When considering Mergers and Acquisitions in Finland it may well be, that the interest of an investor is aimed at acquiring business operations or a company from a bankruptcy estate or a company in reorganization. So much more so, as the amount of bankruptcies in Finland due to the recession have increased many years, although a certain decrease in the bankruptcy numbers has recently been noticed. The number of bankruptcy proceedings in 1993 was 6.800 and in 1994 5.500
The reorganization of a business secures the preconditions for a healthy business activity by e.g. restructuring debts, in order to provide the business with a successful continuation of its operations The relevant legislation entered into force on February 8, 1993,
During the two and a half years time of validity of the law approximately 500 reorganization proceedings have been initiated in Finland and approximately 150 reorganization plans have been confirmed.
BANKRUPTCIES
The Essentials of Bankruptcy Proceedings
Petition for and Order of Bankruptcy
A petition for bankruptcy proceedings may be submitted either by the debtor or by the creditors.
In case the proceedings are initiated by a creditor, the district Court in which the case is tried, shall provide the debtor with an opportunity to respond to the bankruptcy petition. If the Court approves the petition, it will enter an order of the opening of bankruptcy proceedings with the precise date and time of the decision.
In the order the Court also appoints an interim receiver, who shall take possession of the assets of the debtor.
Hearing of Creditors. Inventory
When deciding on the opening of bankruptcy proceedings and the appointment of the interim receiver, the Court also stipulates the time of the creditors' hearing.
The hearing of the creditors is usually held within one month from the opening of bankruptcy proceedings. Time extensions are granted e.g. based on the size of the bankruptcy estate.
After the opening of bankruptcy proceedings the interim receiver shall draft an inventory of the estate to be presented to the Court at the creditors' hearing. The estate inventory shall include all the assets of the debtor and the debts that have arisen before the time of the opening of bankruptcy proceedings.
The correctness of the inventory of the estate is sworn before Court by the debtor or its relevant officers.
Appointment of Administrator. Claims. Objections.
If the bankruptcy estate has sufficient assets for the continuation of bankruptcy proceedings, the Court appoints an administrator for the estate.
In order to continue the proceedings the minimum required amount of assets in the estate is about FIM 50.000. If the required assets do not exist, the bankruptcy proceedings lapse.
If the bankruptcy proceedings are continued, the Court will give a date by which the creditors must lodge their claims with the Court or, if the Court so orders, with the administrator. The administrator is obliged to notify the creditors of that date for lodging claims by public summons.
When the written claims of the creditors have been lodged with the Court or with the administrator, the administrator shall draft a list of the claims. From the list appear the claims of each creditor and the basis for each claim. The administrator shall deliver the list of the claims to the Court and on request to the creditors for a reasonable payment.
Written objections to the claims by a creditor, the debtor or by the administrator shall be lodged with the Court by the ordered date. The objection shall include a specified demand stating in which extent the basis for the objection. The Court will continue to deal with the objected claims in an ancillary Court session.
Bankruptcy Judgement. Division of the Estate
The bankruptcy proceedings will end in a final bankruptcy judgement, in which the Court deals with all claims and the preferences that have been demanded for the claims. An appeal can be made against the final bankruptcy judgement to the Court of appeal.
The administrator shall divide the accrued assets according to the final bankruptcy judgement. Before the division of the assets all the trials concerning objections to the claims and other trials must be concluded and this may take several years. Furthermore, before the division of the assets the administrator shall pay all the debts of the bankruptcy estate, in other words the debts that have arisen after the opening of bankruptcy proceedings.
Decisions in a Bankruptcy Estate
For the time period from the opening of bankruptcy proceedings till the creditors' hearing the administration and the assets of the debtor are managed by the interim receiver.
After the creditors' hearing the administrator takes over the responsibility.
The supreme authority is, however, exerted by the creditors at the creditors' meeting. At the creditors' meeting the creditors have the right to take up any matter concerning the administration of the bankruptcy estate or the realization of its assets.
The administrator has the right to bring any matter decided upon of the creditors' meeting. Generally the following matters are decided at the creditors' meeting:
- authorization of the administrator to realize the property or approval of certain realizations;
- authorization of the administrator to take the legal actions he considers necessary, or decision-making on individual legal actions or settlement of individual cases; and
- approval of the final account and payment of the dividends.
At least two creditors' meetings will have to be held, one after the creditors' hearing and one when the bankrupt is discharged. Especially in cases where the estate is very complex, several creditors' meetings are held.
The Acquisition of the Debtor's Business Activity
Shares or Business Activities
It is generally possible to acquire both shares and the business activities from the bankruptcy estate. Shares naturally are mainly of interest only if the subsidiaries of a parent, which is declared in bankruptcy, might be sold. In such a case careful studies should be aimed at securing the subsidiaries independence from the parent.
Negotiation Counterparts
Negotiations concerning an acquisition of a business activity or a part of it are conducted with the interim receiver or the administrator or with a person authorized by them.
In addition it could be beneficial to involve a bank representative that has financed the debtor's business, because a part of the property to be sold may be held by the bank as a security.
In most cases the result of the negotiations will be referred to the creditors' meeting for approval. Thus, negotiations will probably also be conducted with certain major creditors in order to ensure the approval of the creditors' meeting. If the administrator has been authorized by the creditors to realize the property of the estate, the decision of the creditors' meeting is not required.
Decisions in Creditors' Meeting. Qualified Majority.
As general rule the decision of the creditors' meeting is the opinion supported by over 1/2 of the amount of claims represented in the meeting. In effect, the power to decide upon a matter may rest with only one creditor if his claims represent over 1/2 of the aggregate claims in the bankruptcy.
A creditor who has undertaken to finance the acquisition negotiated by the administrator, may not participate in the decision, if that creditor's claims have preference based on lien, pledge or similar rights.
The acquisition might aim at purchasing the business activity in whole or in part as a functional entity to an acquirer who, directly or indirectly, has a close relationship with the debtor, an owner of the debtor company or a creditor. Parties scrutinized for such purposes are the acquirer or a person owning at least 1/5 of the acquirer.
A close relationship exists if the acquirer, as the debtor's shareholder or for an economic reason comparable to such shareholding, has an essential community of interests with, or has an essential influence on certain parties. Such parties are e.g. the debtor, a person who owns, or during the last year has owned, at least 1/5 of the debtor company, or a creditor, whose claim represents at least 1/5 of all debts.
In such a case the decision in favour of transferring the ownership must be supported pro primo by the creditors whose claims represent more than one half of the (other) preferential claims and pro secondo by the creditors whose claims represent more than one half of the ordinary claims.
Thus, the qualified majority requirement applies on a parent company intending to acquire the business activity of its bankrupt subsidiary, or on a creditor, whose claim represents at least 1/5 of all the debts of the bankrupt debtor.
Aspects on Share Purchases
A part of the business activity of the debtor may be carried on in an economically healthy subsidiary, in which case the subsidiary's shares might be acquired.
The transfer of ownership would then from a bankruptcy point of view be considered as a transfer of a functionally whole entity, and the sale contract should be decided upon by the creditors' meeting in accordance with the procedure described above including the provisions concerning qualified majority.
REORGANIZATION PROCEEDINGS
The Essentials of the Reorganization Proceedings
Petition for and Order of Reorganization
A petition for reorganization proceedings may be submitted either by the debtor or by the creditors.
The Court will request a statement by the major creditors whether or not to initiate the reorganization proceedings. A similar statement will be requested from the debtor if a creditor filed the application.
The Court will initiate the reorganization proceedings, unless the Court finds, that the reorganization proceedings does not remedy the insolvency of the debtor.
Administrator. Creditors' Committee.
When ordering the initiation of reorganization proceedings the Court appoints an administrator.
The main task of the administrator is to draft a proposal for a reorganization programme. Furthermore, the administrator shall follow and supervise the operations of the debtor during the reorganization proceedings.
The Court usually also appoints a creditors' committee, the task of which is to supervise the administrator and assist him as an advisory body on behalf of the creditors. The creditors' committee shall be composed of different creditor groups equally represented. Creditors' groups are e.g. secured creditors and creditors whose claims have a similar basis.
The Reorganization Programme
The administrator shall draft a proposal for the reorganization programme that fulfils the provisions of the law.
The programme proposal shall be drafted within the time period provided by the Court. The period may not, without special reasons, exceed four months. Although rare, competing proposals may be drafted by the debtor, by the creditors, or by the shareholders of the debtor company. In order to have a right to make a competing proposal, however, the creditors' claims must represent at least 1/5 of the secured or unsecured claims, and the shareholders must own at least 1/5 of the debtor company. In practice only one programme proposal is drafted on behalf of the administrator.
Having confirmed that the proposal for the reorganization fulfils the formal provisions of the law, the Court requires the administrator to notify the creditors of the proposals. The creditors are provided an opportunity to comment on the contents of the reorganization programme, based upon which the administrator may alter his proposal.
It is not uncommon, that the programme lasts for at least 5 - 10 years. An other typical feature of a programme might be the inclusion of certain convertible (equity) loans primarily provided by the banks that financed to debtor company prior to the reorganization.
Approval of Reorganization Programme
The administrator submits the final proposals to the Court, which decides on the division of the creditors into groups according to their status of preference and the quality of their claims. The outcome of the proposal is decided upon by voting among the creditors.
If a majority of the creditors and a majority of the amount of the claims in one creditor group vote for the approval of the plan, and if the approval of the plan has been supported by over 1/5 of all the reorganization debts, the Court approves the reorganization programme subject to certain conditions. If all the creditor groups vote for the confirmation of the reorganization plan, only some minimum requirements on the plan need to be fulfilled.
Interruption of Proceedings
The reorganization proceedings might be interrupted in certain cases.
Thus, if after the opening of the proceedings it becomes obvious that the debtor is insolvent, and it is likely that the insolvency cannot be removed through the reorganization proceedings or that the recurrence of the insolvency cannot be prevented otherwise than temporarily, the proceedings shall be interrupted.
A considerable alternative to the interruption is that the proceedings are continued if it is likely that the property of the company or an essential part of it may be assigned as a whole.
Decision-making during the Reorganization Proceedings
The debtor, or in case the debtor is a company, its board of directors and managing director, will retain the power to give orders concerning the assets and the operations.
However, for certain measures the debtor will have to acquire the consent of the administrator. Such measures are for example the transfer of ownership of the business activity or a part of it. Thus the transfer of a business activity of a company under reorganization may take place only with co-operation between the debtor company and the administrator.
In case the property is held as security, the transfer may also require the consent of the holder of the security.
Purchase of Business Activity from a Debtor under Reorganization
Because the economic situation of the debtor under reorganization is weak, a purchase of the shares of the company, although possible in itself, is seldom beneficial for the acquirer. Instead it would be recommendable to acquire the business activity of the company in part or in whole.
In practice it is of considerable interest to notice, that in the major reorganization proceedings, the structure of the companies has been concentrated on the core business, by disposal of the non-core business activities, not fitting in with the structure of the company. Such a business entity may have formed a subsidiary, in which case the sale has been covered with the shares of the subsidiary.
In case an investor intends to acquire a business entity from a company under reorganization, the best way to proceed is to contact both the company and its administrator in order to find out all the necessary information concerning the company and the reorganization programme including e.g. the convertible loans.
If the acquisition of the business activity is carried out during the reorganization, the only exception from a normal acquisition of business is that the deed of sale has to include the consent of the administrator. Very often a prerequisite for the consent is, that the administrator or his representative have taken part in the sale negotiations.
Where a company under reorganization is concerned, the assignment of its business activity in part or in whole as a functional entity can also be taken into consideration when drafting the reorganization plan. In these cases the reorganization plan must include the method of assignment, the terms of the assignment and the name of the assignee, if it is known. The debtor company has, of course to consent to the sale.
In cases where an investor considers the business of the debtor company sound in itself, it is possible, subject to the proceedings described above, to acquire the shares of the company, refinance it and in practice end the restructuring.
BANKRUPTCIES AND REORGANIZATIONS ARE POSSIBILITIES
As described above, neither a bankruptcy nor a reorganization in itself is a major obstacle to acquisitions in Finland. One could even argue, that under certain conditions a bankruptcy and a reorganization could enhance such possibilities. Furthermore, it is not unlikely to find an interesting targets in Finland, being in bankruptcy or under reorganization.
Naturally an investor's interest is to limit possible risks in such acquisitions to a minimum. Such limitations are obtainable, and may be limited to normal acquisition risks, although the use of an experienced lawyer and other consultants is recommendable.
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.
ARTICLE
13 September 1995
