Company management - 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.
Company management
The rights and obligations of board members and shareholders in a private limited company.
A private limited company must have at least one shareholder and at least one management board member. The management board primarily oversees daily operations and represents the company in legal transactions. More strategic decisions are made by the general meeting of shareholders. Such decisions include amending the articles of association, changing the share capital, electing or removing board members, approving the annual report, profit distribution, deciding on dissolution, merger, divisions, or transformation of the company, etc. The articles of association can set out for even more rights.
Larger private limited companies may also establish a supervisory board, which is mainly responsible for monitoring and overseeing the management board’s activities.
As a general rule, shares of a private limited company are freely transferable. However, if a shareholder wishes to transfer shares to a third party, the other shareholders have a preemptive right to buy these shares. The articles of association may state differently and add additional restrictions on share transfers.
A share transfer agreement must be notarized. However, if the company's share capital is at least €10,000 and fully paid, the notarial requirement can be waived in the articles of association, allowing shares to be transferred in a form that enables reproduction in writing. On the contrary, to ensure greater transparency, the maintenance of the shareholders’ list can also be transferred to the operator of the Estonian Securities Register.
The principles of transfer also apply to pledging shares. In general, shares can be freely pledged in notarized form, but exceptions can be outlined in the articles of association. When shares are pledged, the pledgor can still exercise the rights derived from the shares.
Changes to the articles of association regarding the form or restrictions of transferring shares must have the unanimous consent of all shareholders. Therefore, when establishing an OÜ, it is essential to consider whether a customized set of rules—such as stricter restrictions on share transfers—would better protect shareholders' interests in the future.
The management board is the daily governing body of the private limited company and has a broad authority. A member of the management board does not have to be a shareholder. The members of the Management Board are elected and dismissed by the shareholders, who also decide on the amount and terms of their remuneration.
If there are more than two members in the management board, a chairman is also elected, who organizes the work of the board. Each member of the management board may personally represent the company in all transactions unless the articles of association stipulate otherwise.
A member of the management board must fulfill their duties with the due diligence of a prudent entrepreneur. Members who breach their duties and cause damage to the company are jointly liable for compensating the damage. A member of the management board must keep business secrets and may not compete with the company, particularly by engaging in a similar activity as a sole proprietor or as a governing body member of such a competing company. The management board is also responsible for organizing accounting.
If the company's insolvency in the future seems likely, the management board must take steps to overcome financial difficulties, restore liquidity, improve profitability, and ensure sustainable operations, including considering submitting a restructuring application. If the company is permanently insolvent, the management board must immediately file for bankruptcy. After insolvency is recognized, management board members may not make payments on behalf of the company that are not consistent with due diligence of a prudent entrepreneur. Members are obligated to compensate for any payments that were not consistent with that.
The liability of a management board member primarily involves responsibility towards the company. A creditor of the company has a derivative claim against the management board member only in limited cases. To do so, the creditor must prove that they are unable to satisfy their claim from the company's assets. This does not necessarily require the existence of an enforcement document or an unsuccessful enforcement, but essentially, the creditor must prove that the company is insolvent or would become insolvent if their claim against the company were satisfied.
Shareholders manage the private limited company through voting at the general meeting. A shareholder’s voting rights are typically proportional to their share, based on the assumption that one cent equals one vote. However, the articles of association may provide for specific rights related to shares or shareholders, including decision-making and voting rights.
Generally, a general meeting is competent to make decisions if more than half of the votes represented by shares are present, and a decision is made when more than half of the votes cast at the meeting are in favor. Decisions can also be made in writing, without convening a meeting, provided that more than half of all shareholders' votes are in favor. When electing individuals, the person with the most votes is elected.
It is important to note that the Commercial Code requires a higher majority vote for certain more important decisions. For instance, amending the articles of association, increasing or decreasing the share capital, dissolving the company, merging, or dividing it requires a two-thirds majority vote. The articles of association can usually set out an even higher majority vote requirement in these questions.
Shareholders must adhere to the exact procedure for convening meetings or making decisions without convening a meeting, especially as regards to notifying other shareholders, setting deadlines, and setting the agenda of the meeting. If the law or the articles of association are materially violated, the decision is void. Therefore, it is essential to familiarize oneself with the precise procedures established by the Commercial Code.
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.
It is not uncommon for two good acquaintances to form a private limited company, intending to share their rights and obligations equally. Unfortunately, it is also not uncommon for their relationship to deteriorate over time. As mentioned above, decision-making requires a majority vote, which is impossible in a 50/50 shareholding scenario, if one side refuses to cooperate. Thus, one party is able to effectively block the company's ability to operate.
In principle, shareholders are obligated to follow the principle of good faith in their mutual relations and to consider each other’s legitimate interests. This principle may could include a duty to vote for or against certain decisions. Although theoretically this obligation exists, enforcing it practically would require going to court. This process takes time and money, making it impractical for regular business activities.
Shareholders do not have a legal right to forced buyout. In the case of disagreements, a resolution must be found through mutual agreement. Courts may exclude a shareholder from the company – for immediate and fair compensation – if the shareholder has significantly failed to fulfill their obligations without a valid reason or otherwise severely harmed the company’s interests. This standard is high, but more importantly, such a lawsuit can only be filed by shareholders representing more than half of the share capital, meaning this option is not available in cases with equal shareholders.
The simplest way to resolve such a situation is to prevent it from arising. The articles of association can provide for many differences compared to the law. Instead of using the default articles of association from the business register, it is perhaps advisable to consult a lawyer in advance and address any concerns together.
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