The world is constantly changing, and with it, business activity, its directions, ambitions, and needs are also evolving.

For various reasons, many entrepreneurs must at some point in their operations consider transforming their activities and consequently reorganizing their companies.

Such reasons may include, for example:

• expansion of business operations
• separation of business sectors and units
• or, conversely, narrowing the scope of activity and consolidating fields.

These drivers may stem from economic growth or decline, changes in the legal framework, new societal needs and, therefore, a demand for new specialists, goods, and services, or literally the replacement of humans by robots.

Restructuring refers to the reorganization of a company’s operations, structure, assets, liabilities, or management, primarily with the aim of improving efficiency and adapting to market or legal changes, as well as overcoming economic difficulties.

The main forms of restructuring available are merger, division, and transformation of companies.

Mergers, divisions, and required steps

As the term merger suggests, companies are combined in such a way that at least one company (the company being acquired) ceases to exist and is deleted from the register. The acquiring company remains. Alternatively, both merging companies may be deleted from the register and replaced by a newly established company.

It is important to note that deletion of the merging company from the register does not automatically extinguish its rights and obligations. All assets of the company being acquired transfer to the acquiring company, which becomes its legal successor. Therefore, one cannot assume that contractual obligations (such as loan repayments) automatically terminate. Such obligations pass to the surviving company, which must continue to honor all existing agreements.

Stages of the merger process

How to start the merger process?

The procedure begins with a visit to a notary. The merging companies must first conclude a notarised merger agreement specifying, among other things, the exchange ratio of shares, the terms of transfer, and the balance sheet date, i.e., the date from which the company’s being acquired transactions are deemed to have been made on behalf of the acquiring company.

After signing the merger agreement, it must be submitted, along with the merger report and auditor’s report, to shareholders for review and approval. The review period must be at least two weeks for private limited companies (osaühingud) and one month for public limited companies (aktsiaseltsid). Shareholders may decide unanimously to waive the preparation of a merger report and an auditor’s report. Otherwise, a merger report explaining and justifying the terms of the merger agreement must be prepared.

Public limited companies and companies whose shares are registered in the Estonian Central Register of Securities (EVK) must also obtain confirmation from the EVK. In addition, an authorisation from the Competition Authority may be required if mandated by the Competition Act.

One month after approval of the merger agreement, an application for registration of the merger can be submitted to the Commercial Register. Along with all previously mentioned documents, the final balance sheet of the company being acquired must also be submitted. In the case of a merger, no shareholder disappears; the shareholders of the company being acquired also receive a share in the acquiring company.

A notice of the merger must be published in the Official Notices (Ametlikud Teadaanded). In the case of public limited companies, an earlier notice regarding the signing of the merger agreement must also be published.

When and why to choose division?

Division allows companies to specialise in specific business areas, enter new markets, or separate activities for strategic reasons. During a division, a company transfers all or part of its assets and liabilities to one or more newly established entities.

A company may be divided by way of a distribution or a separation. This means that the division may be total (resulting in the dissolution of the original company) or partial (where the divided company continues its activities alongside other existing or newly established companies). Similar to mergers, division requires going through agreements, resolutions, and finally submitting an application to the Commercial Register.

What should be taken into account in the case of a cross-border merger or division?

Cross-border mergers are subject to additional requirements and therefore take more time. For example, a more extensive merger agreement must be drawn up, addressing shareholder compensation, procedures for determining such compensation, creditor protection principles, and benefits granted to members of management bodies.

A notice about signing such an agreement must be published in the Official Notices, including for private limited companies. Similar to domestic procedures, a merger report, audit, and approval of the merger agreement are required.

In cross-border mergers, an additional certificate is required. If an Estonian company being acquired participates in the merger, the registrar shall, within three months, send a merger certificate to the competent authority of the state where the acquiring company is located. In some cases, the registrar has the right to refuse to issue the certificate. The same applies to cross-border divisions.

Both mergers and divisions take place without liquidation proceedings. If a company undergoes liquidation, it is deleted from the register without a legal successor, and all its rights and obligations end.

Artificial restructuring

When is a transaction considered ostensible (fictitious)?

Although mergers and divisions are lawful means of corporate reorganisation, their use without a genuine economic purpose may indicate an artificial, i.e., ostensible transaction.

In such cases, the registrar may refuse registration if it appears that the transaction lacks real economic substance or conceals another transaction. Thus, a restructuring must have a valid economic purpose. For instance, German courts have found that the transfer of company assets alone does not constitute a transformation.[1]

According to the Commercial Code, a cross-border merger, division, or transformation certificate will not be issued if the transaction is intended for fraudulent or criminal purposes, or even if the registrar has reasonable grounds for suspicion.

Tallinn Circuit Court, in case No. 2-20-11609, stated that the rules on division are designed to allow entrepreneurs to reorganise their activities with minimal cost. However, a division cannot have as its sole purpose the transfer of a single asset (such as real estate or a shareholding) from one company to another, since this can be achieved through an ordinary transfer transaction.

A share exchange ratio may be set at zero without rendering the division fictitious if the shareholders and their proportional holdings remain the same. Similarly, transferring a single asset (e.g., a share in another company) does not automatically make a division artificial.

However, if such circumstances occur together, i.e., the transfer of individual assets between companies without changes in capital, the division may be deemed fictitious because it conceals another transaction. In such cases, the legitimacy of the division should be justified in more detail in the division report.

Artificial restructuring often manifests in obtaining tax advantages. In case No. 3-22-282, Tallinn Circuit Court ruled that a merger conducted solely for tax exemption purposes was an artificial reorganisation. The court found that the true purpose was not to acquire participation in investment projects but to avoid income tax on tax-free dividend distributions, thereby justifying the application of section 84 of the Taxation Act.

The court emphasised that the right to tax exemption cannot be transferred independently of real economic substance; there must be a genuine link between the tax exemption and the associated assets. This case confirms that in reorganisations, not only the legal form but also the actual economic content of the transaction is assessed to prevent artificial tax benefits.

How to avoid registration refusal?

To avoid a situation where the registrar refuses to record the transaction, it is crucial to ensure that mergers and divisions have clearly defined economic substance, not just formal structure. Corporate reorganisations must comply with legal requirements to prevent artificial tax advantages and to ensure that asset transfers have genuine economic value. Companies should thoroughly document their objectives and ensure that transactions do not appear aimed at avoiding tax liabilities or creating fictitious reorganisations. A purely formal restructuring may lead to refusal of registration.

How to prepare for restructuring in practice?

It is important to map out the actual situation of the companies and the steps necessary to implement the planned structure. In any restructuring, the company’s existing contractual partners must also be taken into account, as a transformation, division, or merger may often alter contractual relationships. Special attention should be paid to the rights and obligations of contractual partners to ensure that their position remains clear after implementation.

The role and obligations of contractual partners

All existing company contracts should be reviewed to identify clauses concerning mergers, divisions, or transformations. Such contracts may impose obligations to notify partners within a certain period or obtain their consent. Failure to comply may result in contractual penalties.

To avoid disputes and penalties, it is advisable to conduct due diligence. This provides an overview of the company’s situation, rights, obligations, and possible restrictions affecting restructuring. Special attention should be paid to bank agreements, but restrictions may also arise from procurement, lease, or rental contracts, or from the conditions attached to financial aid.

Additionally, each restructuring must consider management and governance in the final structure, including potential changes to the management board or supervisory board.

How to inform and involve employees in the process?

Employees must not be overlooked in the restructuring process. They must always be informed and, in some cases, consulted. In cross-border restructurings, the Community-scale Involvement of Employees Act applies, which in certain cases requires ensuring employee participation in corporate governance. The restructuring agreement must specify the consequences for employees, and for cross-border transactions, the report must describe the effects on employees, including measures for protecting employment relationships and any significant planned changes in working conditions.

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[1] Administrative Court of Frankfurt, Judgment of 7 April 2021, Case No. 5 K 922/18.F.