1. Post

   What Connects Airplanes, Straws and Corporate Responsibility?

   Corporate responsibility covers a wide variety of topics, as the examples above show. So what are we actually talking about when we say corporate responsibility? You can easily find several definitions by googling, but I am a simple girl so I give you a simple definition: Corporate responsibility is balancing between people, planet and profit in the corporate world. This means that companies should respect the environment and treat the people around them fairly, while also operating in a financially sustainable way. Why should companies care? Let’s have a more detailed look at why. Why does corporate responsibility matter to companies and to us corporate lawyers? Well, the obvious answer is public image. Any scandal in operations near or far will lead to a damaged reputation. There are also other reasons than brand image for companies to embrace corporate responsibility, such as cost savings, and employee and customer engagement (see more arguments in the Forbes’ article ). Last but not least, we can ask ourselves the fundamental question: Why should corporations behave differently than individuals? Why would we give corporations the right to misbehave behind the corporate façade while we don’t approve of similar behaviour from our fellow citizens? Something good hidden here? If the above arguments do not convince you about the benefits of corporate responsibility, let me talk a little bit about airplanes and straws. Airbus has recently developed an airplane (A350) that brings more comfort to passengers with less fuel burn, emissions and noise – attractive and responsible business for both Airbus and airline companies. Another example is LifeStraw  which is a straw that makes water drinkable in developing countries, preventing many diseases from spreading – good business that saves lives. Both examples show that we can actually have the cake and eat it too – generate profits and do good for the world. How does this sound? Do you have an A350 or a LifeStraw for your company already in mind?

   Published: 16.12.2014

2. Post

   Six Important Quality Drivers in the LDD Process

   For the time being, though, we’ll have to do legal due diligence (LDD) reviews the old fashioned way. If you don’t have any robots around, make sure that the following six quality drivers are in place in your DD process to make sure you get value for the money and time you invest in it. 1. Does the quality of the data room meet your expectations? Entering a virtual data room in which the material is not properly organised is a little bit like entering a house that hasn’t been cleaned for some time. It doesn’t give a good impression of the target company or the seller. It’s essential that the reviewers can easily and quickly understand why the documentation disclosed is relevant. It’s always useful for a buyer candidate to ask for the request list used when compiling the materials. This will give you a better understanding of the completeness and relevance of the disclosed information. The request list isn’t sufficient alone, though. In addition, you may need answers to the following questions: Providing this information up front would speed up the Q&A process a great deal, and we advisors wouldn’t have to repeat the same questions just to understand what we are reading in the data room. 2. Do you understand the limitations of the written word? A picture is worth a thousand words. This is also true for LDD material, which typically contains only written documents and agreements. Take, for instance, the key customer agreements. They don’t reveal anything about the correspondence between the parties after the agreements were made. Have both parties complied with the agreement? Are they satisfied with the performance of the other party? Were payments made on time? Have there been claims? Are the agreements still in force? All of these require follow-up questions in order to get a sufficient picture of the target’s contractual relationships with its customers and the potential opportunities or risks related to them. This is where the real added value of an LDD review lies, and you should put the emphasis on a smart Q&A process. 3. Are the right persons answering the questions? Given the importance of the Q&A process, it is essential that the persons selected to answer the questions are the right ones. Since there are many reasons for the seller to keep the transaction team small–like keeping the pending sale process confidential–having the relevant experts on board is a significant quality factor for the DD process. Sometimes when reading a Q&A sheet, you don’t even know who’s answering the questions. This doesn’t add to the buyer’s comfort with the results of the LDD review, and it’s rarely in the seller’s interest to not be open about this. A lack of comfort on the buyer’s side will undoubtedly affect the upcoming negotiations. Considering that buyers in a Finnish deal are often ready, or at least expected, to accept that the seller isn’t to be held liable for risks adequately disclosed in the due diligence review, there should be a clear interest for the seller to invite the relevant experts to contribute to the Q&A. 4. Is there access to the management? As a buyer, you should always make sure that your DD teams get proper access to the management of the target company. Sometimes this is even more crucial than having access to the data room materials. To only interview the seller’s representatives may not be enough if they don’t have hands-on knowledge of the business. An interview with the target’s management is often more efficient compared to a lengthy Q&A process in which new follow-up questions arise from the answers already given. And since it’s not rare that the target’s management tends to get frustrated with endless questions from the arsenal of advisors representing many potential buyers, an interview face to face may be a quicker and easier route to get the missing bits and pieces in place. This kind of meeting usually also adds to the buyer’s comfort. 5. Are your advisors collaborating enough? In the good old days when financial, legal and other advisors gathered in a physical data room and spent several long days sitting together sharing information, coffee and biscuits, no particular effort was needed to collaborate. Today the reviewers can be located anywhere in the world and work together virtually.  This is a clear benefit in many ways, but comes with a risk of less collaboration. It’s in your interest to clearly divide the work between your advisors to avoid over-laps, but it’s also important to require that your advisors regularly exchange views and compare findings to avoid information gaps. Sometimes information disclosed in the financial documents is also relevant for the legal review and vice versa. It isn’t rare that financial advisors are able to shed some light on the commercial implications of certain findings in the LDD review, or that lawyers may spot an opportunity or risk linked to a commercial issue. Often, a price tag can then be given to the risk identified. None of this requires much time, but definitely adds value and increases the quality and usability of the DD reports. 6. Are the timetables realistic? While it’s true that generous timetables seldom optimise efficiency, overly tight schedules come with a risk that you won’t get the most value from the review. In most advisory firms, processes for reviewing documents and writing reports are trimmed to meet even the most challenging deadlines. However, the entire DD review can’t be carried out mechanically–even by robots. Analysis and reflection by an experienced professional is still essential and takes time. Considering that this is the part of the review that typically adds most value to the report, it really does not make sense to rush at this point.  

   Published: 12.12.2014

3. Post

   Slush and the Metamorphosis of the Finnish Startup Ecosystem

   The scene has undergone a significant transformation since 2008. Startup companies are the new hope of Finland, and startup founders have become almost like rock stars: magazines write about them and children want to become the next Angry Birds creators. Next week on 18 and 19 November, Slush , the biggest startup event in the Nordics, will be held in Helsinki. The history of Slush dates back to 2008, when the entire event was held in a single hall at the Korjaamo culture factory. This year’s Slush is one of the biggest seminar productions in the history of Finland, and one of the biggest festivals in Finland. The Startup Scene is All Grown up Now Besides all the hype and media interest, the event clearly shows the increased interest towards the technology ecosystem. These days, the technology scene is no longer just about multinational corporations. Rather, it is a vibrant ecosystem with actively participating companies of all sizes. We all know that entrepreneurship is all about hard work, but for years the startup scene has been regarded as a creature of its own. With Slush and other large scale startup venues, the startup ecosystem is no longer considered a counter-movement to corporate life, supported by hoody-wearing geeks who never want to grow up. Instead, the startup ecosystem has grown to be a serious business that is no longer just for the entrepreneurs themselves but also for media, investors and even lawyers. From a lawyer’s perspective, this expansion has meant a boom in seed funding and exits (see our previous posts regarding exit strategies and shareholders’ agreements). Startups are increasingly aware of the opportunities that legal arrangements can bring. Lawyers Learn to Innovate with a Little Help from Our Startup Friends Cooperation with startup companies is also extremely fruitful for lawyers. New kinds of setups force us, as lawyers, to rethink established practices and urge us to foster creativity. This new generation of startup companies brings with it enormous benefits in many ways.  As lawyers, leadership in the technology field can only be gained by constantly working with the latest technological innovations. Such innovations are often developed by startups. One might ask: what do we need all these small companies with little income for? Entrepreneurship is a wonderful thing, even though not all founders will become extremely successful and make millions. It is a hard fact of the free market that many companies will fail, and only a fraction make it. The US, for example, has a celebrated startup scene, yet over half of their startups are gone within five years. Nevertheless, the fear of failure should not hinder entrepreneurship.  What startups are doing today is what listed companies will be doing in five years’ time. Small companies are a great way to experiment and innovate. They are also an excellent school for future leaders. Festivals are all about joy and hype, and good music festivals often  offer something besides the music itself. Similarly, Slush is an important event for us all. Startup culture has enriched Finnish business life and developed the Finnish technology industry. The Finnish startup scene is something that we Finns can be proud of. Slush and the startup scene have changed the way we think, in many different ways. And that goes for lawyers too.

   Published: 13.11.2014

4. Post

   It’s the End of Savile Row: IT Clients Choose Off-the-Rack

   IT service contracts, particularly for IT outsourcing, are still largely custom-tailored solutions, i.e. items of craftsmanship in an age of industrial and post-industrial processes. IT law has for some time been the Savile Row of contract-drafting, where every deal is bespoke tailored according to particular specifications by highly skilled craftsmen. However, this field of law, like any other, exists to serve the ever-evolving needs of its clients, i.e. the companies purchasing IT services. And those clients are increasingly looking for off-the-rack solutions, not expensive tailoring. The IT industry, and with it the services of IT law practitioners, need to modernise, to move away from the traditionalist habits and scheduling expectations which have always been used to produce unique products for bespoke IT legal services. The IT industry needs an industrial revolution. This need for modernisation is driven by changes inside the IT services industry. This relatively young field of business is slowly reaching maturity: clients today have more accurate knowledge of their businesses’ IT service and supply arrangement needs, and IT providers need to adapt to satisfy these more sophisticated expectations. Clients are increasingly interested in retaining service providers who offer efficient and business friendly services, not in purchasing or leasing IT equipment or hiring IT professionals. Focus on the end result, not the process The focus is now on finding a fast-track to the end result: instead of making separate deals for various elements needed to create a functioning IT infrastructure, clients only want to contract and pay for the actual service. This has also meant an increase in IT outsourcing. Firms are giving up their own data centres, IT staff and application licenses, and purchasing services from external providers on a pay-as-you-go basis. The same shift can also be seen in the way Service Level Agreements (SLAs) are handled. SLAs are a staple of IT outsourcing. They establish the acceptable levels of availability or efficiency for IT services in a particular relationship, along with penalties and compensations for failure to meet the agreed upon goals. To truly serve clients’ needs, modern SLAs need to assess the success of the essential object of an IT outsourcing deal, instead of assessing how each of the various individual elements of an IT service contract is functioning. , That is to say, a successful modern SLA assesses whether the desired service is available and whether it produces added value for the client’s business. Today’s clients are not, and do not need to be, interested in the technical details of data centre or application defects; they are interested in making sure that they get what they have paid for: an efficient and business-friendly service. The process is less important than the end result. At the same time, the structure of outsourcing is changing. Traditionally clients would enter into a number of layered agreements with various data centre and application providers, each with its own liabilities and responsibilities towards the client. Now we increasingly see use of a prime contractor model. In this model, one provider is responsible – and liable – for providing the desired service, and usually provides the means for that service through its own sub-contractors, assuming liability for their actions. For the client, this streamlines the process and makes sense: again, what the client desires and is paying for is the end result. Sweet for both the client and the IT provider What does all this mean for IT providers? First of all, IT companies need to acknowledge that the market for outsourced IT services is increasingly competitive. Large businesses are carrying out divestments and merging functions to secure efficiency and profitability. The word partnership is treated almost as an expletive– clients want services that are flexible and adapt to their own changing businesses. And if those services are no longer producing value, or essential for the client’s business, they may be likely to be divested or submitted for a new round of tendering. This also means that IT contracts need to be drafted in a way that allows for termination or reopening for tender with a minimum of fuss. Clients want to avoid hostage situations where an undesired IT partner holds a company’s business for ransom by refusing to let go of business-critical functions. IT companies need to acknowledge this, because business at gunpoint is not good business. With that in mind, the clients of IT services also need to remember that the deal needs to be sweet for both parties. There is such a thing as a deal that is too good. If a client manages to impose standard terms, SLAs, schedules and prices that are vastly advantageous for the client but unprofitable for the IT service provider, there is a risk that the provider will try to get rid of the deal as soon as possible, or lower its performance to a level that is financially sensible but much lower than the client desires. Having the power to be the Wolf of Esplanadi does not mean that you should. In a business deal, both parties need to turn a profit, so relying on the tight competition between providers to hammer through unreasonable terms may turn out to be a mistake. Short-term economic gains can lead to long-term losses. In summary, the IT services industry needs to modernize and provide more products relevant in the age of mass-produced, reasonably priced, business-friendly solutions. IT lawyers and professionals can still wear their Saville Row suits, but except in special cases, they should leave bespoke tailoring to the tailors.  

   Published: 7.11.2014

5. Post

   Is it Time for Regional Cross-Border Football Leagues to Enter the Pitch?

   Regional cross-border leagues are still rare, and football leagues are in most cases arranged according to national borders. But the growing inequality among Europe’s football clubs has sparked new ideas about regional leagues. However, UEFA is standing in the way of these plans. What on earth is this all about? Welsh clubs Swansea City FC and Cardiff City FC play in the English series, and there is a joint women’s league in Belgium and the Netherlands. Additionally, there are plans on the table for creating joint men’s leagues in Belgium and the Netherlands, Switzerland and Austria, the former Yugoslavian countries, Russia and Ukraine as well as the Nordic countries. However, UEFA has arbitrarily shot down most plans concerning regional leagues. No specific rules exist on who is allowed to set up a regional league and under what conditions. UEFA has recently somewhat softened its approach, but irrespective of its fluctuating position, the matter deserves to be looked at from a legal perspective. So let’s take a look at this using a joint Nordic Football League as an example. Why would we want to play together? Well, first of all, no one says that you have to. But imagine somebody would be interested in doing so. Football today is a business. In the famous Bosman case , the ECJ decided that restrictions on the number of EU players in a team and rules prohibiting players to move, without the consent of his club, to another club, after the contract had expired, were illegal. And ever since, the gap between the top and the bottom in European football has increased. The top places in the Champions League and the Europa League are nowadays more often than not occupied by clubs from the big 5, and the Nordic countries aren’t among them. A joint Nordic league could be one way of decreasing the gap. It would lead to a bigger market and better opportunities to boost financial resources. This, in turn, would lead to better possibilities to bring in better players and train better talent. This could increase the chances of Nordic teams competing with the big clubs in Europe. IFK Göteborg actually won the UEFA Cup in 1982 and 1987, remember? Utopia? Well, the route may seem long and winding, but all journeys start with the first step. Interesting idea, but UEFA wouldn’t allow it, would it? UEFA retains all rights to arrange all international football competitions in Europe, so at first glance, it seems that you would need UEFA’s approval for any regional leagues. Though UEFA has softened its position, there is no guarantee that a Nordic league would be given the green light. However, it’s worth remembering that UEFA once strongly resisted what would become the outcome of the Bosman case, but wasn’t able to stop it from happening. Why? Because, you see, there’s also a legal side to all this. Wait a minute, why can UEFA rule the business of football while other businesses have to obey the law? A good question. EU competition law prohibits anti-competitive behaviour, i.e. behaviour that restricts competition on the market. Sport is not exempted from the application of EU competition law as such, and arranging a Nordic league would be a market just like, e.g. steel manufacturing is a market. However, sport is a very special case and differs from ordinary competition, among other things, in the sense that it needs a certain number of competitors to exist and a level playing field to be appealing. The special characteristics of sport have resulted in the view that sport associations are the best ones to decide on their own matters insofar as they relate to the sport itself, such as the rules of the game. This is also how things have always been done. The law still applies to ‘commercial rules’, though. Knowing where the border lies is difficult, since almost all sporting rules have an economic impact. How about a Nordic league then? A joint Nordic league could improve the competitiveness of Nordic clubs. As mentioned above, a bigger market creates better possibilities to raise money, facilitating the purchase of better players and the training of talent. This in turn facilitates a more level playing field, so a good case can be made supporting it. As said, sport is allowed to regulate itself, but at some point, the law intervenes. EU Competition Law requires that self-regulation is proportionate and applied in a non-discriminatory manner. Sharp readers may remember that Cardiff City FC and Swansea City FC play in the English series and not in the Welsh, though Wales has a separate football association. This isn’t, however, explained by the Union Jack, since the Scottish clubs Celtic and Rangers have previously, without success, tried to join the English Premier League. As if this wasn’t enough, Belgian and Dutch women are allowed to play in a joint league. A Nordic league could be beneficial not only in terms of increasing competitiveness, but also with regards to levelling the playing field. The Nordic countries also have the cultural, economic and football-political connections necessary to make such a joint venture work in practise. Although various forms of cooperation have been on the agenda on several occasions, a Nordic Football League in its full form, with the needed path to the Champions League and the Europa League, has never been created. This is partly because of the obstacles put up by UEFA, but there are good reasons to look at the matter anew, since these obstacles may constitute anti-competitive behaviour. Not everyone wants to play football together. But if Leifur, Jørgen, Olaf, Sven and Pekka want to do so, they should be allowed to, especially if it improves their football skills. Tobias Björkström   Tobias Björkström’s article on this topic will be published in Swedish in the journal Urheilu ja oikeus (“Sport and Law”) in late 2014.

   Published: 31.10.2014

6. Post

   Sanctions—As the Dust Settles

   1. Be Aware of Sanctions Relevant for Your Business The Ukraine sanctions have had a noticeable impact in many sectors of the Finnish market, however, it is good to remember that other sanctions programmes also exist and can have a real-life impact. The penalties for violating any of sanction can be significant, and there are many more sanctions programmes in force than just those concerning Ukraine. The EU and the US each have approximately 30 separate sanctions programmes in force at the present time. You may be caught by surprise of the range of business transactions that are restricted or forbidden by sanctions under various circumstances. Sanctions touch on a wide variety of activity. Although prohibitions against doing business with specific individuals or companies have been well-publicised during the Ukraine escalation, other restrictions on certain types of business activity (such as providing services or certain goods even if the counterparty is not sanctioned), tend to receive less attention in the media. Older sanctions programmes, such as those concerning Iran and activities linked to terrorist organisations in various countries around the world, have a broad reaching effect but receive little if any press attention. Importantly, enforcement actions by EU Member States and the US authorities include an investigation of whether the violator knew or should have known that their conduct violated sanctions laws. Also, it is good to keep in mind, that other countries (such as Canada, Australia and Switzerland) have also imposed their own sanctions. Although EU and US sanctions may be for many Finnish enterprises the most likely applicable sanctions programmes, it is good to be aware that other authorities can and do impose sanctions of their own. 2. Determine if Planned Business is Affected by Sanctions If you believe that a business transaction that you have planned could be affected by sanctions, there are some steps you can take to protect yourself against liability—both in case of a sanctions-triggered dispute with your counterparty, as well should an official investigation occur. The US authorities have a history of threatening civil or even criminal prosecution against foreign companies when those companies are believed to have caused US persons to violate US sanctions laws. Knowing as much as possible about the connections of personnel and companies involved in your transactions will improve your ability to determine whether your business plans might need to comply with EU or US sanctions, or perhaps on some occasions with both. 3. Prepare Your Strategy to Prevent Violations and Get the Deal Done Prepare a plan of action to address the risks and to protect yourself against liability. Documenting your efforts to perform an appropriate due diligence sanctions check may prove useful in the future should the need arise to demonstrate that you performed the level of due diligence which the circumstances called for, e.g. in case of an official investigation. It may also be helpful to prepare internal training and education programmes to ensure that your employees are able to identify and address possible sanctions issues. Depending upon the nature of particular situations, it may be beneficial to seek an official clarification or approval of business activities from the authorities. It is also possible in some cases to apply to the authorities for a special license to conduct business which may otherwise be prevented by sanctions restrictions. You may also wish to review your transaction agreements to ensure that they contain language which offers you the maximum protection in the event that the restrictions imposed by existing sanctions, or new sanctions which could be imposed in the future, restrict or prevent the performance of those transactions. Kristina Rutsky

   Published: 27.10.2014

7. Post

   A Well-Functioning Shareholders’ Agreement for a Startup 2/2

   The ‘Leaver’ Situations Every startup comes to a point where the honeymoon is over and some of the founders wish to find a ‘real job’ and leave the company. Also, as the business grows, the administration might need some reassessing. If the founders have their background in, say, engineering, they perhaps no longer have sufficient competence for managing the company alone. The SHA should include provisions on what will happen if someone neglects their working obligation or other material provision of the SHA, or if a shareholder leaves the company. Under these kinds of circumstances, you want to avoid a situation where one of the shareholders quits their job straight after setting up a startup but still retains the right to their shares, the decision-making rights and the right to the dividends and proceeds those shares may entitle them to in the future. As a precaution for a breach of working obligations, a contractual penalty clause is a must in the SHA. Another practical method is to agree that the other shareholders will have the right to redeem the shares of the breaching shareholder, e.g., on a predetermined price. When drafting the terms concerning shareholders who leave the company, the concept of ‘leavers’ is useful. The company may, for example, terminate an employment relationship due to gross misconduct or dishonesty pursuant to the Employment Contracts Act, other legislation or an employment contract. This is a case of bad leaver. On the other hand, the termination may have been decided in consensus or due to grounds beyond the parties’ control, which constitutes a case of good leaver. In both situations, the other shareholders should have the right to redeem the shares of the leaving shareholder. However, a good leaver should receive the market price for their shares, whilst the price paid to a bad leaver tends to be heavily discounted. Transfer of Equity Securities and Exit To control the acceptance of new shareholders in your company, you should consider setting restrictions on the transfer of shares. Share restrictions are also commonly used to favour the existing shareholders. For instance, the existing shareholders should have a primary right to buy new shares issued by the company before they are offered to the public (pre-emptive right) or to buy shares that one of the shareholders has offered to sell (right of first refusal). In the latter option, a shareholder having received an offer from a third party must notify the other shareholders of the price and the other terms and conditions of the offer, allowing the existing shareholders to buy the shares first. Other significant clauses in the SHA are drag-along and tag-along rights. The drag-along right applies when the majority of the shareholders wish to sell their shares or the business of the company. Based on this right, if the shareholders receive an offer that becomes accepted by the majority, the rest of the shareholders are forced to drag along and join the deal. Tag-along rights, on the other hand, mean that if the majority of the shareholders decide to sell their shares, the minority shareholders have the right to join the deal (tag along) on the same terms and conditions. The tag-along right is important especially for investors, who have, in the first place, invested in the principal business and do not wish to continue investing in the new owners. Finally, it is extremely important that all the shareholders agree on when, how and for what price the business should be sold one day. These conditions should also be clearly stated in the SHA. Confidentiality, Non-Competition and Non-Solicitation Clauses Last but definitely not least, the SHA should include terms on confidentiality, non-competition and non-solicitation. These clauses can rightly be called the life insurance of a startup, and they exist to prevent serious damage to the company and its business. The confidentiality clause protects all technical, financial, commercial and other information of the company that should not be disclosed. In turn, the non-competition clause forbids any secondary occupations that may compete or conflict with the company’s business. The non-competition clause must be reasonable and fair but comprehensive to protect the core business. The non-solicitation clause is closely related to the non-competition clause, as it prohibits shareholders from persuading the employees of the company (typically, the best programmers) to get involved in new, competing businesses. All these restrictions should remain in effect for some time after the shareholder has left the company, regardless of the reason of leaving. Some investors, however, are allowed to have many portfolios in different businesses, also in businesses that are actually competing with each other. This may leave them in an exceptional position in which non-competition clauses do not apply. However, confidentiality clauses naturally do. Conclusion With a well-drafted SHA, you will be able to solve severe problems well ahead, even before they actually arise. Our advice is that the first thing to do when starting your company is to sit around a table with your co-founders and think these issues through. Preparing an SHA is significantly easier, quicker and cheaper when it is done at the beginning, compared to difficult negotiations later on when there is already a growing rift between the parties. The SHA protects the company when things don’t go as planned, and, as we all know, plans never go to plan. Preparing the SHA carefully takes a weight off your shoulders and leaves you free to concentrate on your business at full stretch. Tuomas Honkinen

   Published: 2.9.2014

8. Post

   A Well-Functioning Shareholders’ Agreement for a Startup 1/2

   A shareholders’ agreement (SHA) is an agreement between the shareholders of a company. It is one of the most important ways to avoid trouble in the future. Briefly put, the SHA defines how the company is run by the shareholders and the board of directors, what kind of consents are required in decision-making, and how the shareholders may deal with their shares. Together with the Companies Act and the articles of association, the SHA forms the legal spine of the company. When starting a company, the parties are all dazzled with excitement, 100% sure that their startup will shake the market and confident that all the founders are motivated and will be working as hard as possible to succeed. However, the first steps in the life span of a startup may be difficult. There is no money coming in, and uncertainty about breakthrough may create dissent or cause some of the shareholders to lose their interest in the whole project. Under these circumstances, it is very important that each of the shareholders is aware of what is in question in the business, what will happen when certain events occur and what is expected from each shareholder. In our blog post, we will list the most important issues that should be taken into consideration and clearly specified in the SHA. In the first part, we will concentrate on two topics: specifying the roles of the parties and protecting intellectual property rights. In a later post, we will go through three other vital concerns. Administration and Roles of the Parties Primarily, the SHA should define the objectives and roles of the parties so that each of the shareholders has a comprehensive idea of its own roles, duties and responsibilities, as well as those of the other parties. This is essential especially in the case of startups, which typically have only a few shareholders who are all tightly involved in managing and running the business. The purpose of the SHA is to control the decision-making, especially when investors enter the picture. In the beginning, the company often needs to reform its practices, strategies and operation models along the way. Here, agility is key: it is not possible or indeed advisable to bind the company to a fixed long-term plan that cannot be improved if needed. If you are the founder – which probably means you are also the majority shareholder – you want to make sure that all the decisions that need to be made in the company actually get made, whether they are about nominating the board members, raising money or selling the business. However, the parties may have quite diverse objectives and opinions about these issues. In addition, investors also want to have a say in these matters. The SHA must be prepared carefully. It should give reasonable rights to all parties but keep you in control of the crucial matters. It should specify particulars, such as the number of board members, how new board members may be nominated, the voting system and possible observer rights to investors that are not represented in the board. Furthermore, the SHA should include a list of reserved matters, which can only be decided by a qualified majority or with the prior written consent of one or several shareholders. Reserved matters include amendments of the articles of association, issues of equity securities and other important decisions. Protecting Intellectual Property Rights and Know-How The SHA must include a provision ensuring that all the intellectual property rights (IPRs) as well as all technical capabilities, expertise and know-how which have arisen or will arise later in conjunction with the business of the company remain its exclusive property. If a shareholder enters into the SHA with some IPRs of their own, the SHA should state that in certain cases these rights must also be vested in the company as the absolute legal owner and beneficiary. This is particularly true when such IPRs are related to the preparation of the startup. Having exclusive rights to its intellectual property is highly important for your startup for multiple reasons. For example, for many startups the IPRs may be the only valuable property, which makes them crucial for both the company and the investors. In the next part of this blog post, we will tell you more about getting prepared for leaver situations, restricting transfer of shares and other essential provisions that should be included in the SHA. Tuomas Honkinen    

   Published: 28.8.2014

9. Post

   Exit Strategy Checklist for Cashing in Your Startup – Legal Advisor’s Perspective

   From a legal advisor’s perspective, there are several options available as an exit strategy but, nowadays, the most common way is to sell your company. Moreover, a trend of early exits seems to attract many startups, and companies are often sold only 3—5 years after they are founded. Initial public offering (IPO) used to be a popular way to exit, but today companies find it much less tempting. Going public is such a massive project, requiring a proper infrastructure and a lot of effort and money, that most of the startups do not want to deal with it. Furthermore, as startups are typically exiting in such an early stage, most of them would not even fulfil the prerequisites required for an IPO. This is why we want to concentrate on acquisition – how to sell your startup company in a legally simple and easy way. We have made a legal checklist for ‘how to sell a startup’. This checklist is useful when selling the whole stock or parts of it, or when just e.g. licensing the technology of your startup. Moreover, it is suitable not only when exiting, but also in every financing round. Keep in mind that getting capital investors involved in financing rounds may significantly increase the chances of a hefty exit of your startup. These are the reasons why this checklist is already worth taking out from day one of starting your business. 1. Keep your documentation in order, up-to-date and always in electronic form It is crucial to have your documents available when you need them. Usually the need comes when you least expect it, and at the time of an acquisition or a financing round missing documentation can cause extra work, time and costs, unnecessary risks and other inconveniences. Make sure that you conclude written agreements whenever possible and keep them properly recorded and safe. The same applies to statutory corporate documents. Also mind that your intellectual property rights are all properly protected, registered and duly transferred to the company, and that you have their documentation up to date. The key is to keep legal risks low in the company all the time. In theory, the company should always withstand a check by a professional third party . In any case, there will be a due diligence (DD) phase in the event of selling your company or acquiring equity sponsors. Due diligence is an inspection of business made by a potential acquirer/equity sponsor. If the above-mentioned issues are maintained well, the company should be ready for a DD anytime. 2. Mind the confidential information of your company During the DD phase, you need to be ready to answer a broad range of questions concerning your company. Still, be careful about how much and what kind of confidential information you want to introduce to potential acquirers at different stages of the DD phase. A non-disclosure agreement (NDA) is essential before giving any confidential information to a potential acquirer. Bear in mind that you may be giving this information to your competitor and that they are not yet legally bound to buy your business at that stage. In particular, information relating to the most essential functions of business should typically not be given until the very end of the DD phase and not without sufficient deal security. However, the scope of an NDA depends on the nature of your company, and practicality should be kept in mind when protecting confidential information. 3. Use letters of intent to maximise strategic advantage A letter of intent (LOI, also known as a term sheet) is a document outlining an agreement between the parties before the final sale and purchase agreement or the investment agreement is finalised. It basically determines how the deal is structured. The most common purposes of a LOI are to clarify the key points of transaction, declare officially that the parties are currently negotiating and provide safeguards in case the deal collapses. LOI is usually not entirely binding, but it often includes a confidentiality clause (substituting an NDA) and/or covenants providing exclusive rights to negotiate. 4. Develop effective strategies when negotiating the purchase price and other terms of the deal Negotiation skills play a significant role after (or even simultaneously with) the DD phase until reaching a consensus on the sale and purchase price and other terms of the transaction such as liabilities, non-competition restrictions etc. It is important to structure and negotiate potential earn-out elements and critical risk allocation provisions , which might mean that you will need to accept responsibility for some risks a certain time after the transaction has been made. The Sale and Purchase Agreement (SPA) represents the mutual acceptance on an offer, as a result of commercial and pricing negotiations. At this point, before signing an SPA, analyze the terms of an acquisition agreement and ensure that the agreement corresponds to what has been agreed. Always be prepared to exit This is a high-level checklist for the legal issues that need to be kept in mind when selling your startup company. We would like to highlight that planning and completing the exit properly may increase the entire value of your business outstandingly . However, an acquisition as a process is like a train – to reach its destination in time and painlessly, it requires a well-designed railway track. No matter how much you love your startup and how much it has become a lifestyle for you, you need to be prepared to exit, now and always. Design your exit well ahead and make it the most profitable part of all your business processes. Tuomas Honkinen

   Published: 16.7.2014

10. Post

    Daring to be Different

    I must admit that my first thought was whether I could dare to speak about anything other than the law. My next thought was whether I would be able to find things that I could say we have done differently. People often consider lawyers to be fairly conservative, and I have to admit that sometimes it takes some effort to think outside your own little box. Moreover, it takes courage to break out of your comfort zone, which is why I had to do some introspection before I could tell the organisers that I’d love to speak at their event. Being Different Takes Courage In my opinion, having courage means being able to voice your own opinions and ideas without fear of embarrassing yourself (confidence) and getting a positive response in return (respect). Choosing the less-trodden path usually requires passion (the spark) along with the time and energy to invest in plotting a new course (productive balance). These four things—confidence, respect, the spark and productive balance—are the values that our staff agreed on together in 2008. Our values give us the courage to do things differently. Searching for a Deeper Meaning Employer branding company Universum’s recent survey results offered several interesting insights, but the most important was this: young people want their jobs to have a deeper meaning. Companies cannot focus solely on generating profits, but must take responsibility for how their actions affect their interest groups and environment. We consider corporate responsibility from two points of view. On the one hand, corporate responsibility matters play a role in our everyday operations. On the other, we also help our clients to be more successful by taking corporate responsibility matters into account in our assignments.   What’s Next? The desire to promote corporate responsibility has led us to take, among other things, the following steps here at Castrén & Snellman: There is a lot of work still to be done, though, and travelling further down our chosen path will take courage and require us to break free from old patterns of thought.   Dare to Believe in Yourself Sometimes courage doesn’t mean that things have to be done differently. It takes courage to keep your head when others are forging their own paths. It has taken courage to keep making long-term investments in developing our expertise in niche fields of law so that we can provide our clients with a wide array of services to support their business operations. It would be easier to just focus on the more lucrative fields of law. I am absolutely delighted that the way we do things has gained international recognition. A little while ago, Chambers Europe ranked eleven of our services in their highest tier, which is more than any other Finnish law firm. In addition, we won two of the most important awards in our field this spring: The credit for these awards belongs to our clients, who shared their experiences of working with us with the researchers, and to my colleagues for their excellent client service.  The awards brighten our mood every day in our lobby. So what’s next on my list of things that will pluck me from my safe little box and place me firmly outside my comfort zone? Here it comes: please continue reading my future blog posts and follow me on Twitter ! I might be new to contributing to social media, but it’s never too late to learn!

    Published: 2.6.2014