Senior associate Maria Peterson's field of expertise is competition law. During the past years, she has practiced European Union competition law in Brussels and American antitrust law in New York. Maria is also experienced in representing our clients in dispute resolutions and public procurement proceedings.

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Under the new rules, .ee domains may be registered by any local or foreign private and legal entity, while one registrant may register any number of domains.

The principal change in the new regulation stipulates maintenance of the domain, accompanied by a certain annual fee and the validity of registration for a yearly period. Registration of domain names will be organized as a two-tier system – the Estonian Internet Foundation will conclude contracts with registrars (internet service providers) who, in turn, will conclude service contracts with registrants (entities applying for and using the domain).

Hence, in order to renew the validity of current domains during the transition period or to apply for a new domain, registrants must choose, and conclude a service contract with, a registrar approved by the Estonian Internet Foundation. A list of approved service providers uploaded to the site of the Foundation is being constantly updated.

A six-month transitional period during which current domains must be reregistered starts on 5 July 2010. Upon expiry of the transitional period, all domains that have not been reregistered will be free and available for anybody to register.

Stating Share Capital in euros

From 1 July 2010 until the day of changeover, share capital on formation of private and public limited companies may be expressed either in euros or Estonian kroons. However, as of the day of changeover, the share capital of private and public limited companies must be expressed exclusively in euros (for example, in the Articles of Association, the list of shareholders, resolutions of the general meeting). The share capital of a private limited company must be at least EUR 2,500 and the nominal value of a share one euro or a multiple of one euro. The share capital of a public limited company must be at least EUR 25,000 and the nominal value of a share 10 euro cents or a multiple of 10 euro cents.

Businesses registered before the changeover may also express their share capital in kroons after the changeover. In these cases, the share capital must be in accordance with current requirements – at least 40,000 kroons in private limited companies and 400,000 kroons in public limited companies. If share capital is expressed in kroons, the smallest nominal value of a share in a private limited company is 100 kroons and the smallest nominal value of a share in a public limited company 10 kroons.

Amending the Articles

Although the Articles of Association need not be amended merely to replace kroons with euros, the law still foresees some measures so that companies will recalculate their share capital in euros within a reasonable period. That is, if a private or public limited company decides to amend the Articles of Association or to increase or decrease share capital after the expiry of one year from the changeover, the share capital must also be converted into euros at the same time as other amendments are made. This means that expressing share capital in euros may be postponed until other amendments are required or when the share capital is increased or decreased.

Nevertheless, it would be practical to make such adjustments sooner rather than later as the changeover means that accounting and annual reports must express various indicators in euros.

Recalculating the share capital in euros generally also involves the need to increase or decrease share capital, as simply multiplying the nominal values of shares by the official changeover rate will produce results which do not appear as whole numbers and consequently fail to comply with requirements as to the par value of shares.

No par Value Shares

As of 1 July 2010 public limited companies will have the opportunity to issue no par value shares. The option to use shares without a nominal value has been introduced to the Commercial Code primarily with the objective of simplifying recalculation of capital in euros. Unlike in the case of par value shares, no par value shares enable recalculation of the share capital in euros without increasing or decreasing the share capital and allow exactly the same proportions of shareholdings to be maintained as earlier.

Further Amendments ahead

The Parliament is already working on another draft act to amend the Commercial Code, which will bring several important changes for private limited companies. The draft act will:
- foresee reduction of certain formal requirements for documentation under company law and the auditing duty;
- simplify share transfer provisions;
- abolish the fixed-term contractual relationship requirement for members of the management board; and
- provide an option to establish private limited companies without considerable capital investment unless their respective field of activity prescribes otherwise.

It would probably be wise to adjust the Articles of Association of many companies now.

The proposed date of entry into force of the follow-up amendments is 1 January 2011.

Should you have further questions regarding the EURO and corresponding Commercial Code amendments, please contact partner Karina Paatsi for further details.

An entrepreneur makes an investment and acquires a business. The company seems to be a smoothly operating and successful undertaking and all the seller’s assurances seem to support that impression. A while after the acquisition, after a closer look at the company’s day-to-day activities, the buyer finds to his discontent that the company has huge tax arrears, a major supplier cancelled its contract months ago, and on top of all that the company may be liable for huge environmental pollution. It’s obvious that the company does not meet the expectations based on the statements and assurances of the seller. But the seller has no means to compensate for the damage inflicted.

Why are the seller’s statements and assurances important?

In transactions where a shareholding or a company is acquired as an asset, it is customary for the seller to enter into the contract by making material representations regarding the acquired company’s properties and qualities. Usually these assurances concern the legal status of the company, its assets, obligations, substantial contracts, fulfilment of tax liabilities, existing permits and licences, and other relevant aspects. It is also customary to agree that the seller is liable for the validity of the assurances during some specific period (usually up to two years after the transaction) and, should any of them be invalid, the seller is to compensate for damage.

Unfortunately, it may be the case that the seller has no means to compensate, so that earlier assurances and the stipulation of compensation for damage have no actual substance. In that case the buyer could find one of the following measures helpful:

Representation guarantees

In simpler transactions and those involving less scope and value, it is customary to agree upon payment of the purchase price by instalments. In that case the buyer pays the purchase price over an agreed period after the transaction on the basis that the assurances by the seller are valid. The positive side to the instalment system is its simplicity and economy as the parties need no further contracts or extra expenditure. The instalment plan is advantageous because the risk of receiving the purchase price is taken solely by the seller. Should the buyer claim invalidity of assurances, require compensation, and leave some instalments unpaid, the seller has to take measures and invest in receiving the money (file an application with a court or arbitration tribunal). However, in the case of bigger transactions the seller is usually not willing to take that risk.

Using an escrow account is customary with larger and more complicated transactions. The parties agree to the buyer transferring part of the purchase price for some period to an account specifically opened for that purpose and, if the seller has misrepresented the facts, the damage incurred will be recovered from the money on the escrow account. The disadvantage of using an escrow account is that the parties must pay the bank for opening and administering the account and conclude an agreement with the bank. Additionally, the money on the account will be “unusable” during the entire agreed period, which is usually the period of the seller’s liability. At the same time, this scheme should not be feared as the bank’s fee is not very sizeable compared to the transaction value (usually about twenty thousand kroons) and the contract with the bank is quite simple and easily understandable. This scheme minimises the credit risk associated with seller insolvency and the seller will receive the money on expiry of the term (unless the buyer has filed an application with a court or arbitration tribunal) without interference from the buyer.

Recently, a guarantee or surety by the seller’s holding company, usually by the direct or indirect parent company, has come into use. This surety is most usual when the seller becomes an “empty shell“after the sale, with no material assets or profitable business. The advantages of the guarantee and surety provided by a company belonging to the group are simplicity and affordability – they require few additional procedures or expenses. Usually the guarantee is a simple one-page document. The contract of surety is usually longer but also uncomplicated. Generally, the guarantee is realized on the basis of a claim, which means that disputes over actual breach and damage may be resolved after the guarantee sum has been paid to the seller. The case of sureties is more complicated as on top of the claim one needs to prove breach of obligations. However, the buyer should be aware in the case of both guarantee and surety that, if the seller is in financial difficulties, the company providing the guarantee or surety may not be in better shape, which means the credit risk may not be managed.

A relatively commonly used means is the bank guarantee. The advantages of a bank guarantee for the buyer are simplicity of establishment and realization, and greater security as compared to a guarantee by a company in the same group as the seller. In real life, a “demand guarantee” is realized by claiming in accordance with the formalities described in the guarantee without the need to prove breach before payout. On the other hand, the downside for the seller is that the bank in turn often requires a guarantee from the person whose obligations are guaranteed. There have been cases where the bank has demanded transfer of the entire guarantee sum to the bank account. This means the bank guarantee may be too expensive and uncomfortable for the seller.

In the Baltic States, including Estonia, misrepresentation insurance is not yet widely known, although it has been used in the USA, Great Britain, and elsewhere for some time already. Misrepresentation insurance covers damage occurring due to untrue material representations in the sale contract of a company. An insurance agreement may be concluded by the seller or the buyer – the buyer’s insurance will cover damage suffered by the buyer on breach of the seller’s assurances, whereas the seller’s insurance will cover losses incurred on the buyer’s claiming misrepresentation. The advantage of the insurance is that the insurer assumes the risk due to misrepresentation, so that, if any representations are false and the buyer suffers damage, then damages are covered by the insurance and the seller is free from risk of disputes or the need to pay compensation for damage. The buyer receives compensation from the insurer and there are no risks concerning seller solvency or lengthy, expensive court proceedings. The disadvantages of the insurance are its expense (the usual fee is 1-3% of the cover) and more complicated structure as compared to the other guarantees (the insurance contract is quite complex and custom-made for each transaction). Moreover, one should not forget that on the happening of the insured event the insurer may contest the claim so that receiving the sum insured may not be problem-free.

In this connection, it is clear that the individual type of misrepresentation guarantee must be agreed and discussed ahead of the transaction. Risks to be managed are the highest where the buyer has not done thorough pre-purchase research (due diligence) regarding the company to be acquired or conducted an audit. Often, due to time limits, buyers may be justified in opting to not conduct an audit or conducting it in limited scope so that the guarantees required are higher. Additionally, any hints of seller solvency issues should make the buyer suspicious.

Triin Ploomipuu acts as legal counsel in corporate, contract, and commercial law matters. She also assists clients in mergers, divisions, takeovers, and issues related to shareholder agreements.

Professionals from the Luiga Mody Hääl Borenius Transactions and Competition practice have been assigned as legal counsel to the project.

The first stage of the project is primarily to determine whether launching a common Baltic ATM network makes sense and how clients and banks would mutually benefit as a result. This involves evaluating the legal framework, business and technical implementability, and economic efficiency.

Should the first stage analysis result in positive feedback, the banks will assign an operator to provide ATM services and outsource the service they have commenced so far. However, the likelihood of negative effects on banks and clients of a common ATM network would result in the project not being taken further. The preliminary outcome of initial research should be announced by the end of October 2010.

Currently, the four largest banks in the Baltics are involved in the project. If a common Baltic ATM network is launched, other banks will also be able to join. The number of banks involved in the common network will not be limited in the future: the more participants the system has, the more cost-effective it will be.

The ITechLaw organisation:

- draws together IT and technology law specialists,
- offers entrepreneurs know-how for starting and expanding technology companies and overcoming challenges in the recent business climate, and
- operates as a tool for exchanging experience about technology capital investment and attracting additional capital.

Equally important are panel discussions run by recognised international experts about capital-raising from VCs and other sources followed by an Elevator Pitch Competition facilitated by Arctic Startup (Finland), Estonian Development Fund and Tallinn Tehnopol. The winner of last year’s competition was a company developing under the fits.me brand robot mannequins for international leading online retail clothing stores. The VC investment by Estonian Development Fund amounted to EEK 10 mio and was assisted by the professionals of Luiga Mody Hääl Borenius.

Borenius Group associates are long-term members of the organisation's Board of Directors, with Luiga Mody Hääl Borenius partner Peeter Kutman and senior associate Ave Piik acting as planning committee members of the conference.

Also, an increasing number of employers are inquiring about their rights to monitor employee use of work phones and computers or to conduct any kind of surveillance of employee communications and activities. Are employers entitled at their own discretion to conduct surveillance of employees and employee communications? Read more....

Our monthly corporate Newsletter covers in addition to legal alerts and analyses of local legislative amendments, also the latest news and transactions advised by the firm's professionals. Please read the previous issues here.

CAPIP.EU (Coalition Against Piracy) is a service network covering the EU, Norway, and Switzerland and consisting of 23 law firms. The mission of CAPIP.EU is to allow access to a reliable legal service network through a single law firm and receive information about counterfeit and pirated articles within 29 jurisdictions.

Associate of Luiga Mody Hääl Borenius and the Estonian representative of CAPIP.EU Simo Soolo noted that the member firms and customs gain access to a centralised web service for identifying, following, and destroying counterfeit goods, thereby providing legal support to proprietors of brands, patents, models and copyrights in their fight against counterfeiting and piracy. Quick reactions are the best way to prevent counterfeits from entering the market. Thanks to the CAPIP web service, member firms and right holders can stay up to date on the progress of their own cases.

The cause for establishing CAPIP.EU was driven by the dramatic increase of counterfeit goods over the past years. In 2008, nearly 50,000 shipments were seized by customs in the EU area containing approx 180 million counterfeit and pirated goods the value of which rose to approx 15 billion euros in comparison to 2007, signalling an increase of 125%.

For more information, please contact Simo Soolo, simo.soolo@lmh.ee.

On 8 March 2010 the new Estonian Auditing Act entered into force, introducing amendments not only to the auditing industry, but also to the financial sector, including amendments to the Credit Institutions Act. The recent turbulent events in the global economy have revealed the need for credit and the importance of credit institutions. They have crystallized the fact that credit institutions are infrastructure units. Therefore, pursuant to the new regulations, credit institutions are regarded as public interest entities which can be audited only by sworn auditors.

Pursuant to the new rules, Estonian credit institutions are obliged to set up an internal auditing committee. Furthermore, the heads of internal audit divisions within credit institutions must comply with the rules that are applicable under the new Auditing Act to certified internal auditors. The amendments also provide for situations where a sworn auditor's report is required - for example, when applying for a banking licence or when acquiring a qualifying holding in a credit institution.

However, the new accounting rules leave room for interpretation: one accountant is unlikely to come up with exactly the same figure for a company's profit as another accountant. Therefore, qualified auditing is essential for the health of the financial system - particularly bearing in mind the importance of credit institutions and the recently coined concept of 'too big to fail'.

In the aftermath of the financial crisis, further reforms in financial regulation are expected.