Taking counsel: On the draft Estonian Development Fund Act

  • 2006-07-12
  • by Inga Murula
The international competitiveness of states, the result of which is economic growth, is immediately interdependent on the proportion of technology-based undertakings and sectors in the broader economic structure. A knowledge-based economy is characterized by a dominant number of knowledge-oriented jobs and an accelerated growth in welfare. This is the predominant reason behind states' efforts in recent times to shift their economies to a knowledge-based model.

A knowledge-based economy needs wise money 's capital together with knowledge. Money amplifies the knowledge, and knowledge secures judicious investments. The key issue is to bind investment decisions with international trends and innovative ideas. In this sense, Estonia doesn't need just a state risk capital fund but a broad-based national development fund.

The governing coalition's task is to allocate necessary means in order to support Estonia's transition to a knowledge-based economy. Currently the Parliament of Estonia is reviewing a draft Estonian Development Fund Act. The aim of this act is to stimulate and support changes in the Estonian economic field. These changes also foster the modernization of the economy, export growth and creation of new highly qualified employees. The development fund's objective is to support innovative design solutions and raise society's entrepreneurial spirit. The fund shall also monitor key issues of Estonian economic development, the aim of which is to improve the quality of strategic decisions that are made on the state level.

The development fund will invest in small and middle size enterprises registered in Estonia that use modern technology or develop new products and have great growth and export potential. The companies should also have perspective to obtain a considerable position in the international market but are incapable of satisfying equity needs through other economic instruments.

Furthermore, the development fund will be the owner of its own property, and the State Assets Act and Participation in Legal Persons in Private Law by the State Act won't be applicable as regards the right to possess, use and dispose of property.
An explanatory memorandum of the draft Estonian Development Act outlines that investments are mainly made into the fixed capital of enterprises being founded, thereby acquiring a participation interest in the undertakings. The Development Fund can also invest into operative enterprise by acquiring shares through increase of share capital.

As an investor, the Development Fund shall obtain 10 's 49 percent of the enterprise share capital. The fund has a right to invest in projects only together with another private partner (by inclusion of private capital) so that the privatev legal person would have a right to vote and take decisions.

The Development Fund's participation in a company will not exceed a five-year term. After that period, the fund shall dispose of the interest if otherwise decided by Development Fund.
The fund will have a representative on the supervisory board of the enterprise, who shall be designated by the Development Fund's management board. The company's decisions regarding the election and removal of management board members, and any transactions that exceed day-to-day business activity need acceptance of the fund's representative. This ensures that the investments made into a funded enterprise will be used for its purpose.

It is forbidden for the Development Fund to invest into enterprises whose main business is alcohol, tobacco, weapons, gambling or production of environmentally hazardous products or other business that is not in accordance with law or general moral standards.

It can be assumed that a large amount of private capital contribution will come from foreign investors, and these investors might be interested in acquiring additional shares when the fund is disposing of its holdings after five years. It has been predicted that in five years there will be about 50 new successful undertakings as a result of Development Fund activity, which together account for 450 jobs.
The estimated time to pass the Estonian Development Fund Act is in December 2006.

Inga Murula is a lawyer at Teder, Glikman & Partnerid, a leading Estonian law firm and a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms including Kronbergs & Cukste in Latvia and Jurevicius, Balciunas & Bartkus in Lithuania.