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The Finnish venture capital market

Following the information technology boom in Finland in the late 1990s, the venture capital market experienced a period of significant growth. Here, Tarja Wist and Toni Siimes of Waselius & Wist outline the current legal environment for private equity and venture capital investment in Finland.

Until the mid-1990s, the growth and development of the Finnish venture capital market was slow. By 1988, 18 Finnish venture capital companies had started their operations and a total of approximately E108m had been raised as venture capital.

In the latter part of the 1990s, however, the venture capital market experienced substantial growth, partly attributable to the information technology boom in Finland. While in 1996 new venture capital investments amounted to a total of approximately E85m, in 1999 investments reached approximately E286m, which represented a growth of some 55 per cent to the corresponding number in 1998. At the end of 1999, some 550 Finnish companies had raised venture capital.

In line with the growth of the venture capital market in general, the number of exits has increased over the years. Preliminary information indicates that the number of exits in 1999 was 41 per cent higher than in 1998. To meet the market demands for exit possibilities through public offers of shares in growth companies, in October 1998 the Helsinki Exchanges renewed their trading lists and, in such connection, introduced the New Market List for innovative companies at growth stage. Other trading lists include the Main List, the Investors' List and the Pre-List.

In mid-April 2000, 10 companies were listed on the New Market List and the Pre-List. The New Market List has proven itself an attractive marketplace for relatively young information technology companies. A company applying for the New Market List must have an estimated valuation of a minimum of E2m and generally a minimum of 15 per cent of the shares in the company must be held by the public. The company is required to have audited accounts for no more than one at least 12-month financial period.

Regulation

Venture capital activity is not regulated under Finnish law nor is a licence generally required for such activities. However, where the capital used for investment purposes has been raised from the general public through deposits or other instruments of debt, the activities of the venture capital company may qualify as credit institution activities for which a licence is required. The same applies when the venture capital company has borrowed the capital from an entity in its group which is not a credit institution, and which has raised the corresponding funds through deposits or other instruments of debt.

Available instruments

The Finnish Companies Act was revised in 1997. In connection with the revision, which was initiated by the need to harmonize Finnish company law with the corresponding EU directives and which represented the largest revision of Finnish company law since 1978, the flexibility of the Companies Act and the abilities of the parties to agree on new types of structures and instruments were increased, and replaced with a more detailed information obligation. As a result of the revision, the Finnish Companies Act now expressly recognizes subordinated loan (so-called capital loan), which for capital equity purposes will be treated as equity of the company. Until 1997 warrants could only be issued together with a loan (sometimes of only a nominal amount), but the issuance of warrants without linkage to any loan was made possible by the revision. At the same time, the prohibition against the company purchasing its own shares was eased and replaced with detailed disclosure obligation.

While the creation of different series of shares has always been possible and quite frequently used in Finland, the revision of the Companies Act opened new possibilities for venture capitalists to use different types of mezzanine finance instruments to achieve the best possible economical and cooperational structure of the company. The introduction of, among other things, non-voting preference shares and the concept of redeemable shares provided new possibilities for creating shares with features of debt instruments.

Transparency

The revision of the Companies Act has also made limited companies more transparent than before. Companies have to register with the Trade Register, among other things, the terms and conditions of their stock option plan and other such instruments that may affect an increase in the share capital of the company. The articles of association that include stipulations concerning different series of shares in the company, as well as any pre-emption clauses, must also be registered with the Trade Register. Furthermore, the annual accounts of a limited company, including the annual report, must be registered with the Trade Register. Therefore, financial information concerning the company as well as the principal terms and conditions of stock option plans and convertible loans become public knowledge. It is, however, possible to enter into contractual arrangements to stipulate the relationship between the various parties. Such agreements need not, and may not, be registered with the Trade Register. Therefore, the public information available from the Trade Register does not necessarily correspond to actual circumstances and the rights and obligations of various parties.

Minority protection

Finnish company law provides in principle for different types of minority protection:

• a disclosure obligation is imposed on the board of directors in connection with certain decisions to be taken by the shareholders;
• majority requirements exist with respect to decision-making;
• shareholders have the right to receive information; and
• the general principles of company law provide for the equal treatment of shareholders.

Generally, all decisions taken at a meeting of the board of directors or the general meeting of shareholders must be taken with a majority of votes. Some resolutions of the general meeting of shareholders, however, require a majority of two-thirds of votes given and of the shares represented at the meeting. Such decisions include, among other things, resolutions on:

• the issuance of new shares by deviating from the pre-emptive subscription rights of the shareholders;
• the merger of the company with another company;
• amendment of the articles of association;
• liquidation of the company (except where liquidation is required by law); and
• division of the company.

If the company has more than one series of shares, certain resolutions also require an approval of the qualified majority of each series of shares. Also, other majority requirements exist. A majority of two-thirds of votes given and of nine-tenths of the shares represented at the meeting is required, among other things, to amend the articles of association so that more than one-tenth of the result, after the previous losses have been covered, is left in the company without paying dividends. A majority of nine-tenths of the votes given and of the shares represented at the meeting is required, among other things, to issue stock options so that the subscription price of the shares that the stock options entitle the holder to is less than three-quarters of the nominal value of the shares. Furthermore, decisions that, among other things, increase the payment obligations of the shareholders towards the company or limit the right to purchase shares of the company, require the consent of all shareholders.

Taxation of profits derived from investments

Finland applies an imputation or avoir fiscal system for profits distributed as dividends to eliminate double taxation of companies and their shareholders.
Non-residents are subject to Finnish withholding tax on dividends paid by a Finnish company. The flat rate of withholding tax on dividends and interest is 29 per cent. Finland has entered into double taxation treaties with many countries pursuant to which the withholding tax rate is reduced on dividends paid to persons entitled to the benefits under such treaties, typically to zero or 10 per cent-15 per cent. A further reduction in withholding tax is usually available to corporate shareholders for distribution on qualifying holdings (usually at least 10 per cent or 25 per cent of the capital of the distributing company).

No withholding tax is levied under Finnish law on dividends paid to corporate entities that reside within the EU and that hold directly at least 25 per cent of the share capital of the distributing Finnish company, provided that such entities are not entitled to the tax credit under the Finnish avoir fiscal system, and are subject to a general corporation tax in their respective countries of residency, as specified in Directive 90/435/EEC.

Non-residents will normally not be subject to Finnish taxes on capital gains realized on the transfer of shares.

There is no transfer tax payable in Finland on share transfers made on the Helsinki Exchanges. If the transfer is not made on the Helsinki Exchanges, a transfer tax at the rate of 1.6 per cent of the relevant sales price is payable by the buyer. If neither the buyer nor the seller is a resident of Finland or a Finnish branch of a foreign credit institution or a Finnish branch of a foreign investment firm, the transfer of shares will be exempt from Finnish transfer tax. No transfer tax is payable in connection with the issue of new shares.

Waselius & Wist provides legal advice on capital markets and securities law, banking and finance law,among other areas. The firm is frequently involved in various domestic and international transactions and projects, including inter alia, acquisitions, equity offerings and debt issues.
The clientele of the firm includes foreign governments, domestic and foreign financial institutions, listed and unlisted large and medium-sized companies as well as other organisations.

For more information, please email ww@waselius-wist.fi or call +358 9 668 9520