In a public tender offer (PTO), the offeror seeks to acquire shares in a listed company, typically targeting all outstanding shares. If the offeror successfully acquires more than 90% of the target company’s outstanding shares, it obtains the right to redeem the remaining shares held by minority shareholders (the squeeze-out right). This right enables the offeror to become the sole shareholder and subsequently delist the company from the stock exchange. The process in which the squeeze-out right is exercised is known as “redemption proceedings”.
In January 2023, a notable amendment to the Finnish Companies Act came into effect, impacting the calculation of interest payable on redemption price in redemption proceedings. Alongside a significant rise in general interest rates, this legislative change has substantial implications for post-PTO redemption proceedings.
Previously, the law specified that the redemption price would accrue interest at the prevailing reference rate, as outlined in Section 12 of the Interest Act. However, as the applicable interest rate had been at zero for years, the Act was revised to include an additional 3 percentage points to the reference rate specified in Section 12 of the Interest Act. This adjustment aimed to address concerns that the prior rule unfairly disadvantaged minority shareholders, who often faced months of delay in receiving the redemption price without any interest. With the current reference rate of 4.5%, minority shareholders are now entitled to a total interest rate of 7.5% annually, marking a significant shift from the zero-interest era. With the Finnish PTO market remaining active, Avance has been closely involved in advising clients in these transactions as well as subsequent redemption proceedings, enabling us to observe firsthand the practical effects of the amendment.
As a result of the amendment, minority shareholders of listed companies subject to PTOs now receive risk-free interest income on their shares during post-PTO redemption proceedings. This may lead to some shareholders being less inclined to accept tender offers for their shares and potentially encourage arbitrage by certain market participants such as specialized hedge funds, potentially increasing the number of shareholders involved in post-PTO redemption proceedings. This, in turn, may lead to higher administrative costs borne by the majority shareholder (i.e., the PTO offeror). As for now, we have not seen any clear signs that the increase in the interest rate would have led to an increase in arbitrage activity or made it harder to reach the redemption threshold by (i.e., 90% of the outstanding shares of the target company) by a PTO, but this cannot be excluded in future cases.
Another practical implication of the change is that the redeemers have a clear interest to pay the undisputed part of the redemption price in the early phase of the redemption proceedings. During the proceedings, the arbitral tribunal generally confirms that the redeemer has a right to pay the undisputed part of the redemption price — typically equaling the PTO offer price — plus accrued interest, to minority shareholders at any time during the proceedings. To minimize interest accrual, redeemers are likely to opt to make these payments as early on as possible. This marks a shift from the zero-interest era, when minority shareholders in some cases had to wait months to receive payment for their shares (while noting that in many cases the redeemers opted to pay the undisputed price as soon as possible even in the zero-interest environment).
The long-term effects of this amendment on post-PTO redemption proceedings remain to be seen. Although the European Central Bank has recently lowered interest rates, which will affect the interest rate applied to Finnish redemption proceedings, the current landscape is still notably different from that of the pre-amendment period.
For more information, please contact Minna Katajoki, Rasmus Sundström, Robin Nordblad and Antti Aro.