In January 2018, our Restructuring & Insolvency practice conducted an international comparative study on debt-to-equity conversions performed by companies with financial difficulties. The study was carried out in cooperation with international law firms. The study included an international comparison, an introduction to the current Finnish regulation scheme and a summary discussing considerations in the event that debt-to-equity conversion is incorporated into Finland’s insolvency and corporate law.
The study in brief
The summary of the study examines the aspects that must be taken into consideration if the legislator chooses to revise Finnish insolvency and corporate law provisions in future to promote the use of debt-to-equity conversion in company restructuring proceedings and in corporate arrangements falling outside the scope of formal insolvency.
During March–April 2018, the Ministry of Justice organised an extensive round of comments during which they asked for 59 different interest groups’ feedback on particular considerations discussed in the summary of the study. In total, 26 statements were submitted. The interest groups that provided statements were unanimous in that the information and assessments brought forward in the study will be relevant when further developing Finnish legislation on restructuring and corporate arrangements. In addition, they considered the study method, an international comparison, to have been a good choice, and noted that the countries selected for comparison were relevant to the study.
In short, the majority of the statement providers were of the opinion that the current Finnish legal state for debt-to-equity swap and ranking of claims is not ideal. Furthermore, they came to the conclusion that further studies are required to determine how current legislation regarding restructuring and corporate arrangements should be reviewed. Most of the statement providers noted that the manner in which the claims of shareholders are ranked vis-à-vis creditors in Finland, which differs from international practice, skews the Finnish insolvency regime and that this might cause problems in future. It became clear that, if changes were to be made, insolvency legislation should be where they happen.
The majority of the interest groups issuing the statements expressed a sense of urgency for the implementation of legislation regarding debt-to-equity conversion. They also believed that shares should be valued at their fair market value and debts at their nominal value. In general, they were of the view that shareholders should be placed into a separate group when casting their votes on a potential debt-to-equity conversion. Further revisions should be made to the division of groups when voting on whether to approve a restructuring programme. If provisions on debt-to-equity are implemented, the provisions set out in the Finnish Restructuring of Enterprises Act on moratoriums and subordinated debts should be clarified as well.
However, the proposition that the use of debt-to-equity conversion should be limited only to companies of a certain size received mixed responses. Some respondents were supportive of limitations being established in relevant legislation while others were of the opinion that no special boundaries should be imposed.