Securities Market Act Regulates Squeeze-out of Minority Shareholders

The Securities Market Act takes effect on January 1 2002 and supplements the Commercial Code with Section 29, which concerns the takeover of shares for monetary compensation.(1) Section 29 applies to public limited companies whose shares are registered with the Estonian Central Register for Securities and enables majority shareholders to buy out minority shareholders.

Application

When a majority shareholder (ie, an individual whose shares represent at least 90% of a public limited company's share capital) applies to buy out minority shareholders, the general shareholders meeting may give its consent in return for fair monetary compensation.

The company's treasury shares are not taken into account in determining the amount of share capital represented by the majority shareholder's shares. However, its parent or affiliated company's shares are included, if the parent or affiliated company agrees to this.

The application for takeover must be submitted to the company's management board with both takeover and auditor's reports. The management board calls the general shareholders meeting to decide the issue. An application cannot be withdrawn once it has been submitted, nor can its terms and conditions be amended to the disadvantage of the minority shareholders.

The amount of compensation payable to minority shareholders can be determined in two ways. The majority shareholder can determine the amount of compensation payable, in which case it is determined on the basis of the value of the relevant shares 10 days before the notice of the general shareholders meeting was sent. Alternatively, if the individual applying for the shares became the majority shareholder within the six months preceding the general shareholders meeting as a result of a takeover bid made under the Securities Market Act, the compensation payable must at least equal the purchase price of the takeover bid, provided that the bid was accepted by those shareholders who hold at least 90% of votes represented by shares.

General Shareholders Meeting

In addition to the data provided for in Subsection 294(4) of the Commercial Code, the notice calling the general shareholders meeting must declare:

• the name, address and personal identification or registry code of the majority shareholder;

• the proposed amount of compensation payable to minority shareholders per share; and

• the place at which the relevant documentation is available for perusal.

The takeover report must explain the circumstances of the takeover and the basis used for determining the amount of compensation payable to the minority shareholders. If an individual became the majority shareholder within the six months preceding the general shareholders meeting and the amount of compensation was determined accordingly, the report need not be audited.

The auditor is liable for damage wrongfully caused by him or her in relation to the auditing of the takeover report.

At least one month before the general shareholders meeting, the management board must make the following documentation available to shareholders for examination at the seat of the public limited company:

• the draft resolution of the general meeting;

• the annual and management reports of the public limited company for the previous three years;

• the takeover report; and

• the auditor's report.

Resolution and Contestation

The resolution of the general shareholders meeting is adopted if at least 95% of the votes represented by shares are in favour. The minutes of the meeting must be notarized.

The courts may invalidate the takeover resolution if it conflicts with the law, provided a shareholder's petition to this effect is filed within one month of adoption of the resolution. A takeover resolution cannot be invalidated merely because the compensation payable to minority shareholders is thought to be insufficient.

The majority shareholder must pay interest on the amount of compensation from the day of adoption of the takeover resolution, at a rate established by the minister of finance.

Transfer of Shares and Delivery of Takeover Resolution

Within one month of adoption of the takeover resolution by the general shareholders meeting, the management board of the public limited company must submit an application to the registrar of the Estonian Central Register for Securities for the transfer of the minority shareholders' shares to the majority shareholder. A notarized transcript of the meeting's resolution must be submitted with the application. The registrar arranges the transfer of shares to the majority shareholder's account. The management board must submit a notice to the registrar of the commercial register immediately after the shares have been transferred(2) and the following documents must be submitted with the notice:

• a notarized transcript of the resolution of the general meeting;

• the takeover report;

• the auditor's report; and

• the notice of the registrar of the Estonian Central Register for Securities of the transfer of shares.

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

Endnotes

(1) Section 506(2) of the Commercial Code.

(2) If all the shares in a public limited company belong to one shareholder or, in addition to the single shareholder, the shares of the public limited company are owned only by the public limited company itself, the management board must immediately submit a written notice to the registrar of the commercial register providing the name, address and personal identification code or registry code of the single shareholder. The members of the management board shall be jointly liable for damage caused by violation of the notification requirement.