Finnish private equity boom continues

Author: | Published: 1 Feb 2006
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Private equity investors continued to take a leading role in the mergers and acquisitions market in Finland in 2005 and this is expected to continue in 2006.

Buyout transactions made by private equity firms in 2005 include CapMan's acquisition of Moventas (provider of mechanical power transmission technology; the former Metso Drives) from Metso, Nordic Capital's acquisition of Outokumpu Copper Products (maker of fabricated copper products) from Outokumpu, and ABN AMRO Capital's acquisition of Loparex (producer of release liners for adhesive products) from UPM-Kymmene.

However, seed and growth venture capital investments into earlier stage technology companies continue to be made on a much lower level than they were at the turn of the millennium. Finnish government agencies providing financing for early stage companies, such as Tekes, the Finnish Funding Agency for Technology, and Finnish Industry Investment Ltd, continue to have a bigger role in this sector than private venture capital.

The value of exits rose sharply from 2004, partly due to the fact that many of the investments made during the active years between 1998 and 2000 are beginning to be ripe for exit. Finnish private equity firms Fenno Management, CapMan and Eqvitec completed an initial public offering of a Finnish private equity/venture capital investee company on the Helsinki Stock Exchange when AffectoGenimap (provider of customized IT solutions and business intelligence) was listed in May 2005. It was the first Finnish IPO of a private equity/venture capital investee company in many years.

The main course of exit has, despite the successful listing of AffectoGenimap, been the sale of the target company by the private equity firm. The main reason for this is the continued low interest rates in the euro area, which make it easier to find acquirers who are able to pay high purchase prices by leveraging debt. Both the Finnish media and the Finnish private equity sector have recently criticized the strict procedural and disclosure rules related to initial public offerings, resulting in increasing IPO cost, noting that this has decreased IPO activity.

The trend with secondary buyouts, where private equity firms sell investments to other private equity firms, also continued in 2005, with EQT's divestment of ADR-Haanpää (road transportation and logistics service provider to the liquid chemicals industry) to Pamplona and BC Partners' divestment of Sanitec (maker of bathroom ceramics and bath and shower products) to EQT as examples.

The success of Nordic private equity firms' recent fundraising activities has resulted in a substantial increase of funds available for investment in new buyout deals. This, together with the continued low interest rates (despite the slight increase in recent months), is expected to lead to more buyout transactions at higher values than before. The financial media in the Nordic region are already speculating on whether the heated activity in the private equity sector is resulting in the millennium's first financial bubble. Some market observers are warning that banks financing buyouts are starting to take too much risk by allowing unusually high debt-to-equity ratios, lending with too low margins, making concessions in their covenant requirements and not requiring enough security for their loan facilities. However, the banks deny such statements.

It will be interesting to see if these predictions prove to be true.

Legal aspects affecting private equity

Finnish law does not contain any set of legislation particularly designed to regulate private equity investment activities. However, generally applicable Finnish law contains provisions in various acts of legislation that need to be kept in mind when entering into private equity transactions, such as buyouts, in Finland. These provisions can be found, among others, in the Companies Act, in the Act on Competition Restrictions, the Securities Market Act, and in tax law.

Companies Act

The Finnish Companies Act, which was enacted in 1978 and has since undergone several amendments, always plays a role in private equity investments because target companies, and often the acquisition vehicles, if used, are formed as Finnish limited liability companies.

Private equity buyouts are often highly leveraged with debt, so the banks financing the transactions are keen on having sufficient security. Also, the acquisition vehicle is usually the legal entity taking most of the new debt, even though the trading target company generates the cash flow needed to pay the interest and, in particular, amortize the debt. However, the financial assistance provisions in the Companies Act prohibit the target company from providing security for the acquisition vehicle's acquisition loans (or providing financing in general for the acquisition) and, of course, from amortizing such debt.

The parties sometimes try to overcome these financial assistance restrictions through a subsequent legal merger between the acquisition vehicle and the target company. The legality of this arrangement continues, in the absence of case law, to be subject to some debate. It has been suggested that these arrangements would not be legal if the subsequent merger was a condition for the debt financing. On the other hand, the Companies Act contains provisions that aim to secure the rights of all creditors, including acquisition financing lenders, before mergers can be completed. The Companies Act is being replaced by a new Companies Act, which is proposed to come into force on September 1 2006, but provisions prohibiting the financing of an acquisition of the company, or providing security for such financing, will remain in the Act.

The proposed new Companies Act will, however, include certain changes that could affect the structuring of private equity or venture capital transactions. Shares in a limited liability company would no longer need to have a par value, so there would no longer be a direct connection between the quantity of shares and the amount of the share capital, which is subject to distribution restrictions. After the reform has taken place, the share capital of a company may be raised without issuing shares and, respectively, shares may be issued without raising the share capital, for example, by booking the payment for the new shares as unrestricted equity available for distribution to the shareholders, or by issuing the new shares without any payment. Similar provisions will regulate the exercise of stock options (including warrants). These new provisions can be expected to allow more flexibility and options when structuring mezzanine financing with warrants, or when anti-dilution provisions are structured in connection with venture capital transactions.

The proposed Companies Act also contains an express solvency requirement concerning, among others, the protection of creditors. According to this provision, funds may not be distributed if, when making the distribution decision, the persons making the decision knew or should have known that the company was insolvent or that it would become insolvent as a result of the distribution of funds. Although it has been held that the current Companies Act contains a similar, but implied, provision, its wording has only made reference to the distributable funds according to the latest approved balance sheet without reference to any additional, and more current, solvency or liquidity tests.

Merger filings

According to the Finnish Act on Competition Restrictions (the Competition Act), concentrations might require prior approval from the Finnish Competition Authority (the FCA). Concentrations (acquisition of control, acquisition of all or part of a business operation, a merger, and setting up a full-function joint venture) exceeding the turnover thresholds set out in the Competition Act (that is, the combined aggregate worldwide turnover of the parties to the concentration exceeds €350 million and the turnover derived from Finland of at least two of the parties exceeds €20 million) require a pre-merger notification to the FCA.

The concepts of control/decisive influence, undertakings concerned, and full-function joint venture under the Finnish merger control rules are uniform with those set out in the Notices of the European Commission. Private equity firms will usually have to include the turnover of all of their prior investments provided that they exercise control/decisive influence in those investee companies. Control/decisive influence applies when the private equity firm holds a quantity of shares that allows it to elect the majority of the board of the investee company, but this influence may also be based on sufficiently comprehensive veto rights under shareholders'/investment agreements in minority investments.

A concentration must be notified to the FCA within a week of concluding the transaction (for example, signing the binding transaction agreement), and the transaction may not be carried out before the FCA (or the Market Court, as the case may be) makes a final decision on the matter.

The FCA has the right to intervene regarding a concentration, for example, through obligations to divest, and in rare cases by prohibiting the concentration, if that concentration creates or strengthens a dominant position and impedes competition in the Finnish market. However, the Finnish merger control procedure in connection with buyouts usually only results in a delayed closing, due to the fact that private equity firms often have fairly diversified investment portfolios, and so they are not problematic from a competition law point of view.

Securities Market Act

A private equity firm considering a public-to-private transaction in Finland should always carefully evaluate the consequences of the provisions of the Finnish Securities Market Act, including in particular the provisions relating to public offers and mandatory offers, which are being amended as a result of the implementation of the EU Takeover Directive.

An offerer launching a voluntary public offer is, under the current regime, free to set the offered purchase price. However, if the offerer's (including controlled entities) votes in the public company exceed two-thirds of the votes, the offerer is obliged to make a mandatory offer regarding all shares and securities entitling to shares of the target. The purchase price in a mandatory offer is the fair value of the securities taking into account the weighted average price of the security for the previous 12 months, any higher prices paid by the offerer for the securities in that period, and other special circumstances. The fact that a successful public offer for the whole public company would at some point result in the offerer exceeding the two-thirds threshold means that a mandatory offer always follows the initial (voluntary) public offer. As the Securities Market Act governs the price for the mandatory offer, the offerer, in practice, will always value its initial public offer in accordance with the minimum valuation of a mandatory offer.

Under the proposed regime, the purchase price in a public offer regarding all shares and securities entitling to shares of the target must take into account the purchase prices paid by the offerer during the previous six months, or in the absence of such transactions, the weighted average trading price during the previous three months. Also, if a shareholder's stake of the shares or votes in the public company otherwise exceeds 30% or 50%, that shareholder is obliged to make a mandatory offer for all shares and securities of the target at the fair value of the securities. When fair value is determined, the previous purchase prices paid by the shareholder or the weighted average trading price will be taken into account similarly as described above in this paragraph.


The greater reform of the corporate taxation system was approved by the Finnish parliament in 2004, with most changes coming into force in the beginning of 2005. The changes include a decrease of the corporate tax rate to 26% and the tax rate for capital income to 28%, as well as changes in the taxation of dividends.

As part of the reform, capital gains derived by limited liability companies when selling certain shares have become exempt from income taxation. The exemption concerns shares treated as the seller's fixed assets (that is, not financial assets) that the seller has owned for at least a year. The seller's share ownership must also amount to at least 10% of the share capital of the company during that period. The new exemption does not concern shares owned by private equity funds, but it does extend to their acquisition vehicles. So the use of structures with Finnish acquisition vehicles without foreign (for example, Netherlands or Luxembourg) topcos as the ultimate parents might become more frequent.

Traditionally, Finnish private equity firms have preferred to set up their funds in Finland in the form of Finnish limited partnerships (kommandiittiyhtiö). However, when Finnish private equity firms have gained experience and a solid record, and have sought to attract international investors for their funds, the Finnish rules on the permanent establishments have caused problems. According to an older tax ruling, a foreign investor who is a limited partner in a Finnish limited partnership is deemed to have a permanent establishment in Finland. So Finland asserts a taxing right on the foreign investor's share of the income of the limited partnership. This ruling was a big impediment to foreign investors' participation in Finnish private equity funds.

Subsequently, to make Finnish private equity funds more attractive for foreign investors, an amendment relating to taxation of non-resident partners was recently enacted. According to the new rules, effective as of January 1 2006, a non-resident partner's share of profits received through a Finnish partnership is taxed in the same way as it would be if the partner were a shareholder in the Finnish target company. If the non-resident partner's share of the profits of a Finnish partnership includes capital gains or interest, the non-resident partner will not be taxed for capital gains or interest in Finland. Dividends paid from Finnish sources included in a non-resident partner's profit share of a Finnish partnership are subject to final withholding tax as set out in the tax treaty between Finland and the investor's country of residence (usually 0% to 15%).

For the new relief provision to a non-resident partner to apply, the Finnish fund must practise private equity/venture capital business in a manner defined in Finnish tax law, that is, investments are made in private companies, and the fund aims to develop the business of the target companies and to sell the shares in target companies within a limited timeframe. It is not yet possible to evaluate the consequences of the new rules.

Author biographies

Nina Wilkman

Borenius & Kemppinen

Nina Wilkman advises on banking and corporate finance, M&A and private equity issues.

Wilkman has extensive experience in cross-border transactions. Before joining B&K, she worked as an in-house counsel for Outokumpu Oyj and as general counsel for Huhtamäki Oyj.

Wilkman is a member of the board of the Arbitration Insitute and of the Redemption Committee of the Central Chamber of Commerce of Finland. She is also a board member of the Arcada Foundation and Aktia Savings Bank plc.

Nina Wilkman has been a B&K partner since 2000.

Christian Fogelholm

Borenius & Kemppinen

Christian Fogelholm advises on corporate and contract law questions. He also serves as a senior team member in major M&A transactions.

In 1998, Fogelholm studied at the faculty of law at the University of Mainz, Germany. Fogelholm has also in-house experience from Outokumpu Oyj.