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   Legal Design: User-Centricity at the Forefront of Legal Change

   As the legal and technological landscape has become more complex, interest in legal design has grown. Legal design has been a topic of discussion among experts around the world for some time, but now the public’s attention has turned to user-centredness in a new way in Finland too – so much so that people are already demanding it. The legal profession is faced with expectations of comprehensibility, transparency and consideration of the end-user's point of view. Fortunately, thanks to legal design, we are now in a position to meet these expectations. So what is legal design? At first glance, legal design may seem like nothing more than pretty pictures and icons pasted on top of a document containing the original jargon. But legal design is much more than that, although the use of visuals is undoubtedly an important part of it. It is therefore not just a moment of decorating a Christmas tree, but a journey undertaken by a multidisciplinary team from the first meeting with a client to the end of the assignment. The starting point for a legal design project is to identify for whom and for what purpose the service or document is being designed. Legal design benefits both private and public sector organisations. The end-user may be within the organisation, or it may be our client’s customer, and the design itself can be information, product, service, organisational or system design. For example, a privacy policy, a non-disclosure agreement or even a website dealing with a legal process can be designed. The subject matter and the way in which the final product is implemented can therefore vary, as each project is unique. One of the purposes of legal design is to facilitate collaboration between experts and clients, so it benefits us all: the better the understanding between the parties, the more meaningful the relationship is for both, and the better the result. What can we find at the heart of a legal design project? What all projects have in common, is a methodology that builds on an iterative, interactive and creative way of working and problem-solving. At its best, a legal design project is a fun journey that starts with identifying the end-user’s pain points or, in other words, by empathising. Empathy is one of the best tools in achieving a better legal product—after all, we are all human! By understanding what causes frustration and bumps in the road and by putting ourselves in the shoes of the end-user we gain valuable perspective. The iterative working model is all about working on different versions in several stages, each one bringing us closer to a final product that could not have been created without the prototypes that preceded it. So indeed, it’s about trial and error! And the delivery of the final product to the client doesn’t mean the end of the assignment; the legal design project is sealed by a feedback session, an important moment to support learning and development for everyone concerned. Legal design is not only about substance, but also about creating a new culture of collaboration and innovation. Legal design projects consist of a multi-professional team that makes the most of everyone’s skills and perspectives and constantly evolving tools. A successful project may therefore have involved, at its best, graphic designers, lawyers, coders, language experts, legal technology specialists and professionals in the client's own field, such as economists. How does legal design projects benefit our clients? The aim of legal design is to create legal services and products that everyone can understand. However, it is not the answer to everything and should not be forced into every process.  For example, collaboration between lawyers is sometimes best achieved through approaches and concepts specific to the profession. But what about those without a legal background? Those who need our legal advice and who should understand what they are committing to—the end-users ? Those who are not familiar with the law often perceive it as a code language that only lawyers can understand (and it is sometimes challenging for them too). It is not necessarily just a question of comprehensibility. In addition to a lack of knowledge, many people do not have the energy to deal with the obscure contracts, processes and inhumanly long procedures. From the point of view of the function of the legal system, this is not appropriate, is it? When done well, legal design saves time, improves the customer experience and reduces the number of errors in both documents and their interpretation. This can even save parties from litigation, which in turn saves money! Not to mention the fact that a well-designed document is much more pleasant to read as the reader is not overloaded with information. There are many ways in which visualisation can be used alongside linguistic design itself. User-centricity is taken into account through summarisation, readability and perception. Information is balanced and a hierarchy is sought in the document. Through legal design, we want to support lawyers in the practice of law, translate complex legalese into practicalities for the end-user, and enable creative and effective solutions for our clients. The broader goal is to improve everyone’s understanding of the rules and systems that apply to them so that both firms and their clients can navigate the legal system strategically and wisely. Why should legal design be in every lawyer’s toolbox? Legal design is a set of many mindsets and methodologies. In a lawyer’s toolbox, it can therefore be a productive process, leading to the launch of a new service, or a research method for generating data and insight on a particular topic. The implementation of design thinking in law makes our field more multidimensional and more human, giving us a more ambitious and creative way to illustrate things and to resolve the confusion, frustration and friction that law can generate. At Castrén & Snellman, we implement legal design through projects, training for clients and staff workshops. We have formed a multi-professional team where everyone brings their own vision to agile projects. Internally, we use legal design to create different types of documents. Among other things, we have designed legal model documents, information security guidelines and a legal technology interface called Signe. Signe is a contract tool that not only provides our clients with automated documents but also with legal design. With Signe, our clients can have automated contracts in a single, standardised and designed format. Legal tech and legal design should therefore not be seen as separate concepts, but as complementary ones.  In legal design, we see an incredible potential to take law to a new level. There is a lot to design, from privacy policies, user terms and conditions, and non-disclosure agreements to various legal interfaces and systems. There are many uses for legal design, so for lawyers, it’s a world of possibilities! A world that takes us towards a more understandable legal world where we at Castrén & Snellman want to support our clients— with a focus on user-centricity.

   Published: 2.5.2022

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   Continuation Funds as a Tool for Creating Liquidity

   What Are Continuation Funds? In an average continuation fund transaction, a continuation fund purchases one or several investment targets in a fund that is managed by the same fund manager and often near the end of its term. Investors of the existing fund have the option to either sell (i.e. redeem) their investment or to transfer it to the continuation fund. Completely new investors pay their commitments to the continuation fund, which provides liquidity for those investors of the existing fund that have decided to withdraw from the investment target. The terms and conditions of the continuation funds are negotiated between the fund manager and the new investors, and they often vary according to the asset categories that are the object of the continuation fund transaction. When used strategically correctly, a continuation fund can satisfy the interests of the different stakeholders and achieve several targets: it can offer a liquidity window for current investors wishing to withdraw, balance conflicting interests, customise incentives and extend the holding period of the investment targets to maximise their value creation. Continuation fund transactions are, however, complex transactions, and if the process to arrange them is weak, it often damages the fund manager’s reputation. A successful establishment of a continuation fund requires that the investors are provided with a clear business justification, that the transaction structure is created in a manner that solves the main legal and tax challenges and that the legal and commercial process is efficiently managed. The Main Contradiction A substantial portion of continuation fund transactions facilitated by fund managers is never completed. Common reasons for this are disagreements on the fair value and the grounds justifying the transaction. Some investors may be worried about the justifications: is the fund manager actually trying to hold on to a high-quality investment target or is the ultimate purpose of the transaction to dump to the continuation fund unprofitable investment target that could not be realised at an appropriate price on the normal market? There may also be suspicions that the fund manager might want to use a continuation fund to hold on to the fees relating to the investment targets that they would not get if the investment was realised to a third party. Usually, the dynamics of a continuation fund transaction are more complex than a typical withdrawal from a target company, as in practice the fund manager acts as both parties in the transaction. To create an attractive liquidity alternative, the fund manager must offer the potential buyers an attractive transaction proposal and price. On the other hand, acting as the seller, the fund manager also has the duty of care towards the existing fund: in practice, the sales cannot be executed unless a sufficient number of existing investors are persuaded to support the sales. Sometimes the fund manager can also ask the buyers for a group commitment to another fund raised by the fund manager, which may increase the complexity of the transaction. When there is a conflict of interests, measures and justifications are necessary to make the transaction credible and satisfactory to both parties. Starting the Procedure If you are an investor considering investing in a continuation fund, we recommend consulting advisors at an early stage. The legal documentation of the existing fund and its investment targets should be carefully reviewed so that any required approvals and potential restrictions, such as regulatory issues or transfer restrictions, can be identified. Tax advice is necessary for the potentially complex structuring of the transactions, in particular, if the existing investors are to invest in the continuation fund in a tax-neutral manner. Financial advisors are often needed to help with the coordination of marketing, the commercial process and investor relations, as well as with proving the transparency and impartiality of the valuation and sales process to the investors. Sometimes further assessments on whether the transactions are market-based are obtained. As continuation fund transactions are, as a rule, insider transactions, they typically require an approval by the existing fund’s advisory committee or investors. The recommendation is that the fund manager hears the advisory committee before planning the transaction very far. This helps in demonstrating transparency and increasing the investors’ trust, both of which are very important in ensuring a smooth process. Discovering Buyers and Negotiating Terms and Conditions After forming the team of advisors, the fund manager should identify potential buyers. These could include single investors or a consortium. Buyers will become investors of the continuation fund and thus provide liquidity for the investors of the earlier fund. The fund manager can find buyers through their contacts or, for example, through a bidding process. The bidding process is usually managed by the financial advisor who assists in determining the fair value and relieves investors’ concerns relating to the impacts that the fund manager’s conflicts of interests may have on the transaction. After the potential buyers have been identified, the negotiations that follow can be a significant phase that requires expertise both in funds and in corporate transactions. Even though the terms and conditions of the existing fund can be used as a basis for certain conditions, the central terms and conditions of continuation fund transactions are usually customised. These include financial terms, the fund manager’s own investment, conditions on new investor protection, issues concerning uncalled commitments between current and new investors as well as conditions concerning transferable assets and the minimum number of transferring investors. All existing investors’ side letters should be reviewed, and fund managers should be prepared in case the investors want to renegotiate their side letters at this stage. As establishing a continuation fund is ordinary fundraising, fund managers should take into account all provisions that are usually applied, such as applications and approvals relating to the marketing of the funds. What Should Current Investors Take into Account? A disclosure memorandum is usually drawn up for the current investors. In addition to the details concerning the transaction, the memorandum includes important legal information and often also a form with which the investors can partially withdraw from the current fund or transfer a part of their holdings to the continuation fund. Often current investors can also make an additional commitment to the continuation fund increasing their relative indirect exposure to the transferring investment targets. Any necessary approvals of the advisory committee and existing investors are also obtained at this stage. As an exit arranged through a continuation fund deviates from an ordinary exit, it is quite common for the fund agreement to require obtaining an approval of the existing investors. This is usually sensible also considering the fund manager’s liability risks. However, some fund agreements determine permissible inside transfers broadly in such a way that the earlier fund can transfer its holdings in an investment target to any fund managed by the fund manager or its subsidiaries, including a continuation fund. From the investors’ and fund managers’ point of view, it is recommended that the possibility of establishing a continuation fund is discussed already in conjunction with the fundraising for the original fund in order to avoid surprises towards the end of the fund’s term. Successful Completion of the Transaction When investors have decided whether they want to withdraw or transfer their holdings and all preconditions have been fulfilled (e.g. authority approvals have been received), the transaction can be completed. Withdrawing investors are distributed profit, the existing fund can realise the investment target and the continuation fund takes responsibility for holding and developing the investment target. The key to a successful continuation fund transaction is commencing close cooperation with the investors already at an early stage, and a transparent process for determining the price supports such cooperation. Another critical issue is coordinating the interests of the current and new investors in an appropriate and fair manner, which requires thorough consideration of legal, financial and tax matters.  

   Published: 26.4.2022

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   Russia Cannot Be Known by the Mind

   At the same time, Russia has started to take strong measures against foreign companies’ plans to shut down production in Russia. There is a risk that foreign companies must sell off their assets and investments at rock-bottom prices. Another risk comes in the form of threat to nationalise businesses. A number of foreign owned companies, some Finnish among them, are of such importance for the Russian economy that they have already been mentioned by the name in the discussions around possible nationalisation. These firms have been operating successfully in Russia for a long time and have invested large sums there. Should they decide to close the doors, Russia’s current leaders or their immediate circle would not miss the opportunity to take over their businesses. Exiting Russia requires careful consideration and not only because of economic reasons. Companies have concerns over the future of their Russian staff and management after a potential exit. A poorly executed exit may result in the local management facing strict criminal liability due to decisions made by the foreign headquarters. Available exit options vary depending on the company form, and it is highly unlikely to get full price for a Russian business. On the other hand, if a deal is made at the price of even one rouble, it might be possible to dispute the deal later and invoke investment protection. There is no need to stand by and wait for nationalisation. When considering the actions to be taken, the management of a company must promote the company’s interests over the long term. This consideration can and should comprehensively address ESG issues. Over the course of past few weeks, many companies have chosen to withdraw, even though this will cause substantial losses to shareholders over the short term. How many dare to stay? There are arguments pro and con. In any case, companies are faced with a tough decision as good options are scarce.

   Published: 11.4.2022

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   Finnish Companies Looking to Exit Russia – What Role Can Investment Treaties Play?

   In practice, this would mean that foreign businesses that Russia deems to have shut down for ‘purely political reasons’ would be nationalised. According to the Russian government, the rationale for these actions is to prevent bankruptcies and retain jobs. In its current form, the nationalisation proposal would allow the Russian government to impose an external management on, e.g. factories and shops that are left behind by fleeing companies in which a share of at least 25% is owned by ‘unfriendly nations’. This stage of ‘external management’ would last for three months, after which the government would put such businesses up for auction. For foreign companies, the catch is that the nationalisation process can be cancelled if they resume their activities in Russia within five days from the court order imposing the external management or sell their share in a way that preserves the business activity and jobs. The law on the nationalisation of foreign companies has not entered into force yet but is set out to do so with a retroactive effect as of 24 February 2022 if passed by the Russian parliament.   In these changed circumstances, it is paramount for foreign companies with investments in Russia to continuously take stock of the situation and evaluate the available remedies against Russia trying to interfere with their investments. One form of legal protection may stem from investment treaties. These investment treaties, whether bi- or multilateral, can be an important means in combating the potential adverse actions of the Russian government as they offer protection for foreign investors against violations of states. This blog post gives its readers an overview of the key features of the investment treaty between Finland and Russia and the Energy Charter Treaty. Blog continues after picture. Protection for Investments Under the FIN-RUS BIT Finland and Russia entered into an investment treaty on 8 February 1989 (the ‘ FIN-RUS BIT ’). The purpose of the FIN-RUS BIT is to promote and protect foreign investments between Finland and Russia. Even though the provisions of the FIN-RUS BIT are not completely aligned with the standard formulations adopted in modern-day investment treaties, it does contain provisions offering safety measures to Finnish investors against actions that might violate their rights. To this end, Article 3.1 of the FIN-RUS BIT imposes an obligation for Russia to treat the investments of Finnish investors in a fair and equitable manner . In international law, this is referred to as the fair and equitable treatment (FET) standard. The FET standard offers broad protection to Finnish investors as it may be invoked in a variety of situations, e.g. when a host state has treated an investor in a discriminatory or arbitrary manner or when the due process rights of an investor have been violated. There is also extensive case law on breaches of the FET standard that have led to an obligation for the violating host state to pay compensation for damages or losses incurred by the investor.   Article 3.2 of the FIN-RUS BIT, in turn, sets out that neither Finland nor Russia may subject investments under the FIN-RUS BIT to treatment that is less favourable than the one applied to investments made by investors from third countries. This requirement is known as the most-favoured-nation principle in international law, and it prohibits host states from discriminating investors from one state against investors from third countries. Anyone looking to invoke the most-favoured-nation principle should first examine how broad protection Russia offers to third state investors under the investment treaties it has concluded with other states. The FIN-RUS BIT also offers protection against Russia’s potential endeavours to nationalise investments made by Finnish investors. Article 4.2 of the FIN-RUS BIT prohibits the parties from adopting compulsory measures of nationalisation , requisition or other measures to expropriate investments, except where such measures are taken in the public interest. Even if expropriation, such as nationalisation, is considered to be required by the public interest, the investor is entitled to compensation for the interference in its investment. The starting point for determining the amount of such compensation is that it should amount to the real value of the investment. Finally, the FIN-RUS BIT contains a ‘ full protection’ clause as Article 4.1 obligates Russia to refrain from actions that might harm Finnish investors. The said article also offers protection to Finnish investors against actions by private parties. Protection for Investments Under the ECT The Energy Charter Treaty (the ‘ ECT ’) governs investments in the field of energy. Russia signed the ECT when it entered into force in 1991 and chose to apply the ECT provisionally, but never ratified it. Finland, in turn, is a contracting party to the ECT. In practice, Russia’s decision to apply the ECT provisionally has meant that they are bound by the provisions of the ECT only to such extent that the application thereof is not inconsistent with its national legislation. In August 2009, Russia declared that it would withdraw from the ECT as of 18 October 2009. As a result, Russia’s obligation to provisionally apply the ECT came to an end. However, despite its decision not to ratify the ECT, investments made in Russia prior to 18 October 2009 will continue to be governed by certain parts of the ECT, namely Part III setting forth the investment protection obligations and Part V setting forth the dispute resolution mechanism, until 19 October 2029, provided that the application thereof does not contradict Russia’s constitution, laws or regulations. Consequently, any claims of alleged infringement of the investment protection obligations arising out of the ECT shall be settled in accordance with the dispute resolution mechanism included in the ECT if they concern investments that were made during the period of provisional application. Similarly to the FIN-RUS BIT, the ECT provides that the contracting parties must treat investors according to the FET standard and offers protection for foreign investors against nationalisation, expropriation, or other equivalent measures in respect of their investments.       Arbitration as a Mechanism for Resolving Disputes Claims arising out of or in connection with either the FIN-RUS BIT or the ECT may be settled by arbitration. To this end, Finnish investors whose rights under the above treaties have been violated may initiate arbitral proceedings against the Russian Federation. Through arbitral proceedings, an investor may be awarded compensation for any losses it may have incurred as a result of the violating actions of a host state. Arbitral awards rendered under the arbitration clauses of either the FIN-RUS BIT or the ECT are enforceable under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the ‘ New York Convention ’), to which both Finland and Russia are contracting parties. The provisions of the New York Convention enable investors to seek enforcement of arbitral awards in any contracting state where Russia has assets. This might turn out as a feasible option, as enforcing arbitral awards in Russia is known to come with challenges. Key Take-aways for Foreign Investors in Russia For the time being, companies looking to exit Russia or occupied territories in Ukraine should assess whether their investments fall within the scope of any investment treaties and to what extent these might offer protection against potential Russian government actions. In this connection, it is worth noting that Russia has similar BITs in place with other countries that might become applicable in circumstances where an investment is structured in a way that involves numerous countries that fall within the scopes of different BITs. Thus, Finnish or other foreign investors operating through, e.g. the Netherlands might be able to invoke the provisions of the Netherlands–Russian Federation BIT, and so on. In a similar manner, Finnish investors might be able to benefit from the protection offered by other BITs by invoking the most-favoured-nation principle.

   Published: 15.3.2022

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   How to Estimate Whether to Submit a Joint or Separate Offer in a Public Competitive Tendering?

   By combining resources with a competitor, it might, however, be possible to submit a tender. Sometimes cooperation with a competitor can also result in significant cost savings for the customer compared to carrying out the procurement alone. Competition law restricts cooperation between competitors From a competition law perspective, joint offers are not always permitted, and forming a consortium might lead to serious competition law sanctions. If the object or effect of a cooperation between companies is to significantly prevent, restrict or distort competition, then cooperation is prohibited. This means that bidding cartels and other procedures through which markets are shared between competitors are prohibited. The provisions of the Finnish Act on Public Procurement and Concession Contracts have a permissive view on consortiums, while the approach taken in the Finnish Competition Act is negative. So what should competing companies then take into account when they consider bidding as a consortium?  Joint offers attract interest Under competition law, competitors may generally cooperate only if the tenderer is otherwise not able to participate in the competitive tender process. Joint offers in public procurements that violate the competition laws have lately been under discussion both in Finland and elsewhere. We would like to highlight two recent cases where the court stated that a joint offer had prevented competition. 1. In Finland, tenderers were deemed to have used a joint offer to share markets In September 2021, the Finnish Competition and Consumer Authority (FCCA) submitted to the Market Court a penalty payment proposal , in which it proposed a penalty payment of EUR 1.9 million to six companies operating in the Turku region traffic and their joint venture. The companies submitted several joint offers through their joint ventures. According to the FCCA’s estimate, the companies eliminated all competition with their joint offers in the competitive tendering and shared the markets in a manner agreed in advance. In the penalty payment proposal, it is stated that, when evaluated as whole, the violation concerned a serious competition restriction. The companies had alleged that the cooperation in reality would have benefited the client and consumers but, according to the FCCA’s estimate, it was not demonstrated what these benefits were or how they would have been passed on to consumers. 2. In Denmark, a joint offer was considered a competition restriction The permissibility of joint offers has also been assessed in Denmark. The Danish Road Directorate (Vejdirektoratet) requested tenders for repainting road paintings in three different geographical areas. The road painting contract was divided into parts in accordance with the geographical areas. Two large undertakings operating in the road painting market formed a consortium that submitted a tender for all three areas. The consortium won the competitive tendering in all areas. One of the losing tenderers appealed the decision, and the case was brought before the Supreme Court of Denmark ( Hoejesteret 191/2018 ). The consortium was deemed to be in violation of the Danish Competition Act and Article 101 TFEU. The Supreme Court of Denmark held that the question was of a competition restriction, the object of which was to restrict competition. The consortium had also not brought up any efficiencies that would have justified the cooperation. The companies that formed the consortium could have submitted a tender on their own at least in some areas. Because the issue is topical and has attracted a lot of attention, we recommend that companies pay special attention to competition rules when they consider forming a consortium and submitting a joint offer. The aforementioned cases are examples of situations in which advance assessment failed. When is cooperation permitted and when prohibited? If the members of the consortium are not competitors or potential competitors, cooperation is, as a rule, permitted. If the parties of the consortium are competitors, the point of departure is the opposite, and it is necessary to separately assess every time whether cooperation is permitted. The assessment must be made on a case-by-case basis taking into account the actual content of the cooperation, the concrete details and terms and conditions of the competitive tendering. It may be permitted to submit a joint offer if the parties of the consortium could not submit a tender at all on their own or if the cooperation can be justified on efficiency grounds. It is important to note that the threshold for using the efficiency argument is high and the efficiencies must also de facto be passed on to consumers. When making the assessment, it is advisable to consult a competition lawyer – in particular, if the cooperation is to be justified on efficiency grounds. A company that concludes agreements with the aim to distort competition can be excluded from procurements Under the Finnish Act on Public Procurement and Concession Contracts, the contracting entity may decide to exclude from competitive tendering a tenderer that has concluded agreements with other suppliers seeking to distort competition, and the contracting entity can prove that this has occurred. By making joint offers that violate competition laws, the company thus also compromises its possibility to participate in public competitive tendering in the future. Ensure in advance that the cooperation is permitted For the tenderer it is therefore important to always assess the permissibility of cooperation in advance. If cooperation is entered without an assessment, there is a risk that it breaches the cartel prohibition and results in fines and other sanctions. The company may also lose business opportunities in public competitive tendering processes in the future.

   Published: 21.1.2022

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   New Guidelines From ESMA on the Outsourcing of Cloud Services for the Financial Sector – Check Your Policies by the End of This Year

   The new Guidelines help firms to identify, address and monitor the risks and challenges arising from cloud outsourcing arrangements, which are still becoming more common. In addition to competent authorities, the Guidelines are applied to certain players in the financial sector, which include undertakings for collective investment in transferable securities, central counterparties, investment firms and credit institutions when carrying out investment services and activities, as well as credit rating agencies. The Guidelines supplement previous guidelines on outsourcing issued by the European Banking Authority (EBA) and European Insurance and Occupational Pensions Authority. ESMA has stated that the new Guidelines are consistent with the previously issued guidelines. Even though the consistency of the guidelines is useful for the firms falling within the scope of application of ESMA’s Guidelines, all of the guidelines on cloud outsourcing are to be examined separately, taking into account their individual scopes of application. What do firms have to consider under the new Guidelines?  The Guidelines set altogether nine guidelines for firms, which they must take into account in cloud outsourcing arrangements. 1. The firm must have a defined and up-to-date cloud outsourcing strategy that is consistent with the firm’s strategies and internal policies and processes. The responsibilities for the documentation, management and control of cloud outsourcing arrangements must be clearly assigned within the organisation. An internal oversight function must be arranged taking into account the nature and scale of the business. A clear allocation of tasks and responsibilities for management and oversight is the minimum requirement. Firms not categorised as small must establish an oversight function or designate senior staff members who are directly accountable to the management body and responsible for managing and overseeing the risks. The oversight must be risk-based, with a primary focus on critical or important functions. An updated register of information must be maintained on all cloud outsourcing arrangements. A periodical reassessment must be made about whether the cloud outsourcing arrangements concern a critical or important function, and the critical or important functions must be distinguished from other outsourcing arrangements in the register. 2. Before entering into any cloud outsourcing arrangement, the firm must conduct an analysis and a due diligence review proportionate to the nature of the arrangement in question. The firm must assess if the cloud outsourcing arrangement concerns a critical or important function and identify and assess all relevant risks and any conflicts of interest. The analysis must include an assessment of the potential impact of the cloud outsourcing arrangement on the firm’s operational, legal, compliance, and reputational risks. Unlike in the EBA cloud outsourcing guidelines, according to the ESMA guidelines additional factors to be considered in the due diligence on the cloud service provider consist of, for example, service support, including support plans and contacts and disaster recovery plans. 3. As a minimum requirement, the respective rights and obligations of the parties should be clearly set out in a written agreement. The written agreement must include a clear description of the outsourced function, term and termination of the agreement, and a mention of the possibility of the firm to terminate it, the financial obligations of the parties, provisions regarding information security and protection of personal data, access and audit rights and minimum obligations set on the cloud service provider. 4. Information security requirements must be included in the cloud outsourcing agreement. The firm must set information security requirements in its internal policies and procedures and within the cloud outsourcing agreement and monitor compliance with these requirements on an ongoing basis, including to protect confidential, personal or otherwise sensitive data. In case of outsourcing of critical or important functions, the firm must, inter alia, Although the EBA guidelines include provisions of a similar nature, the provisions about strong authentication mechanisms and a risk-based approach in the ESMA Guidelines are different or entirely new compared to them. 5. The agreement must include exit strategies that do not cause undue disruption to the business activities and/or services. In case of outsourcing of critical or important functions, the firm must ensure that it is able to exit the cloud outsourcing arrangement without undue disruption to its business activities and services to its clients, and without any detriment to its compliance with its obligations under the applicable legislation, as well as the confidentiality, integrity and availability of its data. The firm must develop an exit strategy and identify alternative solutions. The firm must also define success criteria for the transition and assign roles and responsibilities to manage the exit strategy. 6. The agreement may not limit access and audit rights. The firm should ensure that the cloud outsourcing written agreement does not limit the firm’s and competent authority’s effective exercise of the access and audit rights and oversight options on the cloud service provider. Firms may enhance the efficiency of the use of audit resources and decrease the organisational burden on the cloud service provider and its clients by requiring third-party certifications and external or internal audit reports, and by pooled audits, without prejudice to their final responsibility regarding cloud outsourcing arrangements. 7. If sub-outsourcing is agreed upon, the agreement must specify clear obligations and requirements. If sub-outsourcing of critical or important functions (or material parts thereof) is permitted, the cloud outsourcing written agreement between the firm and the cloud service provider must include certain provisions and ensure that the cloud service provider properly oversees the subcontractor. 8. The firm should notify its competent authority in writing and in a timely manner of planned cloud outsourcing arrangements that concern a critical or important function. Also, those cloud outsourcing arrangements that concern a function that was previously classified as non-critical or non-important and then became critical or important must be notified to the competent authority. 9. The supervision by competent authorities focuses on the arrangements that relate to the outsourcing of critical or important functions. Competent authorities assess the risks arising from firms’ cloud outsourcing arrangements as part of their supervisory process and focus in particular on the arrangements that relate to the outsourcing of critical or important functions, and assess based on this whether Consequences and future prospects Firms must assess and change their current cloud outsourcing arrangements to comply with the Guidelines by 31 December 2022. Adding pressure to the assessment and possible changes is the notion that if the cloud outsourcing arrangements of critical or important functions have not been assessed by the end of 2022, the companies must notify the competent authorities about this and include in the notification the planned measures, by which the assessment will be completed, or alternatively notify the possible exit strategy.   Pia Ek Miika Junttila Lauri Laatunen Ida Laakkonen

   Published: 12.1.2022

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   Shrewd Owners Lead Change

   It has perhaps been surprising to see just how ambitiously the private sector has tackled problems relating to climate change. Numerous Finnish companies have placed well on the CDP’s list for their environmental efforts. Neste, with its carbon capture and hydrogen innovations, is one example of a Finnish company providing practical solutions to the world’s most urgent problems. BlackRock’s Chairman and CEO Larry Fink also took up the cause by making climate change the theme of his annual letter to the CEOs of the world. While these are all significant steps, they are still just the first ones. Declarations need to be backed up by action. The rapidly changing world and an increasing understanding in companies of the importance of their stakeholders will come to dictate companies’ scope for action. The significance of various stakeholder groups is constantly shifting and is having an increasing impact of corporate value creation. For example, the Coalition United for a Responsible Exxon (CURE), a group of investors with over 145 institutional members, has accused Exxon's board of responding too slowly to climate issues and is calling for changes in the company’s management. The green transition may still be in its infancy, but it has gotten off to a promising start. There is much work ahead for everyone, and in that work, dialogue will be key—not just between companies and their stakeholders, but between companies and their peers. Companies should share their experiences, insights and best practices. It is also clear that the market has shown its strength as a driver of change, provided that the regulatory framework is in place and emissions pricing functions correctly. An active and skilled owner understands and respects their company’s various stakeholders. Continual dialogue is at the core of any successful ownership strategy. As the changes that have already happened prove, companies do not operate in isolation from the rest of society. They can make choices that improve the functioning and welfare of society and the planet as a whole while continuing to create excellent business opportunities. I am hopeful that 2022 will be a less eventful year than this one—but I wouldn’t bet on it. We look forward to continuing to build sustainable success stories and engaging in the necessary dialogue with you in the coming year. Thank you to all our clients and business partners for your trust and the work we have done together this year!

   Published: 22.12.2021

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   Private Equity Fund Legal Due Diligence: How to Conduct It More Efficiently

   As investment volumes grow and the operating environment becomes more complex, legal due diligence reviews of private equity fund investments require more extensive expertise and efficient processes. In this blog, we take a look at legal due diligence reviews of private equity fund investments and at ways to complete them efficiently. What Are the Goals of a Due Diligence Review? Investments in private equity funds are long-term commitments, and investors should carefully assess the terms under which they are willing to make them. The terms of a fund can be compared to a marriage—both have to function in both good times and bad. With the increasing complexity in fund terms, particularly in certain foreign private equity funds, investors would be wise to pay even more attention to due diligence processes than before. The regulation applicable to institutional investors and investors’ own internal investment policies mean that investors have to review the legal terms of funds and report due diligence findings as part of their investment process. International funds seek to ensure that their fund agreements take into account the most common requirements of different investor groups, such as funds of funds.  However, they don't necessarily take into account, for example, the regulation applicable to Finnish pension insurance companies and other financial institutions. A due diligence review allows investors to ascertain whether the fund investment fulfils the requirements of national regulation and their own investment policy. It is also important that the due diligence review confirms that the fund’s commercial and administrative terms are fair to the investor and are in line with customary market practice. Sustainability is also important to most investors.  Investors can respond to problems uncovered in the due diligence review by proposing changes to the fund agreement or by negotiating investor-specific special terms to the investment documentation. The end result is a compromise between the investor and fund manager that is determined to a large degree by the investor’s position in negotiations. An efficiently and professionally conducted due diligence process has a particularly important role in achieving a successful result. Sometimes the risks found in a due diligence review may lead to the the investor deciding not to make the investment. In our experience, these kinds of deal killers can be triggered, for example, by a deal-by-deal distribution model or a lack of key person provisions. On the other hand, some funds may be constrained by their own regulatory obligations and may not be able to offer terms that meet the regulatory obligations of a particular investor. Focal Points for Legal Due Diligence Due diligence processes are always tailored to the characteristics of the investor and the target fund. The contents of the review varies depending on the regulation applicable to the investor, the investor’s investment policy, the fund’s investment strategy and structure, and the composition of the fund’s service providers including delegation arrangements. Certain factors are considered to fall within the minimum scope of the review that should always be examined. These factors include: In addition to the above, it is usually important for the due diligence review to look at investor-specific regulatory requirements and factors relating to the sustainability of the investment and the investor’s investment policy. Typical Challenges in Due Diligence Processes A typical challenge of due diligence reviews from the investor’s perspective relates to the high variation in fund structures and terms along with the time and resources required to review them.  The documentation relating to international private equity fund investments is particularly extensive and complex. Funds operating with different investment strategies and in different geographical regions have their own market practices, and the terms of each fund are unique. The international regulation of funds is developing, and new fund structures are regularly being launched. Identifying the key legal and commercial issues for investors in these situations requires comprehensive expertise and experience of fund structures. Fund investments are most often made by small and dynamic teams, and not all investors have in-house lawyers to perform due diligence reviews. Even if in-house resources are available for reviews, they often have to be shared with other business functions. The challenge in those situations is there not being enough time left for business-critical tasks. Streamlining Legal Due Diligence Reviews Due diligence reviews can be streamlined by developing established tools and processes. We have collected a few good guidelines below. Make Yourself a Checklist Write down the key goals of the review, the requirements set by the regulation and investment policy applicable to the investor, and the commercial, administrative and operative terms that you want to examine in all fund investments. You can also set internal boundary conditions that due diligence findings must stay within. Systematically applying the checklist formed by these factors will speed up the review of fund material and make it easier to react to any problems at an early stage of the process. Start the Process Early Legal due diligence reviews take time, so it is a good idea to start the review as early as possible in the investment process. By doing so, you can identify the most problematic issues relating to the investment in good time and find a solution with the fund manager before the fund’s terms are locked in. Open an Active Dialogue with the Fund Manager and Their Advisers An active dialogue with the fund manager and their legal advisers is an important part of an efficient investment process. It is particularly important to go over matters of principle relating to financial and governance terms as soon as the due diligence process starts.  In our experience, the earlier discussions concerning problems are started with the fund manager, the easier it is to find a satisfactory solution for the investor. Consider Whether Outsourcing Would Provide Efficiency Recently, many investors have outsourced due diligence reviews to outside advisers. This frees up the investors in-house resources for other tasks that provide more added value for business. Outsourcing may not be necessary for all fund investments, but could be used, for example, for the more complex types of funds or ones the investor has no previous experience with. One key reason to outsource is that many investors do not make fund investments frequently enough to have a full picture of the latest fund structures and market practices. This can lead to increasedlearning costs when investing in unfamiliar funds. In such situations, a legal adviser specialised in private equity funds will provide efficiency gains and cost savings.

   Published: 17.12.2021

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   How to Succeed in Outsourcing

   How to Prepare for an Outsourcing Project Outsourcing projects require a lot of planning, coordination and preparation. Therefore, it is worth planning a project and preparing for negotiations well in advance. It is good to plan and carefully consider, among other things, project objectives, prioritisations, resourcing, project schedule, disengagement of current suppliers and criteria for selecting an outsourcing partner. 1.     Be clear on legislation related to outsourcing. At the preparation stage, be clear on the legislation applicable to outsourcing. If employees transfer in connection with the outsourcing, the potential business transfer risk should be identified well in advance. It can affect not only the project schedule, but also the substance of the negotiations. Sharing of costs arising from the business transfer often emerges as an important issue in the negotiations. Hence, it’s good to involve your lawyers and HR well in advance. It is important for the outsourcer to identify any potentially applicable industry-specific regulations. Public sector outsourcing should always be conducted in accordance with public procurement legislation. Outsourcing in the banking and insurance sector, in turn, are subject to the strict regulations of the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the Finnish Financial Supervisory Authority. Banking and insurance operators must also extend the obligations set out in those regulations to their suppliers. When outsourcing, you must never forget data protection regulations, which nowadays affect almost all business activity. Privacy issues come up especially when companies start using cloud or SaaS-based solutions. With regard to data protection, you should pay special attention to the location of the servers. The location of the servers and their potential transfer should be expressly agreed upon.   2.     Disengage current suppliers without service disruption. When preparing for outsourcing, you should go through agreements with those suppliers that may be subject to disengagement. In particular, check the provisions related to termination assistance in order to ensure that the disengagement does not cause disruption upon termination and expiry of the agreement. Make sure that the current suppliers, in cooperation with the new service provider, commit to disengage and transfer services within the transition period to the new provider. It is important to take care of this, especially if there are no provisions committing the supplier to provide termination assistance. Providing some incentives to current suppliers may be a good idea to consider so that service levels do not deteriorate during the transition period. Plan a disruption-free disengagement of the current suppliers in advance: these situations are traditionally prone to conflict which, in the worst-case scenario, can have a significant impact on the service levels and project schedule. What Should You Specifically Take into Account in the Outsourcing Agreement? In the outsourcing agreement, the parties should try to agree clearly on the sharing of responsibilities between them in the performance of services. With IT environments being increasingly multivendor environments, all outsourcing and subcontracting agreements should contain provisions on the duty of suppliers to cooperate with each other. Otherwise, you could easily find yourself in the middle of a time-consuming supplier dispute. In an outsourcing agreement, pay particular attention to the following: Tips for outsourcing and project management The implementation of many outsourcing projects is nowadays carried out using agile methods , the management of which also requires active involvement and resourcing from the customers. In agile projects, you should pay particular attention to the drafting of provisions related to acceptance of the project and iterations (sprints), as well as a warranty period. In particular, agree on when the entire project is deemed accepted and when the warranty periods for the project and its iterations begin. Pay attention to the ownership and transfer of intellectual property rights. This is of particular importance for iterations and unapproved iterations, as well as agreeing on how ownership and rights of use in these cases are allocated between the customer and the supplier. In the implementation of the project, make sure that changes are documented appropriately and in accordance with the agreement . This ensures that the changes made and agreed on a project level have been implemented in accordance with the terms of the agreement, and that the contents of the agreement have not been implicitly changed in an unfavourable manner. Involve your lawyer in negotiating and documenting the changes well in advance. The management of and planning for changes is also closely related to the governance of the agreement. In our experience, regular meetings with technical, operational and strategic management teams, as well as pre-arranged escalation processes, reduce the number of agreement disputes.

   Published: 7.12.2021

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    Tax Liability of Foreign Companies to Change if Decisions Made in Finland

    Finland is not an exception in this regard, as Norway, Denmark, Germany, the UK and the Netherlands, among other countries, all have similar legislation in force. Potential double taxation is eliminated through tax treaties binding on Finland. The definition of the place of effective management is expansive: it is the place in which the company’s board of directors or other decision-making organ makes the most important decisions relating to the company's highest-level daily management. However, the assessment does take into consideration other circumstances relating to the business operations and organisation. How is the Place of Effective Management Determined? If the meetings of the board of directors are organised remotely, the place of effective management is assessed based on the location from where the meeting is joined. This being the case, if the board of directors of a company registered abroad joins a meeting from Finland, the decisions are made in Finland. If the members of the board join the meeting from several different locations, the place of effective management is assessed based on the location of the company's headquarters or other executive management. On the other hand, the place of effective management has to be sufficiently permanent. For example, meetings held as video conferences and other temporary arrangements made due to the pandemic do not form a place of effective management in Finland as long as the arrangement, even if it proves to be a good one, remains temporary. With respect to group companies located abroad, it is a good idea to separate the group’s highest strategic management from the daily management of foreign group companies. For example, the place of effective management of a group’s holding company could be in the Finnish parent company. Despite New Guidance, Assessment is Always Case by Case The Finnish Tax Administration has updated its guidance in line with the new legislation. The new guidance provides examples of how the new legislation is applied in certain situations, but the assessment must always be on a case-by-case basis. It is worthwhile to review your company’s operations in light of the new legislation to chart risks. We would be happy to assist you in this exercise.

    Published: 1.12.2021