Heili Haabu

COBALT Estonia

Tallinn, Estonia

heili.haabu@cobalt.legal

Jesse Kivisaari

COBALT Estonia

Tallinn, Estonia

jesse.kivisaari@cobalt.legal

Paul Schifrin

COBALT Estonia

Tallinn, Estonia

paul.schifrin@cobalt.legal

In Estonia, the Mobility Directive has been implemented into national law. It was transposed by the law amending the Commercial Code and other related acts (cross-border movement of companies) (Äriseadustiku muutmise ja sellega seonduvalt teiste seaduste muutmise seadus (äriühingute piiriülene liikumine)) of 7 December 2022 (“Estonian Implementation Act”). The Estonian Implementation Act primarily supplements and amends the Commercial Code (“Estonian Commercial Code”) and Community-scale Involvement of Employees Act, while the other acts were mostly supplemented by technical amendments. The Estonian Implementation Act has come into force on 1 February 2023 apart from one pending technical amendment which comes into force on 1 September 2023.

The Estonian Implementation Act does not provide for any transitional periods.

The Estonian Commercial Code had allowed cross-border mergers both by way of merger via acquisition and via incorporation already before the Estonian Implementation Act came into force. The Estonian Implementation Act has now also implemented the provisions of the Mobility Directive on cross-border conversions and cross-border divisions via incorporation as full division and partial division and as division by separation.

In addition, the Estonian Implementation Act goes beyond the scope of the Mobility Directive by also allowing the cross-border division via acquisition (i.e. where the company being divided transfers assets and liabilities to one or more pre-existing companies) and the Estonian legislator has not limited such cross-border operation to any specific companies (although taking into account the general scope of application described at Section 3 below).

The scope of application of the provisions on cross-border operations under the Estonian Commercial Code (as amended by the Estonian Implementation Act) is limited to companies in the legal form of a public limited company (aktsiaselts) or a private limited company (osaühing). The provisions on cross-border operations do not extend to the partnerships or other legal forms of companies.

Furthermore, the legislator has prohibited cooperative societies from participating in the cross-border operations.

The Estonian legislator has decided not to apply the Mobility Directive to companies undergoing insolvency proceedings or preventive restructuring frameworks. The Estonian legislator has also prohibited cross-border merger/division/conversion for companies that are undergoing criminal proceedings, which is not required by the Mobility Directive.

The Estonian Commercial Code's standard procedure for cross-border operations generally aligns with the standard procedure prescribed by the CLD as amended by the Mobility Directive. However, the following deviations are worth noting:

• The draft terms of the cross-border merger and division have to be notarized by an Estonian notary with all companies participating in the cross-border operation being present at the notarization. Notarization can be carried out through a representative, although the power of attorney must be:
  • notarized by an Estonian notary; or
  • certified by using an apostille if the power of attorney was issued in a foreign country that has acceded to the Apostille Convention; or
  • legalised if the power of attorney was issued in a foreign country that has not acceded to the Apostille Convention.

Notarial authentication can be performed remotely, i.e. representatives of the companies can participate via a video bridge if the participant has either Estonian identity card, Estonian digital identity card or Estonian electronic identity card of an e-resident.

• The sum of the additional payment prescribed in the draft terms which is to be paid by an acquiring company to the shareholders of the company being acquired shall exceed one-tenth of the sum of nominal values or book values of their exchanged shares only if permitted by the law of Member State applicable to the acquiring company participating in the cross-border merger.
• The notice concerning draft terms of the cross-border merger or division and the notice concerning the conversion must be published in the Official Journal (Ametlikud Teadaanded).
• The independent expert report (excluding any information which may compromise the business secret of the company) must be disclosed and made publicly available either in the commercial register (äriregister) or on the company’s website free of charge to the public.
• The shareholder resolution of the Estonian company participating in the cross-border operation which approves the cross-border operation requires a majority of at least 2/3 of the votes present at the voting unless greater majority is required by the articles of association.
• In addition, if a public limited company (aktsiaselts) has several classes of shares, the shareholder resolution shall be adopted if the previous threshold is fulfilled and at least 2/3 of the holders of each class of shares vote in favour of the resolution. The articles of association can require an even greater majority as well.
• Therefore, grammatical interpretation of the Estonian Commercial Code would allow greater majority requirement than 90% if the articles of association state so. Based on the aforementioned interpretation, the Estonian legislator has implemented the Mobility Directive on the part on which it requires a majority of not less than 2/3 of the votes attached to the shares/subscribed capital represented at the shareholders meeting, but not implemented the maximum majority threshold of 90%.
• If the special rights of a shareholder in managing a private limited company are negatively affected or restricted by a cross-border operation, a consent of such shareholder is necessary for adopting the merger or division resolution.
• In addition to the documents required by the Mobility Directive, Estonian legislator has implemented the requirement that the company being converted/merged/divided has to also provide the following information to the competent authority when applying for the registration of the cross-border operation:
  • in case of a conversion, names of the shareholders who did not agree with the conversion;
  • the minutes of the meeting of shareholders if a resolution is made at a meeting;
  • the permission for merger from a competent authority, if required by the legislation applicable in a specific field of business (e.g., permission from the Financial Supervision Authority);
  • in case of a merger, the final balance sheet of the company being acquired if the company being acquired submits the petition to the competent authority, i.e., to the Business Register. The final balance sheet shall be prepared as at the day preceding the merger balance sheet date and if prepared earlier, the final balance sheet must be prepared as at a date not earlier than eight months before submission of the petition of merger to the commercial register.;
  • in case of a merger, the resolution of the Competition Board to grant permission for a concentration if the obligation to request such permission arises from the Competition Act;
  • if the shares of a transferring/converting company are entered in the Estonian register of securities or another depository, the confirmation of the registrar of the Estonian register of securities or another depository that the management board of the merging company has notified the registrar or the depository of the merger;
  • in case of a merger, where the company being acquired is a public limited company and the latest annual report has been prepared in respect to a financial year, which ended earlier than 6 months prior to the entry into the merger agreement, an interim balance sheet as at a date not earlier than the first day of the third month preceding the entry into the merger agreement or the agreements not to prepare an interim balance sheet;
  • the number of employees at the time of the preparation of the draft terms;
  • the name and registered office of the subsidiary, if any;
  • the confirmation that a security has been provided to the creditors of the company, who have requested to receive such security;
  • the confirmation that the financial position of the company enables participation in the cross-border merger and that the company is capable of performing the obligations deriving from the merger agreement.

• Certain further deviations are described at Sections 6 to 10 below.

The Estonian Commercial Code (as amended by the Estonian Implementation Act) allows for a simplified procedure in case of intra-group cross-border operations generally in line with the provisions of the CLD (as amended by the Mobility Directive).

In any case of a cross-border operation, the independent expert audit and report is not required in following cases:

• if all shareholders of all participating companies waive their right to the audit and report by an independent expert; or
• for all companies participating in the operation which have only one shareholder.

In any case of a cross-border operation, the report section for shareholders of the report of the administrative or management body is not required if the shareholders of the respective participating company waive their right to receive the report section for shareholders of the report of the administrative or management body. That means the Estonian legislator has not excluded companies which have only a sole shareholder from the respective requirement.

In addition to the general simplified procedure applicable to all cross-border operations, the Estonian law includes the following specific simplifications:

Where a cross-border merger by acquisition is carried out by a company which holds at least 90% of the share capital of the transferring company, a shareholder resolution is not required. However, shareholder resolution is required if shareholders whose shareholding in the acquiring company represent at least 5% of the share capital (unless the articles of association prescribe a lower representation requirement) demand so within at least one month prior to the creation of the rights and obligations arising from the merger agreement.

Where a cross-border merger by acquisition is carried out by a way of an upstream merger of a wholly-owned subsidiary into the parent company, i.e. into a company which holds all the shares conferring the right to vote at shareholders’ meetings of the company or companies being acquired, the respective simplifications foreseen in Section 4.2 of the Introductory Summary apply. However, the Estonian legislator has not implemented the simplified procedure for a side-step merger of companies with the same direct or indirect shareholder as set out in the Section 4.2 of the Introductory Summary.

In case of a cross-border conversion, the report of the administrative or management body is not required if the converting company has only one shareholder.

Finally, regarding cross-border division carried out as partial division or division by separation, the Estonian law provides a simplified procedure foreseen for the division by separation in the Section 4.2 of the Introductory Summary. However, it is unclear whether the extension of the simplified procedure to the partial division, in addition to the division by separation, was the aim of the Estonian legislator. The Classification of divisions used in the CLD and the Mobility Directive do not match the classification used in the Estonian Commercial Code which may have led to an inadvertent extension of the simplified procedure. Therefore, we would suggest taking a conservative approach when applying the simplified procedure for partial division.

Under the Estonian Commercial Code (as amended by the Estonian Implementation Act) the objecting shareholders of an Estonian company being acquired (in case of merger), a company being divided (in case of division) or a company being converted (in case of conversion) have the right to transfer their shares or demand that the acquiring/divided/converted company acquires the exchanged share for cash compensation as foreseen by the Mobility Directive if these shareholders would become shareholders of a company governed by the law of a different Member State as a result of the cross-border operation. The following additional procedural aspects apply in this respect under Estonian law:

• The objecting shareholders have to exercise their right to demand that their shares be acquired by the acquiring company (in case of merger), by the company being divided (in case of division) or by the company being transformed (in case of conversion) within one month after the shareholder resolution regarding the merger/division/conversion has been adopted, by communicating such request to the company’s e-mail address. The names of those shareholders that oppose the merger/division/conversion resolution must be added to the respective resolution and the opposition to the resolution shall be confirmed by each shareholder with their signature. The cash compensation must be equal to the sum of money which the shareholder would have received from the distribution of remaining assets upon the liquidation of the company at the time the cross-border operation resolution was made.
• The acquiring/divided/converted company has to pay the cash compensation to the objecting shareholders within two months after the cross-border operation has taken legal effect.
• Shareholders who have demanded that their shares be acquired are entitled to dispute the adequacy of the cash compensation before an Estonian court within three months after the cross-border operation has taken legal effect. The Estonian legislator has provided that the judicial decision regarding the cash compensation is valid and applies to all shareholders of the company. The resolution of the company being acquired (in case of a merger) cannot be declared invalid for the reason that the monetary compensation is unfair.

In addition to the above, the objecting shareholders of a company being acquired/divided/converted may transfer their shares in the company within two months regardless of the restrictions on disposal provided by law or prescribed by the articles of association of such company.

Furthermore, under the Estonian Commercial Code (as amended by the Estonian Implementation Act), in case of a cross-border merger, shareholders who consider the offered share exchange ratio not to be adequate have the right to dispute the share exchange ratio and to request an additional cash compensation in line with the mechanism foreseen in the Mobility Directive if the matter falls under the jurisdiction of the Estonian court. Shareholders are entitled to dispute the adequacy of the exchange ratio before an Estonian court within three months after the cross-border operation has taken legal effect. The Estonian Commercial Code does not provide a possibility to demand shares instead of a cash payment in case of an inadequate exchange ratio.

The creditors of an Estonian company being acquired (in case of a cross-border merger), of an Estonian company being divided (in case of a cross-broder division) and of an Estonian company being converted (in case of a cross-border conversion) benefit from the ex ante protection foreseen in the Mobility Directive: those creditors, whose claims have arisen before the disclosure of the cross-border merger/division/conversion agreement, but whose claims have not become collectable by the date of such disclosure, and who have proven that the merger/division/conversion may endanger the fulfilment of their claims, are entitled to demand adequate collateral from the acquiring/recipient/converting company within three months of the disclosure of such agreement. The Estonian Commercial Code does not provide a possibility for the creditors of the acquiring/recipient company to demand collateral in the event of cross-border operation.

A requirement to submit a declaration of solvency has been implemented into Estonian law. The company participating in a cross-border operation has to submit to the commercial register a confirmation that the financial position of the company enables participation in the cross-border operation and that the company is capable of performing the obligations deriving from the draft terms.

In case of a cross-border divisions, the principle of joint liability of the transferring and receiving company for liabilities of the transferring company has been implemented in line with the Mobility Directive. The joint and several liability of the company to which the liability has not been allocated in the draft terms of division is limited to its net assets and is subject to a limitation period of five years starting from the date when the division has taken legal effect.

The rights of employees to information and consultation must be ensured according to the provisions of the Estonian Commercial Code, the Employment Contract Act, the Employees’ Trustee Act and the Community-scale Involvement of Employees Act. The company must inform and consult with the employees before the adoption of draft cross-border merger/division agreement or draft conversion resolution, or merger/division/conversion report, whichever is earlier. A reasoned response to the opinions and proposals that have been submitted throughout the consultation process must be given before the shareholders’ meeting on which they decide on the adoption of the draft cross-border merger/division agreement or draft conversion resolution.

The information required by the Mobility Directive regarding the effects on the employees must be included in the cross-border merger/division/conversion report and the employee section of the report can be formalised separately. The report must be made electronically available along with the draft cross-border merger/conversion agreement or draft division resolution to the shareholders of the company and the representatives of the employees, or in a case where there are no representatives, to the employees themselves. This must be fulfilled not later than six weeks before the date of the shareholders’ meeting on which the merger/division/conversion resolution is adopted. As stated in the Mobility Directive and as implemented in Estonia by amending the Estonian Commercial Code, the employees’ section of the report is not necessary if the company and its subsidiary do not have any employees.

The representatives of the employees or, if there are none, the employees can submit their opinion on the merger/division/conversion report. The employees’ opinion must be added to the report if it has been submitted not later than two weeks before the meeting or general meeting on which the company will be adopting the cross-border merger/division/conversion resolution. The shareholders of the company must be notified about the opinion.

Furthermore, the representatives of the employees or, if there are none, the employees themselves have the right to submit their comments to the company concerning the cross-border merger/division agreement or draft conversion resolution not later than five working days prior to the shareholders’ meeting where the merger/division/conversion resolution is adopted. They must be notified of this right in addition to the disclosure and submission of the merger/division agreement or draft conversion resolution to the commercial register, which must be fulfilled at least one month before the shareholders’ meeting. Alternatively, in case of a cross-border merger, if all the shares of the company being acquired (which grant voting rights) belong to the acquiring company, and the merger agreement does not need to be approved at the general meeting, at least one month before submitting a petition to the registrar.

Under the national law and Estonian Employees’ Trustee Act, the employees have the right to authorise and have a representative amongst themselves – an employees’ trustee, who is representing the company’s employees in relations with the employer and other employees. If they have chosen one, the trustee will be representing the company’s employees in the consultation process. Moreover, the Estonian Community-scale Involvement of Employees Act allows employers to apply more favourable provisions for the employees regarding the information and consultation rights in case of a cross-border operation.

The regulations of the Mobility Directive on employee participation have been implemented in Estonia with the amendment of a pre-existing Community-scale Involvement of Employees Act. There are no general rules on employee participation in the management of companies in Estonian law. Under the Community-scale Involvement of Employees Act, employee participation rights have been established in compliance with the respective regulation of the Mobility Directive. Negotiations on employee participation must be opened if the number of employees of at least one of the merging/dividing/converting companies exceeds a certain threshold. If the target country for the transformation is Estonia (i.e. the result is a company incorporated in Estonia), the threshold set by the law of the source country above which employees are entitled to participate in the management of the company must be considered.

The following aspects of the Estonian laws regarding the employee participation are worth noting:

• The special negotiation body is able to take decisions by an absolute majority of its members and at the same time it must be provided that such a majority also represents an absolute majority of the employees. Moreover, special majority conditions are specified in certain cases.
• The members of a special negotiating body are appointed in proportion to the number of employees employed in each Member State where the participating companies are located, by allocating each Member State one seat per portion of employees employed in that Member State amounting to 10% of the number of employees employed in all the Member States taken together.
• If during the negotiation period, the number of employees of participating companies changes significantly or if there are structural changes in those companies and these changes affect the division of seats allocated for Member States, the seats must be reallocated.
• The negotiations between the special negotiation body and the company management must be completed within six months, which can be extended up to one year from the formation of the special negotiating body if the parties decide to do so by their joint decision.
• If the special negotiation body and the company management fail to agree on an employee participation regime within the above time period of six months or one year, and other specific requirements are met, a statutory representative body of employees is founded.
• The Estonian legislator has not decided to limit the proportion of employee representatives in the administrative body of the recipient companies resulting from the negotiation between the special negotiation body and the company management.

The notarization requirement for the draft terms of the cross-border merger and division is a procedural peculiarity under Estonian law which needs to be taken into account with respect to timing and costs. This matter has been further described in Section 4.

In Estonia, the commercial register (äriregister) is the competent authority responsible for reviewing the requirements for cross-border merger, division and conversion both in case where Estonia is the departure Member State or the destination Member State.

The documents for cross-border operations that are to be submitted to the Estonian commercial register and to domestic employees and creditors must be provided (at least) in Estonian language. Documents in a foreign language must be submitted to the registrar together with their translation into Estonian made by a sworn translator. Although Estonian is the authoritative language, commercial register provides a possibility to disclose translations into a foreign language besides the Estonian language.

Estonian law does not provide any further structuring options for cross-border operations as defined in the Mobility Directive. The Estonian Implementation Act also allows cross-border division via acquisition (as described in Section 2), which is left out of the scope of the Mobility Directive. For the avoidance of doubt, our answer herein does not include other possible options that do not fall under the definition of either merger, division or conversion as defined in the CLD as amended by the Mobility Directive but may have a similar ultimate effect as cross-border operations (e.g. Business transfers, non-monetary contributions etc.).