The development of the Finnish capital markets has corresponded with the common European trends of cyclical changes in activity and regulatory reactions thereto. Bank-based debt capital remains the primary financing vehicle for companies in Finland, encompassing roughly 80 per cent of financing origination, as opposed to 20 per cent from the capital markets or public trading. The role of the capital markets has, however, been gaining ground as a source of financing in Finland after notable European-wide regulation increases in the banking sector, particularly the tightening of capital requirements. Both the Finnish regulated main market of Nasdaq Helsinki (the Helsinki Stock Exchange) and the multilateral trading facilities of Nasdaq First North (First North Finland and First North Bond Market Finland) continue to attract new listing candidates and issuers. The Helsinki Stock Exchange has also recently introduced a simplified listing to First North Bond Market. This listing enables smaller companies to enter into the bond finance market and investor trading platform by accepting template terms and expediting listing procedures due to the lack of a requirement for an EU-regulated listing prospectus and International Financial Reporting Standards financials requirements.
i Helsinki Stock Exchange
The Helsinki Stock Exchange is the main trading venue in Finland for stocks, bonds and derivative instruments. Since 2007, Nasdaq has controlled the various exchanges and regulated markets across the Nordic countries under the ‘Nasdaq Nordic’ moniker. Nasdaq Helsinki is the Nasdaq Nordic subsidiary located in Finland.
Nasdaq Helsinki has one official list, the Helsinki Stock Exchange, sometimes also called the ‘main market’, which is divided into three segments based on market capitalisation of the listed companies (Large, Mid and Small Cap). Additionally, a division of Nasdaq Nordic is the multilateral trading facility Nasdaq First North, which expanded into Nasdaq Helsinki as First North Finland and First North Bond Market Finland, and which is for smaller companies not wishing to be listed on the Helsinki Stock Exchange. As multilateral trading facilities, First North Finland and First North Bond Market Finland, sometimes called the ‘growth market’, do not have the legal status of an EU-regulated market (unlike, e.g., the Helsinki Stock Exchange), and are subject to less onerous regulations compared to the Helsinki Stock Exchange.
Nasdaq Helsinki uses the INET Nordic trading system for trading in the securities market. Trading and clearing are carried out in euros, with the smallest possible price change (tick size) being €0.0001.
Euroclear Finland Ltd (Euroclear Finland) provides clearing services under the HEXClear clearing system and registration services for securities on Nasdaq Helsinki’s various trading platforms. Transactions are carried out on the second business day after the trade date (T+2), unless a longer period is otherwise agreed upon between parties. All companies whose shares or other securities, both equity and debt, that are subject to public trading on Nasdaq Helsinki must register these securities with Euroclear Finland. Conversely, all holders of such securities must open a book-entry account with Euroclear Finland or an account operator (e.g., a stockbroker, credit institution or other organisation registered with Euroclear Finland), or instead register their shares through a nominee registration process to have their securities entered in accounts. Nominees cannot exercise the rights of shareholders, but may receive dividends and participate in share issues. Euroclear Finland maintains company-specific shareholder registers for shareholders that have joined the book-entry securities system, and offers book-entry account services for such shareholders who do not wish to use commercial services offered by account operators.
In Finland, only a non-Finnish shareholder may appoint an account operator to act as a custodial nominee account holder on its behalf. Finnish persons or entities as of now may not hold equity securities in (omnibus) nominee-registered accounts.
ii Regulation in Finland
Finland has a civil law system that closely resembles the legal frameworks of other Nordic countries. The past few decades of European cooperation and integration have greatly affected Finnish legislation and, as such, moved the Finnish securities markets regulation in line with that of other EU capital markets. In addition, the EU’s European Securities and Markets Authority (ESMA) strives to promote supervisory convergence in the EU and, inter alia, provides guidelines and common Q&A information. National authorities, such as the Finnish Financial Supervisory Authority (FIN-FSA), must make every effort to comply with these ESMA guidelines (comply or explain principle), and in practice, FIN-FSA adopts ESMA guidelines as part of its regulations and guidelines applicable to Finnish regulated entities and market participants. Other governing bodies with securities oversight are the Cabinet of Finland (also called the Council of State), the Ministry of Finance of Finland, the Bank of Finland, the Finnish Securities Market Association (FSMA) and Nasdaq Helsinki itself.
Legislation and official regulation
The Securities Markets Act (746/2012, as amended) (SMA) is the primary regulation of the capital markets in Finland. The SMA, along with other regulations, governs the issuance and trading of securities, disclosure obligations and takeover bid conduct.
The most recent significant legislative changes are those with regard to insider dealing and market manipulation. As of 3 July 2016, ESMA published the Market Abuse Regulation (MAR) and the Directive on Criminal Sanctions for Market Abuse (also called the Market Abuse Directive, CSMAD or MAD II). MAD II complements MAR by requiring EU Member States to introduce criminal offences of insider dealing and market manipulation, and to impose maximum criminal penalties for the most serious market abuse offences. Consequently, MAR and MAD II have pre-empted certain SMA provisions, as well as regulations and guidelines issued by FIN-FSA. MAR also extends the scope of EU market abuse regulation from regulated markets to multilateral trading facilities. The regulation presented minor changes to the prohibition of insider information abuse, and more substantial changes to the timing and delay of insider information disclosure.
While the SMA is largely aligned with its respective EU regulation, there is certain national gold plating relating to, for example, prospectus rules when it comes to smaller offerings. Where an offering would fall below the €5 million minimum level of the EU Prospectus Directive (2003/71/EC, as amended by 2010/73/EU) (EUPD), the SMA still requires preparation of a ‘national prospectus’ for offerings above €2.5 million and below the said €5 million. The content and procedural filing requirements for such national prospectus nonetheless follow to a certain extent the requirements placed on a prospectus prepared pursuant to the EUPD, especially those EUPD prospectuses of small and medium-sized companies that benefit from a proportionate disclosure regime. While a national prospectus offering will not be admitted to trading on an EU regulated market, the national prospectus does allow offerors a less onerous path to offerings that do not meet the ‘general public’ exemptions of prospectus requirements, that is, offerings to either qualified investors or to no more than 150 other investors, such as in cases of employee or seed offerings.
The Investment Services Act (747/2012, as amended) (ISA) is the central regulation that applies to companies whose principal business includes offering investments services, such as, for example, execution of orders on behalf of clients, underwriting or placing securities issues or arranging an issue, or portfolio management. The ISA mainly implements the Markets in Financial Instruments Directive (MiFID) in Finland. The ISA has detailed provisions on the business activities, financial security and risk management of investment firms, as well as on conduct of business and client relationships.
Other financial market regulation covers, among other topics, investment funds, and provision of the clearing and settlement and trading of financial instruments. The financial markets legislation is supplemented with lower level decrees of the Ministry of Finance, relating to, for example, prospectuses and takeover documents, or FIN-FSA’s regulations and guidelines, relating to, for example, offering and listing of securities.
Rules of the market places and self-regulation
In addition to legislative compliance, there is also significant self-regulation by different market participants and relevant associations.
Companies that are listed or that trade on a regulated market must also adhere to specific rules of Nasdaq Helsinki, the private company hosting the Helsinki Stock Exchange and First North regulated markets. The rules of the Helsinki Stock Exchange are confirmed by the Ministry of Finance. These rules include provisions on, inter alia, eligibility to be listed on the market, periodic reporting and insiders. The Helsinki Stock Exchange has a statutory supervisory duty to ensure compliance, importantly, with the SMA, as well as with the Rules of the Exchange in activities on the stock exchange.
Chapter 11 of the SMA also requires a listed company to directly or indirectly belong to an independent body established in Finland that broadly represents the business sector and provides recommendations on its own guidelines that it publishes to establish best practices and uniformity. These guidelines are complementary, and compliance with them is subject to the comply or explain principle. The largest of these independent bodies is FSMA, a cooperation organ established by Nasdaq Helsinki and the Finland Chamber of Commerce in 2006.
FSMA publishes the Helsinki Takeover Code, most recently revised on 1 January 2014, which addresses practices related to actions of both bidder and target companies, as well as the management and shareholders of each, and affects all relevant parties involved in a public takeover bid. To aid companies comply with the Helsinki Takeover Code, FSMA hosts the Takeover Board, which may issue recommendations providing direction for mergers and acquisitions.
FSMA also publishes the Finnish Corporate Governance Code, most recently revised on 1 January 2016. The Code aims to improve the transparency of corporate governance practices and principles of listed companies, and to advance more uniform corporate governance reporting. In replacing the prior 2010 Code, the 2016 Code was in response to the European Commission’s 2014 Recommendation regarding the quality of corporate governance reporting. FSMA has similarly set up the Market Practice Board, which may issue recommendations covering corporate governance practices and regulation.
FSMA also hosts the Advisory Board of Finnish Listed Companies that helps the lobbying efforts of listed companies, both nationally and internationally (particularly within the EU), and promotes discussion among listed companies. This board was established by the Confederation of Finnish Industries EK, a private organisation consisting of associations and member companies in the Finnish business community, and the Finland Chamber of Commerce.
iii Supervision of capital markets
FIN-FSA is the supervisory authority for Finland’s financial and insurance sectors. FIN-FSA operates in connection with the Bank of Finland but is independent in its decision-making. The entities supervised by FIN-FSA and the Bank of Finland include credit institutions, investment firms, fund management companies, insurance and pension companies, and other companies operating in the financial or insurance sectors, such as Nasdaq Helsinki.
FIN-FSA’s supervisory powers are for the most part laid out in the Act on the Financial Supervisory Authority (878/2008, as amended). FIN-FSA performs its supervisory tasks through, for example, the review of Finnish-listed companies’ disclosure obligations, prospectus filings and takeover bids. The most relevant supervisory powers regarding the securities markets concern the right to obtain and inspect information, which includes, inter alia, the right to obtain information from the board of directors of a listed company notwithstanding any confidentiality provisions. In addition, regarding offerings, FIN-FSA has the power to postpone an offer in situations where FIN-FSA has reasonable grounds to suspect that the offering to the public violates the SMA or regulations issued under it, to prohibit the continuation or repetition of prohibited marketing, and to impose conditional fines.
FIN-FSA or Nasdaq Helsinki may sanction non-compliance with applicable securities markets regulations. Sanctions may range from notices of non-compliance or conditional or administrative fines or penalty payments, to removal of the securities from trading or registration cancellation of the non-compliant party (such as, a registered adviser of a listed company). If evident harm has been caused to investors, FIN-FSA may order the entity on which it has imposed the prohibition to amend or remedy its actions. For example, in an offering where the statutory information had not been provided in connection with its marketing, FIN-FSA prohibited the continuation of the marketing and required the offeror to provide its investors with the statutory information and the option to cancel previous commitments. Serious breaches of certain securities markets regulations are subject to criminal sanctions of fines or imprisonment.
iv Structure of the courts in Finland
The Finnish court system consists of three types of courts: general courts of law, administrative courts and special courts. Civil, criminal and petitionary matters are processed in the general courts of law, which include first instance local district courts, courts of appeal and finally the last resort Supreme Court. Minor disputes in the district courts may require leave for continued hearing to be heard in the courts of appeal. Leave must be granted for any case to be heard by the Supreme Court (approximately only 9 per cent of appeals are granted leave).
Administrative courts include the administrative courts of first instance and the last resort Supreme Administrative Court. Matters of administrative law, such as the activities of authorities (e.g., FIN-FSA) and administrative procedures are processed in these courts. There are also four special courts in which specific types of issues are processed. For example, where an administrative sanction otherwise issued by FIN-FSA would exceed €1 million, it will need to be issued by the Market Court.
The Finnish court procedure is centralised, ensuring that the judgment is based on facts presented to the court immediately before deciding the issue. There is also a preparatory session held before the actual trial. The litigation process is governed by certain other key principles such as the principle of oral hearings and the principle of immediacy, both of which provide for all statements and evidence to be presented to the same court and judges who would ultimately decide on the matter; the principle of transparency, which provides parties the right to receive information; and the principle of contradiction (audiatur et altera pars), which provides parties in trial the right to present their case in court.
II THE YEAR IN REVIEW
i Developments affecting the capital markets
Over the past five years, the number of initial public offerings (IPOs) in Finland has been relatively low. However, from zero listings in the Nasdaq Helsinki markets in 2011, there has been a relative upswing since: three Helsinki Stock Exchange listings and six First North Finland listings in 2014, and five Helsinki Stock Exchange listings and seven First North Finland listings in 2015. So far, there have been five Helsinki Stock Exchange listings and three First North Finland listings in the first half of 2016. It has also been a historical first half, with two companies transferring from First North Finland to the Helsinki Stock Exchange, corroborating First North Finland’s purpose to offer a stepping stone for companies that are willing to grow into the Helsinki Stock Exchange.
The market value of the Helsinki Stock Exchange has also had a share in the relative upswing. As of end of August 2016, the Helsinki Stock Exchange’s market value was around €196 billion, a continued increase since end of year 2015 (€187 billion) and 2014 (€168 billion); although, however, still lower compared to 2007 (€252 billion). As of the end of August 2016, there were 129 Helsinki Stock Exchange listings accounting for this market value.
In general, the Finnish capital markets have continued their modest upswing from the 2008 financial crisis recovery that started in 2011. This trend may be explained by the continued extremely low interest rates as a result of the 2008 financial crisis, making equity investments and IPOs more attractive. This has led such companies to seek other financing options outside direct bank financing. Recent high market valuations have also increased interest in IPO transactions, making equity investments more attractive both from issuers’ and investors’ perspectives. This continued upswing is notable when taking into account this year’s events so far, namely a couple of IPO suspensions for unrelated reasons, and of course, the Brexit turmoil. The continued uncertainty in other European countries has seemed, however, to play in favour of the Nordic markets.
Even though the number of IPOs may not be as high as in Sweden, where the IPO market has enjoyed an IPO boom, the Finnish market still remains active with several potential rumoured IPOs and other equity capital markets transactions. There is, in other words, an expectation of continued deal activity for the remainder of the year and the beginning of next year.
ii The bond market
Despite the quite active IPO market during the past few years, bond offerings generally also continue to grow. The primary actors keeping the bond market afloat are, however, supranational or government investors. The European Central Bank is encouraging borrowing through its bond-buying programme. In addition, the state-owned financing company Finnvera has a mandate to invest in bonds. On the other hand, while the Finnish banking sector is in good shape and still actively providing financing, the liquidity and capital requirements of Basel III and its implementing act in Europe, the CRD IV package, are increasing the regulatory burden for banks and will make lending more challenging. Nonetheless, in these attractive market conditions, the bond market has still been active.
Furthermore, the Confederation of Finnish Industries EK, the same private business organisation noted earlier, has led work to develop and enhance the functionality of Finnish bond markets in cooperation with its members. This work resulted, for instance, in the introduction of template bond terms in 2013. These terms have been widely used and familiarised by the market players, making the bond issuance process less onerous.
Despite the lack of legislation and court practice, agents are commonly used to represent bondholders, as reflected by agent clauses in the noted template bond terms. Investors are thus represented through creditors’ meetings, which can be compared to general meetings of shareholders. Due to the practice and general trend towards an agent structure, work on new legislation concerning agents of bondholders has commenced in the Ministry of Finance and is estimated to be completed in the spring of 2017. The purpose of the new legislation is to expand the authority of the agent to act on behalf of the bondholders, as well as how the agency actions are controlled, to be in line with the common view that the agent is at least authorised to represent the investors.
iii Cases and dispute settlement
There is rather limited legal precedent to guide the interpretation of the Finnish securities markets legislation and actions of FIN-FSA in its supervisory tasks. However, in the past decade there have been a number of high-profile, white-collar securities fraud investigations and criminal procedures. Most of the cases in question were, however, extremely contentious, with very case-specific details and facts. In many of these cases, the first instance courts found the defendants guilty, but these decisions were reversed at the appellate levels.
iv Relevant tax law
Recent changes in the Finnish tax regime are the result of the increasing competition for tax revenues and the economic downturn. The Finnish corporate tax rate is 20 per cent, below the EU and European average. Relevant Finland developments have also closely followed OECD’s project to tackle base erosion and profit shifting. Legislation restricting deductibility of interest expenses entered into force in 2014 to dampen tax planning by Finnish companies financed by intra-group loans from their foreign group companies. Additionally, the Finnish Tax Administration has become more aggressive in challenging existing corporate structures and intra-group loan arrangements. The concern over losing tax revenues has driven Finland to safeguard its tax base more diligently.
Former Finnish legislation allowed broad deductibility of interest expenses, which could be limited only by applying the transfer pricing regulation or the general provision for tax avoidance. The limitations restrict the deductibility of the net interest expense (the amount of all interest expenses exceeding all interest income) to 25 per cent of the company’s fiscal EBITDA. The current limitations are subject to certain safe haven clauses, and interest payments for third-party loans are not affected. However, third-party loans may be deemed as intra-group loans in situations such as back-to-back arrangements or when a related party has secured a third-party loan with collateral. The interest limitation rules have to be considered when arranging financing structures of Finnish entities.
Dividends received by a Finnish company may be tax-exempt due to domestic tax law, EU law or tax treaty provisions. In general, dividends received by a Finnish unlisted company are tax-exempt if the dividend-distributing company is either an unlisted company or a listed company of which the dividend receiving company holds at least 10 per cent share capital. Pursuant to the EU Parent Subsidiary Directive (2003/123/EC), these same principles apply if the dividend distributing company qualifies under the directive. Tax treaty states may also impact tax treatment of dividends.
Generally, tax treatment of dividends distributed by unlisted companies is significantly more favourable than the tax treatment of dividends distributed by listed companies. In addition, repatriation of funds from non-restricted equity capital of listed companies is taxed as dividend income. Repatriations of funds by foreign shareholders may also be subject to Finnish dividend withholding tax. These considerable differences in the tax treatment of dividends may have influenced companies’ willingness to go public. Some awaited changes to the dividend taxation of companies listed in the First North marketplace may be presented, as the group of tax experts appointed by the Ministry of Finance will give its final report on the current Finnish corporate taxation model at the end of January 2017.
Recently, the Finnish Supreme Administrative Court (SAC) released certain capital markets-related tax decisions, which have concerned, for example:
- a the taxation of dividends received by a non-resident life insurance company;2
- b the application of the new rules on deductibility of interest expenses and the scope of the general anti-avoidance rule as for interest deductions;3
- c the taxation of management holding companies;4
- d the reclassification of hybrid loans;5
- e listed warrants;6
- f the taxation of securities transactions conducted under the ISDA CSA;7 and
- g the tax treatment of prospectus fees in corporate restructurings.8
The two recent precedents concerning the deductibility of interest payments on intra-group loans9 are particularly important. Both cases concerned a Finnish branch that had acquired shares via intra-group transactions from a non-resident group entity. In its decision, the SAC determined whether the acquisition loan and the related interest payments could be attributed to the Finnish branch and deemed as a deductible expense. In both cases, the deductibility of interest expense was denied. Following the decisions by the SAC, the Finnish Tax Administration published its view that it will also take subsidiary structures under review based on this new case law. These precedents therefore might have further-reaching significance in the future.
Following the 2015 Finnish parliamentary election, the new government agreed on the governmental programme, which included a new tax policy. The government’s tax policy and measures taken accordingly have aimed to boost growth, entrepreneurship and employment. The previous broad tax base policy and measures to combat tax avoidance coupled with low or moderate tax rates has continued and will continue. Taxation of earned income has been lowered slightly in connection with a broad agreement on income policy reached by the Finnish central unions. Reducing taxation of labour is intended to support employment and economic growth, and to ensure increased purchasing power. The easing of taxation on labour will be funded, inter alia, by increasing excise duties, such as tobacco and waste tax. With respect to the governmental programme, a group of tax experts was appointed by the Ministry of Finance to give its opinion on and propose amendments to the current Finnish corporate taxation model. The proposals for actions will be presented in January 2017.
v Relevant insolvency law and cases
The Finnish Ministry of Justice has launched a project to amend the Bankruptcy Act (120/2004, as amended). The Ministry is currently hearing from different experts from various fields and interest groups to draft amendments to the Bankruptcy Act. There has been talk of possibly amending special provisions relating to bondholders and credit-swap instruments.
During the past year, several companies that have recently been listed are currently undergoing involuntary bankruptcy or restructuring proceedings. The case that has received by far the most press coverage has been the ongoing restructuring proceedings of Talvivaara Kaivososakeyhtiö Plc, and its subsidiary Talvivaara Sotkamo Ltd. During the past year, Talvivaara group’s insolvency proceedings have included criminal proceedings relating to management liability and complex environmental proceedings. In an attempt to revive Talvivaara, the state-owned company Terrafame Ltd has offered to buy the business from the bankruptcy estate without success.
The most recent publicly traded company that has resorted to formal insolvency proceedings is Componenta Plc, which on 1 September 2016, together with its subsidiaries in Finland and Sweden, filed applications for the commencement of corporate restructuring proceedings. At the time of writing, the District Court is deciding whether the restructuring proceedings shall be commenced. The Swedish court has already commenced the restructuring proceedings of the three Swedish subsidiaries, and we are confident that the District Court of Helsinki will approve Componenta Plc’s and its Finnish subsidiary’s restructuring applications.
The bankruptcy proceedings of Tiimari Plc that commenced in 2013 are still ongoing, as are the restructuring proceedings of Technotree Plc and Trainers’ House Plc. The restructuring proceedings of Takoma Plc and its subsidiaries that started in 2014 are currently implementing their restructuring programmes.
III OUTLOOK AND CONCLUSIONS
The upcoming significant legislative changes affecting capital markets in Finland are as follows:
- a Implementation of the amendment directive MiFID II (2014/65/EU) and its associated regulation MiFIR ((EU) No. 600/2014), which will extend MiFID into investment firms’ investment products, among other things.
- b Expected results of the ongoing negotiations of the new Prospectus Regulation intended to repeal the EUPD.
- c The Finnish Parliament is considering government bills for a new act on book-entry accounts and settlements that include necessary amendments for the application of the EU Central Securities Depositories Regulation (909/2014), as well as a government bill enabling the application of the EU regulation on key information documents for Packaged Retail and Insurance-based Investment Products ((EU) No. 1286/2014).
- d Relating to national capital markets regulation, the Ministry of Finance has been active in planning domestic regulations to improve the Finnish capital markets and alternative sources of financing. The work has resulted in the Crowdfunding Act, which the Finnish Parliament voted for in June. This act entered into force in September 2016. The Ministry of Finance is also currently preparing a government bill for a legislative act regulating bond agents, as the current governance thereof consists of limited general regulations dealing with agency, representation and contractual matters.
The upcoming significant legislative changes, aside from MiFID II, are principally intended to encourage capital market activity. Along with these changes, the Finnish government and other interested parties have set up a number of working groups, such as the Finnish Foundation for Share Promotion, to propose various reforms in the tax, general securities markets and listing regimes to further encourage the attractiveness of the Finnish listing platforms. For these reasons and its recent past performance, the Finnish capital markets’ outlook seems healthy and its upward trend should advance accordingly.
1 Juha Koponen is a partner, Janni Hiltunen is a senior associate, and Mark Falcon and Matias Keso are associates at Borenius Attorneys Ltd. The authors would like to thank partner Niina Nuottimäki, counsel Robert Peldán and associate Turo Lehtonen for their contribution to the bond, insolvency and tax sections, respectively, of this chapter.
3 SAC:2016:72, SAC:2016:71 and SAC:2015:11.
9 SAC:2016:71 and SAC:2016:72.