The focus in Finnish mergers and acquisitions is increasingly turned to environmental aspects. This text describes the basic legislation, analyses the importance of certain central environmental rules and gives some implications of the way to take the environmental aspects into account in mergers and acquisitions Finland.
1. RELEVANT LEGISLATION
The key legislation in Finland concerning corporate environmental aspects is the Act on Compensation for Environmental Damage (1994:737, "the Act"). Other relevant legislation comprises certain international conventions and a few other applicable Finnish acts.
Before the Act was passed in August 1994 the rules on liability for environmental damage had been governed by general rules of tort and rules of neighbouring law, mainly according to the Damages Act of 1974 (1974:412). However, the old legislation failed to cover the question of compensation for environmental damage comprehensively, it lacked uniformity and was difficult to overview.
The Act did not, however, repeal or narrow the application of the earlier legislation. The Act is more of an additional law which brings new, previously unregulated situations into the scope of application of the damage compensation laws.
The most important novelty with the Act is the definition of an environmental damage, whereby certain situations when damage has been caused, are governed under special rules of strict liability.
2. THE ACT ON COMPENSATION FOR ENVIRONMENTAL DAMAGE
2.1 Applicability
Compensation for damage is paid when an activity on a specific region causes damage to the environment. Under the Act such activities are defined as
1. pollution of water, air and land,
2. noise, vibration, radiation, light, heating or smell, or by
3. other comparable disturbance.
The Act does not, however, cover contractual liability, nor does it cover compensation for damage which is regulated by special legislation. Neither does the Act cover pollution originating from means of transport.
The application of the law is restricted to environmental damage caused by activity after the entry into force of the Act, i.e after June 1st 1995.
2.2 Strict Liability
The Act introduced a rule of strict liability, which for an operator is a significant change compared to the earlier legislation. With normal rules of tort and with situations governed under the Damages Act of 1974 the responsibility and liability for an operator required negligence, whereas under the new Act an operator is strictly liable.
The injured party's burden of proof is lesser than before the Act was enforced, as the strict liability assumes an unproven fault or any other tortious behaviour to lie with the person presumed liable.
It is also important to note that many of the Act's rules and especially the rule on strict liability are stricter than the similar EC environmental rules.
2.3 Degree of Tolerance
With strict liability follows a need to limit the liability in view of the fact that society should be prepared to bear a certain degree of pollution and damage without receiving compensation. Compensation should therefore only be received for unreasonable environmental damage or inconvenience.
Accordingly, the Act contains a limitation rule that compensation shall be paid only if it would be considered unreasonable to tolerate the disturbance with regard to local conditions or its occurrence ge-nerally in similar conditions. However, the limitations are not applicable on personal injury, more significant property damage or damage caused by criminal or intentional behaviour.
2.4 Liable Persons
Strict liability is laid upon the operator of an activity causing the environmental damage. Further, persons comparable with an operator have a strict liability, e.g. a parent company could be held liable for its subsidiary's activities.
An assignee to whom the activity causing the environmental damage has been transferred is liable for that damage if the assignee had knowledge of, or knowledge of the risk of damage or disturbance at the time of the transfer.
If two or more persons by their activities probably jointly have caused the environmental damage they will be held jointly and severally liable for the damage.
2.5 Causality
A claimant has to prove a probable causal link between the activity and the damage. According to the preparatory works for the Act "probability" means a proof clearly over 50 per cent that the damage has been caused by the specific activity.
2.6 The Amount of Compensation
The damage compensation shall be paid in full for personal injury and property damages.
Compensation for financial loss not connected with personal injury or property damage shall be paid for as consequential damages, unless that loss is minor. Damage of this type might hit a polluter, for example if a recreational enterprise's turnover drops as a result of pollution affecting an area nearby.
Compensation is, however, always paid in full for damage caused by criminal activity.
Other environmental damage than losses connected with personal injury or property damage shall be compensated to a reasonable amount taking into consideration the time the disturbance lasts and the possibilities for the claimant to avoid the damage. However, this kind of damage often leads to consequences of an economic nature, e.g. reduced market value for a real estate, in which case the claimant may, under certain circumstances be entitled to compensation for such reduction.
2.7 Costs of Prevention and Reinstatement
Reasonable costs for preventing damages or restoring a damaged region may be claimed from the person liable for the polluting activity. The right to claim such compensation is given both to private person (whose individual right has been infringed) and to the Finnish Government.
2.8 Other provisions
In cases where the damage can be estimated in advance, compensation shall, when requested, be determined by the competent Court for such future damage. The compensation may be paid in one or several instalments. Naturally, if circumstances considerably change, the amount may be adjusted later.
An owner of a real estate whose property partly or completely loses its usefulness for its owner as a result of a damaging action may require that the property or part of it shall be redeemed by the person liable.
3. ADDITIONAL ASPECTS
3.1 Finnish Legislation
Other Finnish legislation having an impact on the environmental issues includes the Damages Act of 1974, which is the general act on compensation of damage, the Water Act (1961:264) and the Adjoining Properties Act (1920:26). The Water Act includes rules on pollution and damage to water and the Adjoining Properties Act governs rules on neighbouring relations.
In situations unregulated in the Act compensation may be payable according to the Damages Act.
3.2 International Aspects
The convention on Civil Liability for Damages Resulting from Acti- vities Dangerous to the Environment by the Council of Europe was signed by Finland in June 1993. The Convention deals exclusively with damages caused by dangerous material or organisms and certain aspects of waste management, as laid out in the convention. It does not deal with noise or smell, so its applicability is more restricted than that of the Finnish Act. It does, however, include a rule on strict liability. The compensation paid according to the convention is always the total amount of damage, i.e. there is no maximum amount.
This convention has not yet come into force. Therefore the European Commission plans to set out certain guidelines and rules for dealing with environmental damage within the European Union, and possibly to fulfil the obligations of the Convention mentioned above. The preparation of this is under discussion.
Under the non-discrimination Article 3 of the Nordic Treaty on Environmental Control, a citizen of a Nordic country shall not, in executing his right to compensation, be in a disadvantage compared to a citizen of the country in question. This means that the Finnish Act of Environmental Damage might also be applied on a Swedish citizen, if he in Sweden suffers from damage caused by an operator in Finland.
The EC has no legislation concerning compensation for environmental damage.
4. M&A CONSIDERATIONS
4.1 Strict Liability
As mentioned above it is important to note that the Act in general and concerning the strict liability especially are stricter than the EC environmental rules.
The strict liability rule increases the possible situations where an operator can be held responsible for a pollution, as it assumes the operator to be responsible regardless of whether the operator has acted in a cautious manner when causing the damage.
4.2 Assignee's responsibility
The rule according to which an assignee to whom the activity has been transferred is liable if the assignee knew about the damage (or the risk of it) at the time of the transfer is significant.
The rule applies to damage caused by activity of the original operator. The damage does not necessarily have to be noted before the M&A transfer, as the assignee can also be held liable for damage caused by the previous operator noticed after the transfer. Therefore, in an acquisition the buyer might be held liable for damage caused while the seller was in charge of the business or the activity.
The assignee can not free himself from possible claims by not checking for any possible environmental damages or the possibility of future damages as he has a certain obligation to seek clarification of the environmental status of the subject in question. Furthermore he can not free himself from a liability based on the Act towards a third person, although the parties between themselves may agree on different terms and conditions.
Naturally, it is highly recommended that this possibility be reflected in the purchase agreement regardless of whether or not the actual liabilities have been identified or not in order to minimize any risks for later claims for damages. However, one can not rule out a risk to land in a litigation before a competent Court concerning the distribution of liability.
The transborder environmental liability towards especially Sweden and Norway from Finland might be an issue in a M&A structure and implies carefulness of purchaser in M&A transaction.
4.3 Due Diligence Notes
During a Due Diligence procedure it is important, in addition to identifying actual environmental pollution, to identify potential environmental damages or risks for such, and also to check for any possible future damage. If found, the issues could be considered at least as a price issue.
High-risk businesses where an thorough environmental audit shall be made are those in manufacturing, the generation and supply of power, the supply of fuels and water and waste management. It is naturally highly recommended in any kind of business that consideration should be given to environmental aspects.
The Due Diligence process i Finnish acquisitions prior to the enforcement of the Act, did not especially focus on the environmental issues. This text clearly shows the increasing importance of the environmental issues, as later claims often might destroy an otherwise successful investment. Possible purchasers in Finland will probably see an increased focus on these issues, to be reflected in a concern in the purchase agreement and environmental Due Diligence researches carried out much more often than now.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
