Harmonisation of Estonian Company Law: Pre-conditions in Existing Law
As in other areas of law, harmonisation of national law with legislation of the European Union (“EU”) in the sphere of company law is currently on the agenda in Estonia. Although Estonia is not a member of the EU, the principles of European law should be considered. Article 69 of the Association Agreement between Estonia and the European Communities and Member States (the “Europe Agreement”),1 signed on 12 June 1995, prescribes the approximation of Estonian company law with EU legislation. Although the Europe Agreement does not specify the date for completion of this process, it is clear that resolution of this matter is a prerequisite for becoming a full member of the EU. Thus, the speedy approximation of company law is a priority from the perspective of state policy.
All East European countries are probably in the same situation where hardly has the national law been created when now it is necessary to bring it into line with EU requirements. As a result, the national law will cease to be original. Based on the need to harmonise national law with EU requirements, future harmonisation requirements should be considered already in the preparation of draft legislation. Since in the formation of a national legal system, experience of other countries in corresponding areas should be considered, adherence to EU requirements is possible since such requirements have developed from the national laws of the Member States and, allegedly, the best part of each national legal system has been used in the formulation of harmonisation measures.2
The principles established by the EU have a twofold role. On the one hand, they have been developed on the basis of the law of specific countries and, on the other, they affect, in turn, the laws of the Member States. However, it is a different matter as to what effect a particular country has had and to what extent a particular country must amend its laws in order to adjust them to the principles of the EU.
The principles of EU company law are expressed in EU company law directives. An analysis of the status of the directives and incorporation of the requirements contained therein into national law indicates that the Member States are free to decide how to enact the requirements of the directives.3 However, it has been recommended that the formulations used in the directives be directly incorporated into national law to avoid possible conflicts between the national law and the directives.4 Although practical, this recommendation can hardly be applied in Estonia at present since there are no official translations of the directives available.5
In examining the harmonisation measures, the extent of harmonisation required by the EU should be considered since it is not currently expedient to apply all requirements in Estonia. Further, different ways of harmonisation should be weighed. Although the existence of a variety of possibilities for harmonisation has been regarded as a shortcoming,6 this can also be considered an advantage to a certain extent in the preparation of new national legislation.
As noted above, the Europe Agreement contains a requirement for harmonisation of company law. However, in addition to this instrument, more specific recommendations were provided by the European Commission White Paper concerning integration of the countries of Central and Eastern Europe which was adopted in 1994.7 Although the White Paper is only recommendatory in nature, it contains much more precise instructions for harmonisation of national law than the Europe Agreement.
The White Paper establishes the following pre-conditions for harmonisation of legislation regulating company law:
1) establishment of a commercial register and a state gazette to publish specific information such as the structure and financial details of enterprises and third persons;
2) appointment of an administrative and judicial body to ensure the registration of commercial undertakings and supervision over the legality of certain acts;
3) appointment of independent experts to assess the financial status of enterprises at different stages (formation of capital, merger, etc.); and
4) organisation of training for contemporary managers.8
None of the pre-conditions set out above was fulfilled in Estonia before 1 September 1995. As of that date, the Commercial Code (“CC”)9 regulating the fundamentals of all corresponding issues entered into force in Estonia. The laws of several European countries (Germany, The Netherlands, Denmark, Sweden, Switzerland, Austria, Czech Republic, Poland, Bulgaria, Hungary and Spain) were consulted in its preparation which ensured compliance of the CC with the best European traditions.10 Further, EU company law directives were used in its preparation as well in order to ensure compliance of the main structure of the CC with EU requirements. The actual situation in Estonia was also considered since the immediate establishment of all EU requirements was not feasible or practical due to the stage of economic development in Estonia at that time. Therefore, a choice had to be made whether to establish all EU requirements at once or incorporate them into legislation gradually, thereby providing possibilities for adaptation for Estonian traders.
The first requirement, the establishment of a commercial register, has been fulfilled in Estonia since Part II of the CC contains provisions concerning such registers. Commercial registers were introduced as of the entry into force of the CC. However, a new registration system was not created, but the existing system was extensively transformed. Before the entry into force of the CC, commercial undertakings were entered in enterprise registers which operated on the basis of the Enterprise Act.11 Unfortunately, the choice of bases for the registers in the Enterprise Act of 1989 was not successful. Registrations were effected on two levels: registrars worked at county governments, whereas the central register was maintained by the Statistical Office. Consequently, the registers were statistical in nature. As a result, the information therein was incomplete and the protection of third persons' rights were not guaranteed. Since, due to its structure, the enterprise register contained a large volume of information which did not reflect reality (according to different opinions, false information amounted to 30-50 per cent), the initiation of a register complying with EU requirements was not possible on the basis of the enterprise register. Therefore, one of the aims in the preparation of the CC was to establish a new register.
The first issue to be resolved in preparing the fundamental principles of the commercial registers was to find a suitable registrar. The experience of other countries and the situation in Estonia were considered. Based on the experience of other European countries, it was determined that there were three options regarding the choice of a registrar: the courts, an administrative authority or another institution. The latter option was immediately rejected since the only candidate was the Estonian Chamber of Commerce and Industry to whom it would not be possible to grant the right to maintain a register since it is a person in private law in Estonia.12 As a result, there remained the first two options. The courts were finally chosen as the registrar as the greatest advantages of the court system were their institutional independence and the fact that the courts also maintain the land registers. This process has been relatively smooth. An increase in the already great workload of the courts was considered a shortcoming, but the experience of the land registries showed that the workload would not increase drastically since, in addition to judges, other persons (assistant judges) would be involved in the work and, consequently, this would mean a relatively modest increase in the workload of judges. Further, initiation of the commercial registers together with the land registers made it possible to introduce the commercial registers relatively quickly and at a low cost, the importance of which should not be underestimated. As noted above, the transformation of a statistical register into a legal one was probably not possible and, therefore, traders also had great responsibilities in the course of the reform. The period for entry of operating commercial undertakings in the commercial register was two years (the period expired on 1 September 1997) and during this period, traders were to file applications for entry in the commercial register. Without a doubt, the question may be raised of whether imposition of such a duty on traders was fair since it meant expenses in time and money. Further, upon entry in the commercial register, traders had to fulfill all the requirements of the CC which were much stricter than the existing ones. However, the benefit from such a duty was twofold: on the one hand, traders were able to choose a legal form to best suit their needs and, on the other, there is now more information available about business partners.
While the EU requirements for registers have been practically met, there are significant shortcomings in the publication of register entries. Although the publication requirement is not unfamiliar in Estonia, it is not applied to the extent prescribed by the EU, in that, the second EC company law directive establishes a requirement for information bulletins. In Estonia, there is no special publication for register entries. Rather, the Riigi Teataja Lisa13 is used for this purpose, which also publishes the legislation of ministers and local governments, and official notices.14 In addition, the same entries also appear in the publications designated by the heads of the registration departments. Another difference is that pursuant to subsection 34 (1) of the CC, entries in the commercial register enter into force as of their signature, and not after the publication of notices concerning the entries as required by the second company law directive.
As noted above, the commercial registers are maintained by the register departments of the county and city courts. By a regulation of the Minister of Justice, Estonia has been divided into four registrar jurisdictions and there are four commercial registers,15 respectively. The EU has established a preventive administrative or judicial control on the formation of commercial undertakings. Further, Member States can prescribe that the foundation agreements and articles of association of undertakings and later amendments be officially certified.16 The first requirement implies that there must be a state body to check the documents and register the formation of companies when the minimum requirements are met. The second requirement is usually fulfilled by state-authorised notaries who certify that the formation has taken place and that it has been confirmed by the founders or their proxies in the presence of an authority.17 Estonia has fully met the first requirement by authorising the registrars of commercial registers to check the filed documents. Estonia has partially made use of the other requirement by prescribing a requirement to notarise the foundation agreements of private limited companies and public limited companies, although the articles of association and later amendments thereof may be in unattested written form. In principle, at the present time, Estonia has fully met the second pre-condition set out in the White Paper.
The third pre-condition specified in the White Paper is the establishment of an institution of independent financial auditors. From the perspective of current developments in Estonia, there are two points of departure in this matter: the legal basis of such institution and the assignment of duties to auditors by law. With respect to the latter, definite requirements have been established by law as the CC prescribes a requirement to use auditors in the assessment of non-monetary contributions and in mergers and divisions. Further, in some cases, a requirement for mandatory audits has been established. For example, an audit is mandatory for all public limited companies and for private limited companies and co-operatives whose turnover exceeds the level provided by law.18 As to the former, the institutional bases for auditors are not fully regulated yet. The institution of auditors as independent financial auditors was established in Estonia in 1990 when the government adopted the Temporary Auditing Regulations.19 As evident from the title of these regulations, this is temporary legislation which nevertheless has been in force for seven years already.
The Temporary Auditing Regulations establish the main fundamentals for assessment of the qualifications of auditors but regulation by them is far from sufficient. The main impediment to harmonisation with EU legislation is the fact that the issue in Estonia is not resolved by an Act but by secondary legislation. The problem is currently being addressed and a bill for the Auditors Act20 has been completed. This bill attempts to fully meet the requirements of the eighth company law directive and is also modeled on corresponding Acts of EU Member States. The independence of auditors should be guaranteed by greater organisational autonomy. At present, this sphere is governed by the Auditing Council, a state agency within the area of government of the Minister of Finance. In the future however, an auditors committee, an institution relatively independent from the state, will be established as a legal person in public law and will have the same degree of autonomy as the Estonian Bar Association.
To conclude, although the third pre-condition is yet to be fulfilled, Estonia has an advantage in the regulation of this matter since the EU requirements may be followed immediately together with implementation of the whole institution. EU requirements in the new Member States of Finland and Sweden were only incorporated into national law in 1995.21