Right of first refusal is quite often a centerpiece of hostile takeover battles. In many cases it plays a significant role in the more friendly takeover negotiations as well. Use of right of first refusal based on the law and articles of association has been heavily disputed and rules on that critisized in Estonia for many years. It has almost seemed that the legislator can not get it right and this concept remains uneffective for ever.

At the end of October the parliament of Estonia took yet another shot at repairing the situation. The goal is to make the post factum right of first refusal as regulated by the commercial code effective and trustworthy.

So far one of the central problems has been for example the unclarity in public limited companies (in Estonian “aktsiaselts”) whether a person using the right of first refusal (a co-shareholder) has a direct claim against the purchaser of shares. It has been clear that a co-shareholder has a claim against the selling shareholder on the basis of the rules of right of first refusal integrated in the laws, but the claim against the third party purchaser has failed in many occasions.

The new rules for private limited liability companies (in Estonian “osaühing”) foresee that it can be provided in the articles now that a share can not be sold to a non-shareholder unless at least 2/3 of votes are given in favour of such transaction in the general meeting. If such approval is received the right of first refusal does not apply. This new rule is targeted at giving the shareholders a possibility to make private limited companies more “closed” and capable of selecting their shareholders. At the same time it may give shareholders holding 2/3 of votes more power vis a vis minority.

New rules for public limited companies (in Estonian “aktsiaselts”) foresee that should there be stated in the articles of association of a company that the right of first refusal applies to the sale of its shares, there shall be entered a mark with respect to this in the Central Depository of Securities (where shareholder lists of all public limited companies are kept) and any transfers damaging or limiting the right of first refusal shall be void.

It remains to be seen and tested by practice whether the new rules actually help the market place to function more smoothly. New rules will be applicable from January 1, 2006.