Mandatory Dividends a Significant Restriction on Business Freedom
The Parliament has initiated a draft for the amendment of the Commercial Code, which aims at ensuring better protection for small investors. The biggest planned amendment is to establish mandatory dividends that has a negative impact on entrepreneurship as well as the business environment. The draft includes a number of other principal amendments in the business environment, which the Chamber does not support.
There are far bigger problems than the protection of small investors
It is necessary to wait for the results of the company law revision, which analyses the problems related to small investors. After the revision it is possible to give a more accurate assessment of what is the situation in terms of protection of small investors. The survey of legal problems conducted among the members of the Chamber in spring did not reveal any issues related to the rights of small investors. However, it was found that the smallest number of problems were felt in relation to commercial law. Instead, the major problems involved high labour taxes, lack of labour force and hiring of foreign labour. Furthermore, according to the data of Enterprise Estonia, investing into Estonian companies is hindered by other aspects, such as decreasing of the number of people in working age, restrictions to hiring foreign labour and the price of electrical energy, not the lack of protection for small investors.
Mandatory dividends are a significant restriction of business freedom
According to the applicable law, a company has the freedom to decide if owners are paid dividends or the retained profit will be kept in the company as an investment. The draft establishes a precondition according to which a company is always obliged to pay the profit. As an exception, profit may be retained only if at least 75% of the shareholders are against the distribution of profits. As such, the proposal means establishing mandatory dividends in the commercial law.
The legislator should not prescribe, in which manner earning profit from a holding in a company should take place. The regulation significantly restricts the right of ownership and business freedom, because owners and shareholders who have a share of up to 74.9 percent in a company will not be able to decide on investing a company’s profit into the company’s activities. It is also possible that the extent of the infringement of fundamental rights and liberties arising from the regulations would cause a conflict with the Constitution.
Conflict with the tax policy
The planned dividend regulation contradicts the current tax policy where a company is not required to pay income tax on retained profit. Such principle has been established in order to support reinvestment of profits and growth of company. However, the draft contradicts supporting the business environment – instead of encouraging investments, “turning profits to money” is encouraged. As a result, establishing mandatory dividends may have serious consequences to Estonian economy.
Changes in the business environment require a thorough analysis
The draft includes other substantial changes in Estonian business environment that have not been analysed and should not be passed without it. For example, it is planned to give shareholders the right to exit a company in a manner that regardless of the size of the share, another shareholder or company will have to buy the share for a fair price. The planned changes also aim at defining information of the providing of which to owners and shareholders a company cannot refuse. Furthermore, small investors would have the right to file claims against the members of the Board and Council.