Several rules and regulations affecting entrepreneurs have taken effect or are about to take effect in Estonia – among other, rules for money laundering and terrorist financing prevention and for opening bank accounts for non-residents, as well as  requirements for disclosing actual beneficiaries  become stricter.

Ministry of Justice revises Estonian company law

The Ministry of Justice has commenced an audit of company law in Estonia. The audit includes reviewing and updating the rules of all forms of association for companies as well as registration procedures. In 2017, the revision committee established the first starting points.

The final analysis-concept will be presented to stakeholders in 2018, with public consultation scheduled to be open until the end of 2018. As chair of the Estonian Bar Association company law committee, Sorainen partner Karin Madisson is a member of the Revision Committee.

Beneficial owners to be disclosed

All Estonian undertakings must disclose data on their beneficial owners to the commercial registry starting from 1 September 2018.  Data that must be disclosed are: name, date of birth, habitual residence, and the position held by the beneficial owner. The obligation to submit data to the commercial registry lies with the management board of the undertaking.

Under the law, a beneficial owner is a natural person who, by taking advantage of their influence, performs an operation or a transaction or who exercises control over a transaction, operation or another person in whose interests or favour or on whose account a transaction or operation is performed. A beneficial owner is also a natural person who ultimately holds or controls over 25 percent of the shares in an undertaking.

A member of the highest management body of an undertaking must be shown as the beneficial owner if the undertaking has not succeeded in identifying the beneficial owner and has exercised and exhausted “all possible identification measures”. In addition, there must also be no doubt that such a person does not exist.

Data on beneficial owners must be filed with the commercial registry during company formation procedures. If the data remain unchanged, the management board must confirm the correctness of the data in the annual report. If the beneficial owner changes or data become outdated, the correct data must be filed with the registry within 30 days from becoming aware of the new data.

The sanction for not filing data, or filing incorrect data, on a beneficial owner is a fine up to 300 fine units (EUR 1,200) for a natural person and a fine up to EUR 32,000 for a legal person. The sanction for not conducting identification procedures is a fine up to 300 fine units or detention for a natural person and a fine up to EUR 400,000 for a legal person.

More severe sanctions in prevention of Money Laundering and Terrorist Financing

As a result of changes in the law, sanctions laid down for violations were tightened up as of 27 November 2017. The legislator also specified the substance of due diligence measures related to establishing and monitoring business relations. Under the amendments to the law, sanctions for finance-related violations (eg, violating the obligation to monitor a business relationship or to notify suspicion of money laundering and terrorist financing) will increase from EUR 32,000 to EUR 400,000. The Financial Supervision Authority suggested making local law comply with the IV Money Laundering Prevention Directive, under which the maximum sanction for a legal person is up to EUR 5 million or 10% of total annual turnover. However, this suggestion was declined.

The main reason for setting more severe sanctions is that previous legislation was too lenient and liberal in regard to not applying preventive measures. The purpose of revised sanctions is to motivate undertakings to refrain from committing infringements. Increasing financial sanctions does not automatically mean a dramatic increase in the amount of the fine imposed in practice. The purpose of raising fine rates was to enable more flexibility to the Financial Supervision Authority and the Financial Intelligence Unit in fulfilling their legal obligations.

Opening of bank accounts for non-residents became more complicated

In 2017, several changes were made for opening bank accounts and closing existing accounts for non-residents (including e-residents and residents of the European Union) and non-resident beneficial owners of Estonian companies. Similarly, banks have already started closing existing non-resident current accounts.

For example, in several banks it is no longer possible to open an account with a power of attorney or an additional special agreement with the bank must be entered into. Moreover, the majority of banks do not offer the possibility of video identification as planned. Additionally, for non-residents there is a stricter need for some connection with Estonia. As a general rule, it is not sufficient for banks to open a bank account and/or a securities account for an association that is planning to start commercial operations in Estonia (but has not yet entered into any such agreements) or if the bank account in Estonia is intended to be used solely for the purpose of tax optimization or for holding shares in an Estonian company (acceptable on rare occasions). In this case, it is important for the bank to understand the structure of the client group (incl to clarify actual beneficiaries – that is persons whose shareholding amounts to 25% or more whereas it is likely that the threshold will be reduced to 10% as the rules become stricter).

In addition, banks have actively begun to close existing accounts of non-residents (or non-resident beneficial owners). The difference between the information given on opening an account (eg planned business activities, partners), which the bank itself actively controls, may serve as a basis for closing the account. If a bank account is only used for making foreign settlements and is not actually connected to Estonia, then a bank may close the account. The closure of a bank account connected to a securities account is not hindered if the share of another company is held on the securities account. This could cause unexpected obstacles for a client who wishes to sell shares from the securities account.

LEI code required for transactions

From 3 January 2018, an LEI (Legal Entity Identifier) ​​code is required for a legal entity that deals with securities registered with the Estonian Central Register of Securities (ECRS) or the stock exchange. Holding shares in a private limited company or a limited liability company in the ECRS does not require an LEI code, but for transactional purposes an LEI code must be obtained. An investment service provider can require submission of an LEI code. If the client does not do so, the service provider cannot comply with the legal reporting obligation and must decline the transaction.

The LEI code is a worldwide identifier for a legal entity, but it does not replace the Estonian Commercial Register code. The LEI code will allow identification for monitoring purposes of legal entities involved in global financial markets. The LEI code must be applied for by an authorized LEI operator for a fee and will involve an annual maintenance fee for updating the code. No LEI operators are operating in Estonia today, but the necessary information on operators is available on the website of the Financial Supervision Authority.

Amendments in regard to implementing directive on protection of trade secrets

The European Union has adopted directive EL 2016/943. This aims to harmonise regulation of protection of undisclosed know-how and business information, to ensure the smooth functioning of the EU internal market. The purpose of the directive is to ensure protection of trade secrets against unlawful acquisition, use and disclosure in the internal market. For this purpose, an unambiguous definition of trade secrets has been created, including know-how, business and technological information. In addition, the circumstances where applying legal remedies for protecting business secrets are justified were established. Member States have to implement the directive into domestic legislation no later than on 9 June 2018.

The plan is to implement the Trade Secrets Protection Directive in Estonia via new legislation – the Ministry of Justice is currently drafting the Unfair Competition Act. As a result of implementation, the term “confidential information” will disappear from the Competition Act and will be replaced by the term “trade secret”. So far these terms were used in parallel.

Under the new law, a “trade secret” will be defined as information which is not entirely or partly general knowledge, or not accessible to persons who are normally exposed to this type of information. This information needs to possess a commercial value which must derive from the confidentiality of the information. In addition, a person exercising control over the information must have applied necessary measures to keep the information confidential. Together with the definition of “trade secret”, many other new terms are introduced, such as “the owner of a trade secret” and “products that infringe rights regarding trade secrets.

In addition, the plan is to supplement current regulation of unfair competition and the legal remedies available for violations. Moreover, procedural measures are specified for the protection of trade secrets, for instance, maintaining the confidentiality of trade secrets during court proceedings. So far, this has been the main obstacle for owners of trade secrets for initiating court proceedings to protect their right to trade secrets.

Mergermarket declares Sorainen “Baltic M&A legal adviser of the year” for the fifth time

In December, Mergermarket presented Sorainen with the “Baltic M&A Legal Adviser of the Year” award. This is already the fifth time Sorainen has received this prestigious award. Each year the Mergermarket awards recognise the leading law firms and financial advisers in the mergers and acquisitions (M&A) field in Europe. The winners are chosen through a unique three-stage selection process that employs both empirical data and independent expert opinion to form a reasoned and substantiated selection. Every year, the judging panel, which includes senior representatives from Mergermarket, major private equity funds and international law firms, evaluates the strategic nature, complexity and innovativeness of cross-border deals.

Among key mandates last year, Sorainen is proud to have advised:

• Nordea in combining its Baltic operations with DNB to create Luminor, the leading Baltic bank: the largest-ever merger in the Baltics and recognized as the Baltic M&A Deal of the Year 2017.
• Providence Equity Partners in acquiring the Baltic business of Swedish media holding Modern Times Group (valued at EUR 115 million).
• Palink, operator of the second largest retail chain in Lithuania, in the sale of 100% of Palink shares to Rimi Baltic (ICA Group) (total transaction value EUR 213 million).
• AMC Theatres on its acquisition of Nordic Cinema Group Holding (deal valued at EUR 893 million).
• CPA®:17 - Global, managed by affiliates of W.P. Carey Inc., in a series of acquisitions of Baltic retail property portfolios (valued at EUR 187 million).

M&A Forum sees potential in Baltics

On 4-5 October in Vilnius, the Baltic M&A and Private Equity Forum was held for the seventh year in a row by Sorainen in cooperation with the Baltic business dailies Verslo Žinios from Lithuania, Dienas Bizness from Latvia and Äripäev from Estonia. Every year, the forum gathers representatives from private equity and venture capital funds as well as investment bankers, consultants, lawyers, business executives and owners.

Attendees found the Baltics to be a market with great potential. “The Baltic states offer many investment opportunities and we should be doing more here”, said keynote speaker Tomasz Czechowicz, founder of Poland’s leading private equity group MCI Capital. He described MCI’s formula for success as follows: “First, you build national champions, then you build regional champions, and then you build European champions – that’s how we do it.”

According to Tamasz Szalai, investment director at CEE Equity Partners, the Baltics should not be considered a small market. “Indeed, companies here are small and it is not easy for funds to invest. Still, it is an exciting market with great potential.”

Not all indicators were positive, however. Žygimantas Mauricas, Chief Economist at Luminor, reminded the audience that economic sentiment is close to post-crisis highs but the Baltics are no longer European champions. “We have to work harder than before, offer something more”, he noted.

Consolidation is a clear trend in the Baltics. “Saturated markets, limited organic growth prospects, the growing importance of cost-efficiency and globalization pressures are the main reasons why consolidation is becoming the new norm,” said Žygintas Mačėnas, co-founder and Managing Partner of SUMMA Advisers. Following this trend, an increasing number of mergers exceeding 40% of market share are being cleared by local competition authorities.

The forum also celebrated the most significant transactions completed in the Baltics during the past year. The merger of Nordea and DNB Baltic operations, the largest-ever Baltic transaction, was awarded the title of the Baltic M&A Deal of the Year 2017. The investment by PAG Capital and Meridian Capital Management in Food Union was announced as the Baltic Private Equity/Venture Capital Deal of the Year, while European Lingerie Group’s acquisition of Germany’s Felina won the title of Baltic Outbound Deal.

Karin Madisson Partner send e-mail ph +372 6 400 934		Toomas Prangli Partner send e-mail ph +372 6 400 966		Piret Lappert Senior Associate send e-mail ph +372 6 400 961		Juulika Aavik Senior Associate send e-mail ph +372 6 400 942
Hanna Pahk Associate send e-mail ph +372 6 400 915		Kai Vainola Associate send e-mail ph +372 6 400 954		Häli Sokk Associate send e-mail ph +372 6 400 946		Oliver Ämarik Legal Assistant send e-mail ph +372 6 400 984

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