Finland: Commercial Disputes - Now and in the Future

by Jan Waselius and Tanja Jussila

The current Finnish Companies Act (osakeyhtiölaki 734/1978) regulating limited liability companies was enacted in 1978, entered into force as of 1980 and has consequently been in force more than 23 years. There is no doubt that the commercial world surrounding Finnish limited liability companies has undergone enormous changes in the last quarter of a century (inter alia the deregulation of the Finnish financial market and Finland’s entry into the European Union), wherefore a reform of the Companies Act has been considered necessary for a while, and is momentarily under consideration. A working group has been appointed by the Ministry of Justice to prepare a proposition to a new Companies Act, and it submitted its consultation paper on May 6, 2003. The paper comprised over 350 pages and a proposal to an entirely new Companies Act. During the autumn of 2003, several commercial organisations, among others the Finnish Bar Association, submitted their statements on the paper, and currently (February 2004) the Ministry of Justice is commencing the preparation of the Government Bill to the new Companies Act.

The aim has been to create a flexible and competitive new Act on limited liability companies, particularly focusing on the interests of small companies, and the proposed new Act contains, inter alia, provisions affecting the character and handling of company-related commercial disputes.

The principles concerning compensation for damage contained in the current Companies Act are reflected also in the proposal to the new Act. The aim is neither to strengthen nor to alleviate the liability to compensate for company-related damage. The proposal purports to correct some defects of the current Companies Act and increase legal security by introducing provisions that are excluded from the current Companies Act. Furthermore, the proposal to the new Act introduces to commercial disputes a presumption of negligence, pursuant to which the management of the company is presumed to have acted negligently (unless able to prove the contrary) when damage has been caused by a violation of the Companies Act or the company’s Articles of Association. The same applies where the liability of the management or a shareholder to compensate the caused damage has been caused by means of an action taken in favour of a person or entity closely connected to the company.

Although the presumption of negligence at first glance seems to be a novelty, Finnish legal literature has already before set forth the opinion that the current Companies Act must be interpreted as containing a presumption of negligence. Therefore, the new provision in reality constitutes a codification of a legal position already earlier expressed.

The reason for the above proposal lies in the relationship between a member of a company’s management and the company, wherein the member may be considered to be a representative (agent) of the company. Finnish contract law contains a presumption of negligence in that a person or entity violating a contract must prove having acted with due care (not negligently) in order to avoid liability to compensate damage. The proposal suggests that the provisions in the Companies Act and a company’s Articles of Association defining the management’s relationship to the company may be compared to a contract, wherefore the presumption of negligence should be extended from contract law to the new Companies Act.

Under the current Companies Act a founder, Board Member, Administrative Board Member and Managing Director of a limited liability company is obliged to compensate any damage caused to a shareholder of the company by violation of the Companies Act or the company’s Articles of Association.

Damage caused to a shareholder is generally indirect damage in the sense that the damage in reality is caused to the company but has an impact on the shareholder by means of a decrease of the value of his shares. In principle, such indirect damage has constituted compensable damage under Finnish law, but in 2000, the Finnish Supreme Court limited a shareholders’ right to compensation for indirect damage (loss of share value) by rendering a decision wherein it laid down that a shareholder could claim compensation from the company management only when the shareholder had "a particular need of judicial relief".

The proposal to the new Act goes even further and suggests that a shareholder shall not have the right to receive compensation for damage caused to a company, i.e. indirect damage caused to the shareholder. This loss of the shareholder is substituted by vesting him with the right, under certain circumstances, to initiate proceedings in its own name in order to obtain compensation to the company.

Under the current Companies Act a shareholder of a company is obliged to compensate any damage caused by a violation of the Companies Act or the company’s Articles of Association, provided that such damage was caused by wilful misconduct or gross negligence.

The position in the proposal to the new Companies Act is that gross negligence would no longer be required in order for a shareholder’s liability to arise, but that negligence would suffice. The background material to the proposal states that, in spite of the wording of the relevant provision, each case and each shareholder must be considered in casu in an appraisal of the level of diligence that may be required from such shareholder, taking into account, for instance, whether question is of a small-scale minority shareholder or a major parent company. The latter may be expected to possess deeper business knowledge than the former and, therefore, more stringent requirements may be placed on its diligence.

Although the proposal emphasises that the liability cannot be connected to damage caused by e.g. a minority shareholder’s participation in the General Meeting of Shareholders of a listed company, some concern has already been perceived as to whether the abolishment of the "gross" –requirement will make shareholders’ liability more strict.

In Finland, disputes related to limited liability companies are generally dealt with by the "ordinary" courts of law, in first instance the District Courts, in second instance the Courts of Appeal and in last instance, the Supreme Court.

The court system has been criticized as being too slow, too costly and lacking the expert knowledge frequently required in complicated commercial disputes. Consequently, arbitration agreements have grown increasingly popular and a growing number of complex cases are brought to arbitration in reliance on the expertise of the elected arbitral tribunal and on the reputation of the proceedings as non-public, speedy and cost-effective. Although it rightly may be questioned whether arbitral proceedings in general may be considered rapid and cost-effective, the lack of appeal combined with the possibility to concentrate factual and legal expertise in the arbitral tribunal, can be assumed to render arbitral proceedings the most convenient way to handle intricate and extensive disputes.

Pursuant to the current Companies Act, a limited liability company may include in its Articles of Association a provision to the effect that all disputes arising between the company on the one hand and the Board, a Member of the Board, the Managing Director, an auditor or a shareholder on the other, shall be handled in arbitration. Such provision has the same effect as an arbitration agreement and, in the provision, it may be determined that the arbitration shall abide by a certain set of rules, in practice usually the rules of the Arbitration Institute of the Central Chamber of Commerce of Finland or the Finnish Arbitration Act (laki välimiesmenettelystä, 967/1992). Alternatively, the parties may agree on the procedure of the arbitration.

In the proposal to the new Companies Act, the working group has taken into consideration on the one hand the intricacy of today’s commercial disputes and the consequential demand for expertise in resolving them, and on the other hand the limited number of such cases being brought to Finnish courts. The result is a proposition according to which disputes pertaining to the application of the new Companies Act would be concentrated to six (out of 63) District Courts, one in each Court of Appeal District. The above provision is proposed to be discretionary so that the company may deviate therefrom in its Articles of Association, i.e. for instance maintain that disputes shall be referred to arbitration or, as a novelty, to a certain District Court.

The execution of this proposal would incontrovertibly provide the so selected District Courts with the possibility to develop a broader expertise in commercial disputes than what is possible today, when the limited number of cases are scattered in all 63 District Courts. The consequence of such concentration would be an enhancement of the parties’ legal protection by providing the framework for disputes to be handled by judges possessing the best possible competence. On the other hand, the Finnish court community has expressed its concerns that a concentration of commercial disputes would not improve the expertise of judges, but rather require extensive development of their professional skills in other fields of law than company law. Also it has been pointed out that the largest District Courts already are burdened with backlogs and that it will be difficult to identify the cases subject to concentration.

Generally, the proposition to a new Companies Act has been welcomed and the changes proposed therein considered necessary. However, concerns have been raised in relation to the maintenance of legal security and predictability on a general level whilst, the specific changes, in turn, have provoked opposition or gathered support among different societal organisations representing different community interests.

The government bill to the Act will probably be finalised in 2005 and the new Act will, provided that it eventually is adopted by the Parliament, enter into force at the earliest towards the end of 2005 or, more likely, in 2006.