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Transaction advisory

Important fact to remember when selling your shareholding in a company

Author: Kärolin Rohumäe, legal adviser

In most countries, including Finland, Norway and Denmark, there are no form requirements for a sales contract of a share, yet Estonian law requires the contract to be notarised. Only if the company’s shares are registered in the Estonian securities register (hereinafter EVK) can the notarisation requirement be waived.

In providing advisory services to many Estonian companies, we have noticed that foreign shareholders and board members may not always be aware of the notarisation requirement in Estonia. There was a recent case where our adviser forwarded a registry card to a client who was surprised to find that the parent company was still listed as a Swedish company although the shares had been sold to a Finnish company five years before that. Closer examination revealed that while the client had indeed transferred the shares on the basis of a sales contract, however it had been in the form of an unattested agreement pursuant to Finnish and Swedish requirements. As Estonia does not accept an unattested sales contract of a share, there are two ways of going about solving the problem:

  • sign a notarised sales contract of the share or
  • register the shares of the company in EVK and later transfer the shares to the new owner.

In the case of this example, the client initially decided to register the shares in EVK but after he was unsuccessful to open a bank account, he had to opt for the second way – to conclude a sales contract at an Estonian notary.

On what basis to decide whether to sell the shares under a notarised sales contract or conduct the sale in EVK?

If the seller's shares belong to a foreign company, notarisation of the sales contract will require presentation of the shareholders’ resolution and also the registry card and articles of association issued by a foreign notary, accompanied if necessary, by apostil and sworn translation into Estonian. Thereafter the representatives of the seller and buyer must go to an Estonian notary's office to sign the sales contract in the presence of the notary. The parties to the contract may be represented by someone else on the basis of a power of attorney, in which case the legal representatives of the company do not need to be present. After signing of the sales contract, the notary shall notify the Commercial Register, which shall make the relevant entry within five business days.

  • The advantage of signing the contract at a notary is that the terms and conditions of the contract are drafted by the notary, which means that there is more legal certainty.
  • A disadvantage is the complexity of the notarised transaction and the expenditure of time and money.

For that reason, in some cases it is easier to first register the company’s shares in EVK and afterwards sell the share. In the case of a sale of an EVK-registered share, the seller must submit to the administrator of the securities account an order to transfer the share to the buyer and the buyer must submit to the securities account administrator an order to accept the share from the seller. Similarly, the buyer must present to the administrator an order to transfer the purchase price agreed between the parties and the seller must present the order to accept it.

The abovementioned procedures are really all that is necessary. However, we do recommend that at least a written sales contract be signed between the parties to avoid potential disputes later on.

  • The legally binding nature of an entry in EVK speaks in EVK’s favour. Subsection 9 (2) of the Securities Register Act states that if a person acquires a security or a right to a security in good faith relying on the register, the register is deemed correct with regard to the person. Thus, the shares in the company belong to the company whose name is entered into EVK. The entry in the Commercial Register on the other hand possesses solely information value; as in cases not registered in EVK, it is the management of the company who is legally required to maintain a list of shareholders.
  • The other positive quality is the simplicity and speed of the procedures.
  • Problems may come up if a party to the transaction is required to open a bank account in Estonia as a foreigner in order to execute a transaction. This can be a long and complicated process and in the worst case may not prove successful. The prerequisite for opening a securities account is the existence of an ordinary bank account. But if the company’s shares are already registered in EVK and the buyer has a securities account, conducting the sale via EVK is certainly the most convenient and efficient solution.

What does the future hold?

The current relatively time-consuming and bureaucratic obligation acts as a brake on the business environment and can be an obstacle to bringing in investors. For that reason, Parliament introduced a legislative amendment at the end of last year. The amendment will abolish the requirement of notarisation for a transaction of obligation – the sales contract of share. The amendment would not however affect the requirement of form for a transaction of disposition. That means the sales contract of share may be unattested, but the notary must notarise the certificate stating that the share was transferred by a person entitled to do so.

As an exception, there is an option of waiving the requirement of form for a disposition. In such a case, the company’s share capital must be at least 25,000 euros and the articles of association of the company must allow such a transfer. In addition, the shareholders must provide their consent (does not need to be notarised) for this. If the company’s articles of association allow a transfer transaction to take place without notarisation, a corresponding marking is also added to the company’s register card.

In implementing the amendment, it should be borne in mind that the sales contract of a share does not need to be notarised, but solely an unattested sales contract is not sufficient for making an amendment in the Commercial Register. On the basis of the explanatory notes to the current draft legislation, the notary must notarise the certificate stating that the share was transferred by a person entitled to do so. This is necessary for ensuring the trustworthiness of the data in the Commercial Register. It is desired to implement the amendments this June, with the exception of relaxing the requirement of form for a disposition.

As long as the rules on form requirements for sale of a share have not been changed, the notarisation requirement must be adhered to carefully. Otherwise, for the purposes of Estonian law, the share will not be considered to have transferred.