The provisions of the currently applicable Commercial Code, which regulate the Commercial Register, will be transferred to a separate Commercial Register Act, and some notable amendments will be made to the currently valid Commercial Code.
The Commercial Register Act will enter into force in three stages: the general date of entry into force is 1 February 2023, but the amendments concerning the maintenance of a list of shareholders and a list of building association members will enter into force on 1 September 2023, while the amendments concerning, among other things, the reservation of a business name and the making of entries on a specified date will only enter into force on 1 March 2024.
In this article, we shall take a look at the more important amendments entering into force in the coming year. Above all, the new regulation will bring legal clarity and ensure the reliability of the data submitted to the e-Commercial Register. The main aim is to simplify the activities of both the undertakings and the registrar, including to ensure legal certainty for third persons in relying on registry data.
The new regulation allows the registrar to fine a person obligated to submit data upon a failure to submit the data prescribed by law or upon the submission of false data. The data published about undertakings in the Commercial Register will thus become more reliable and that allows third persons to analyse the progress and business competence of a legal person before starting a business relationship. Third persons will also gain access to fine rulings made with regard to natural persons related to a legal person.
The minimum share capital requirement for private limited companies will be abolished
Where no contribution is made upon the foundation of a private limited company, the currently applicable Commercial Code does not establish a term for share capital contributions; instead, it leaves it up to the shareholders to decide, creating a situation whereby share capital contributions remain unmade for a long time. Contributions must be made when the shareholders wish to increase or reduce the share capital or make payments from the private limited company. The regulation of private limited companies will become more flexible, as the minimum share capital requirement will be abolished. This means that private limited companies can no longer be founded without making a contribution. Rather, the capitalisation need of the company will be left up to the founders to decide because the minimum share capital requirement established in the currently applicable act is generally in no way linked to the actual capital needs of a company.
A private limited company may therefore also be founded with a share capital of one cent, but it is important to note that in the case of bankruptcy proceedings the temporary trustee may demand that the shareholder cover the temporary trustee’s fee and expenses to the extent of 2,500 euros, if the share capital of the private limited company is less than 2,500 euros and the assets of the legal person are not enough to satisfy that claim.
Maintaining the list of shareholders of a private limited company in the Commercial Register
Starting from 1 September 2023, the lists of shareholders of private limited companies will be maintained by the Commercial Register, which means that the data entered in a list of shareholders will gain an entry status in the Commercial Register. This results in the public trustworthiness of the data, which in turn significantly improves the legal certainty in making transactions with the shares of a private limited company. Pursuant to the currently applicable regulation, a shareholder must present a contract that certifies the acquisition of a share to a notary in order to prove his or her holding in the private limited company and to transfer a share. In the future, both the transferor and the acquirer of a share can rely on the public and reliable data of the Commercial Register.
The said change will apply to companies the shares of which are not registered in the Central Register of Securities or which have not stopped using the disposition format requirement. If the shares are registered in the Central Register of Securities, the list of shareholders will continue to be maintained by the Register, and if the disposition format requirement is no longer used, the management board of the private limited company shall maintain the list of shareholders.
Failure to submit an annual report
Until now, the discipline of submitting the annual reports of legal persons has proven to be a significant problem, as annual reports are submitted late or not submitted at all. The legislator has taken the position that the systematic failure to submit annual reports cannot be accepted, for it is a matter of the reliability of the business environment as well as an obligation arising from law and therefore does not come as a surprise for legal persons.
The regulation makes it possible to impose a fine on a legal person that has failed to submit an annual report by the due date without making a warning ruling. In imposing a fine, the registrar has been given great discretionary power, and fines can therefore be imposed repeatedly until the submission of the annual report. In imposing a fine and determining its amount, the registrar can take into account how many times the legal person has failed to submit the annual report by the due date, how much time has passed from the submission term and other circumstances important for the registrar. In addition to a legal person, the registrar may also impose a fine on a member of the management board of a private limited company and, as a new feature for private limited companies, also on shareholders.
If a legal person fails to submit the report within the term granted by the registrar and at least three months have passed from the term for the submission of annual reports as prescribed by law, the legal person may, if certain preconditions (no assets, not a party to any ongoing proceedings) are met, be deleted from the Register in a simplified procedure.
In order to reduce abuses related to the violation of the reporting obligation and to prevent situations where reorganisation is used for getting rid of companies that have failed to submit annual reports and do not wish to fulfil that obligation, an additional measure has been added to the law. It stipulates that the registrar will not make merger, division or transformation entries in the Commercial Register until the legal person taking part in the merger, division or transformation has submitted the absent annual report.
Allowing for Commercial Register entries to be made on a specific date
Starting from 1 January 2024, companies are given the option of reserving a business name for up to six months. Upon reserving a business name, a company must state the field of activity of the company in which it wishes to use the business name as well as the legal format of the company, and these cannot be changed later in the course of the reservation.
In justified cases, companies can also request that an entry be made in the Commercial Register on a specific date. This can, for instance, be done when it is necessary for a merger to enter into force on a specific date and there would be enough time to determine whether there are any deficiencies in the application or the entry can be made on the desired date.
An application for making an entry on a specific date can only be filed with regard to the amendment of data, not in the case of applications for first entry. The state fee for reserving a business name will be 150 euros, which will not be returned upon the cancellation of the business name reservation.
Restoration in the Register after the deletion of a person from the Register
Pursuant to the amendments to be entered into force, the registrar may delete a legal person from the Register faster and by way of a simplified procedure, such as in the case of a failure to submit an annual report or absence of a contact person. For instance, upon a failure to submit an annual report, the legal person may be deleted from the Register at the earliest after three months have passed from the term for the submission of the report. A legal person may also be deleted from the Register if it has failed to appoint the mandatory contact person. In the future, companies are obligated to appoint a contact person by a specific term. The term can be extended if it has expired; otherwise, the contact person will be automatically removed from the Register.
A legal person can be restored to the Register on the basis of a relevant application for the purposes of both continuing its activities and conducting liquidation proceedings, if it turns out that the deleted person did have assets. Restoration to the Register is possible within three years from the deletion from the Register, if the person was deleted due to a failure to submit an annual report or due to an absence of a contact person (compulsory dissolution). In other cases, if the company subjected to compulsory dissolution did have assets and it wishes to complete the procedures related to the assets, the company can be restored to the Register for completing the procedures. This is called additional liquidation and, in such cases, there is no term for restoration to the Register.
If a legal person is restored to the Register, the expiration of the claims filed against it is suspended from its deletion from the Register until its restoration to the Register.
Other major amendments
The amendments revoke the requirement that the net assets (own equity) of a private limited company must be at least as big as the amount of the minimum share capital of a private limited company as established by law.
The amendments exclude the time limitation (of two months) on the distribution of a public limited company being liquidated, if the public limited company only has one shareholder or the public limited company itself is the other shareholder.
A branch of a foreign company will no longer be obligated to appoint a contact person – this will be voluntary. A branch of a foreign company will be obligated to enter the Estonian address of the branch in the Register, as the formerly applicable requirement to appoint a contact person if the head of the branch his located in a foreign country is waived.
The creation of group rules will specify the liability of management board members and stipulate the cases in which the management board of a subsidiary is not liable for the damage caused in the fulfilment of the parent company.
The requirement that the place of residence of at least one liquidator must be in Estonia will be abolished; the respective requirement will also not apply to management board members who often act as liquidators.