Five Steps for Mergers

There are two statutory ways in which companies can merge in Estonia. Either a company that is being acquired merges with another and the former is dissolved, or two companies merge to create a new company and the merging companies are dissolved.

Pursuant to the Commercial Code, merging companies may be of different classes according to their entry in the commercial register. The exception is commercial associations. These may only merge with each other. Also, the merger of branches is not permitted because they are not considered to be legal persons.

As a result of a merger, the assets and obligations of the company being acquired transfer to the acquiring company. Similarly, upon foundation of a new company, the assets and obligations of the merging companies transfer to the new company.

Generally, five steps must be taken by companies in order for a merger to have legal effect. They are:

• conclusion of the merger agreement;

• preparation of the merger report, if appropriate;

• adoption of the relevant resolution and approval of the agreement by the shareholders of the merging companies;

• notification of the creditors; and

• submission of the petition for entry of the merger in the Commercial Register.

The merger agreement is the source document for mergers. It regulates the circumstances of the merger. If a new company is founded, the merger agreement must state the business name and seat of the new company. The articles of association or partnership agreement of the company being founded must be attached to the merger agreement.

Agreements must be notarized. They take effect only after all the shareholders or partners of the relevant companies have given their approval. Otherwise the agreement has no legal effect.

Agreements must be audited when stipulated by law, unless all partners or shareholders of the merging company agree that an auditor need not audit the agreement, or if the acquiring company holds all shares of the company being acquired. However, audits are obligatory for mergers involving public limited companies. In the case of private limited companies and commercial associations, an audit must be undertaken upon the request of a shareholder or member of a merging company. The Commercial Code does not provide for the obligatory audit of the merger agreement for general partnerships or limited partnerships.

The management board or representative partners must also prepare a written report in which the merger is explained and justified to partners and shareholders. As with auditing, a report is only necessary if the net turnover of the merging companies exceeds Ekr100 million per financial year, or the merging companies account for more than 40% of the market.

All the partners or shareholders of merging companies must approve the merger by resolution. In the case of general and limited partnerships, a merger resolution is adopted if all the partners are in favour. However, a partnership agreement may prescribe that a merger resolution is adopted if more than two-thirds of the partners are in favour.

In the case of private limited companies, public limited companies and commercial associations, the majority requirement is two-thirds, although articles of association may prescribe a higher majority. If the adoption of the merger resolution conflicts with the law or the articles of association, a court may declare it invalid.

Approval of the merger agreement by resolution of the acquiring private limited company is not required if at least nine-tenths of the share capital of the private or public limited company being acquired is held by the acquiring private limited company.

If the acquiring company is not a general or limited partnership, generally it must increase its share capital in order for the merger to go ahead, so that the shareholders of the acquired company have the opportunity to buy shares of the acquiring company. Upon an increase of the capital, the assets transferred by the acquired company must be evaluated according to the procedure prescribed for valuation of a non-monetary contribution.

All creditors must be informed of the merger resolution. In addition, the relevant notice must be published twice in an official publication, Ametlikud Teadaanded. Creditors whose claims are not sufficiently guaranteed may demand security or satisfaction of their claims.

After at least three months have passed since publication of the second merger notice, a petition for entry of the merger in the commercial register may be submitted.

Upon the merger of companies of different classes, a partner or shareholder of the company being acquired who opposes the merger resolution may demand that the acquiring company exchange his or her shares for monetary compensation. This matter must be raised within two months of entry of the merger in the commercial register. The monetary compensation shall be equal to the sum of money which the partner or shareholder would have received from the distribution of remaining assets upon liquidation of the company when the merger resolution was made.

For further information on this topic please contact Risto Vahimets at Law Office Tark & Co by telephone (+372 6 110 900) or by fax (+372 6 110 911) or by e-mail ([email protected]).