The new Act would be both clearer and more comprehensive than the present Act. The operating freedom of the companies would increase with the removal of different restrictions and formal requirements and the introduction of new operating methods. The provisions on the legal protection of creditors and minority shareholders would be enhanced.

Special attention has been paid to the position of small limited companies. The clarification of the regulation would improve their possibilities to familiarise themselves with the provisions of the Act.

Regulation on company management to be lightened

According to the proposal, the Articles of Association of a limited company could be very short. It would only have to contain provisions on the trade name, domicile and branch of the company. With regard to other matters laid down by the Articles of Association, the Act would contain presumption provisions, which would be applied unless differing provisions are included in the Articles of Association.

The procedure of the General Meeting of the Shareholders would be somewhat lightened. No resolution would anymore have to be taken on discharge from liability of the company management. According to the Articles of Association, the General Meeting of the Shareholders could also be held outside Finland and certain provisions relating to notices to convene the meetings would be made easier.

There would be no specific provisions on the size of the company that has to have a Managing Director or which can have a Supervisory Board. For the sake of clarity, the starting point in the election of management bodies would be for the General Meeting of the Shareholders to elect the company Board of Directors and the Board of Directors in turn to elect the Managing Director. However, the Articles of Association could order that the Supervisory Board has the right to elect the members of Board of Directors.

The proposal is to leave the provisions on the audit of a limited company essentially unchanged. The amendment of the Audit Act is at present pending in the Ministry of Trade and Industry, which may later on require amendments also in the Companies Act.

The publicity of shareholdings to remain as it is

Information on holdings in limited companies would be public in the same way as at present. The company’s Share Register and Shareholder Register should be available for inspection in the head office. Like at present, foreign holders could have their shares nominee registered, in which case their holdings would not be public.

The par value of shares to be abolished

Shares have traditionally had a par value laid down in the Articles of Association, meaning the minimum value to be paid for each share. According to the proposal, there would no longer be a par value unless the Articles of Association so order.

The reform would mean an elimination of the connection between a share and the share capital. This would facilitate the procedure in share issues and other arrangements. The share capital could be raised without issuing shares and shares could be issued without raising the share capital. A bonus issue would be possible without reserve fund transfers and for example a share split could be implemented by issuing new shares without payment.

The reform would not affect the position of creditors or minority shareholders. For example the payment of the share capital and the permanency of the capital would have the same guarantees as at present.

Investments made in the unrestricted equity of the company would be entered in a separate fund, so that they would be significantly more transparent than at present. This would mean that profit funds and invested equity would be kept separate.

A bonus issue without the right of pre-emption would be allowed in the case of an exceptionally weighty economic reason taking into account the interests of the company and all the shareholders. An example could be an incentive system of the personnel or the need to pay compensation to the holders of a more valuable class of shares when combining share classes. The company could also issue bonus shares to itself.

The regulation of such a bonus issue has, however, been tightened compared to earlier draft proposals inter alia by requiring the report of an approved auditor on the grounds of the withrdrawal of the right of pre-emption.

Solvency requirement for the distribution of funds

The provisions on the distribution of the company’s profits and other funds are proposed to be supplemented by a provision to the effect that no funds may be distributed if, when making the decision on the distribution, the persons knew or should have known that the company was insolvent of that it would become insolvent due to the distribution of the funds. This aims at ensuring that the company maintains its operating requirements and at enhancing the protection of creditors.

Reserves formed of unrealised asset appreciation, such as the fair value reserve and revaluation reserve formed in a financial statement complying with international financial statement standards (IFRS standards), would belong to restricted equity. This means that this type of unrealised appreciation could not be distributed for example as dividends.

The present Companies Act restricts the giving of a loan to a person belonging to the inner circle of the company. The restrictions aim at preventing going around the provisions on the distribution of assets and at preventing possible abuse. However, the proposal is to remove the restrictions on inner circle loans, because they have not been functional. Inner circle loans would still be governed by the general principles of the Act.

The mergers and divisions of companies to be speeded up

The proposal is to speed up the merger procedure of companies. The procedure to protect creditors relating to a merger could be started already when registering the draft term of merger. This would make it possible to complete a merger procedure in slightly over three months. Corresponding reforms would also relate to division.

The proposal contains new provisions on so called tri partite merger, in which another party than the acquiring company, usually its parent company, pays the shareholders of the merging company the merger consideration. The proposal also contains provisions on division by giving assets to an operating company, i.e., a company incorporated earlier.

A limited company could be transformed into a cooperative, a partnership or limited partnership or its operations could be continued by a private entrepreneur. According to the present Act, it is possible to transform a cooperative or a partnership into a limited company but not vice versa.

Review of provisions on liability for damages

The new Act would contain provisions on the presumption of negligence in cases where damage has been caused by procedure against the law or the Articles of Association or by an act favouring someone in the inner circle of the company. In these cases the damage would have to be compensated unless the party responsible for the procedure proves that he has acted with care.

The liability of a shareholder for damages for breach of the Companies Act or the Articles of Association would not require gross negligence like at present; instead, negligence alone would suffice to create the liability. However, the liability for damages could not in practice concern a small shareholder, because he cannot be presumed to be especially active or to have special knowledge of the matters of the company.

The right of an individual shareholder to compensation for the shareholder’s indirect damage, i.e., for damage caused to the company, would be abolished. However, a special minority of the shareholders and, under certain conditions, an individual shareholder would have the right to bring an action for damages on behalf of the company.

All actions for damages referred to in the Companies Act would be subject to a special limitation period of five years. At present, the period of limitation is either a specific two or three year set period or the general period of limitations.

A shareholder challenging the legality of the decision of the General Meeting of the Shareholders would, like at present, have to bring action against the decision usually within a period of three months. What would be new is that the Act would also make it possible to bring action against a clearly illegal decision of the Board of Directors when the Board of Directors decides on a matter belonging to the General Meeting of the Shareholders upon authorisation of the General Meeting of the Shareholders.

Disputes to be solved by certain District Courts

The handling of civil disputes where the Companies Act applies would be concentrated in eight District Courts, that is the District Courts of Helsinki, Kuopio, Lahti, Oulu, Tampere, Turku, Vaasa and the Åland Islands. At present these matters are handled by all District Courts in Finland. The concentration of the cases would allow the judges better to specialise in company law matters. Lately, the number of cases decided has been about one hundred a year.

Retroactive raise of the minimum share capital

The purpose is for the new Companies Act to enter into force on 1 September 2006. The entry into force of the Act contains a transitory provision, under which companies founded before 1 September 1997 would, within three years from the entry into force of the Act, have to raise their share capital to a minimum of EUR 8,000. If the raise of the share capital is not made and if the company does not change its legal form, it would have to be placed into liquidation or struck from the Trade Register.

Additional information:
Senior Adviser, Legislative Affairs Pekka Pulkkinen, tel. (09) 1606 7702
email: first name.t.last name@om.fi