Changes to the Finnish Restructuring Act (“FRA”) enabling debt-to-equity conversion in in-court restructurings (“FRA restructurings”) became effective as of the beginning of this year (for a full description see Debt-to-equity Conversion in Corporate Restructuring – Legislative Amendment to Take Effect on 1 January 2026, Borenius). These changes represent a fundamental change to the rights and negotiation position of the equity holders and boards that represent the equity in widely held companies vis-à-vis creditors. To have a better understanding of the brave new world we need to first explain how equity was treated under the previous FRA rules. We will then outline the relevant changes and finally explain what these changes mean for the equity and how boards should react.

The state of play under the previous rules

The previous FRA rules did not recognize converting debt to equity in FRA restructurings nor cancelling existing equity. If there was a reduction (“haircut”) of the senior debt, junior debt received nothing whilst equity stayed in place, unless a majority in all creditor groups approved a payment to junior debt or the equity holders consented to a dilution. This resulted in a rather odd ranking of claims in FRA restructurings (residual equity taking priority over junior debt).

The Finnish law is also somewhat unclear as to when a board should file a distressed company for an in-court restructuring or bankruptcy, basically allowing the board to continue trading if it has good faith negotiations ongoing for raising new debt/equity or haircut of existing liabilities. As a result, most FRA restructurings started as “free-falls” (deeply distressed companies with empty cash boxes and no pre-agreed restructuring terms with the major creditors). The boards, however, did not have to be overly worried about postponing the difficult discussions with the creditors as this would in principle just mean a bigger haircut with the equity untouched and therefore no material worry for breach of fiduciary duties to shareholders. 

The new FRA rules

Under the new FRA rules a restructuring programme may give the creditors the right to subscribe for shares in the debtor in exchange for restructuring debts that would otherwise be subject to haircut or extended payment periods. The conversion of creditor claims can be coupled with complete cancellation of the existing equity and can be crammed down on out-of-the-money shareholders without their consent. There are certain exceptions allowing the equity to stay in place (at least partially), but these exceptions will most probably apply only to closely held companies unless the shareholders are willing to invest new money. In widely held companies, where shareholders are not part of the daily operations (i.e. not a strategic resource providing sweat equity) the expectation is that in FRA restructurings the existing equity will be (mostly) wiped out.

In more established restructuring markets with debt-to-equity conversion rules it is common for certain investors to buy distressed company fulcrum debt and enter workout negotiations and in-court restructuring proceedings with aggressive loan-to-own strategies. It seems fair to assume that this will also be the case in Finland.

What should the boards do?

The new rules are a bit of a game changer for the boards from the fiduciary duty point of view compared to the above described “old world”. Filing a free fall restructuring application to court by a widely held compa-ny brings a substantial risk of complete cancellation or at least substantial dilution of existing equity. The better option is to always have a clear understanding of the liquidity path of the company and to approach major creditors early on if necessary to negotiate changes to the existing financing arrangements. At the same time the company should consider the need for Plan B, which is to prepare a restructuring plan straw-man (including a bankruptcy outcome comparison) and relevant filing documents in case the workout dis-cussion should prove unsuccessful. This would enable the company to be able to file for in-court restructur-ing in a timely manner and sufficiently prepared.

In the US and UK, where the legislation has allowed debt-to-equity conversions for quite some time, pre-filing restructuring support agreements (“RSA”) have become quite common. In an RSA the debtor and a substantial number of creditors pre-agree on the terms of the restructuring plan to be approved by the court. The filing and the processing of the plan will be much quicker, and a court approved plan will then bind the other creditors preventing holdout scenarios. It will also allow the company to reap the benefits of the RSA restructuring (including a moratorium preventing debt collection measures and cherry-picking lease and po-tentially other agreements). An RSA thereby combines the benefits of out-of-court private workout negotia-tions and public in-court restructuring.

With debt-to-equity conversions now a reality under the FRA, Finnish boards can no longer afford the luxury of delayed action—proactive restructuring planning has shifted from best practice to fiduciary necessity.