Finland: Meeting the Demands of Today’s Business Environment
Finnish Companies Act Reform Under Consideration

by Jan Waselius and Tanja Jussila

Article originally published in May 2003

In April 2001 the Finnish Ministry of Justice appointed a working group assigning to it the task to prepare a proposition to a new Companies Act. On May 6, 2003 the working group handed over to the Ministry of Justice its consultation paper comprising over 350 pages and a proposal to an entirely new Companies Act.

The current Companies Act (osakeyhtiölaki 734/1978) has been in force since 1978 and, despite it having undergone considerable revision and several partial renewals during its 25 years in force, has publicly been considered not to meet the demands of today’s competitive business environment.

Since 1978, the limited liability company as a company form has experienced a growth in popularity, particularly among smaller companies. The rigidity of the current Companies Act does, however, entail that also minor limited liability companies are compelled to abide by extensive formalities in connection with e.g. mergers or summoning of Annual General Meetings. Formalities, which consume a disproportionate amount of time and money.

Also the world surrounding a limited liability company has evolved enormously since the late seventies. The financial markets have been deregulated and have grown increasingly international, triggering Finnish companies to seek financing directly from the international market, and, thus, diversifying share holdings as well as investments. Additionally, Finland has joined the European Union and the EMU, thus rendering the Finnish markka a closed chapter and bringing in the euro as national currency. Partly for these reasons and partly as a result of the last decades’ general business development, the business environment of companies has turned increasingly competitive. This fact, as well as the significance of company legislation as a means of enhancing the competitiveness of Finnish limited liability companies, were explicitly recognised by the working group appointed by the Ministry of Justice.

All things considered, the working group declared as its goal a flexible and competitive act on limited liability companies, particularly focusing on the interests of small companies. The act is, nevertheless, proposed to be applicable to private as well as public limited liability companies irrespective of size, but companies falling under certain size-related limits are proposed to be exempted from certain obligations laid down in the new act.

The proposed new Companies Act adheres to the same principle as the current Companies Act in that it regulates the vast majority of legal issues that arise in limited liability companies, thus enabling companies to operate free of cost-incurring shareholders’ agreements on basic company law issues. The new proposed act does, however, grant companies greater freedom of choice in terms of company law formalities by converting certain presently mandatory provisions into discretionary ones, and by abolishing some formal requirements. Hence, the enactment of the proposed proposition would entail that limited liability companies would, inter alia, no longer by law be required to have Articles of Association or, under given conditions, auditors, and the formalities pertaining to convening a General Meeting would be relieved.

The increased flexibility in company law matters would be balanced by introducing fresh means of safeguarding the position of creditors and minority shareholders. Restrictions would be imposed on a company’s right to distribute profit funds in situations of threatening insolvency, and the possibility of minority shareholders’ to obtain information of their rights would be enhanced.

A particular feature of the proposed act is that general principles of company law, such as the principle of equality among shareholders, are explicitly pronounced as opposed to existing as generally accepted but uncodified principles. Consequently, the enacted general principles could be relied upon when no specific provision appears to be applicable to a given situation.

Among the propositions in the proposed new act is that the current merger procedure would be simplified and expedited. This would be achieved by allowing public notice on the creditors of the merging company, which is a compulsory phase of the merger procedure, to be initiated at an earlier stage of the proceedings than currently possible. Other proposed facilitations of the merger procedure are that the obligation to draw up and append to the merger plan interim accounts of the companies taking part in the merger, as well as the redemption procedure of shares and option rights held by parties opposing the merger, are relieved.

The working group also proposes that so-called three-party mergers, i.e. mergers where the merger consideration is paid to the shareholders of the merging company by another party than the merging or the receiving company, would be introduced in the Finnish legal system. The Finnish merger provisions would be applicable also in the event that the third party taking part as payor of the consideration is a foreign company, typically a mother company.

In Finland, shares of a limited liability company have traditionally had a nominal value, and companies are prohibited from issuing shares for a consideration below the nominal value. Any premium paid for newly issued shares is recorded on the premium fund, which is a restricted equity fund, the money of which cannot normally be distributed to the shareholders as profit. Pursuant to the introduction of the euro, companies have no longer been required to define the nominal value of their shares, but a book equivalent has been calculated for each share by dividing the share capital with the number of shares.

A long acknowledged fact is, however, that the nominal value of a share provides virtually no indication of the actual value of the share or of the rights connected thereto. On the contrary, the linkage between the nominal value and the share capital complicates shareholders’ rights and causes confusion between nominal and actual value.

Consequently, the working group proposes a transition into a share capital system where the presumption is that shares have no nominal value. The proposed change would disconnect shareholders’ rights and share capital enabling, for instance, increase of share capital to be effected without new issue of shares, and vice versa. In the absence of a share nominal value, the premium fund is proposed to be abolished and the subscription price for new shares, including premium, would be recorded either as share capital or, partly or in its entirety, on a newly introduced fund, "the invested unrestricted equity fund". A company would, however, always be obligated to possess a share capital amounting to at least its registered minimum share capital. As is apparent from the name of the proposed new fund, any money recorded thereon would constitute unrestricted equity, and the only remaining restricted equity would eventually be the share capital.

As a main rule, money on an unrestricted equity fund may be distributed as profit. Since the working group proposes that all funds with the exception of the share capital shall constitute unrestricted funds, the scope of money available for distribution appears to be enlarged. On the other hand, it is proposed that distribution of funds would not be permitted where the distributing company is threatened by insolvency as a consequence of the distribution.

The proposed changes would render it possible, when effecting an absorption merger, e.g. to transform the entire equity of the merging company, whether restricted or unrestricted, into unrestricted equity in the receiving company. Equally, in the event of a share exchange, an amount corresponding to the share subscription price could be recorded on an unrestricted equity fund. The proposed new act also contains provisions permitting a limited liability company, where there are weighty economical reasons thereto, to undertake a gratuitous targeted share issue, and a company may free of charge issue new shares to itself, which shares may be used as consideration in an acquisition.

Under the current Companies Act, an obligation to keep share and shareholders’ registers available in a company’s headquarters is imposed on limited liability companies, and the law vests anyone with the right to obtain a copy of all or part of the registers. An exception from this main rule, originally caused by the fear that foreign investors would eschew Finland as a target for their investments, is that foreign shareholders may nominee register their shareholdings, thus avoiding that the identity of the shareholder himself is exposed.

Subsequent to the enactment of the current Companies Act, trading with publicly noted shares has become subject to the Securities Market Act, which act inter alia regulates issues relating to insiders’ shareholdings and imposes an obligation to launch a public notification when a shareholders’ holding exceeds or undercuts certain limits. Moreover, the publicity of shareholdings has been abused for e.g. direct marketing and recruitment purposes.

Therefore, the working group regards the publicity of shareholdings as outdated and proposes that only a shareholder would have access to the share and shareholders’ register of private limited liability companies. An exception would be companies with a sole shareholder, the identity of whom would be public. Shareholdings in public limited liability companies would be public only where the voting right of the shareholder exceeds 1/1000 of the entire voting rights of the company.

The proposal of a new Companies Act has already provoked discussion in Finland, and the debate has barely come to a start. In particular, the proposal that companies, which in terms of size do not exceed certain limits, would be discharged from the duty to have their accounts audited, can be expected to trigger expression of opinion. In its proposal the working group itself has recognised that the realisation of this particular proposal must be further appraised in the continued preparation of the new act.

The working group’s consultation paper will now be commented on by a number of organisations representing the Finnish industry and commerce. On the basis on their reactions, the Ministry of Justice will eventually draft a government bill, the drafting of which will consume more time the harsher the received criticism has been. A realistic expectation is that the government bill will be finalised in 2005, whereafter the new act would enter into force at the earliest towards the end of 2005 or, more presumable, in 2006. Finland, thus, has to wait a few more years until the competitiveness and attraction of Finland as a business environment and Finnish companies as targets for foreign investments is ameliorated by legislative means, but the first step, a long one, has been taken.