Due Diligence for a corporate acquisition in Finland
October 2019

Due Diligence for a corporate acquisition in Finland

Conduct of a due diligence scrutiny is common international practice prior to a significant acquisition. This is also true in Finland. Finnish law offers little protection to an inconsiderate buyer.

There are two main motives for the buyer regarding the conduct of a due diligence.

Disclosure of the Seller

The seller will disclose business documentation to the buyer in their own interest, so that the buyer can acquaint themselves with potential problems and risks (“disclosure”). Simultaneously, the seller will insist upon the limitation of their liability for circumstances that could have been identified in an appropriate review of the provided material.

It is hard for a buyer to refuse agreement upon such a limitation. Besides, the limitation generally applies even without an explicit agreement according to Finnish law.

By way of a comprehensive disclosure, the seller can reduce the risk of being subjected to claims after the transaction. A thorough seller will therefore often also conduct a due diligence assessment themselves in order to identify factors and processes that need to be disclosed.

Subsequently, the buyer must review and analyse the provided material thoroughly, because otherwise disclosed risks remain with the buyer.

Substantial risk management

While the above aspect deals with the seller’s liability, probably the most important motivation for the buyer’s due diligence is their immediate self-interest.

Even though the purchase agreement generally entails a more or less long list of warranties by the seller, the buyer is still advised to not rely on these warranties. Apart from the fact that enforcement of damage claims is unpleasant and resource-intensive, the damages and disadvantages potentially actually arising from unidentified risks are disproportionally greater than what the seller can be made liable for.

The seller’s liability in corporate acquisitions is practically always limited in its amount and can only be claimed within a certain period of time after the transaction. The liability for so-called indirect damage is often entirely excluded. Usually the liability ends, where it is the most painful to the buyer: loss of production, investments turning out futile, loss of markets due to the infringement of intellectual property, loss of key personnel on the grounds of unclear working conditions, reputational loss – the list could be continued.

The buyer ensures with their due diligence, that such consequences do not occur. If the assessment identifies risks, these can possibly be considered in the transaction, for example by rendering the transaction closing dependent on the processing of certain aspects (“conditions precedent”).

In order for the due diligence to fulfil this purpose, the buyer cannot fully rely on the seller’s selection of the topics disclosed. Instead, they will prepare their own list of requirements guided by the details of the corporation to be acquired, the economic aims of the buyer, and the potential core risks.

Procedure of the Due Diligence

The due diligence scrutiny usually begins with the completion of a preliminary agreement between the parties, in which these agree at least upon the confidential treatment of provided information. Often the seller simultaneously guarantees the potential buyer exclusivity meaning that for a certain period of time, they will not carry on negotiations with other buyer candidates, because the buyer has to use substantial resources for the due diligence.

Regularly, the buyer uses, in addition to internal resources, external consultants for the due diligence, typically for the legal and tax due diligence. Often also technical or commercial consultants are used for the assessment of the substance of the corporation to be acquired.

Usually the consultants report their findings in written form. The report identifies problems and risks and gives advice on how these can be handled in the transaction. A good due diligence report can also often be used as a first assessment of the situation and starting point for the later integration.