M&A and Private Equity Legal Update - June 2012
  Dear clients and cooperation partners,

Many of our readers see the Baltic States as one geographic market. However, the Baltic governments have so far not managed to follow such business logic on a political level. Until now. We are pleased to witness a joint attempt of the Baltic countries and the European Investment Fund to promote private equity investments through the Baltic Innovation Fund, which will hopefully start operating as a fund-of-fund by the beginning of next year. You can read more about this fund below.

We are working hard with Äripäev, the Estonian business media leader, to put together an interesting agenda for the next Baltic M&A and Private Equity Forum, which will be in Tallinn on 18 October 2012. It is not too late to propose suggestions for topics and speakers, and we would be happy to hear your proposals before the summer break.

Regular topics include recent transactions and updates on local legislation and court practice on M&A matters.

We hope that you enjoy the reading and that you will have some time for a relaxing summer vacation!

Yours sincerely,

Toomas Prangli
Partner, Regional Head of the M&A and Private Equity Team



Place: Kumu Art Museum, Tallinn, Estonia
Date/Time: Thursday, 18 October 2012; 09:00-18:00

The Baltic M&A and Private Equity Forum has been held for several years now and the event has turned into a prime meeting place for mergers and acquisitions (M&A) and private equity industry players and advisors. This year the forum will be held in Tallinn on 18 October. Previously held in Riga and Vilnius, the forum has gained a stellar reputation among leading representatives of private equity and venture capital funds, investment bankers, advisors, lawyers, managers and owners of companies in Lithuania, Latvia and Estonia.

Forum organisers – media leaders Äripäev (Estonia), Dienas Bizness (Latvia) and Verslo žinios (Lithuania), in cooperation with law firm SORAINEN – invite you to save in your diary the date of this prestigious annual event for the Baltic M&A and private equity industry.

The one-day event provides you with the essential information about the most relevant aspects of the M&A market in the Baltic States, plus presentations of real case studies. Additionally this is an excellent opportunity to establish new contacts, share experience, find new business opportunities and spend a day with your peers.

The forum will cover the following:

  • current M&A market trends in Europe and the Baltics;
  • private equity and venture capital workshops;
  • experiences by Baltic companies as to whether M&A is a good vehicle for business growth;
  • tools for successful M&A and private equity transactions.

To express your interest and to receive within the next month a more detailed invitation to the Baltic M&A and Private Equity Forum 2012, please email your contact information to: seminars-estonia@sorainen.com.

Gea Kallas
Business Development & Marketing Manager




Sanoma sells kiosk operations in Finland, Lithuania and Estonia, and press distribution in Estonia and Lithuania
BaltCap invests in software development company Clusterpoint
Eesti Energia sells Televõrgu to Tele2
Fortum sells off part of its business to EQT Infrastructure Fund
Unilever acquired Ingman Ice Cream
Litorina Kapital acquires majority in leading Nordic bakery equipment supplier
Cargotec sells its component manufacturing in Estonia
Towmar Baltic buys out SMIT
Sale of Narvesen Baltija
Bitė acquires Eurocom

For other recent transactions please click here.



In May 2012, the governments of the three Baltic States issued letters of intent approving the launch of the Baltic Innovation Fund (BIF). The BIF will be a pan‐Baltic private equity fund-of-fund organised by the European Investment Fund (EIF) and the governments of Estonia, Latvia and Lithuania, which is expected to boost the growing market needs for financing.

The EIF is ready to contribute EUR 40 million to the BIF, provided that each Baltic State contributes EUR 20 million. This will be matched by venture capital and private equity funds active in the Baltics. The funds will be selected by the BIF (which remains under the auspices of the EIF). This would make the total amount of financing EUR 200 million via this initiative.

BIF financing is aimed at growth and expansion-stage export-oriented companies in a wide range of sectors, and investments will be made in the form of equity or mezzanine-type loans. The BIF is well supported by the local venture capital and private equity industry via local umbrella organisations (Estonian, Latvian and Lithuanian private equity and venture capital associations), other market participants as well as state initiatives aimed at innovation.

The formal four-partite agreement for the BIF is expected to be signed in September 2012, proposals from fund managers are to be considered in October 2012, and the investment period of the BIF is expected to begin from January 2013.



When an undertaking (assets forming a business) is transferred or sold, the obligations attached to the undertaking transfer to the buyer automatically and the buyer and the seller become jointly and severally liable for the obligations unless otherwise agreed with the creditor. Between the buyer and the seller, unless otherwise agreed, it is assumed that the buyer is ultimately liable.

The key questions are, what is an undertaking and when it is deemed to have been transferred? Under Estonian law, an undertaking is an economic unit to which certain assets, rights and obligations can be attributed. An undertaking could be a business line or a specific location of a business that in theory has the capacity to continue its business independently as an ongoing concern even if separated from the company or entity of which it is part.

The National Court resolution on 21 December 2011, involving Saurix Petroleum and RAGN-SELLS, expanded the concept of transfer of an undertaking. In previous cases the National Court has taken a relatively conservative approach as to when a collection of assets and rights constitutes an undertaking. In this case the National Court took a much more expansive view deeming a transfer to have taken place even when the business activities themselves were interrupted and not continued as an ongoing concern.

The case involved real estate used for waste management operations. The seller had stopped its operations on the plot and three months later sold the real estate to the buyer. Some time after the purchase, the buyer began using the real estate for its own operations. There was no evidence that any agreements were transferred and it was determined that the buyer's business on the real estate was not identical to the business of the seller. The buyer did hire some of the former employees of the seller who previously worked at the same location. Thus it could be alleged that in transferring the real estate the business did not continue on going concern basis, but instead the buyer established a new business on the property which was similar to the previous business.

The National Court ruled that, for transfer of undertaking, it is not necessary to transfer client agreements or to continue the business in an uninterrupted manner. The court found that it was sufficient to determine that the activities of the seller before the transfer and the buyer after the transfer were similar. The court based its decision on similarities in the activities indicated in the waste management permits involving the property before and after the transfer and also on the fact that the buyer had hired certain employees of the seller for their specialised skills. The court also referred to European Court of Justice (ECJ) practice concerning the protection of employees in transfers of business – the ECJ has found that employees are protected in circumstances where the transferred business does not retain an organisational independence as long as the transferred assets retain a functional connection and can be used for the same or analogous economic activity (Klarenberg vs Ferrotron).

While the case raises particular concerns in future acquisitions of commercial real estate, there are also wider implications for other purchases of used assets. In Estonia, unlike in many other jurisdictions, the relatively flexible provision for the transfer of undertakings has been widely used to structure ordinary M&A transactions and this has been a useful tool. However, the concept has previously been understood in a more limited way and whether there has been a relatively-uninterrupted continuation of the business has been understood to be a core question in determining whether the buyer's liability is triggered. In the light of the new ruling, any acquisition of more-substantial used assets should involve also an analysis of whether the transfer might be considered a transfer of undertaking and therefore should be structured as an M&A transaction. Transfer of such assets may bring with it liabilities related to the assets including tax, employment and trade debts.

It should also be noted that the issue has implications for value added tax (VAT). Transfer of undertaking is not deemed as taxable turnover and no VAT is payable upon such transfer. If VAT has been paid, however, the input VAT is not deductible.

Paul Künnap
Senior Associate




In Latvia talks about the potential privatisation of two major players in the telecommunications industry – Lattelecom and Latvijas Mobilais Telefons (LMT) – are once again on the agenda.

The recently-restored high level working group assigned with the task of assessing future management scenarios with respect to the state-owned shares in Lattelecom and LMT met for the first time on 12 April 2012 to hear a report by the Privatisation Agency of the Republic of Latvia (Privatisation Agency) on the previously unsuccessful privatisation attempts and to consider the principal aims associated with each of the potential future management scenarios for the state-owned shares in Lattelecom and LMT, including their potential sale.

The high-level working group enjoys strong political support since it is led by Daniels Pavļuts, the Minister of Economics of the Republic of Latvia, and includes Aivis Ronis and Andris Vilks, respectively the Ministers for Transportation and Finance of the Republic of Latvia.

As the next step it is expected that, by the summer of 2012, the Privatisation Agency will come up with an in-depth analysis of the pros and cons associated with each of the potential future management and sale scenarios with respect to the state-owned shares in Lattelecom and LMT, evaluating the associated risks as well as considering whether there is need to additionally involve consultants and experts. On the basis of that analysis the working group is expected to decide on further actions.

It is still too early to estimate the scenario which might be preferred by the high level working group and whether the talks about the potential privatisation will stop at Lattelecom and LMT; however, we will keep you updated regarding future developments in this regard.

As a reminder, the Latvian State owns 51% of the shares in Lattelecom through the Privatisation Agency and 28% of the shares in LMT through Latvia State Radio and Television Centre and the Privatisation Agency, while 23% of the shares in LMT are owned by Lattelecom. The net turnover of Lattelecom in 2010 was approx LVL 139 million (approx EUR 198 million) and the net turnover of LMT for the same period was approx LVL 126 million (approx EUR 179 million).

Jānis Bite
Senior Associate




On 26 January 2012, the Supreme Court of Lithuania issued a landmark ruling which will further strengthen the protection of employees in cases of corporate reorganisation. The court established that employees are entitled to claim automatic employment with the business transferee, based on provisions of the European Community Acquired Rights Directive (2001/23/EC; “ADR”), despite the fact that the guarantee of automatic transfer has not been fully implemented under Lithuanian law.

The dispute arose when a Lithuanian company (“A”) decided to hive off part of its activities into a new entity (“B”) by means of a corporate reorganisation. As a result, company A ceased to carry on certain specific activities and dismissed employees which were engaged in those activities. One of the discharged employees decided to challenge the dismissal, claiming employment with company B. The latter stated that there was no agreement between the two companies on employee transfer and, therefore, company B had no obligation to take over the employment of company A’s employees.

The Supreme Court of Lithuania commented the following: “When applying national legal rules, which are subject to implementation of a European Union (EU) directive, such rules should be interpreted in the context of the directive and in the light of European Court of Justice (ECJ) case law. According to ADR, in case of business transfer, employees are guaranteed an automatic transfer of employment relations from the business transferor to the business transferee. According to ECJ, protection by ADR is a matter of public law and therefore applies irrespective of the will of the parties, ie employment contracts pass to the transferee irrespective of the will of the parties.”

The Supreme Court continued: “So in case the company is reorganised, the employment of those employees who work at the department subject to transfer should pass from the reorganised company to the newly established company irrespective of the agreement between the old employer and the new employer. The latter does not have a right to reject the placement of such employees. The transferee may later consider redundancy of its employees under applicable laws if valid reasons for such termination of employment exist. However, such reasons are not grounds for rejection of the placement of employees under transfer. By accepting the operations, assets, rights and duties of [a department of company A], [company B] also took over employer’s obligations.”

As a result, company B has been recognised as transferee of company A’s employment relations and therefore as the employer of the plaintiff. This judgment shows that the Supreme Court of Lithuania is willing to fill in the gaps of national law in implementing EU directives and is ready to apply principles arising from the ECJ’s case law related to employment law.

Jurgita Venckutė
Senior Associate
SORAINEN Lithuania




The privatisation campaign in Belarus is making a slow start this year but there is also a chance of some unexpected new opportunities.

This year, the general privatisation procedure began as usual – the State Property Committee prepared the year’s privatisation plan, which covered some 130 small and mid-size companies (including 83 whose sale failed in the previous year); 19 “strategic” enterprises were also rumoured to be potential sales targets – until the plan was discussed at the grand session involving the national  government,  Presidential  Administration  officials,  regional  governors  and  President  Lukashenka  himself,  in  late March 2012. The latter, somewhat unexpectedly, but with quite sound reasoning, questioned the established approach to privatisation in Belarus: the considerable effort invested in determining privatisation targets, producing lists of companies, of which only a small number really interests investors, and the lengthy preparatory procedures. Instead, the President suggested a model that may briefly be described as follows: any enterprise in Belarus, regardless of industry, size and location, is for sale, as long as the investor and the government can agree  on  terms  and  conditions.  No  more  annual  privatisation  lists,  no  more strategic and non-strategic enterprises, but there will be no “mass privatisation” either. Each privatisation case should be considered individually.

If this idea is implemented, then a significant revision of privatisation laws and procedures will be needed. So far the government has not cast much light on the possible coming changes. Only a few things are clear. If there is to be a privatisation campaign, it will commence later than usual (June-July). The government also confirmed its commitment to conduct eight “pilot” privatisations with the support of the World Bank and selected financial and legal advisors. Please follow quarterly issues of SORAINEN Belarusian News for details. To subscribe please click here.

Toomas Prangli
Toomas Prangli
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Pekka Puolakka
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Laimonas Skibarka
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