Developments in Finnish takeover practice

Author: | Published: 7 Jan 2003
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Regulatory framework

The regulation of public tender offers in Finland is largely contained in the Securities Market Act of 1989 (SMA), whereas the squeeze-out procedure is governed by the Companies Act of 1978. The said regulation is supplemented by guidelines given by the government agency entrusted with the supervision of the capital markets in Finland, the Finnish Financial Supervision Authority (FSA). This legal framework is not very detailed and leaves many issues unregulated. An offeror may therefore be faced with uncertainties relating, for example, to pricing in a public acquisition process in Finland. In connection with the pending Telia - Sonera merger, which is carried out as an exchange offer by Telia to Sonera's shareholders, the FSA issued on October 30 2002, on request by Telia, a statement that is intended to clarify some of these issues (Statement).

Voluntary offer

An offer to purchase shares becomes subject to the provisions of the SMA if the offer is directed to the public and relates to listed securities. As long as the offeror holds less than two-thirds of the votes in the target company, a voluntary public offer can generally be structured in a very flexible manner. The threshold of two-thirds of the votes triggers under the SMA the obligation for the majority shareholder to make a mandatory offer for all the outstanding shares and other securities of the target company (in this article called 'mandatory offer' as opposed to the 'voluntary offer' referred to above).

The SMA regulates voluntary offers particularly lightly. In principle, the SMA only sets forth the requirement regarding the equal and fair treatment of the shareholders in the offer and the requirement to prepare and have approved by the FSA a tender document containing sufficient information on the offer. No specific requirements apply to the pricing or type of consideration to be offered under the voluntary offer, and such matters are left very much to the offeror's discretion. The voluntary offer may also contain various conditions on, for example, the proportion of shares or votes to be obtained by the offeror through the offer and clearance to be obtained from competition and other authorities. The offeror may reserve the right to waive some of these conditions.

Voluntary offers like Telia's pending exchange offer for Sonera may thus have been made contingent on the offeror obtaining a certain minimum holding in the target. In Telia's case this threshold is 90 per cent of the shares and votes in Sonera, a shareholding which would allow the squeeze-out of the remaining minority shareholders in Sonera.

Under the SMA, a shareholder that accepts a conditional voluntary offer may withdraw from selling his/her shares, should the offeror fail to obtain the proportion of shares or votes as set out in the voluntary offer. However, no such right to withdraw applies if the offeror has undertaken to make good to each shareholder who has accepted the conditional voluntary offer any higher price that the offeror pays or receives for the shares of the target company within one year of the closing of the conditional voluntary offer. Telia has given such an undertaking to Sonera's shareholders in the offer document and Sonera's shareholders who have accepted the conditional voluntary offer are consequently not entitled to withdraw from selling their shares, should Telia decide to waive the 90 per cent condition.

Mandatory offer

The SMA provides that a shareholder whose holding in a publicly traded company exceeds two-thirds of the votes in the company, must offer to purchase all the remaining shares and other securities of the target company at the fair market price. Where the two-thirds threshold is reached as a result of a voluntary offer, the obligation to launch the mandatory offer arises at the closing of the voluntary offer.

In respect of the mandatory offer, a number of issues are statutorily regulated. The mandatory offer must be launched within one month of the obligation arising and must be open for acceptance for a minimum of one month. The offeror must prepare an offer document and submit it to the FSA for approval. The offer price must be the fair market price and the consideration must always be cash even though the offeror can also offer alternative consideration in addition to the cash offer, such as its own shares. No conditions are allowed in the mandatory offer.

In addition to the statutory provisions that apply to public tender offers, the articles of association of the Finnish target company may contain company specific provisions, which may affect the manner in which an offer may be structured. The Articles may include specific majority requirements for resolution making and in particular may include poison pill structures, whereby the threshold for the obligation to make an offer for all outstanding shares is reduced and/or the offer price increased from that contained in the SMA.

Pricing in the mandatory offer

When determining the fair market price for the purposes of a mandatory offer, the SMA provides for three factors that are to be taken into consideration. The first and primary factor to be taken into account is the volume weighted average price (VWAP) of the target company's shares on the Helsinki Stock Exchange over the 12-month period preceding the moment when the obligation to launch the mandatory offer arose. Secondly, any higher prices paid by the offeror for the shares of the target company over this 12-month period may be taken into account when calculating the price to be offered in a mandatory offer. The final factor affecting the determination of the offer price in a mandatory offer is "any other relevant circumstances". Such other relevant circumstances have not been defined in the statute, but it is generally considered that such circumstances must be connected with the target company and may include situations where, for example, the company's net asset value is well above its market value or where there have been material changes in the target company's share capital.

Under the SMA, if the consideration offered under the mandatory offer exceeds that offered under the preceding voluntary offer, the offeror is obligated to pay the difference in the prices to each shareholder that accepted the voluntary offer. This difference, the top-up, is payable in cash.

Statement

The SMA makes no mention of exchange offers as the statute has been designed with cash consideration in mind. This state of regulation makes it difficult to calculate the value of the consideration offered under the exchange offer as well as to evaluate its effect on the price to be offered in the mandatory offer and the amount of the top-up payable, if any.

The Statement sheds light on some of these unclear issues. As regards the calculation of the prices the offeror might have paid over the 12-month period in excess of the VWAP of the shares of the target company, the FSA is of the opinion that the value of the exchange offer would be taken into account. The FSA further proposes that in order to determine whether the price was to be considered higher than the 12-month VWAP of the Sonera share, the Telia shares offered in the exchange offer should be valued based upon the lower of the following:

  1. the VWAP of the Telia share during a relatively short period (for instance, five trading days) preceding the expiry of the exchange offer period; and
  2. the market price of the Telia share prior to the announcement of the exchange offer.

In the event that the exchange offer, based upon such a method of calculation, should represent a materially higher value than the VWAP of the Sonera share during the 12-month period preceding the expiry of the exchange offer period, such higher value should be taken into account in establishing the fair market price of the Sonera share for the mandatory offer. However, the FSA takes the view in the Statement that in circumstances where the offeror extends the exchange offer as an alternative to the cash consideration offered in the mandatory offer, the value of the offer shares as calculated in the above manner would not constitute "any higher price paid by the offeror for the shares of the target company over the said 12-month period".

As regards the top-up payment in connection with an exchange offer, the FSA has noted as a matter of principle that exchange offers per se are not exempt from the obligation of payment of top-up, in cases where the cash consideration offered under the mandatory offer exceeds the value of the consideration under the preceding exchange offer.

In the Statement, the FSA stated that when calculating the potential top-up payment by Telia, the consideration paid under the exchange offer should be valued on the basis of the higher of the following:

  1. the VWAP of the Telia share during a relatively short period of time (for instance, five trading days) preceding the expiry of the exchange offer period; and
  2. the trading price prevailing for Telia shares prior to the announcement of the exchange offer. The FSA has further provided in the Statement that if the difference between the value of the exchange offer calculated in the above manner and the cash consideration offered under the mandatory offer is immaterial, no obligation to pay top-up applies.

Squeeze-out

As soon as a shareholder holds more than ninety per cent of the shares and votes of the target company, such majority shareholder is entitled to force the remaining shareholders to sell their shares. Equally, these remaining shareholders are entitled to force the majority shareholder to purchase their shares. Under this squeeze-out procedure, the price payable for the remaining shares is also the fair market price. However, the procedure is not governed by the SMA and, instead, is subject to the provisions of the Companies Act.

The Companies Act, however, contains no guidance on the calculation of the fair market price to be paid in the squeeze-out procedure nor does it recognize the concept of a top-up. A shareholder may contest the squeeze-out price offered and the dispute is then to be settled by arbitrators, who, in principle, are not bound by the criteria for determination of the fair market price provided under the SMA. Such arbitration procedures are already rather well-established in Finland and there are a wealth of arbitral awards in the area. The arbitrators have usually followed the pricing of the mandatory offer but there have also been occasional instances where the arbitrators have set the squeeze-out price at a higher level. The decision of the arbitrators may be appealed to the public court.

Future prospects

The Statement is the most extensive piece of guidance issued by the FSA to date in relation to the pricing of mandatory offers in an exchange offer environment. As the FSA can only give opinions and guidance, the Statement is not necessarily binding on the courts, which may choose to take a different view should the matter be referred to them. So far, there are no authoritative court rulings in these matters. It appears, therefore, that legislative reform is needed in Finland to bring the take-over regime up to the requirements of international investors. Bearing in mind that a new version of the proposed EU take-over directive was issued in October 2002, any changes in Finnish take-over legislation will in all likelihood be postponed until the eventual implementation of the proposed directive in Finland.


Waselius & Wist
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Finland
Tel: +358 9 668 9520
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www.waselius-wist.fi