II/1997
ISBN 9985-9146-0-0
Issue
Legal issues concerning local governments in Estonia are addressed in this article and an attempt is made to assess state and local government legislation. Different problem areas are dealt with in turn in the article and the presented examples are primarily based on legal decisions adopted or planned to be adopted by the City of Tartu.
I. Regulation by By-laws of Rural Municipalities or Cities
Based on dynamic changes in legislation and as a result of the last local government elections, local governments have undertaken to amend the by-laws of rural municipalities and cities. This process is examined from two aspects during the period of 1 January 1994 until the present (the previous versions of the City of Tallinn By-laws and the City of Tartu By-laws were approved on 17 June 1993 and on 17 February 1994, respectively). First, new legislation that entered into force and amendments to legislation already in force during this period which should be considered in the amendment of by-laws of rural municipalities or cities will be examined. Second, the areas which should be subject to regulation by by-laws of rural municipalities or cities in accordance with the legislation in force will be analysed.
A legal problem in this field is the fact that at present there is no law to regulate the concordance, approval, registration and use of the coat of arms and flags of local governments. In view of the first aspect, the following Acts are relevant: the Local Government Organisation Act and the Education Act Amendment Act, General Principles of the Civil Code Act, County Administration Act and Local Government Organisation Act Amendment Act, Anti-Corruption Act, Public Service Act, Rural Municipality and City Budgets Act Amendment Act, Local Government Organisation Act Amendment Act, Commercial Code, Territory of Estonia Administrative Division Act, Planning and Building Act, Local Government Council Election Act, and Section 22 of the Local Government Organisation Act Amendment Act.
With regard to the second aspect, the legislation in force prescribes regulation of the following issues by local government by-laws:
1) the procedure for establishment, the rights and duties, and the procedures of local government bodies and their committees, and agencies of rural municipalities or cities (section 8 and subsection 28 (2) of the Local Government Organisation Act (hereinafter “LGOA”));
2) the bases for representation of rural municipalities or cities as persons in public law by councils, chairs of councils, rural municipality governments or city governments and mayors (subsection 10 (1), clauses 42 2) and 50 2) of the LGOA);
3) the procedure for use of the coats of arms and flags of rural municipalities or cities (subsection 14 (2) of the LGOA);
4) the procedures for making council regulations public and for making council regulations, resolutions and minutes of sessions available to the public (subsections 23 (1) and (7) and 37 (2) of the LGOA);
5) the procedure for the exercise of supervision by councils and governments over the implementation of council regulations and resolutions, and the regulations and orders of rural municipality governments or city governments (section 24 and subsection 36 (6) of the LGOA);
6) the conditions and procedure for election of mayors (section 27 of the LGOA);
7) the procedure for making regulations and orders of rural municipality or city governments public (subsection 31 (1) of the LGOA);
8) the procedures for possession, use and disposal of municipal property (subsection 34 (2) of the LGOA);
9) the duties of chairs of councils (clause 42 4) of the LGOA);
10) the bases and procedure for the activities of council committees (including auditing committees) (subsections 47 (2) and 48 (3) of the LGOA);
11) the procedure for substitution of mayors (subsection 49 (5) of the LGOA);
12) the procedures of rural municipality governments or city governments, and the bases and procedure for establishment and bases for the activities of committees (subsection 49 (11) of the LGOA);
13) the duties of mayors (clause 50 8) of the LGOA);
14) the procedure for making the minutes of sessions of rural municipality governments or city governments and meetings of councils and government committees available to the public (subsection 51 (7) of the LGOA);
15) the duties of rural municipality or city secretaries (clause 55 (4) 5) of the LGOA);
16) the procedure for exercising supervision over orders of rural municipality or city district managers (subsection 57 (7) of the LGOA); and
17) the procedure for passage of budgets (subsection 12 (1) of the Rural Municipality and City Budgets Act).
In practice, a need may arise for the regulation of a broader range of issues than set out above by by-laws of rural municipalities or cities. The principle of legality should be observed.
Effect on the Local Government Level
The way in which the regulation of issues which by law are within the competence of the City of Tartu under its By-laws (as listed above) is envisioned, will be examined below, each in turn. This analysis is based on the third draft version of the By-laws (hereinafter the “Draft By-laws”) which by the time this article was written had undergone first reading in the Tartu City Council. This version is compared with the two earlier versions where necessary.
1) The Procedure for Establishment, the Rights and Duties, and the Procedures of Local Government Bodies and their Committees, and Agencies of Rural Municipalities or Cities (section 8 of the LGOA)
The purpose of the Draft By-laws (section 1) is to provide the procedure for establishment, the rights and duties, and the procedures of the local government bodies and their committees, and of the administrative agencies of the City of Tartu. The earlier versions of the By-laws also concerned local government agencies (municipal agencies) but the section concerning the sole competence of the Tartu City Council provided that municipal agencies were to be regulated pursuant to a specific procedure established by the Council (clause 19 1.6)). Such solution was contrary to the requirement of a logical structure for legislation.
The establishment of a city government (subsection 28 (2) of the LGOA) is based on the principle that council members vote separately with regard to every government member candidate entered on a list presented by the mayor. A different possible solution permitted under the LGOA is to vote in favour or against the list as a whole.
Under the Public Service Act (subsection 5 (1) and section 18), local government officials are either elected or appointed to office. The provisions of the Draft By-laws concerning approval of the Tartu City Government (clauses 30 2) and 3), 31 1) - 3) and 38 1)) also include appointment. An amendment is unnecessary since approval of local government officials by the Tartu City Council should be regarded in this case as election to office as provided by the Public Service Act.
The LGOA does not provide a quorum requirement for voting in a council. Pursuant to subsection 45 (5) of the LGOA, council resolutions are adopted by a majority of votes in favour, except with the issues specified in clauses 22 2), 4), 6) - 10), 14), 15), 17) and 23) in which the majority of the council membership is necessary in voting. However, the first and second versions of the By-laws (clauses 28 1) and 27 1), respectively) provided that the City Council has a quorum if at least one half of the City Council members participate in the session.
Clause 27 4) of the Draft By-laws establishes that the agenda of a meeting may, after its approval, be amended by a majority of the City Council voting in favour. The agenda may only be amended with respect to the order of the approved items on the agenda or by omission of an item from the agenda. Voting on inclusion of new items in the agenda is contrary to subsections 43 (3) and 44 (5) of the LGOA.
Issues concerning committees of the Tartu City Government are not directly regulated by the Draft By-laws.
2) The Bases for Representation of Rural Municipalities or Cities as Persons in Public Law by Councils, Chairs of Councils, Rural Municipality Governments or City Governments and Mayors (subsection 10 (1), clauses 42 2) and 50 2) of the LGOA)
The competence of a local government as a person in public law is exercised by its bodies. Pursuant to section 4 of the LGOA, the council and government are the bodies of a local government. They are collegial bodies headed by the chair of the council and mayor, respectively. In addition to the members of these bodies, a rural municipality or city as a person in public law may also be represented by other officials; for example, in a court on the basis of an authorisation or in the preparation of records in the particular matters of administrative offences. However, representation of a local government body also involves representation of the rural municipality or city as a person in public law.1 Thus, the position that the chair of a council represents the rural municipality council but may also represent the rural municipality on the basis of a single authorisation of the council or government2 cannot be considered justified.
This matter is regulated by Tartu City Council Regulation No. 25 The Procedure for Representation of the City of Tartu as a Person in Public Law (26 May 1994) in more detail than by the Draft By-laws.
3) The Procedure for Use of the Coats of Arms and Flags of Rural Municipalities or Cities (subsection 14 (2) of the LGOA)
The procedure for use of the city flag and coat of arms was established by Tartu City Council Resolution No. 92 The City of Tartu Coat of Arms, Flag and Seal (1 November 1990) which was based on the Tartu City Council Resolution of 17 December 1928 and the Tartu City Soviet Resolution of 20 December 1988. By enactment of the second version of the City of Tartu By-laws, the text of the latter resolution was incorporated into the By-laws as an appendix and the resolution itself was repealed. The text of the appendix has undergone little linguistic revision in the Draft By-laws. Similarly to clause 3, the fact that to date there is no law to regulate supervision over the implementation of legislation passed by councils and governments causes legal problems.
4) The Procedures for Making Council Regulations Public and for Making Council Regulations, Resolutions and Minutes of Sessions Available to the Public (subsections 23 (1) and (7) and 37 (2) of the LGOA)
Tartu City Council regulations are made public before their entry into force in the city information centre, city library, University of Tartu Library and the office of the Council. Regulations of general importance are published in the Riigi Teataja Lisa.3 Regulations enter into force on the day following their publication unless a different date is provided for in the regulations. City Council resolutions enter into force on the date specified therein and the persons who will implement them and other concerned persons must be given notice thereof (clauses 28 3) and 4) and 41 3) and 4) of the Draft By-laws). The Draft By-laws do not provide the entry into force dates of Council regulations which have no general importance and, therefore, such dates must be established in each regulation. Section 81 of the City of Tallinn By-laws regulate the entry into force of council regulations in the same manner. As a rule, regulations of representative bodies of local governments should be regarded as legislation of general importance since they regulate issues which are most relevant for the population of rural municipalities or cities. In addition to regulations, Tartu City Council resolutions and records are also accessible to everyone in the city information centre, city library and the University of Tartu Library. The Foreign Relations and Enterprise Development Department of the City Government also includes an information division. The functions of the division are to make materials concerning the Tartu City Council and Government available to the population; gather legislation of the City Council and City Government, make it accessible through queries and ensure that it is updated in the City Government computer network; gather and publish statistical and informational materials concerning the City of Tartu; arrange for guidance from the population to the corresponding City Government structural units or state agencies based on the nature of their queries and provide information concerning the structure and operations procedure of the City Government; and compile and publish a City Government telephone directory (clause 9 of the Appendix to Tartu City Government Order No. 847 of 16 May 1996). The experience of Uppsala, Sweden, a twin city of Tartu, was followed in establishing the division.
5) The Procedure for the Exercise of Supervision by Councils and Governments over the Implementation of Council Regulations and Resolutions, and Regulations and Orders of Rural Municipality Governments or City Governments (section 24 and subsection 36 (6) of the LGOA)
With regard to supervision over the implementation of legislation of the Tartu City Council, which according to administrative law theory is a form of self-control, the Draft By-laws provide for the right of City Council members to address enquiries to officials elected or approved by the City Council and to receive documents or other information (clause 18 5)). Further, the By-laws provide for the supervisory functions of auditing committees (section 25). However, the Draft By-laws do not establish a procedure for supervision over the implementation of legislation of the City Government. Clause 33 2.5) of the Draft By-laws only provides that the mayor arranges for the implementation of regulations and orders of the City Government. A problem concerning rural municipality and city secretaries is the fact that the LGOA does not regulate their replacement.
6) The Conditions and Procedure for Election of Mayors (section 27 of the LGOA).
Under the procedure of the Draft By-laws for election of the mayor of the City of Tartu, no candidate for city mayor who meets the requirements can be deprived of the right to stand as a candidate. Both the first and second versions of the City of Tartu By-laws were contrary to this principle. The first version (clause 35 6)) prescribed that if neither candidate for city mayor who received the greatest number of votes in the first round of voting is supported in the repeat vote by a majority of the membership of the Council, they can no longer stand as candidates for the same office. Under the second version of the By-laws (clause 34 6)), in such case, neither candidate may stand as a candidate for the same office during the term of office of the membership of the City Council. These versions of the By-laws contained similar errors with respect to candidates for the chair of the Council (clause 23 6)). The above-mentioned provisions are contrary to section 11 and subsections 12 (1) and 14 (3) of the Constitution of the Republic of Estonia.
7) The Procedure for Making Regulations and Orders of Rural Municipality or City Governments Public (subsection 31 (1) of the LGOA)
Tartu City Government regulations and orders are available in the city information centre, city library and the University of Tartu Library similar to legislation of the City Council. In the cases specified by the regulation, a regulation will be published in the Riigi Teataja Lisa or a local newspaper. The Legal Chancellor is given notice of regulations of the City Government within ten days after their adoption. The persons who will implement the regulations and orders of the City Government and other concerned persons are given notice of them by the office of the City Government within seven days after their adoption (clause 39 3)).
8) The Procedures for Possession, Use and Disposal of Municipal Property (subsection 34 (2) of the LGOA)
Based on clause 22 6) of the LGOA, possession, use and disposal of municipal property must be regulated in detail by corresponding procedures established by council regulations. The Draft By-laws regulate this area in more general terms. Further, several Acts regulating proprietary relations (for example, the Law of Property Act, and the Commercial Leases Act) should be considered. Also, legislative amendments should be considered in issues concerning local budgets and taxes.
9) The Duties of Chairs of Councils (clause 42 4) of the LGOA)
In addition to the duties directly set out in the LGOA, the Draft By-laws include the following duties of the chair of the Tartu City Council:
1) preside over meetings of the management board (clause 22 4));
2) issue directives for organisation of the activities of the office of the City Council (clauses 22 6) and 39 2)); and
3) resolve payment of compensation to the chair, assistant to the vice-chair and advisers of the City Council if any of these local government officials are released from office on their own initiative (clause 38 5)).
10) The Bases and Procedure for the Activities of Council Committees (Including Auditing Committees) (subsections 47 (2) and 48 (3) of the LGOA)
The Draft By-laws include the following additional aspects:
1) in addition to the chair of a Council committee, a Council committee must include at least four members. At least one half of the committee members must be members of the City Council (clause 24 2));
2) the competence and procedures of a City Council committee are determined by regulations of the City Council and the by-laws of the committee (clause 24 4)). The by-laws of permanent committees are approved by the City Council (clause 24 1)). In principle, the law does not require that committees have their own by-laws but enactment thereof may be regarded as positive; and
3) all City Council committees report on their activities to the City Council at least once every year (clause 24 5)).
11) The Procedure for Substitution of Mayors (subsection 49 (5) of the LGOA)
In the absence of the mayor of the City of Tartu, he or she is substituted for by an assistant mayor who is assigned the duty to substitute for the mayor in accordance with the principles for division of labour between the members of the City Government (clause 33 4)). The procedure for substitution of city secretaries is determined by the mayor (clause 35 6)).
12) The Procedures of Rural Municipality Governments or City Governments, and the Bases and Procedure for Establishment and Bases for the Activities of Committees (subsection 49 (11) of the LGOA)
The corresponding regulation by the Draft By-laws is evidently insufficient since the By-laws do not contain any specific provisions concerning the procedures of the City Government as compared to the LGOA. Further, the bases and procedure for the establishment of committees and the bases for their activities are completely unregulated.
13) The Duties of Mayors (clause 50 8) of the LGOA)
In addition to the duties directly set out in the LGOA, the Draft By-laws contain the following duties of the mayor of the City of Tartu:
1) submit a declaration of his or her economic interests and observe the Procedure for Implementation of the Anti-Corruption Act (clause 29 5));
2) manage the work of the structural units of the City Government (clause 33 1)). The term “manage” is used in its general meaning, since departments of the City Government are directly managed by their heads;
3) in coordination with the City Government, appoint to office the heads of the structural units of the City Government (clause 33 2.5). This function (except coordination with the City Government) is based on section 19 and subsection 20 (1) of the Public Service Act;
4) determine the procedure for substitution of city secretaries (clause 35 6)); and
5) resolve payment of compensation to assistants of the mayor, city secretaries and heads of departments of the City Government if any of these local government officials are released from service on their own initiative (clause 38 5)).
14) The Procedure for Making the Minutes of Sessions of Rural Municipality Governments or City Governments and Meetings of Councils and Government Committees Available to the Public (subsection 51 (7) of the LGOA)
There is no legal regulation concerning the minutes of meetings of the Tartu City Council and committees of the Tartu City Government. The minutes of sessions of the City Government are available at the office of the City Government (clause 32 3)).
15) The Duties of Rural Municipality or City Secretaries (clause 55 (4) 5) of the LGOA)
In addition to the duties directly set out in the LGOA, the Draft By-laws contain the following duties of the city secretary:
1) submit a declaration of his or her economic interests and observe the Procedure for Implementation of the Anti-Corruption Act (clause 29 5));
2) manage the activities of the office of the City Government and organise the use and disposal of city property which is in the possession of the office of the City Government, including the resources allocated for maintenance of the structural units of the City Government (clause 35 2)); and
3) issue directives for the use and disposal of city property under his or her authority and for organising the work of persons in the service of the office of the City Government (clauses 35 2) and 39 2)). The wording “city property under his or her authority” needs amendment.
16) The Procedure for Exercising Supervision Over Orders of Rural Municipality or City District Managers (subsection 57 (7) of the LGOA)
Supervision over orders of city district managers is also provided for in the City of Tallinn By-laws (section 97). Under these By-laws, the corresponding supervision is exercised by the mayor and the governing bodies of city districts. If the governing body of a city district finds that an order of the city district manager is contrary to law or other legislation concerning the state or City of Tallinn, it will propose to the city district manager to bring the corresponding order into compliance with the law or other legislation. If the city district manager fails to present his or her opinion on the proposal of the governing body within two weeks or if the reply of the city district manager does not satisfy the governing body, the latter may submit a request to the mayor to invalidate the order of the city district manager. The City Government has the right to invalidate orders of city district managers which are contrary to law or other legislation concerning the state or City of Tallinn. The governing bodies of city districts also have the right to apply to initiate an expression of no confidence in a city district manager pursuant to the procedure provided for in section 38 of the City of Tallinn By-laws.
17) The Procedure for Passage of Budgets (subsection 12 (1) of the Rural Municipality and City Budgets Act)
Pursuant to clause 45 3) of the Draft By-laws, the finance department manages the preparation of draft city budgets. Based on a forecast for the economic and social development in the coming budgetary year, the finance department informs every user of budget funds of the maximum amount of the user's expenditure. The users of funds submit their comments and objections together with proposals to specify or amend the corresponding parts of the city development plan (clause 45 3)). The procedure for preparation of budgets is also regulated by Tartu City Council Regulation No. 44 of 17 November 1994.
II. Amendment of Section 35 of the Local Government Organisation Act
Section 35 of the LGOA which regulates enterprise (economic activities) has undergone several amendments.
When the LGOA entered into force on 28 June 1993, the following version of section 35 was in force:
Ҥ 35. Enterprise
(1) In order to provide services, a rural municipality or city may found municipal enterprises or participate in enterprises which are significant for the development of the rural municipality or city.
(2) The articles of association of a municipal enterprise and the head of a municipal enterprise are approved by the corresponding rural municipality or city government on the proposal of the mayor.
(3) Rural municipalities or cities have the right to enter into contracts in order to perform their functions.”
Section 536 of the Commercial Code (CC) which entered into force on 1 September 1995 amended the LGOA by substituting the word “Enterprise” in the title of section 35 of the LGOA with the phrase “Economic activities”. As well, subsections 35 (1) and (2) of the LGOA were reworded as follows:
“(1) In order to provide services, a rural municipality or city may found local government agencies which are not legal persons and be a shareholder or stockholder in commercial undertakings which are significant for the development of the rural municipality or city.
(2) The competence and administration of local government agencies are determined and the heads of the agencies are approved by the given rural municipality government or city government on the proposal of the mayor.”
Section 160 of the Commercial Code and Related Implementation Acts Amendment Act which entered into force on 8 June 1996 amended subsection 35 (2) of the LGOA as follows:
“(2) The foundation of a local government agency is determined and its articles of association are approved by the local government council. The head of the agency is approved by the rural municipality government or city government on the proposal of the mayor.”
Section 16 of the Foundation of and Participation in Legal Persons in Private Law by the State Act which entered into force on 19 July 1996 amended section 35 of the LGOA as follows:
Ҥ 35. Economic activities and participation in legal persons
(1) In order to provide services, a rural municipality or city may found local government agencies which are not legal persons, be a shareholder or stockholder in commercial undertakings which are significant for the rural municipality or city, found foundations and be a member of non-profit associations.
(2) The foundation and termination of the activities of a local government agency are determined and its articles of association and amendments thereof are approved by the local government council. The head of the agency is approved by the rural municipality government or city government on the proposal of the rural municipality or city mayor.
(3) The foundation and dissolution of a foundation whose sole founder is a rural municipality or city and the foundation of a private limited company or public limited company whose sole shareholder or stockholder is a rural municipality or city are determined and their articles of association and amendments thereof are approved by the local government council. Members of the supervisory board of a foundation, private limited company or public limited company are appointed and other rights of founders, shareholders or stockholders are exercised by the rural municipality government or city government. If a private limited company has no supervisory board, the rural municipality government or city government appoints members of the management board of the private limited company.
(4) If a foundation is founded by several founders or if, in addition to a city or rural municipality, other shareholders or stockholders participate in a commercial undertaking, or if a rural municipality or city participates as a member in a non-profit association, participation and dissolution are decided by the rural municipality or city council. The rights of shareholders, stockholders, founders or members are otherwise exercised by persons designated by the rural municipality government or city government.
(5) A rural municipality or city has the right to enter into contracts in order to perform its functions.”
Below, the legal rationale of the above amendments to section 35 of the LGOA are examined. With regard to the first amendment due to section 536 of the CC, the phrase “local government agency” in section 35 of the LGOA denotes an organisationally independent administrative agency administered by a local government which exercises administrative functions by providing services in public law in cultural, educational, social or other spheres within the competence of the local government. Earlier, the LGOA did not directly regulate municipal agencies: only clause 48 (3) 3) provided for the right of auditing committees to audit their accounting. The Act expressly provides that local government agencies are not legal persons. Previously, the executive body of a local government, its structural units (departments and executive agencies) and the municipal agencies administered by them (schools, health care institutions and community centres) were considered to be legal persons which was also provided for in their by-laws. This principle was contrary to the principles of administrative law theory and, after the entry into force of the General Principles of the Civil Code Act, to the existing legal system.
A body of a legal person in public law as an essential component of an administrative authority expresses within its competence the will of the administrative authority. Thus, the council as the representative body of a local government expresses within its competence the will of the corresponding rural municipality or city as a person in public law by acting in the latter's name to the extent and with the authority provided by law. Further, agencies providing services in public law cannot be regarded as legal persons. The executive body of a local government, its structural units and municipal agencies are institutions which exercise the legal competence of the local government as a person in public law (corporation in public law). Pursuant to subsection 6 (2) of the Law of Property Act, the property of a legal person or a legal person cannot belong to other persons. It is clear that the classification of the structural units of a rural municipality government or city government as legal persons would be in direct conflict with the above provision. To conclude, the existing legal system does not regard the executive bodies of local governments together with their structural units (administrative agencies) and municipal agencies as independent legal persons (see also subsections 6 (2) - (4) and 44 (2) of the General Principles of the Civil Code Act and section 24 of the Law of Property Act Implementation Act).
The first amendment to section 35 of the LGOA did not provide expressly that the foundation of a local government agency falls within the competence of a rural municipality government or city government. Since the foundation of an agency is not possible without regulation of its competence and procedures (competence and procedures are provided for in the by-laws of an agency), it may be assumed that the legislators placed the foundation of an agency within the competence of the executive bodies of local governments.
According to the amendment of section 35 of the LGOA by the CC, a rural municipality or city may participate in a private limited company as a shareholder and in a public limited company as a stockholder. Thus, local governments do not have the right to participate in general partnerships and limited partnerships (see also subsections 80 (2) and 125 (2) of the CC).
The second amendment to section 35 of the LGOA, due to section 160 of the Commercial Code and Related Implementation Acts Amendment Act, involves a change in competence whereby the foundation of a local government agency and approval of its by-laws were transferred from the competence of the executive body of a local government to the competence of the representative body of a local government. In connection with this change, two aspects should be emphasised. Firstly, a change in competence effected in the Act after such a relatively short period of time (less than a year) indicates that the legislators had not initially addressed this issue seriously. This is also clear from the amendment of subsection 35 (2) of the LGOA of 19 July 1996. Frequent legislative changes in competence prevent administrative bodies from planning their work properly. Secondly, it is justified in principle, that municipal agencies are founded and their by-laws are approved by local government councils. On the level of local governments, this is a political problem which also affects the budget which in essence is within the competence of rural municipality or city councils. According to some Acts (for example, sections 16 and 37 of the Pre-School Child Care Institutions Act, subsection 12 (1) of the Basic and Upper Secondary Schools Act, and subsections 3 (2) and 15 (1) of the Special Interest Schools Act), the foundation, transformation and dissolution of municipal agencies are matters within the competence of the executive bodies of local governments. However, there is no direct conflict with subsection 35 (2) of the LGOA. Recently enacted laws such as the Museums Act and the Performance Agencies Act provide that municipal museums and municipal performance agencies, respectively, are founded by a rural municipality government or city government on the decision of the corresponding local government council. The council also approves the by-laws of the corresponding agencies according to subsections 5 (2) and 6 (1) of the Museums Act and similarly, according to subsections 3 (2) and 4 (2) of the Performance Agencies Act. Thus, these provisions should be interpreted similarly to the provisions of the afore-mentioned Acts.
The third amendment, due to section 16 of the Foundation of and Participation in Legal Persons in Private Law by the State Act, introduced the terms “foundation” and “non-profit association” to section 35 of the LGOA. By the time of this amendment, the Riigikogu4 had passed the Foundations Act and the Non-profit Associations Act. However, the fact that participation of rural municipalities or cities in legal persons and the exercise of the rights of shareholders, stockholders, founders or members by rural municipalities or cities were subjected to specific regulation is of major importance. In this context, the amendment of subsection 506 (3) of the CC should also be addressed. According to the initial version of this section, until the entry into force of a corresponding Act, private limited companies and public limited companies all of whose shares or stocks were held by the state or a local government were to be managed with consideration to the specifications established by the Government of the Republic. The Commercial Code and Related Implementation Acts Amendment Act amended the wording of subsection 506 (3) of the CC by omission of the words “or local governments”, and by substitution of the words “until the entry into force of a corresponding Act” with the words “until entry of commercial undertakings in the commercial register”. The specifications established by the Government of the Republic are provided for in the Temporary By-laws of Management Boards of Category I State Public Limited Companies and the Temporary By-laws of Management Boards of Category II State Public Limited Companies approved by Government of the Republic of Estonia Regulation No. 264 of 29 December 1990.
Effect on the Local Government Level
The above amendments to legislation prove that rules of law in a legal system do not exist in isolation but are closely connected with other rules of law. Consequently, an amendment of an Act may give rise to the need to amend several pieces of local government legislation. This, in turn, involves a power struggle on the local level in relations between local government representative bodies and executive bodies.
The fact that the structural units of city governments and the municipal agencies administered by them are not legal persons has posed several questions for their heads and members of city councils. The main issue is what this means in reality. It was feared that municipal agencies would be no longer able to enter into employment contracts, perform proprietary transactions and possess a seal and bank account. In order to better explain the nature of legal persons, the main features of legal persons as known in the theory of civil law are:
1) organisational unity;
2) separate property;
3) independent proprietary liability; and
4) operation in one's own name.
If one of these features is absent, a separate legal person does not exist. With regard to entry into employment contracts, it may be noted that clause 3 2) of the Employment Contracts Act provides that structural units of legal persons may act as employers if they have been granted the corresponding right. Based on this provision and on subsection 6 (3) of the General Principles of the Civil Code Act, municipal agencies as representatives of local governments may enter into employment contracts and, as a result, create rights and obligations in labour law if they are so authorised by law. This is, first and foremost, provided for in the by-laws of such agencies. The amendments to section 35 of the LGOA were followed by a review of the by-laws of all municipal agencies. Further, the fact that local government agencies are not legal persons does not mean that they cannot possess a seal or bank account.
The review of the by-laws of municipal agencies also affected the Tartu City Property Regulations governing municipal property, and other local government legislation. Subsection 9 (3) of the Tartu City Property Regulations approved on 19 January 1995 provides that municipal enterprises and agencies are founded, administered and wound up pursuant to procedure approved by the City Council. Pursuant to subsection 507 (1) of the CC, the foundation of municipal enterprises as traders is prohibited after 1 September 1995 since the CC does not prescribe such a category. Consequently, subsection 9 (3) of the Tartu City Property Regulations had to be amended accordingly (clause 1.2 of Tartu City Council Regulation No. 76 of 30 November 1995). At present, the existing version of subsection 9 (3) is contrary to subsection 35 (2) of the LGOA and still requires amendment.
Concurrently with the need for amendment of the Tartu City Property Regulations, Tartu City Council Regulation No. 39 Procedures for Foundation, Administration and Winding-Up of Municipal Enterprises and Agencies (20 October 1994) required amendment. This was effected by Tartu City Council Regulations No. 76 and 77 of 30 November 1995. In addition to several deficiencies in the content of Regulation No. 76, upon enactment of the new version of the regulation, the earlier version was not repealed. Since the original version of the CC which entered into force on 1 September 1995 provided that the transformation of municipal enterprises must be decided and organised by rural municipality governments or city governments on the proposal of mayors (subsection 509 (4)) placing the foundation of municipal agencies within the competence of the executive bodies of local governments (section 35 of the LGOA), the role of the Tartu City Council became problematic in the enactment of Regulations No. 76 and 77. These regulations included provisions requiring the transformation of municipal enterprises and prior approval of the by-laws of local government agencies by the City Council (clause 12 of Tartu City Council Regulation No. 76 and clause 5 of Tartu City Council Regulation No. 77). As a result, the question arose of whether this requirement for approval was legally binding. If the legislators have expressly placed the resolution of particular issues within the competence of the executive bodies of local governments, a council does not have the right to restrict this competence by establishing additional conditions or procedures unless so prescribed by law. In this case, the corresponding authorising rule was not provided by law. Further, the legal implications of a refusal to seek approval remain unclear. Naturally, the practical co-operation between local government bodies in issues concerning municipal enterprises and agencies is necessary, but a council cannot assume the role of the legislators. To date, Tartu City Council Regulations No. 76 and 77 of 30 November 1995 have been amended (Regulations No. 94 and 95 of 5 September 1996), but are still in need of further review in light of Government of the Republic Regulations No. 244 Procedures for Establishment and Transformation of State Agencies Administered by Government Agencies and for Termination of Their Activities (6 November 1996) and No. 274 Procedures for Transformation, Merger and Division of State-Owned Enterprises, State Funds and Commercially Leased Enterprises (6 November 1996).
Next, the regulation of the participation of cities in commercial undertakings will be examined. For the sake of brevity, foundations and non-profit associations will not be considered. Prior to the amendment of section 35 of the LGOA by the Foundation of and Participation in Legal Persons in Private Law by the State Act (section 16), the competence of local government bodies in the foundation of commercial undertakings all of whose stocks or shares were owned by them, and the resolution of participation in and management of commercial undertakings were insufficiently regulated by legislation apart from the version of subsection 506 (3) of the CC in force during the period 1 September 1995 to 8 June 1996. According to this version of subsection 506 (3), the specifications established by the Government of the Republic were to be followed until the entry into force of a corresponding Act (as discussed above). In Tartu, this issue was regulated by the City of Tartu By-laws and the Tartu City Property Regulations. The corresponding provisions were amended in both these instruments. The City of Tartu By-laws were approved by Tartu City Council Regulation No. 13 of 17 February 1994 and entered into force on 1 March 1994. Clause 42 5) of the By-laws provides that participation of the City of Tartu in profit and non-profit firms, organisations and funds is to be decided by the City Council. Tartu City Council Regulation No. 88 of 13 June 1996 amended the City of Tartu By-laws to a great extent. Clause 42 4) of the current version of the By-laws provides that participation of the city in commercial undertakings and funds is to be decided by the City Council.
The Tartu City Property Regulations were approved on 19 January 1995 by Tartu City Council Regulation No. 50 and entered into force on 1 February 1995. Subsection 9 (1) of the Regulations stated: “The City shall engage in enterprise if the need for such engagement arises from the City Property Management Plan. The need for and extent of participation of the City in commercial undertakings or other legal persons engaged in enterprise is decided by the City Council if such participation exceeds one million kroons or by the City Government if such participation is up to one million kroons.” Subsection 9 (2) prescribed that the city representative or representatives in legal persons with City of Tartu participation are appointed by the City Government. On 2 March 1995, subsection 9 (2) was amended by the addition of the words “informing the City Council of the names and positions of the representatives”. Tartu City Council Regulation No. 63 of 18 May 1995 substituted the word “kaubandusühingus” [in commercial undertakings] in subsection 9 (1) by the word “ariühingus” [in commercial undertakings] (clause 1.3) and amended subsection 9 (2) to read as follows: “(2) The City Council shall appoint a representative of the City to the supreme directing body of a legal person with City participation.”
Tartu City Council Regulation No. 76 of 30 November 1995 amended subsection 9 (1) of the Tartu City Property Regulations as follows: “(1) The City shall engage in enterprise if the need for such engagement arises from the City Property Management Plan.”
How can the content of the above-mentioned legislation be characterised? The amendments made to the Tartu City Property Regulations by Tartu City Council Regulation No. 63 may be considered incorrect. At first glance, the amendments only involve a change in competence. However, this gave rise to the pre-conditions for the adoption of legally incorrect resolutions in other legislation.
In the enactment of the new version of subsection 9 (2) of the Tartu City Property Regulations on 18 May 1995, the fact that the temporary by-laws of management boards of category I and category II state public limited companies approved by Government of the Republic of Estonia Regulation No. 264 of 29 December 1990 were in force at the time the amendments were made was not considered. Further, the issue of the Riigi Teataja ( No. 26-28) containing the CC which entered into force on 1 September 1995 had already been published by that time. Subsection 506 (3) of the CC prescribed the requirement to consider the specifications established by the Government of the Republic in the management of private limited companies and public limited companies all of whose shares or stocks were owned by the state or a local government. In such public limited companies, the management board was considered to be the supreme body whose competence, as a rule, also included issues within the competence of the general meeting (clauses 1 and 2 of the Temporary By-laws of Management Boards of Category I State Public Limited Companies and the Temporary By-laws of Management Boards of Category II State Public Limited Companies, respectively). Instead of retaining the existing version of subsection 9 (2) of the Tartu City Property Regulations, a model was constructed for casuistic reasons in which the management structure of commercial undertakings as prescribed by the CC was applied. Such management structure was applied according to the principle that if all stocks or shares in a commercial undertaking are owned by the City of Tartu, the City Council shall decide the following issues:
1) the foundation, merger, division and transformation of the public limited companies and private limited companies;
2) upon the foundation of the commercial undertaking, election of members to the general meeting of the public limited company and appointment of members to the general meeting of the private limited company;
3) approval of the articles of association of the public limited companies and private limited companies; and
4) dissolution of the public limited companies and private limited companies.
Other functions of the directing bodies of the public limited companies and private limited companies as provided for in the CC were to be performed by the representatives elected or appointed to the directing bodies of the public limited companies and private limited companies by the City Council (Tartu City Council Regulation No. 76 Foundation, Management, Merger, Division, Transformation and Dissolution of Municipal Public Limited Companies and Municipal Private Limited Companies with Full City Participation (30 November 1995). Since the City Council had the possibility to exercise directly or through its representatives the functions of the supreme directing bodies of the commercial undertakings, this resulted in the Council (the representative body of the local government) forming the general meeting in public limited companies in which all stocks were owned by the city and appointing representatives to the general meeting of the public limited companies in which there were also other stockholders besides the city. Appointment and election of representatives to general meetings were also effected upon the transformation of municipal enterprises into public limited companies (for example, Tartu City Council Resolution No. 310 Transformation of the Municipal Enterprise “SAB” and Appointment of City Representatives to the General Meeting (13 June 1996)). As a rule, members of the City Council were elected as city representatives for such public limited companies(Tartu City Council Resolutions No. 239 Appointment of Representatives to the General Meeting of AS Tartu Laululava (5 October 1995), No. 246 Partial Amendment of Tartu City Council Resolution No. 239 of 5 October 1995 (2 November 1995), No. 249 Appointment of Representatives to the General Meeting of Public Limited Companies Owned by the City or with City Participation (16 November 1995), and No. 264 Appointment of Representatives to the General Meeting of AS Tartu Jõujaam (7 December 1995)). This practice resulted in the City Government being unable to make management decisions in the commercial undertakings and, consequently, fully perform its functions in the economic activities as provided for in the City of Tartu By-laws. It is clear that this was not in accordance with the principle of sole responsibility for administration.
The amendment of section 35 of the LGOA by the Foundation of and Participation in Legal Persons in Private Law by the State Act and new relationships between the political forces in the Tartu City Council made it possible to repeal or amend the above-mentioned unlawful regulations and resolutions. However, the Tartu City Property Regulations still await amendment to be brought into concordance with the amended legislation. The following extract from the minutes of a meeting of the Budget and Economic Committee of the City Council gives an indication of the oddities which lawyers have had to deal with:
“5. AGENDA
5.4. Amendments to the City Property Regulations
6. THE MEETING RESOLVED:
6.4. On J.R.'s proposal, the presented draft amendments were rejected since they ignore the Council's rights of ownership.
Resolution: The City Government is to take measures (to include additional clauses in the City Property Regulations) to protect the City Council's rights of ownership. The Auditing Committee of the City Council is to find a lawyer to consult on filing a protest with the Legal Chancellor concerning amendments made to the Local Government Organisation Act by the Riigikogu (section 35 pursuant to which the executive power of a local government is authorised to organise economic activities).”
III. The Commercial Code and the Transformation of Municipal Enterprises
Pursuant to subsection 507 (1) of the CC which entered into force on 1 September 1995, enterprises founded on the basis of legislation in force before the entry into force of the CC which are not dealt with as traders in the CC must be transformed pursuant to section 509 of the CC or dissolved. The foundation of, transformation into, merger with or division into such enterprises is prohibited after 1 September 1995. This provision also applies to municipal enterprises. The latter were founded pursuant to the Enterprise Act and the By-laws of Municipal Enterprises approved by the Government of the Republic on 5 July 1990. The first piece of legislation was repealed upon the entry into force of the CC (section 526 of the CC) whereas the other is still in force. Pursuant to subsection 509 (4) of the CC, municipal enterprises may be transformed into private limited companies, public limited companies or local government agencies. The legislators have enacted a change in competence to decide on and organise transformation. Initially, subsection 509 (4) of the CC prescribed that the transformation of municipal enterprises must be decided and organised by the rural municipality government or city government on the proposal of the mayor. The Commercial Code and Related Implementation Acts Amendment Act (section 144) placed the decision of transformation of municipal enterprises within the competence of rural municipality or city councils whereas organisation of such transformation remained within the competence of the executive bodies of local governments.
What should be borne in mind in the transformation of municipal enterprises? First and foremost, this is an economic-political decision. Nevertheless, upon granting a new form of organisation (that of a commercial undertaking or an agency) to municipal enterprises, the nature of the functions exercised by them should be considered. Local government agencies exercise administrative functions by providing services in public law, while commercial undertakings exercise business functions. Further, in comparison with private limited companies, the requirements for public limited companies are much stricter.
In legal terms, transformations should, in addition to the above-mentioned provisions of the CC, be based on subsections 509 (2), (7) - (10) and section 511 of the CC. Further, subsections 507 (2) and (3) should be considered. Pursuant to the latter subsection, municipal enterprises which were not transformed or dissolved by 1 September 1997 are subject to a compulsory winding up pursuant to the procedure provided for in section 513 of the CC. Also, on the basis of section 482 of the CC (“Application of foundation provisions”), apart from the provisions regulating transformations, the provisions regulating the foundation of specific undertakings should be followed in so far as not otherwise provided by Chapter 33 of the CC. For example, the requirement for notarisation of transformation resolutions is derived from subsections 138 (4) and 243 (4) of the CC. Although subsection 509 (8) of the CC regulates the right of merger by enterprises which have not been entered in the commercial register, this subsection also allows for a concurrent transformation of several municipal enterprises which are not dealt with as traders under the CC into a commercial undertaking without a prior transformation of each municipal enterprise into a commercial undertaking. Note that upon the transformation into local government agencies, this would not be necessary.
A comparison of clauses 168 (1) 3) and 4), 298 (1) 4), subsections 509 (4) and 480 (5) of the CC with subsection 35 (3) of the LGOA indicates that a council resolution concerning the transformation of a municipal enterprise must designate the members of the management board and, if a supervisory board is formed, the members of the supervisory board. Subsequently, a need may arise to change the membership of the supervisory board, or of the management board of a private limited company which does not have a supervisory board. Pursuant to subsection 35 (3) of the LGOA, with regard to commercial undertakings all of whose stocks or shares are owned by a rural municipality or city, the resolution of this matter is within the competence of the rural municipality or city government. Thus, the rural municipality or city government must amend the council resolution by its order.
Of the legislation regulating transformations, the Accounting Guidelines for Transformation of State Enterprises into State Public Limited Companies approved by Minister of Finance Regulation No. 208 of 2 December 1994 should be noted. Pursuant to Note 2 of clause 10 of these guidelines, the accounting regulations applicable upon the foundation of state public limited companies also apply upon the transformation of municipal enterprises into public limited companies in municipal ownership.
Effect on the Local Government Level
Clause 3 of Tartu City Council Regulation No. 76 of 30 November 1995 required the Tartu City Government to submit to the City Council within three months a time schedule for transformation of municipal enterprises indicating their new forms of organisation and designating the members of the City Government responsible for the transformations.
To date, the Tartu City Council has adopted six transformation resolutions (Resolutions No. 310 of 13 June 1996; No. 316 of 20 June 1996; No. 331 of 19 September 1996; No. 335 of 17 October 1996; No. 336 of 17 October 1996; and No. 62 of 6 February 1997). Of these resolutions, five concern the transformation of municipal enterprises into public limited companies and one resolution concerns the concurrent transformation of ten municipal enterprises into a local government agency. As a result of an incorrect application of the CC, Tartu City Council Resolutions No. 310 and 316 prescribed appointment of city representatives to the general meeting. To date, these resolutions have been amended accordingly.
Some confusion was created in the City Council by the issue of whether the members of supervisory boards, members of management boards and auditors are elected or appointed. However, this is not an issue of substance.
Pursuant to subsection 229 (1) of the CC, registered stocks may be freely transferred. Most of the articles of association of the public limited companies approved by the transformation resolutions contain a clause under which, until the City of Tartu is a stockholder, stocks may only be transferred on the decision of the City Council. There is no distinction made between the situations where the city is the sole stockholder and where there are several stockholders. This clause restricts the competence of the City Government in transfers of property provided for in section 33 of the Tartu City Property Regulations. Therefore, the amendment of this clause in the articles of association of these public limited companies is justified.
The articles of association of a public limited company should specify the size of its management board (clause 244 (1) 7) of the CC) by indicating the exact number of members. Vague indications as to the number of members, such as “one to three members” or “up to three members” should be avoided (clause 3.2.1 of the AS Tartu Veevärk Articles of Association, clause 4.1 of the AS Liikor Articles of Association, clause 4.1 of the AS Kaubur Articles of Association and clause 4.1 of the AS Kesklinna Kaubahall Articles of Association).
It is not clear why statements accompanying draft resolutions concerning the transformation of municipal enterprises have been formalised as operational guidelines in the appendix to a Tartu City Council resolution (clause 7 of Tartu City Council Resolution No. 335 of 17 October 1996).
As a whole, the articles of association of the six public limited companies approved by resolutions concerning the transformation of municipal enterprises are characterised by the use of almost the exact same wording as the text of the law. However, it would have been more advisable to make a better use of the possibilities for regulation provided by the CC.
Finally, the resolution concerning the transformation of ME5 Luarvik Luarvik into a public limited company based on the CC is presented as an example. There is no doubt that the CC allows for different solutions. For the sake of brevity, the articles of association of the public limited company which formed an appendix to the transformation resolution are not included.
SOODOMA CITY COUNCIL
R E S O L U T I O N
No. ............1997
Transformation of Municipal Enterprise Luarvik Luarvik
Based on subsection 509 (4) and sections 480 and 482 of the Commercial Code (RT I 1995, 26-28, 355; 1996, 52-54, 993; 1997, 16, 258), the Soodoma City Council
R e s o l v e s:
1. To transform the municipal enterprise Luarvik Luarvik into a public limited company under the following conditions:
1.1. The business name of the public limited company is AS Luarvik Luarvik.
1.2. The location of the public limited company is Kropotkini 14, City of Soodoma, Republic of Estonia.
1.3. The areas of activity of the public limited company are:
1.3.1. ...............................................................................; the
1.3.2. ...............................................................................; is
1.3.3. etc.
1.4. The amount of stock capital is .............(...........) kroons.
(in words)
The stock capital was formed on the basis of the property of ME Luarvik Luarvik.
The whole of the stock capital is held by the City of Soodoma.
1.5. The stock capital is divided into ..............(...........) stocks,
(in words)
the nominal value of which is ......................(...........) kroons.
(in words)
1.6. Employment contracts entered into with the employees of the municipal enterprise remain valid upon the transformation and the employees are guaranteed all rights in accordance with section 6 of the Employment Contracts Act.
2. To approve the AS Luarvik Luarvik Articles of Association in accordance with the Appendix.
3. To elect the members of the AS Luarvik Luarvik Management Board as follows:
3.1. Jaan Tatikas (personal identification code 11111111111, residence Batu khaani tee 18 b, Soodoma)
3.2. ............................................................................................................................. -->F_Toim_Title
3.3............................................................................................................................... -->F_Toim_Title
4. To elect the members of the AS Luarvik Luarvik Supervisory Board as follows:
4.1. Ivan Julm (personal identification code 33333333333, residence Lehmalauda 19, Soodoma)
4.2................................................................................................................................ -->F_Toim_Title
4.3. .............................................................................................................................. -->F_Toim_Title
5. To elect Ants Kaval (personal identification code 55555555555, residence Põrgupõhja 13, Soodoma) as the auditor of AS Luarvik Luarvik.
6. The management board of AS Luarvik Luarvik is to arrange for entry of the transformation in the commercial register pursuant to the procedure prescribed in section 485 of the Commercial Code.
7. The Resolution enters into force...................................
Jaan Jaaniuss
Chair
pp.58-70