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   National Security in Tighter Focus in Real Estate Deals Starting in 2020

   Hybrid influencing, terrorism and other threats to national security are a common sight in news headlines, and Finland has not remained idle. The previous government of Prime Minister Juha Sipilä took the position that new threats require new kinds of preparedness. Sipilä’s government proposed more detailed legislation to regulate the purchase of properties that are significant to overall security. Acts Restricting Real Estate Deals As a foundation for new legislation, the Ministry of Defence published a report in 2017 on how vital societal installations could be secured. Legislative reforms were required to ensure that properties in close proximity to vital installations do not fall into the wrong hands. The necessity of legislative reform was also supported by the significant increase in real estate purchases in Finland by foreign – particularly European – investors. Foreign investors see Finnish real estate as a good investment. An exception to this growth trend is the significant decline in Russian buyers. Finnish Parliament passed national security reforms in 2019, and the new and amended acts will enter into force from the beginning of 2020: What has Changed? The acts concerning permitting, pre-emption and redemption supplement one another and provide the state with better tools to intervene in the ownership and use of properties that threaten national security. Furthermore, the reforms provide improved tools to take national security into account in advance, for example, when planning the use of areas. Restrictions were placed on the acquisition of real estate by non-EEA buyers so that non-EEA natural or legal persons can acquire real estate in Finnish territory only if the Ministry of Defence grants a permit for the acquisition. Even if a legal person has its registered office in the EEA, it requires a permit if at least one-tenth of the total votes in the legal person or corresponding actual control is held by a non-EEA natural or legal person. How these reforms, particularly the permit requirement, will impact foreign acquisitions of real estate remains to be seen. Hopes are that the impact will not be negative. The danger is that foreign investors could find the Finnish system to be too rigid. At worst, this could lead to foreign investors looking for investment targets in other countries, which would reduce the liquidity of the Finnish real estate market.

   Published: 7.11.2019

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   Prosperity and Responsibility – The New Age of Investing

   The trailblazers in responsible investing have been the most demanding clients, such as institutional investors and family offices. For them, responsibility is a necessity, but it has also begun to catch the attention of the wider public. Younger generations—millennials and Generation Z—have a very different worldview and consumer habits than today’s middle-aged generations, and expect companies to have a positive impact on society. Corporate impact reporting and supplementing financial figures with new performance indicators are also rising trends. Corporate responsibility reports provide a general picture, but comparing responsibility and impact between companies remains difficult. Measuring impact and communicating it to investors will require innovative solutions. Companies seeking investors need to create incentives that promote sustainable development and positive social impact. The best incentive is likely to be including impact in the valuation of companies in addition to financial performance. The EU has included responsibility in its action plan, which ties financing to sustainability. With skilfully drafted conditions, it is already possible to incorporate impact into investments. Responsible and impact investing is no longer a marginal phenomenon, but the new normal in investing.

   Published: 6.11.2019

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   What is ‘green’ or ‘sustainable’ investment? EU might have the answer

   The market has started to respond to this obvious gap. Sustainable investment as a field has grown rapidly during the past years and has transitioned from being a niche area to mainstream. Sustainable investing, i.e. investing along environmental, social and governance (ESG) criteria is one of the fastest-growing strategies in finance, and within ESG, it’s the “E” that has recieved the most attention. Market is facing a positive problem: investors’ demand for sustainable investments already surpasses offering. However, an itching problem is starting to bother investors more and more, namely what counts as a ‘green’, or ‘sustainable’ investment? How do we really measure and compare green and sustainable investments? Although a number of initiatives on how to report sustainability measures have emerged, there is currently no single sustainability standard available. So who will take on the challenge to bring a common language to this field? It appears as if the EU has taken it on its shoulder to lead the way. The EU has long expressed its wish to take the global lead in promoting sustainable finance. In March 2018, the EU showed that it is serious about taking the leading role in reforming the financial system to support the transition towards a sustainable economy, by adopting the ‘ Action Plan on Financing Sustainable Growth ’. One of Action Plan’s aims is to set down conditions and frameworks in order to develop a clear and unified classification system, or taxonomy , for environmentally sustainable economic activities. While expectations on the taxonomy are undoubtedly high, the main question is whether the taxonomy actually will manage its task - to direct capital flows toward a more sustainable economy. Critical voices have pointed out that a taxonomy could counteraction and instead lead to a decrease in ambition level amongst those already passing the bar for what is considered ‘green’. Another concern brought forward is with sustainability and science rapidly developing, there is a risk that what we consider sustainable or green today, might not be so in the future, which could risk the practical usefulness of the taxonomy. Despite some concerns, the taxonomy would nonetheless contribute to a standardized, science-based classification system and provide some alleviation to the fare of greenwashing. The goal is clear – we need to achieve a carbon-neutral economy – and so is the time line – now.

   Published: 21.10.2019

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   Sustainable development through public procurement

   One of the UN’s defined Universal Sustainable Development Goals is to promote public procurement practices that are sustainable in accordance with national policies and priorities (Goal 12.7). Sustainable public procurement is both a significant principle and a major economic phenomenon that has a role to play in saving the world. Indeed, the UN’s Sustainable Development Goals have also been described as ‘The closest thing the world has to a strategy’. A Tool to Help Everyone Win Procurement law can be a powerful tool in the right hands. For example, contracting entities can include corporate responsibility factors in the suitability requirements for bidders and take the emissions from the manufacturing and use of products being procurement into account when comparing bids. Employment requirements can be set for bidders, such as a requirement to arrange work trials or practical training for job seekers who have a diminished work capacity or are otherwise difficult to employ. The entire subcontracting chain can be covered by Code of Conduct requirements imposed on suppliers and they can be required to comply with human rights conventions. Impact investing projects can also be implemented through public procurement. In this approach, the public sector only pays for results while private money supplies the financing. The impacts achieved benefit the end users and their families, the service providers, the public sector and investors. Everyone wins, be the goal the prevention of marginalisation of children and youths or the promotion of employment among immigrants. Investors receive both a reasonable profit and make an impact. Dialogue between Public and Private Sectors is Key So how do we go about brining contracting entities and responsibly companies together? The first step is to create a dialogue concerning what the markets can offer and what operating models and innovations the markets can be expected to develop. The next step is to make sure that procurement departments have the resources to run procurement processes in a way that makes achieving sustainability goals possible. Above all, we need strategic policies for the development of sustainable procurement and the courage to take a new approach to procurement.

   Published: 19.10.2019

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   Does Your Strategy Encourage Competition on Merits?

   Companies that believe in what they do care for their employees and customers and keep abreast of the changing world. This recipe for success ensures that the company will not face problems with competition law compliance. Nevertheless, success also requires growth and collaboration. Many companies benefit from industry cooperation, but the decision how to cooperate and with whom requires careful thinking. You cannot join forces with your competitors to do things you could equally well do on your own. You cannot exchange information on factors that affect how you compete or ask about your competitors’ pricing strategies. The idea of free competition requires that everyone compete on their own merits. Growth enhances efficiency and brings synergies. However, there are limits to growth in business. A very strong market position may hamper efficiency and innovation. If your company becomes dominant, competition law will restrict its freedom of contract and freedom to operate. It is up to the management and board of directors to ensure that a company abides by the rules. This will be hard to achieve if the strategy guides the company in another direction or if the connections of the board members  limit effective competition. From this perspective, the Supreme Administrative Court’s  recent ruling on the bus cartel  is a  decision all board members should read carefully.  It also states that the companies represented in the board of directors of the company will be held responsible for the infringement the board becomes aware of.  The ECN+ Directive , in turn, introduces changes to the national competition laws of the Member States that will entail more severe sanctions. From time to time, companies should take a critical look at their strategies: Does our strategy rely on genuine competition and developing our own strengths? Do our partnerships promote efficiency, innovation and customer’s interest? This kind of competition will ultimately produce the best results for the company itself and for society as a whole.

   Published: 26.9.2019

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   Forewarned is Forearmed - Gaining a Strategic Edge in Complex Merger Filings

   More Data, More Detail The notifying party will notice the more technical approach to merger filing procedures by the authority’s – at times – substantial requests for information. More and more, authorities do not seek aggregated, high-level data, but instead want data that is as granulated as possible. While an extensive data gathering process implies more work for the merging parties, it also allows both the notifying party and the authority to test more thoroughly a variety of hypotheses. The hypotheses of interest in such instances will be whether the notified merger will result in a significant impediment to effective competition and consequently reduce consumer welfare. As this process is the reality facing merging firms, the importance of having conducted a thorough economic analysis of your own before beginning merger filings cannot be overstated. Work Up Front Makes Life Easier Down the Line A common worry among the notifying parties is that the information requests can at times seem excessively burdensome (and there are many instances when acquiring the relevant data may even be impossible). After all, it is far easier to request detailed data than it is to acquire it, placing many times an undue burden on the involved firms. We should nevertheless keep in mind that what the use of data and economic models add to the merger filing procedures (when used appropriately of course) is a level of transparency and reliability that would be difficult to achieve otherwise. The effects predicted by an economic model can be replicated and the source of the result traced to its root causes. While the data gathering process can be intensive, there is still a silver lining in that when analytical methods and data is correctly and appropriately used, then it becomes easier to predict and plan for the discussions that will take place with the competition authority. Economic Analysis as a Foundation for Realistic Bids In addition to ensuring that the parties are well prepared for merger filing proceedings with a competition authority, an appropriately conducted economic analysis of the relevant competition effects may also give a strategic edge at an even earlier stage. Prior to notifying a competition authority, firms are in many instances involved in a bidding process. At the stage when firms are considering valuations and bidding strategies for a potential target, sidestepping merger regulation issues may be costly if offers are made that have not taken into account the potential merger risk. Moreover, a thorough economic assessment will inform the potential buyer of the commercial feasibility of any potential remedies, allowing the buyer to effectively negotiate with the seller how divestitures may affect the transaction valuation. In a similar vein, a thorough competition assessment will ensure sufficient deal security from the seller’s perspective. Finding this balance between the buyer’s and seller’s perspectives often hinges on the parties having the same realistic view of the possible competition concerns and the necessary remedies needed to alleviate any concerns. This makes an early-stage competition assessment not only a necessity but also a strategic tool to make better business decisions. Don’t Make Decisions in the Dark When choices are made without the support of relevant data and theories, the results can often be arbitrary and biased. On the other hand, the use of data and economics aid decision makers to make decisions on well-founded and robust grounds. This holds true for both a competition authority when evaluating a merger as well as a when a buyer presents a bid. If the increased use of data can help hold a competition authority to account and aid firms in making well-informed and unbiased decisions, then it is perhaps something we should all encourage.

   Published: 24.9.2019

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   Competition Damages Cases Set New Precedents

     Did the Infringement Cause Harm? One of the crucial questions in competition damages cases is whether the competition infringement actually caused harm to the claimants. In Finland’s largest competition damages trial to date, Metsähallitus (an entity managing state-owned forests) claimed damages in the original amount of approximately EUR 283 million from the forest industry companies Stora Enso, UPM-Kymmene and Metsäliitto Cooperative based on the Market Court’s ruling on a competition infringement in the roundwood market.  In addition to extensive factual evidence, the parties submitted a significant volume of economic expert reports on the impact of the infringement. The Helsinki District Court and the Helsinki Court of Appeal dismissed Metsähallitus’ claims because the competition infringement had not been shown to have had an effect on the prices of roundwood agreed between the parties. The Court of Appeal’s judgement remains final as the Supreme Court did not grant Metsähallitus leave of appeal. Earlier in 2017, the Helsinki District Court had dismissed damages claims in the original amount of more than EUR 50 million brought by private forest owners and municipalities regarding the same competition infringement on the roundwood market. The decisions by the District Court are final. The legislation on the burden of proof regarding the occurrence of damages changed partially in December 2016 with the entry into force of the Act on Competition Damages. The Act is based on an EU Directive and it places the burden of proof regarding the occurrence of harm in cartels on the defendant. In other words, cartels are presumed to have caused harm unless the participants show the contrary. Who Pays and How Much? If harm has occurred, the next step for the court to assess is the amount of damages. This summer, the Helsinki District Court gave a decision in a damages case based on predatory pricing. Finland’s largest dairy operator was alleged to have inflicted harm on its competitors by pricing below its variable costs. This was Finland’s first significant damages trial related to an abuse of a dominant market position and one of the very few in Europe. Four claims out of six were settled before the main hearing. As regards the remaining two, the damages awarded by the District Court were less than a third of the original claim, which amounted to EUR 30 million. The decision is final. Often, the court will also have to determine how liability for damages is divided between members of the competition infringement. In June, the Supreme Court handed down its first rulings regarding damages claims based on the so-called asphalt cartel. The Finnish government and 40 municipalities claimed damages that originally amounted to a total of  EUR 120 million from asphalt companies on the basis of a cartel. The Supreme Court clarified, among other things, the joint and several liability of cartel participants in a situation where the liability for damages has become time-barred for some of them. In the cases before the Supreme Court, three companies were jointly and severally liable for damages. However, for two of them, the liability had become time-barred. The Supreme Court deemed that this had caused the joint and several liability to lapse. Notwithstanding this, in one of the cases the third company was liable for the full amount of damages due to the fact that it had been the contracting party of the claimant. In another case, the same company was only liable for one third of the damages, because it had not been a contracting party of the claimant but it had otherwise played a central role in the cartel. The asphalt cartel damages cases have also brought up the issue of the transfer of liability in corporate acquisitions before the Supreme Court. The Supreme Court referred this question to the Court of Justice of the European Union for a preliminary ruling. The CJEU gave its ruling in the spring. It found that the purchaser of a cartel company is liable for damages if it continues the company’s activity, even if it had dissolved the acquired company. This ruling will be taken into account in the Supreme Court’s final decision. Read More For those who would like to learn more about competition damages, our experts Ilona Karppinen and Sari Hiltunen have compiled an extensive account of Finnish law and legal praxis for the publication Private Antitrust Litigation: A Practical Law Global Guide.

   Published: 23.9.2019

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   Uncertain Times, Unexpected Opportunities?

   How is the M&A market doing? According to Merrill Corporation's Deal Drivers report , the aggregate value of corporate transactions in Europe was EUR 350 billion in the first half of 2019 – lower by a third compared to the previous year. Seems like a drastic drop, but compared to the second half of 2018, the value has actually grown by 20%. If anything, the numbers suggest that the market is returning to normal after a stormy 2018. Still, economic and political tensions are seeping into regulation. Foreign direct investment faces increasing government scrutiny. In the EU, 14 countries have passed laws allowing them to have the final say on investments in industries essential to the national economy or national security, and more are set to follow suit. Recognising this trend, the European Commission issued a framework regulation on the screening of FDI earlier this year. The regulation does not make screening obligatory or establish harmonised criteria, but serves the more general goals of cooperation and transparency. EU countries will have to report their FDI screening activities to the Commission and to each other, which will slow the merger process. Nonetheless, cooperation and transparency are good for the market. Companies continue to seek growth opportunities across the globe. I believe that buyers will be bold when a lucrative strategic target hits their radar. This time of transition may well translate into opportunities.

   Published: 28.8.2019

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   EU Sets More Stringent Rules on Pre-Marketing of AIFs

   Briefly put, marketing means offering units or shares of alternative investment funds (AIF) to investors. In contrast, pre-marketing – or soft circling, as it is also known – occurs, for example, when an AIFM based in an EU Member State is testing whether professional investors might be interested in a given type of investment. To reduce doubt, the European legislators recently clarified the line between marketing and pre-marketing through Directive (EU) 2019/1160 of the European Parliament and of the Council . The Directive must be implemented by the Member States by 2 August 2021; the Finnish government has not yet proposed a bill to that effect. What will change with the Directive? Uniform Definition and Rules for All Member States Until now, the rules governing pre-marketing have been ambiguous. The Directive seeks to change this by establishing a harmonised definition of pre-marketing that will be applied in all Member States. In other words, AIFMs should be able to presume that the same rules apply to pre-marketing across the European Union. However, the outcome depends on how Member States transpose the Directive into their national laws. The Directive specifies three key characteristics for pre-marketing: In addition, the Directive imposes additional criteria on pre-marketing that concern, e.g. the accuracy of the information provided to investors. For example, if the AIFM gives a draft prospectus or offering document to a client as part of its pre-marketing, the draft must clearly indicate two things: firstly, that it does not constitute an offer or an invitation to subscribe to units or shares of the AIF, and secondly, that the information in it should not be relied upon because it is incomplete and may change. Only Authorised Intermediaries May Participate in Pre-Marketing Pre-marketing is not always carried out by the AIFM. Instead, the manager may wish to enlist an intermediary with special expertise of a given industry or of investor behaviour in a given country. In such cases, the Directive prescribes that the intermediary must be an authorised investment firm (or a tied agent), a credit institution, a UCITS management company or an AIFM. Pre-Marketing Becomes Supervised by Authorities In the future, the pre-marketing activities of an AIFM will be supervised by authorities. AIFMs based in the EU must inform the competent authority of their home Member State about pre-marketing by submitting a free-form notification no later than two weeks after they have begun pre-marketing. AIFMs must also adequately document their pre-marketing. Scope of Reverse Solicitation Restricted Until now, an AIFM that has not submitted a notification on marketing has been able to claim that investors who have subscribed for fund units have contacted the manager on their own initiative. This is known as ‘reverse solicitation’. The Directive considerably tightens the prerequisites for reverse solicitation. From now on, if professional investors subscribe for units or shares in the AIF within 18 months from the beginning of pre-marketing, it will be considered the result of marketing, and the AIF manager must submit a marketing notification. Next Steps in Harmonisation of AIFM Rules The Directive is the latest phase in the EU’s efforts to harmonise the regulation governing AIFMs, which began in 2011. In 2021, when Member States are to implement the Directive, we will have witnessed a decade of harmonisation. It will be interesting to see what domain of regulation the legislators will tackle next.  For example, will AIFMs have to comply with the product governance requirements similar to those applied to investment service providers under the MiFID II regime? Only time will tell.

   Published: 21.8.2019

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    M&A: As Buyer Liabilities Increase, Due Diligence Must Cover New Ground

    Liability May Arise on Grounds of Stakes Already Sold The foreword of the survey report cites a case that illustrates the importance of compliance for buyers. The buyer in this case was a large international investment bank that had been a shareholder and the indirect parent company of a cable manufacturer, which was subsequently found to have participated in a cartel. The European Commission fined the cable manufacturer 100 million euros. Roughly a third of the total was jointly and severally payable by the company and the investment bank as its former owner. According to the Commission, the investment bank had exercised decisive influence in the cable company and could therefore be considered liable for the cartel, even though there was no evidence that the bank’s representatives had been aware of the cartel plans or had participated in the cartel’s implementation. This position was confirmed by the Court of Justice of the European Union. Buyers Cannot Afford to Neglect Data Protection This July, the British Information Commissioner’s Office issued a notice of its intention to impose a fine of 110 million euros on a major accommodation group for breaches of data protection law. The group had suffered a cyber attack that could be traced back to a corporate acquisition made in 2016: the target company’s information systems had become vulnerable well before the merger. The ICO found that the buyer had not carried out sufficient due diligence upon the acquisition. In a statement, Information Officer Elizabeth Denham said: ‘The GDPR makes it clear that organisations must be accountable for the personal data they hold. This can include carrying out proper due diligence when making a corporate acquisition,  and putting in place proper accountability measures to assess not only what personal data has been acquired, but also how it is protected.’ ‘Personal data has a real value so organisations have a legal duty to ensure its security, just like they would do with any other asset.  If that doesn’t happen, we will not hesitate to take strong action when necessary to protect the rights of the public.’ The ICO’s decision is not final, but it sends a strong message to companies considering an acquisition. Buyers must carefully inspect how the target has addressed data protection. It is possible that they will no longer be able to fulfil their duty of care with a customary desktop analysis completed with management interviews. Instead, European data protection authorities may require a thorough assessment of the technical security and adequacy of the target’s data systems. The General Data Protection Regulation has been enforceable for a bit over a year now, and authorities have taken the initiative and imposed fines for non-compliant processing of personal data in several dozens of cases. Look Deep Neglected compliance risks can be costly for buyers in M&A. Violations may undermine the profitability of a deal and permanently damage the buyer’s reputation. Moreover, authorities are eager to intervene in suspected breaches. Properly addressing compliance risks in due diligence helps avoid unpleasant surprises. In addition to reviewing documents, we recommend that buyers have a separate compliance session with the compliance officers of the seller or the target. This helps grasp the target’s performance and identify operations that warrant a further review.

    Published: 21.8.2019