Solvency should also be taken into account in the distribution of company assets

Blogs February 9, 2016

Tvist

Corporate

Many foreign companies have already made the decision to invest into businesses in Estonia, whether (a) establishing their own subsidiary or (b) purchasing a fully functional company in Estonia. Hopefully, many foreign companies are considering that option. The decision to invest consist on different factors and it is made in the highest management level of the foreign company, but these factors are mainly business-related (transparent tax system, reasonable labor costs, effective usage of the IT by the public sector etc.) that the foreign company can benefit from. Therefore, the money related pros overrule the cons (obviously, not all the time, otherwise we would be Dubai).

The legal system of Estonia is not in the TOP 5 key factors (of course, there are exceptions) in the pros (neither in cons) of the checklist. Mainly, the legal systems is not a deal-breaker for the investment decision, it is more or less a neutral factor. The latter has caused an assumption for the “big guns”, I mean the shareholders, who are in charge and the subsidiary is under their control without knowing which governing body they should control or monitor and what are the rights and obligations of the different corporate bodies.

In my own practice, I have witnessed that the shareholders are not aware of the extent of the management rights the subsidiary might have and the foreign shareholders go by the assumption that Estonia is in the European Union, hence how different the legal system (including the chain of command) can be. In general, the assumption is correct, but the devil is always in the details and a small difference compared to the foreign country’s legislation in the mind of the “big gun” might have a very different consequence in the Estonian legislation. Hence, the devil should be confronted from the start and busted to the bones.

Now, coming back to the two (points a-b) possible ways (of course, non-exhaustive, just most common ways) to enter the magical world of Estonian legislation. The first option probably gives a better understanding for the foreign owner as establishment needs more hands on approach (at least for the legal department): going through the articles of association, the rights and obligations of the corporate bodies, labor law issues etc. This option also gives the advantage to reduce future legal costs when the foreign company can structure the company taking into account the future investments, structuring and its tax implications.

The second option’s legal side does not get so much attention (not discussing the due diligence procedure) or comes to the awareness of the foreign company. Nevertheless, both options would need a good advisor (mainly option b) who would address and underline for the “big guns” all the relevant and essential factors in the chain of command of the Estonian company.