How to add a shareholder for an Estonian company?
Almost every aspect of establishing and managing an Estonian company can be done entirely online from anywhere.
We say almost because things get a bit tricky when you want to add a new shareholder for your Estonian company. Adding a new director is already very easy if that person is an e-resident who can make a digital signature.
Until now, you’d have to transfer shares offline at a notary in Estonia. There are also two novel ways to transfer shares in an Estonian company, but these methods both have limitations too. Fortunately, there’s also a little known trick that enables you to add a new shareholder online for your Estonian company without having to transfer any existing shares at all. The new shareholders don’t even need to have an Estonian digital ID.
So we put together this up-to-date guide with everything you need to know to about how to add a new shareholder for an Estonian company.
The standard ways to add a new shareholder to your Estonian company
If you want to bring in a new co-owner then most Estonian company owners, until now, have had to arrange offline notary appointments to transfer shares. That needs to be done in Estonia with all shareholders present, which obviously comes with both hassle and cost. It’s inconvenient even if you live in Estonia at the best of times, but it’s especially inconvenient for e-residents and during a lockdown.
If it’s not possible for a shareholder to attend the notary meeting, the only alternative has been through the use of ‘power of attorney’. This will save a trip to a notary in Estonia, but it’s still just another layer of hassle and expense to involve a business services provider, in addition to a notary. In fact, you’ll probably need to pay for a foreign notary too because documents from most countries will need to be apostilled by the designated authority.
Why was it so tricky to transfer shares for an Estonian company?
Estonia is proud to be a digital nation where 99% of government services are online and everyone has a digital ID that can be used for authenticating themselves and signing legal agreements online. However, there are some big decisions that must still be done offline. That covers getting married, getting divorced, buying property, selling property, buying company shares, and selling company shares.
This isn’t because Estonia lacks the technology for these things to be done online. It’s simply that these are such big decisions that the state wants to be sure you are doing them of your own free will after serious consideration. It probably wouldn’t be a good idea if you could just hit delete on your marriage at any time of the day or night. When it comes to transferring shares and real estate, the state wants an extra layer of security to prevent you being blackmailed or unduly pressured to sign off assets. By law, a notary is an independent public official to whom the Estonian state has delegated this duty to oversee the security of legal relationships and the prevention of legal disputes. A notary always has a mandatory professional indemnity insurance to compensate for any damage caused by wrongful transactions.
You might think voting should fall into that category too, but Estonia’s i-voting system already has some well thought out safeguards designed into it, such as the ability to vote repeatedly whenever you want to change your last ballot.
You used to have to register your baby offline too if you were an unmarried couple, but this coronavirus crisis has at least swept away that requirement. It’s an example of how this crisis is acting as a catalyst for even deeper digitisation, even in Estonia where things are already very advanced. You may have seen in the news, for example, that Unicount has joined forces with other companies in Estonia serving e-residents to formally request that the Estonian government prioritises the elimination of offline pickups for e-Residency digital ID cards. That story is here in Estonian. So we hope that urgent advances in digitisation during this crisis could be extended to the area of buying and selling company shares too.
However, there are already four alternative options you can consider for adding a new shareholder.
Just prior to the crisis, the Estonian notaries helpfully added a new way to sell shares of your Estonian company. In addition, the law has been changed to allow one new method that can be used in two different ways. Finally, we at Unicount have discovered our own very simple solution.
Four alternative ways to add new shareholders
1. Using an e-notary
Estonian notaries have launched an e-notary service so that company owners can visit an Estonian Embassy abroad to transfer shares, instead of at a notary office in Estonia. You can read more about this on the e-Residency blog here.
All other aspects of the process remain the same so you will still need to book and pay for a notary, but at least you don’t have to fly to Estonia or get an attorney involved.
You can choose a notary by logging in with your digital ID at notar.ee. Don’t worry too much about which one to choose, as long as they can conduct the transaction in English and are part of the e-notary scheme. Notary fees are regulated by law and they all provide the same good quality of service.
The pilot project for e-notaries is taking place at Estonian embassies in Helsinki, Brussels, Stockholm, London and Riga where they have a biometric facial recognition set up in a separate room. So this will help some e-residents around the world, but not everyone. Of course, the coronavirus crisis has also added new complexities even reaching those embassies for the foreseeable future.
Our hope (and that of Estonia’s e-Residency programme) is that the e-notary programme can evolve to allow remote share transfer from anywhere in future. Notaries are already looking into extending the e-notary pilot to have video conferencing transactions with “previously identified persons” without the requirement of being at the embassy.
2. Managing your own shareholder list
The Estonian Parliament recently changed the law at the request of the startup sector so that shares can now be transferred to a new shareholder at the responsibility of the parties involved, if the company’s articles of association approves this. This can only be added to the articles of association if it is unanimously agreed by all existing shareholders.
The law comes into force from 1 August 2020.
However, for this to work your company will need to have a share capital of at least €10,000 that has been fully paid in. That’s helpful for growing startups, but not useful for most e-residents and other Estonian company owners.
This is similar to the historical trust based system already used in other EU jurisdictions, such as the UK and Sweden.
However, what if you don’t have a share capital of €10,000 paid in, but still want to add a new shareholder for your Estonian company?
3. Using NASDAQ CSD
Your company can register its shares with Nasdaq CSD, as an alternative to the Estonian Business Register managing your shareholder list.
Nasdaq CSD is the regional central securities depository (CSD) with a business presence in Estonia, Iceland, Latvia and Lithuania. They manage the shareholder lists of listed stock companies and other companies wishing to use their services.
The restriction here though is that all the shareholders need to have a securities account at an Estonian bank. That can be a tricky requirement for even the most experienced venture capital fund investors if they are non-residents. It also still requires a trip to Estonia to open the initial account at that bank before applying for the securities account. Estonian startups have lobbied to change this requirement, but have had no success so far.
So what if your new shareholder doesn’t have an Estonian securities account and none of the other options are suitable for you? Well, there is one more option that we’ve discovered.
4. The simplest way to add new shareholders for your Estonian company
There’s one more way to add a new shareholder to your Estonian company and it’s surprisingly simple. We like to keep things simple here at Unicount so we’ve tried it ourselves multiple times with our own businesses and we are aware that it has successfully worked for other startups.
However, we still welcome any feedback that readers may have about this method because it is not commonly known or used at present by e-residents.
It works because you don’t actually transfer any existing shares to your new shareholder. You simply issue new shares online directly to them instead. This involves no notary and no attorney.
As outlined in Estonia’s Commercial Code, you will need to produce a digitally signed shareholders’ resolution that outlines the planned new share allocation with the details of all the shareholders. You’ll also need the proof of their payment for this previously agreed share from your company’s banking service provider.
If your articles of association specify an exact registered share capital amount (as is standard) then you might want to make this more flexible, such as ‘€2,500 to €10,000’. This will enable you to repeat this share issuing process again in future by adding a new shareholder without having to submit the changed articles to the Business Register too.
You can then log into Estonia’s Business Register, alter the share capital amount, and submit it with those supporting documents. This is then processed by the Tartu county court who will check that this process has been done correctly and update the public data in the Business Register to make it official.
For example, let’s say you are the sole shareholder of a company with the minimum share capital of €2,500 and you want to sell 20% of your company to a new partner. You don’t actually need to transfer 20% of your shares. Instead, you can agree to issue 625 new shares worth one euro each and mark your business partner as the new shareholder for this amount on the shareholder’s agreement. That person will then make their payment of this amount into your company bank account or fintech account before you can register it with Business Register.
If you value your company’s shares above the face value then the new shareholder would still pay in that entire amount you agreed upon, but the rest would be treated as equity instead of the share capital. This is very handy if your company is a startup with losses that have reduced the company equity below the registered share capital (of which half must be kept at all times on the balance sheet). So just bear in mind that this would not help you when you just want to sell your shares for profit.
Here’s an interesting thing about this method. Only the existing shareholders need to digitally sign the agreement. Unlike selling shares at a notary, the court does not expect people who have been issued new shares to present any representation right documents or notarised registration certificates.
That means you can add a shareholder even if they do not have an Estonian digital ID. The new partners would only need to make a digital signature on future resolutions if required under the rules of the company’s articles of association and subject to the amount of their shareholding. For example, amending the articles of association usually requires approval from two thirds of shareholders so two 50% shareholders would need to have digital ID cards for that. The annual report just has to be signed off by one director though. Even if a digital ID card isn’t needed, we’d always advise non-residents to apply for e-Residency for its long term benefits, especially if you are going to be the co-owner of an Estonian company, but at least you wouldn’t be held back by waiting to pick up your digital ID card.
Just one last issue…
There’s one thing that can make this advice a bit tricky for e-residents. The Estonian Business Register and the Tartu county court both expect your documents in Estonian.
So, since publishing this article, we’ve written up a free template for you to use. It’s in Estonian, but has guidance in English about how to use it. You can download it here.
What if I want to buy or sell an entire Estonian company?
Finally, this subject also comes up a lot in the e-resident community as people seek to buy or sell entire Estonian companies. Our advice is simple here too: Don’t.
The main motive for buying an existing company among e-residents is to get hold of an existing bank account or licence that the company may have too, such as a licence to trade crypto. This really isn’t advisable because both of those things are issued to the company dependent on factors that include an assessment of the business model, clients, shareholders, beneficial owners and board members. If any of these details change then both the bank account and license can be withdrawn (as often happens in these circumstances).
Fortunately, it’s so simple to start a new company online that there is little to be gained from trying to buy one from someone else. You can then apply for banking and licenses that are available based on your own circumstances.