Senior associate Heili Haabu (heili.haabu@borenius.ee) writes in BalticBusinessNews blog that on starting a business, the founders face the question of which legal form to use and what is the best way to conduct company business. In light of the constantly changing Commercial Code, the answers to those questions might not be the same today as they were last year or a couple of years ago.
Private limited company or public limited company?
When choosing the legal form most suitable for business, the founders’ basic choice is between a private limited company and a public limited company. The Commercial Code regulating the management of these two types of company is becoming ever more flexible, so that today we cannot say that, in the case of a larger circle of founders and a larger investment, the form of a public limited company is absolutely justified, as is commonly believed. The draft Act on amending the Commercial Code, entering into force on January 01, 2011, will further enable founders to design a private or public limited company to meet their needs.
Several traditional features of a private or public limited company can be essentially excluded or significantly reduced by regulation through the Articles of Association. For example, differences concerning management structure can be significantly reduced. The Articles of Association may require election of a supervisory board for a private limited company, even though the Commercial Code only requires this for a public limited company but generally not for a private limited company. In the case of a public limited company, the Articles of Association may significantly limit the competence of the supervisory board so that almost all business-related resolutions are made at the management board level so that the role of the supervisory board is relatively small. But if the founders wish to have their say in as many issues as possible on management of a company, the form of a private limited company is still most suitable. The competence of the shareholders of a private limited company can be expanded to the desired extent by the Articles of Association, while in the case of a public limited company the shareholders can mainly decide only matters provided by law but other matters only if requested by the management board or supervisory board.
Differences between public and private limited companies are also decreasing in terms of aspects related to transfer of shareholdings. In the case of a public limited company, the Articles of Association may allow shareholders a right of pre-emption on transfer of shares to third parties, thus moving away from the principle of free transferability of shares. On the other hand, in the case of a private limited company, the Commercial Code amendment allows exclusion of shareholders’ legal right of pre-emption and, in contrast, makes a private limited company open to new shareholders. However, the possibility to establish a “closed private limited company” has not disappeared – the Articles of Association may allow transfer of shares to third parties only on meeting additional conditions (with the consent of the shareholders, supervisory board or management board). In the case of a public limited company, a restriction of this kind cannot be set.
Moreover, the rules for adopting resolutions of shareholders of a private or public limited company have approached each other over the last few years and the Commercial Code allows for flexible solutions in the case of both company forms, such as voting by mail and electronic means, without participating in a meeting. However, adoption of resolutions by a public limited company is subject to somewhat stricter requirements: unlike in the case of a private limited company, this is possible only if all shareholders agree and sign the resolution. In the case of a private limited company, convening a meeting can be avoided through a written procedure (without the requirement for the consent of all shareholders), and where shareholders of a public limited company need to plan a special general meeting more than three weeks in advance, a private limited company can formulate a resolution of shareholders within a few days to meet the prior notification requirement.
New possibilities on formation
The possibility to form a private limited company electronically under the expedited procedure through the internet registration portal may already be familiar to many people. However, the amendments to the Commercial Code will further simplify formation of a private limited company.
According to the Act amending the Commercial Code, formation of a private limited company will also become affordable to those persons who have been blocked so far by the current requirement for upfront payment of share capital. That is, the Act allows a natural person to form a private limited company with share capital of EUR 25,000, without down-payment of capital. In that event, shareholders will be fully personally liable for the obligations of the company to the extent of unpaid contributions. Profit cannot be allocated or other payments made until contributions have actually been made. However, this does not limit payment of remuneration to shareholders or a fee to a member of the management board, for example (provided the resources for this are created during business activities).
The Act also simplifies formation of a private limited company with non-monetary contributions (contributions in kind), significantly reducing the obligation to hire an auditor. While the currently applicable Commercial Code always requires filing of an audit opinion with the Commercial Register when the value of a contribution in kind exceeds EUR 2,500 or the total value of contributions in kind accounts for more than one-half of the share capital, by contrast under the new Act, hiring an auditor is not required if the capital does not exceed EUR 25,000, irrespective of how large a proportion of the capital contribution is made in kind. This significantly reduces the expenses on making a contribution in kind and considerably facilitates making such a capital contribution than is currently the case.
Summary
The constantly changing Commercial Code enables several new, flexible possibilities for the management of public and private limited companies, also for formation of a private limited company. Upon choosing a legal form and making decisions related to formation, it already makes sense to be aware of the amendments to the Commercial Code planned to enter into force on January 01, 2011.
Heili Haabu provides legal counsel in corporate governance issues and manages correspondence with state authorities. In addition, Heili has specialised in drafting various types of commercial contracts and advising clients in transactions and corporate restructuring.
How to establish your own business as of January 2011?
Senior associate Heili Haabu (heili.haabu@borenius.ee) writes in BalticBusinessNews blog that on starting a business, the founders face the question of which legal form to use and what is the best way to conduct company business. In light of the constantly changing Commercial Code, the answers to those questions might not be the same today as they were last year or a couple of years ago.
Private limited company or public limited company?
When choosing the legal form most suitable for business, the founders’ basic choice is between a private limited company and a public limited company. The Commercial Code regulating the management of these two types of company is becoming ever more flexible, so that today we cannot say that, in the case of a larger circle of founders and a larger investment, the form of a public limited company is absolutely justified, as is commonly believed. The draft Act on amending the Commercial Code, entering into force on January 01, 2011, will further enable founders to design a private or public limited company to meet their needs.
Several traditional features of a private or public limited company can be essentially excluded or significantly reduced by regulation through the Articles of Association. For example, differences concerning management structure can be significantly reduced. The Articles of Association may require election of a supervisory board for a private limited company, even though the Commercial Code only requires this for a public limited company but generally not for a private limited company. In the case of a public limited company, the Articles of Association may significantly limit the competence of the supervisory board so that almost all business-related resolutions are made at the management board level so that the role of the supervisory board is relatively small. But if the founders wish to have their say in as many issues as possible on management of a company, the form of a private limited company is still most suitable. The competence of the shareholders of a private limited company can be expanded to the desired extent by the Articles of Association, while in the case of a public limited company the shareholders can mainly decide only matters provided by law but other matters only if requested by the management board or supervisory board.
Differences between public and private limited companies are also decreasing in terms of aspects related to transfer of shareholdings. In the case of a public limited company, the Articles of Association may allow shareholders a right of pre-emption on transfer of shares to third parties, thus moving away from the principle of free transferability of shares. On the other hand, in the case of a private limited company, the Commercial Code amendment allows exclusion of shareholders’ legal right of pre-emption and, in contrast, makes a private limited company open to new shareholders. However, the possibility to establish a “closed private limited company” has not disappeared – the Articles of Association may allow transfer of shares to third parties only on meeting additional conditions (with the consent of the shareholders, supervisory board or management board). In the case of a public limited company, a restriction of this kind cannot be set.
Moreover, the rules for adopting resolutions of shareholders of a private or public limited company have approached each other over the last few years and the Commercial Code allows for flexible solutions in the case of both company forms, such as voting by mail and electronic means, without participating in a meeting. However, adoption of resolutions by a public limited company is subject to somewhat stricter requirements: unlike in the case of a private limited company, this is possible only if all shareholders agree and sign the resolution. In the case of a private limited company, convening a meeting can be avoided through a written procedure (without the requirement for the consent of all shareholders), and where shareholders of a public limited company need to plan a special general meeting more than three weeks in advance, a private limited company can formulate a resolution of shareholders within a few days to meet the prior notification requirement.
New possibilities on formation
The possibility to form a private limited company electronically under the expedited procedure through the internet registration portal may already be familiar to many people. However, the amendments to the Commercial Code will further simplify formation of a private limited company.
According to the Act amending the Commercial Code, formation of a private limited company will also become affordable to those persons who have been blocked so far by the current requirement for upfront payment of share capital. That is, the Act allows a natural person to form a private limited company with share capital of EUR 25,000, without down-payment of capital. In that event, shareholders will be fully personally liable for the obligations of the company to the extent of unpaid contributions. Profit cannot be allocated or other payments made until contributions have actually been made. However, this does not limit payment of remuneration to shareholders or a fee to a member of the management board, for example (provided the resources for this are created during business activities).
The Act also simplifies formation of a private limited company with non-monetary contributions (contributions in kind), significantly reducing the obligation to hire an auditor. While the currently applicable Commercial Code always requires filing of an audit opinion with the Commercial Register when the value of a contribution in kind exceeds EUR 2,500 or the total value of contributions in kind accounts for more than one-half of the share capital, by contrast under the new Act, hiring an auditor is not required if the capital does not exceed EUR 25,000, irrespective of how large a proportion of the capital contribution is made in kind. This significantly reduces the expenses on making a contribution in kind and considerably facilitates making such a capital contribution than is currently the case.
Summary
The constantly changing Commercial Code enables several new, flexible possibilities for the management of public and private limited companies, also for formation of a private limited company. Upon choosing a legal form and making decisions related to formation, it already makes sense to be aware of the amendments to the Commercial Code planned to enter into force on January 01, 2011.
Heili Haabu provides legal counsel in corporate governance issues and manages correspondence with state authorities. In addition, Heili has specialised in drafting various types of commercial contracts and advising clients in transactions and corporate restructuring.