It’s All About People and Thinking Cross-Border
New Partner Ilkka Leppihalme
Anti-Corruption – The New Trend Is Focus on the Tone from the Top
Dual-Class Share Structures Are Cool Again – But Should They Be?
Finnish Pension Reform 2017
Revised Guidance Regarding Equity Incentive Schemes
There’s much talk these days about technology beating lawyers, but insightful advice is still always rendered by people. The best advice is given by talented people with knowledge and experience, working with passion as a member of a team or in a network. The advice is likely to be even better, if the team works well, if its members share the same passion, the same values and a common culture.
At the same time, people on the other side of the table are often the root cause of the challenges we face in our work. So the question becomes, how to find an insightful person, in a team or network, with the right values that can influence other people.
In 2015 our clients turned to us for insightful advice more than ever before. At the same time, we turned to our networks for support in rendering advice as the challenges increasingly extended beyond our national borders.
Nowadays, our services are rendered on a regional basis or in an international context; we support our clients in structuring their businesses so that everything runs smoothly from an operative, regulatory and tax perspective; we assist our clients in the sale or acquisition of businesses covering multiple jurisdictions; and we represent our clients in cross-border disputes.
The Lawyer shortlisted D&I for Leading Law Firm 2016 – The Nordics together with six other law firms from the Nordic countries. We were the only firm with one single office and with no offices outside our country. At the same time Mergermarket ranked us fourth among all law firms with a presence in the Nordics in Nordic M&A deal value in 2015.
This goes to show how we’ve managed to bring added value to our clients also in matters that cover several jurisdictions; we think regionally and cross-border. We manage to render top quality advice together with our friends from other jurisdictions. The cooperation we have with leading firms in many jurisdictions allows us to offer our clients the most insightful advice almost anywhere.
In this time of social media and networks, it comes as no surprise that the best advice is rendered by the best local forces cooperating cross-border.
In an increasingly interlinked and complex world, you are wise to partner up with talented individuals working in the best teams and tapped into the best networks for not just correct legal advice, but for truly insightful advice.
Senior Partner, Head of M&A & Private Equity
Mr. Ilkka Leppihalme joined Dittmar & Indrenius partnership on 1 January 2016 to become the new Head of the Competition & Public Procurement practice and a member of the Corporate Advisory, Compliance & CSR practice as well as the Dispute Resolution practice. Ilkka joined Dittmar & Indrenius together with his trusted team, Counsel Matti J. Huhtamäki and Associate Heidi Muukkonen.
Competition & Public Procurement practice at Dittmar & Indrenius – Quo Vadis?
It is really exciting that we were three to join the D&I competition practice at the same time and from the same firm. It is the first time that basically an entire competition practice moves to another law firm in Finland. We now have one of the very biggest practices, partly reflecting also the recent significant growth of the firm itself.
“Widely recognised as one of the leaders of Finland’s next generation of competition law experts”
- CHAMBERS EUROPE
The combined experience of all of D&I’s competition lawyers is tremendous and quite unique indeed. For example, we have been involved in almost all of the major competition infringement cases and competition law related damages cases in Finland and have experience from both sides of the table. Naturally, our aim is still to raise the profile of our excellent and experienced practice even further. I hope that my nearly 18 years in the profession, which include also several years in London and Brussels, and my many contacts, will help us in this. Actually, I would like to take this opportunity here to thank my clients for following us to D&I.
What’s keeping you busy right now?
I have traditionally always had a wide variety of competition work on the table and this is continuing. At the moment I am perhaps the busiest with infringement and merger control related work as well as with damages actions and compliance training. I am one of the five members of the Competition Law Expert Group of the Finnish Bar Association and we have also some interesting discussions and legislative initiatives going on there.
“Always provides first class and timely competition law services”
- THE LEGAL 500
Competition law related damages actions are nowadays an increasingly topical issue in competition law. They are also significant and interesting with regard to damages actions in general. The current court cases will help define e.g. the measuring of alleged damage and time-bar issues. For example, the Helsinki Court of Appeal will deal with these in its judgments in the asphalt cases later this year and the Supreme Court is about to give its precedent on the latter aspect in the near future. The forth-coming case law may be of significance also in other than competition law related cases. Note also that the Damages Directive – which entered into force in December 2014 – has to be implemented this year. All this is partly also a reason why our practice is keeping such close contact with our excellent Dispute Resolution practice and why many of us are working on both kinds of cases.
What will the future hold for our Competition & Public Procurement practice?
Competition law infringements and the related damages actions as well as merger control are likely to be in the heart of any esteemed competition practice also in the future. Competition law is developing fast both on the EU and national level – as it has always done – and given the forthcoming precedent-nature judgments e.g. in the damages cases we are in for busy and interesting times. The asphalt cartel and the car spare parts cartel related damages cases (in the Helsinki Court of Appeal) as well as e.g. the Valio abuse of dominance (predatory pricing) case (in the Supreme Administrative Court) are all important cases where judgments are expected this year and where D&I has a role in developing the future of competition law.
In the merger control front, it is exciting to work closely with such a cutting-edge M&A & Private Equity practice. It will certainly play a significant role in the further success of the competition practice.
It is also one of our goals to focus on deepening our relationships with our numerous friends in several leading competition practices in other jurisdictions. It is of course a clear advantage to our clients that we are an independent law firm that can freely choose among and recommend them the truly best lawyers in other jurisdictions for advice – based on our personal knowledge and experience, not on a formal agreement or membership.
“Skilful, talented lawyer - one of the easiest people to work with in the Finnish market”
- CHAMBERS EUROPE
Ilkka Leppihalme is a leading, highly ranked expert within EU and Finnish competition law covering inter alia merger control, cartel investigations, horizontal and vertical agreements, abuses of dominance, damages cases and compliance programs across a wide range of industries.
Ilkka has been involved in a number of landmark cases, such as the asphalt cartel and the raw wood cartel cases as well as some major damages and merger control cases.
Before joining Dittmar & Indrenius in 2016 Ilkka made a distinguished career as a partner and head of competition in another leading law firm in Finland. Prior to this, he was with Freshfields Bruckhaus Deringer in Brussels.
Partner, Head of Competition & Public Procurement
In July 2015, Norwegian court sentenced four management members to several years of imprisonment for failure to prevent the corruption.
OECD Foreign Bribery Report 2014
It is no news that even world pronoun businesses find themselves involved in anti-bribery investigations. According to OECD, there have been 427 investigations since the OECD Anti- Bribery Convention entered into force in 1999. The OECD Foreign Bribery Report (published in 2014) summarizes the main characteristics of those 427 corruption cases.
According to the Report, these are some of the key characteristics of corruptive activities:
OF CASES INVOLVED CORPORATE MANAGEMENT OR CEOS
OF CASES INVOLVED PAYMENTS THROUGH INTERMEDIARIES
OF CASES INVOLVED BRIBES TO OBTAIN PUBLIC PROCUREMENT CONTRACTS
Focus of Enforcement Agencies
The contents of the Report have been keenly studied by enforcement agencies around the world. The finding that corporate management is often involved, or at least aware, has lead to an increased emphasis on the behaviour of the top management.
The new trend is demonstrated in recent cases:
Fertilizer supplier acknowledged that it had paid out bribes in three countries (Libya, India and Russia) totaling more than 70 million crowns (€ 8,4M) from 2004 to 2009. In July 2015, Norwegian court sentenced four management members to several years of imprisonment for failure to prevent the corruption.
In London, the Serious Fraud Office’s first application for a Deferred Prosecution Agreement was approved in November 2015. The counterparty to the DPA, Standard Bank Plc was the subject of an indictment alleging failure to prevent bribery contrary to section 7 of the Bribery Act 2010. This was the first use of section 7 of the Bribery Act 2010 by any prosecutor.
In the US sentences were handed down in March 2015 for participants in Direct Access Partners’ scheme to bribe a Venezuela state bank official. The former CEO and former managing director were both sentenced to four years in prison and forfeitures of $ 3.6 million and $ 2.7 million.
It is to be anticipated that the increased focus on top management will bring to the surface many more high-profile cases. The FBI has even set this out in the press release on the Direct Access Partners case:
“The convictions and prison sentences of the CEO and Managing Director of a sophisticated Wall Street broker-dealer demonstrate that the Department of Justice will hold individuals accountable for violations of the FCPA and will pursue executives no matter where they are on the corporate ladder.”
What Should We Learn?
The bulk of corruption takes place through intermediaries. Third party due diligence needs to target all the parties involved and be matched with a risk assessment that takes into account the territory and the type of activity. Third party due diligence should not be seen as a “one size fits all” -exercise. It is important to fully understand the roles and duties of the parties and be prepared for retroactive scrutiny. Red flags that do not appear to present serious issues in the usual circumstances, may pose significant risk of liablity when they appear in combination with a different overall set of facts.
When sentencing the Norwegian executives the court used phrases such as “had opportunity to stop” and “top management did not follow their own rules”. The existence of policies and procedures for the prevention of corruption, the systematic communicating of those and the monitoring and addressing of all suspected breaches continue to be the key building blocks for anti-bribery compliance. But it should be noted that the most important group to educate may be the top management. In case of an investigation, the top management may be seen as having failed to fulfill its preventive obligations, if the tone from the top as demonstrated in operative activities is not clear and strong.
Battling corruption is a world-wide mission and enforcement agencies expect companies to acknowledge their role and come forward with suspected cases as early as possible and cooperate. Self-reporting saves time and resources and can lead to reduced sanctions and penalties. Cooperation counts as a mitigating element but only if there is complete transparency and the authorities get access to all relevant information. There is no excuse for attempts to hide or destroy evidence. If corruptive activities have taken place, the only viable strategy from the enforcement point of view is to admit, cooperate, show remorse and undertake corrective action.
An illustration on how bribery can be hidden in a co-operation structure.
Partner, Head of Corporate Advisory, Compliance & CSR
“The one share, one vote rule is good for listed companies, good for the shareholders, and good for the country.”
JOHN J. PEHLAN IN 1986, A CHAIRMAN OF NYSE BACK THEN
What Is a Dual-Class Share Structure?
A dual-class share structure (“DCSS”) means a structure in which a firm has more than one share class with different rights, usually voting rights, attached to them. In a typical DCSS, insiders hold shares with multiple votes per share when the public receives shares with only one vote per share. It is also possible that shares issued to the public do not have any voting power. A characteristic feature of DCSSs is that they allow shareholders to achieve a controlling position by investing disproportionally low share of capital.
Especially in the United States, 1980s were a golden period of public takeovers, and as DCSSs serve as efficient anti-takeover mechanisms, such structures were increasingly adopted to protect managements against hostile takeovers. However, DCSSs are bad for corporate governance, and driven by an increased academic and public interest in corporate governance throughout the 1990s, the market faced a trend where dual-class companies unified their share structures back into a single class.
In 2004, a new wave of dual-class IPOs began when Google adopted a DCSS for its IPO. After Google’s IPO companies like LinkedIn, Groupon, Yelp, Zynga and Alibaba have chosen to execute their IPOs with DCSS. It has been speculated that the most recent DCSSs have been adopted to protect companies from activist investors.
The financial bottom line is that DCSSs tend to increase principal-agent costs and private benefits of insiders, and consequently destroy shareholder value. Furthermore, DCSSs weaken, on average, the long-term performance of a company and institutional investors tend to avoid companies which have more than one share class. It has been shown that the firm value of an average European firm with dual-class shares is approximately 19 percent lower than a firm with only one share class.
In the light of the above mentioned, it is not surprising that both share classes of Stockmann plc rocketed on 29 January, when Stockmann announced that its shareholder HTT STC Holding Ltd, representing over 10 per cent of the shares in Stockmann, had proposed the Annual General Meeting (to be held on 15 March) to unify Stockmann’s current share classes into a single class. The positive market reaction occurred, despite the fact that in this stage it is uncertain whether the Annual General Meeting will pass the proposed resolution.
As the topic of DCSSs is current again and as they have always been common in Europe, including Finland, I chose to research the following questions in my Master’s thesis for finance:
(i) Why have some publicly listed companies in Finland chosen to create DCSSs?
(ii) What common characteristics do publicly listed companies in Finland with DCSSs have?
(iii) Why have publicly listed companies in Finland chosen to unify their share structures into a single class?
First, while analysing reasons why some Finnish companies have chosen to carry out their IPOs with DCSSs during the recent years, I found that none of these companies had given any justifications for such structures. In a way, DCSSs are taken as given and are only flagged as risks in prospectuses. Perhaps, in the future, as investors will become more sophisticated, they will require well-grounded justifications for DCSSs.
Second, when running a binary choice regression analysis of Finnish publicly listed companies, I found that there are statistically significant and positive correlations between a DCSSs and (i) the size of a company and (ii) existence of anti-takeover provisions (such as poison pills, voting ceilings and staggered boards) in the Articles of Association of a company. These findings are against financing theory, as larger companies and companies already having an anti-takeover mechanism in their Articles of Association should already be protected against hostile takeovers. On the other hand, large Finnish listed companies are relatively small on an international scale, and therefore the size does not protect them against global private equity or industrial players.
In addition, companies operating in the health care industry or providing consumer goods tend to have two share classes more often than other companies. In contrast, technology companies tend to have a DCSS more seldom than companies operating in other businesses. This can be considered as surprising in light of the current international practice, in which large technology companies have chosen to adopt DCSSs. Furthermore, there is some evidence that companies which have been longer subject to public trading have more often a DCSS (not a statistically significant finding) which is also against the financing theory, as DCSSs are usually seen as temporary structures which are deployed in situations where simultaneously outside equity is needed and management is willing to hold control over the company.
Finally, when analysing public statements of companies that have chosen to unify their DCSS into a single class structure, I found that such companies have emphasized that the unification will clarify the ownership structure, increase public interest towards the company’s share and improve the liquidity of shares. It was also stated that the unification is beneficial in order for a company to raise equity financing from investors.
It remains to be seen whether the new wave of dual-class IPOs will also strike to the Finnish market or will a rise of corporate governance, little by little, result in marginalisation of DCSS on Nasdaq OMX Helsinki. Personally, I would bet on the latter alternative. Especially I am anticipating increased pressure from institutional investors towards dual-class companies to unify their share classes.
The author’s Master’s thesis is electronically available at: http://epub.lib.aalto.fi/fi/ethesis/pdf/14207/hse_ethesis_14207.pdf
Finland is among the last EU countries to rise the general retirement age from 63 to 65.
In recent years in Finland, the extension of working life and the future sustainability of public-sector finances have been topics of extensive discussion. The EU Commission has encouraged Finland to consider linking the retirement age to the extending life expectancy.
Finland is among the last EU countries to rise the general retirement age from 63 to 65 years by 2025. After that, the retirement age will be linked to life expectancy.
The current part-time pension will be replaced by a partial early old-age pension.
In September 2014, the Finnish central labor market organizations and the State agreed on an extensive pension reform that will come into effect as of the beginning of 2017.
The Finnish Parliament approved the legislative proposal on 20 November 2015. The new legislation was ratified in the end of January 2016.
Pension will always accrue at a rate of 1.5 per cent.
Key Results of the Reform
The reforms apply to people born in or after 1955 in every field of activity, also public sector. However, they do not impact people already in retirement.
The central change will be the gradual raising of the minimum retirement age to 65 years. As of 2018, the old-age retirement age limit will rise by 3 months for each birth-year cohort until the minimum old-age retirement age is 65 years. The upper age limit for old-age pension will be five years higher than the earliest eligibility age.
The reforms apply to every field of activity.
The current part-time pension will be abolished and replaced by a partial early old-age pension which can begin already at the age of 61, depending on the employee’s year of birth. People who have worked for at least 38 years in strenuous and wearing work may be eligible for the years-of-service pension (or career pension) once they are 63 years. One precondition for receiving this pension is that the work is either physically or mentally wearing.
In future, pension will always accrue at a rate of 1.5 per cent annually for everyone over the age of 17. Accelerated accrual for 63-67 year-olds will be removed and, instead, an increase for deferred retirement will be paid.
The pension reform may lead to an increase in the pension liabilities.
Effects on the Supplementary Pension Arrangements
If a company has a supplementary pension arrangement in effect for its employees, the reforms may have an influence on them. Normally, the statutory pension benefit is coordinated with the supplementary pension benefit once the employee has reached the statutory retirement age. When the statutory retirement age rises, the pension reform may lead to an increase in the pension liabilities if the employer has made a binding promise on certain pension coverage. Such promise may have been made orally in general or in writing, e.g. in an employment contract.
Terms of employment can also be established by practice. Certain benefits or practices that are not based on the employment contract, but which have been paid or applied for years can be binding on the employer. We are aware that companies are facing disputes on how their pension scheme rule shall be interpreted.
Companies are facing disputes on how their pension scheme rule shall be interpreted.
Key Insights:As a result of the reform:
- The retirement age will be raised from 63 to 65 years by 2025.
- The current part-time pension will be replaced by a partial early old-age pension at the age of 61.
- A new pension type will be introduced: the years-of- service pension.
- Pension will accrue at a rate of 1.5 per cent annually for everyone over the age of 17. An increase of 0.4 per cent for deferred retirement will be paid.
- The pension liabilities of the employer may increase if the employer has made a binding promise on certain pension coverage to its employees.
The Finnish Tax Administration has recently issued a revised guidance regarding the taxation of employment based stock options. The guidance addresses also various other types of equity incentive schemes. The main changes in the guidance relate to social security charges and transfer tax implications.
New Instructions Regarding Social Security Charges
The guidance provides new instructions regarding social security charges in connection with equity incentive schemes where the employees receive for free listed shares of the employer or its group company, e.g., RSUs. The applicable rules regarding such share awards and employment based stock options are partly overlapping. The revised guidance states that to the extent the awards vest earlier than the first anniversary of the grant date, and the amount of benefit is not viewed as being dependent on the development of the share value, all employee and employer social security charges are payable similar to normal salary.
If the value of the benefit is dependent on the development of the share value in a period of at least one year, the award may be provided partly or wholly in cash instead of shares without being subject to all social security charges. Part of the award may be provided in cash for instance to cover taxes, or where shares cannot be provided to all employees participating in the incentive scheme. The cash award does not qualify as a stock option as it does not entitle to shares. However, the cash award is not subject to employee and employer social security charges (apart from the larger part of employee’s health insurance premium) as long as the cash award is given in lieu of shares, i.e., the original nature of the award remains unchanged.
The guidance issued by the Finnish tax authorities seems erroneous in respect of the transfer tax treatment of the issuance of new stock options.
Transfer Tax Aspects
Transfer tax is generally due on transfers of ownership in Finnish securities. The Tax Administration is of the opinion that transfer tax is generally due on transfers and also on the issuance of stock options.
However, it has been an established interpretation in Finnish case law that no transfer tax is payable on the issuance of new securities. Therefore, the guidance seems erroneous in respect of the transfer tax treatment of the issuance of new stock options.
It is necessary to analyse the details of the incentive scheme since the tax treatment may vary even within similar types of schemes based on their individual characteristics.
Transfers of listed shares are generally exempted from transfer tax. However, the exemption does not apply where the remuneration for the shares is in the form of work. The Supreme Administrative Court of Finland (“SAC”) has issued a ruling (KHO 2015:32) in which transfer tax was due on shares acquired on the stock exchange under an equity incentive scheme. In that case, part of the award was provided in cash, and the employees were obliged to acquire shares with the cash award. The SAC ruled that the consideration for the shares consisted partly or wholly of the employees’ work contribution and, therefore, the transfer tax exemption regarding listed shares did not apply.
Key Aspects in Considering Different Kinds of Incentive Schemes
When planning an incentive scheme, at least the following tax aspects should be considered: income tax implications for the employees, social security charges, the deductibility of the award for corporate income tax purposes, and transfer tax treatment. It is necessary to analyse the details of the incentive scheme since the tax treatment may vary even within similar types of schemes based on their individual characteristics.
Finally, it may be noted that various types of synthetic equity incentive schemes are increasingly popular on the Finnish market. Besides their flexibility, synthetic equity incentive schemes may also entail tax advantages. The deductibility of payments under a synthetic equity incentive scheme as well as transfer tax aspects, for instance, may facilitate the use of such schemes over more traditional equity incentive schemes.
Besides their flexibility, synthetic equity incentive schemes may also entail tax advantages.
Partner, Head of Tax & Structuring
D&I appointed one new partner, Mr Ilkka Leppihalme, as of 1 January 2016 to become the new Head of Competition & Public Procurement practice. Partner Ilkka Leppihalme joined D&I together with his trusted team.
D&I ranked fourth among law firms with a Nordic presence in Mergermarket report on Nordic M&A deal value in 2015.
D&I shortlisted by The Lawyer for Leading Law Firm 2016 – The Nordics together with six other law firms from the Nordic countries.
years of thinking ahead.