Sole proprietor (füüsilisest isikust ettevõtja, FIE)
- must be registered
- has no minimum capital or articles of association
- is responsible for the business with his personal property
General partnership (täisühing, TÜ)
- two or more partners
- partners are solidarily liable for the obligations of the general partnership with all of their assets
Limited partnership (usaldusühing, UÜ)
- two or more partners
- at least one partner (general partner) is liable for the obligations of the limited partnership with all of the general partner’s assets
- at least one partner (limited partner) is liable for the obligations of the limited partnership to the extent of the limited partner’s contribution
Commercial association (tulundusühistu)
- aimed at supporting and advancing the economic interests of its members through collective business activity
- members take part as consumers, users, suppliers, laborers or in other similar manners
- no personal liability of its members for the obligations of the association unless the articles of association provide for personal liability, which can be full personal liability or additional liability at least in the sum of 2,500 euros
- minimum share capital of 2,500 euros unless the articles of association provide for personal liability
Private limited company (osaühing, OÜ)
- at least one shareholder
- the minimum share capital is 1 cent per shareholder
- share capital must be paid but can also be in the form of a non-monetary contribution
- shareholders are not responsible with their personal property. If the share capital is under 2,500 euros and in bankruptcy proceedings the other assets of the debtor are not sufficient for satisfying the claim of the interim trustee, then reimbursement from a shareholder can be required to the extent of the difference between the share capital and 2,500 euros.
- transfers of share must be notarised. If the share capital is at least 10,000 euros and fully paid in, said format requirement can be changed in the articles of association to a format which can be reproduced in writing.
Public limited company (aktsiaselts, AS)
- at least one shareholder
- share capital must be at least 25,000 euros
- shares must be registered and entered in the Estonian Central Register of Securities
- no personal liability for the company’s obligations
Non-profit association (mittetulundusühing, MTÜ)
- a voluntary association of persons, whose objective or main activity is not earning income from economic activity
- may engage in economic activity and earn income, but this must be used to achieve the objectives specified in its articles of association
at least two members, the conditions of membership and members’ obligations are set out in the articles of association
A takeover bid may not include resolutive conditions (where the end of legal consequences is contingent upon an uncertain event). A mandatory takeover bid may also not contain suspensive conditions (where realization of legal consequences is contingent upon an uncertain event). The offeror may not set conditions that can be influenced by the offeror or persons acting in coordination with them.
The offeror may link the termination of rights and obligations to the disclosure of a competing takeover bid. This cannot be done in the case of a mandatory takeover bid. A mandatory takeover bid may, however, be set contingent on obtaining the approval of the Competition Authority or another governmental institution if such approval is mandatory.
Once a takeover bid has been publicly disclosed, the offeror is prohibited from making changes, except to make the price more favorable to the target and to waive suspensive conditions. The obligation to pay the purchase price in cash cannot be replaced by an obligation to pay in securities, and vice versa.
In the case of other business combinations besides takeover bids, any conditionality depends on the agreement of the parties. Sale agreements for shares or stocks may be conditional. Merger and division agreements may also be conditional. If a condition specified in a merger or division agreement has not occurred within five years of the contract being signed, the entity may terminate it.
The purchase price may be paid in cash or in liquid shares traded on a regulated securities market. Payment of the purchase price in shares is only permissible if it does not violate the requirements of the Securities Market Act. If shares are transferred as part of a conditional increase in share capital, payment for the shares can only be made in cash.
In the case of division and merger, shareholders must be provided with the contract, the report, and the auditor's report at least two weeks before deciding on the merger or division. If a public limited liability company (AS) is involved, the documents must be made available at least one month before the decisive general meeting. No earlier than one month after the decision, an application must be submitted for the registration of the merger or division in the Commercial Register. The application will be reviewed within five business days. All in all, the relevant waiting periods provided by law add up to about three months.
In cross-border mergers and divisions, the auditor’s report and the draft agreement must be made accessible at least six weeks before the general meeting and the agreement must be submitted to the Commercial Register for disclosure no later than one month before. Naturally, the requirements of the other participant's jurisdiction must also be considered.
For other business combinations, the time spent is primarily related to gaining access to a notary, which is usually relatively quick. For larger combinations, the most significant time expenditure is associated with conducting due diligence and auditing.
The main laws relevant to business combinations are:
- The Commercial Code (conditions for mergers and divisions, selling and purchasing shares);
- The Non-profit Associations Act (the same for non-profit associations);
- The Securities Market Act (conditions for trading on regulated securities markets);
- Law of Obligations Act (general terms of a sales contract, regulations on the transfer of enterprise);
- Law of Property Act (conditions for the transfer of immovables and other real rights such as servitudes).
Agreements are typically governed by Estonian laws. There is freedom to choose the applicable law regarding general or specific contractual terms. This freedom is larger in the case of share, asset, or enterprise purchase agreements and less so in mergers and divisions.
Some operations, such as registry entries, are done according to Estonian laws. Share purchase agreements usually need to be executed in a notarial form. Notarial form can also be a requirement when purchasing an enterprise or certain assets, such as real estate.
Dispute resolution is usually carried out through a local court or an arbitration institution. The parties generally have the right to also decide on the jurisdiction.
Obligation of disclosure depends on the business combination.
The purchase of shares generally does not require an obligation to disclose information beforehand. The list of shareholders of a private limited company is public anyways, along with information about the ultimate beneficial owners. The shareholder of a public limited company acquires their rights when entered into the share register, which is maintained by the Estonian register of securities or another depository if so allowed by law.
The public offering of shares and trading on the securities market has more specific rules (e.g. information disclosed in takeover bids) which can be found in the Securities Market Act.
The acquisition of an enterprise as an asset does not usually require any disclosures. However, the acquirer must promptly notify the creditors of the assumption of obligations, while the transferor must inform the debtors about the assignment of claims to the acquirer. For registered assets, entries regarding changes in ownership must be made in the relevant registries.
In the case of mergers and divisions, the disclosure obligation is greater. A merger or division agreement must be drawn up (including information about the distribution of shares, replacement ratio, additional payments, arising rights of shareholders, list of assets and liabilities, etc.). Additionally, a report explaining and justifying the legal and economic aspects of the merger or division must be submitted too.
At least two weeks before deciding on the approval of the merger or division agreement, shareholders must be given access to the agreement, the report, and the auditor's report. Immediately after the registration of the merger or division, a notice must be published in the Official Announcements (Ametlikud Teadaanded) publication for the creditors of the companies involved.
In the case of a public limited company (AS), one month before the decisive general meeting on the merger or division, the agreement must be submitted to the Commercial Register or published on the company's website, accessible to the public free of charge until the end of the general meeting. Additionally, a notice in the Official Announcements publication is published regarding the conclusion of the agreement, indicating where the agreement, report and auditor's report can be reviewed.
Additional disclosure obligations may arise under the Money Laundering and Terrorist Financing Prevention Act or, in the case of concentration, under the Competition 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. The disclosure obligation must be fulfilled promptly, but no later than within four trading days.
Regarding business combinations, the disclosure requirements are influenced by the specific circumstances of the combination. For example, if it results in a change of control or ownership structure, or if the business combination involves material transactions that affect the ownership structure of the companies involved, the disclosure requirement is present. See also the previous section.
When carrying out any activity, a member of the managing body (board or supervisory board) of a company must perform their obligations with due diligence. A board member who, through a breach of their duties, causes damage to the company is liable for compensating the incurred harm. The general duty of care for a board member means that the board member must act in good faith and in the best interests of the company, be adequately informed for decision-making, and refrain from taking unreasonable risks for the company. Board members are also subject to a duty of loyalty, which includes avoiding conflicts of interest; for example, they must not prioritize their own interests or those of related parties over the interests of the company. Additional obligations may arise from the articles of association, decisions of a general meeting, or agreements concluded with the board member.
According to Estonian law, the liability of any member of the managing body is primarily directed towards the company itself. Creditors may demand compensation for damages from the member only when they cannot satisfy their claims from the assets of the company.
In case of merger or division, members of the managing body or shareholders authorized to manage the company are jointly liable for damage negligently caused to the company, its shareholders or creditors through the merger or division. Shareholders have, according to case law, the right to demand compensation from board members only in exceptional cases, for instance, when a board member has violated a provision protecting a shareholder or has committed an intentionally wrongful act. An example of such a situation could be when a refund cannot be enforced against the merging company, partially or entirely, due to insolvency or removal from the Commercial Register.
Controlling shareholders do not have specific obligations. All shareholders are liable as shareholders only for damage caused negligently. A shareholder is not liable for the damage caused if they did not participate in the decision underlying the harm or if they voted against said decision. The same applies in business combinations.
Usually, decisions are made by the shareholders' general meeting with a simple majority vote (more than 50% must be in favor).
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. If a public limited company (AS) has multiple classes of shares, the merger decision is considered adopted if at least two-thirds of the owners of each type of share vote in favor, and the articles of association do not prescribe a higher voting majority. In the case of a general or limited partnership, a decision regarding a merger or division is considered adopted if all partners vote in favor. The partnership agreement may specify that the decision is adopted if supported by over two-thirds of the partners. If a partner of a general partnership or a general partner of a limited partnership being acquired opposes the merger resolution, the partner or general partner shall become a limited partner of the acquiring company. Similarly, if a partner of the general partnership or a general partner of a limited partnership being divided opposes the division resolution, the partner or general partner shall become a limited partner of a recipient limited partnership.
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.
A cross-border merger decision cannot be invalidated on the grounds that the financial compensation is unfair or that the information provided did not meet legal requirements. 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 replaced share or stock for monetary compensation. The same right applies in 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.
Hostile takeovers in Estonia are relatively uncommon. As an EU member state, Estonia has adopted the European Takeover Directive. This directive includes the board neutrality rule, which means that the board cannot take any actions that could frustrate a takeover bid. Such forbidden actions include significant disposal or acquisition of assets, disposing or encumbering assets which are materially important to the bidder, payment of unreasonable compensation to the board or executive management, etc.
However, the target company still retains the right to solicit competing takeover offers. Similarly, the supervisory board must disclose a reasoned opinion on the takeover bid, explaining and revealing issues of conflicts of interest and measures taken to mitigate them, providing an assessment of the impact of the takeover, etc.
Minority squeeze-out 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 ask the general meeting to decide to acquire the shares owned by minority shareholders. The majority shareholder must pay fair compensation, which is determined by the majority shareholder based on the value that the shares had ten days before the notice of the general meeting. The majority shareholder must submit a takeover report, explaining the conditions of the takeover and the determination of the compensation amount. The report must be audited, and the costs of the audit are borne by the majority shareholder. The report and documents must be presented to the shareholders for inspection at least one month before the decisive general meeting. The general meeting's decision is adopted if at least 95/100 of the votes represented by shares are in favor. One month after the adoption of the decision, the board submits an application to the securities register holder for the transfer of shares to the majority shareholder.
- Secondly, if the shares are traded on the securities market, a squeeze-out is possible after making a takeover bid. If the offeror has acquired at least 9/10 of the share capital of the target issuer representing the voting rights as the result of a takeover bid, the target issuer may decide, at the request of the offeror, on the takeover of the remaining shares belonging to target persons for a fair compensation. A resolution on such a takeover is adopted if at least 9/10 of the votes represented by shares are in favor. Fair compensation may be paid in money or in liquid shares traded on the market and cannot be lower than the purchase price of the takeover bid. 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, the general meeting of the merged company may, upon the request of the majority shareholder, decide within three months from the conclusion of the merger agreement on the takeover of the shares belonging to minority shareholders by the majority shareholder. The general meeting's decision on the acquisition of shares belonging to minority shareholders is adopted if at least 9/10 of the votes represented by shares are in favor.
An activity license is required for operating in certain business sectors, especially in areas related to providing essential services, national defense, finance, healthcare, or fields that require specific qualifications or heightened security requirements for the protection of the public or the environment, etc.
A company subject to licensing requirements must obtain a license before commencing economic activities in the respective sector. The application for an activity license is typically reviewed within 30 days. In areas where there is no licensing obligation, there may still be a requirement to submit a notice of commencing economic activities in the relevant sector. The general principles of the licensing process are established in the General Part of the Economic Activities Code Act, but specific prerequisites for obtaining a license are outlined in various specific laws.
Sectors and activities subject to licensing requirements, their specific requirements, and the relevant laws applicable to them can be checked using the Estonian Classification of Economic Activities (EMTAK) search system (available at emtak.rik.ee).
Certain sectors, such as water usage, mining, waste management and so on, require an environmental permit. The relevant legal act in this regard is the General Part of the Environmental Code Act.
Concentrations (such as mergers or acquisitions of control) in certain sectors are subject to restrictions under competition law. Please refer to the section on competition law for more information.
Bankruptcy or reorganization proceedings do not forbid a merger or division. As an exception to this, a cross-border merger, division or transformation is not permitted, if the company is in liquidation or if reorganization or bankruptcy proceedings have commenced.
Even if the termination of the company is provided for in the articles of association or decided by the shareholders, the shareholders can still decide on the merger, division, or transformation of the company until the commencement of the distribution of assets.
In bankruptcy proceedings the company is managed by the bankruptcy trustee instead of the former management board. For example, if the merger is not completed by the time of declaring bankruptcy, necessary actions to finish the merger can only be taken by the trustee. The general provisions of the Law of Obligations Act regarding the transfer of the enterprise do not apply in bankruptcy proceedings. The trustee may sell the enterprise or its organizationally independent part only with the consent of the bankruptcy committee. Other individual assets of the company are usually sold by the trustee through public auctions. When a share is sold in an enforcement or bankruptcy proceeding, the enforcement agent, trustee and the debtor are not liable for defects in the share, except for possible unlawful damage caused.
While employment contracts usually transfer unchanged in the case of a merger, division, or transfer of an enterprise, this is not the case in the event of the employer's bankruptcy, and the transferor or acquirer may terminate employment contracts due to redundancy.
