General overview

What legislation governs M&A activity in your jurisdiction?

M&A activity is governed by the Commercial Code. Specific acts regulate certain industry sectors, for example, banking, insurance companies, and investment funds. The main statutory provisions relating to takeover bids to acquire voting rights in public limited companies listed on the Tallinn Stock Exchange are set out in the Securities Market Act.

What impact have recent legislative changes had on the nature and amount of M&A activity?

Extensive amendments to the Commercial Code came into force as of January 2006. New regulation regarding expedited procedures for incorporating new private limited companies in Estonia came into force as of January 2006. This change enables SPVs to be incorporated for M&A transactions within two days. A recently adopted law amending the Investment Funds Act introduces a new kind of contractual investment fund in Estonia: the venture capital fund (VCF). Until recently these funds existed only in the form of private and public limited companies making investments for the benefit of their shareholders.

What have been the most significant M&A transactions in your jurisdiction over the past year?

The most significant transactions in 2006 have been Silja Oy's acquisition by Estonian company Aktsiaselts Tallink Grupp, Kingdom Hotels International's acquisition of Colony Investors VII, LP/Colony HR Holding (Lux) (OÜ Swissotel Estonia), and the acquisition of Raisner by Iberdola. The Olympic Entertainment Group initial public offering and Eesti Ehitus IPO were also noteworthy developments during the past year.

How, and to what extent, is foreign involvement in M&A transactions in your jurisdiction regulated or restricted?

There are no general regulations or restrictions adopted in Estonia regarding foreign involvement in M&A transactions.

Due diligence

What are the principal disclosure requirements in a typical M&A transaction?

Ordinarily a seller is expected to make disclosure of all material facts affecting the value of the business. This depends on the nature of the business in question but, as a general rule, for the Estonian market, clients tend to instruct their legal counsel to obtain disclosure of all transactions and other circumstances worth at least €5,000 ($6,650) or €10,000. The seller is usually requested to disclose circumstances affecting the image of the business or that might result in interruption of business, for example, allegations of non-compliance made by the state authorities.

Regarding companies admitted to trading on the Tallinn Stock Exchange, the Securities Act and decree of the Minister of Finance on the Takeover Rules provide detailed regulation on information to be made available by the offeror. The information with respect to a bid is usually contained in the notice of the takeover bid and in the prospectus.

To what extent do disclosure requirements achieve market transparency?

As a general rule, transparency of the business after the due diligence is no more than satisfactory. Counsel for the buyer is expected to make independent enquires from both public registers and other sources of publicly available information, in particular, checks of the credit history agency and court decisions system.

How significant an issue is prospectus liability in a typical M&A transaction?

Issue of a prospectus is rather an exception and is followed by either due diligence, which findings have generally the same legal standing as the prospectus, or extensive representations and warranties making reference to the prospectus. False disclosure in the course of the due diligence or breach of contract could serve as grounds for a cause of action against the seller.

How have recent M&A transactions and/or legislation dealt with the issue of material adverse change clauses?

Material adverse changes before the closing have the same legal effect as any other material matters of fact subject to disclosure in negotiations. It is however not unusual to apply material adverse changes provisions to the period after the closing, in particular, when the previous management continues managing the business.

What are the key unresolved issues in your jurisdiction?

The main unresolved issues are the legal standing of certain defences by the buyer concerning reasonable disclosure, especially in the course of due diligence, and limitation of liability for small claims. Though these issues involve findings of fact in any given case, case law would be highly helpful.

Takeovers

Are there any specific regulations and/or regulatory bodies governing takeovers in your jurisdiction?

The takeover rules set out in the Securities Market Act apply to the companies listed on the Tallinn Stock Exchange. The main supervisory body of the market is the Financial Supervisory Authority (FSA). The Tallinn Stock Exchange is the only regulated securities market in Estonia. It is part of OMX, which owns and operates exchanges in Copenhagen, Stockholm, Helsinki, Riga, Tallinn and Vilnius.

What are the various methods by which a takeover can be achieved?

Most acquisitions in Estonia are carried out by way of straightforward share acquisition, where the company acquires a majority shareholding in a public company, under which the majority shareholder is required to make a takeover bid for the remaining minority shareholders.

How differently are hostile and voluntary takeover bids treated?

The Tallinn Stock Exchange is still young, so hostile takeovers in Estonia are almost non-existent.

What penalties are imposed for parties who violate takeover regulations (or equivalent)?

Violation of takeover regulation results in a prohibition against using voting rights in the company in question. This also constitutes an offence.

What are the thresholds for disclosing bids and offers?

The threshold for making a takeover offer is possession of directing influence, which is evaluated on a case-by-case basis. The precise number of shares necessary to constitute takeover obligation depends on the allocation of shares among the shareholders, including whether they are passive or proactive and whether some of them have major shareholdings, the number of the places on the board controlled by the shareholder, and other factors.

A shareholder is also under an obligation to disclose acquisitions or disposals of shareholdings of 5%, 10%, 33.3%, 50% and 66.6% of the shares. This disclosure obligation is without prejudice to the takeover obligation discussed above.

Competition/antitrust

What have been the major recent developments in competition policy and legislation as they relate to M&A in your jurisdiction?

Amendments to the Competition Act came into force as of July 1 2006. They abolish the exemption notification system and change the criteria for control of concentrations.

How are the competition/antitrust regulations enforced in your jurisdiction?

The Estonian Competition Board exercises supervision in respect of compliance with the Competition Act and the corresponding regulations, investigates agreements and contracts restricting competition, processes cases of abuse of dominant position by undertakings, examines the competitive situation in different goods markets, makes proposals to improve the competitive situation, and exercises control in respect of concentrations. In case of violation of the Competition Act, the Competition Board is competent to perform administrative sanctions or to invoke misdemeanour or criminal procedures.

How do legislation and regulation approach the issue of abuse of dominant position?

Any operation of an undertaking that damages the market situation in any way is prohibited. Competition law requires that a dominant company must compete fairly (that is, it must not use its advantages to injure other companies and consumers). A company in a dominant position has the right to compete with smaller undertakings and new participants in the market, but the competition must be based on an increase of efficiency and more rationalized operation, not on abuse of market power. The first abuse of dominant position is punished as a misdemeanour. Repeated offences are subject to criminal punishment.

To what extent are parties to an M&A transaction subject to prior notification requirements?

A concentration in Estonia is subject to control if: during the previous financial year, the aggregate turnover in Estonia of the parties to the concentration exceeded Ekr100 million ($8.5 million); and turnover in Estonia of each of at least two parties to the concentration exceeded Ekr30 million.

A concentration that is subject to notification under the merger control rules must be notified to the Competition Board before the concentration can be enforced and after entry into the merger agreement, acquisition of control, acquisition of joint control or announcement of the public bid for securities. Credit institutions, securities brokers and insurers must give notification of a concentration after obtaining permission from the state supervisory authority in the corresponding field of activity.

Author biography

Mariana Hagström Teder Glikman & Partnerid Mariana Hagström is an attorney-at-law who focuses on M&A and corporate matters, real estate and competition law. Hagström is a recommended individual for competition law by PLC Which Lawyer? She graduated from the University of Tartu (Estonia) in 1998 and gained her LLM from the University of Stockholm in 2001. She speaks English and Estonian. She also speaks Russian, Finnish and Swedish.