Blog

Wist Attorneys

January 2025

When Shareholders Agreements Clash with Company Law

The Finnish Supreme Court case KKO 2020:34 revisited

In shareholders agreements, minority shareholders are often asked to relinquish control of the company to the majority shareholder and to agree to extensive waivers of their fundamental shareholder rights. This raises the question of how such agreements align with the mandatory provisions of company law. The Finnish Supreme Court case KKO 2020:34 sheds light on this issue. In this case, the Court ruled that a resolution to redeem the shares of an employee who had left the company was invalid, despite the employee having signed a shareholders agreement that provided for the redemption of their shares upon termination of employment. The Court stated that, under company law, a unanimous shareholders' resolution and the consent of the affected shareholder are required for the redemption of shares when shares are not redeemed pro rata from all shareholders. The consent given in the shareholders agreement was deemed insufficient and, in addition, to be withdrawn.

In its reasoning, the Supreme Court confirmed the widely accepted position under Finnish law that the obligations under a shareholders agreement constitute contractual obligations of the parties but do not generally have any company law implications and, further, that a failure to comply with the shareholders agreement does not render a corporate resolution invalid.

Interestingly, the Court, however, acknowledged that consent for the redemption of shares can in principle be given in advance in a shareholders agreement, indicating that the consents or waivers given in shareholders agreements could, indeed, impact the validity of the relevant corporate resolutions. In the case at hand, the shareholders agreement only did not include the comprehensive terms and conditions for the redemption, particularly did not specify the redemption price in sufficient detail, and therefore, could not be construed as a valid consent under company law.

Equally interestingly, the Supreme Court also stated that even if a shareholders agreement included a valid consent, such consent could always be withdrawn by the shareholder at any time before the relevant corporate resolution is made. Whether such withdrawal violates the shareholders agreement is irrelevant when assessing the company law requirements for a valid corporate resolution.

This Supreme Court case has occasionally been misunderstood to imply that all redemption provisions in shareholders agreements would be invalid under Finnish law. However, the Court's ruling did not in any way negate the contractually binding nature of shareholders agreements but only addressed the specific company law requirements for a valid corporate resolution to redeem shares. On the contrary, the Court expressly confirmed that shareholders agreements are binding as contractual obligations between the parties.

The case remains highly interesting for another reason: While the Supreme Court confirmed that shareholders agreements do not generally have company law implications, it also recognized that a consent or waiver given in a shareholders agreement can still be relevant when assessing the validity of corporate resolutions. However, the practical impact of this conclusion is limited by the shareholder's ability to withdraw such consent or waiver at any time.

The Supreme Court case highlights the complex interplay between shareholders agreements and contract and company law and underscores the importance of ensuring that any waivers or consents included in shareholders agreements are comprehensive and clearly defined to be enforceable. Ultimately, the case serves as a reminder that company law requirements must be met for corporate resolutions to be valid, regardless of the contractual obligations set forth in shareholders agreements.

October 2024

The Man Who Knew Too Much

- the case of the CEO who bought shares when he shouldn't

In autumn 2014, the CEO of a Finnish listed company bought shares of the company only a few weeks before the company announced that it had received a large order from one of its longtime customers. The company's share price reacted positively to the news, the price rose quickly and remained on an elevated level. Did the CEO do wrong?

In April this year, the Finnish Supreme Court sentenced the CEO to conditional imprisonment for aggravated misuse of inside information. The Supreme Court found that the CEO had been aware of the progress of the ongoing negotiations with the customer and of the large size of the prospective order when buying the shares. As the CEO of the company, he must have understood the financial significance of the order in question and its relevance for investors and to the company's share value. The Supreme Court concluded that the CEO had traded in shares of the company with the purpose of gaining financial benefit and that his offence was deliberate.

The core of the Supreme Court's ruling lies in its reasoning about when information is of a sufficiently precise nature to constitute inside information. The CEO argued that the outcome of the client negotiations still was uncertain at the time when he bought the shares. The Supreme Court, however, ruled that the concept of inside information does not mean that one has to be able to make certain conclusions about the occurrence of a future event, and stated that insiders would always be in a better position on the stock market if only events which are highly likely to occur would be classified as inside information. The Supreme Court found that the information about the prospective customer order clearly was of a precise nature because there was a reasonable expectation that the negotiations would be successful. There were no significant risks relating to the company not receiving the order nor to the order being of lesser value. Information about the prospective order was, further, not vague or general information based on which it would not have been possible to draw any conclusions on its potential impact on the share value.

To his defence the CEO also argued that negotiations about customer orders belonged to the company's ordinary course of business and that it was the policy of the company not to treat such negotiations as inside information and, further, that he had sought advice from the company's inhouse counsel before he bought the shares. The Supreme Court did not give merit to these arguments but ruled that it is the responsibility of the person who trades in shares on the securities market to ensure that such trading is not prohibited because of inside information.

The Supreme Court ruling was largely based on the European Court of Justice (ECJ) precedents in which the ECJ had established that also information relating to an intermediate step which is part of a protracted process may be precise information and thereby constitute inside information and that this also applies to steps which may reasonably be expected to come into existence or occur. The Supreme Court also referred to the ECJ having stated that the only information excluded from the concept of inside information is information that is vague or general, from which it is impossible to draw a conclusion as regards its possible effect on the prices of the financial instruments concerned.

This case touches upon a critical question of whether there ever is a level playing field when corporate executives trade in shares of the company they work for. CEOs, COOs, CFOs and other members of the management are by definition expected to be very familiar with the company's business and to have more information about the company's affairs than investors in general. Where also day-to-day customer negotiations may fall within the scope of inside information, it is increasingly difficult to draw the line. The lessons from this case should inspire all executives to act with the highest standards of integrity and diligence, ensuring that their actions always align with both legal requirements and ethical principles.

This case also underscores the importance of listed companies to have clear and comprehensive, up-to date disclosure policies and trading restrictions to provide reliable guidance to their executives and directors when they navigate the complexities of modern corporate governance. It is important to remember that maintaining market integrity and investor trust is paramount

February 2022

Can shares of a limited company have a negative value?

The Finnish Supreme Court had to address this fundamental question in a case where minority shareholders of a limited company had initiated proceedings to force the 98,95% majority shareholder to buy out the minority holdings in the company. The claim was based on the framework provided by the Companies Act for the squeeze-out of minority shares which both entitles and obligates a majority shareholder holding more than 90 % of the share capital and votes to buy out the minority shares for their fair market value.

The challenge in the case was that, under the company’s articles of association, the shares held by the minority shareholders carried playing rights on the company’s golf course and were connected to a payment obligation to cover for the company’s running costs and to service its loan to a financial institution. Because of the cost, there was practically no market for the shares.

The Supreme Court established that the value of the minority shares was negative because the payment obligation connected to the shares was greater than the value of the shares based on other valuation methods. Since, under the company’s articles of association, only shares of the share classes which carried playing rights (but not shares of other classes) were connected to an obligation to make contributions to the company to allow for the repayment of the company’s loan, such loan was, when the minority shares were valuated, allocated only to shares of such classes to which this obligation was connected.

The ruling resulted in a negative purchase price which the minority shareholders had to pay to have their shares purchased by the majority shareholder - an outcome which the minority shareholders hardly could foresee when they initiated the proceedings, and which sets a scary example to all of us who hold shares in housing and other non-profit companies.

In its ruling the Supreme Court acknowledged the fundamental principle of the Companies Act that the shareholders are not personally liable for the debts of a limited company. The Supreme Court, however, pointed out that a company’s articles of association may, as long as the company is operative, provide for an obligation of shareholders to make contributions to the company, as is customary in housing companies and, for example, incorporated tennis and golf clubs, and that such an obligation has an impact on the value of the shares.

In a previous legal precedent, the Supreme Court had established that a similar obligation of shareholders to make contributions to the company to service the company’s loans did not mean that the shareholders would be personally liable for such loans of the company upon the company’s liquidation. Accordingly, the liquidation value of the shares held by the shareholders could not be negative. In its current ruling, the Supreme Court seems to have made a distinction by underlining that a shareholder’s obligation to make contributions to the company may only apply as long as the company is operative, thereby confirming that the going concern value of the shares can, nevertheless, be negative.

The Supreme Court could easily have taken a different view and ruled that the minimum value of any shares of a limited company should always be their liquidation value or nil. Such a ruling would, however, have opened an avenue to all minority shareholders in a similar position to avoid their agreed payment obligations by forcing the majority shareholder to take over their shares for a zero consideration. Then again, the majority shareholder holding the requisite 90 per cent shareholding for squeeze-out would always be in a position to decide to liquidate the company if the company’s debts exceed the value of its share capital – a decision which the minority shareholders could never alone make.

23 December 2020

My little Christmas story

Some ten years ago, in the evening before Christmas Eve, when I was driving back home, I saw a man lying in the snow, almost passed out drunk. It was very cold, below -30 C°, and I realised that he could not survive there. I stopped the car, helped the man into the backseat and told him that I would drive him home.

“Where is home”, I asked. “Thherrrr…”, he replied raising his arm and letting it fall effortlessly in an attempt to point forward. I started to drive forward wondering where to go, when he started talking: “I have been drrrinking”, he said with a friendly drunken voice, and continued, “I got out of the jail today”. “Oh”, I replied glancing at my handbag which was lying wide open on the front seat, just in front of the man. “Why were you in the jail”, I asked hoping that we would soon find his home. “I killed a man”, he said. “Oh”, I replied, feeling increasingly uneasy. But this man did not appear violent, just drunk, and I wondered whether the manslaughter could have happened in a bar fight. I did not dare to ask more.

By this time, we had reached the next crossing and I asked which way to go. I interpreted this handwave as an instruction to turn to the left, drove to the end of the street and stopped my car in front of a housing complex. “I hope my wife will take me back”, he muttered when he got out of the car and started swaying towards the housing complex in the freezing cold winter night. I drove away with mixed feelings hoping that he indeed would find his family and get home for Christmas.

With this little story I would like to wish you all a very Happy Christmas and a Wonderful New Year. Let’s take care of each other!

30 November 2020

Takeover defences emerging!

A long time ago, at the end of the bullish 1980’s when I was a law student and an intern at the Ministry of Justice working on the first Finnish securities market laws, I was fascinated by the takeover battle over Leipurin Tukku, a company listed on the Helsinki Stock Exchange at that time. This was when I first learned about poison pills, golden parachutes, crown jewels, cornering, white knights and other classic takeover defences, and read academic writings suggesting that the powers to decide on takeover defences should rest with the shareholders and not with the board of directors, a principle which twenty years later was spelled out in the EU Takeover Directive.

This autumn two takeover bids in the Finnish market have lapsed because of the lack of sufficient shareholder support – one of them because of a shareholder building a sizeable corner in the target. I found this particularly cool, since this takeover defence was undertaken by a shareholder despite the target’s board recommending the bid. It will be interesting to see how the story continues.

Takeover defences are seldom in the Finnish market, but there are some very interesting prior examples. Have a look at the Schibsted/Alma Media case from 2004/2005, for instance: Late in the year, the Norwegian media company Schibsted launched a takeover bid for all shares of the Finnish media company Alma Media. The main driver of the takeover bid was Alma Media’s holding in the Swedish broadcasting company TV 4, which Schibsted was looking to get hold of.

The board of directors and the major shareholders of Alma Media were, however, unhappy with the takeover bid and the price offered, and masterminded a successful defence strategy. The board realised that more value could be created for the company if its broadcasting business was separated from its printing and other businesses and then sold out together with the holding in TV 4, or the crown jewels in takeover defence terms. The company soon found a friendly purchaser for its broadcasting business, a white knight so to say, who also was willing to offer a good price. The board then called a general meeting of shareholders to address the sale of the broadcasting business to the white knight and to approve a set of further measures enabling the company to lighten its balance sheet and distribute the sales proceeds to its shareholders. The shareholders approved the board’s proposals, and Alma Media’s broadcasting business, together with its holding in TV 4, was sold to the white knight, and Schibsted’s takeover bid lapsed. – An almost textbook example of the sale of crown jewels and the use of a white knight as a takeover defence.

In the Schibsted/Alma Media case, the skilful use of classic takeover defences resulted in a better price and deal for the target company and its shareholders. The lesson to be learned by this example is that takeover defences can, indeed, sometimes be in the interest of the target’s shareholders, and be implemented in full compliance with the takeover rules and the spirit of the Takeover Directive. While the target’s board of directors may – and sometimes should – be active in designing and implementing the necessary defensive measures, the Takeover Directive sets out a strict requirement that the target board must obtain the prior authorisation of the general meeting of shareholders before taking any action which may result in the frustration of the bid. Given the time required to set up a defence strategy and to convene a general meeting of shareholders, this may be challenging unless the target board is prepared and has easy access to advisors who can help to assess the merits of the bid, evaluate the alternatives available and, if so desired, set up a defence strategy.

20 October 2020

Takeovers and a few takeaways for directors

The Finnish takeover market has been extraordinarily dynamic in the past 12 to 24 months. An active takeover market often benefits shareholders and is generally positive for the overall securities market. However, for the directors of the target companies, a takeover bid is always a challenge as it calls for a strong view of the company’s vision and strategy to support a balanced consideration of the bid while weighing the interests of the company and its shareholders.

Not all bids are good opportunities, and, in these cases, the directors should have the stomach to recommend against them. In practice, most unwanted bids are rejected by the target board before the market learns anything about them. This is natural, of course, because the support of the target and its directors and major shareholders significantly increases deal security and helps the bidder in integration after the bid. In my experience, however, too many prospected takeover bids are rejected by the directors – or sometimes only by the chairman or the CEO – without a proper investigation of the merits of the bid.

What should a director then do if he/she is approached with an initial takeover proposal? Here are a few takeaways for consideration:

If you are approached with a takeover proposal, always bring the proposal to the consideration of the entire board of directors. Even where you would dislike the bidder or suspect that the proposal would not have realistic chances, other directors may have different information and consider the situation differently.
Always think first about the interests of the target company, including its shareholders as a collective. A director serves the company and must act in the best interest of the company. No director should consider him/herself as a representative of any certain shareholder, financier or other party. Only the interests of the company matter and should not be confused with any other interests – whether personal or those of the background nominees.
Consider the bid and the company’s options thoroughly. Where needed, the company should be prepared to solicit competing bids or to consider defence strategies or alternative corporate restructurings.
Try not to bind your hands too early. As lucrative as a prospective bid may sound, there may be another suitor behind the corner and the company may need to be free to act. If you believe that it, indeed, is necessary to conclude a combination agreement with the bidder before the launch of the bid, make sure that the agreement includes appropriate walkaway provisions for the event of a competing bid or another interesting proposal.
Be aware of the completion risk and protect the company’s proprietary information and expertise. Takeover bids seldomly are unconditional and deal security is notoriously lower than in private M&A. Keep the company independent of the bidder and do not share proprietary information with the bidder until the deal is completed.
Call a shareholders meeting before you take any protective actions or implement defence strategies. Most takeover defences require an express authorisation by the shareholders meeting.
Be mindful of the insider dealing restrictions.
Have your advisors readily available. It is imperative that the board of directors has timely support from its professional financial and legal advisors. Bring them along as early as possible to be able to act swiftly when needed.

07.09.2020

Case paperitehdas – yhtiön vai kansakunnan etu?

Uutinen sanomalehtipaperituotannon loppumisesta Suomessa ja aikanaan maailman hienoimman paperikoneen sulkemisesta on saanut aikaan paljon polemiikkia yhtiön eduntavoittelusta ja arvoista, ja onpa jopa maan ylin johto kansakunnan edun nimissä arvostellut päätöstä paperitehtaan sulkemisesta.

Yritystoiminnan lainalaisuuksien perusteella on toki aivan selvää, että yritystoimintaa ohjaa yhtiön etu, eikä varsinkaan kansainvälinen pörssiyhtiö voi perustaa päätöksiään sen kotivaltion etuun tai tietyn tehdaspaikkakunnan tilanteeseen. Velvoittaahan jo osakeyhtiölaki yhtiön johtoa huolellisesti toimien edistämään nimenomaan yhtiön etua. Mutta tarkoittaako yhtiön etu vain sen osakkeenomistajien taloudellisen voiton maksimointia vai pitäisikö yhtiön johdon ottaa huomioon myös sen muiden sidosryhmien (”stakeholdereiden”) – työntekijöiden, asiakkaiden, rahoittajien ja yhteiskunnan – intressit?

Kvartaalitaloudessa yhtiön etu ymmärretään helposti kapeasti vain yhtiön lyhyen tähtäimen taloudellisena etuna ja yhtiön tavoitteena maksimoida seuraavan kvartaalin tai ainakin vuoden tuotto. Yhtiön osakkeen arvo heijastaa kuitenkin myös pitkän aikavälin tulevaisuuden odotuksia ja sen myötä kaikkia yhtiön arvoja. Internetin välityksellä nopeasti leviävä tieto vaikkapa lapsityövoiman käytöstä tai ihmisoikeusrikkomuksista vahingoittaa heti brändiä ja voi johtaa vakaviin seurauksiin. Kuluttajaboikotit ovat jo pitkään vaikuttaneet niin öljy-yhtiöihin kuin lihanjalostusteollisuuteenkin. Varsin tuoreessa muistissa on tapaus, jossa keveä suhtautuminen ympäristöarvoihin johti jopa kaivosyhtiön konkurssiin. Monet kansainväliset suursijoittajat seuraavatkin Norjan valtion öljyrahaston esimerkkiä ja tunnustavat yritystoiminnan sosiaalisten ja ympäristövaikutusten merkityksen osakkeiden pitkän aikavälin arvolle ja sijoittavat vain yhtiöihin, joiden arvopohja ja toimintakulttuuri ovat kunnossa.

Jo pelkästään näiden esimerkkien perusteella on helppo todeta, että voitontavoittelu muiden arvojen kustannuksella harvoin edistää yhtiön etua pitemmällä aikavälillä. Yhtiön ja sen osakkeenomistajien taloudellisen edun edistäminen edellyttää siksi, että yhtiön johto arvioi huolellisesti päätöksiensä vaikutukset myös yhtiön tärkeisiin sidosryhmiin ja yhtiön toimintaympäristöön. Julkiselle keskustelulle paperitehtaan sulkemisen sosiaalisista ja taloudellisista vaikutuksista yhteiskuntaan on siis ehdottomasti paikkansa. Yhtiön toimitusjohtajan julkisuudessa esittämä kritiikki Suomen vaikeasta liiketoimintaympäristöstä kertookin osaltaan siitä, että yhtiön johto on perehtynyt kokonaistilanteeseen ja kantaa huolta myös yhtiön kotivaltiosta ja sen kilpailukyvystä. Dialogille yritysten ja yhteiskunnan arvoista on selvästi tilausta.