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September 25, 2020

Legislative changes in share transfers in Estonia

During the recent pandemic, some obstructing factors of Estonian company law became more evident and acute, prompting the Estonian legislator to speed up some of the long-planned legislative changes. The first being changes in the regulation on the transfer of the shares of private limited company (in Estonian osaühing or ).

Notarizations and bureaucracy in share transfers

There are probably not many foreign companies having Estonian subsidiaries in the form of a private limited company, Osaühing/OÜ in Estonian, or wishing to invest in one, that have not pondered over Estonian fondness of notaries or experienced troubles with local banks. The reason for that lied in the code of the Estonian company law. At least it used to be or is topical to a lesser degree today.

The principle was that all transactions concerning the transfer or the pledge of shares of -s were to be notarized. And not only the actual share purchase or pledge transactions, but also agreements setting out legal intentions for future share transactions. Meaning that also the shareholders’ agreements and option agreements/plans should have been certified by the notary in order to be legally valid and fully enforceable.

It goes without saying, that the notarization as an extra bureaucracy creates extra burden for participants both in terms of time and expenses. That is in particular topical where there are number of shareholders or investors involved, who as a rule need to either be personally present at the signing of the documents or arrange a notarized/apostilled power of attorneys for its representative. Notarized transactions are also regarded as rather expensive, since the notary fees are usually tied to the value of the transaction.

The notarized format can only be relinquished in respect of transfer of shares registered at the official Estonian Central Register of Securities held by Nasdaq. It is a voluntary option for OÜ’s to do so and against a periodical fee. However, in practice even this relief does not always turn out to be a saving grace for foreign companies wishing to invest in Estonian equities, as the next hurdle – access to Estonian banks proves to be even higher. The precondition for maintaining ’s shares as securities is having a securities account at a local bank. Local banks have however imposed a highly restrictive stance on its KYC procedures in recent years, so that it has become more of a rule that foreign companies without clear ties to Estonia have been rejected by the banks.

More lenient rules for share transfers

From the above it becomes evident why there is a vocal opposition to the earlier share transfer rules had been gathered. So, in the beginning of August 2020, the long-awaited legal change concerning share transfers entered into force.

One of the improvements to the law is that the agreements to the effect of stipulating future terms and conditions for share transfers that is, to use formal legal definition - the transaction constituting an obligation do not anymore require a notarized format. In practice this leniency concerns quite a wide range of corporate and M&A arrangements such as the shareholders’ agreements, option agreement, investment agreements, debt to equity conversion agreements.

Under the amended law, the notarized form is however continually foreseen for the actual transfer of the ownership or pledge of share (disposition for the transfer). There are, however, the following important exceptions to the rule:

  1. Private limited company should have least EUR 10 000 paid- in share capital at
  2. Respective provision in the articles of association
  3. Consent of all shareholders for waiving the notarized format of share transfers i.e. for the respective amendment of the articles of association.

All in all, the above legal change could be considered as good news. However, in order to fully implement the waiver of the notarized format the shareholders should consider whether it would be worthwhile to change the articles of association combined with an increase in paid-in share capital above the EUR 10 000 threshold.

The other legislative change handles e-meetings. Read more in our blog: Formal recognition of e-meetings as a corporate meeting forum in Estonia.