Estonia: Changes Related to the Transfer of Shares of Private Limited Companies
A number of changes related to the transfer of shares of private limited companies entered into force in May and August this year. The main purpose of the changes was to simplify the transfer of shares and to make it foremost easier for foreigners to invest in Estonian start-up companies. Other companies can also take advantage of new opportunities, but there are also risks involved.
More about the changes
Firstly, any agreements that may lead to the actual transfer of share in the future no longer need to be notarized. Until now, for example, option agreements or simple agreements under which the share of a private limited company is transferred after the agreed time had to be concluded by a notary, and in case of non-compliance with the formal requirements, the agreements were void. Such agreements do not have specific form now. However, the amendment of the law does not make the previously concluded contracts valid and the contracts should be reconfirmed in writing in order to make these legally valid.
The second amendment also enables to conclude a transfer agreement without a notary – for example, in an unattested form. To this end, the articles of association of the company should be changed and this possibility must be provided for in the articles of association, whereas all shareholders should be in favour of amending the articles of association. The second requirement is that the share capital of the company should be more than 10 000 euros and fully paid. To achieve this, shareholders must either make additional contributions or decide to increase the share capital on account of the company’s equity (for example, retained earnings or share premium). The latter presumes that the company has sufficient unallocated equity. If these conditions are met, shares can be sold in a format that can be reproduced in writing and the same form requirement also applies to pledging.
And as a third change, the minimum nominal value of a share of the private limited company share is 1 cent instead of the previous 1 euro, which is also the basis for counting the votes when making decisions. It should be noted, however, that if your articles of association state that the minimum nominal value is 1 euro or that each 1 euro gives 1 vote, this change will not affect you until the articles of association are amended accordingly. It is possible to create significantly more precise proportions between shareholders with this amendment.
Transfer of the share in a new way
The list of shareholders of a private limited company continues to be maintained by the management board of the private limited company (except in case of the register of securities). In order to transfer the share, the purchaser and the seller must enter into a sales agreement and notify the management board of the transfer of the share. The law does not prescribe a form of notification, but requires that the notifier would also certify the transfer of the share. In particular, this can be done by submitting a sales agreement or by any other means appropriate for the management board. In any case the transfer of a share is considered to have taken place for a private limited company only after the notification and amendment of the list of shareholders. Prior to the latter the acquirer of the share has no shareholder rights as to the company – for example, the company may, being uninformed, pay dividends to the old shareholder. As a new obligation the shareholder should immediately notify the management board of any changes in the information included in the list. In case of a notarial sale the notary notifies the commercial register of the transaction by himself/herself. In case of sale pursuant to the new procedure the management board should notify the commercial register of the changes in the list of shareholders. This can be done in the company registration portal https://ettevotjaportaal.rik.ee/index.py?chlang=eng
It is still possible to transfer the shares in a notarized form. This applies as a mandatory form requirement if the above described changes have not been made or as a voluntary option if changes have been made. In this case the commercial register is notified of the changes by a notary, but the need and obligation to notify the management board still exists – no rights will arise with respect to the private limited company without it.
In case of transfer of a share at the notary, the notary checks the identity of the purchaser and the seller, their active legal capacity and the content of the contract, incl whether the parties still understand which transactions they are making and whether the share to be sold belongs to the seller at all. This is certainly an additional factor of confidence. The disadvantage here is the notary’s fee, but in many cases this cost pays off in legal certainty.
Transfer of the share in the register of securities
It is also possible to continue registering the shares of the private limited company in the register of securities maintained by Nasdaq CSD which means that the management board of the company no longer keeps the list and any changes made in the register take effect immediately as to both the private limited company and shareholders. The share of each such private limited company is located at the securities account of the shareholder, which the shareholder has opened in a bank. In this case the sales agreement does not contain any form requirements, but in order to transfer a share, the transferor and the transferee should issue the respective securities transaction orders in their banks, the details of which should match. In case of such orders it is also possible to pay the purchase price immediately, so that the condition of the transfer of the share is also the transfer of the purchase price.
An additional advantage of the register is the strong pledge with which the ban on the transfer of shares can be linked and which can be realised quite easily. In case of other methods of transfer the pledge gives the creditor much fewer options and involves additional risks. It also costs to keep the shares in this register, but these are rather smaller amounts.
To sum up it could be stated that each method of registering and transferring shares has its advantages and disadvantages and each private limited company should assess its capabilities and needs in order to choose the right method. Fortunately, it is possible to change these methods if necessary, although the transition to the new method requires the consent of all shareholders.