New Case-Law Highlights Importance of Internal Governance Rules in Finnish Ltd’s

In many cases, especially in cross-border M&A, foreign buyers of Finnish target companies tend to nominate new board members from their own organisation to oversee the integration and operations of the target, leaving the existing management in place to continue running the day-to-day business.
 
A recent ruling by the Finnish Supreme Court highlights the importance of having robust internal governance rules in place as a tool to manage liability risks faced by the board members.
 
The Finnish Corporate Governance Model
 
The Finnish Companies Act sets out the fundamental regulation on governance and regulates the framework for the roles, responsibilities and rights as well as the relation of the governing bodies of a company.
 
The main corporate bodies of a company according to the Companies Act are the General Meeting of shareholders, the board of directors and the managing director.   
 
The General Meeting, as the ultimate corporate authority of a company, through which the shareholders exercise their decision making power, decides upon matters such as election and dismissal of board of directors, adoption of financial statements and distribution of assets, as well as decision relating to the company’s shares and share capital.
 
The board of directors have a wide general competence, which includes for example deciding upon management, strategy and organisation of the company’s operations, supervision of the company’s accounting and financial matters as well as determining on how corporate governance is implemented by the company. The directors are subject to a duty of care as well as a duty of loyalty. These duties include a duty to keep themselves informed about the operations and development of the company as well as a duty to monitor the company’s activities.
 
The responsibility for the company’s day-to-day management, which shall be pursued in accordance with the directions given by the board of directors, falls within the competence of the managing director.  The board of directors are, however, responsible for making decisions that are clearly outside the scope of daily management. The managing director generally has the most extensive and recent information about the company and its operations, which gives him a responsibility to keep the board of directors duly informed.
 
Supreme Court Ruling 9 September 2016 (Case KKO 2016:58)
 
The Finnish Supreme Court issued a ruling in a matter which involved a limited liability company that produces potato flakes. As the production of potato flakes causes environmentally harmful waste, the company held an environmental permit for its operations. The environmental permit included detailed instructions on measures to be taken by the company in order to comply with the permit as well as with other environmental statutes and orders.
 
The production facility of the company had during a number of years emitted sludge, causing environmental contamination. The managing director of the company had been aware of the breach and the contamination, but had not actively informed the board about the situation. The board members were, however, charged based on their position as members of the board.
 
The main questions in the case concerned who in practice was responsible for monitoring the compliance of the environmental permit and whether the members of the board of directors should be held responsible for causing environmental contamination by neglecting their duties as board members.
 
The members of the board argued in their defence that they were external board members appointed only to take care of the legal and financial matters of the company. The company was a family-owned business where the managing director had an exceptional extensive responsibility range and took care of all other matters in relation to the company’s operations. The board had made sure that the company held an environmental permit, but had not familiarized itself closer to its provisions since they considered it to fall within the scope of the managing director’s duties as a day-to-day business matter.
 
It was not in dispute that the production of potato flakes caused environmental contamination and that the operations required an environmental permit. In addition to this, the production of potato flakes constituted the main business in the company’s operations. Since any breach of the environmental provisions could lead to a withdrawal of the permit, which would consequently lead to material limitations imposed on or even discontinuation of the company’s business operations, the court considered the environmental permit and compliance with environmental statues to be an essential part of the company’s business operations. The court therefore considered that the board had a central role in ensuring that all environmental matters were duly organized and supervised in accordance with any environmental provision.
 
The court however found that the board had not given any instructions or orders, or in any other way delegated the responsibility regarding the management and supervision of environmental matters to the managing director. Due to the fact that the board had not taken any actions in order to organize such matters the court found that they had neglected their duties as board members and were ordered to pay fines.
 
Conclusion
 
The Supreme Court’s ruling court’s decision highlights that even though the Companies Act sets out a distinction of tasks and responsibilities between the different governing bodies it can in practice be difficult to draw the line between the general competences of the corporate bodies and it may not be sufficient for the board to rely on the broadly defined definitions set out in the Finnish Companies Act.
 
A feasible assumption would have been to consider the management and supervision of the environmental permit as a part of the managing directors responsibilities as part of the duty to monitor daily operations of the company.
 
The ruling, however, highlights that the board is responsible for making sure that matters which are of crucial importance for the continuity of the company’s operations, are adequately monitored and taken care of and the board may need to actively direct the management to provide information on the company’s operations.
 
The case furthermore highlights the importance of establishing a charter on the division of work that clearly defines and distinguishes the duties and responsibilities of the two corporate bodies within the company.
 
In this particular case, the outcome of the decision could have been different if there would have been evidence of any instructions from the board to the managing director regarding the issues in questions. A clearly outlined responsibility charter would have showed that the board had both noted the importance of the environmental permit for the company’s operations as well as taken reasonable measures to ensure that the company’s business operations comply with the applicable provisions.

Borenius Attorneys Ltd is one of the leading law firms in Finland. The firm was established in 1911 and consists of over 200 employees in three jurisdictions. We provide an easy access to full-scale business law solutions in Finland, Russia (Borenius Attorneys Russia Ltd) and in New York in the U.S. (Borenius Attorneys LLP). Borenius provides services in all areas of law for corporate clients. Borenius is top-ranked by all the major legal directories, such as the Legal 500, IFLR1000, and Chambers and Partners. In 2016 Borenius received the prestigious Finland Law Firm of the Year award from Chambers Europe and was the only Finnish firm to receive Tier 1 ranking in all of IFLR four categories (M&A, Banking & Finance, Capital Markets and Energy & Infra). Borenius continuously ranks among the top Finnish law firms in terms of the number and value of M&A transactions carried out.

Partner Andreas Doepel advises companies on corporate law matters and on mergers and acquisitions with a particular emphasis on company law.
 
Andreas graduated from the University of Helsinki in 1998, after which he has worked at Borenius Attorneys Ltd. on various transactions.
 
Andreas heads Borenius Attorneys Ltd’s Corporate Advisory & Compliance group.

Andreas can be contacted on +358 (0)20 713 33 or by email at andreas.doepel@borenius.com