Private Investment in Finnish Projects
Key aspects for transactions in Finland
Finland has become an attractive location for international investors seeking reliable and profitable investment targets. This article highlights some key points for the parties of a project M&A transaction in Finland.
Finland has a strong, stable economy and a predictable political environment. As a member of the euro zone, Finland is highly accessible for European investors. Finland’s real estate market has been a popular target for international funds for many years.
Recently, investments in industrial facilities as well as in infrastructure have been on the rise as well, with the emphasis being on energy projects, most prominently renewable energies. This trend is expected to continue.
Structure of a Finnish SPV
Like in other jurisdictions, individual projects in Finland are commonly organized in the framework of a Single Purpose Vehicle (SPV). In Finland, the vehicle comes – almost without exception – in the legal form of a limited company (osakeyhtiö, Oy).
The Oy is an independent legal entity that is “bankruptcy remote”, i.e. the insolvency of the SPV does not put the parent company at risk in excess of the loss of any equity or debt investments already made. Further, the assets held by the SPV are as such unaffected by the insolvency of the parent company, and can thus serve as collateral for non-recourse financing or other financing instruments.
The minimum share capital in a private limited company is EUR 2,500. The articles of association contain the fundamental rules for the company’s structure and management. The law leaves the founders of new companies considerable latitude in moulding the articles according to their needs. For the case that the SPV is in the hands of more than one shareholder, the articles may contain detailed individual provisions, e.g. with regard to voting rights, distribution of profits, pre-emption rights, or formalities in respect of shareholders’ meetings.
The central managing organ of the company is the board of directors (hallitus), consisting of one or more members. If fewer than three regular members of the board are nominated, one substitute member must also be appointed.
Board members do not necessarily have to work in the company on a continuous basis. The board is, however, the organ ultimately responsible for the management of the company. It has responsibility for supervising the managing director and giving the managing director instructions as to how to fulfil his or her duties.
In addition to the board, the company may appoint a managing director (toimitusjohtaja). In practice, the majority of Finnish companies have a managing director. If a managing director has been appointed, he or she runs the day-to-day business of the company. The managing director is also responsible for ensuring proper accounting. The authority of the managing director is limited to the usual course of business, insofar as the articles of association do not provide otherwise.
Contract Drafting for Project Acquisitions
The contract work for a project acquisition in Finland should be done under the rule of Finnish law. While the parties can generally pick the jurisdiction of their choice for their contract, the actual acts of transfer would have to be executed under Finnish law, and many provisions such as conduct of business, tax clauses, etc., would have to be shaped to accommodate Finnish law in any case.
This being said, it is nowadays commonplace in Finland to draft contracts in the English language and to include sufficiently detailed provisions so as to reduce the possibility of unexpected effects of the applicable law.
Finnish law does not impose excessive formalities on the parties. The transfer of shares in a SPV can be achieved by simple agreement without the involvement of notaries or authorities. The same is true for the transfer of most assets in an asset deal. Only the transfer of real property requires participation of a municipal officer.
It is not required but common to supplement the sale and purchase agreement with separate transfer deeds for certain types of assets such as shares, real property, licenses, and certain contract relations. This is motivated by various practical considerations, not the least of which being that certain transfers need to be filed to tax authorities or public registers and thus become publicly available. Adding separate transfer deeds prevents commercial details from leaking to the general public.
Liability and Diligence in M&A Transactions
As in other jurisdictions, the typical project sale and purchase agreement under Finnish law includes detailed provisions on the seller’s liability, including warranties and the provisions on the extent and limitations of liability in case of non-fulfilment of warranties.
It is good to be aware of the fact that the Finnish legal system is inclined to disregard even explicit contract wording on liability issues if a court finds that the wording does not in substance correlate with the facts. Neither party can rely on contract clauses relieving them from their own diligence.
For the seller, it is common to limit all liability to the warranties explicitly stated in the contract. However, if the court (or the arbitral tribunal) finds that known facts of relevance have not been adequately disclosed, it may disregard the limitation of liability. Hence, the seller’s risk control requires that the seller themselves assesses the facts that need to be disclosed in a process that is commonly called a seller due diligence. Needless to say, the seller must also make sure that the warranties actually given are fulfilled.
For the buyer, in turn, it will be risky to rely entirely on given warranties when the buyer would have had the opportunity to conduct their own scrutiny of the facts in a due diligence review. The degree of care expected from the buyer will depend on the circumstances - the value of the transaction, the availability of relevant documentation, and the expertise of the parties, amongst others. But if the expected diligence is forgone, the buyer will be blocked from invoking a warranty, or liability claims may be adjusted to account for the buyer’s negligence.