The risk of becoming the target of a hostile bid is not the sole domain of listed companies. Medium sized companies with a diversified ownership structure may often be tempting targets for bids from competing companies. Frequently, the aim is not necessarily to acquire all the shares of the company, but rather to gain control of the company, either by securing a majority of the votes or by dominating a diversified group of owners with a smaller share.

A bid is considered hostile if the board of the company does not approve of it nor recommend its acceptance to the company’s shareholders. The negative attitude towards the bid may be attributable to the fact that the bidder represents a shareholder that does not meet the qualities desired by the other shareholders, or to the content of the bid.

Shareholders must prepare for hostile bids in advance. When a hostile bid has been published, the means for defending the ownership structure, other than offering a competing bid, are limited. The Finnish Companies Act offers some tools for shareholders who wish to control the ownership of the shares in the company.

Under the Companies Act, the articles of association of a limited company may include a redemption clause providing existing shareholders with a possibility to redeem shares being sold or transferred, as well as a consent clause requiring an acquirer of shares to seek the board’s consent to the transfer.

Under the Companies Act, a shareholder whose ownership share exceeds 90% may redeem the remaining shares and, correspondingly, the minority shareholders may require the majority shareholder to redeem their shares. The prescribed redemption price is the market value of the shares.

One of the more active debates surrounding the Companies Act has been the question of whether the 90% squeeze-out threshold prescribed by the Companies Act can be lowered by means of a stipulation in the articles of association of the company. Such a stipulation would constitute a so-called poison pill clause, requiring a shareholder whose ownership share exceeds the threshold (e.g. 33.3% or 50%) to redeem all remaining shares for a fixed price.

The preparatory works for the latest, more substantial amendment of the Companies Act in 1997 did not provide a clear answer to the question of whether or not such clauses would be upheld under Finnish company law.

The Finnish Trade Register has in practice accepted and registered articles of association stipulations in relation to a number of Finnish listed companies. These typically require an acquirer receiving more than 33.3% or 50% of the shares to offer to purchase the remaining shares.

Until recently the question of whether such stipulations will be upheld has remained unanswered, but has been discussed in Finnish legal literature. During the last six months there have been two new developments which make it worthwhile revisiting the debate over the poison pill clause and its application in Finnish limited companies.

Firstly, the Finnish government presented a proposal to parliament on 2 September 2005 for an amended Companies Act (proposal 109/2005). The aim of the amendment is to introduce a completely rewritten, modernised and competitive Companies Act, increasing flexibility for shareholders without putting the interests of creditors and minority shareholders at risk.

Secondly, on 2 November 2005, the Finnish Supreme Court gave a ruling, number 2005:122, in a case involving inter alia the question of whether the addition of a poison pill clause was acceptable and in accordance with the Companies Act or not.

Thankfully, the new Companies Act does, unlike the 1997 amendment, address the poison pill question in one respect. However, the flexible approach adopted in the proposed new Companies Act does not extend to the possibility to include a threshold for a squeeze-out provision lower than the 90% prescribed by the law. There are good reasons for this.

According to the preparatory works, the articles of association may not deviate from the Companies Act where the stipulations of the Act are intended to protect the interests of the minority shareholders. Therefore, it is not possible to stipulate that the threshold at which the minority shareholders may require the majority shareholder to redeem the remaining shares is higher than 90%, nor may the threshold at which the majority shareholder is entitled to redeem the shares of the minority shareholders be lowered from the 90% prescribed by the law.

The Supreme Court ruling 2005:122 provides helpful clarification of this and other earlier discussions of poison pill clauses.

In this particular case, the general meeting of shareholders of a local telecoms company had voted to include a poison pill stipulation in the articles of association, requiring a shareholder whose ownership share amounted to or exceeded 10%, 33.3%, 50% or 60.6% to offer to purchase the remaining shares at a price specified in the articles of association.

The specified price was to be the highest of four alternative calculations (put simply, the highest of the annual result times ten, net equity value times five, average market value from the last 12 months times five or the weighted average market value from last 24 months times five).

A minority shareholder, owning approximately 7% of the shares, asked the courts to declare the decision by the general meeting void, based inter alia on the fact that the stipulation infringed the shareholders’ right to transfer his shares freely and was contrary to the Companies Act.

The local District Court accepted the poison pill stipulation, whereas the Court of Appeals declared the decision void as being contrary to the Companies Act. The Supreme Court granted leave to hear the case and concluded that the poison pill stipulation in this case was indeed contrary to the Companies Act and accordingly void.

The Supreme Court, however, also concluded that there is no absolute right to transfer shares freely, as evidenced in the Companies Act itself where redemption and consent clauses are expressly permitted. The Court also referred to the capital markets rules, which currently requires shareholders acquiring at least 2/3 of the votes to offer to purchase all remaining shares, and to the EU takeover directive 2004/25/EC, which is to be implemented in Finland in 2006 (possibly lowering the threshold for the compulsory bid to 30%).

The ruling also discussed the squeeze-out rule, but concluded that a stipulation requiring the shareholder to offer to purchase the remaining shares does not put the interests of the minority shareholders at risk, as the stipulation does not require the minority shareholders to accept the offer and hence the poison pill clause does not compare to the squeeze out provision of the Companies Act.

However, while the Supreme Court did find that the principle of free transfer of shares in a limited company does not rule out poison pill clauses as such, the effect of a poison pill clause on the whole may be to limit the shareholders’ possibilities to transfer their shares freely to such an extent that the poison pill clause constitutes a prohibited limitation of the shareholders’ rights.

The ruling helps to clarify the current situation to some extent: it is now evident that poison pill stipulations may be acceptable in casu. However, the ruling does not conclusively specify under what circumstances a poison pill stipulation will be accepted and upheld. Legal analysis of the overall effect of the stipulation will be necessary, on a case-by-case basis, in order to assess whether proposed poison pill stipulations are so drafted as to run the risk of being declared void.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.