With recession officially overcome in the second quarter of 2010, the economic outlook for Estonia has become slightly more optimistic for the coming years. The strong recovery and growth of Estonia’s trading partners in the Nordic region has helped put the country back on track. Accession to membership of the Eurozone from January 2011, however frail the euro is currently perceived to be, serves as a sign of credibility to sceptics who heralded the imminent devaluation of the kroon only a short while ago. Although domestic demand is expected to remain weak, there are positive signs, such as the strong performance of the exports sector, of a gradual increase in interest in doing business in Estonia. Estonia’s OECD membership, officially gained in December 2010, is likely to be seen as signifying the transition from a developing to a developed economy.
For businesses, leaner times have meant significant steps towards restructuring and consolidation. The trend has been to maximise efficiency, as well as to cut back on the all-too-common uneconomical practices of the recent times of plenty.
Aside from steps towards greater efficiency, it has been generally recognised that along with greater integration with the Scandinavian and German economies, the Estonian economy needs to move further away from a model based on cheap labour towards a knowledge-based economy. This trend is already clearly visible, with a number of technology companies showing good growth both inside and outside of Estonia and many former start-ups entering a promising mature phase. The country’s (albeit warily) improved and more pragmatic ties with Russia have brought some fresh dynamism to the traditional transit sector, although political concerns remain.
Developments in legal market
The legal market has showed evidence of following the fluctuations of the larger economy, albeit with a slight delay. With the recovery entering its fourth quarter, the legal market has only recently started picking up, especially from the third quarter of 2010.
As well as measures to increase efficiency, businesses have taken steps to cut down on their legal expenses. At the same time, however, the ongoing consolidation and restructuring operations that businesses are unable to carry out without professional legal assistance have provided enough work for the larger legal players to weather the storm.
Law firms have reflected the trend towards greater efficiency in meeting clients’ heightened demands. While the legal market of only a few years ago may have been something of a privileged club with little competition, the tables have turned, and price battles are becoming part of everyday business. Estonia’s legal market is following the worldwide trend away from traditional hourly rate-charging towards new pricing models, with fixed and capped fees, binding estimates and success fees becoming the norm.
While it is the result of a longer development, one noteworthy attribute of today’s market is the dominance of legal firms covering the Baltic and Nordic areas. This model has clearly survived, if not gained strength, during the crisis.
Trends in M&A activity
As if finding an excuse for a standstill, until the summer of 2010, the economy, along with the once booming M&A sector, was marked by the anticipation of the euro resolution. The market saw only a handful of major transactions close during this period. The tendency of transaction parties not to reach deals due to irreconcilable price expectations continued, with the total number of transactions qualifying for Competition Board review down to ten in 2010, from 17 in 2009. Despite the fall in large transactions, the spring of 2010 saw the IPO of AS Premia Foods on the NASDAQ OMX Tallinn, the success of which has been acclaimed as a positive sign of the recovery of confidence by the investor community.
The market started to show signs of picking up in early autumn 2010, and this was continuing in the beginning of 2011. This is partly due to a slight but perceptible easing in bank financing policies. The adoption of the euro is another factor contributing to the rise in confidence, as is the fact that Nordic investors seem to have found their way back to Estonia. Yet for the time being, the potential of the M&A market does not seem even close to being fulfilled. Bolder initiatives in the M&A sphere, traditionally supported by investment funds or major bank financing, can be expected to be held back until the Estonian economy’s actual performance in the Eurozone becomes clear. The anticipated increase in the number of strong corporate finance entrepreneurs, currently scarce in the region, will also likely contribute to the recovery of the M&A market in Estonia.
Developments in legislation and case law
Efforts to stimulate business expansion with legal reforms continued during 2010, with numerous changes to the Commercial Code entering into force from 2011, aiming for a yet more investor-friendly environment. The amendments include the right to establish private limited companies without the obligation of making a share capital payment before the company’s registration. Also, the rather rigid regulation on share transfer restrictions in private companies has been replaced by a more flexible approach, making the use of customised share transfer regulations, such as tag along and drag along mechanisms, much simpler. The requirement that at least a half of a company’s board members reside in EEA countries has been abolished. Moreover, the amendments allow for the election of board members without a term, removing the bureaucratic need to periodically update their respective terms. In a beneficial move for foreign investors, the new regulations allow for the holding of shareholder meetings via e-mail.
An anticipated development in the tax environment is that employee tax options will no longer be considered as fringe benefits requiring the payment of income tax upon issuing. This is expected to be of remarkable assistance for early phase start-ups desiring to motivate their employees without incurring immediate expenses. More generally, Estonia’s tax regime is acclaimed for its relative stability and clarity and has more or less remained true to this promise during the crisis, with the exception of the controversial increase of VAT in spring 2010. The absence of corporate income tax (with profit only taxable upon distribution) has continued to generate interest among Nordic entrepreneurs in utilising Estonian tax benefits when planning their activities. This has been marked by Statoil Fuel & Retail ASA’s resolution from fall 2010 to bring its financial hub, through which the group’s operations in the Scandinavian and East European regions are operated, to Tallinn.
The two past years of contracted investment activity saw remarkable changes in both business and legal terms. Increases in efficiency, as well as fears about investing in turbulent times, have helped inflate corporate cash reserves. Coupled with rising interest from foreign investors, access to these free resources is expected to shake the market from its standstill in the coming months and years, although the fervent boom of a few years ago will probably remain history.
Cautious return to growth
With recession officially overcome in the second quarter of 2010, the economic outlook for Estonia has become slightly more optimistic for the coming years. The strong recovery and growth of Estonia’s trading partners in the Nordic region has helped put the country back on track. Accession to membership of the Eurozone from January 2011, however frail the euro is currently perceived to be, serves as a sign of credibility to sceptics who heralded the imminent devaluation of the kroon only a short while ago. Although domestic demand is expected to remain weak, there are positive signs, such as the strong performance of the exports sector, of a gradual increase in interest in doing business in Estonia. Estonia’s OECD membership, officially gained in December 2010, is likely to be seen as signifying the transition from a developing to a developed economy.
For businesses, leaner times have meant significant steps towards restructuring and consolidation. The trend has been to maximise efficiency, as well as to cut back on the all-too-common uneconomical practices of the recent times of plenty.
Aside from steps towards greater efficiency, it has been generally recognised that along with greater integration with the Scandinavian and German economies, the Estonian economy needs to move further away from a model based on cheap labour towards a knowledge-based economy. This trend is already clearly visible, with a number of technology companies showing good growth both inside and outside of Estonia and many former start-ups entering a promising mature phase. The country’s (albeit warily) improved and more pragmatic ties with Russia have brought some fresh dynamism to the traditional transit sector, although political concerns remain.
Developments in legal market
The legal market has showed evidence of following the fluctuations of the larger economy, albeit with a slight delay. With the recovery entering its fourth quarter, the legal market has only recently started picking up, especially from the third quarter of 2010.
As well as measures to increase efficiency, businesses have taken steps to cut down on their legal expenses. At the same time, however, the ongoing consolidation and restructuring operations that businesses are unable to carry out without professional legal assistance have provided enough work for the larger legal players to weather the storm.
Law firms have reflected the trend towards greater efficiency in meeting clients’ heightened demands. While the legal market of only a few years ago may have been something of a privileged club with little competition, the tables have turned, and price battles are becoming part of everyday business. Estonia’s legal market is following the worldwide trend away from traditional hourly rate-charging towards new pricing models, with fixed and capped fees, binding estimates and success fees becoming the norm.
While it is the result of a longer development, one noteworthy attribute of today’s market is the dominance of legal firms covering the Baltic and Nordic areas. This model has clearly survived, if not gained strength, during the crisis.
Trends in M&A activity
As if finding an excuse for a standstill, until the summer of 2010, the economy, along with the once booming M&A sector, was marked by the anticipation of the euro resolution. The market saw only a handful of major transactions close during this period. The tendency of transaction parties not to reach deals due to irreconcilable price expectations continued, with the total number of transactions qualifying for Competition Board review down to ten in 2010, from 17 in 2009. Despite the fall in large transactions, the spring of 2010 saw the IPO of AS Premia Foods on the NASDAQ OMX Tallinn, the success of which has been acclaimed as a positive sign of the recovery of confidence by the investor community.
The market started to show signs of picking up in early autumn 2010, and this was continuing in the beginning of 2011. This is partly due to a slight but perceptible easing in bank financing policies. The adoption of the euro is another factor contributing to the rise in confidence, as is the fact that Nordic investors seem to have found their way back to Estonia. Yet for the time being, the potential of the M&A market does not seem even close to being fulfilled. Bolder initiatives in the M&A sphere, traditionally supported by investment funds or major bank financing, can be expected to be held back until the Estonian economy’s actual performance in the Eurozone becomes clear. The anticipated increase in the number of strong corporate finance entrepreneurs, currently scarce in the region, will also likely contribute to the recovery of the M&A market in Estonia.
Developments in legislation and case law
Efforts to stimulate business expansion with legal reforms continued during 2010, with numerous changes to the Commercial Code entering into force from 2011, aiming for a yet more investor-friendly environment. The amendments include the right to establish private limited companies without the obligation of making a share capital payment before the company’s registration. Also, the rather rigid regulation on share transfer restrictions in private companies has been replaced by a more flexible approach, making the use of customised share transfer regulations, such as tag along and drag along mechanisms, much simpler. The requirement that at least a half of a company’s board members reside in EEA countries has been abolished. Moreover, the amendments allow for the election of board members without a term, removing the bureaucratic need to periodically update their respective terms. In a beneficial move for foreign investors, the new regulations allow for the holding of shareholder meetings via e-mail.
An anticipated development in the tax environment is that employee tax options will no longer be considered as fringe benefits requiring the payment of income tax upon issuing. This is expected to be of remarkable assistance for early phase start-ups desiring to motivate their employees without incurring immediate expenses. More generally, Estonia’s tax regime is acclaimed for its relative stability and clarity and has more or less remained true to this promise during the crisis, with the exception of the controversial increase of VAT in spring 2010. The absence of corporate income tax (with profit only taxable upon distribution) has continued to generate interest among Nordic entrepreneurs in utilising Estonian tax benefits when planning their activities. This has been marked by Statoil Fuel & Retail ASA’s resolution from fall 2010 to bring its financial hub, through which the group’s operations in the Scandinavian and East European regions are operated, to Tallinn.
The two past years of contracted investment activity saw remarkable changes in both business and legal terms. Increases in efficiency, as well as fears about investing in turbulent times, have helped inflate corporate cash reserves. Coupled with rising interest from foreign investors, access to these free resources is expected to shake the market from its standstill in the coming months and years, although the fervent boom of a few years ago will probably remain history.