Friday, 4 December 2015

SPA Series Part 10: Negotiating M&A Deals in Finland - Conditions Precedent, Merger Control and Miscellaneous

So next in our blog we move forward to conditions precedent (or CP clauses as these are called). The substance of these CP clauses consists of the items that need to be satisfied before the deal is actually done and transaction completed. When these conditions precedent are completed, then you can have a closing and finally after all closing formalities, and of course champagne, title to the shares passes from the seller to the purchaser. We will in our next blog talk about an issue whether to have a simultaneous or separate signing and closing so we do not go there yet, but save that fascinating topic for later date. The main concern for the seller is in CP terms is that if these are too flexible, these give to a buyer a way out of the deal or exit so to speak without incurring any liability so one needs to be careful. But do you know what are the typical conditions precedent that seller or buyer should require?

As to the seller I would say that at the minimum there should be reference to approvals by the Competition Authorities, or a waiver that merger clearance is not needed. This could be expanded to cover other licenses and regulatory approvals, as well as violations of laws, judicial orders or similar.

Regarding merger control I think it is also worth explaining how this Finnish system works. So the applicable law in Finland is the Competition Act (No. 948/2011) (the Competition Act), which entered into force on 1 November 2011, which mainly harmonize the Competition Act with EU rules. The meaning of the merger control is to protect the effective competition in the Finnish market and control particularly such concentrations which results in creation or strengthening of a dominant position. The procedure in merger control matters is that the Finnish Competition and Consumer Authority (FCCA) investigates a concentration in the first stage and either clears it or submits a request to the Market Court to prohibit it. Clearing of the concentration may be subject to conditions. This is an area were we have lots of interesting clauses like “hell or high water” or similar and perhaps I write on these separately at some point. The Market Court shall investigate the case on the basis of FCCA’s request and it has also an authority to review appeals made from FCCA’s decisions. The decisions made by the Market Court can be further appealed to the Supreme Administrative Court. FCCA’s investigation right depends on the turnover threshold set in the Competition Act. Parties are obligated to make concentration notification if the combined aggregate worldwide turnover of the parties exceeds €350 million and the aggregate turnover in Finland of each of at least two of the parties exceeds €20 million. Parties must file the notification prior to the implementation of the concentration. Filing of the notification is made free of charge but sanctions are possible if the transaction is closed before clearance of concentration. The fine which can be up to 10 percent of the total turnover of the relevant undertakings will be imposed by the Market Court on the basis of FCCA’s request.

Another typical condition precedent for the seller is that there shall have occurred no breach of the buyer’s undertakings. There could be a discussion whether this breach should be material or not or whether this breach is incapable of being remedied. Finally, financing for the Purchaser and all corporate authorizations and resolutions to be secured and reviewed before the signing of the Agreement could be one to be require as well.

In case of the Buyer these conditions precedent typically arise from due diligence investigation and these might cover wide variety of situations so this list is not in any way exhaustive. The same as mentioned above for the Seller apply here as well, but in addition, there could be for example:

  • Approvals from third parties are satisfactorily acquired which could include whatever approvals there are from the transfer of governmental licenses to change of control - approvals in material agreements;
  • The representations and warranties of the Seller herein contained having been true and correct as of this date and continuously until the closing;
  • The related agreements have been signed (e.g., transition services, distributions or delivery agreements or similar) 
  • There could be classical MAC –clause (so no “Material Adverse Change” having taken place between signing and closing, as naturally if there were material adverse change the buyer might want to walk away);
  • Key employees could be required to sign new agreements, lock-in agreements or similar;
  • The Company has not received, e.g., claims or terminations relating to most important agreements typically referred to as “Material Agreements”; and
  • Many others depending on the situation.

In IP-intensive deals there is often a need to fulfill some loopholes like require assignments IP rights to the company retrospectively from the owners, employees or partners. I have a good example on the last one when we advised one venture capital investor in the Finnish game-sector company some time ago. There was a situation that most parts of the software engine that was running target company’s online game were coded by the founders of the company prior to the time the company was incorporated. Here we did not find a single document that would have granted the company any right to use such code not to mention a document in which copyright and all intellectual property rights should be assigned to the company. Gladly they were able to secure retrospective assignments as conditions precedents and the deal went forward. Finally, while these are conditions precedent, these are still something that the buyer should be allowed to waive these rights if they wish to proceed.

Hopefully this helps someone and I wish all of you very pleasant weekend!