Five amendments to the Commercial Code opposed by the Chamber of Commerce
The Ministry of Justice commissioned a document containing hundreds of proposals for amending the Commercial Code. Below is the overview of the amendment proposals subject to the strongest opposition by the members of the Chamber of Commerce.
1. Establishment of compulsory dividends
In order to protect the rights of minority shareholders, the Working Group on company law review has suggested an idea to legalise compulsory payment of dividends. In case majority shareholders have not adopted a resolution regarding the payment of dividends, minority shareholders may, under certain conditions, demand the private limited company or public limited company to pay dividends.
The Chamber of Commerce opposes the legalisation of compulsory dividends. Payment of dividends must remain a majority vote resolution and the act should not allow for exclusions. Most private limited companies do not have irreconcilable disagreement between owners, and they do not deploy non-payment tactics to influence the minority. Additionally, it is already possible to amicably agree on dividends policy by entering into shareholders agreement.
Establishment of compulsory dividends has several negative effects. Firstly, the amendment may inhibit the development of a company. The company may lack liquid assets to pay of dividends or cancel an important investment. Also, it may increase the number of disputes concerning whether the company is required to pay dividends or not.
2. Removal of the requirement for quorum
Feedback from the members of the Chamber of Commerce showed that companies also oppose the proposal to remove legal requirement for quorum. Quorum represents the number of votes of shareholders participating or represented at the meeting of shareholders necessary for adopting resolutions. Today, the meeting of shareholders has a quorum only if more than one-half of the votes are represented at a meeting. According to the proposal, any meeting with at least one shareholder present would have a quorum.
Companies do not support that proposal, because they are used to currently applicable set of rules and perceive that such amendment may lead to a situation where a decision is made without broad support. This, in turn, would increase the number of disputes. Considering that the requirement for quorum has no practical problems and companies do not seek for amendment in that regard, it is not reasonable to amend current regulation merely based on legal theory.
3. Granting minority shareholders the right to withdraw
The Commercial Code is to be supplemented with a provision that would grant minority shareholders the right to withdraw from the private limited company based on relevant request, provided that there are good reasons due to which, in consideration of all facts and mutual interest, he cannot be reasonably presumed to remain a shareholder. In case of withdrawal, a shareholder would have the right to demand the private limited company to pay fair compensation for his share. Currently, minority shareholders do not have such right.
The Chamber of Commerce does not support such amendment. Firstly, it is very probable that after enforcement of the amendment, there will be disputes regarding the validity of shareholder’s reason to withdraw. Further disputes will rise when determining fair compensation. Also, a situation may occur where private limited company has no liquid assets to pay fair compensation. It does not mean that the private limited company would become insolvent after paying the compensation, but it may be forced to sell non-liquid assets or cancel planned investments, which eventually has negative impact on the value of the private limited company and thus to shareholders.
4. Transfer of share by oral agreement
The Working Group has also made a proposal according to which the Articles of Association may prescribe that the transfer of share is not subjected to procedural requirement arising from the law. This means that a share can also be sold by oral agreement or via social media if prescribed so by the Articles of Association. The Chamber of Commerce does not support such amendment. Oral agreement causes confusion, significantly reduces legal certainty, may cause disputes and thus have negative impact on Estonian business environment instead.
5. Lifting the restrictions regarding shares
The Working Group on company law review has made a proposal to remove the option to preclude pledging of shares by the Articles of Association. Furthermore, they propose excluding from the Act the option to prescribe the right of pre-emption of shares by the Articles of Association. Thus, all shares should be freely transferable in the future.
The Chamber of Commerce does not support these amendments, because it remains unclear why should the state impose a law to restrict shareholders’ freedom of mutual agreement. Moreover, we are not aware of any practical issues that would require making such changes. Making amendments merely for reasons arising from legal theory is not justified.
The selection and wording of amendments to be included in the draft act amending the Commercial Code are currently unknown. Initial version of the draft act will probably be completed in the first half of 2020.