How to use Technology as "Contribution in Kind" under the Finnish Companies Act? - Experiences from Our Cross-Border M&A Management

Hello, dear readers,

First off, I want to congratulate once more our Finnish Information Processing Association, FIPA. The occasion is their 60th birthday, so greetings go to Robert, Tiina and the rest of the team! They organized a very interesting seminar some days ago on recent developments in the Finnish ICT sector. There were plenty of great speakers, Mikko Hyppönen, Ari Rahkonen and Turkka Keskinen just to mention a few. The product of the decade in Finland was also elected and Linux won the category—perhaps not surprisingly. We can say so congratulations for that achievement as well!

Then, to our topic. I promised that this time I would continue our M&A blog but, as it happened, I got so much carried away from technology issues yesterday, so I thought that I’d write something about technology and M&A. More precisely, it would be corporate law. I decided to talk a bit about technology licensing and use of technology as a contribution in kind. This is actually a real-life situation with cross-border elements and we can imagine that the background is that a Finnish technology company (leader in its field) is doing an M&A arrangement with its competitor in one of the BRIC countries. The following gives to you an outline of the relevant sections of chapter 9 of the Companies Act:

Section 12 — Contribution in kind
(1) If, instead of cash, the subscription price is paid in full or in part with other assets (contribution in kind), the assets shall at the time of conveyance have a financial value to the company at least equal to the price thus paid. An undertaking to perform work or provide services shall not be used as contribution in kind.
(2) The share issue decision shall contain a mention of the payment of the subscription price in kind. In addition, the decision shall contain an account specifying the contribution in kind and the price covered by it, as well as the circumstances relevant to the valuation of the contribution and the methods of valuation. If the provisions in this subsection have not been complied with, the subscriber shall prove that the contribution had a financial value to the company equal to the subscription price. Any shortfall shall be paid to the company in cash.
(3) If the subscription price is paid in cash on condition that the company is to acquire assets against consideration, the provisions on contribution in kind apply correspondingly to the acquisition.

Section 14 — Registration of new shares
(4) If a share has been paid for in kind, also a statement by an auditor on the account referred to in section 12(2) and on whether the assets had a financial value to the company at least equal to the price thus paid shall always be attached to the registration notification. (461/2007)

Two alternative options for executing the deal were discussed at the beginning:

A. the company would issue new shares first to itself and then hand over such old shares (pay attention to word "old" so these are no longer newly issued) to the buyer. According to the CFO, the original intention presumably was to avoid some of the above Companies Act’s formalities, such as the above-mentioned accounts specifying the contribution in kind and the price covered by it, as well as the circumstances relevant to the valuation of the contribution and the methods of valuation, or auditor statements on valuation; or

B. the company would make use of an official Companies Act’s contribution in kind structure. In other words issuance of new shares in which the value of the technology is used as a payment.

The idea that the CFO originally had in mind with option A was that with this solution, the price for the handover of our technology and the price for the shares would be set off (“they give us shares with a value and we give the technology with a value and neither party pays anything”). However, under Finnish law, if you hand over your own shares (like in option A) it is technically the same as an issuance of new shares. The second point is that if you pay the subscription price under circumstances where a precondition is that the subscribing company will acquire assets or services from the issuer (or for example from its inner circle so in theory it could be anyone), then it is again technically a contribution in kind under the Companies Act.

Could we circumvent formalities of the Companies Act in this way like CFO planned in option A? Well, the issue was actually discussed when the Companies Act was implemented and the answer is no. Valuation of technology is difficult we all must admit especially nowadays when the technology can be seen in many cases to have strategic value (as opposed to mere calculations based on revenue flows and enforcement). In general the value of a technology-based company or valuation of mere technology as such is more connected with the time and place—what is the value needed to execute the deal?— rather than following statistics or making mathematical calculations regarding the “right price”. As the Board has a general obligation to work for the benefit of the shareholders, it is definitely something that they need to evaluate on their shareholders’ part whether the minimum value is at least equal to the value paid for the shares and circumvention is not unfortunately possible. As a general guidance, my recommendation to questions such as, “what is the right price?” is that it is not the right price that is relevant but whether the technology has “at least the claimed value”. Here the issue is to analyse the story behind the valuation, typically giving you an idea whether the pricing is correct or not. If you have any hesitation, consider requesting fairness opinion from a third party, such as the good people from KPMG who have a top notch team for this. It was also discussed how to value the technology in this kind of event, but I think it deserves another posting.

But this is not the whole story. Especially in a cross-border environment, the investment was about to be made to a BRIC country and therefore the applicable legislation was not Finnish. This makes the situation slightly different and one should evaluate whether local law says anything about these kinds of arrangements.

One also needs to evaluate the taxation elements in this deal. Are in-kind structures and sale of technology treated differently in taxation? Tax authorities do not recognize set-off as a legal construction and therefore issuance of shares and sale of technology would be treated independently. If you end up “selling” your technology, then you probably end up paying taxes as well, while contribution in kind is typically tax-neutral. I am not a taxation law expert and this is a generalisation that I will make even at the risk that this might be slightly incorrect. Also this tax issue was put forward for more detailed review to our local partner.

To sum up, we ended up recommending a traditional in kind structure unless the local applicable law would have brought to the table any new aspects. Please note that this story is simplified in a manner that not all cross-border elements and taxation issues are reviewed here, but hopefully this helps you forward in technology transactions!

Cheers,

              Jan

IT Disputes and Project Management - Some Thoughts from Talentum's Seminar 20.11.2013

Excellent fall for everyone! I though that I write this time some words about today's seminar at Talentum in which I had a pleasure of giving a speech. Despite my presence the speaker list was very impressive containing Mikko Manner of Roschier, Kai Erlund of Krogerus, Markus Kinni of Deloitte, JP Rautiainen of Kesko, Tytti Hallavo of Sininen Meteoriitti, Max Mickelsson of Microsoft and Mats Welin of Hästö just to mention a few. I have to say that personally it was just magnificient to be in such a good company and even if the morning was very grey and rainy, and just to illustrate whether conditions, even my dog did not want to go out, I was full of energy and truly eager to go there. It turned out an event to be worth waiting for and I must say I have seldom been in such an interactive event - perhaps it was not surprising as so many of us were passionate about IT projects and disputes! 

My below slides are in Finnish unfortunately, but I started with outlining some general industry trends from the past decade and so, development of license and service fee matrixes, role of contract negotiations in general and following with the reasons why so many IT projects fail. Some main themes relate to project management tasks and how project management should change if we are facing with a potential IT dispute. I also raised some points on the selection of appropriate measures for a specific dispute and how to evaluate cancellation, termination, discontinuation obligation, damages, unjustified enrichment and price reduction arguments and burden of proof issues. I would argue that more attention should be paid to error tolerance where we have a quite high threshold still despite the fact that the world is changing at an ever increasing pace towards something I call "Quality-driven IT Contracting". 

Some more detailed issues should probably be mentioned as well and one not so widely discussed legal issue in our jurisdiction is the relationship between price reduction and damages claims. I would argue that more attention should be paid to the limitation of liability clauses to limit potential exposures in this respect. I would personally not necessarily support the view that the intention of the parties is that limitation of liability clauses automatically also limit the amount of price reduction claims. Enrichment prohibition should naturally be taken into account whether the claim is damages, price reduction or both.

Another point is that sometimes one also see termination of a project on the basis of termination for convenience (as opposed to material breach) followed by damages claim AND unjustified enrichment claim. I have a clear view on the merits of this latter claim, but what do you think? I will save something for the next discussion or post your view and I might reply.

Check my slides from: here

Mikko Manner's presentation followed mine, covering IT audits and key points were that "...audits are more than license compliance audits; they are useful tools for the business, CIOs and lawyers alike for a variety of purposes, as long as all involved have the right approach and implement the approach properly in the agreement and real life alike". Very valuable points and also good contracting issues were discussed. As auditing is here to say, from license audit perspective I raised an issue that perhaps license management and auditing could play more important role in on-going services agreements and this way taken into more efficient use - not only for the license compliance purpose, but for a wider use to benefit customers in their corporate governance.

Then we had a panel discussion chaired by Kai Erlund which centred, at least I would summarize it, around the theme of "communication". The latest IT trends are based on cloud solutions and BYOD, and lots of discussions took place on the selection of the right negotiation team (and "who is actually the customer"), communication of the customer's business requirements such as NFRs and FRs properly and generally on understanding of the suppliers business logic in cloud environment. It seem to be agreed that neither agile nor waterwall methods provide a bullet proof solution to avoid budget, time or scope disputes, but at least by good communication (also contractual reporting) you minimize risks.

The day was concluded by Mats Welin who gave a speech on litigation process perspectives. In the project management organization it is important to understand what is needed if we end up in a litigation and we need to provide evidence to support our case what are, e.g., additional personnel costs arising out of a breach. Failing to implement right measures will almost certainly mean that the arbitration or ordinary court will deem that you have not provided "sufficient evidence". So in other words, the project management should need to change the focus a bit when litigation seems probable and adopt new kind of measures. From legal side I had a discussion on price reduction and are courts allowed estimate the amount of price reduction like they can estimate damages (OK 17:6), and further it was discussed, a question asked by Otto Markkanen of Castrén & Snellman, that can you raise price reduction claim in an IT contract dispute if Sale of Goods Act is excluded. Interesting points and not necessarily simple - I have a view, Mats has a view, but tell me yours? This is the best part in these seminars - sharing ideas and experiences and learning more! And finally thanks to Talentum and Salla Korhonen in particular for magnificent arrangements!

More to follow on this as well and next time I will write about M&A again - new blog under the way!

Cheers, 

                Jan

Four Principles for SME Financing - Additional Revenue Streams via IP Monetization?

I recently had an interesting discussion with some of my entrepreneur clients about financing. This gave me the thought that I could perhaps try to share some ideas for those engaged in early financing rounds. We were discussing a question that was rather much as follows: 

“How much funding should we seek from investors, considering that we have two alternatives: A and B. If we select A (which is a joint project with our customer), we need significantly less capital than with alternative B, and we might be in a very beneficial situation in the subsequent rounds if we are able to construct workable demonstration facility as a customer project. Alternatively, we can opt for alternative B, immediately going for our own business model where we naturally would need a larger investment. So what’s your view?”

Sound familiar? Let me shed light on some key issues to consider. Of course this is not really a question for a lawyer, but we ended up providing a recommendation that entrepreneurs should keep the funding amounts small in the early rounds when the valuations are lower and then scale up the amounts in the later rounds when it is a lot more clear how money can create value and when the valuations will be higher. These very same words were used by Fred Wilson in an excellent post on valuations vs. ownership in more detailed terms, a VC and principal of Union Square Ventures—really worth checking out.

If you choose option A, as this company did, they might still need some funding for their operations and the following points could help you:

M&A activity in Finland is relatively high and this autumn we seem to have increasing movement among the foreign investors, at least in the form of contacts towards our firm, TRUST. However, valuations have traditionally been lower in Finland, which seems to indicate that companies are sold at the development phase earlier than similar companies in, say, Sweden. To some extent, this is due to the lack of funds, problems with First North and inactive bond markets for SMEs unlike in Norway, for example. Opting for VC too early might mean that investors are not competing against each other as there might just be one VC investor. Naturally, this also influences the deal terms and how much control your are able to maintain after the first rounds. 

Even in option A, you would need funding and some issues to be considered:

First, the terms of payment in cleantech and/or mechanical/process technology deals tend to be more front-loaded nowadays — an issue which would generally make customer deals more tempting (don’t be afraid of using this option and negotiating payment milestones carefully using guarantees to provide safety to the customer). 

Second, Finnish companies should be more active in seeking patent and technology licensing arrangements to finance their operations (your foreign competitors use these tools as well — say if the process can be used for coal in addition to other substances and coal is not within your core business, you might consider licensing the coal application to China for example. Feels like making money for nothing, right?).

Third, consider industrial players as investors either from the customer or supplier side. Business angels have shorter investment cycles and they are unlikely to provide further funding or they do not have ample resources at least. Also you need to take into account that industrial players might have different business interests as they are not necessarily making their profit from the exit within the next 5 years. Also consider, e.g., conversion of your suppliers’ deliveries as contributions-in-kind; less need for funding and smaller “financing cap” between the customer payment and time when you have to pay for your supplier. The optimal solution would be to draft customer and supplier agreements back-to-back so that there would not be any financing cap, but this is not always possible in long-term industrial projects.

So to summarize our thesis, “not too much money too early”, “best to have several investors”, “consider alternative business models to support your business”, “consider alternatives for VC investors”. Hopefully this helps!

Cheers,

               Jan

Attorneys at Law TRUST. Ranked Among the Leading Finnish M&A and Financial Law Firms!

This is quite exceptional topic, but it is a quite exceptional day as well! But in any case I had to write a word about this even though someone might consider this as condemned "self-marketing" but let me assure you that the intention is just the opposite. 

The respected IFLR1000, which is an annual guide to the world's leading financial and corporate law firms covering over 120 jurisdictions worldwide, has listed our firm TRUST. among the leading Finnish law firms in M&A and Banking & Finance today!!! 

The aim of IFLR1000 is to provide clients of law firms throughout the world with easy-to-use rankings and profiles of the leading firms in each country organised by practice area, accompanied by analysis of the market trends and business environment.

They base the rankings and analysis on their own extensive independent research, which is conducted by dedicated journalists in offices in New York, London and Hong Kong with a goal to produce the most objective and informative guide possible. 

This is part of our statement:

"Boutique firm Trust is headed by partner Mika Lehtimäki who is supported by partner Jan Lindberg. It was only established in 2011 but has been building a reputation for itself in the past few years and gaining recognition from the market for its work. Its working method is to focus on a small number of clients with more "intensity" and through this the team believes it can achieve the best quality."

I just wish to take this opportunity and thank all our clients and colleagues for their kind words and this only makes us work even harder!!! And of course thanks my friend and magnificent colleague Mika as well for the splendid road so far during the past few years and I'm eagerly waiting all those interesting things that the future will brings in front of us! ;)

Cheers, 

                 Jan

Subconscious Copying, Identical Works and Inspirations - Scope of Copyright Similar to Patent Monopoly?

There is an issue I started thinking about several years ago. It was interesting, so I also wrote a short story while I spent some time at the distinguished Oxford University. As there have been several copyright-related issues on our tables recently at TRUST., I though about writing something on this topic myself as well but, please, bear in mind that the background for this originates from the precedents and literature from the UK and not so much from Finland, where we unfortunately still suffer from a relatively scarce amount of precedents despite our brand new IP court. The point of this article really is that I have always fancied the idea that we could have actually two identical copyright protected works (and by this I mean identical or very similar, of which Led Zeppelin's past actions serve as a good example, as pointed out my good old friend - listen from here) existing in the world while under patents it is at least substantially more difficult. Perhaps one exception is filing applications on the exactly the same date (which I gather might still involve some practical difficulties but I am glad I do not have to be an expert in these patent filing procedures). However, in this online world we are currently living in, it can be questioned whether this is really the case for copyrights as almost all the works are available globally and, then, how can you actually prove that you did not copy? Or should subconscious copying constitute an infringement at all? And taking this into account, are the scope of protection awarded by the patent (here exclusivity to make, offer to sell and so forth) and copy-right (protection against, e.g., copying, making available to the public, as an example) fundamentally so different when such issue is dealt with in courts?

Let's see in detail. There are two different types of infringements and this helps analyse subconscious copying. Primary infringement is concerned with people directly involved in the restricted activities. The other form, secondary infringement, is concerned with people who operate within the commercial context and are indirectly involved in the restricted activities, for example by way of dealing with infringing copies. It is held that the mental element is not as important in the case of primary infringement as it is in the case of secondary infringement. The reason for this additional mental element in the case of secondary infringement can be based on the requirement of knowledge. Since a person is not performing directly restricted activities, secondary infringement is justified only if and to the extent he/she was aware of the wrongfulness of his/her actions. In direct infringement, a person him/herself is per-forming restricted activities. Is it, however, to hold him/her responsible even if he/she is not aware of the infringement? I would argue (obviously) that subconscious copying should amount to infringement on the grounds of “originality”, “harm” and “unjustified enrichment” arguments. On the other hand, economical argumentation does not seem to provide an answer to this question due to the fact that copyright is not a right of monopoly in the sense that if a person using his own skill and labour creates independently the same or similar work, it is held to be non-infringing and this char-acteristic feature inevitably seems to result in welfare losses.

The case closest to this point is Francis, Day & Hunter vs. Bron, in which the plaintiff claimed that the defendant, a publisher, and Mr. de Angelis, a composer of a song “Why”, had infringed his copyright in song “In a Spanish Town”. In the trial, Wilberforce J. held that the copying had not been intentional despite the fact that the songs contain many similarities. Mr. de Angelis denied not only copying but also that he had consciously heard the song. In his judgement, Willmer L.J. considered subconscious copying first as a psychological possibility and came to the conclusion that if such subconscious copying is to be found, it is required that there is a proof of familiarity with the work alleged to be infringed. The main problem in this infringement issue was establishing the causal connection between the defendant’s work and the plaintiff’s work (emphasis here by the author), since, as mentioned above, copyright is not a monopoly right. Willmer L.J. also seemed to accept Mr. Skone James’ proposition that a causal connection can be presumed if there is a substantial amount of objective similarity. Furthermore, Mr. Skone James argued that the denial by the defendant can be seen as evidence to rebut the causal connection but it is not conclusive. It should be noted that if the defendant can show sufficient counterevidence, for example, that both works were inspired by the same source, his work might be held to be non-infringing. So, from this perspective the subconscious work can be held to be infringing.

It is also possible to look at the process of skill and labour from the perspective of originality. In the Interlego AG vs. Tyco Industries plc case, the plaintiff owned intellectual property rights to Lego bricks. The defendants intended to manufacture a competing system in Hong Kong, and is was alleged that this infringe the plaintiff’s copyright in designs for the bricks. In this case, Lord Oliver considered the concept of originality and argued that a mere process of copying, which requires application of skill and labour, does not render the work original. He also argued that there should be some material alteration, which suffices to make the work an original work. The point here is that if a person is subconsciously copying, he is not using his own but someone else’s skill and labour, and I argue that this aspect also renders the treatment of subconscious as an infringement justified. In other words, he is not using right kind of skill and labour.

Subconscious copying can also be understood from the perspective of “harm” caused by subconscious copying to the original creator. This requires that we presuppose some kind of general duty of care towards other people, which includes a requirement that we should not take fruits of someone else’s labour. It should, however, be noted that the argument of harm is justified only to the extent that the original copyright holder is actually worse-off as a result of infringement. Michael J. Spence classifies harm to three different subcategories, which are also relevant when analysing the harmful effects caused to the original creator by the copier despite the fact whether copying is conscious is not. First, material harm can result if the copier and the original creator operate in the same markets in competition. Second, the original creator might suffer emotional harm. Third, cultural harm might result if the work in question would no longer be of any value to him in relation to the others in the community.

Another line of argumentation might be based on unjustified enrichment. By taking someone else’s work even accidentally or, as in this case, subconsciously, the copier is unjustifiably enriched at the expense of the original creator. If it were allowed, the result would be analogical to allowing unfair competition in the event of misappropriation of intangibles. In the case of intangibles, the problem of the argument relates to the issue of imitation and how much is taken and similarly in the field of copyright the question is whether substantial part is taken or not.

From the economical perspective, copyright nature seems to lead to some restrictions. Since—at least in theory—copyright itself is not a right of monopoly, two independ-ent authors may create the same work and in this respect waste resources. Therefore it is difficult to see how allowing or forbidding subconscious copying would lead to more effective allocation of resources or help save resources. 

However, when, in practice, e.g., all music or pictures are available online as said above—I return to the one of the first questions—if you have this case in a court, can you really have two identical copyright-protected works existing at the same time? I would say not likely if a causal connection can be presumed out of substantial objective similarity, which I think is a correct line of argumentation by the way and provided that the works are not inspired by the same source like for example a picture of Finnish rural landscape where you have a field full of hay and blue sky above. This leads to another interesting question, which I will discuss later, namely, when there is a copyright infringement between objectively similar works inspired by the same source.

Until next time!! Cheers, Jan

SPA Series Part 3: How To Negotiate M&A Deals In Finland?

Splendid September for everybody also here from Attorneys-at-Law TRUST.! It is time for our next posting in our M&A negotiation series. Below, you can find a timeline illustrating how an M&A negotiation process might proceed in real life. In addition to examining these dynamics, I also want to raise some, perhaps neglected, points from the patent and privacy point of view for those readers who are more familiar with “an ordinary” deal structure.

As in any commercial transaction, it all starts from a contact with the potential acquirer, an action which can be taken by the seller or the target directly—or it could be an investment bank having an assignment from the seller to find a potential buyer. 

The first thing to bear in mind is the non-disclosure agreement. Now, there are two different non-disclosure agreement (NDA) models that one might use depending on whether there is a direct contact between the buyer and the seller or investment bank (submitting first teasers and then later information memoranda).

Do you know what the differences are between an ordinary mutual NDA and NDA made by a venture capital firm or for the purposes of an investment bank submitting information memoranda? Well, we are not going to tell you everything—perhaps at some later point. Let us just assume at this point that an NDA serves two purposes. First, controlling the exchange of information; and second, the use of this very information in the future.

Before any detailed information is exchanged, an NDA should be in place. Furthermore, before the parties proceed to due diligence, which means an investigation of the target typically from financial, legal and technical perspectives, the seller or its representative may have asked for indicative bids from one or more buyers, possibly this way trying to limit the number of companies performing detailed investigations of the firm. This is not always the case and it might be that first the parties negotiate a “term sheet” and after that there is due diligence. As a third option, there might be the signing of the entire share purchase agreement after which the due diligence process is carried out before the deal is closed.

In the due diligence process, one has to bear in mind that information is one of the most valuable assets of any company. It is not very unorthodox that potential competitors bid just to catch a glimpse of the assets or even confidential patent applications! Furthermore, if there are competitors in the process, one very important thing often forgotten by even the largest of law firms not familiar with patent-intensive business sectors is that in a due diligence process one may enable patent exposure if competitors are permitted to perform technical due diligence. Your competitor might, e.g., find something that is covered by their own patents and try to assert these patents against you or a third party acquirer with an intension to block business.

Slightly carried away from the original theme, consider a possibility for including a patent mining or non-assert clause in this situation IN ADDITION to limiting the access to relevant documentation in practice. A non-assert clause is like a covenant not to sue. I assume that this is a more familiar clause for most of you. However, a patent mining clause might be more unfamiliar. Here is an example of its idea:

“I promise to you that if I receive information I do not use this information to file patent applications, perform infringement analysis or for other similar purposes. If there are any issues to the contrary and I, e.g., file an infringement claim against you, I promise to prove that I have acted as stated in this clause”.

If you have not prepared a term sheet before due diligence, then it could be prepared simultaneously. As it appears, most commercial issues are clarified in the term sheet likewise the deal structure. However, in many cases it may be too early to fix the deal structure at this stage as relevant information might arise in the due diligence process that influences the decision, whether it is a share deal or asset deal altogether.

An example might be that originally it would have been agreed that the transaction is done as a share deal because that the seller typically is better off as they might get a tax neutral deal. In due diligence, it is, however, established that certain IP assets and third-party technology licenses are within the company and those would be very important to the other affiliates and business units of the seller. Of course, these assets might be transferred or assigned to the seller or its affiliates as a condition precedent to the closing to the seller (which takes time that you may not have). Alternatively, it might be worth considering whether the buyer would agree to execute a business purchase agreement and limit the transaction to “transferred assets” while they would perhaps get a license to the retained assets. This way the buyer might even pay a bit more of the assets, as they may be able to make deductions in their taxation. All these depend on the particular circumstances surrounding the deal. So, after the completion of the term sheet, heavy negotiations usually take place ending with the SPA. The deal structure is something that we need to deal with separately and it is not covered in this current blog posting.

Some post-closing issues typically arise already before the SPA is signed, and one thing involves transfer of data necessary to continue business without interruptions.

If you are transferring personal data, one should keep in mind the perhaps slightly neglected issue that even in this case the theoretical starting point is the “consent” of the person whose information one is about to disclose. There is one statement from the Finnish Data Ombudsman 14.9.2009 (1467/44/2009) in which it is stated:

“Ennen yritysjärjestelyn toteuttamista voidaan myös harkita työelämän tietosuojalain 3 §:n mukaisesti työsuhteen oikeuksien, velvollisuuksien, etujen tai työtehtävien erityisluonteen kannalta välittömästi tarpeellisten tietojen luovuttamista esim. henkilötietolain 8 § 2 mom. mukaisena tavanomaisena luovutuksena. Tällöin edellytyksenä on, että työntekijöiden ei-arkaluontoisia henkilötietoja voidaan luovuttaa tarkoitukseen, joka on yhteensopiva rekisterille määritellyn käyttötarkoituksen, kuten palvelussuhteen hoidon kannalta, jos työntekijöiden voidaan olettaa tietävän henkilötietojen tällaisesta luovuttamisesta. Henkilötietojen luovuttaminen on myös mahdollista tarpeellisuusvaatimuksen täyttyessä työntekijän suostumuksella.

Tietosuojavaltuutetun käsityksen mukaan on tarkoituksenmukaista, ettei kaikkien työntekijöiden nimiluetteloa yksityiskohtaisine palkkatietoineen sekä työsuoritusarviointitietoineen luovuteta uudelle mahdolliselle työnantajayritykselle ennen yritysjärjestelyn toteutumista.

- Henkilötietolaki (523/1999) 3 §, 5 §, 6 §, 7 §, 8 § 1 mom. 1 kohta, 5 kohta, 6 kohta, 8 kohta, 8 § 2 mom., 9 §, 10 §, 24 §, 32 § ja 33 §, 34 §.

- Laki yksityisyyden suojasta työelämässä (työelämän tietosuojalaki, 759/2004) 2 §, 3 §, 4 §, 4 §:n 3 mom., 5 §.

- Työsopimuslaki (55/2001) 1 luku 10 §

- Laki yhteistoiminnasta yrityksissä (334/2007) 4 luku 15 §, 6 luku 32 §”

  

So, in summary before closing, the rule of thumb is that disclosure of personal data should be limited. As the relevance of this area of law is increasing (and significant sanctions have been imposed), it is worth investigating this unchartered territory further. Perhaps, we next address the realm of NDAs even though I promised not to do so. This should give to you a vivid picture how the process “flows” forward in a timely manner.

Until next time and we want to cite one of my favorite academics, Karl Popper, who said: “If we are uncritical we shall always find what we want: we shall look for, and find, confirmations, and we shall look away from, and not see, whatever might be dangerous to our pet theories.”. There are no objective truths in an M&A process, and we invite you to disagree with us, comment and contribute your insight and we all learn more!

Social Media Policies - What Issues to Cover?

Social media policies have been discussed many times purely from employment law perspective, and in particular, how employees’ acts and omissions in the social media should be evaluated in the employment relationship's termination and cancellation situations. So in other words in typical cases which may lead to long disputes unless considered and handled appropriately. 

Social media is, however, much more complex creature than it would first seem to be having relevance to several other disciplines. For example, to overall sales policies, webstore terms, brand strategies, IT, data protection, or taxation just to mention a few examples. Adan Smith, director from Wragge & Co has written an excellent article to this effect on social media marketing titled: "Don't make a # of it: Social media and marketing" which is definitely worth reading if you are considering policies and marketing in social media. The writing is available from here. He states the very truth that "Even with the most thorough planning, experience suggests that things can and do still go wrong. Businesses should have a well thought out crisis management policy in place, just in case". One example might be the famous case of "water bottle price" in a restaurant owned by one of the Finland's top chefs Hans Välimäki. As the price for a water bottle was very high, it caused significant negative consumer campaign in the social media. I do not know whether there was a policy in place in this case, but even the best policies might prove not to be bullet-proof. However, if you are planning to set up one you might face with a problem where to start and what issues should be covered. Let me show you a couple of points: 

"1. What are the objectives of the policy?

• Permissive
• Restrictive
• Neutral

2. When the policy enters into force and how changes are communicated?

3. Should social media policy be the same or different for different businesses or business units?

4. Should technical measures to be implemented to prevent access to one or more social media services?

5. How the employer monitors communication in social media?

6. What is the personal responsibility of an employee in social media?

• Employees' duty of loyalty
• Differences, if any, between communication during one's free time as oppose to working time
• Specific liability issues, e.g., for governmental officials

7. How to introduce yourself in social media?

• Use of your own name
• Use of employer's name and your working position
• Use of employer's trade name, trademarks or other symbols or logos
• Use of employer's e-mail

8. Stakeholders to be recognized when you communicate in the social media?

• Other employees
• Management
• Owners
• Customers
• Potential customers
• Suppliers
• Partners
• Competitors

9. How the use of social media can be beneficial for an employer?

• Product reviews
• Reclamations
• Correction of incorrect information
• Support

10. How to behave in social media?

• Examples how people may understand communication differently?
• Illegal, aggressive, obscene and similar messages
• What is the process for handling violating or infringing materials?

11. How to handle contracts and IPRs in social media?

• Contracts and their meaning in social media
• Compliance with license terms regarding material in social media
• Reference to the policy regarding usage of third party materials (citations, pictures and similar)
• Personal undertakings in employment and directorship agreements, shareholders' agreements and similar

12. How to ensure data security and confidentiality issues?

• Installations of programs to employer's environment
• Closed/open environments
• Policies regarding confidential information
• Identification of confidential information
• How compliance is monitored?

13. Insider information in social media?

14. How much time I can use in social media?

• Positions/tasks
• Relevant/irrelevant communications

15. How to comply with privacy issues in social media?"

To this last point I must focus in detail later due to the fact that the current EC privacy law regime is in transition. Why this is important is that the current proposal contains, e.g., provisions stating that the authorities "shall" issue fines for a breach of privacy and this fine may be so high as up to two percent of the global turnover (as oppose to "may" that might give us poor mortals some room for discretion). Therefore, this is one of the key issues also in social media policies, but currently it is not sure whether there is sufficient political support for this initiative, or whether it will be postponed.

Well I have now covered some points to help you to get started - until next time!

Thoughts on Goodwill Protection and Trademarks in Finnish IP Litigations (in Finnish: Goodwill-suoja ja tavaramerkit suomalaisissa IP-litigaatioissa)

Kun kesäloma on vielä hieman kesken, olemme pitäneet taukoa M&A-aiheisessa juttusarjassamme ja sen sijaan ajattelin laittaa teille linkin tähän viimeisessä IPR Infossa julkaistuun artikeliin, jonka olen laatinut yhdessä OTK Kiira Lehtosen kanssa. Norkkimisen eli goodwill-suojan myöntäminen jakaa mielipiteitä edelleen. Näin immateriaalioikeuslitigaatioiden kannalta kyse on usein siitä, milloin brändinhaltijalla on mahdollisuus kieltää tai rajoittaa kilpailijan jäljitelmien myyntiä ja markkinointia, jos kilpailija on käyttänyt tuotteessa omaa tavaramerkkiään? Tässä muutama esimerkki ns. "copycat"-tuoteista: linkki, niin voit myös itse testata onko kussakin kuvassa kyseessä sama vai eri tuote.

Erityisen ajankohtaiseksi aiheen tekevät Suomessa markkinaoikeuden viimeaikaiset ratkaisut, joista on keskusteltu paitsi AIPPIn ja STY:n vuosittaisessa IPR-päivässä, myös IPRinfo-lehden numerossa 1/2013. Lähtökohtana suojan myöntämiselle on oikeuskäytännössä katsottu olevan, että I) on tapahtunut toisen maineen ja tunnettuuden hyväksikäyttö; II) hyväksikäyttö on oikeudeton; ja III) hyväksikäytön kohteena oleva esimerkiksi tuote, palvelu tai muu liiketoiminnan tekijä on siten tunnettu, että se voidaan yhdistää taustalla olevaan elinkeinonharjoittajaan. Orjallisen jäljittelyn tavoin sekoitettavuutta ei kuitenkaan varsinaisesti edellytetä.

Imitointi on myös yksi keskeisimpiä tekijöitä kilpailun ja kulttuurin kehityksessä. Omat näkemyksemme perustuvat ajatukseen, että pitkällä tähtäimellä vapaa kilpailu johtaa yhteiskunnan kannalta kokonaistaloudellisesti tarkastellen parhaaseen mahdolliseen lopputulokseen. Esimerkkinä voidaan pitää sodanjälkeisen Saksan autoteollisuuden kehitystä. Vapaan markkinatalouden Länsi-Saksasta ovat useat maailman johtavista automerkeistä peräisin, kun taas suunnitelmatalouden Itä-Saksan ”itäautot” ovat lähinnä surullisenkuuluisia. Rajoittamalla immateriaalioikeuksilla vapaan kilpailun periaatetta meidän tulee samalla huolehtia siitä, ettemme tee liian laajoja poikkeuksia, joita emme voi perustella yhteiskunnan saamilla vastaavilla hyödyillä. Tämä pätee myös goodwill-suojan laajentamiseen. Monopolit ovat lähtökohtaisesti siis tehottomia, joten myös tavaramerkkien olemassaololle tulee löytää oikeutusperusteet. Tällaiset löytyvätkin informaation tuottamisesta markkinoille, jonka perusteella osaamme tehdä tietoisia valintoja erilaisten vaihtoehtojen välillä ja saamme käsityksen niiden laadusta.

EUT:n ratkaisukäytäntö on kuitenkin kehittynyt suuntaan, jossa suojataan näiden edellä mainittujen funktioiden lisäksi myös investointeja. Erityisesti tässä suhteessa huomion ansaitsee L’Oréal v Bellure -tapaus (C-487/07), jonka perusteluihin on antamisensa jälkeen viitattu lukuisissa muissa tapauksissa (mm. C-376/11, C-558/08 ja C-278/08). Kiinnostuitko aiheesta? Jos näin pääsi käymään, niin lue lisää alla olevan linkin kautta Euroopan Unionin tuomioistuimen (EUT) tulkintalinjan kehittymisestä, goodwill-suojan myöntämisen oikeutusperusteista ja lopuksi kerromme miksi goodwill-suojan suoja-alan laajentaminen on ongelmallista (IPRinfo_2_2013/Tulisiko-norkkiminen-kieltaa) ja miten Suomen lainsäädäntöä tulisi tämän aiheen osalta tarkastella.

Erinomaista kesän jatkoa!

SPA Series Part 2: How To Negotiate M&A Deals In Finland?

So it is time for our next section on mergers and acquisitions. Before we start with the question on “parties” of the agreement and definitions and interpretation issues as promised last time, we need to focus on some preliminary considerations. When I started my law studies one of our more-distinguished professors said that “during you career you learn to ask more and more questions on each topic and after law school you should be able to present at least three relevant questions on any legal issue”. On the other hand, Mika mentioned that his old boss and partner, a well-known M&A figure, taught him years back that every M&A deal contains the maximum of three fundamental issues that need to be resolved or addressed. The rest is not that significant. So if you are planning a transaction either as a buyer or a seller – what are the questions you should ask? Well, we naturally cannot offer here the pleasure of enjoying the bliss of a a full law degree, which we’ve had our share of - not only one but also twice at the minimum, but at the minimum we can provide you all with a head start and some insights on the matters you should go through to ensure that your deal will be successful.

First of all, if you are planning to acquire or sell a business in Finland there are a couple of alternative basic structures you should be aware of:

i) an acquisition of the shares in the target company (beware of the liabilities);

ii) an acquisition of all or part of the target company’s business (buy the assets you need); and

iii) a statutory merger or a share exchange (may be a tax neutral structure).

We will discuss below share purchase deal of a non-listed target. It should be noted that the questions are directed solely to that kind of deal structure. Some structuring issues will be mentioned later as well, but let’s go through the questionnaire first to get us started:

• Why are you doing the deal (getting rid of competition, synergies, accessing, specific clients,    brand, IP rights, market access)?
• What are the specific risks that might prohibit or restrict you from reaching the fundamental goals?
• What is the business rationale for planning to sell or planning to pay what you are planning to pay?
• Start with the identification of the parties – potential buyer and sellers. Do these parties exist and do they have any assets or background?
• Need for non-disclosure agreements? One-sided or mutual? At what point can you present one without feeling embarrassed.
• Letter of intent or memorandum of understanding – is this needed? Is there negotiation exclusivity? Note that the need and content depend on whether you are the buyer or the seller and whether you want to “lock” the negotiating position – at all.
• Is the process an auction or negotiation with a specific named party? What does the auction mean – cost-wise and time-wise?
• Practical matters like deadlines, contact details of legal and financial advisors and similar?
• More practical matters like signing rights and proxies? A need for Board of Directors approval? Who has the authority?
• Stock exchange releases – who will handle? A road map is often needed as disclosure will often have to be made without undue delay
• Handling of payments and other closing arrangements – who will handle and who will agree with banks?
• Is there a need to engage also foreign legal and financial advisors? Legalization of documents and similar official requirements? Rule of thumb – advice in the parties’ home jurisdiction and from the location of the collateral is often required.
• Other issues needed to keep the deadlines like rulings from competition law authorities, co-operation procedures, preliminary rulings from tax authorities? How do these affect the closing?
• Planned signing and if needed closing dates?
• Due diligence issues, responsible parties and form of the report (descriptive or finding report)? Is the report intended to be relied upon by parties financing the said transaction?
• Are certain issues excluded from the scope of due diligence? How the data room is formed and what is the materiality threshold? How do you manage the confidentiality issues – who has access and what should be accessed?
• Then identify the target carefully – is it a separate company or a group? This is also important due to the fact that you’ll need to know with whom you can discuss
• You never know enough of the background - so what are the countries where the target operates, what is the operating model (e.g. subsidiary, branch office, distributor or something else) and also what are the most relevant of these all (e.g. in terms of revenue)?
• Ownership structures for all entities? Are there options or convertibles that might change the structure?
• How the transaction is about to be financed, e.g. shares or cash?
• Business sale or share sale? 

• It is important to engage tax advisor in the process early as this structuring is heavily influenced by tax considerations – are shares part of the sellers’ fixed assets and do capital gains benefit from tax exemption? If the deal would be a business transfer, could the seller otherwise minimize taxes e.g. use losses from previous years? Effects on the purchase price?
• Special rights entitling to shares like options, convertible capital loans, transfer restrictions and similar?
• Are there special risks, assets or liabilities that should be excluded from the transaction?

• Need to establish new companies for the purposes of the transaction? Why? Are you planning to merge the acquirer with the target (may be needed due to the “financial assistance” restrictions)?
• Specific key persons? Management considerations? How do you plan to engage them?
• Transitional services after transaction? IT, administration, real estate, for example?
• Other tax e.g. from the purchase price perspective, or future considerations from the buyer’s perspective?
• Purchase price structure, adjustments and earn-outs? How do you fix the mechanism and the numbers for determining these?
• Is the purchase price connected with the refinancing or rearrangement of target’s financing?
• Should there be an escrow arrangement?
• How the deal is financed – cash, debt from banks? Determine which balance of creditor and shareholder control is acceptable to you as a buyer.
• Redemptions, targeted issuances of shares or similar as part of the purchase price? Do you want the seller to hang on to the company- or would it be better to just have a vendor note from the seller (i.e. deferred purchase price with interest)?
• What are the most critical business issues – that we know already?

• Main suppliers and customers?
• Core assets and intellectual property rights?
• Litigations?
• Key persons?
• Corporate law matters – will there be trade name change or other similar changes with the trade register? Board composition of the closing? Assignment of IP rights as a precondition for the closing?
• New employment and director agreements – is there a need to make changes?

• Cooperation procedures (employment laws) if needed?
• What kind of SPA draft is optimal – friendly or aggressive? Internal approval for drafts?
• What kind of representations or warranties should be used as a starting point?
• Limitations of liability? Claim periods? Basket?
• Financial standing of the seller – need to consider parent company guarantee?
• Other specific issues regarding environment, transfer tax, competition law and so forth

So as a summary, any transaction is a process and most of the law firms have already these processes in place like we have ours as well. The rest is pretty much implementation typically without a need to be engaged in difficult theoretical discussions regarding, for example, seller liability under the Contracts Act in situations X, Y or Z. So with this questionnaire we hope that you start asking the right questions and then in the following postings we will see how these issues are covered in the process, as well as in the legal documentation and negotiations, in more detail. 

Already at this stage the most important lesson is that you should identify those most critical issues why the deal is done and what are the factors ensuring the successful case and hold on to those points. The Greek historian Herodotus was not talking about M&A when he said, “Great deeds are usually wrought at great risks.” It is however very much true that in many cases companies are not well prepared for complexities of an M&A risks and we hope that this list could serve at least as a starting point for such preparations – until next time!

SPA Series: How to Negotiate M&A Deals in Finland?

We'll kick off with this posting a new blog series on M&A and how to negotiate M&A deals in practice. This one will be done in collaboration with my good old friend and Oxonian colleague Mika J. Lehtimäki. What we aim to achieve is to provide an overview of all the terms of a typical share purchase agreement, the typical negotiation points and illustrate also some common compromises and tactics. So this is the outlook what is about to follow (our target is to post new material bi-weekly):

1.         PARTIES, DEFINITIONS AND INTERPRETATION
2.         SALE AND PURCHASE OF SHARES
3.         PURCHASE PRICE, EARN-OUTS AND ADJUSTMENTS
4.         COMPLETION        
5.         BUYER'S WARRANTIES
6.         SELLER'S WARRANTIES
7.         LIMITATIONS OF LIABILITY
8.         POST-COMPLETION OBLIGATIONS
9.         CONFIDENTIAL INFORMATION
10.       ASSIGNMENT PROHIBITED
11.       GUARANTEES
12.       CO-OPERATION AND COMPETITION
13.       THIRD PARTY CLAIMS
14.       VARIATION
15.       WAIVER
16.       CUMULATIVE REMEDIES
17.       COUNTERPARTS
18.       EFFECT OF COMPLETION
19.       ENTIRE AGREEMENT
20.       INVALIDITY
21.       THIRD PARTY RIGHTS      
22.       GOVERNING LAW AND DISPUTES
25.       DISCLOSURE LETTER AND SOME WORDS ON OTHER SCHEDULES
26.       SOME ADVICE ON "BOILERPLATE CLAUSES"

Some sections will be divided in subsections as it may be too difficult to fit all information on warranties, for example, to a reasonable size of one blog. Another theme that is divided to several smaller subsections will be purchase price, which is naturally needed to go through different variations from locked-box to earn-outs.

We decided to start the blog to share experiences of seasoned M&A lawyers. Both me, being very active in technology, outsourcing and intellectual property deals and Mika J. Lehtimäki, who is a very well-known figure in banking & finance, have led several domestic and cross-border transactions and during our careers we have learned most tricks and intricacies from practice. There has not been a single book or guide which could assist a young lawyer in his or her journey to the wonderful world of M&A which is an issue we wanted to fix. It is not so long ago (most likely 2001) I was doing my first seed investment to a small technology-based company and I went to the chamber of my tutor just to ask what an earth is a disclosure letter and how should I “qualify warranties”.  The small but invaluable piece of advise I received then was still valid last year when I was leading a large financing round relating to a contemplated green technology or should I say cleantech production facility, or representing a Finnish company in the divestment of their operations abroad. As for Mika, he still remembers his first M&A deal in 1999 negotiating against one of the grand-old-men of Finnish corporate law. Although not a pleasant lesson, something that put him first in the deep end of the world of M&A tactics and trickery.

We will focus in our posts also on the negotiation process as it is one of the most critical issues in any M&A deal. It is young lawyer’s typical problem that one too easily sabotages the deal while experienced negotiator may come up with excellent workarounds that still lead to win-win deal for both parties.

Main target audience of this blog series is those already having experience on M&A and perhaps have participated negotiations already. Legal education is not necessary so we also think that our thoughts could be useful for financial advisors, CFOs and management in general involved in these kinds of cases.

Finally before we start it is important to note that contract language used in this blog is mainly intended to illustrate the point in question so we have not tried to formulate bullet-proof language in that respect. It should be noted that precise drafting is one of the most important issues in particular in cross-border deals where contractual interpretation is not necessarily based on “intention of the parties”.

Any questions and comments are warmly welcome and if you wish to submit particular comments to any specific topic or you have been wondering some point raised in a previous case, let us know and hopefully we are able to provide guidance on those as well.