Enacted Summary

In its 2004 Corporate Governance Sector Assessment, the European Bank for Reconstruction and Development (EBRD) concluded that Estonian corporate governance legislation is in "medium compliance" with the Organization for Economic Cooperation and Development Principles of Corporate Governance. According to a 2006 EBRD Commercial Law Assessment, the institutional environment in Estonia is considered sound, with an impartial and generally experienced and competent court system. Legal procedures and measures are generally clear and enforceable, although it is considered easy for a defendant to delay proceedings. Furthermore, corporate information is reliable and statutory auditors are fairly independent from shareholders. However, shortcomings exist in terms of redress and disclosure of information, as well as in the definition of responsibilities for the management board. Procedures for obtaining disclosure are usually lengthy and complex, and the enforceability of disclosure is weak. Per the 2006 EBRD Assessment, the Commercial Code represents the primary legislation for corporate governance. It was last amended in January 2007 and the major amendments were regarded by a 2007 EBRD report as "the most significant developments affecting corporate governance" in Estonia at the time. Also, the Corporate Governance Recommendations, based on the "comply or explain" principle, entered into force on January 1, 2006, and aimed to enhance corporate governance and transparency. The code is generally compliant with the OECD Principles.

General Overview

The extensiveness of corporate governance legislation in Estonia was assessed by the European Bank for Reconstruction and Development (EBRD) 2004 Corporate Governance Sector Assessment Project. The EBRD came to the conclusion that corporate governance legislation was in "medium compliance" with the Organization for Economic Cooperation and Development's (OECD) Principles of Corporate Governance. According to a 2006 EBRD assessment on commercial laws of Estonia, the institutional environment in Estonia is considered sound, with an impartial and generally experienced and competent court system. Legal procedures and measures are generally clear and enforceable, although it is considered easy for a defendant to delay proceedings. Furthermore, corporate information is reliable and statutory auditors are fairly independent from shareholders. However shortcomings exist in the areas of redress and disclosure of information. Procedures for obtaining disclosure are usually lengthy and complex, and the enforceability of disclosure is weak.

According to the 2006 EBRD assessment, the Commercial Code represents the primary legislation for corporate governance. The Commercial Code was last amended on January 1, 2007; these major amendments were regarded as "the most significant developments affecting corporate governance" in Estonia at the time of the 2007 EBRD corporate governance legislation assessment project. The Commercial Code mandates a two -tier system for a public company, where the supervisory board members are elected by the shareholders' meeting and the supervisory board elects members of the management board. The Corporate Governance Recommendations issued by the Financial Supervisory Authority (FSA) in co-operation with the Tallinn Stock Exchange (TSE) entered into force on January 1, 2006 with the goal of enhancing corporate governance and transparency through notably improved reporting systems by listed companies. According to the 2007 EBRD corporate governance legislation assessment report, the code is "generally compliant with the OECD Principles" (p. 3), enforced by regulations of the TSE, and based on the comply-or-explain principle. Recommendations refer, inter alia, to the composition and responsibilities of management boards, the role of stakeholders, and the disclosure of information in order to ensure fair treatment and equal access to information for all shareholders.

Estonia's financial sector is modern and efficient, states the U.S. Department of Commerce's (DoC) 2009 Country Commercial Guide. The FSA is an independent agency which is responsible for banking, insurance, and securities market supervision in order to enhance the stability, reliability, transparency, and efficiency of the financial sector. The TSE is the only regulated securities market in Estonia. As at end of December 2007, according to the FSA's 2007 Annual Report, 18 companies were listed on the Tallinn Stock Exchange (TSE). The TSE began operations in 1995, and is the only regulated secondary market for securities in Estonia. The NASDAQ OMX Group announced on January 14, 2009 that the Tallinn Stock Exchange would be renamed as NASDAQ OMX Tallinn. The NASDAQ OMX Group was created in 2008 and is the world's largest exchange company.

The Investor Protection Index is a subcomponent of the World Bank's 2009 Doing Business Indicators, and consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes range between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Estonia scores 8.0 in the disclosure index against a regional average of 5.9 and an OECD average of 5.9. It scores 3.0 in the Director Liability Index against a regional average of 4.2 and an OECD average of 5.0 and 6.0 in the Shareholder Suits Index against a regional average of 6.2 and an OECD average of 6.6.

The Principles

IIPrinciple I: Ensuring the Basis for an Effective Corporate Governance Framework

The institutional environment in Estonia is considered sound, with an impartial and generally experienced and competent court system, as stated in the 2006 EBRD assessment. Legal procedures and measures are generally clear and enforceable, although it is considered easy for a defendant to delay proceedings. Furthermore, corporate information is reliable and statutory auditors are fairly independent from shareholders.

Per the same EBRD report, the Commercial Code represents the primary legislation for corporate governance. The Commercial Code was last amended on January 1, 2007; these major amendments were regarded as "the most significant developments affecting corporate governance" in Estonia at the time of a 2007 EBRD corporate governance legislation assessment project. The Corporate Governance Recommendations entered into force on January 1, 2006 with the goal of enhancing corporate governance and transparency through notably improved reporting systems by listed companies. As noted in the 2007 EBRD corporate governance legislation assessment report, the code is generally compliant with the OECD Principles, enforced by regulations of the Tallinn Stock Exchange, and based on the comply-or-explain principle. Recommendations refer, inter alia, to the composition and responsibilities of management boards, the role of stakeholders, and the disclosure of information in order to ensure fair treatment and equal access to information for all shareholders.

IIPrinciple II: The Rights of Shareholders and Key Ownership Function

The 2006 EBRD study shows that procedures for obtaining disclosure are usually lengthy and complex, and the enforceability of disclosure is weak. The enactment of the Corporate Governance Recommendations on January 1, 2006 provides for the fair treatment and equal access to information for all shareholders. According to a 2009 legal update by the law firm Sorainen, amendments were made to Commercial Code in June 2008 and November 2008, "permitting prompt transfers of share capital payments into the account of a company under formation electronically or by notary" and making the formalization requirements with respect to shareholders' meeting minutes, voting record, and shareholders' resolutions more stringent, "if the latter serves as a basis for election of a management board member" (p. 1). However, the sources cited above do not directly address Estonia's compliance with this principle.

IIPrinciple III: The Equitable Treatment of Shareholders

The 2006 EBRD study shows that minority shareholders in Joint-Stock Companies can call a general meeting to request information from management. However they need to be backed by other shareholders representing the majority at the meeting in order to adopt decisions. In relation to redress, actions available to minority shareholders are also limited and costly. Furthermore, procedures for obtaining disclosure are usually lengthy and complex, and the enforceability of disclosure is weak. The enactment of the Corporate Governance Recommendations on January 1, 2006 provides for the fair treatment and equal access to information for all shareholders. However, the sources cited above do not directly address Estonia's compliance with this principle.

IIPrinciple IV: The Role of Stakeholders in Corporate Governance

As reported in the TSE 2007 Corporate Governance study, the enactment of the Corporate Governance Recommendations on January 1, 2006 provides recommendations as to the role of stakeholders in order to ensure fair treatment and equal access to information for all shareholders. However, the sources cited above do not directly address Estonia's compliance with this principle.

IIPrinciple V: Disclosure and Transparency

The institutional environment of disclosure is considered sound, according to the 2006 EBRD assessment. As reported in the EBRD's 2007 Corporate Governance Legislation Assessment, the Corporate Governance Recommendations entered into force on January 1, 2006 to enhance corporate governance and transparency among listed companies.

According to the 2007 KPMG Investment Guide, beginning in 1995, Estonia based its national accounting standards on International Financial Reporting Standards (IFRSs). Pursuant to the 2003 Accounting Act, all Estonian companies may choose whether to apply Estonian Accounting Standards (RTJs) or IFRSs. KPMG states that RTJs generally require less disclosure than IFRSs and are primarily designed for the application by small and medium sized entities. Therefore, differences between RTJs and IFRSs occur, and some areas are not covered at all. However, according to the 2004 World Bank Report on the Observance of Standards and Codes (ROSC) on Accounting and Auditing, public interest companies, such as credit institutions, financial holding companies, mixed-activity holding companies, insurers, and companies whose shares or other securities are traded on a stock exchange in Estonia or other European Union (EU) Member State are required to prepare their consolidated and legal entity financial statements pursuant to IFRSs beginning January 1, 2005. Estonia thereby complies with European Commission (EC) Regulation No 1606/2002, which requires all EU listed companies to prepare consolidated accounts following IFRSs as endorsed by the EC starting January 1, 2005.

IIPrinciple VI: The Responsibilities of the Board

As stated in the 2006 EBRD assessment, amendments to the Commercial Code on January 1, 2006 improved the rights and duties of companies' management bodies. The Commercial Code mandates a two-tier system for a public company, where the supervisory board members are elected by the shareholders' meeting and the supervisory board elects members of the management board. The enactment of the Corporate Governance Recommendations on January 1, 2006 provides recommendations as to the composition and responsibilities of management boards in order to ensure fair treatment and equal access to information for all shareholders. However, the publicly available information does not directly address Estonia's compliance with this principle.