Karin Madisson Partner karin.madisson@sorainen.com
	Kadri Kallas Specialist Counsel kadri.kallas@sorainen.com
	Toomas Prangli Co-Managing Partner toomas.prangli@sorainen.com
	Triin Tigane Legal Assistant triin.tigane@sorainen.com

On 11 February 2015, the Estonian Parliament approved amendments to the Commercial Code (to take effect on 1 July 2015) initiated by the Estonian Development Fund, which aim to make regulation of private limited companies more flexible, especially taking into account the interests of entrepreneurs wishing to involve shareholders and investors with various interests.

a. Share subscriptions more flexible

Previous procedures for share capital increase and share subscription were rather rigid. A shareholders’ resolution had to reflect the identity of those who participated in a share subscription. If all those named in the shareholders’ resolution did not end up participating in the share subscription, then a new shareholders’ resolution was required. However, in many cases it is not possible to name all those who will participate in a share subscription. Under the amended law, a shareholders’ resolution need reflect only those with the right to participate in subscription for shares. The actual participants will be determined after the subscription and payment of the issue price. The right to subscribe for shares can be transferred on the same conditions as a share.

b. Wider possibilities for companies to acquire their own shares

Previously a company was allowed to own up to 1/10 of its own shares. The amended law shifts the limit to 1/3. Shares acquired or taken as security in excess of the limit must be transferred to a third party or the status of security of those shares must be ended within three years from acquisition or pledging.

c. Possibility to issue shares with special rights

The amended law enables the articles of association of a private limited company to allow issue of shares with preference rights. Preference shares may give preference upon payment of dividends, or liquidation preference, or preference to proceeds from the sale of shares in the company, and veto rights on adoption of shareholders’ resolutions with certain substance. This enables investors in start-ups to protect their investment despite their minority shareholding.

d. Possibility to increase share capital conditionally and to issue bonds

The amendments allow for fundraising in the form of convertible bonds or convertible loans and issuing options to employees. This can be done by increasing share capital conditionally. The issue price must be paid in the form of a cash contribution. A resolution on conditional share capital increase must state:

• the purpose of the increase,
• the persons entitled to subscribe for the shares,
• the issue price of the shares or the basis for determining the issue price, and
• the deadline for subscription for shares.

Convertible bonds are personal. The owner of a convertible bond can acquire a share of the company against a convertible bond. A convertible bond may be transferred similarly to a share.

e. Management or supervisory board acquires the right to increase share capital

The amendments permit shareholders to delegate the right to decide on share capital increases to the management or supervisory board. This would enable a more rapid and efficient reaction to company financial needs as procedures for adopting resolutions by the management or supervisory board are simpler and more flexible than those applicable to decision-making at a shareholders’ meeting. This also simplifies the procedure for issuing options by the management or supervisory board within the limits set by the shareholders. The shareholders must still set the term, conditions and maximum extent of a share capital increase.

f. Adoption of resolutions by supervisory board simplified

In addition to taking into account the specific needs of start-ups, the amendments also simplify the procedure for adopting resolutions by the supervisory board applicable both to private limited companies and public limited companies. Supervisory board members may participate and exercise their rights in supervisory board meetings by electronic means, provided they participate by two-way communication in real time or by other electronic means which enable them to follow, participate in and vote at a meeting (eg through Skype or video conference call).

Furthermore, adoption of a supervisory board resolution without calling a meeting no longer requires a handwritten or electronic signature, but can be adopted in a format reproducible in writing, ie via e-mail communication.