Experts question legality of stock option perks - HELSINGIN SANOMAT INTERNATIONAL EDITION - BUSINESS & FINANCE

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number of legal experts interviewed by Helsingin Sanomat say thatprint this
various
systems of incentives used by listed companies in Finland violate the law.
In a period of just over a year, 12 listed companies have adopted an incentive
system in which companies give financial assistance to help executives in the
acquisition of shares of holding companies.
The shareholders of the holding companies are directors of listed companies,
who also invest their own money in their company. As shareholders they are
entitled to a tax break in the arrangement.

The problem arises from the fact that under Finnish corporate law, a listed company
may only finance the acquisition of shares by its own employees, or those of a
company working in close cooperation with the company.
“The incentive programme violates the law on limited liability companies,
because it does not involve the financing of shares by the employees of the company
or of a company close to it, but rather those of an outside enterprise”, says Jukka
Mähönen, Professor of Civil Law at the University of Turku.

There are no precedents on the interpretation of the clause in question, because no
cases have been brought to court on its basis yet.
Adherence to the law on limited liability companies is monitored by
shareholders, creditors, and auditors.
“With good will, and by looking the other way, it might be possible to make the
interpretation that the shares are for company employees because they have a
dominant position in the holding company. However, the law cannot be stretched
this far”, says Raimo Immonen, Professor of Commercial Law at the Turku School of
Economics.

Holding companies are unlisted companies whose shareholders are allowed to take
up to EUR 90,000 in tax free dividends a year, if the dividend is no more than nine
per cent of the recipient’s net wealth.
The tax rate is 19.6 per cent on dividends that exceed EUR 90,000.
According to the legal experts interviewed by Helsingin Sanomat, encouraging
commitment of corporate managers through share ownership perks is a good idea
as such.
“The purpose of the system that is in use is fine as such, but the wording of
the law on limited liability companies is virtually nonsensical in this respect.
Economically there is no difference between direct funding of employees, or funding
their companies”, Jukka Mähönen says.

The law is based on a European Union directive, which means that Finland only has
limited possibilities to change the law.

The directive on capital was amended in 2006, opening up wider possibilities for
member states to alter the regulations. However, Finland has not availed itself of
this possibility.

Violation of the law on limited liability companies can bring punishments of fines or
up to a year in prison. However, the legal experts consulted by Helsingin Sanomat
say that the perks in question probably do not meet the criteria of an actual crime.
“This would require that funds would have been distributed in a manner that
hurts creditors. It is not a crime, because the arrangement is justified from the point
of view of business activities, and no money has been lost”, Immonen says.
If a court were to find that the incentive arrangements violated the law, it would
probably order the holding company to return the money that it got as a loan. http:/
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