Sources of Corporate Governance Rules/Practices

This article first appeared in Getting the Deal Through: Corporate Governance - A Global Competition Review Special Report, www.globalcompetitionreview.com.

1. What are the primary sources of law/regulation/practice (company law, securities law and regulations, listing rules, voluntary codes) relating to corporate governance?

Corporate governance in Finnish publicly listed companies is regulated by the Finnish Companies Act (734/1978, as amended), the accounting legislation, mainly the Bookkeeping Act (1336/1997, as amended) and the Accounting Act (936/1994, as amended) and the security markets legislation, mainly the Finnish Securities Market Act (495/1989, as amended) and the guidelines and regulations by the Finnish Financial Supervision Authority (FSA), as well as the rules and regulations of the Helsinki Exchanges.

A code of best practice (the Compliance Instructions) was issued in 1997 by the Corporate Governance Committee, appointed in 1996 by the Finnish Central Chamber of Commerce and the Confederation of Finnish Industry and Employers. The Helsinki Exchange has recommended that listed companies apply the Compliance Instructions. In addition, the Ministry of Finance and Trade has issued a guideline regarding the handling of corporate governance issues in state-owned companies and associated companies.

2. What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder activist groups whose views are often considered?

The Helsinki Exchange supervises the observance of the provisions and regulations issued on the activities of the stock exchange, the rules of the Helsinki Exchange, and proper practice within the stock exchange. The Helsinki Exchange nominates a disciplinary board to handle the disciplinary matters of the stock exchange.

In addition, the FSA supervises the financial markets and the entities operating therein, as well as issuing guidelines and regulations relating to securities market legislation and securities market practice.

The supervision of the interests of investors and shareholders in Finnish business life is carried out inter alia by the Finnish Shareholders’ Association.

3. What powers do shareholders have to (a) appoint or remove directors or (b) require the board to pursue a particular course of action? According to the Companies Act, directors shall be elected by the general meeting of shareholders. The articles of association may stipulate that less than half of the directors shall be appointed in another way. If the company has a supervisory board, the supervisory board shall in general elect the directors, unless otherwise provided for in the articles of association.

Shareholders have no general right to instruct the board on matters which are the board’s responsibilities. A shareholder may approach the board with a suggestion or opinion. It is, however, the board independently which will consider whether the suggested course of action is in the interest of the company (the shareholder collective). If it is in the interest of the company, the board generally has a duty to pursue the action. If, however, it is not in the interest of the company, the board may not pursue a particular course of action on the suggestion of one shareholder. The shareholders’ meeting may, however, issue non-binding instructions to the board in business matters.

4. What decisions are required to be reserved to the shareholders?

The annual general meeting (AGM) of shareholders decides on the adoption of the profit and loss statement and the balance sheet, any measures arising from the profit or loss of the adopted balance sheet, the granting of any discharge of liability to board members and the managing director, and any other issues which fall to be decided at the AGM pursuant to the Companies Act or the articles of association. In addition, decisions such as amending the articles of association, increasing or decreasing the share capital, merger, diffusion or going into liquidation are made by the shareholders’ meeting.

The general meeting of shareholders generally elects the board and/or the supervisory board, if such a body is included in the articles of association. The general meeting of shareholders also elects the auditor(s) and any deputy auditors.

5. To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

According to the Companies Act, all the shares of the company have equal rights attached to them. The articles of association may, however, enable the company to issue different classes of shares with different rights attached to them. The classes of shares may differ from each other with regard to, inter alia, the number of votes attached to the share or the right attached to the share in the distribution of the assets of the company.

In addition, the articles of association may provide that the company must or may have shares carrying a limited right to vote which are presumed not to have the same rights as other shares (so-called preference shares). The right to vote can be excluded with regard to the matters handled at the general meeting of shareholders, with the exception of certain defined matters relating to the most essential rights of the holder of preferred shares. Any such shares must have a specified financial benefit attached to them compensating for the lack of other rights. A class of shares that carries no voting rights whatsoever is prohibited by the Companies Act.

Generally, voting rights accord to the rule of ‘one share/one vote’ and every shareholder has, at the general meeting of shareholders, the right to exercise all the voting rights attached to the shares represented by him, unless otherwise stipulated in the company’s articles of association, which may, for example, regulate a certain maximum percentage of votes per shareholder or stipulate a regressive or progressive voting scale.

The number of votes carried by the shares of a shareholder may not, however, exceed 20 times the number of votes carried by the same number of shares of another shareholder.

6. Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote?

Each shareholder has the right to participate in the general meeting of shareholders, with the exception of the company or its subsidiaries which own shares in the company in its own name.

The articles of association may stipulate that a shareholder shall, in order to attend the meeting, inform the company of his intention to participate at the latest on a date specified in the notice to convene. In order to exercise his or her rights at the meeting a shareholder must also be entered into the share and shareholder register of the company. The holder of a share registered in the name of a nominee may be temporarily entered into the share and shareholder register for the purpose of being able to attend the meeting.

Shareholders may exercise their rights at the meeting in person or by proxy. Also, the articles of association may stipulate that in certain matters a shareholder may authorise the board or another person to act as a representative at the expense of the company.

7. Are shareholders able to (a) require meetings of shareholders to be convened and/or (b) require resolutions to be put to shareholders against the wishes of the board and/or (c) require the board to circulate statements by dissident shareholders?

An extraordinary meeting of shareholders shall be held at the request of shareholders holding a minimum of one-tenth of the shares of the company. The articles of association may also stipulate a smaller holding.

A shareholder has the right to have a matter handled at the general meeting of shareholders on condition that he presents a request to the board early enough for the board to be able to include that matter in the notice to convene the meeting.

A shareholder has no general right to require the board to circulate statements by dissident shareholders, with the exception of an obligation of the board to circulate a notice to convene an extraordinary shareholders’ meeting, as above.

8. Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action against controlling shareholders for breach of these duties be brought?

According to the Companies Act, the general meeting of shareholders may not pass any resolution that will result in an unjust benefit being conferred on a shareholder to the detriment of another shareholder.

A shareholder may be held liable to compensate another shareholder who has suffered loss as the result of his or her wilful misconduct or grossly negligent act infringing the Companies Act or the articles of association.

One or several minority shareholders may bring an action against the board in the name of the company on certain conditions, eg if they represent at least one-tenth of all the shares or the equivalent of one-third of the shares represented at the general meeting of shareholders and the same number of shareholders have voted against a decision to grant discharge to the board members.

9. Can shareholders ever be held responsible for the acts or omissions of the company?

There are certain cases where the controlling shareholder has exceptionally been held liable for the company’s liabilities, mainly on the basis that a separate entity has been used for the very purpose of escaping liability. These cases are, however, very exceptional, and would always depend on a judgment in casu.

10. Are anti-takeover devices permitted?

No Finnish legislative act or regulation expressly addresses the right of, nor the measures available to, a company or its management to defend the company against a hostile tender offer. Nor have any general principles been established through legal practice or precedent. The various opinions expressed on the matter have, however, generally emphasised the importance of equal treatment of shareholders.

The Companies Act provides for several stipulations of the articles of association that will, to some extent, protect the company from hostile takeovers. It is for example possible to include a so-called poison pill in the articles of association, ie a provision providing for a lower threshold for the duty to redeem the shares of the minority shareholders, normally one-third or a half (under the Securities Market Act ownership of two-thirds of the shares). The articles of association may further limit the voting power of a shareholder to a certain percentage of the total voting rights in the company, or it may be provided that certain decisions must be taken by the general meeting of shareholders with an exceptionally high qualified majority. Listed companies may not include a provision that restricts the right to acquire listed shares of the company in the company’s articles of association. In addition, in order to prevent a hostile takeover, a substantial percentage of the company’s shares may be issued to and be held by a friendly party, subject to the applicable regulations.

11. Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Private limited companies may include in their articles of association a provision according to which the company and/or the shareholders have a right to redeem shares that are transferred to a new shareholder. It may also be stipulated that an acquisition of shares in the company is dependent upon the consent by the company. However, according to the rules of the Helsinki Exchanges, listed companies may not include in the articles of association provisions that restrict the right to acquire listed shares of the company.

12. Are compulsory share repurchase rules allowed? Can they be made mandatory in certain circumstances?

According to the Companies Act, the articles of association may provide that the share capital of the company can be lowered through a redemption of defined shares in the company.

It should be noted that the shares of a company listed pursuant to the rules of the Helsinki Exchanges shall be freely transferable. It is not clear, however, whether the share repurchase rules described above are to be considered a hindrance to free transferability.

13. Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

Finnish companies can have either a one-tier or a two-tier board structure. The board of directors (the board) is the mandatory corporate body elected by the general meeting of shareholders, whereas the supervisory board refers to the special corporate supervisory body that may be provided for in the articles of association of a company with a share capital of at least € 80,000. Supervisory boards mostly exist in state-owned companies, and the trend is to decrease the number of supervisory boards.

14. What are the board’s primary legal responsibilities?

According to the Companies Act, the board is responsible for the management and the proper arrangement of the operations of the company. The board generally elects the managing director, and is responsible for the supervision of the book-keeping and control of the financial matters of the company.

The board instructs the managing director on the day-to-day management of the company and decides upon operations that are unusual and extensive with regard to the normal operations of the company. The board collectively represents and signs for the company and is responsible for convening the general meeting of shareholders and for implementing the decisions of the shareholders’ meeting.

15. Who does the board represent and to whom does it owe legal duties?

The duty of the board according to Finnish law is to promote the best interests of the company. The interest of the company is generally interpreted as the shareholders’ collective interest. The board may, therefore, not act in the interest of one or some of the shareholders only, and all decisions should be taken in the interest of the company as a whole.

16. Can an enforcement action against directors be brought on behalf of those to whom duties are owed?

The board is liable to compensate the company for all damage caused during their appointment if the damage has been caused wilfully or negligently. The decision to bring an action for damages on behalf of the company shall be made by the general meeting of shareholders. The general meeting of shareholders may grant the board a discharge of liability, but this does not preclude the company from bringing an action against the board unless the granting of discharge was based on correct and complete information.

One or several minority shareholders may bring an action against the board in the name of the company on certain conditions, eg if they represent at least one-tenth of all the shares or the equivalent of one-third of the shares represented at the general meeting of shareholders and the same number of shareholders have voted against a decision to grant discharge to the board members.

In addition, the board is liable for damage caused to a shareholder or a third person by infringement of the Companies Act or the articles of association.

17. Do the board’s duties include a care/prudence element?

The duties of the board include a duty of care, which means that the members of the board have a duty to act in the best interests of the company, and to act with such prudence to ensure that the interests of the company are secured. Generally, this means the kind of care that can be objectively expected of a person in such a position.

The board members also have a duty of loyalty requiring that they act in good faith and with loyalty towards the company, and that their actions are in accordance with the interests of the company. The duty of loyalty is determined according to a subjective interpretation. A board member is required to act honestly and in good faith ensuring that no conflict of interest exists between his and the company’s interests.

18. To what extent do the duties of individual members of the board differ (for example, if their skills and experience are different)?

All persons elected as board members are presumed to have the required capacity and skills necessary to serve as board members. As a rule, no distinction is made regarding the individual board member’s duties, and the board always makes its decisions under the Companies Act collectively. Tasks may be divided between the individual board members according to their particular skills. The board, however, as an entity remains responsible for its duties according to law.

The skills of individual board members might in casu be relevant in court proceedings when determining the compensation for damages for each board member, or when deciding upon the division of liability, predominantly in a situation when the person in question has been nominated to cover particular aspects of the business.

19. To what extent can the board delegate responsibilities to management, a board committee or person?

It is possible to arrange the operations and working manners of a company internally and to assign certain duties to officers, management boards or executive committees. Irrespective of such internal arrangements, the board must always pass its resolutions at board level in a meeting when deciding on matters falling under the scope of its duties according to applicable law or other regulations, and the liability of the board may not be delegated.

The Corporate Governance Committee recommends that companies whose boards allocate particular tasks to different committees and/or individual directors should confirm such allocations in writing.

20. Is there a minimum number of ‘non-executive’ and/or ‘independent’ directors required by law, regulation, or listing requirement? If so, what is the definition of ‘non-executive’ and/or ‘independent’ director and how do their responsibilities differ from those of executive directors?

Finnish law does not distinguish between executive and non-executive directors, nor does it require a minimum number of non-executive directors. The issue was discussed in the Corporate Governance Committee and it was considered that no recommendation needed to be made regarding any requirement for non-executive directors.

It was, however, noted that the participation of non-executive directors in the board promotes the independence of the board in relation to the executive officers of the company, which is important for the management function of the board.

21. Do law, regulation, listing rules or practice require separation (or joining) of the functions of board chairman and CEO? If flexibility on board leadership is allowed by law, regulation and listing rule, what is generally recognised as ‘best practice’ and what is the common practice?

According to the Companies Act, the managing director may always be a member of the board, but in companies with a share capital of at least € 80,000 may be chairman of the board only if the company has a supervisory board. The managing director is entitled to be present and has a right to be heard at the board meeting even though he is not a member of the board.

There are conflicting views on the feasibility of electing the managing director to the board or, in smaller companies, as chairman of the board – and the practice varies from case to case.

22. What board committees are mandatory? What board committees are allowed? (Specify for what functions.) Are there mandatory requirements for committee composition (eg ‘independence’)?

According to Finnish law, no board committees are mandatory, and the Companies Act does not provide any regulations concerning executive or board committees. It is, however, possible to delegate the preparation of certain matters, provided that the final decision is taken at board level. From a company law point of view, the function of a committee is only to assist the board and it derives its role and responsibilities from the directions and orders issued by the board from time to time.

The Corporate Governance Committee recommends that if an audit committee is established, the members of this committee should be elected from board members who are not employees of the company. The committee’s main responsibilities and working principles should be determined in the board guidelines and the composition of the committee be clarified in the annual report and the company prospectus.

23. Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

The board works and makes decisions in board meetings. The board is convened by the board chairman when necessary or when requested by a board member or the managing director. No further requirements are set by law, regulation or listing requirement.

24. Is disclosure of board practices required (committee structure, number of meetings, attendance, etc) by law, regulation or listing requirement?

The Corporate Governance Committee recommends that public companies confirm the duties of the members of the board in its annual report and prospectuses, if these are assigned special duties and responsibilities. The Corporate Governance Committee has also recommended that in many cases written rules of procedure for the board be prepared, but that there is no need to impose such an obligation on all companies.

According to the rules of the Helsinki Exchanges the listing requirements include a statement on how the company’s administration, result-monitoring, risk-management and company disclosure have been arranged.

25. Is there any law, regulation, listing requirement or practice which affects (a) the remuneration of directors, (b) the length of directors’ service contracts, (c) loans to directors, (d) other transactions between the company and any director?

(a) In general, the body electing the board members decides upon the remuneration of the board members (shareholders’ meeting or, if such corporate body is stipulated in the articles of association, the supervisory board). The articles of association may also contain provisions regarding the remuneration of board members. The Corporate Governance Committee recommends that public companies disclose the board member’s remuneration in their annual accounts or prospectuses.

(b) The term of board members’ service may be stipulated in the articles of association as a fixed term or until further notice. Unless otherwise provided for in the articles of association or otherwise decided upon at the election of a new member, the term of a board member’s service shall end at the close of the general meeting of shareholders deciding upon the election of a new member.

(c) According to the Companies Act, the company may grant a monetary loan to a party belonging to the inner circle of the company (eg board members, managing director, shareholder owning at least one per cent of the shares in the company and family members of these persons) subject only to the fulfilment of certain conditions.

(d) The Companies Act contains rules prohibiting a board member or the managing director from participating in the handling of an agreement between himself/herself and the company or in the handling of an agreement between the company and a third person by which he or she would receive a material benefit that may be contrary to the interests of the company.

26. In relation to directors and officers liability insurance, (a) is it permitted and/or common practice, (b) can the company pay the premiums?

A director may obtain insurance against liability for damage arising from a breach of the provisions of the Companies Act caused to the company, the shareholders or third parties. Wilful misconduct and acts based on gross negligence would always be excluded from the scope of the insurance. As a rule the company would not be prevented from paying the insurance premium if so authorised by the shareholders’ meeting.

27. Are there any constraints on the company’s indemnifying directors in respect of liabilities incurred in their capacity as directors? If not, are such indemnities common?

According to the Companies Act the decision to bring an action for damages on behalf of the company shall exclusively be made by the shareholders’ meeting (or in certain cases by a minority group of shareholders) and this right may not be limited. The shareholders’ meeting may decide that the company shall have a directors liability insurance policy, which, however, will not cover gross negligence or wilfulness. A commitment to hold directors harmless for compensation to third persons has not been tested and would have to be evaluated according to the general rules regarding the liability of the board of directors and the right to payments by the company. Considerations such as whether the payment might be considered as hidden dividend or the arrangement be the subject of other restrictions under the Companies Act would have to be made.

28. What role do employees play in corporate governance?

According to the Companies Act, the company, the directors or the shareholders are under no specific duty to look after the interests of employees. Employees’ interests may generally be taken into account if they are not contrary to the collective interests of the company and the shareholders.

Pursuant to the Employee Representations Act (725/1990, as amended), the employees of a limited company with at least 150 employees have the right to be represented at managerial level in the company. At the initiative of the employees, employees and management shall negotiate and agree on the managerial level where it would be desirable for the employees to have a representative. If employees and management cannot agree, the employees have a right to require the nomination of an employee representative on the board or the supervisory board, as the case may be, additional to the members of the board or supervisory board otherwise elected.

Pursuant to the Co-determination Procedure Act (725/1978, as amended), a representative of the employees in companies with more than 30 employees, with some exceptions, must be heard when the company decides upon certain matters, such as significant changes in the working conditions of the personnel. The company, its representatives and members of management are responsible for complying with this obligation.

29. Are the corporate charter and by-laws of companies publicly available? What are companies required to publicly disclose?

According to the Trade Register Decree and the Companies Act, a company has an obligation to register its articles of association and all subsequent amendments in the Finnish Trade Register. The information contained in the Trade Register is publicly available.

The company must also submit the annual accounts for registration within two months of the adoption of the income statement and balance sheet at the AGM of shareholders. All public companies must also, under the Companies Act, prepare interim reports and submit them for registration. Listed companies have an obligation to publish the information in interim reports and annual accounts as stock exchange releases.

Listed companies have a general obligation under the Securities Market Act to make available for subscribers sufficient information on factors that may have a material effect on the value of the security. In addition, the securities market legislation stipulates an obligation to disclose the annual report and the interim reports of the company, as well as information relating to different kinds of changes in the company. Detailed information must also be provided in any company prospectus.

In addition to statutory rules, the Compliance Instructions include certain recommendations on the disclosure of information relating to the company’s organisation, board member remuneration and other corporate governance issues.