All the questions
Main transactional issues
The most typical forms of incorporation in Finland are the limited liability company (Osakeyhtiö (Oy)) and public limited company (Julkinen Osakeyhtiö (Oyj)).
Transactions, including technology mergers and acquisitions transactions, that involve private equity investors are usually structured by one or more Finnish holding companies organized as limited liability companies, depending on tax and debt financing requirements or to facilitate management ownership.
In technology mergers and acquisitions, buyers are often industrial companies rather than private equity firms, with acquisition structures often tending to be relatively simple, usually with no more than one holding company, or one acquiring buyer a target company directly due to the lack of external financing.
ii Transaction Structures
Equity and asset transactions are the most typical transaction structures in Finnish technology M&A transactions, primarily for tax reasons, as explained in more detail below. Typical US structures such as triangular mergers are not contemplated by Finnish law; nor do they provide any tax or company law benefits.
Finnish technology M&A transactions tend to be based on individual negotiations or, more rarely, structured auction processes, in which case a corporate financial adviser usually leads the process.
iii Terms of the Acquisition Agreement
The documentation of share acquisitions generally follows the framework of common law agreements with certain modifications to better adapt to the Nordic legal environment. In general, the documentation does not differ significantly from the UK or US market standard, although the documents tend to be slightly shorter and certain legal concepts are interpreted differently due to civil law statutory grounds. Examples of differing interpretations include, for example, disclosure mechanisms: in Finland, if a buyer has specific knowledge prior to closing, based on due diligence or otherwise, that a representation or warranty is incorrect , it generally will not be able to claim breach of this warranty after Closing.
The conclusion of a definitive purchase contract between the parties may be preceded by a letter of intent describing the contemplated acquisition. A Finnish-style Letter of Intent is generally non-binding except for terms of exclusivity and confidentiality.
While Finnish transactional documentation has generally been opposed to general conditions precedent, there are some notable exceptions. Most technology companies in Finland have received funding from Business Finland (state aid), which means that clawback provisions should always be considered when making foreign acquisitions. Business Finland is generally able to retroactively recover funding provided to a company if an acquisition has not received Business Finland’s consent, which can have significant repercussions. For this reason, the requirement of Business Finland’s consent is usually included as a precondition. Other typical conditions precedent include waivers of buy-out or consent clauses contained in the target’s articles of association, as well as the consent requirement for the transaction of the company’s largest customers.
As a result of the covid-19 pandemic, there has also been an increase in the popularity of the material adverse change clause (MAC). While this clause is frequently used in mergers and acquisitions in the United States to provide a way out in cases where something unexpected happens in relation to the acquired business, MAC clauses have been extremely rare in mergers and acquisitions. Finnish acquisitions. However, with the rise of global economic uncertainty, MAC clauses have started to be used more frequently, along with break clauses, force majeure clauses and other clauses aimed at decision makers wanting solutions in the event of rapid aggravation of adverse circumstances.
When it comes to preferential buy price mechanisms, in equity trades, locked box mechanisms are the typical seller preference, while on the buy side, the preferred choice tends to be trading accounts. ‘completion. Earnings elements are also often seen in Finnish technology M&A transactions. In recent years, tech M&A deals have typically been stock-for-cash or cash-and-stock acquisitions, and that also seems to be the trend in 2021.
In recent years, warranty and indemnification insurance has begun to feature in technology M&A transactions as well, although it is still relatively rare. It is also not a standard option for mid-size transactions due to pricing considerations and the often stringent due diligence requirements of underwriters in order for IP warranty coverage to be granted.
Technology M&A deals in Finland tend to be predominantly equity financed, which also explains the high share of industrial (non-private) buyers in this sector.
In the rare instance where external financing is used for a technology M&A transaction, senior secured bank debt is the most common source of debt financing. Small and medium transactions are usually financed by Nordic banks.
v Taxation and accounting
There are different types of Finnish tax aspects that need to be considered with respect to technology mergers and acquisitions transactions. Relevant tax considerations also vary depending on the structure and financing of each transaction and the scope of a transaction; for example, whether a transaction concerns a transfer of shares or a transfer of assets and the status of the parties as individuals or companies. In addition to Finnish national tax law, relevant tax treaties entered into by Finland should be taken into account.
Transaction-related capital gains are generally taxable in Finland for Finnish tax resident individuals and companies, but also for non-resident companies that have a permanent establishment for Finnish income tax purposes. Taxable capital gains in Finland on shares and assets are generally subject to the normal rate of income tax (currently 20% for companies and 30 or 34% for individuals depending on the amount of the capital gain). value). However, capital gains realized on shares of a Finnish company are, in general, not taxable income for non-resident companies or individuals in Finland due to the various applicable tax treaty provisions. Capital gains realized on various assets other than shares may be taxable in Finland for non-resident individuals or companies depending on the nature of the asset.
Certain capital gains from the sale of shares classified as fixed assets for Finnish tax resident companies are, in certain circumstances, exempt from tax under the Finnish participation exemption. For the participation exemption to apply, there are prerequisites regarding the status of the seller, the nature of the ownership and the nature of the shares in question. If the preconditions are met, the respective capital losses are not tax deductible.
Transfers of shares, securities and real estate to Finland are generally subject to transfer tax in Finland. Transfer duties are generally paid by the buyer. The transfer tax base is made up of the purchase price and certain other contributions related to a transaction. The transfer tax rate for shares in a Finnish company is 1.6%. Despite this, no transfer tax is due in Finland for Finnish shares if the buyer and seller are not Finnish tax residents. In addition, no transfer duty is generally payable on the transfer of securities which are traded on a regulated market or on a multilateral trading facility, subject to certain preconditions.
In general, the Finnish Accounting Act, as amended,8 and the corresponding accounting decree are followed in Finland. However, the use of accounting standards as defined in international accounting standards and international financial reporting standards is mandatory for companies whose securities are traded on a regulated market in a country belonging to the European Economic Area and may also be used voluntarily by other companies.
vi Cross-border issues
Many Finnish tech M&A deals have a cross-border element, and foreign participation in Finnish tech companies continues to grow.
While the government generally views foreign ownership in a positive light, the Act on Supervision of Acquisitions of Foreign Businesses in Finland sets certain limits on foreign direct investment. The purpose of the law is to control and, if necessary, restrict the transfer or influence of foreign organizations and foreigners. However, these restrictions only apply if essential national interests, such as national defence, security of supply or other essential functions of society, so require.
Under the law, a business acquisition is deemed to occur when a foreign owner obtains control of at least 10, 30 or 50% of the total number of votes conferred by all shares of a Finnish company. In sectors other than defense and dual-use sectors, the law only applies to foreign owners residing outside the EU or the European Free Trade Association. Matters concerning the control or approval of business acquisitions are dealt with by the Finnish Ministry of Economic Affairs and Employment.