Commercial Code to Go Through Various Changes

The Ministry of Justice has commissioned an analysis of the Commercial Code, which comprises of approximately 1000 pages, setting forth theoretical as well as practical problems in the Commercial Code and proposing solutions for the problems. The analysis covers almost all topics contained in the Commercial Code from establishing a company and capital requirements to organising meetings and dissolution of companies.

Obligation to maintain a list of shareholders might be transferred to notaries

According to the Commercial Code, the list of shareholders must be maintained by the management of a private limited company. The list of shareholders is published in the Commercial Register and today it has only an informative, not a legal meaning. This means that a buyer of a share cannot be fully certain when relying on the Commercial Register that the seller is the owner of a share.

In the opinion of the persons preparing the analysis of the commercial law, the list of shareholders could, in the future, have public reliability. According to their proposal, the obligation to maintain the list of shareholders must be given to the notaries for that purpose. The data of the list of shareholders would still published in the Commercial Register and the persons who wish to buy a share could rely on this data.

Additionally, there is a plan to lighten the requirements for transferring a share. While today, notarised verification is required for transferring the shares in the central register of securities, in the future notarising (i.e. verification of signature, which can be carried out by a notary of a foreign country) or performing the transaction electronically (i.e. by signing digitally).

Quorum requirement may be eliminated

Pursuant to the Commercial Code, there is an overall requirement that in order to pass a decision of shareholders it is necessary that more than half of the votes represented by shareholders or shares are in favour. The analysis document proposes to eliminate the overall quorum requirement and give each company the right to establish the quorum requirement in the articles of association similarly to the regulation of the non-profit organisations. The amendment does not concern cases where the increased quorum requirement arises from the law. For example, to add points to the agenda of the meeting during the meeting the requirement of two thirds of representation must still be fulfilled.

Furthermore, there is a proposal to change the requirement for the majority votes. While today, there must be over half of the votes represented at the meeting in favour in order to pass the decision of shareholders, then according to the proposal, the votes with the right to vote who participated in the voting of the respective decision could be taken as the basis in the future. This means that the votes in favour must exceed the votes against by one vote and the votes that did not participate, or the impartial votes would not be taken into account unlike now.

Protection of minority shareholders strengthened

The analysis contains various proposals that aim at improving the protection of minority shareholders. For example, there is a proposal to foresee a sell-out opportunity for public limited companies as a counter proceeding for the so-called takeover. This means that the law provides for a specific time from the moment of occurrence of the takeover situation during which the minority can request takeover of shares from the majority shareholders.

A proposal has been made in protection of minority shareholders to establish a principle in the Commercial Code according to which a shareholder may request, with good reason, dissolution of a private limited company. Additionally, a proposal has been made that instead of dissolution, the court may decide exclusion for fair compensation of the shareholder who requests dissolution. As an alternative, there is a proposal according to which a shareholder can request excluding themselves or another shareholder for good reason.

Automatic prohibition on business could be eliminated

Today, a debtor who is a natural person cannot engage in business and be a member of a managing body of a legal entity from the moment he/ she is declared bankrupt until the end of the bankruptcy proceedings. The analysis document has reached the conclusion that establishing such automatic prohibition on business is unreasonable. Therefore, a proposal has been made to amend the current procedure so that the court can impose the prohibition on business only if overwhelming circumstances justify it. This means that in the future, the court would assess for each case if the prohibition on business is necessary or not.

More information to be displayed in the Commercial Register

The authors of the analysis have proposed to set out clearly in the Commercial Code, which data bear legal effect, i.e. they can be trusted, and which data only carry informative meaning. The registry code of a company is, for example, of legal effect, but the data regarding the end of term of a board member have no legal effect.

An idea has been proposed to publish in the Commercial Register, data related to reorganisation both in terms of starting the proceedings as well as approving the reorganisation plan. There has also been a proposal to add to the Commercial Register a note on a company if in the opinion of the Tax and Customs Board the company is the so-called apparent company the aim of which is to avoid taxes.

At the same time, the analysis contains various proposals for decreasing the amount of information in the Commercial Register. For example, a proposal has been made to end the unlimited disclosure of real beneficiaries and give access to these data only in case of legitimate interest. Furthermore, it is not considered necessary to display data on the end of term of a board member in the Commercial Register.

In the analysis document, the state has been proposed to create a separate environment in the entrepreneur portal that companies and owners could use for carrying out electronic meetings and making decisions (including sending notices, voting, preparing minutes).

Private limited company minimum capital requirement could be eliminated

According to the Commercial Code, the minimum share capital requirement is 2500 euros. At the same time, since 2011 it is allowed to establish a private limited company without the capital contribution. The analysis document proposes eliminating the minimum share capital requirement because it no longer serves its purpose, i.e. does not give the creditors a significant security. If the minimum capital requirement is eliminated, the shareholders can set out in the articles of association what is the amount of the minimum capital of the shareholder.

If the option of establishing a company without the contribution will remain in the law, then according to the analysis document, set-off of the dividend requirement against the contribution payment should be allowed. This means that if a company has earned profit, capital can be formed from it and the shareholder is not required to make the contribution. At the moment, dividends cannot be paid out if the shareholders have not made the agreed capital contribution during establishing of the company.

Draft to be prepared by spring

The Ministry of Justice is currently collecting feedback on the analysis and planned proposals for amendments in the commercial law from the Chamber of Commerce and other stakeholders. Opinions of entrepreneurs are welcome until 14 December. Based on the analysis document and feedback from various stakeholders, the draft for the amendment of the Commercial Code will be prepared during the spring of 2019.

Read more on the analysis and planned proposals for amendments at the website of the Chamber www.koda.ee.

Marko Udras, Head of the Policy Formation and Legal Department