Finnish arbitration procedure: redemption of minority shares in connection with public bids

Author: | Published: 7 Jan 2003
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Public bids and the right and duty of redemption

It is a general practice in Finland in connection with public bids to offer to acquire all of the shares of the target company. But for practical reasons it is nearly impossible to acquire all of the shares of a listed company by a voluntary public bid. Under the Finnish Companies Act a bidder has the right to acquire the remaining shares not tendered in the public bid if and when the bidder has bought through voluntary offer more than 90 % of the shares in the target company (squeeze out).

When the bidder has acquired a portion of shares and the attached votes which represent more than 90 % of all the target company's shares and votes, the bidder (the redeemer) has the right to redeem the remaining shares at a fair price. The remaining shareholders on the other hand have the right to demand that their shares be redeemed at a fair price. The redeemer and the shareholders may agree on the fair redemption price but if they cannot agree or the right to the redemption is otherwise challenged, the dispute is settled by arbitration. In this respect even a single shareholder may cause the start of arbitration proceedings.

In attempt to provide an overall picture of Finnish arbitration procedure for the redemption of minority shareholdings, this article will briefly describe the relevant measures.

Appointment of a trustee

When the squeeze outs arise the company whose shares are to be redeemed applies to the court of the place of its registered office for appointment of a trustee to look after the interests of absent shareholders during the redemption procedure. Six months after this notification, the redeemer may, under the Companies Act, agree on terms of redemption with the trustee. This agreement may only be reached if no minority shareholder has notified the target company or the trustee that he objects to this agreement and if no dispute exists between the redeemer and another shareholder over the right of redemption or redemption price.

However, in practice it is very rare that the redeemer can agree on the terms of redemption with the trustee for listed companies with a large number of shareholders. A bidder wishing to obtain 100 % of the shares in the target company must almost as a rule complete the acquisition through the arbitration.

In arbitration proceedings the trustee looks after the interests of all the absent shareholders. In practice the trustee looks after the interests of not only the shareholders that have prohibited the trustee to agree on the fair redemption price but of all other minority shareholders that do not participate actively in the arbitration.

Commencement of arbitration

Under the Companies Act the arbitration begins by making an application to the Finnish Central Chamber of Commerce. The application may be made either by the redeemer or any minority shareholder wishing to start the arbitration process. Upon receiving the application the Board of Arbitration of the Chamber of Commerce appoints the necessary number of arbitrators, and if more than one arbitrator is appointed, a chairman of the arbitrators.

Arbitrators must have the expertise needed for the task so law professors and business-oriented senior attorneys at law have usually been appointed to act as an arbitrator. The number of appointed arbitrators varies from one to three depending on the complexity and economic value of the dispute at hand is of relevance in this respect.

The appointed arbitrators should be independent with respect to the redeemer, target company and the relevant minority shareholders. The appointment procedure requires typically from one month to three months to complete.

Arbitration procedure

When the arbitration tribunal has so been appointed, it first decides on how to proceed. The Companies Act does not stipulate in detail how the arbitration procedure itself should be conducted. However, a reference is made to the Finnish Arbitration Act.

Under the Act, the arbitration tribunal must give parties sufficient opportunity to present their case. The parties usually have a set time limit in which to present their written statements to the tribunal. The tribunal will usually then arrange one or more oral hearings in addition to which the parties to the arbitration can give the tribunal written statements and evidence to support their claims.

The Act allows the redeemer possibility to obtain title to the shares under redemption even while the arbitration is pending. If the right of redemption is not in dispute or if a decision has become final but the redemption price has not been agreed upon or ordered, the redeemer has the right to receive title to the shares against the giving of a security approved by the arbitrators for the payment of the redemption price. In this case, the shareholder will be entitled to the going interest on the redemption price from the giving of the security until the final determination of the redemption price.

The redeemer typically first asks the arbitration tribunal to confirm the existence of the redemption right and to approve the security against which the redeemer shall have the right to receive title to the shares from the shareholders to be redeemed. In such a case, the dispute of the fair redemption price is decided later on.

Redemption price

Under the Companies Act the shares must be redeemed at a fair price. In determining the redemption price of the shares, the arbitrators must take into account all the relevant circumstances of each individual case. There are no detailed instructions in the Act how the price should be determined.

In practice the arbitration tribunal has used various methods to determine the redemption price such as the liquidation value, cash flow value and market price. Over the past few years accepted arbitration practice for listed companies has been to put the main emphasis on the market price of the share. In recent arbitration practice the fair price has in most cases been the same as the offer price used in the preceding public bid.

Arbitration award

On completion of the arbitration procedure the arbitration tribunal renders an arbitration award. The award confirms whether the redeemer had the right to redeem the minority shares and the fair price for redemption. The award includes an explanation of how the tribunal reached its findings.

The arbitration award is given to the redeemer and all of the minority shareholders as soon as it has been rendered. Under the current procedure the award is submitted usually to each and every one of the minority shareholders and if the number of minority shareholders is large, the tribunal orders the redeemer to take care of such submissions.

Upon the issue of the award the redeemer becomes liable to pay the redemption price confirmed in the award to the minority shareholders. If the shares of the target company have been entered into the Finnish book-entry system, the payment will be effected through that system.

Transfer of title to the shares

Under the Companies Act the redeemed shareholder must deliver the relevant shares to the redeemer against the redemption price within one month from the agreement on the redemption price or from the date on which the arbitration award became final. If this is neglected, the redeemer must without delay deposit the redemption price with the County Government of the place of the registered office of the company without reserving the right to reclaim the deposit for himself.

The redeemer is deemed the holder of the relevant shares when the deposition has taken place. However, if the redeemer has obtained the title to the shares under redemption already in connection with the arbitration procedure the deposition shall entitle the redeemer to take back the security given to the arbitration tribunal as a security for the payment of the redemption price.

Costs of the arbitration

The redeemer is liable for arbitration costs unless the arbitrators, for special reasons, consider it reasonable to order the holder of the shares to be redeemed to be liable for all or part of the costs. But it is very rare that anyone other than the redeemer of the shares is ordered to pay any of the arbitration costs.

The relevant costs include any and all costs and expenses relating to arranging the arbitration procedure as well as the fees and costs of the arbitrators as confirmed in the arbitration award.

Filing of the arbitration award

The arbitrators register the arbitration award at the Finnish Trade Register within two weeks of its issue. All arbitrational awards are therefore public and can be obtained by anyone from the Finnish Trade Register.

A party dissatisfied with the arbitral award has the right to refer the matter to a court of law by bringing an action against the other party. The action must be brought within two months of the date when the party received a copy of the arbitral award. If the request referred to in sections 38 or 39 of the Arbitration Act has been made then the action must be brought within two months of the date on which he received a copy of the decision of the arbitrators replying to this request.

Under section 38 of the Act, a party may request the arbitral tribunal to correct any errors in the calculation of the award and any clerical or typographical errors or any other errors of similar nature. Section 39 of the Act also says that, unless otherwise agreed by the parties, either party may with notice to the other party ask the arbitration tribunal to make an additional award as to claims presented in the arbitral proceedings but omitted from the award.

Merilampi Marttila Laitasalo
Eteläesplanadi 22 A
00130 Helsinki
Tel: +358 9 686 481
Fax: +358 9 6864 8484