Finland: Pricing Risks Connected to Exchange Offers in Finland

The acquisition of public limited liability companies in Finland usually follows the classic four-step structure. The first step is for the buyer to acquire the shares of major shareholders in the target company. Next, a voluntary public tender offer ("voluntary offer") is usually launched, followed by the launch of a mandatory public tender offer ("mandatory offer") governed by the Securities Market Act (the "SMA"). The obligation to launch a mandatory offer arises from the provisions of the SMA, which stipulate that any shareholder whose holding in a public limited liability company exceeds two-thirds of the votes in the company, must offer to purchase also the target company’s remaining shares and securities entitling to shares at fair market value. The final step of the takeover is the squeeze-out of minority holdings pursuant to the provisions of the Companies Act, laying down that a shareholder holding more than nine-tenths of all shares and voting rights of a company, has the right and obligation to redeem the remaining part of the shares at fair market value.

The Impact of the Mandatory Offer Price

Finnish law regulates neither the amount nor the type of consideration to be offered for shares in a voluntary offer, and the consideration may consist of cash or, for example, shares in the acquiring company.

The voluntary offer price may, however, be affected retroactively by the price offered for the shares in a succeeding mandatory offer. Namely, if the acquiror subsequently launches a mandatory offer and the consideration offered for the target shares in the mandatory offer exceeds that offered under the voluntary offer, the acquiror must pay the shareholders who accepted the voluntary offer a so-called top-up, which is the amount by which the mandatory offer price exceeds the voluntary offer price.

Determining the amount of the top-up is uncomplicated if the consideration offered in both the voluntary and the subsequent mandatory offer is cash. Difficulties arise, however, when the consideration in a voluntary offer consists of shares that subsequently are to be compared with a cash consideration offered in the mandatory offer. The question is, in essence, who should carry the risk of a decrease in the value of the shares offered as consideration in the voluntary offer, the shareholders or the acquiror?

In a statement issued by the Finnish Financial Supervisory Authority (the "FSA") in connection with the merger between Swedish Telia and Finnish Sonera (the "Statement"), the FSA addressed this intricate issue. The FSA emphasized that the corporate takeover market must be able to operate effectively, and one prerequisite for this functionality is that the acquiror with reasonable certainty must be able to assess the expenses caused by a subsequent mandatory offer. Thus, in comparison with a mandatory offer price, shares offered in a voluntary exchange offer should be valued on the basis of the higher of the following: (i) the value of the shares prevailing prior to the announcement of the voluntary offer or (ii) the calculatory value of the shares prevailing during a relatively short period of time (for instance, five trading days) preceding the emergence of the obligation to launch a mandatory offer. Therefore, as a principle, when accepting shares as consideration in a voluntary offer, a shareholder also accepts the price risk associated with such shares.

Another factor to take into account when assessing the voluntary offer price of the target shares in a takeover under Finnish law is that also a subsequent squeeze-out price, in certain cases, may affect the voluntary offer price.

Under the SMA, when a voluntary offer is conditional on the acquiror attaining a certain percentage of shares or votes in the target company, a shareholder, who has accepted the voluntary offer, may withdraw from the offer if the acquiror does not attain the predetermined interest in the target company. However, a shareholder acceptor of the voluntary offer may not withdraw, if the acquiror undertakes to notify the shareholder of any higher price received or paid by the acquiror for the tendered shares within one year from the end of the voluntary offer period, and to pay the amount by which such price exceeds the voluntary offer price.

Where the typical four-step acquisition procedure is abided by and a conditional voluntary offer, subsequent to the mandatory offer, is followed by a squeeze-out of minority holdings, and such squeeze-out takes place within one year from the end of the offer period, a top-up pursuant to the above may become payable on the basis of the squeeze-out price. Thus, if a higher price is offered for the tendered shares in the squeeze-out than in the voluntary offer, the acquiror must pay to the acceptors of the voluntary offer the difference between the two prices.

Furthermore, according to the Statement, only the price offered by the acquiror during the squeeze-out procedure, as opposed to the actual price paid by the acquiror, shall be relevant in calculating a possible top-up. This is because possible disputes between the shareholders and the acquiror regarding the share price in a squeeze-out procedure are, in the end, settled in arbitration or court proceedings. Such proceedings are not uncommon in Finland, wherefore the final payable squeeze-out price for all shares may be elusive at the time of the voluntary offer. Recently, for instance, an arbitration tribunal ruled that the squeeze-out price for the Sonera shares offered by Telia as consideration for Telia shares in the Telia-Sonera merger was too low, and ordered that the shares of the shareholders participating in the proceedings were to be redeemed at the price 5.78 euros instead of the offered 5 euros.

General

According to the SMA, the price offered in a mandatory offer must be the fair market value of the target shares in question. The FSA has required that cash consideration must always be an alternative offered to the shareholders in a mandatory offer.

When determining the fair market value of the target shares in a mandatory offer, the SMA provides that the following factors shall be taken into account:

1. the volume weighted average price paid for the shares of the target company on the stock exchange during the twelve months preceding the moment when the obligation to launch a mandatory offer arose (the "12-month average price");
2. any acquisition of shares of the target company during such twelve-month period where the acquiror, any entities under its control and other parties acting in concert with the acquiror, have purchased shares at a price that is higher than the above average price; as well as
3. any other special circumstances.

In practice, the prices tendered in Finland in voluntary offers and in subsequent mandatory offers have often been equal to or somewhat higher than the 12-month average price of the shares in question. The 12-month average price rule (the first criterion above) is a measure that protects the interests of the shareholders of the target company in situations where the market price of the target shares has declined prior to the mandatory offer. It has been argued that the rule has had a restrictive impact on launching of public tender offers in Finland.

The determination of the effect of any higher price paid for the target shares during the twelve months preceding the mandatory offer (the second criterion above) is ambiguous when the acquiror has offered shares as compensation in a voluntary offer preceding the mandatory offer. In essence, the question is, who should carry the risk of an increase in the value of the shares offered as consideration, the shareholders or the acquiror?

The FSA has, again with reference to the need of the acquiror to be able with reasonable certainty to assess the expenses caused by the mandatory offer, stated that shares constituting the consideration offered in the voluntary exchange offer should be valued on the basis of the lower of the following: (i) the value of the shares prevailing prior to the announcement of the voluntary offer or (ii) the calculatory value of the shares prevailing during a relatively short period of time (for instance, five trading days) preceding the moment when the obligation to launch a mandatory offer arose.

The Finnish take-over regulation has been substantially unchanged since 1996 when the current 12-month average price rule replaced a similar 2-month average price rule, which dated back to the enactment of the SMA in 1989. Any other changes to the take-over regulation have been postponed in the expectation of the approval of the final form of the EU Take-over Directive.

The Statement by the FSA in connection with the Telia-Sonera merger is the most extensive piece of guidance issued in Finland to date in relation to the pricing of exchange offers. However, as the FSA has also contended, the Statement is not binding upon the courts. FSA’s authority in the matter only allows it to offer opinions and guidance. The courts may therefore choose not to take it into account, should the matter be referred to them. The effect of the Statement on future mergers and acquisitions in Finland remains to be seen, but it is safe to say that truly satisfactory results in the subject matter may only be achieved through legislative reform.