The board and shareholders in a listed Finnish limited liability company and insider information

Author: | Published: 7 Jan 2003
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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
Tel: +358 20 506 6000
Fax: +358 20 506 6100