Recent changes in Estonian corporate law and legal framework related to financial collateral arrangements
Ermo Kosk and Rutt Värk
Red Legal
Tallinn
Ermo Kosk (Bio)
Rutt Värk (Bio)
As of January 1 2011 Estonia became the 17th member of the eurozone and is the first ex-Soviet state to adopt the EU single currency. This has certainly caused an increase in investors' and banks' confidence. The rapid recovery of economic growth in Estonia in 2010 and 2011 has not resulted in similar growth in borrowing and M&A transactions yet but we can already see increase in transaction number and volumes.
Adoption of the euro as the official currency required extensive amendments to Estonian legislation. Local companies are still in the process of converting their share capital into euros and dealing with related formalities. Furthermore, Estonia has during recent years been simplifying its corporate laws in order to make doing business easier and attract foreign investors.
In 2011 there has been also some material legal changes concerning bank lending. One such change is related to regulation of financial collateral arrangements, which has been one of the most important types of securities for banks and other financial institutions in case of pledge of shares and monetary claims (receivables). Namely, use of financial collateral has now been in certain cases restricted or even made impossible for lenders.
Changes to regulation regarding financial collateral arrangements
As of June 30 2011 new regulation concerning financial collateral arrangements has come into force in Estonia. It can be concluded that such changes may have negative effect on the Estonian security package and its enforceability for professional lenders.
The most important changes concern (i) the permitted object of financial collateral and (ii) types of pledgers allowed to establish financial collateral.
Firstly, the object of the financial collateral is now considerably restricted compared to the previous regulation which encumbered any and all securities (incl. shares) and monetary claims (receivables). According to the new legislation, only the following assets may be encumbered with financial collateral:
(i) certain types of securities expressed by a registry entry (except for derivatives);
(ii) claims for monies on a current account; and
(iii) credit claims (except for the claims arising from credit agreements with consumers or micro- and small-sized enterprises).
Secondly, the new regulation excludes the possibility to conclude a financial collateral arrangement between a qualified financial market participant and any legal person. Professional lenders are now allowed to conclude financial collateral arrangements only with large-sized enterprises corresponding to certain specific criteria specified by law.
It must be noted that the changes specified above do not affect the financial collateral arrangements, which are concluded before June 30 2011.
Pledge of registered securities
A new regulation has been introduced also in respect of pledge of registered securities (including pledge of shares).
It is now required that the right of disposal of the pledgee in respect of pledged securities is registered in the Estonian Central Register of Securities (ECRS). The pledgee shall be entitled to give instructions for disposal of securities in the course of enforcement only if the parties have so agreed and respective notation has been entered in the ECRS. This may bring along the necessity to re-register some of the currently established share pledges where such requirements have not been met.
Changes concerning limited liability companies
As of January 1 2011 a new redaction of the Commercial Code came into force, which eases the requirements in respect of Estonian private limited companies (PLC). The new changes give more flexibility to the shareholders and management in respect of share transfers and corporate formalities. In order to benefit from the changes, it may be necessary that the articles of association of the company are updated. Below is an overview of some of the most important changes.
More simplified procedure for transfer of shares
As a general rule, the right of pre-emption of shareholders applies upon transfer of a share of a PLC to a third person. However, under the new Commercial Code the shareholders now have the possibility to exclude the right of pre-emption altogether by the Articles of Association. In addition, the shareholders are allowed to specify in the Articles of Association other additional conditions for share transfers (e.g. the consent of other shareholders, the Management Board, the Supervisory Board or any other person).
Changes regarding Supervisory Board and Management Board
The new Commercial Code does not oblige a PLC to have a Supervisory Board unless so decided by the shareholders and prescribed in the Articles of Association. This is to ensure the more simple and flexible management structure of PLCs.
In addition, as of January 1 2011 the members of Management Board of PLCs can be appointed for an indefinite period. This reduces the hassle of observing the date of termination of the powers of the members of the Management Board and submitting documents to the Commercial Register for extending the powers after each term of office.
The residence requirements for the members of Management Board have been now abolished and all members of the Management Board can have their residence in any country in the world.