Mankala model – an enabler of significant investments?
The so called Mankala model, frequently used by power companies in projects, was developed in Finland in order to finance substantial investments in the energy sector. Amongst others, the Mankala model has made possible the 1970s’ major power plant investments in industrial nuclear power that companies could not have been able to execute alone. In addition, the Mankala model has enabled the pursuit of a more efficient plant size compared to smaller units.
The Mankala model was named after a 1963 Supreme Administrative Court ruling concerning Oy Mankala Ab. The company in question produced – and continues to produce – energy to its shareholders against reimbursement of costs, in accordance with its articles of incorporation. According to the above-mentioned Supreme Administrative Court ruling, the difference between cost-reimbursement based electricity’s cost price and the market price could not be viewed as disguised dividend distribution. Since then, the Mankala model has been established as a significant part of the Finnish energy sector.
In the Mankala model the company does not strive for a profit, but the commodity’s production is based on the cost price. The shareholders are entitled to the commodity produced, as provided for in the articles of association, but are on the other hand also responsible for paying the production’s fixed and variable costs. The economic benefit is transferred to the shareholder by other means than through a normal distribution of assets as set out in chapter 13 section 1 of the Limited Liability Companies Act (“Companies Act”).
A shareholder has a special financial obligation to the company
A shareholder’s financial obligation is based on section 2 of chapter 1 of the current Companies Act, according to which the obligation to make special payments to the company can be stipulated in the articles of association. A corresponding opportunity was included already in section 27 (2) of the Companies Act of 1895, according to which a shareholder could be obligated in the articles of association to make additional payments to the company. The obligation to make additional payments cannot be open-ended but instead must be defined in such a way that the basis and the amount of the payment are set out in the articles of association. Unless specifically provided, a shareholder is not obliged to make any payments to the Mankala company beyond what they have otherwise committed to in the memorandum of association or the share subscription agreement or undertaking.
Mankala companies are also covered by the principle that business continuity cannot be jeopardised by risky activities that would in all likelihood jeopardise the continuity of the company. Like other limited liability companies, Mankala companies abide by the creditor protection regulations set out in the Companies Act. Stipulating a payment obligation in the articles of association doesn’t mean that the shareholder would be liable for the company’s undertakings. Due to the principle of separation of assets of a limited liability company, a creditor can only recover their claims from the company (subject to other contractual obligations, guarantees or special legislation).
A letter of comfort as part of Mankala companies’ financing scheme
The Mankala structures may often enable very affordable financing solutions, especially in big investment projects. It is quite common to use a so-called letter of comfort in the financing schemes of Mankala companies. Letter of comfort -name refers to the fact that it is supposed to be used to support the debtor company’s access to credit, and it is issued by a shareholder of the Mankala company to the bank financing the company. Providing a letter of comfort is usually a condition for the credits granted to Mankala companies. The contents of letters of comfort vary, and they can be categorized based on their legal effects into weak, strong, and medium-strong letters of comfort. The issuer of a letter of comfort can, for example, promise to maintain their share in the company, confirm that the articles of association of the company won’t be amended, or declare that they will take care of the company’s financial situation. The shareholders should however avoid the letter of comfort becoming a guarantee or a warranty, or that the issuer of the letter would undertake to fulfil the principal debtor Mankala company’s obligations to the creditor. The bank, on the other hand, usually has the opposite intention.