Shareholders of an Estonian company can distribute the shares online now!
The e-Residency Program of Estonia empowers global entrepreneurs to open and manage a company online. Following the spirit of the e-Residency Program, Estonia has been working hard to eliminate restrictions and modernize all administrative paperwork to enable a fully remote access to all services. Most of the things you need to do to manage your company can be done online. Estonia has also made a great effort to make a friendly legislation for remote banking, allowing you to pay the share capital of your company using any European bank, including fintech solutions.
However, some very specific legal procedures still required a physical visit to Estonia. One of them was changing the distribution of the shares of your company. We are happy to announce that, from the 1st of August, 2020, this procedure can be done online in some situations.
What are the shares of the company
The shares of the company contain the ownership of the company. The shareholders, the holders of the shares, are the owners of the company. Owning the shares of a company is what grants them control over the company.
This is different from the management board, or the directors of the company. The directors take the daily decisions of the company, but if they are just board members, and not shareholders, they don’t control or own the company. The shareholders can fire them and set a new management board anytime.
Of course, you can be a shareholder AND board member of your company at the same time. That’s the most usual situation. If you are the only member of the company, you are the only shareholder (owning 100% of the shares of the company) and the only member of the board (taking all the decisions of the company).
What does it mean to change the distribution of shares?
Imagine that you open a company in Estonia. Things go well and the business grows a lot. After one year, one of your friends offers to buy 20% of the company for an important sum of money. You accept, so you will keep 80% of the company, and your friend will now own another 20%.
This is called a change in the distribution of shares. From 100% of the shares owned by you to a 80/20 distribution.
Previously, that would require you and your friend to visit a notary in Estonia. From the 1st of August, an amendment to the Commercial Code will enter into force, which will enable private limited companies to transfer shares more easily, under certain conditions.
Who is this interesting for?
This is especially interesting for global startups or new businesses that are looking for investment. In fact, the main goal of this new legislation was to encourage investment in Estonian companies, especially foreign investment.
Thus, if you are a startup, investors can now enter the company, buy shares, and exit, completely online. That’s great news, and will prevent the tedious process of traveling to Estonia to buy or redistribute the shares that was required previously for investors or venture capital firms.
What are the conditions?
The legislation change gives shareholders great flexibility to redistribute the share capital easier and faster, and thus creates better opportunities to invest in Estonian companies. The minimum formal requirement provided by law is a written form specifying the share distribution, alongside these conditions:
In order to make a corresponding amendment to the articles of association, the share capital of a private limited company must be at least 10,000 euros and fully paid.
A notation shall also be entered on the registry card of the private limited company to indicate that the company removes the requirement of notarized approval of share disposal, sale or redistribution of shares. This indication helps to better safeguard the interests of the parties in the transaction, and this information may be important to potential acquirers before the transaction is made and influence their decision.
Such an amendment to the articles of association of an existing private limited company requires the consent of all shareholders. Therefore, the change cannot be made by a majority decision, but must be the choice of all shareholders.
So in summary:
- The company must have declared a share capital of 10,000€ and they should have been paid.
- The company must alter the entry in the registry of the company to indicate the fact that shares can be redistributed online.
Other aspects to consider
Allowing a fully online redistribution of shares also increases the responsibility of the shareholders themselves and the management board. The Management Board will have the obligation to notify the Commercial Register immediately if there are changes in the shareholders’ distribution not performed through a notary. In addition, the shareholders are obliged to immediately notify the management board of any changes in the shareholders’ data of these changes, so the management board can notify the Commercial Registry.
The smallest nominal value of a share has also changed. What’s that? The minimum fragmentation that a share can be subject to. Previously, shares where divided up to one euro. That meant that if you had a share capital of 2500 euros, those were generally 2500 shares of one euro. You could not own 1250,50 € in shares, it was either 1250 or 1251 euros (50% or 50,04% of shares respectively).
With the new legislation, the minimum denomination of share is one cent of an euro. So now if you have 2500 euros in share capital, you may have 250,000 shares of 0,01€ of value each. The lower nominal value of a share is very convenient for potential acquirers, because the company can issue an exact share percentage that does not have to be rounded up or down to the nearest whole number.
Estonia is continuously improving their business system to allow complete location independence and 100% online management of your company. The latest change in legislation, that entered into force the first of August of 2020, allows shareholders to redistribute their shares online (without the need of visiting a notary), if certain conditions are fulfilled.