On March 26, 2025, the Finnish Ministry of Justice published a working group report proposing the implementation of debt-equity swap as part of the restructuring measures available under the Finnish Restructuring of Enterprises Act.

A debt-equity swap refers to converting debt into equity, typically into shares. In practice, creditors would be able to convert their claims to shares (or other equity-like instruments, such as share options) in the debtor company during the restructuring proceedings. As a result, existing shareholders would typically see their ownership diluted as creditors become part-owners of the debtor company.

The reform aims to address the current imbalance in risk allocation between shareholders and creditors. Under existing law, shareholders’ rights cannot be altered in restructuring proceedings without their consent, whereas unsecured creditors may face substantial write-downs of their claims. The proposed change seeks to treat debt and equity more equitably and bring the Finnish restructuring tools closer to international standards.

Although Finnish legislation does not currently regulate debt-equity swaps in restructuring, debt-equity swaps have already been carried out either within formal restructuring proceedings or as voluntary measures under the Finnish Companies Act. To date, these conversions have primarily involved publicly listed companies.

Restructuring programme to replace corporate decision-making

Under the proposed model, the approved restructuring programme would override the corporate decision-making procedures normally required for a directed share issue. The right of creditors to receive shares in exchange for their claims would be determined directly in the restructuring programme.

Depending on the structure of the swap, other corporate actions may also be necessary, such as issuing options or other special rights, amending the articles of association, or nullifying existing shares. These actions could also be included in the approved restructuring programme without the need to follow the procedural requirements of corporate law.

The scope of the reform would be limited to limited liability companies undergoing court-supervised restructuring proceedings.

Decision-making based on group majorities

A debt-equity swap in restructuring proceedings could be approved with the consent of the so-called group majorities of creditors. Creditors are typically divided into groups based on the priority of their claims. Approval of the restructuring programme would also require a simple majority approval from the shareholders’ voting group. This would lower the threshold for decision-making compared to the qualified majority requirements under the Finnish Companies Act.

However, the programme could not be approved if its content infringes the rights or legitimate interests of the shareholders. A key safeguard in this context would be the principle of equal treatment under Chapter 1, Section 7 of the Finnish Companies Act, which prohibits decisions that would unjustly benefit one shareholder, or another party, at the expense of the company or another shareholder. Ultimately, the court would assess such matters when deciding whether to approve the restructuring programme.

Approval without shareholder majority support

A notable aspect of the proposal is that, in certain circumstances, a debt-equity restructuring programme could be approved even without the support of a majority of shareholders (i.e. cross-class cram-down). Approval of the programme in such circumstances would be subject to the existing requirements of the Finnish Restructuring of Enterprises Act, along with additional conditions proposed in the reform.

However, the proposal also acknowledges the specific characteristics of small businesses. It suggests that in micro and small enterprises, as defined in the Finnish Accounting Act, debt-equity swap could not be implemented without the consent of the shareholders.

Estimated impacts on stakeholders

Creditors who would otherwise face significant write-downs in their claims could, through a debt-equity swap, receive shares, options, or other special rights instead of a loss. In a successful restructuring, these instruments could generate returns even exceeding the original claim, if the debtor company’s value increases. On the downside, the original claim is not reinstated if the programme fails or the company is declared bankrupt.

Creditors who decline the option of a debt-equity swap would remain subject to conventional restructuring measures, such as debt reductions or other modifications, without benefiting from any subsequent rise in the debtor company’s value.

Debt-equity swaps, when combined with other restructuring measures, can help restore viable business operations and reduce the risk of unnecessary bankruptcies. By more effectively reducing debt burdens, these swaps may improve the chances of recovery and long-term viability. Their use is likely to increase following the reform, particularly as awareness of the mechanism grows.

From the shareholders’ perspective, the reform may result in dilution of ownership, as the company’s capital structure can be altered significantly, potentially without shareholders’ consent.

However, in the broader context, this does not necessarily weaken the position of shareholders. In an alternative insolvency proceeding, bankruptcy, the value of shareholdings is typically lost entirely.

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In summary, debt-equity swaps have the potential to serve as an effective new measure within corporate restructuring, enabling more robust rehabilitation measures and providing creditors with an incentive to offer new financing.

The working group’s report gained a lot of feedback. The majority of feedback contributors have supported the objectives and key proposals of the report, but also considerations to be taken into account in further preparation have been submitted. It remains to be seen how the final government proposal will be formulated.