the first half of the year.

Generally, most dual-track processes have resulted in trade sales in recent years, and trade sales can also be considered the most common form of private equity exit, but the increased IPO activity in 2021 has led to many IPO exits for private equity investors. Private equity sellers occasionally reinvest upon exit, while it is customary for private equity sellers to remain as investors for brief lock-up periods after IPOs.

Apart from private sales to other private-equity-backed investors or corporates and IPOs, any other forms of private equity exit have recently been uncommon. Triple-track exit processes where a recapitalisation is prepared in parallel are not common in Finland.

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 the 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 their 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 lock-up 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.