Legal framework of takeovers in the Baltics
The following is a general intro to takeover regulations in the Baltics, as well as a short overview of a few significant developments in Estonia.
According to Estonian law, on application of a shareholder whose shares represent at least nine-tenths of the share capital of a public limited company (majority shareholder), the general meeting of shareholders may decide in favor of the shares belonging to the remaining shareholders of the public limited company (minority shareholders) being taken over by the majority shareholder in return for fair monetary compensation.
This so-called squeeze-out regulation, effective since 2002, was introduced to Estonian law based on the EU Directive on Takeover Bids and similar regulations in many other European countries. The squeeze-out regulation in Estonia applies both to listed and non-listed companies.
Latvian and Lithuanian legislators have also adopted squeeze-out regulations; however, contrary to Estonia, these apply to listed companies only. Accordingly, a shareholder of a listed public limited company, having acquired the shares constituting at least 95 percent of all votes (in Lithuania) or shares (in Latvia) may apply for the compulsory takeover of minority shares. In Lithuania, this regulation entered into force only in the beginning of 2005 and in Latvia in the beginning of 2004.
To speak about major developments in Estonia with respect to takeovers, the National Court of Estonia has recently made several decisions that clarify the partly uncertain and much-disputed squeeze-out regulation. In the ruling of Dec. 20, 2004 against AS Sampo Pank, the National Court concluded that the takeover resolution cannot be declared invalid on the basis that the audit report is deficient. In the ruling dated Dec. 21, 2004 against AS NG Investeeringud, the National Court provided long-awaited guidance on how to determine the value and amount of compensation for the shares taken over.
Accordingly, the National Court of Estonia agrees with local and international theories, as well as practice of other countries, that minority shareholders must receive full economic compensation for the shares taken over, and that the amount of compensation cannot be less than the market value of the shares.
In determining the amount of compensation, the future prospects of the company must be taken into account in addition to evaluating the shares based on their book, liquidation and other relevant values. The National Court of Estonia is of the opinion that in determining the fair value of the shares based on the future prospects of the company, the DCF (discounted cash flow) method or its modifications, could be used.
In the same ruling the National Court of Estonia also ruled that the majority shareholder is under obligation to explain and justify the amount as well as the fairness of the compensation, and the auditor is under obligation to check this.
To summarise the above, all of the Baltic states have adopted laws allowing squeeze-out of minority shareholders, but only Estonia has given this right to majority shareholders of nonlisted public limited companies. This facilitates the creation of more efficient business entities and decreased operating costs (e.g., by way of skipping calling and holding notarised general meetings etc.). However, when executing takeovers in Estonia, majority shareholders should pay close attention to the recent case law developments in Estonian squeeze-out regulation outlined above.
