Author: | Published: 9 Oct 2003
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The Finnish Companies Act regulating limited liability companies last underwent serious revision in 1997. In 2001, the Finnish Ministry of Justice appointed a working group with the task of carrying out a complete overhaul of the Companies Act, with the aim of providing flexible and competitive legislation to govern limited companies generally. One of the aims was also to ensure that the interests of minority shareholders as well as of creditors of limited companies were sufficiently protected. Such protection is generally considered to fall under the definition of corporate governance.

The working group's report published in May 2003 does not include proposals for explicit and detailed corporate governance principles. Instead, the report states that corporate governance issues should be resolved through self-regulation. However, the provisions of the new Companies Act proposed in the report do concern matters which are generally deemed corporate governance issues. Such provisions concern, among other things, the relationship between the various bodies of the company, the composition of the board of directors and the liability of the board members. This article will focus briefly on these last two issues.

It should be noted that the report will be subject to discussion and criticism before a draft Bill enters the legislative process. Therefore, the proposals set out in the report may be amended before and during the legislative process. It is expected that a new Companies Act will come into force at the earliest in 2005.


The situation now

The current Companies Act divides limited companies into small limited companies, with fully paid-up share capital of between €8,000 ($8,706) and €80,000, and large limited companies with minimum fully paid-up share capital of €80,000. This division is rather arbitrary as it has no bearing on the amount of the company's shareholders' equity or the extent of the company's business. However, only the shares of a public limited company (which must have minimum fully paid-up share capital of €80,000) may be offered to the public.

Under the Companies Act, every limited company must have a board of directors. Where the company's fully paid-up share capital is at least €80,000, the company must have a minimum of three ordinary board members, as further defined in the company's articles. The board is, as a rule, appointed by the general meeting of shareholders. The company's articles may, however, provide that less than half the board members are appointed otherwise.

Under the Companies Act, a board member must be a natural person who is not a minor and who has not been declared incompetent or bankrupt by a court of law. The member may not simultaneously serve as a member in the company's supervisory board, should the company have one. In addition, at least one of the board members must be permanently resident in the EEA, but a dispensation from this rule can be obtained.

The Companies Act does not include requirements as to the ratio of non-executive/executive board members. Accordingly, the general meeting of shareholders can appoint the board members as it sees fit, provided that they meet the above requirements. It may, generally, be stated that the majority of board members in Finnish listed companies are non-executive directors, which, in accordance with the principles of corporate governance, is likely to increase the independent supervision of the operations of the company's management.

A company with fully paid-up share capital of at least €80,000 must have a managing director. The managing director cannot simultaneously serve as the chairman of the board (unless the company also has a supervisory board), but the managing director may be appointed as a board member. In a number of Finnish listed companies the managing director is also appointed as a board member.

Expected amendments under the working group's report

According to the report, the arbitrary division of limited companies into small and large companies, as described above, would be abolished. Under the report, the qualifications to act as a board member would not be amended. The statutory number of board members would, however, be slightly amended. According to the report, a company's board would have between one and five ordinary board members, unless otherwise provided in the articles. Although not required by the report, good business practice would require that at least listed companies should provide for a sufficient number of board members to ensure competent and expert management of the company.

Furthermore, under the report the prohibition against the managing director acting as chairman of the board would be abolished. The general principles of corporate governance, although not codified in Finnish law, would make it inappropriate for the managing director also to serve as the chairman of the board. Whether or not Finnish listed companies would take advantage of this amendment remains to be seen.

Finally, it should be noted that a company's articles may set more stringent requirements than the Companies Act and the report as regards the qualifications of the board members and the chairman of the board. Accordingly, the articles may include specific requirements as regards, for example, the number of non-executive/executive board members. Such provisions are very rare in Finland at the moment. The increased awareness of corporate governance issues and investor pressure may result in such provisions becoming more common, especially with regard to companies whose shares are also listed or sought to be listed outside the Helsinki Exchanges.


Liability under the Companies Act

Board member liability may be realized as civil liability in the form of liability for damage caused or, in the event of an act constituting a criminal offence, as criminal liability. Civil liability of the board members requires that negligence or willful misconduct of the board members and causality between the negligence or willful misconduct and the damage caused must be established. The civil liability of the board members under the Companies Act may be further divided in two categories depending on to which party the liability is being directed: liability towards the company, and liability towards a third party or the shareholders of the company.

Under the Companies Act, a board member is personally liable for damage caused by him or her to the company through negligence or willful misconduct. The liability towards the shareholders and third parties is, however, limited to cases where the Companies Act or the company's articles have been breached.

Generally, a board member may be deemed to have caused damage if he or she personally has participated in the decision-making in the matter by voting for the resolution in the board meeting. Also, a board member may be deemed to have caused damage if he or she, in the course of their duties, has omitted to act in compliance with law and good business practice. The Supreme Court has, furthermore, established liability for the chairman of the board on the grounds that the chairman had not participated in the board meetings while having an active obligation to supervize the company's conduct.

As regards the level of negligence of a board member required to create liability towards the company, even minor negligence suffices to establish liability for damages. As regards the level of negligence required of a board member for liability to arise towards the shareholders or a third party in the event of breach of the Companies Act or of the company's articles, the general liability and the corporate principles provide that under the Companies Act even minor negligence suffices to establish liability for damage. When evaluating whether the board members have acted negligently, a reference to a so-called bonus pater familias test is often used: the board members are required to show "objective diligence", meaning the degree of care and diligence that might objectively and reasonably be expected of a person in the same position and situation.

For the sake of clarity, a board member incurs no liability in a situation where a business decision subsequently proves to be a miscalculation, provided that the decision was taken on the basis of due preparation and consideration. Thus, the negligence test is similar to the business judgment rule.

Damage will generally be compensated to its full value. Responsibility is considered individually for each board member. If two or more members have caused the damage jointly, they are, as a rule, considered jointly and severally liable for the damage. However, the liability may be mitigated if it is considered to be unreasonably onerous in view of the financial standing of the relevant board member and that of the injured party as well as other relevant circumstances.

The provisions of the Companies Act do not exclude liability on other grounds. Thus, board member liability may be realized, for example, due to a breach of the Securities Market Act or general liability under the Damages Act. However, under the Damages Act, liability for purely financial loss (that is, loss that is not associated with personal injury or damage to property), is realized only where the loss arises from a criminal offence or where there are otherwise very serious grounds for such liability.

Expected amendments under the report

The report, for the most part, would maintain the principles mentioned above. As a new principle, however, negligence of board members would be assumed where the damage would be based on breach of the Companies Act (as adopted by the implementation of the report) or the company's articles. To avoid liability, the relevant board member would have to show that he or she has acted with due care.

Furthermore, under the report the right of a shareholder to receive compensation for indirect damage would be abolished. Where the actions of the board members damage the company, the value of the shares held by the shareholders is decreased. Such indirect damage would not be compensated to the shareholder directly. Instead, the board members would be liable to compensate the company.

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