Legal Aspects of Finance Slide Set 14 Matti Rudanko

Legal Aspects of Finance 11 2 Decision on case 1 1st argument: major shareholders’ commitments 2nd argument: ideological motivation –any causality to damage difficult to construct: it should be shown that new shares are less worth than old ones –damage is mainly embodied in differences between subscription price / redemption price (merger) and market price / selling price obtained by subscribers –theoretically it should rather consist of differences between a fictitious price under the hypothetical exclusion of distorted information impact and the actual market price / selling price

Legal Aspects of Finance 11 3 Right of a shareholder to demand redemption Companies Act, Ch. 14, Section 12 ( /145; repealed, now the same rules apply by virtue of the New Companies Act Ch. 16, sect. 13) A shareholder of the company being acquired who has voted against the merger decision shall have the right to demand that the company redeem, at the market price, from him the shares notified for entry in the share register prior to the General Meeting of the Shareholders. The shareholder shall reserve the right to demand the redemption at the General Meeting of the Shareholders when the shareholders are asked about the matter prior to the vote on the merger. A written claim of redemption shall be submitted to the company within one month from the General Meeting of the Shareholders that has decided upon the merger. If no agreement can be reached on the right of redemption or the redemption terms, the matter shall be referred to be decided by arbitrators in the order referred to in chapter 16, section 5 unless otherwise agreed. In the determination of the redemption price, factors arisen after the General Meeting of the Shareholders that has decided upon the merger shall not be taken into account.

Legal Aspects of Finance 11 4 Decision on case 1 (cont.) Arguments 1 and 2 indicate a motivational error of the subscribers / misstatement of the issuer –misstatement: OikTL (Contracts Act) art. 30 –error in motivis: OikTL art. 33: breach of the good faith in contracts rule (not all motivation errors) both are possible grounds for invalidity of sub- scription –no need for negligence / damage that can be combined with a damages claim based on the restitution of the purchase price

Legal Aspects of Finance 11 5 Contracts Act Section 33 A transaction that would otherwise be binding shall not be enforceable if –it was entered into under circumstances that would make it incompatible with honour and good faith –for anyone knowing of those circumstances to invoke the transaction –and the person to whom the transaction was directed must be presumed to have known of the circumstances.

Legal Aspects of Finance 11 6 The Economic values of contract Expectation value / interest –the additional value of contract to a party –e.g. earnings, increased turnover –protected object: rationality of commitment –with contract breaches –productivity Reliance value/interest –the value of party commitments –e.g. investments, costs, value of performances –protected object: rationality of risk taking –with invalidity –protectiveness

Legal Aspects of Finance 11 7 Decision on case 1 (cont.) Argument 3 (the economic status of the bank) damages claim (the breach was considered to be shown but the claim rejected as non-causal) –breaches of norms create a presumption of negligence –damage and causation: classical law: difficulties in bringing evidence Market Fraud Theory: preconditions may be fulfilled facilitates the introduction of class action (not yet available in Finland): the evidence procedure simplified if the subscription remains valid, (only) the expectation interest compensated (e.g. lost profit) but not e.g. contracting costs

Legal Aspects of Finance 11 8 Decision on case 1 (cont.) if the subscription is invalid, no compensation for expectation interest (e.g. lost profit), only for reliance interest basis: ban of enrichment in damages law cf also the duty of the injured person to do everything in his power to limit the escalation of damages –e.g. to oppose to the merger and to take the redemption price