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Attracting investments and exercising of share options has been simplified

Adam Rang
Adam Rang, Communications Director at Unicount

The amendments to the Estonian Commercial Code that entered into force on the 1st of August 2020 simplified the attraction of investments and granting of share options, which makes Estonia more attractive to foreign investors and solves several problems that arose in practice.

The amendments enable to:

Conclude a share purchase agreement without the notary;
Under certain conditions to transfer the ownership of a share without going to a notary;
Conclude the shareholders’ agreement in free form;
Grant and realize share options without rounding problems;

No more need to meet the notary to conclude a share purchase agreement

Legally, the sellers’ obligation to transfer the ownership (obligational transaction) and the transfer of ownership from one person to another itself (disposition) is distinguished. Prior to the amendments, both the obligational transaction and the disposition had to be concluded by a notary and practically the issue of distinction did not arise.

Only the shares registered in the Estonian Securities Register could be transferred without the involvement of a notary into the process.

The amendment also enables to enter the obligational transaction of shares of private limited companies not registered in the Estonian Securities Register in free form. Thus, from August, a contract to purchase a share might be entered in the form of an e-mail or the use of social networks or even orally.

However, it is advised to avoid oral agreements, as it is more difficult to prove the circumstances of an oral agreement than in the case of a written contract. In order to become the owner of the share, the notary must still be contacted as usual. Such a change will make it much easier for foreign investors to make transactions with the shares of Estonian private limited companies.

Thus, for example, an investor located in Germany will be able to gain control over the respective share relatively quickly and will be able to formalize the disposition of the respective share with an Estonian notary later.

When certain conditions are met, the ownership of the share may also be transferred without going to the notary

Trading shares is further simplified by the possibility for private limited companies on certain conditions to waive the requirement of the notary form for the disposition. For this purpose, the share capital of the private limited company must be at least 10 000 euros and the free form of the disposition prescribed in the articles of association of the private limited company.

If the obligational transaction is now universally form free, then the disposition must at least be in a format reproduced in writing – therefore, it isn’t possible to enter into oral agreements to transfer part of the ownership of the share.

The amendments might be interesting to private limited companies with shares of which a large number of transactions are made or of which the larger part of shareholders are non-residents of Estonia.

At the same time, it would be reasonable to foresee such a need already upon the establishment or the initial phase of the operation of the company (when shareholders are still few), as such amendments to the articles of association require the consent of all shareholders. During the pre-seed or seed phases, the founders should consider whether to establish or amend the articles of association to allow or disallow the freedom of the notarial form of the dispositions.

Founders and early investors must take into account that the established freedom of notarial form is likely to increase the interest of foreign investors in acquiring a share in the company since the share could be acquired without going to an Estonian notary.

Freedom of form of the shareholders’ agreement

Due to the obligational transaction becoming form free, the shareholders’ agreement will also become form free, which will further increase Estonia’s attractiveness to foreign investors. Shareholders’ agreements concluded before the amendment to the law which included a co-sale obligation or the regulation of reverse vesting, had to be authenticated by a notary, as the respective provisions oblige the sale of shares upon fulfillment of certain conditions.

According to the new legal provision, shareholders’ agreements containing provisions obliging the sale of shares no longer need to be authenticated by a notary and may be entered into in a form suitable to parties. Thus, the change in law will lead to a faster process of attracting investments and lower costs for all involved.

The nominal value of a share no longer needs to be a multiple of the euro

The Commercial Code was further amended regarding the minimum nominal value of the share. Before the amendment to the law, this was one euro or multiple thereof, but now the minimal nominal value can be one cent or the multiple of a cent.

Thus, such a change makes it possible to distribute the shares more precisely among the shareholders while increasing the share capital to a lesser extent.

In addition, the given amendment also simplifies the exercise of share options and minimizes the need to round when exercising share options, thus allowing a more precise distribution of share options. In practice, numerous rounding problems have occurred in the event of exercising of shares due to the requirements of minimal nominal value and the multiple of share.

Thus, in the past it has been necessary to round up or down with the exercise of the share option to a whole number, because the law did not allow to acquire, for example, a share of 2,59 euros (and it had to be rounded to 3 euros, for example). In order to be able to acquire a share of the size prescribed by the share option more fairly (without the need of substantial rounding), the nominal value of the share established by the amendment is 1 cent.

Therefore, after the change, we will be able to see decimal values in the circulation of shares as well, e.g. 0,06, 2,59 or 11,58 (if the articles of association allow it) and to realize the shares provided for with share options more fairly.

In conclusion, the amendments to the Commercial Code which entered into force in August are a welcome step in making the Estonian business environment more attractive and in strengthening the image of Estonia as the flagship of start-up entrepreneurship.

Original article by Hedman Partners law firm

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