Supreme Court ruling 2014:65: The formal and factual requirements and time limitations concerning the acquisition of company’s own shares under the Limited Liability Act

The Supreme Court of Finland outlined in its ruling no 2014:65 (16 September 2014) the validity of the acquisition clause in a share purchase agreement concerning an acquisition of company’s own shares and held the clause non-binding on the company because of deficiencies in the company’s decision making.

The shareholders of Vihti Hillside Golf & Country Ltd. (hereinafter referred to as the “Company”) decided unanimously to accept new rules on the playing rights in the Company’s extraordinary general meeting held on 23 April 2003. The rules included terms and conditions on the arrangement of the direct share issue for its founders for the price of 3 000 euros / A class share. In accordance with the rules, the acquired A shares became subject to a condominium charge as of year 2007, after which the founders were able either to keep the shares and pay the charge or sell the shares back to the Company for the price of 6 000 euros / A class share.

Pro Classic Ltd. acquired 10 pieces of A class shares in the direct issue. The share purchase agreement entered into between the Company and Pro Classic Ltd. included the aforesaid acquisition clause. When Pro Classic Ltd wanted to use its right to sell the acquired shares back to the Company, the Company refused to purchase the shares.

The Supreme Court held that the decision made by the Company in the extraordinary general meeting on 23 April 2003 was non-binding because it was both formally and factually contrary to the old Limited Liability Company Act (734/1978) in force during that time. Firstly, the Court stated that the decision only concerned the acceptance of the rules for the playing rights, not the acquisition of the Company’s own shares. The reference to the Company’s obligation to acquire the shares was only made in the annex to the decision, but an actual decision about the acquisition was not made and thereby marked in the minutes of the meeting.

According to § 3.2 of Chapter 7 of the old Limited Liability Company Act, both the decision of the company and the proposal for the decision were required to provide information about, inter alia, the purpose of the share acquisition, its impact on the company’s equity, the purchase price and the clarification of the financial status of the company. By merely accepting the rules for the playing rights, the Company had not fulfilled the formal requirements set forth in this provision.

In addition, by virtue of § 3.1 of the Chapter 7 of the old Limited Liability Act, the acquisition of the Company’s own shares was only possible by using the distributable funds of the Company. As the Finnish Government stated in its proposal for this act (no 89/1996. p. 98), the purpose of these formal requirements was to safeguard the rights of the third parties, such as debtors. Because the Company did not have distributable funds, the Company was not able to make the acquisition decision.

According to the Supreme Court, the referred law aims at ensuring that the acquisition decision is based on the up-to-date clarification of the financial status of the company and that the acquisition is legally justified and fulfils the requirements of the law from the point of view of current and future shareholders and debtors. In this case, the decision could not meet the requirements because it would occur far in the future—at the earliest, three years after the decision date.

Not only was it relevant in this case that the Company lacked an adequate amount of funds during the time of the decision, on 23 April 2014, but also that the Company was unable to even make any commitments concerning future accounting periods, because no reliable information of its financial status at the time of the acquisition was available to it when the decision was made.

The currently valid Limited Liability Companies Act (624/2006), Chapter 15, also includes rules on the acquisition and the redemption of a company’s own shares. The new regulation is conceptually clarified with more specific provisions on the subject matter. On a level of main principles, the new regulation is consistent with the old regulation, which can therefore be applied when interpreting the respective rules under the current Limited Liability Companies Act.