THE BALTICS

Efficiency and cost-saving through cross-border mergers Return to menu

Equipped with legal advice supplied by Sorainen’s pan-Baltic offices, insurance company If arranged a cross-border merger of its subsidiaries in Estonia, Latvia, and Lithuania into one legal person based in Estonia and with branches in Latvia and Lithuania. This is the first cross-border merger of a financial institution in the Baltic States and one of the first in Europe under EU Directive 2005/56/EC on cross-border merger. Why it could be wise to resort to this option? And would it be a solution for you?

The benefits that a cross-border merger may offer to international companies include the following:

• Simplifying and unifying company structure, thus saving organisational costs. Running a company is more complicated and expensive than operating a branch for a group because a branch has fewer mandatory bodies and much more flexible working arrangements. For example, no need exists to convene and arrange board meetings. In addition to bodies required by law, group companies often operate special departments or advisory bodies, which often duplicate the work of the bodies required by law and may even conflict with the law as to competence issues.

• Involving the parent company in decision-making. Many international parent companies exercise thorough and active supervision over their subsidiaries. However, supervision procedures may not always mesh with local legal requirements applicable to businesses, such as the number of management bodies, membership, working procedures, and liability. This may lead to a situation where “official” and “unofficial” (actual) corporate management procedures operate in parallel. Further, the parent company may sometimes set what decisions and transactions need to be made, but these may conflict with the obligation of a managing body member to act in the best interests of the company, i.e., not the parent company. Through branch structure, the previous parent company becomes liable for the business of the branch, so that creditors are better protected and the previous parent company exercises greater influence on branch activities.

• Saving extra-organisational costs. A merged cross-border company is subject mainly to one supervisory authority instead of several local ones. Reduced financial and other reporting requirements significantly decrease unnecessary administrative work. This is especially important for companies subject to financial supervision, which need to pay large supervision fees in each country of location.

• Ensuring more efficient use of capital. Undertakings enjoy freer hands to move capital from one country to another as needed. Settlement of accounts between branches is conducted differently from the ordinary procedure.

• Reducing capital maintenance costs. Branches do not have to maintain share capital, reserve capital, and net asset levels. This is especially important for companies subject to financial supervision, for whom capital maintenance levels are very high. However, after a merger these levels apply only to one company, instead of applying to the parent and subsidiaries separately.

• Eliminating the need for many intra-group transactions and covering related costs (consultancy, taxes). Often, a parent company permanently backs the business of its subsidiaries. These internal finance transactions, even between interrelated companies, should be made on a reasonable commercial (arm's length) basis, so that subsidiaries pay interest to their shareholder on loans. Taking into account transfer pricing and the thin capitalisation rules, material part of the interest might not be deductible for tax purposes, whereas the parent company usually pays profit taxes on interest received. All this would generally be unnecessary if a foreign company operated through its branch. A branch is not a separate legal entity, so that the issue of internal contract costs may be optimised subject to certain restrictions. Moreover, no VAT is applicable on service charges between head office and a branch or permanent establishment.

• Increased protection of cooperation partner and client interests. Combining resources generally simplifies and speeds up services for clients. A merger makes the company bigger, stronger, and thus more reliable. This gives a clear competitive advantage and better protection for creditors.

• Saving administrative costs. For example, branches have much softer requirements for drafting and filing reports to authorities: often, accounting and financial reporting is largely required only on the parent company level. Further, enhanced use of parent company databases and facilities enables availability of higher service quality to clients.

In today’s complex economic situation, success awaits those companies capable of establishing more transparent, more efficient, and client-friendlier undertakings, thus increasing their competitive power. To achieve this goal, cross-border merger is an option open to all companies operating cross-border in the Baltic States. Note, though, that the requirements of normative acts regarding cross-border mergers in Latvia, Lithuania, and Estonia vary significantly both in relation to content and form of merger documents and sequence and terms of activities during the process. Therefore, professional legal advice is critical for execution of a cross-border merger.

• Additional information: Karin Madisson
  e-mail: karin.madisson@sorainen.ee

• Additional information: Risto Agur
  e-mail: risto.agur@sorainen.ee

ESTONIA

Ruling supports enforcement of pre-emption right Return to menu

Upon transfer of a share in a private limited company (osaühing) to a third person, other shareholders enjoy a right of pre-emption. The general rule is that a pre-emption right may be executed within one month from the moment of becoming aware of the content and terms of a share transfer agreement, i.e., receipt of the agreement. A shareholder entering into a share transfer agreement must submit the agreement to the management board of the company whose shares are transferred and the management board must immediately inform the other shareholders. But what to do if the other shareholders never receive the share transfer agreement and information of its content and terms?

The Supreme Court of Estonia ruling of June 2009 (3-2-1-68-09) clarifies that an interested shareholder may insist on examining a share transfer agreement from related parties – the company, the buyer, the seller, and the notary attesting the transaction. These parties are obligated to make the agreement available. The right of a shareholder to make such a demand stems from the Law of Obligations Act (clause No 1015), under which a third person may do so in cases where 1) the document sought is compiled in the third person’s legitimate interests, or 2) the document sought concerns the legal relationship between the third person and the party in possession of the document, or 3) the document sought relates to preparations for a contract which concerns the legitimate interests of the third person. Furthermore, the court clarified that the only fact which an interested shareholder making the demand has to prove is that he or she is a shareholder of the company whose shares were transferred. In the light of the ruling, Sorainen would recommend that you consider amending your articles of association to include an obligation and procedure for submission of the agreement to interested shareholders.

Management board members’ liability broadened Return to menu

The Supreme Court of Estonia has also in its recent decision (3-2-1-103-08) taken the stand that a management board member may also be liable for unfair competition under the Competition Act. Unfair competition is taken to mean dishonest trading practices and acts contrary to good morals and practices, including: 1) publication of misleading information, presenting or ordering misleading information for publication, or disparaging a competitor or the goods of a competitor; 2) misuse of confidential information or of an employee or representative of a competitor. The prohibition of unfair competition as a general rule applies only to entrepreneurs, which under the law include a) legal entities, b) a sole proprietorship or other person acting in an economic or professional capacity or c) a union which is not a legal entity or d) a person acting in the interests of an entrepreneur. As a novelty, the national court has identified management board members simply as comparable to the fourth category – “persons acting in the interests of an entrepreneur”. Consequently, all management board members should be aware that their acts for possible violations of the non-competition rule and obligation to maintain business secrets are also covered under the Competition Act under the non-contractual damage compensation rules, i.e., not only on the basis of a contractual relationship and under the Commercial Code.

• Additional information: Karin Madisson
  e-mail: karin.madisson@sorainen.ee

Court reminder to define business secrets Return to menu

The concept of business secret is not comprehensively defined under Estonian law. Competition law provides some suggestions on how to define the concept as a guideline for civil servants but not as a general definition applicable to civil law relationships. However, the court has often referred to TRIPS article 39 section 2 and German federal court practice to add substance to the definition. In short, and as a general recommendation, the court in its June 2009 ruling (3-1-1-46-09) affirmed that each entrepreneur should clearly define in its agreements (employment, board member, and others) and internal regulations what its business secrets are so that the parties know the content of their obligation. A judge does not have sufficient knowledge of a business or the time needed to get to know it in order to be able to identify what exactly is economically valuable and secret for that business. Consequently, Sorainen urges you to include these definitions and, where they are already included, then to review them, in order to unify and make these definitions as inclusive as possible of all the data you consider valuable to your business.

• Additional information: Anne Adamson
  e-mail: anne.adamson@sorainen.ee

LATVIA

Registration of corporate changes to take longer Return to menu

The tense economic situation has affected services at the Latvian Companies Register, which is now closed on Fridays. The Companies Register has also notified closure of a number of regional units and a plan to extend the term for reviewing documents filed. This will result in more time-consuming registration, which should be taken into account when planning registration of corporate changes.

Transactions with shares of a private limited liability company Return to menu

Prior to acquisition of shares it is important to check the company shareholders’ register to verify whether the seller is the actual owner of shares and whether the shares are fully or only partly paid up. Under the general provisions of the Commercial Law, only fully paid up shares can be sold.

The situation when shares are partly paid up is common during the first year of a company’s existence and while increasing the share capital. In practice, it means that if a shareholder has subscribed for e.g. 100 shares and paid only 50% of the price, each share has been only partly paid up so that none of the 100 shares can be sold. Additionally, the shareholder must comply with the term set for final payment for the shares. Non-compliance may result in losing the rights to shares subscribed for but not fully paid-up. In such a situation, the company itself takes over the unpaid shares.

Amendments to Law on State and Municipally Owned Shares and Companies Return to menu

On 12 March, 30 April, and 16 June 2009, amendments were passed to the Law on State and Municipally Owned Shares and Companies. Under the amendments, State and municipally owned companies as well as private companies wholly owned by State and municipally owned companies may not form a supervisory board. These amendments introduce restrictions concerning the level of remuneration, education, experience, and qualification of management board members and in some cases also the number of positions a management board member may hold in other companies. Prior consent from the Cabinet of Ministers will be required for State-owned companies or the council of a municipality for municipally-owned companies in order for these companies to acquire shares or increase or decrease their level of interest in other companies.

Management board members may no longer be considered “employees” Return to menu

On 16 June 2009, new amendments to the Law on State Mandatory Social Insurance came into force. Under the amendments, individuals holding a position in a private or a public limited liability company are no longer considered “employees” under the law, so long as they do not receive remuneration for performing their duties. These individuals are:

1. management board member;
2. supervisory board member;
3. procura holder;
4. controller;
5. another person holding a position which may entitle to remuneration.

In practice, this means that on preparing monthly tax returns on mandatory State social insurance contributions, personal income tax, and the entrepreneurial insolvency risk fee paid in a taxation period for each person qualifying as an “employee”, the company does not have to include the name of a management board member (or others mentioned above) in the tax return, as was the case before.

Misleading company name Return to menu

In May 2009, the Head State Notary of the Latvian Companies Register adopted a decision in which the Companies Register refused to register a limited liability company with the name “Valdis Zatlers”, which is the full name of the President of Latvia, as this name was considered to contain significant misleading information regarding the company’s commercial activity and to be in contradiction with good morals. The decision states that the full name of the President as a company name might mislead third parties and indicate a link between the President and the company. However, no such link exists in the particular case. Sorainen notes that this practice can not yet be considered permanent, as the decision is being debated publicly and may be appealed.

• Addition information: Brigita Tērauda
  e-mail: brigita.terauda@sorainen.lv

LITHUANIA

Changes in management board decision-making Return to menu

A new rule on decision-making by the management board is applicable as of 1 July 2009. A management board decision is considered adopted if more than a half (1/2) of all elected management board members vote in favour.

Shareholders’ Rights Directive implemented in Lithuania Return to menu

On 17 July 2009, the Parliament adopted amendments to the Law on Companies implementing the Shareholders’ Rights Directive (2007/36/EC). The amended law entitles shareholders to submit questions in advance to the company on issues related to the shareholders’ meeting agenda. Furthermore, the shareholders’ meeting may now be convened on 21 days prior notice, instead of 30 days. Similarly to Latvia and Estonia, companies in Lithuania may enable shareholders to vote by electronic means of communication.

Extended concept of public offering Return to menu

This amendment to the Law on Companies also places an obligation on public companies not regulated by the Securities Law to prepare an information memorandum on transferable securities that the company intends to offer publicly. This requirement applies only if the total price of securities offered exceeds LTL 350,000 (ca. EUR 101,367) over 12 months. The amendment is aimed at better protection of minority shareholders’ rights.

Limitations annulled for members of supervisory and management boards Return to menu

Amendments to the Law on Companies of 17 July 2009 annul limitations applicable to persons intending to become members of management or supervisory boards. A member of a supervisory board cannot at the same time hold the position of CEO or be a member of the management board in the same company. Before the amendments this limitation also applied in respect of the management bodies of parent and subsidiary companies, e.g. a management board member of a parent company could not be a supervisory board member of a subsidiary.

New procedure on granting permission to use “Lithuania” in company name Return to menu

A new procedure on granting permission to use the word “Lithuania” in a company name is in force as of 28 June 2009. The new procedure establishes more objective criteria for granting permission to use “Lithuania”. For example, permission should be granted to a foreign company establishing a branch or representative office or to a foreign company establishing a subsidiary in Lithuania using the founder’s company name. The previous procedure established more subjective criteria, e.g. notability of the founder, development of the Lithuanian economy.

In addition, from now on notaries public verify whether a company satisfies the criteria for using “Lithuania” in its company name. Under the previous procedure the Minister of Justice would decide on issuing permission to use “Lithuania” after receiving a proposal from a specially formed commission.

Unfortunately, the new procedure contains one significant drawback. A founder owning a trade mark that differs from its own company name cannot use that trade mark in the name of a subsidiary including the word “Lithuania” unless other criteria indicated in a list are met.

More amendments still to come for Law on Companies Return to menu

The so-called “Sunrise” commission under the Lithuanian Government was formed in order to simplify regulation of the business environment in Lithuania. One working group focusing on improving the Law on Companies has prepared a number of proposals to amend the current law. These include, e.g.:

1. To reduce the mandatory minimum share capital of private limited liability companies from the current LTL 10,000 (ca. EUR 2,896) to LTL 1,000 (ca. EUR 289). Furthermore, the suggestion is to cancel the restriction on the maximum number of shareholders – currently 250 – in those companies.
2. To cancel the requirement for signature specimen forms of each person authorised to sign on behalf of a company. This would be particularly important for companies with foreign natural persons in managing bodies as obtaining signature specimen forms can be costly and time-consuming.
3. To eliminate a legal gap in current regulation. Currently, a CEO can only be de-registered from the Register of Legal Entities if the competent body confirms the resignation and appoints a new CEO. The proposal is to establish a certain term after which the CEO could be de-registered even without resignation approval and appointment of new CEO by the competent body.

• Additional information: Algirdas Pekšys
  e-mail: algirdas.peksys@sorainen.lt

BELARUS

New registration procedure in force Return to menu

As of 1 February 2009, Decree No 1 introduces the declarative principle of company creation in Belarus. Simplification of procedure concerns both the number of documents in the package of documents for registration and the period involved.

Currently, an applicant to register a company should file an application, articles of association, extract from the commercial register (for foreign companies), copy of ID document (for foreign natural persons), and certification of State duty payment. Pre-registration requirements include approval of the company’s business name, determination of its legal address, and opening of a temporary account to receive the authorised capital.

Besides, minimum authorised capital requirements have been abolished for most types of company. Requirements for minimum authorised capital remain only for close and open joint stock companies – approximately EUR 875 and EUR 3,500 respectively.

A company is registered in the commercial register on the day of applying for registration. Within five days the company is registered with the tax, insurance, and other agencies. Previously it took a month to register a company in the commercial register and ten days more to register with other agencies.

At the same time the Decree places more responsibility on shareholders. If shareholders provide unreliable information, registration of the company may be invalidated, the company liquidated, and the company’s income may be charged to the benefit of local budget.

Significant amendments to Law on Companies Return to menu

The Lower Chamber of the Parliament has adopted amendments to the Law on Companies. The amendments provide for new rules on sale of shares of joint-stock companies, execution of pre-emptive rights by shareholders, purchase by a company of its own shares, and disclosure of information on company financial and economic activities.

Thus, property rights in authorised capital should not exceed 50% thereof. Currently, the amount of property rights is limited to 50% of the minimum authorised capital for open and close joint stock companies, and unlimited for limited liability companies.

The amendments clarify the definition of large-scale transactions, and procedures for deciding on their execution and changing their terms. The amendments also broaden the range of persons who may dispute large-scale transactions in court. Furthermore, the draft provides for a definition of affiliates and amendments to the procedures for conducting the general meeting of shareholders, and election of the returning board and inspection commission.

Amendments to Civil Code Return to menu

On 11 June 2009, the Lower Chamber of the Parliament adopted amendments to the Civil Code. The draft contains new provisions on the status of a unitary enterprise. The founder of a unitary enterprise is entitled to exercise the functions of the sole executive body of a unitary enterprise. The amendments concern the founder’s powers with regard to establishing a unitary enterprise, its management, its reorganisation, and its liquidation.

The draft clarifies the definition of composition of the enterprise as a property complex and rights to profits, production, revenue, and assets of the unitary enterprise. Rights to joint ownership of the assets of a unitary enterprise assets are extended.

• Additional information: Maksim Salahub
  e-mail: maksim.salahub@sorainen.com

• Chief Editor: Karin Madisson
  e-mail: karin.madisson@sorainen.ee

SORAINEN NEWS

RECENT TRANSACTIONS

Legal structuring of If cross-border merger Return to menu

The Sorainen pan-Baltic team represented If, a leading property and casualty insurance company in the Nordic region, Denmark, and the Baltic countries, in a landmark transaction involving the cross-border merger of its Baltic group companies based on the EU Directive on cross-border merger. This was the first cross-border merger of regulated financial market participants in the Baltics based on the EU Directive, and one of the very first in Europe. Sorainen assistance covered both the legal structuring of the project and implementation of the pan-Baltic  transaction  up to final completion and post-merger action.  The Sorainen specialist team  was  lead  by  partners  Karin Madisson, Dr Tomas Kontautas, Eva Berlaus, and senior associate Risto Agur.

Advising Pohjola Group in the Baltic States Return to menu

Sorainen Latvia and Lithuania offices are advising Pohjola Group, a leading financial services group in Finland providing banking, asset management, and non-life insurance services, with respect to its companies in the Baltic States. Besides regular corporate matters such as management issues and annual accounts approval-related resolutions, Sorainen provided advice on capital structures in local jurisdictions, including equity requirements. The client is advised by partner Pekka Puolakka, senior associates Brigita Tērauda, Algirdas Pekšys, Anne Adamson, and associate Ina Budelinaitė.

Restructuring of Merck in the Baltic States Return to menu

Sorainen Estonia, Latvia, and Lithuania offices advised Merck, a major pharmaceutical company specialising in drug development and manufacturing, on restructuring its business operations in the Baltic States. Sorainen advice covered incorporation of legal entities, consultations on licensing, and regulatory issues. The client was advised by partner Renata Beržanskienė, senior associate Algirdas Pekšys, and associates Gytis Malinauskas, Roberts Prūsis, and Katrin Altmets.

Advising Vaasan & Vaasan subsidiaries in Latvia Return to menu

Sorainen Latvia office is providing continuous support to Vaasan & Vaasan Group, a leading bakery operator in Northern Europe, with respect to its companies in Latvia. Sorainen advice covers a full range of corporate law issues. The client is advised on corporate law matters by partner Pekka Puolakka, senior associate Brigita Tērauda, and associate Zane Paeglīte.

MKV a leading road construction corporation in Estonia Return to menu

Sorainen Estonia office senior associate Risto Agur is acting as one of the court-appointed reorganisation advisors for MKV, the Estonian road construction corporation, in court-administered reorganisation proceedings among the first to be conducted under the new Reorganisation Act that took effect in Estonia from the end of December 2008. The transaction is complex due to lack of practice in implementing the new act as well as the large number of creditors (around 200), some of whom have been heavily in opposition. The five-year reorganisation plan foresees e.g. postponing repayment of secured and strategic creditors, and discounting claims by other unsecured trade creditors (including the Tax Board) by 50%. The client was also advised by partner Karin Madisson.

Assisting Atria Eesti in mergers Return to menu

Sorainen Estonia office assisted Atria Eesti, one of the largest and oldest meat packers in Estonia, with analysis and support for its merger with subsidiaries Vastse-Kuuste Lihatööstus and Wõro Kommerts. The case was led by partner Karin Madisson and associate Indrek Ergma.

Creation of joint venture by Towage & Marine Assistance and SMIT in Lithuania Return to menu

Sorainen Lithuania office advised Towage & Marine Assistance, the leading towage and ship assistance company in the port of Klaipėda, on setting up joint venture company Towmar Smit Baltic with SMIT, a leading worldwide maritime services company. With a total value of EUR 31 million, this was one of the first such transfers in Lithuania. Towage & Marine Assistance contributed its whole business to the joint venture company as a complex, including e.g. tugboats, employees, shares in subsidiaries. In this case Sorainen also succeeded in obtaining merger clearance from the Lithuanian Competition Council. The client was advised by partner Laimonas Skibarka, senior associates Raminta Karlonaitė and Lauras Butkevičius, associate Goda Deltuvaitė, and others.

EMPLOYEES

New arrivals to the Sorainen Corporate Advisory team Return to menu

On 2 April 2009, Allar Jõks, former Estonian Chancellor of Justice and a judge of 10 years standing, joined Sorainen Estonia office as specialist counsel supporting the Sorainen Litigation team as well as the Competition & Regulatory and the Corporate Advisory teams. Aku Sorainen, managing partner, says that Mr Jõks joining Tallinn office offers a good opportunity to strengthen our team with a highly experienced lawyer and a distinguished expert in applying the law offering wide experience in different areas of law.

The Sorainen Corporate Advisory and Mergers & Aquisitions teams were recently strengthened by the arrival of an experienced lawyer, Sergej Butov, who joined the Lithuania office as a senior associate in August 2009. Sergej Butov specialises in company law, restructuring and insolvency, and M&A. Before joining Sorainen, he worked for eight years with Lideika, Petrauskas, Valiūnas ir partneriai LAWIN. He graduated with a Master’s Degree in Law from Vilnius University and obtained a Practice Diploma in International Business Organisations and International M&A from the College of Law of England and Wales. In 2008 he obtained an LL.M. in Business and Corporate Law from Erasmus University Rotterdam School of Law.

SEMINARS

Sorainen to organise pan-Baltic seminars on cross-border mergers Return to menu

Sorainen invites you to seminars on “Pan-Baltic cross-border mergers: legal, practical and tax perspectives”. During the seminar the Sorainen team and clients will share their knowledge and practical experience about planning and implementing a pan-Baltic cross-border merger, including tax aspects to be considered in merger planning. For more information and seminar registration, please visit the Sorainen website – www.sorainen.com.