Over1 the course of time limited liability company (LLC) has become world’s most significant form of doing business. In June 2014 there were almost 250000 LLCs in Finland.2 Clearly, limited liability company is the most significant form of doing business also in Finland. The model of the LLC can be found from Italy and especially of the 15th century Genoese Bank of Saint George.3 However, the historical roots of a modern LLC are in fact in the 17th century European chartered companies.
The History of a Limited Liability Company in Finland
The first LLC of Finland was established in 1762 – it was a tile company called Den privilegerade Oäkta Porcelains Fabrique.4 Later on especially constantly growing sea trade required new risk management tools.5 In Finland particularly manufacturing industry was keen on this new form of doing business.6 Also the revival of the trade between Europe and Asia required a clearer form of doing business. LLCs were seen as an efficient way of collecting capital from several tradesmen.7 From the risk management point of view LLC offered two vital advantages. Firstly, LLCs offered ways to divide business risks between several merchants. Secondly, in a limited liability company there is indeed a limited liability for the obligations of the company. It means that shareholders are not liable for the obligations of the company. This is indeed still the key feature of a LLC – and actually the reason for its worldwide success as a company form.
The first actual Finnish Companies Act was given in 18648. Due to the limited liability of the shareholders LLCs have limited ways of distributing assets to the shareholders. The most common way to distribute assets is profit distribution (dividend) to the shareholders. It means that it is possible to distribute the profits to the shareholders of the company. In principal it means that if the company has made profit e.g. for 100000 euros, and there are no so called normal profit distribution restrictions deriving from the Companies Act or articles of association, it is possible to distribute that amount in full to the shareholders of the company. These normal limitations have traditionally been fixed share capital and balance sheet and solvency tests. In other words, the company must have the assets to pay its debts to the creditors first before distributing its assets to the shareholders. This is called creditor protection.
War Economy and Special Profit Distribution Limitations
The purpose of this text is to clarify how the profit distribution of a limited liability company was enacted in Finland during exceptional circumstances in the years 1942-1945 (war years). Could it be possible to use these special limitations even nowadays, for example in Europe? Finland was in military conflict as follows: Winter War 1939-1940 (Finland – Soviet Union), Continuation War 1941-1944 (Finland – Soviet Union), Lapland War 1944-1945 (Finland – Germany). Because of special conditions there were significant quantitative restrictions to distributing the profits of the company to the shareholders in a normal manner.
During the war the economy was adapted to a new situation. Special limitations were somewhat typical and it was not unusual to impose strict restrictions on economy which had a great impact on citizens and companies as well. For example, the principles of war economy led into several acts concerning working, export, import, prices, taxes and trade.9 Mainly the acts were of restrictive nature. Especially legislation concerning fixed prices of products hit the companies’ economic status. At the same time distribution of assets was restricted by special legislation, the first of those was a Dividend Restriction Act 26/1942.10 The purpose of a company is mainly to make profit to the shareholders, and according to Companies Act (1895 22.2 §) the shareholders were to receive the proven profits of the company.11 Hence, these limitations imposed indeed significant restrictions to the traditional and lawful possibility to distribute its assets. In the beginning of the winter war there were over 15000 LLCs in Finland and the total amount of share capital was over 11,4 billion Finnish marks.12 Taking this fact into account, surprisingly, the restrictions have not actually been studies by law scholars at all.
Justifications of the Limitations
Since 1942 the shareholders’ meeting was not allowed to distribute the profits in a normal manner. According to the Dividend Restriction Act (1.1 §) the LLC was able to distribute no more than 6 percent of its share capital to the shareholders. However, if the average amount of dividend in the years 1936-1938 had been more, the company was allowed to distribute that average amount. Decision of distributing more than mentioned led into decision being void (2 §). In addition, the board of the company not allowed to put in action a decision that was made against the decree. There were also articles concerning the circle of acquaintances and supervision of the act. For instance, the companies were even obliged to deliver the information of the profit distribution to the authorities. There were also sanctions for shareholders and management of the company failing to obey the act. The acts were given yearly, the last one given in 1945.13
These special limitations were mainly justified by social reasons. Justifications can be arranged in four categories:
1. Effort to take into consideration the special conditions caused by the war
2. Effort to limit the purchasing power in general
3. Effort to direct exceptionally big dividends to the use of society’s economy
4. Effort to avoid uneven profit distribution caused by special conditions.14
The limitations of profit distribution being exceptional limitations were enacted yearly between years 1942-1945. The limitations were not to become a permanent procedure. However, the limitations were considered acceptable and necessary.15 The war caused severe economic difficulties of the society.
Some companies, however, made good profits during the war while others were indeed struggling with declining profit margins.16 Generally, the aim of the act(s) was to maintain general righteousness and equality between companies as well. In the war economy the restrictions and limitations can not be considered as unusual methods of stabilizing the struggling economy. One of the key justifications was to direct exceptional dividends to the use of society’s economy. The companies were able to use more funds to actually keep the company rolling. This investment point of view can definitely be considered one of the most important justifications for the special limitation of profit distribution. A solvent company was able to operate better in uncertain circumstances and pay its debts to debtors as well.
However, special limitations were also criticized. For instance, it was claimed that law-drafters have not paid enough attention to the effects of the act on the production companies.17 These exceptional limitations interfered in a very fundamental right of the shareholder – the right to receive the proven profits of the company. Without doubt, limitations caused difficulties in founding new companies. The limited liability company as a business form was originally developed as a risk management tool but in a way one risk of entrepreneurship was actually realized due to the special limitations. There was also a lot less capital to start up new companies as the funds were left in the possession of the companies.
Overall, due to the mutual equity of the companies and the general need of investments, special limitations during the war can be considered justified. Aim to avoid uneven profit distribution was also a justification that can not be left unnoticed – some companies did indeed make better profits in war economy than in the times before it. In today’s Finland the use of such special limitations of profit distribution is most unlikely because only very exceptional circumstances during the war led into using such severe limitations in one of the most important rights of the owners.
Is it possible to use these exceptional limitations of profit distribution nowadays, for example in Europe? The uncertainty of the world economy and European financial crisis forces to consider new measures to balance the economy. Some societies are having very serious economic difficulties and drastic measures have already been taken. For example, in Europe there has been substantial debt cuts and lengthening of loan periods. One day some societies having most serious economic difficulties might also need to consider special limitations to the profit distributions in order to increase the investments of companies. However, it would require very exceptional circumstances.
Ph.D. Janne Ruohonen is a University Lecturer in Business Law at the School of Management at University of Tampere, Finland.
Lähde- ja kirjallisuusluettelo
Aunesluoma, Juhana. Paperipatruunat – Metsäteollisuus sodassa ja jälleenrakentamisessa 1939-1950. SKS 2007.
Drockila, Lauri. Osingonjakokelpoiset varat osakeyhtiölain mukaan. Suomalaisen lakimiesyhdistyksen julkaisuja (N:o 119) 1964.
Hallituksen esitys 128/1941 vp laiksi osingon rajoittamisesta [Government Proposal on Dividend Restrictions Act].
Heikonen, A.R. Avoin yhtiö Suomen oikeuden mukaan. WSOY 1948.
Jännes, Juho. Laki osingon rajoittamisesta. Helsinki 1942.
Kantanen, Pekka & Sillanpää, Kari J. Osakekirjat kertovat. Kustannusosakeyhtiö Frederika 1989.
Kauppa- ja teollisuusministeriö. Kauppa- ja teollisuusministeriö 75 vuotta II, 1888-1938-1963. 1963.
Kekkonen, Jukka. Merkantilismista liberalismiin – Oikeushistoriallinen tutkimus elinkeinovapauden syntytaustasta Suomessa vuosina 1855-1879. Suomalaisen lakimiesyhdistyksen julkaisuja A-sarja N:o 172. Suomalainen lakimiesyhdistys 1987.
Kekkonen, Jukka. Taloudellisen lainsäädännön liberalisoiminen. In: Pia Letto-Vanamo (Ed.): Suomen oikeushistorian pääpiirteet – Sukuvallasta moderniin oikeuteen. Gaudeamus 1991.
Laki osingon rajoittamisesta [Dividend Restriction Act I] 26/1942.
Laki vuodelta 1942 suoritettavan osingon rajoittamisesta [Dividend Restriction Act II] 981/1942.
Laki vuodelta 1943 suoritettavan osingon rajoittamisesta [Dividend Restriction Act III] 1015/1943.
Laki vuodelta 1944 suoritettavan osingon rajoittamisesta [Dividend Restriction Act IV] 132/1945.
Laki vuodelta 1956 suoritettavan osingon rajoittamisesta [Dividend Restriction Act V] 660/1956.
Ruohonen, Janne. Oskeyhtiön voitonjaon maksukykytesti ja vstuu maksukyvyn säilymisestä. Tampere University Press 2012.
Ruohonen, Janne. Osakeyhtiön osingonjaon rajoittaminen erityislainsäädännöllä vuosina 1942-1945 ja 1956. Lakimies 2014:4.
Schybergson, Per. Aktiebolagsformens genombrott i Finland – Utvecklingen före 1895 års lag. Finska vetenskapssocieteten 1964.
Rasila, Viljo. Liberalismin aika. In: Ahvenainen, Jorma & Pihkala, Erkki & Rasila, Viljo (Ed.): Suomen taloushistoria 2. Kustannusosakeyhtiö Tammi 1982.
- Detailed scientific referee article on the subject, please see: Ruohonen 2014, 565–582. See also Ruohonen 2012, 52–54. [↩]
- Trade Register of Finland 2014/06/30: LLC 247050. Finnish Patent and Registration Office. www.prh.fi (7.10.2014). There are also private traders (205738), limited partnerships (34520), partnerships (12301) and co-operative societies (4626). [↩]
- Heikonen 1948, 1-3. [↩]
- Kantanen & Sillanpää 1989, 19. [↩]
- The history of limited liability company, see Schybergson 1964, 10-12. [↩]
- Kekkonen 1987, 147; Rasila 1982, 23. [↩]
- About the historical development of a limited liability company and raising the capital, see: Kekkonen 1991, 194-195. [↩]
- See Finnish Companies Acts: Keisarillinen Asetus Nimettömistä eli Osakeyhdyskunnista (24.11.1864/28); Laki osakeyhtiöistä (22/1895). [↩]
- Kauppa- ja teollisuusministeriö 1963, 88-97. [↩]
- Laki osingon rajoittamisesta [Dividend Restriction Act I] 26/1942. Acts concerning the restrictions of dividends were given also in years 1943, 1944, 1945 and 1956. See Dividend Restriction Acts II-V. [↩]
- See also Drockila 1964, 77-96. [↩]
- Hallituksen esitys 128/1941 vp laiksi osingon rajoittamisesta [Government Proposal on Dividend Restrictions Act], 2. [↩]
- In principal the contents of the dividend restriction acts were similar to the first act. There were however some minor changes concerning the calculation of the dividend. [↩]
- Hallituksen esitys 128/1941 vp laiksi osingon rajoittamisesta [Government Proposal on Dividend Restrictions Act], passim. [↩]
- Jännes 1942, 3-8. [↩]
- Aunesluoma 2007, 103-105. For example, metal industry had great production volumes during the war. At the same time export companies were struggling with ever lowering production. [↩]
- See for example Jännes 1942, 1-3. Profit distribution was limited also in 1956 (general strike). Nevertheless, it is not easy to find abiding arguments for special limitations of profit distribution in that particular year as the economy had already been stabilized. This limitation can, without doubt, be seen rather excessive. [↩]