Mergers & Acquisitions – Choosing the Structure: Mergers, Joint Ventures, Licensing Agreements and Public Tender Offers
In part one of the article series on various structures of an M&A deal, acquisitions of shares and business operations and/or assets were examined. Alternative ways to structure a transaction will be presented below, starting with mergers.
Mergers are rarely used when foreign companies enter Finland for the first time. Earlier, this was due to the fact that merger was, under the Companies Act, possible only between Finnish entities. Therefore, mergers were commonly used to simplify the legal structure of the group after the actual transaction had taken place usually through a share or business transfer. Since the end of 2007, however, cross-border mergers have become possible as a result of the Cross-Border Mergers Directive (2005/56/EC) and its implementation into the Companies Act.
In a merger the assets and liabilities of the merging company are transferred to the receiving company, while the shareholders of the merging company receive shares in the receiving company as consideration. The consideration may also be cash or other assets.
A merger can be implemented either as a merger of one company into another (absorption merger) or as a merger of two or more companies to form a new company (combination merger). A merger of a wholly-owned subsidiary with its parent is considered a special form of absorption merger, called a subsidiary merger. Tripartite merger is an absorption merger, where another party than receiving company provides the consideration.
Finnish Merger Process
The Finnish merger process involves a number of notification and application procedures, as set out in the Companies Act. Therefore, the process takes approximately six (6) months, at a minimum, to complete. The process commences by the preparation of a merger plan by the board of both the merging and receiving company. The merger plan must be filed with the Trade Register within one (1) month of its signing. At least within four (4) months of the registration of the merger plan, an application for a public notice to the unknown creditors of the merging company shall be filed with the Trade Register. The notice period lasts for three (3) months. A notice shall be published also to the creditors of the receiving company in case the auditors consider in their statement that the financial position of the receiving company could be jeopardized by the merger. The known creditors of the merging company shall be informed by written notifications on their right to oppose the merger no later than one (1) month prior to the due date set in the public notice for creditors to oppose the merger.
The merger must be approved at the general meeting of shareholders of the merging company by a two-thirds (2/3) majority of both the votes cast and of the shares represented. In a subsidiary merger the board of the merging company decides upon the approval of the merger. In the receiving company, the merger can be approved by the board, unless shareholders holding more than one twentieth (1/20) of the shares in the company require that the merger shall be approved at the general meeting of shareholders. Such resolutions must be passed within four (4) months of the registration of the merger plan and no later than one (1) month prior to the due date set in the public notice. The merging companies need to file the notification to the Trade Register to implement the merger within six (6) months from the approval of the merger. If the rights of the creditors have been secured, the Trade Register shall consequently approve the merger.
The legal consequences of a merger take effect as of the registration of the implementation of the merger with the Trade Register. As a consequence, the assets and liabilities of the merging company are transferred to the receiving company and the merging company is deemed dissolved. As soon as possible after the implementation of the merger, the board of the merging company shall prepare a final report, present it to the general meeting of shareholders and file it with the Trade Register.
Joint Ventures and Strategic Alliances
There are no specific laws in Finland regarding the establishment or operations of joint ventures or strategic alliances. Thus, the general principles of Finnish contract and corporate law apply. Under Finnish law, a majority shareholder effectively controls the operations of a limited liability company, subject to the rules on minority protection provided for in the Companies Act. However, a combination of corporate and contractual vehicles, typically consisting of the Articles and Shareholders’ Agreements, may effectively transfer some or all of the control in the joint venture company to a minority shareholder(s). The parties should therefore agree on a balanced combination of the Articles and the underlying Shareholders’ Agreements, taking into account the nature of the business to be carried out and other relevant considerations.
There is no specific legislation on license agreements in Finland. Accordingly, licensing is governed primarily by general contract law, the Commercial Code (3/1734, as amended, FI: kauppakaari), competition law and laws regulating intellectual property rights.
License agreements are often viewed as good tools for the distribution and manufacturing of products as well as the creation of extensive service networks. The licensee will manufacture, distribute and/or care for the service of the products according to the licensor’s specifications, while sharing the commercial benefits with the licensor. As a general rule, the licensor receives the benefits as royalty fees, but also through increased sales and access to new market areas. The licensee, on the other hand, gains access to new technologies, rights to use the licensor’s intellectual property rights and goodwill, and the possibility to enhance its own knowledge without excessive investments in research and development.
Public Tender Offers
A public tender offer is the most common way to acquire a publicly listed company. Public tender offers are governed by the Securities Market Act (SMA), which (i) regulates the offer procedure and related information requirements, (ii) requires equal treatment of all holders of the securities that are tendered for, and (iii) introduces a threshold of voting rights that triggers an obligation to offer to acquire all the remaining shares of the company. Compliance with the SMA and related legislation is monitored by the Finnish Financial Supervisory Authority.
Restrictions for Foreign Acquirers
There are only a few restrictions for foreign acquirers in Finland, since the general restrictions on foreign ownership of Finnish companies were abolished in 1993. As a general rule, shares in Finnish companies as well as their assets can therefore be acquired by foreign entities without any approvals by the Finnish authorities.
The Act on Control of Foreign Acquisitions of Finnish Companies (the “Control Act”), entered into force on 1 June 2012. The Ministry justified its proposal for the New Control Act by arguing that the Finnish government did not have sufficiently efficient methods for preventing companies that are “essential for Finland’s security” from being acquired by an “unwanted” stakeholder.
The Control Act does not provide a list of the industries or companies, apart from the defense industry, to which the law applies. Thus, the defense industry remains the only industry where all the companies having a beneficial owner in any country other than Finland have to seek the confirmation of the Ministry if they intend to acquire a stake exceeding the set threshold of 10 per cent. The Control Act nevertheless extends the Ministry’s authority to define situations where essential national interests are jeopardized. Such relevant industries from the Ministry’s and thus national interest perspective may be for example payment industry as well as TV and radio broadcasting. Based on general information on the Finnish market, no transaction has been disapproved so far under the Control Act.
In addition to the Control Act, some other specific Finnish regulations also apply to foreign acquisitions of companies, which hold real property located on the border zone or other areas protected for defense purposes.
In the third and final part of the M&A series, which will be published next week, the practice of legal due diligence in M&A will be presented.
Read more on related topic from part I: Choosing the Structure: Private Share Purchases and Business Acquisitions of this article series.