LMHB contributes to Chambers Global

Chambers Global 2010 edition has been published and the experts of our office, senior partner Sten Luiga and senior associate Kristel Raidla compiled the country overview for Estonian jurisdiciton.

Please read the article below and see our firm’s rankings at Chambers and Partners online.

Recovering from recession
The general feeling in Estonia is that the worst of the economic crisis is over and the country should move on with valuable experience gained from overspending and overly venturesome business projects. The first half of 2009 was gloomy and it was difficult to see any realistic signs of recovery, but the latest figures seem to indicate that the recession has slowed down. Decrease in GDP has decelerated, investors have returned to the capital markets and M&A activity has overcome a complete standstill.

The business community appears to be more optimistic than a few months ago, but still careful as recovery may be slow and there may be unexpected setbacks. While exports are believed to lead the way towards stabilisation as the world’s economy recovers, direct foreign investments are needed for facilitating new growth. The main goal is to meet the Maastricht criteria and adopt the euro in 2011. While joining the eurozone in a year may be too optimistic, it is definitely one of the most important tools for restoring confidence in the Estonian economy and investment environment.

Developments in legal market
The steep economic growth of recent years contributed to the rapid expansion and success of Estonian law firms both in terms of head count and financial results. The months and years to come are likely to bring about the reorganisation and reordering of the legal market.

The highly competitive Estonian legal market has become even more so due to turbulent times in economy. Large transaction-oriented law firms are facing overcapacity and aggressive bidding for securing new assignments. While fierce competition may be stressful for lawyers, it is an opportunity for clients to benefit from price competition.

Besides dealing with competition, lawyers have had to adjust the methodology of their work in order to cope with limited financial resources allocated to advisers and tight time schedules driven by market needs. A more efficient approach to provision of legal services has benefited clients and the legal market in general.

Trends in M&A activity
In terms of M&A activity, the first half of 2009 was rather quiet. Since then, clients have shown more interest in potential deals but only a handful of these have reached closing, despite many businesses being for sale, mainly due to irreconcilable seller and purchaser price expectations. Regrettably, the once booming pan-Baltic M&A market is now almost non-existent and there are no trends indicating this situation will change in the near future. Surprisingly, there have been very few distressed sale processes, giving observers reason to believe that such transactions are still to come.

At the same time recent initiatives originating from Nordic countries may soon result in actual deals. The likelihood of significant strategic acquisitions by Finnish and Swedish companies increases in line with the willingness of Nordic banks to secure financing for such transactions. The combination of Nordic interest and the fact that Estonia is in better economic shape than its Baltic neighbours may set the scene for a more thorough integration of Estonian and Nordic economies and legal markets.

The Estonian government has set joining the eurozone as its primary objective for 2010. Until then, speculation will continue over devaluation of the Estonian kroon, causing insecurity regarding prices of potential acquisition targets and their ability to generate profit.

It is obvious that the value attributed by Scandinavian investors and local entrepreneurs to businesses on sale varies to a considerable extent, mainly due to the international media discussing devaluation of national currencies and the severe economic situation of the Baltic States in general. Such insecurity can only be brought to an end through devaluation of the Estonian kroon or adoption of the euro based on the current exchange rate.

Until then we expect M&A activity to concentrate on share swap-type transactions not involving substantial amounts of cash. The decreasing purchasing power of consumers and the corresponding shrinkage of revenues entails the need to cut costs, which in turn may render concentration in certain sectors unavoidable.

Developments in legislation and case law
Against the backdrop of turmoil in the financial markets and economy, Estonia has continued its strenuous moves towards creating an investor-friendly environment and liberal business climate. Recent changes to the Commercial Code introduced new possibilities for electronic voting and real-time transmission of meetings through the Internet. Starting from 2010, annual accounts of all companies should be filed through electronic channels.

Another noteworthy development is the entry into force of the Employment Contracts Act, which has contributed to the modernisation of employment relations, one of the last areas confined by stagnant norms that got in the way of a modern business environment. The new law brought relief to companies facing economic hardship by giving more flexibility in rearranging employment relations and enabling them to overcome financial difficulties through temporary reduction of wages, shorter deadlines for giving termination notices and reduction of redundancy compensation.

Estonia’s tax regime has been viewed as one of the most attractive in the EU, mainly due to the abolishment of traditional corporate income tax – which means that income is not taxable as long as it is reinvested and profit is only taxable upon distribution. However, during recent years the attractiveness of our tax regime was threatened by unpredictable interventions by the tax authority. In 2009 the Supreme Court decisively clipped the wings of the authority in several landmark disputes. It was made clear that a taxpayer is free to structure transactions in a tax-efficient manner without being condemned for tax evasion and paying additional taxes for perfectly legitimate tax planning.