Debt-to-equity Conversion in Corporate Restructuring – Legislative Amendment to Take Effect on 1 January 2026

Significant changes to the Finnish Restructuring of Enterprises Act, enabling debt-to-equity conversion in corporate restructuring will take effect as from 1 January 2026. The aim of the changes is to improve the possibilities of restructuring the capital structure of a company in financial difficulties and thus promote the achievement of the restructuring objectives set out in the Restructuring Act. In addition, the changes seek to balance the risk sharing between creditors and owners, improve the success of restructuring proceedings, and increase the availability of international debt financing for Finnish companies.

A key reform is that the restructuring program may stipulate the right of creditors to subscribe for shares (or option rights or other special rights) in the debtor company in exchange for their restructuring debts. The conversion of creditors' claims into shares can cram out-of-the-money shareholders and does not require decisions by a general meeting of shareholders, that would otherwise be required under the Finnish Limited Liability Companies Act. Amendments to the articles of association and the cancellation of shares may also be included as part of the restructuring program.

The Finnish Securities Markets Act will also be amended so that exceeding the mandatory bid threshold would not lead to an obligation to make a mandatory bid for all shares and securities entitling to shares in the debtor company when the implementation of a confirmed restructuring program results in a party’s holdings to exceed the mandatory bid threshold.

The new legislation will enter into force on 1 January 2026. According to the transitional provision, restructuring cases initiated before the entry into force will be governed by the regulation in force prior to that date.

The Restructuring Act introduces a new concept, "conversion restructuring," which refers to the restructuring of a limited liability company, the debts of which are converted into shares or other instruments entitling to shares, resulting in a change in the company's ownership structure. The new provisions relating to conversion restructuring concern the content, processing, confirmation, implementation, and expiry of the program.

Conversion restructuring deviates from the provisions of the Limited Liability Companies Act in certain aspects. Share issues, special rights, and amendments to the articles of association may be introduced, and potentially amended, in the restructuring program without a general meeting. However, the principle of equality under the Limited Liability Companies Act continues to guide conversion restructuring, and the restructuring program may be rejected if it violates the equality of shareholders.

The restructuring program must specify the terms and conditions of the debt conversion, including who has subscription rights, the subscription price and its basis, the subscription and payment period, the necessary amendments to the articles of association, and the possible cancellation of shares. The administrator's obligation to negotiate the terms and conditions of the restructuring program is extended to include shareholders, if conversion is proposed.

Once the draft restructuring program is ready, the process of reviewing the proposal begins by giving the parties involved an opportunity to review the proposal and express their views on it and review and dispute the restructuring debts included in the program. In the case of conversion restructuring, this opportunity to review the program must also be given to the shareholders of the debtor company.

If the shareholders and creditors unanimously approve the restructuring program, the program may deviate from what is stipulated in the law for the protection of shareholders and creditors. A restructuring program involving debt-to-equity conversion can in the future be confirmed by a court even if not all shareholders approve it, also known as cross-class cram-down. If all the creditor groups approve the plan, the approval from the shareholders is considered to be reached if more than half of the shareholders that have voted have supported the program.

In conversion restructuring, confirmation of the restructuring program by group majorities means confirmation of the restructuring program on the basis that a majority of all creditor groups and shareholders consent to it and the creditors' combined claims represent more than half of the total amount of claims of the creditors in the group who participated in the vote.

Shareholders form one group participating in the vote on the restructuring program proposal. The number of votes of shareholders is determined on the basis of their corporate law voting rights, taking into account any provisions in the articles of association on the number of votes conferred by the shares owned by them.

In a conversion restructuring, confirmation of the program without the consent of the group majorities means confirmation of the program even if a majority in all the creditor groups or shareholders do not approve of the program. This means that a decision to implement a debt conversion which is binding on the shareholders of the debtor company may in the future be taken against the will of shareholders.

According to the Restructuring Act, compulsory confirmation of the program requires that at least a majority in one creditor group has voted in favor of approving the program and the claims of all creditors who voted in favor represent at least one-fifth of all creditor claims. In addition, compulsory confirmation of a restructuring program (i.e. when the approval of all classes cannot be reached) is possible only if the approval of at least one "in-the-money" creditor group (i.e. a creditor group that would receive payments in bankruptcy) is obtained. In practice, "in-the-money" creditor group would often mean a creditor group consisting of secured creditors, ordinary unsecured creditors or public creditors. This ensures that a subordinated creditor group with no genuine economic interest in the debtor company's business cannot bind all other creditors and shareholders to the restructuring program against their will.

Shareholders are subject to a modified absolute priority rule, where exceptions to the absolute priority rule may be made for compelling reasons, such as ensuring the continuation of business operations, additional capitalization, or the conditions for implementation. In the case of micro and small enterprises – to which we do not foresee that the debt conversion would in any case be commercially applicable – approval of the majority of shareholders is, however, always required for a conversion program.

Expedited confirmation of a restructuring program refers to a procedure in which procedural stages relating to, among other things, the presentation of objections and statements concerning the restructuring program proposal or voting on the proposal do not need to be fully completed, but a sufficiently supported proposal can be directly confirmed as a restructuring program. As in the full restructuring proceedings, if a debt conversion is contemplated, all shareholders of the debtor company must be given an opportunity to be heard and express their views on the program proposal in an expedited restructuring proceeding as well.

Expedited confirmation of a restructuring program therefore requires that a sufficient number of shareholders have approved the program proposal. The number of votes conferred by each share is assessed taking into account the provisions of the articles of association on the number of votes conferred by different share classes. The number of votes of shareholders who do not express their view at all is not taken into account.

Expedited confirmation of a restructuring program requires written approval from all creditors whose aggregate claims amount to at least 70 per cent of the total amount of claims, and from each creditor whose claim amounts to at least 10 per cent of the total amount of creditors' claims. However, if the debtor is required under the program proposal to pay at least 25 per cent of the total amount of each creditor's claim no later than one year from the confirmation of the program, the approval threshold is lowered from 70 per cent to 60 per cent. The conversion of debts is considered as “payment of debt”, so expedited approval of the program may be approved with the lower creditor approval threshold.

Debt conversion is not invalidated by the debtor's program default, the expiry of the restructuring program or bankruptcy. If the debtor must file for bankruptcy after the restructuring program has been approved, the creditor's original claim is not restored to the extent that they have received substitute performance in the form of shares or instruments convertible into shares, meaning the conversion is final regardless of the ultimate success of the program. This is in line with the current practice of the Finnish Supreme Court.

Debt conversion is a voluntary form of payment for creditors. Creditors may accept or reject the conversion; therefore, no party can be compelled to take shares in the debtor.

An exception will be added to the Securities Markets Act, clarifying that a mandatory tender offer obligation will not arise if the offer obligation threshold is exceeded due to the implementation of a restructuring program confirmed in a conversion restructuring. There will, however, be no amendments to the thresholds for mandatory notifications of major shareholdings.

We are happy to answer any questions you may have regarding this reform.