Does Estonian legislation hinder US investments?

17.01.2012, 10:29

Maivi Ots, managing partner of Law Office Eversheds Ots & Co, and Lauri Liivat, associate, write that the legislation in force in Estonia is discriminating US companies by prohibiting them to directly acquire shares of Estonian registered public limited companies.

Namely, all shares of public limited companies registered in Estonia are registered in the Estonian Central Register of Securities (EVK), and the precondition for acquiring any shares is maintaining a security account with an account administrator, i.e. a local commercial bank. Furthermore, a precondition for opening a securities account is opening of an associated bank account. Thus, leaving aside negotiations connected with the transaction etc, the first step that an investor needs to take for acquiring shares is opening a securities account and a bank account in a local commercial bank. The latter also applies to acquiring a share of a private limited company registered with EVK.

However, opening of a securities account and a bank account can turn out to be unexpectedly complicated, if not impossible. Namely, local banks have adopted a practice according to which companies registered in the US are not opened securities accounts at all, other than in certain extremely exceptional cases. There are several reasons for that, for instance banks have been imposed particularly strict requirements concerning provision of financial services to persons from outside the EU. The said requirements stem, above all, from the Money Laundering and Terrorist Financing Prevention Act, the relevant regulations of the Minister of Finance, as well as from guidelines of the Financial Supervision Authority and EU directives. Furthermore, restrictions also stem from the legislation of the US, which prohibits provision of a number of services to US residents by companies who are registered outside the US, and do not have an activity license granted by the financial supervisory authorities of the United States. Provision of services without an activity license can cause several risks. Ultimately, of course, it boils down to the issue of banks’ own risk policy. As a private law person a bank is free to select its customers, and reasons for refusing to open an account may be different. Taking into consideration the requirements set to banks it is understandable why the banks are rather cautious in this respect.

The above described situation has resulted in policy generally applied by the banks not to open securities accounts for companies registered in the United States. In this context we do not mean professional investment companies, but investors who wish to carry out business in Estonia. Moreover, an investor who plans to acquire shares in Estonia is hardly willing to open in its name a securities account and a bank account in Estonia, which causes the investor to spend a lot of time and money on handling the paperwork and providing the bank various documents, and to bear subsequent expenses connected with maintaining the account.

The requirements set to the bank originate, above all, from the particular nature of financial services, and are not aimed at establishing restrictions to holding of shares, which, however, is an inevitable result. Therefore an artificial situation has been created where investors from the US are forced to make investments to Estonia either through a subsidiary located in another European country or acquire first a private limited company in Estonia, the only business of which is holding shares. Since in the case of shares of a private limited company registration with EVK is voluntary there is no need to open a securities account. In such case transactions are carried out before a notary, whose activities are also subject to the provisions of the Money Laundering and Terrorist Financing Prevention Act, but in their case it does not rule out conclusion of such transactions. Therefore this represents a somewhat unreasonable discrimination between acquiring shares of public limited companies, as opposed to shares of private limited companies, which is hardly the objective of the effective legislation.

At the time when the central securities register system was created a decision was made to utilise the existing banking infrastructure, and the obligations of an account administrator were assigned to commercial banks. Meanwhile however, the requirements set to the banks have become stricter, various regulations have become more detailed, and therefore investors are set unreasonable requirements from the aspect of acquiring shares. Thus, perhaps now is the time to overhaul the existing system?

Finally it is essential to point out that this problem is certainly not limited to just investments coming from the US. Other investments from outside the EU can face similar problems, but investments from the United States are the most frequent among them, causing these issues to emerge over and over again.