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Beyond Borders: Eversheds Sutherland's ICR insights series. EU Mobility Directive – Legal Update – Estonia

  • Estonia
  • Corporate
  • Labor law and trade union issues

24-11-2022

Country specific - Estonia

This country specific outline contains further information regarding the implementation of the provisions of the EU Mobility Directive into Estonian law and provides further local insight.

For further information and to access any of our other country-specific briefings that we have prepared, please refer to the bottom section of our general briefings page here.

Cross-border mergers, divisions, and conversions

Current status of the implementation

The draft act (the “Draft Act”) implementing Directive (EU) 2019/2121 of the European Parliament and the Council of 27 November 2019 amending Directive (EU) 2017/1132 with regard to cross-border conversions, mergers and divisions (the “Directive”) was first prepared by the Ministry of Justice of Estonia and sent to Estonian Parliament of Estonia (Riigikogu) for processing in May 2022. On 05 October, the Government of the Estonian Republic (Vabariigi Valitsus) approved the final version of the Draft Act and the changes in the Commercial Code and other related laws will enter into force on 31 January 2023.

Summary of the current and future Estonian legal landscape

The cross-border merger has been implemented in Estonian law since 2007 when such an amendment was first regulated in the Chapter 6 (articles 433¹and following) of the Estonian Commercial Code. For the most popular types of companies (private and public limited liability companies), this was widely used in practice immediately from that time. The Draft Act amends the current regulation based on the Directive and adds the following two chapters to the Commercial Code: (i) cross-border division and (ii) cross-border conversion. New chapters follow the same principle that currently applies to cross-border mergers and the domestic regulation applies as the cross-border regulation does not provide specific rules.

The new regulation also regulates the situation where a company registered in the Estonian Commercial Register participates in a cross-border division as an acquiring company. Thus, a company subject to the law of another member state submits a Certificate to the Registrar from the relevant notary or foreign competent authority, reflecting that the foreign company which participates in the process is compliant to the laws of the other member state and the requirements for the division have been met and all the pre-division actions have been completed.

Regarding cross-border conversions, the following new regulations are added to the law, pursuant to Article 86d of the Directive. First, the resolution of conversion shall include: the information about the legal forms and registry addresses of converting company and converted company in respective member states; the indicative timetable of the conversion planned and the procedure for determinin the benefits and cash compensations paid to the shareholders. Secondly, the resolution of conversion shall include the principles of the safeguards, such as guarantees and pledges offered to creditors and special advantages granted to members of the management board. The benefits and subsidies that the company has received during the five years before the planned conversion must also be shown in the resolution of conversion. 

Permitted companies and geographic scope

All private and public limited companies (OÜ and AS in Estonian) that are registered in the Estonian Commercial Registry and wish to reorganize their business or ‘move’ across borders may use the new regulations to divide, merge or converse with the similar entities in European Economic area (EEA). This means all EU countries, Iceland, Liechtenstein and Norway. The United Kingdom is not the member of EEA or EU as of 31 January 2020.

Companies in liquidation or those in which restructuring or bankruptcy proceedings have been initiated cannot participate in cross-border movement.

Timing and the general scheme

Estonian domestic merger, acquisition and conversion processes may last generally 4-6 months but in certain cases only two months (in case of acquisition). In cases of cross-border movement a longer time must be considered as the process also depends on the processes in another member state. For example, the Directive sets out a three month deadline to the Registrar for the issuance of the Certificate however, the deadline may be extended by another three months when the Registrar needs to use the help of an independent expert. Therefore, the participant in cross-border movement should allow a 6–12-month timescale to complete the cross-border movement.

The Directive provides for an extensive legal framework and (largely) harmonised legal process for these cross-border transactions and introduces specific safeguards for creditors, employees and (minority) shareholders. For any further guidance and advice on these matters, please do reach out your local Eversheds Sutherland contact.

Competent authority, pre-transaction certificates and anti-abuse checks

In Estonia, the competent authority and guarantor of its legality is the registrar of the Commercial Registry (the “Registrar”) which plays an important role for the possibilities of cross-border movement based on the Directive. The Registrar verifies the legality of cross-border movement and primarily ensures the process complies with the domestic rules. The Registrar also monitors the motives of cross-border movement more widely than before and in certain cases, the Registrar cooperates with other relevant authorities to minimize the use of cross-border movement for malicious or criminal purposes.

The stages of cross-border division are described in a simplified manner as follows. Firstly, a draft of the cross-border division agreement is drawn up and, as well as the division report. shall be made available electronically six weeks before the general meeting to decide the division. Following that. the division will be published through the Commercial Registry or on the webpage of the company. After publication, the company adopts the division resolution and applies to the Registrar to receive the Division Certificate.

Effective date, method and manner of inbound cross-border transactions

In the case of an inbound cross-border transaction (meaning a transaction whereby a company based in another EU/EEA Member State transfers (assets) (in)to or is converted into an Estonian company) the cross-border transaction shall subsequently be finalised in Estonia. To be able to legally complete and effect the procedure in Estonia, the Registrar will require a pre-transaction certificate from the designated competent authority of the other Member State(s) involved.

Inbound cross-border transactions (i.e inbound conversions, mergers, and divisions) become effective in the date, method and manner as prescribed by Estonian law. The process is as follows.

Firstly, the transaction plan and resolution of the shareholders to reorganize the company shall be adopted as prescribed by the law. The employees have the right to receive the transaction report at least 30 days before the general meeting of shareholders. The comments raised by the representatives of the employees are then presented in a general meeting. The specificity of the transaction process should be published, to notify the creditors and minority shareholders about the planned transaction, in the Official Gazette in Estonia at least 30 days before the shareholders meeting. An independent expert will verify the fairness of the exchange ratio, meaning that the appointment of a common expert is permitted. Finally, the process is completed by a transaction deed which will be notarized. The notarized transaction deed will be filed to the Estonian Commercial Registry.

Miscellaneous

The new law prescribes the process for preparing the division report. Among other things, the report must thoroughly explain the impact on employees, measures to protect employees and changes in working conditions.

Please note, that mergers are subject to competition control in Estonia as the Competition Act defines mergers, when at least one of the merged companies ceases to exist, as concentration. The Competition Authority must be informed when the merged companies or at least one of the companies has more than 40% of the certain market concentration, or if the authority deems that such a merger might limit the competition.

Key local contacts

Should you have any questions or if you require any assistance please do not hesitate to contact us.

Other country specific

For reference, please find other country-specific information we prepared as part of this Insight Series here.