Some Clarification Obtained on the Status of In-House Entities

Overview of In-House Procurements in Finland

The Finnish Act on Public Procurement and Concession Contracts (1397/2026, as amended) (“the Act”) requires that contracting entities in Finland arrange competitive tendering for their procurements. One exception to the main rule is procurements from in-house entities, which do not require such tendering. However, evaluating and determining the status of these entities is not always straightforward. This complexity has sparked ongoing debate in Finland regarding in-house entities and conducting public procurement without competitive tendering, as may be permitted under the Act.

Under the Act, an in-house entity is defined as an entity that is formally separate and independent from the contracting entity for policymaking purposes. It is further required that the contracting entity, either alone or together with other contracting entities, exercises a controlling interest in the in-house entity in the same way as in its own establishments. Contracting entities is deemed to exercise a joint controlling interest in an in-house entity if the executive organs of the in-house entity consist of representatives of all of the contracting entities and the contracting entities may jointly exercise decisive policy making power with respect to the strategic objectives and important decisions of the in-house entity. Additionally, the in-house entity needs to operate in the interests of the contracting entities that exercise the controlling interest.

Moreover, under the Act, the starting point is that the in-house entity performs no more than 5 % and a portion of not more than €500,000 of its business operations with parties other than the contracting entities that exercise a controlling interest over it. This percentage should be based on the average total turnover for the three (3) years preceding the conclusion of the agreement, or through some other corresponding measure derived from operations. Furthermore, an in-house entity may have no capital other than the capital of contracting entities. However, the Act does not specify, for example, the precise share ownership a contracting entity must hold in the company to be considered as having an in-house relationship.

The Market Court Decision

In Finland, the interpretation of in-house status and the exercising of a controlling interest were recently clarified by a Market Court decision (MAO 154/2024) dated March 15, 2024. The case was brought to the Market Court by the Finnish Competition and Consumer Authority (FCCA), which acts as the procurement supervisory authority in Finland. The case involved the Wellbeing Services County of Vantaa and Kerava (“WSC”), which had purchased staff support services worth over €9 million from Sarastia Ltd (“Ltd”) without competitive tendering. The WSC argued that Ltd was an in-house entity because WSC owned 0.04% of Ltd’s share. Despite this, the five (5) largest shareholders collectively held 51.91 % of Ltd’s shares, while approximately 200 other owners each held less than 0.1 % of Ltd’s shares. The FCCA determined that the WSC had not complied with the Act, as it failed to exercise the necessary control over Ltd to justify the procurement without competitive tendering.

The Market Court reviewed the case and concluded that Ltd could not be considered an in-house entity of the WSC. The Court first analysed the voting structure at Ltd’s general meetings, where each shareholder's voting power is proportional to their shareholding. Consequently, the contracting entity, with its limited share of votes, had minimal influence over Ltd's strategic objectives and key decisions. Furthermore, the Market Court observed that the large number of shareholders in Ltd likely prevents the formation of a unified will at general meetings, thereby complicating the exercise of a controlling interest over Ltd.

In its decision, the Market Court also evaluated other opportunities for participation and influence as outlined in the Ltd's shareholders' agreement and articles of association. Specifically, the Court evaluated the contracting entity’s ability to exercise decisive policy making power through Ltd’s board of directors. It found that the entity’s potential to elect, even collectively with other shareholders, members to a nomination committee is negligible and practically impossible without the involvement of the largest shareholders. In principle, the nomination committee is composed of members elected by Ltd’s three (3) largest shareholders along with three (3) so-called client shareholders.

The Market Court also considered whether the contracting entity could exercise decisive policymaking power through the Ltd’s advisory board, which is tasked with preparing proposals for the board on matters to be discussed at general meetings. Every shareholder, irrespective of share size, is invited and has one (1) vote at these advisory board meetings. However, the Market Court found that the contracting entity’s influence on Ltd’s strategic objectives and key decisions via the advisory board depended on two (2) key conditions: the contracting entity’s recommendations or proposals must align with the majority views of the advisory board and gain majority support, and the board of directors must agree to present these recommendations at the general meeting. To ensure the contracting entity's influence is effective, the general meeting should still approve the proposal presented for decision in accordance with the contracting entity's position. Given the conditions and the contracting entity’s limited influence over the decisions of the general meeting and board of directors, the Market Court ruled that the contracting entity, whether acting alone or jointly with other entities, cannot effectively exercise a controlling interest over Ltd to the extent required for it to be considered an in-house entity. Thus, Ltd was not recognised as an in-house entity of the WSC, disqualifying the County from procuring services without competitive tendering under the in-house status.

As a secondary argument, the contracting entity claimed that extreme urgency could have justified a direct award, independent of the in-house relationship. The Market Court subsequently reviewed this claim and agreed that unforeseeable circumstances beyond the control of the contracting entity met the conditions for a direct award. While the contracting entity and the body responsible for initiating its operations should have been aware of the impending transfer of responsibility for organising social and health services to the WSC starting in 2023, the inability of the potential contractor to provide the necessary services by May 6, 2022, came as a surprise. The Market Court acknowledged the essential nature of the service procurement and noted that, due to the scope and complexity of the upcoming reform of the wellbeing services counties, it was not certain that the procurement could have been effectively handled through an open, restricted, or negotiated procedure to ensure the timely availability of staff support services starting in 2023.

Although the conditions for a direct award were met, the Market Court found that the contract was concluded for an excessively long period. The Market Court noted that the contracts were of indefinite duration, requiring termination by the parties, and found no justification for the contracting entity's inability to procure the staff support services through finite-duration contracts. Consequently, the Market Court deemed that the contract's duration exceeded what was strictly necessary under the direct award criteria. In line with the proposal from the FCCA, the Court ordered that the contract period end twelve (12) months after the decision becomes final and imposed a penalty of €1,000 on the WSC.

Future Prospects

The Market Court's decision further refines the interpretation of in-house status in relation to the exercise of a controlling interest. While it affirms that in-house procurements are permissible within the framework established by the Act and case law, it emphasises that determining in-house status requires a holistic assessment, where the size of share ownership is not the sole evaluation factor.

Despite these clarifications, the issue remains topical. The WSC has appealed the decision to the Supreme Administrative Court and since appeals to the Supreme Administrative Court in Finland require leave to appeal, it remains uncertain whether the higher court will review the case. However, if resolved by the Supreme Administrative Court, the case would clarify the legal interpretations and the status of procurement by in-house entities even further, as the decision of the Supreme Administrative Court is final. Additionally, the FCCA has brought another related case to the Market Court this year. This case involves the Wellbeing Services County of Southwest Finland, which in 2022 procured collection services worth €1.9 million without a tender process from a subsidiary of Sarastia, despite holding only 0.09% of Sarastia’s shares.

The topic also remains relevant in Finland, as the Government Programme proposes significant revisions to the regulation of in-house entities under the Act, aiming to enhance fair competition. For instance, the government intends to limit the public sector's ability to provide support services, such as cleaning and financial management, through in-house entities when functioning market exist. Additionally, measures are proposed to be introduced to restrict contracting entities from circumventing procurement law via in-house entities, including setting a minimum ownership threshold of 10 % for these entities. In-house entities would also be permitted to make procurements only when they are more economically advantageous than market alternatives or when an overriding public interest exists, if the proposal goes through. Moreover, the thresholds for the sale of in-house entities would be standardised, with a maximum limit set at 5 % of ownership or €500,000 of the turnover of in-house entities. 

A working group has already been established to advance the legislation project, and a government proposal to reform the Act is expected to be submitted to the Parliament in the autumn of 2025. As Finland experiences significant developments in in-house procurement, we eagerly await the final outcomes of both the Market Court decisions and the possible legislative changes.

Latest insights

More Insights
Orange notepad with pencil

Intellectual Property in E-Cigarettes and Vapes in the UAE

Jun 13 2024

Read More
Snow-capped mountain range

Setting the scene: Hong Kong Privacy Commissioner publishes first comprehensive AI-specific guidance

Jun 13 2024

Read More
Baggage carousel

Travel businesses and trade marks

Jun 13 2024

Read More