2005: A Year of Changes in M&A

Published in American Lawyer: Guide to Global M&A, January 2006.

The past year has been an active year in the Finnish M&A market, which has seen, among others, several transactions in regard to Finnish listed companies (Pohjola, Saunalahti, Alma Media to mention a few), larger reorganisations in the daily goods retail field (SOK-Spar and Tradeka-Wihuri combinations) and also some increased private investor activity in regard to Finnish industry companies (Finndomo, Karelia). Foreign private equity interest in the Finnish market has remained strong (Outokumpu Copper Products, Loparex).

In the legislative area, year 2005 has also brought many significant changes impacting the M&A field, including changes in the fields of corporate taxation, company law and securities markets regulation, as commented on further below.

A larger tax reform, including a reform of the corporate taxation system, was approved by the Finnish Parliament in 2004, with most changes having come into force at the beginning of 2005 (some changes with effect on the M&A field entered into force already in 2004). The changes include a lowering of the corporate tax rate to 26% and the tax rate for capital income to 28%, as well as certain changes in the taxation of dividends.

As part of the reform, capital gains derived from selling of certain shares by limited liability companies has become exempt income taxation. The exemption concerns shares accounted as the seller’s fixed assets and which the seller has owned for at least a year. The share ownership of the seller must also amount to at least 10% of the share capital of the company during the mentioned period. The new exemption does not concern shares owned by venture capitalists or shares in housing or real estate companies.

In the area of case law, there have been some developments in regard to the Finnish group contribution system. Group contribution, which is deductible for the payer and considered the taxable income of the payee, is only available where there is at least 90% direct or indirect ownership between the companies. According to applicable law, the group contribution system is also only available between companies resident in Finland, which limitation has been considered potentially conflicting with the EC Treaty freedom of establishment. In an interim decision given in May 2005 (KHO 2005:29), the Finnish Supreme Administrative Court decided to ask the European Court of Justice for an advance ruling which connects closely to the question of the compatibility of the group contribution system with EC Law. ECJ’s decision in the case will probably not be given until 2007. It is, however, possible that the Finnish legislator is forced to amend or abolish the current group contribution system already in the near future.

A complete reform of the Finnish Companies Act is being processed at the moment aiming e.g. at reducing procedural requirements. The Government Bill was issued on 2 September 2005 and the new Act is proposed to enter into force on 1 September 2006. The main propositions can be summarized as follows.

Shares in a limited liability company would no longer have a par value, unless such a clause is separately included in the Articles of Association, whereby there would no longer be a direct connection between the amount of shares and the share capital. The purpose of this is, among others, to facilitate the procedure of issuing shares. After the reform has taken place, the share capital of a company may be raised without issuing shares, and respectively, shares may be issued without raising the share capital.

The proposed Act would also require only a limited amount of information to be included in the Articles of Association of a limited liability company, consisting of information regarding the trade name, domicile and line of business of the company. With regard to other matters, presumptive provisions would be introduced, which would be presumed to be used unless explicit differing provisions would be taken into the Articles of Association. The proposed Act also aims at making company 3 management easier by e.g. lightening the procedural requirements of Shareholders’ Meetings (for instance, resolutions on discharge from liability of the management would no longer need to be taken). In addition, the Act proposes to amend the provisions on e.g. merger proceedings. For example, by enabling creditor protection procedures to start already at the registration of the draft merger terms, merger proceedings may be completed already in little over three months.

In regard to the distribution of funds, the proposed Act contains a solvency requirement aiming, inter alia, at the protection of creditors, which states that no funds may be distributed if, when making the distribution decision, the persons making the decision knew or should have known that the company was insolvent or that it would become insolvent as a result of such distribution of funds. As to liability for damages, the proposed Act contains new provisions on the presumption of negligence in cases where damage has been caused by an illegal procedure or an action contrary to the Articles of Association or favouring an insider. Disputes in relation to the new Act are proposed to be concentrated to eight district courts specialised in the field of application of the Act.

Changes have also taken place with regard to the Finnish Securities Market Act and the Act on the Financial Supervision Authority (FSA), the changes having come into effect on 1 July 2005. The aim of the amendments is to implement the Market Abuse Directive (2003/6/EC), and to amend existing Finnish legislation in the field of abuse of insider information and market manipulation. The amendments to the provisions on inside information aim at preventing the improper use of information e.g. by defining insider information more precisely and by elaborating on the provisions regulating disclosure and control of such information. As part of the amendments, the FSA has also received new, more extensive powers to use e.g. administrative sanctions.

The new wording of the Securities Market Act specifies the definition of inside information to refer to information of a precise nature which has not been made public or which has not otherwise been available in the market and which would be likely to have a significant effect on the value of the financial instrument. The requirement that 4 the information must be of a precise nature is new. Information being of a precise nature presupposes that the information refers to a set of circumstances or an event which already exists or has occurred or which may reasonably be expected to come into existence or occur. In addition, it is required that it is possible to draw conclusions on the effect such circumstances or such event could possibly have on the price of the financial instruments or derivative instruments.

While the main rule remains that relevant information shall be publicly disclosed as soon as possible by companies subject to public trading, the amendment also includes provisions on that a company can postpone public disclosure of information such as not to prejudice legitimate interests, presuming that this does not endanger the position of investors and that the company can ensure that the information stays secret. A new requirement is that companies subject to public trading have an obligation to post on their Internet sites all inside information that they are required to disclose publicly.

The amendments also broaden the scope of the subjects of inside information. Companies have to keep track of, and register in the public insider register, members of the upper management of the company, presuming that such persons regularly receive inside information and that they have the right to make decisions impacting the company’s development and business organisation. Also the close relatives of persons listed in the public insider register shall be entered into the register, including the husband/wife or registered spouse of such person. In addition to the public insider register, companies subject to public trading also have an obligation to keep an internal, non-public, company-specific insider register listing all employees, which due to their position or duties regularly receive inside information, as well as keep a register of other persons, who due to an employment or other agreement relationship work for the company and thereby receive such information (including so called project-specific registers). Consultants to companies subject to public trading, such as attorneys or audit companies, are also required to maintain their own company-specific registers. According to new provisions prohibiting unjustified disclosure, inside information must not be disclosed by an insider to third parties, unless such disclosure is made in the normal course of the exercise of employment, profession or duties.

In addition to the above changes, the Securities Market Act has been amended on 1 July 2005 in order to implement the Prospectus Directive (2003/71/EC), which aims at harmonizing European legislation in regard to the offering and listing of securities. Through the implementation of the directive, cross-border offering is facilitated, e.g. by provisions according to which a prospectus approved in one Member State becomes directly valid in all other Member States.

In regard to M&A market activity in 2005, certain transactions of interest are mentioned below.

In a transaction which has generated ample media attention, Finnish Bank OKO acquired a majority stake in insurance services group Pohjola Group plc from Suomi Mutual Life Assurance Company and Ilmarinen Mutual Pension Insurance Company. By further launching a public offer to acquire the remaining shares of Pohjola (making the whole transaction value a notable EUR 2,042 billion), OKO is striving to create a new Finnish finance group of note.

In another acquisition which has received much media attention, Finnish telecom company Elisa Corporation managed to acquire over 90% of the shares in Saunalahti Group Oyj on the basis of a public offer competing with the earlier offer made by Icelandic company Novator, as accepted, inter alia, by the target’s largest shareholder, Novator itself. The next step in the acquisition valued at ca. EUR 320 million, is to launch squeeze-out proceedings in order for Elisa to acquire the remaining part of the share capital of Saunalahti. The acquisition has received conditional approval by the Finnish Competition Authority.

Another large Nordic public transaction has been the battle for the Finnish publishing and media group Alma Media Corporation. In December 2004, Norwegian media company Schibsted ASA announced its intention of making an unsolicited public offer for Alma Media’s shares for the equivalent of EUR 705 million. However, Alma Media’s largest shareholder, Swedish publishing house Bonnier & Bonnier AB, saw things 6 differently. In January 2005, Bonnier entered into a strategic alliance with Swedish private investment firm Proventus Industrier AB. The mentioned parties thereafter made a joint offer for Alma Media’s broadcasting division for EUR 460 million. The deal also included the acquisition by Almanova Oy, a newly-created entity owned by the other shareholders of Alma Media, of the non-broadcasting activities of the latter (newspaper publishing, business information production and distribution etc.). Almanova and Alma Media merged on 7 November 2005, forming the new listed company Alma Media Oyj.

In the daily goods retail field, the markets witnessed the acquisition of a majority stake in Spar Finland plc, the listed Finnish supermarket chain, by Finnish cooperative Suomen Osuuskauppojen Keskuskunta (SOK) from Swedish Axfood AB. The transaction is still subject to regulatory approval. In the same field, cooperative Tradeka Corporation and retailer Wihuri Oy agreed to merge their daily goods retail businesses in a transaction supported by venture capitalist Industri Kapital.

Other deals during 2005 include the LBO by ABN Amro’s private equity arm and the management of the Netherlands-based producer of release liners for adhesive products, Loparex Group, from UPM-Kymmene Oyj; telephone directories producer Fonecta Group Ltd’s acquisition of local competitor Inoa Suomi Oy from Norwegian Interinfo Holding SCA; and digital media corporation RealNetworks Inc.’s acquisition of Finnish mobile games developer Mr. Goodliving Ltd.

In regard to general market trends in the ambit of M&A, except for a focus on cost cutting and streamlining, a recent trend has shown a willingness of cross-industry listed companies to divide into smaller, more transparent entities, with a view, inter alia, to attracting foreign investors. On the basis of current figures, the strategy, as implemented e.g. by Fortum, Kone, Orion and Kemira, appears to be quite successful.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.