Estonian Parliament aims to amend laws concerning establishment and management of private limited companies and transfer of shareholdings
The first parliamentary reading of a draft resolution to amend the Commercial Code took place on 19 May. The draft aims to significantly amend requirements on private limited companies. Founding and managing private limited companies, making non-monetary contributions, transfer of shares, and other procedures will become far simpler.

The objective of the draft act is that the private limited company as a type of enterprise should become far more attractive. The extensive amendments aim to simplify regulations related to private limited companies. The primary aim is to enable company setup without down payments (contributions), to alleviate formal requirements for documentation under the company law, to simplify share transfer regulations, and to cancel the fixed term of office for management board members. Once the amendments enter into force, it would certainly be reasonable for existing private limited companies to review their articles of association with a view to applying newly available simplified solutions.

Establishing private limited companies
Amendment proposals pertaining to establishing private limited companies are the widest ranging. Namely, the new idea is to enable formation of private limited companies without down payment of share capital. However, this option applies only to private individuals; legal institutions still have to make a full contribution.

The planned amendment does not set a term during which capital has to be paid up, which means capital may remain unpaid for an unspecified term. At the same time, dividend payments may be made to shareholders only if the share capital has been fully paid up. Moreover, if the company becomes insolvent before full payment of capital, the founders can be required to make the contribution.

Non-monetary contribution and legal reserve
The relatively lengthy procedure for non-monetary contributions will become significantly smoother. The plan is to ease the obligation to use the services of an auditor and other specialists. Non-monetary contributions are to be valued by the auditor only when the share capital of the company exceeds EUR 25,000 and the value of the contribution is at least 10% of that or if all non-monetary contributions amount to more than half of the share capital. In all other cases, the value of the contribution and its correlation to the nominal value of a share will be assessed by the management board of the company.

Notably, setting up a legal reserve is to become voluntary. Should the company choose to establish or maintain a legal reserve, the current regulation will apply. At the same time, the option will be available to abandon the legal reserve entirely.

Transfer of shareholdings
Under the current Commercial Code, any transfer of a shareholding triggers the right of pre-emption by the other shareholders. The currently available alternative is an even more rigid system – transfer by resolution of the shareholders. Under the planned amendment, the pre-emption right may be precluded by a relevant stipulation in the articles of association. This means that the shareholders may agree in the articles of association that a shareholding of the private limited company is treated as a share of a public limited company, i.e. it may be transferred to third parties without restrictions.

Moreover, the plan is to allow a transfer of shareholding to be associated with any preconditions stipulated in the articles of association. The specifics of this amendment have not been provided but it will enable the provisions of shareholders’ agreements to be included in and thereby become enforceable through the articles of association - an option currently lacking. This means that the shareholders’ freedom to design inter-shareholder relationships will increase, which in turn will increase the importance of articles of association in regulating such relationships.

Convening shareholders’ meetings
The draft will be a huge step towards alleviating formal requirements for documentation under the company law. As the current quite strict requirements are actually not of real use, the draft will allow sending notices convening shareholders’ meetings in a format reproducible in writing (i.e. including by e-mail, fax or even Skype, MSN, or other instant messaging software, so long as logs are kept). The same means can be used to send proxies of representatives taking part in the shareholders’ meeting, as well as opinions and voting results if a resolution is passed without convening a meeting. To avoid disputes, the minutes of the shareholders’ meeting must be in writing, and shareholders’ votes and opinions must be appended thereto.

Management of private limited companies
Under the current law a management board member may remain in office for up to five years, after which a new shareholders’ meeting must convene to extend the mandate. The draft amendment foresees an option for appointment of management board members for an unspecified term of office.

Additionally, the draft will exempt private limited companies from the requirement to establish supervisory boards. At the moment this requirement extends to companies with share capital over EEK 400,000 and less than three management board members. When the amended law enters into force, private limited companies will not be required to establish supervisory boards in any case.

The amendment proposal also sets that management board members need no longer be limited to residents of Estonia, EEA member states, and Switzerland. Currently at least half of the management board members must live in the named area. Soon they may come from any part of the world. However, if more than half of the management board members are from outside Estonia, the requirement will be for an appointed person in Estonia entitled in the name of the company to receive and accept documents sent to the company.

In conclusion
The draft act foresees that the amendments will enter into force as of the beginning of 2011. However, if this occurs then the articles of association of private limited companies under the old law may be stricter than the new amended law so that some simplified solutions may be used only after amending the articles of association. As introduction of the euro also requires amendments to the articles, it would be advisable to review the articles in order to put all changes and amendments to maximum use.

As the draft may undergo some changes during discussion in the Parliament, we will keep “Deal with LMHB” readers posted.