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Estonian Legislation Guide in IFLR 1000 (2006)

21.07.2005

IFLR 1000, the international legal market’s leading guide to the top law firms advising on international corporate finance has requested Tark & Co to write the opening article for the guide's Estonian chapter.

The following is a legislation guide for Estonia contributed to IFLR 1000 (2006 issue) by Tark & Co partner Hannes Vallikivi:

"Estonian lawyers are used to constant changes to their regulatory environment. In recent years the driving force of changes has been the harmonization of Estonian law with EU law. The financial services reform in the EU adds to the turbulence. Court and regulatory practice, another important source of wisdom for practitioners, is emerging slowly in a small market. However, recent initial public offerings (IPOs), public takeovers and other sophisticated transactions have tested financial markets regulation.

Financial supervision

Estonia adopted a uniform financial supervision model in 2000, under the Financial Supervision Authority Act. The management of the EFSA was reorganized in 2005, and is now divided into prudential supervision and business conduct supervision. As a part of its activity, the EFSA issues guidelines to market participants. In 2005, it issued the requirements for the organization of the information technology sector, requirements for the organization of operational risk management, guidelines for reporting transactions by certain insiders, and requirements on informing life insurance customers.

Banking

The Credit Institutions Act 1999, which regulates commercial banks and savings unions, has been amended several times recently. Amendments that came into force on January 1 2005 updated the provisions regulating the licensing of banks and the acquisition of qualifying holdings. The content of the provisions remained essentially the same, allowing cross-border activity according to the Directive 2000/12/EC.

The Money Laundering and Terrorist Financing Prevention Act 1999 reflects the requirements of EU legislation (Directive 2001/97/EC). The Financial Collateral Directive was also implemented in May 2004, by making changes to several acts.

The securities market

Estonia missed the deadline for implementation of the new Prospectus Directive, and in mid-2005 the government was still preparing a draft implementation act. However, before the deadline expired and the council regulation regarding contents of prospectuses entered into force, two IPOs were completed, the first for six years. Utility company Tallinn Water and telecoms company Starman successfully went public, and listed their shares on the Tallinn Stock Exchange. The impact of those quickly and effectively conducted IPOs on future public offerings cannot be overstated. Indeed, at the time of writing this article, rumours about further IPOs in 2005 are circulating.

The implementation of the Market Abuse Directive (the MAD) enhanced the EFSA's supervisory powers, specifying the cooperation between it and foreign supervisory authorities, thus affirming the possibility for foreign supervised entities to enter the Estonian market.

Estonian takeover regulations were tested in the successful takeover of Hansabank by Swedbank (FöreningsSparbanken). At €1.7 billion, this was the biggest ever transaction in the Baltics, and was followed by a squeeze-out procedure. The transaction raised several legal questions about the process of takeover, most notably about the role of minority shareholders. In this light, implementation of the Takeover Directive should be a priority of the government. As the Takeover Directive allows opt-outs, it remains to be seen whether the legislator chooses the path of national protectionism or puts the interests of cross-border takeover activity first.

The Supreme Court of Estonia passed two judgments at the end of 2004 regarding the determination of fair price in the squeeze-out procedure. The Supreme Court also stressed the need to comply with the EU legislation when interpreting Estonian law, and implied that relevant market practice should be considered when deciding how to fill in the legal loopholes.

The Tallinn Stock Exchange - Estonia's only regulated secondary securities market - belongs to the OMX group, as do the exchanges in Riga and Vilnius. Securities listed on the main lists of those stock exchanges form a common Baltic list, although legally the listing still takes place on just one of the exchanges. The rules of the Tallinn Stock Exchange have recently been amended in line with the MAD. Moreover, corporate governance rules revolving around the comply-or-explain principle have been initiated by the exchange in cooperation with the EFSA.

The wording of the regulations governing investment firms has recently been amended, although the content of the regulations remains largely the same. At the time of writing this article, EFSA draft guidelines on investment services had been disclosed for comments.

The Investment Funds Act adopted in 2004 was thoroughly amended in January 2005. The changes concerned the cross-border provision of investment management services, the acquisition of a qualifying holding, and the supervision of investment management companies. Further changes to the Investment Funds Act, introducing venture capital funds as a special type of investment fund, are pending.

Insurance

A new Insurance Act came into force on January 1 2005, replacing the existing rules with a more elaborate framework regarding insurance activity and its supervision, including insurance mediation."

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