February 20th 2019
An unnecessary and harmful clause was added to the Finnish Limited Liability Companies Act
A new clause was added to the Companies Act, according to which the purpose of a limited liability company is to generate profits for shareholders. The topical question is, is such a clause necessary in law at all? Or is the phrase purely harmful?
Historically, a limited liability company is one of the types of companies that can conduct business. A special feature of a limited company is that ownership is based on capital investments that can also be traded. The Annual General Meeting decides annually, within the limits set by law, how much of the company's profits are distributed to shareholders as dividends.
The company's management must drive the company's interests and ensure that the business is successful. This has always been the case. Such an activity does not require that the law defines the purpose of the company.
The wording of the Act confuses the decision-making of the General Meeting. Without this clause, decision-making on dividends could be made on a sound basis. Decisions on the distribution of dividends can now be influenced by decision-making even when it is not in the company's interest and is against the will of the majority of shareholders.
The wording of the Act makes it difficult for the management of the company to operate and increases the risk of claims by the management. This can paralyze the development of healthy businesses.
Under the pressure of an aggressive group of owners - even minority owners - management may be at risk of minimizing focus on activities that bring quick profits to an aggressive group but is destructive to the company's business.
The above-mentioned problems are not new in the history of international limited liability companies. The exception is that in Finland the root cause of the problem is recorded in the law. In addition, the wording of the law is economic and not legal. The law has an economic opinion that is just one opinion among others.
In legal science, the question has been considered from two different theories. One theory is known as 'property model' or 'owner concept'. In this theory, a joint-stock company is an instrument whose sole purpose is to maximize the wealth of its owners. Another theory is known as "entity model" or "equity concept". According to the company model, a limited company is an instrument that can simultaneously serve the interests of several of its participants.
Whatever the opinion, the question is, in any case, legal theory or economic theory. It is not wise to record the current theory of choice at any given time.
The most well-known example of legal history is the Court's ruling in 1919, Dodge v. Ford Motor Co .. Instead of paying dividends, Henry Ford intended to invest in new technology and more sophisticated production and pay higher wages to employees. As a result of the claim by the minority shareholders (Dodge brothers), the court ruled that dividends would prevail. The statement of reasons for the decision includes a statement that the purpose of a limited liability company is to generate profits for shareholders. The phrase has survived. The sentence has not been applied in the United States as such in the case-law, nor was it enshrined in law.
Over the last hundred years, the issue has been repeatedly discussed, and the issue has also been taken into account in law-making in the United States. Once and for all, it has come to the conclusion that the purpose of a limited liability company is to “conduct legal business” and that the management of the company has a duty to act in the interests of the company.
Would it also be advisable in Finland to review the definition of the purpose of a limited company?
“The purpose of a limited company is to conduct legal business” is a historically well-established, harmless and in many ways tested definition. It is difficult to understand why the definition is not used in Finland.