M&A in Estonia - Doing Business in Estonia
Estonia is renowned for its business-friendly environment with a simple tax system and digital-first approach to government services.
Whether you wish to launch a startup, expand your corporation through a local branch, or work here as a freelancer, Estonia offers excellent opportunities and an efficient digital ecosystem.
Here are a few reasons why Estonia is an ideal place to do business:
- A company can be established in a day through a fast and straightforward registration process.
- The minimum share capital of a private limited liability company is 0.01 euros.
- Almost all reports and applications can be easily submitted online.
- Estonia's tax system is simple, with a 0% corporate income tax on undistributed profits.
- There are very few restrictions to foreign ownership or management and foreign entrepreneurs are treated equally to Estonian citizens.
- As an EU member state, Estonia provides access to the European single market and operates under the EU legal framework.
Estonia is also an excellent base for your business, even if you don't plan to live here. With the e-Residency program, you can easily manage your company remotely from anywhere in the world. For more detailed steps on establishing a company in Estonia, please see here.
The following guide will answer common questions that may arise when conducting business in Estonia. We hope to provide an overview of the most important things to expect or keep in mind. For any specific inquiries, please contact our team of expert lawyers who are ready to assist you with any issues you may have.
M&A in Estonia
An overview of different means of acquiring companies in Estonia.
The following are the more usual transactions when it comes to M&A in Estonia:
- Acquisition of shares;
- Acquisition of enterprise (a business unit as a collection of assets instead of a legal person);
- A merger, including:
- A combination merger where a new company is formed by the merging companies and the merging companies are considered dissolved;
- An absorption merger, where one company absorbs the other and the acquired company is considered dissolved);
- A division, including:
- A division by distribution, upon which a company transfers its assets to recipient companies and shall be deemed to be dissolved;
- A division by separation, upon which a company shall transfer part of its assets to one or several recipient companies;
- An EU cross-border merger or division;
- Takeover bids (squeeze-out).
Depending on the type of structure, the most relevant acts can be the following:
- The Commercial Code: conditions for mergers, divisions, and share transactions;
- The Securities Market Act: conditions for trading on regulated securities markets;
- The Law of Obligations Act: general terms and regulations for sales contracts and enterprise transfers;
- The Law of Property Act: conditions for transferring immovables and other property;
- The Competition Act: conditions for the application of control by the Competition Authority.
There are no transfer taxes in Estonia. However, making or amending entries in registers like the Commercial Register or the Land Register requires payment of state fees, which are usually nominal, as set by the State Fees Act.
Certain contracts, including merger and division agreements and real estate transfers, require notarial certification. The notary fee, determined by the Notary Fees Act, is usually a percentage of the transaction value. In mergers and divisions, the transaction value is based on share capital, while in asset purchases, it is based on the asset's value. Since the value of the enterprise is often much higher than share capital, notary fees are usually more substantial.
In any case, the most significant costs in M&A will be those related to due diligence, legal assistance and auditing. Other fees will only make up a small percentage of that.
As for time, in the case of division and merger, the relevant waiting periods provided by law add up to about three months. In cross-border mergers and divisions, the requirements of the other participant's jurisdiction must also be considered. For other transactions, the time spent is primarily related to gaining access to a notary, which is relatively short. The time cost is similar to the financial cost: the most significant expenditure is associated with conducting due diligence and auditing.
The obligation to disclose information depends on the structure of the transaction:
- Share purchases: generally, there is no obligation to disclose information beforehand. Public share offerings and trading market transactions have more specific rules (e.g. information disclosed in takeover bids), which are outlined in the Securities Market Act.
- Enterprise acquisitions: typically, these do not require public disclosure. However, the acquirer must promptly notify creditors about the assumption of obligations, and the transferor must inform debtors about the assignment of claims. For registered assets, changes in ownership must be recorded in relevant registries.
- Mergers and divisions: These require disclosure on a larger scale. A merger or division agreement must be prepared, detailing aspects like share distribution, replacement ratios, additional payments, arising rights of shareholders, and lists of assets and liabilities. Additionally, a report explaining the legal and economic justification for the merger or division must be submitted. Shareholders must be given access to the agreement, explanatory report, and auditor’s report at least two weeks before approving the merger or division. After signing decision and registration of the agreement, a notice must be published in the Official Announcements (Ametlikud Teadaanded) for the creditors.
Further disclosure requirements may arise under the Money Laundering and Terrorist Financing Prevention Act or the Competition Act, especially in cases involving concentrations.
Separate from that is the disclosure of substantial shareholdings, made under the Securities Market Act. The disclosure thresholds are 5, 10, 15, 20, 25, or 50 percent or 1/3 or 2/3 of all votes represented by the shares issued by the issuer. If the number of votes owned by a person corresponds to or exceeds any disclosure threshold, whether increasing or decreasing, the person must inform the issuer and the Estonian Financial Supervision and Resolution Authority about the number of votes they own. The disclosure obligation applies to every shareholder but in certain cases may also apply to other individuals, such as those authorized to exercise voting rights, those who may exercise those rights as part of a collateral etc. There are several exceptions regarding the disclosure requirements and special rules for how voting power is counted and what information must be shared. It is therefore advisable to familiarize oneself with the Securities Market Act.
Minority squeeze-out can happen with a public limited company (AS) and can occur on three bases, being either corporate law-based, securities market law-based, or merger law-based.
- Firstly, a squeeze-out can be carried out in accordance with the Commercial Code. A shareholder whose shares represent at least 9/10 of the share capital can request the general meeting to decide to acquire the shares owned by minority shareholders. The majority shareholder must pay fair compensation. The majority shareholder must submit a takeover report, explaining the conditions of the takeover and the determination of the compensation amount. The general meeting's decision is adopted if at least 95/100 of the votes represented by shares are in favor.
- Secondly, if the shares are traded on the securities market, a squeeze-out is possible after making a takeover bid. If the offeror acquires at least 9/10 of the voting shares the target issuer may approve the takeover of remaining shares for fair compensation, which cannot be below the takeover bid price. Fair compensation may be paid in money or in liquid shares traded on the market. A resolution on such a takeover is adopted if at least 9/10 of the votes represented by shares are in favor. The decision must be made within three months after the expiry of the takeover term.
- Finally, if a merging company owns at least 9/10 of the share capital of a merged company, its general meeting may, upon the request of the majority shareholder, decide on the takeover of minority shares within three months of the merger agreement. Approval requires 9/10 of the votes in favor.
Hostile takeovers in Estonia are, in principle, nonexistent. As an EU member, Estonia has adopted the European Takeover Directive, which includes the board neutrality rule. The rule prohibits actions such as significant asset disposals or acquisitions, encumbrances materially important to the bidder, or unreasonable compensation to the board or executive management. However, target companies can still seek competing takeover offers, and the supervisory board must disclose a reasoned opinion on the bid, addressing conflicts of interest, mitigation measures, and its impact.
The Commercial Code prohibits a company from granting loans or providing collateral for the acquisition of its own shares. Such loan agreements are void, but the transaction itself remains valid. The person securing the loan must compensate the company for any damages caused by such security. As a result, leveraged buyouts in Estonia are typically carried out through a special purpose vehicle created for this purpose.
In the case of approving a merger or a division, a two-thirds majority is required unless the articles of association prescribe a greater majority requirement. Other than the fact the majority must be convinced on the merger or division, the shareholders do not have specific appraisal rights. The decision on the merger or division cannot be invalidated on the grounds that the exchange ratio of shares or stocks was set too low. If the exchange ratio is determined to be too low, a shareholder may demand a refund. In the case of a cross-border merger, a shareholder who does not agree with the merger decision has the right to sell or demand that the entity acquires their share or stock in exchange for monetary compensation. The same right applies in the case of division. The law also provides for the protection of preferred shares and convertible bondholders, stating that their rights must be preserved in the case of a merger or division.
When an enterprise (a business unit) is transferred under whichever legal basis (merger, division, purchase agreement etc), employment contracts transfer unchanged to the acquiring company under the Law of Obligations Act. Terminating contracts due to the transfer is prohibited if similar economic activities continue. However, layoffs are allowed in a situation where, as a result of restructuring, it is no longer possible to offer work to the employee. The lay-off must be carried out in accordance with the requirements of the Employment Contracts Act. The above does not apply in the case of transfer due to bankruptcy.
Before the transfer of the enterprise, the transferor and the acquirer must submit a notice to the employees’ representative or, in their absence, to the employees. The notice must contain information about the transfer, including the transfer date, reasons, consequences, and planned measures. If changes affect employees (e.g., changing the location or working hours), prior consultation is required with the representative or employees. If there is a need to change any conditions agreed upon in the employment contract, consultation alone is not sufficient, and the employee's written consent is also required. Failure to perform the obligation to inform and consult upon the transfer of the enterprise is punishable by a fine of up to 32,000 euros.
Cross-border transformations, divisions, or mergers are governed by the Community-scale Involvement of Employees Act, which outlines regulations for informing and consulting employees and their participation in the management of the enterprise.
Cross-border merger and division is possible for an Estonian limited liability company (AS and OÜ) with another limited liability company which is registered in an EU/EEA country, and which complies with the requirements of Directive (EU) 2019/2121.
The procedure is similar to a domestic one with some differences. The preparation of a merger report is mandatory. The agreement must specify among other things the compensation offered to shareholders, the principles of creditors' protection and benefits provided to the members of the governing bodies. The transaction report must also explain the transaction’s impact on the company's shareholders and employees, including measures taken to protect employment relationships and significant changes in working conditions or the place of business. The transaction agreement must be attested by an Estonian notary. The agreement must be reviewed by an auditor who also prepares a written report.
A creditor whose claims arose before the disclosure of the cross-border agreement has the right to receive security with respect to claims that have not become due by the date of disclosure if the transaction may jeopardize the fulfillment of his claims.
Participation in a cross-border merger or division is not permitted if the company is in liquidation and the distribution of its assets to partners or shareholders has started, or if reorganization, bankruptcy or criminal proceedings have been commenced against the company.
The Community-scale Involvement of Employees Act is also a relevant law in case of cross-border transformations, divisions, or mergers, outlining regulations for informing and consulting employees and their participation in the management of the enterprise.
Finally, the rules and regulations of the other jurisdiction must naturally be taken into consideration too.
In M&A transactions, VAT generally does not apply. No turnover arises from the transfer of an enterprise or assets during a merger or division, or transfer of company shares. Securities transactions are also exempt from VAT, with limited exceptions.
The exchange of shares or contributions during the merger or division of companies is not taxed with income tax. Income tax applies only to a company’s profit which is taken out of a permanent establishment. However, this does not apply when transferring an enterprise to another company during a merger or division, provided that economic activity continues in Estonia through the company.
Income tax is charged on gains derived by a non-resident from a transfer of share in a company, if, at the time of the transfer or in the two years preceding it, more than 50% of the assets of the company consisted of real estate located in Estonia, and the non-resident held at least a 10% stake.
Estonia has adopted the Anti-Tax Avoidance Directive, which outlines conditions for taxing profits from transactions made for the purpose of obtaining a tax advantage. It also specifies the method and conditions for taxing profits when assets are transferred to a foreign permanent establishment. In certain cases, it is possible to tax profits of foreign-controlled companies from non-genuine arrangements for obtaining a tax advantage.
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