The role of a major shareholder in the decision making of a
Finnish limited liability company has recently been the subject of
an intense debate, which has revolved around the Government's own
role as a majority shareholder. But from a corporate law point of
view these issues are relevant to any company, private or
public.
The debate has involved some rather extreme views. While some
commentators have held that a majority shareholder may actively and
directly participate in matters that are handled by the board,
others argue that even a majority shareholder may participate only
indirectly through voting at the shareholders' meeting.
This debate has raised many interesting and important legal
questions. One is the generic question of the position of Finnish
law regarding the relationship between the board and a major
shareholder and to what extent the major shareholder may, could or
even should become involved in the operations of the company.
Another question, which evolves from the foregoing if the company
is listed, is the possession of insider information by the major
shareholders and its potential impact on the board and the company.
While this article addresses these questions, it does not purport
to comment on the correctness of the procedures followed in any
actual case.
The division of functions between the board and the
shareholders' meeting
According to the Finnish Companies Act the board is in general
responsible for the management and the proper arrangement of the
operations of the company. It normally elects the managing director
and instructs him on the day-to-day management of the company and
decides upon matters that are unusual and extensive with regard to
the ordinary operations of the company. The board collectively
represents and signs for the company.
In fulfilling its responsibilities, the board shall always act
in the best interest of the company and its shareholders, but at
the same time ensure that all shareholders are treated equally so
that no unjust benefit is conferred upon a shareholder to the
detriment of another shareholder. Under the Finnish Securities
Market Act, the board of publicly-listed companies must also
observe obligations regarding investor protection and a functioning
capital market, including the stipulations regarding disclosure to
the market.
According to the Companies Act, shareholders use their right to
decide upon company matters at the shareholders' meeting to the
extent that the matters are within their competence pursuant to the
Companies Act and the articles of association. All other matters
belong to the board or to the managing director (subject to the
supervision by the board) and the articles of association may not
diminish the authority of the board to represent the company and to
properly arrange the company's operations.
Shareholder involvement in decisions
As the shareholders' right to make decisions is limited to the
shareholders' meeting, the authority of which is limited by that of
the board, the shareholders' ability to otherwise influence
decisions made by the board is in reality dependent on their right
to receive information regarding the company's affairs.
Apart from releases and other information submitted to the
market the shareholders' ability to obtain information is generally
limited to the right to request at the shareholders' meeting that
the board submit information that may be of relevance for the
evaluation of the annual accounts, the financial condition of the
company or any other matter handled at the shareholders' meeting.
Such information must at the request of any shareholder be
disclosed if the board does not determine that the disclosure will
have a material adverse effect on the company and its affairs.
The board has also obligations to make disclosures on its own
initiative, such as the obligation under the Companies' Act to
disclose the annual accounts at least a week prior to the annual
general meeting. The board of a listed company must also follow the
disclosure rules under the Securities Market Act and has a
continuing general obligation to disclose to the market all
information, which may have a material effect on the value of the
company's shares.
Shareholders' influence over company decisions is to a large
extent left at the discretion of the board. While there are
explicit (although not entirely unambiguous) rules regarding
shareholders' right to request information and the board's
obligation to disclose information, there is no explicit
legislation regarding the boards right to provide information to
shareholders. This question must therefore be evaluated mainly
against the general principles and obligations under which the
board operates.
Can the major shareholder influence board decisions?
When applying the foregoing to the relationship between a major
shareholder and the board, the conclusion is that the major
shareholder has little possibilities to influence decisions, unless
the board takes the initiative and invites the major shareholder to
influence the decision making one way or the other. Can the board
do that and, if so, in what manner?
To begin with, the answer must be sought in the fundamental
responsibility of the board to act in the best interest of the
company while respecting equality among shareholders. In the
absence of explicit restrictions on the provision of information,
other than those referred to above, it would seem clear that the
board has the right to provide information selectively to one or
several shareholders without violating equality among its
shareholders in general, as long as this can objectively be
justified as being in the best interest of the company. However, it
should be noted that if the information provided is price sensitive
and qualifies as insider information for purposes of the Securities
Market Act, then appropriate arrangements must be put in place
ensuring that such information may not be used in violation of
insider trading rules.
The provision of information is, if not legally binding,
necessary if a major shareholder is, for example, asked by the
board to express an opinion on a decision to be made. Can the board
then ask for such an opinion from the major shareholder? We see no
reason why the board could not do this, as long as the fundamental
responsibilities referred to above are observed. There may even be
instances where it could cause severe harm to the company and its
shareholders collectively if a major shareholder is not consulted.
Take, for example, that negotiations regarding a far-reaching
arrangement ultimately requiring the approval of a shareholders'
meeting were concluded without the knowledge as to whether the
arrangement were supported by one or several major shareholders. If
the arrangement is ultimately rejected by the shareholders' meeting
because of resistance from the majority of the shareholders,
substantial resources may have been tied up in the preparation and
negotiation of the arrangement and sensitive information regarding
the company may have been disclosed to the other party of the
contemplated transaction in vain and possibly to the detriment of
the company.
It therefore appears reasonable to make the conclusion that if
the circumstances are such that the board has the right to consult
a major shareholder, it may in fact be obliged to do so. In
evaluating this authority based on the interest of the company and
the shareholders, a right (i.e. authority) to do something may in
fact amalgamate with a corresponding obligation.
Consulting a major shareholder does not bind the board, nor can
the board delegate the responsibility for the decision even if the
major shareholder has been consulted. Therefore, as a matter of
corporate law the selective disclosure to one shareholder always
entails some liability risk for the board. This risk has to be
assessed against possible risks resulting from the board not
actively seeking views form shareholders whose opinion they know
will ultimately be decisive in a shareholder vote.
Shareholders with insider information
It is not uncommon that major shareholders are represented on
the board of a Finnish listed company. While such a situation often
facilitates a dialogue between the board and the major shareholder,
which can be beneficial for the ultimate support of the board´s
work, there are also inherent risks of conflicting interests. We
will briefly examine such risks through a scenario where only one
board member possesses insider information that concerns the
shareholder which appointed him.
Under Finnish law, insider information is defined as non-public
information that could have a material effect on the value of the
company's listed securities. A person who has such information may
not use it to gain economic benefit for himself or anyone else; the
misuse of insider information through willful misconduct or gross
negligence is a criminal offence. The board members of a Finnish
listed company are defined as statutory insiders and are thus
subject to all relevant insider rules and legislation. As a matter
or routine the Financial Supervision Authority (FSA) always
investigates the trading of securities whose market value for one
reason or the other has fluctuated materially. If the FSA discovers
potential misuse of insider information, the matter is handed over
to the police for criminal investigation.
Let´s assume that D is a member of the board of company Gamma.
Gamma has a financial investment in the listed company Beta, which
it plans to increase. D is an executive of the listed company Alfa,
which is a large shareholder of Gamma, and has knowledge about
negotiations between Alfa and Beta regarding an arrangement, which,
if materialized, is envisaged to have a significant positive impact
on the market value of both Alfa and Beta.
Let´s further assume that D does not disclose the insider
information that he possesses to the board of Gamma, which goes
ahead to make a resolution to increase Gamma´s holding in Beta. The
arrangement between Alfa and Beta is publicly announced soon
thereafter, and the market value of both Alfa and Beta increases
significantly. The FSA investigates the preceding trading in the
market, and discovers the large acquisition made by Gamma and the
related significant increased value of Gamma´s shareholding in
Beta. In view of D´s position as executive in Alfa and his board
membership in Gamma, it is likely that misuse of insider
information would be suspected and a criminal investigation would
probably follow.
At the outset, it would appear rather obvious that if D took
part in and supported the decision to acquire the shares in Beta,
at least D would have misused insider information. But is the
situation that simple?
No doubt, the situation is delicate. How should D have behaved?
Should he have disclosed the insider information to Gamma's board?
Should D have taken part in the decision or not? If a genuine
majority of Gamma's board would have supported the transaction even
without D´s vote, could D not argue that it was actually in the
best interest of the company Gamma that also he gave his support,
which in fact did not change the chain of events? If D had
refrained from voting by referring to a conflict of interest, would
there not in fact be a risk of allegations that the rest of the
board must have understood that D possessed insider information
regarding Beta? Perhaps D should rather have disclosed his insider
information to the board of Gamma? Gamma would then certainly have
been prevented from acquiring the shares in Beta. D could face
allegations that since his vote in any event would not have decided
the outcome of the decision; his disclosure of insider information
unnecessarily obstructed Gamma from a beneficial transaction that
it could otherwise have done in good faith. D would have violated
his duty to act in the best interest of Gamma.
D also has an obligation of confidentiality towards his employer
Alfa, which in turn may have a contractual confidentiality
undertaking towards Beta regarding their discussions. Disclosing
insider information to the board of Gamma would violate such
obligations, and obtaining consent for disclosure is not always a
viable alternative.
D clearly has a dilemma, which is twofold. On one hand, he has
to deal with the potential conflict between Gamma's and his
employer Alfa's interests. On the other hand, even without such
conflict, he has in his capacity as board member of Gamma to
evaluate what would be in the best interest of that company. Within
the limits of this article it is not possible to give a conclusive
answer as to how D should proceed with his dilemma, but whatever D
decides, it is crucial that he keeps clear records of everything he
does, which would include such reasons that are justifiable from an
objective perspective.
Roschier Holmberg
Keskuskatu 7A
00100 Helsinki
Finland
Tel: +358 20 506 6000
Fax: +358 20 506 6100
www.roschier.com