APPROVAL OF ANNUAL REPORTS – NECESSITY AND REQUIREMENTS

In Estonia, the half-year mark tends to be a busy time for local companies and their accountants as this is when six months pass from the end of their last financial year (which is often the calendar year) and they need to submit to the Commercial Register their annual reports. Even though the electronic submission of annual reports through the Company Registration Portal has been made as quick and easy as possible, the entire process itself, from the preparation of the annual report to its submission, takes much longer and is more complex. In addition, there is also the audit requirement to consider for public limited companies and certain private limited companies. The Commercial Code requires the annual report to be approved by the shareholders' meeting or the general meeting of shareholders of the company before submission to the Commercial Register.

It arises from the judicial practice of the Supreme Court (judgment No. 2-17-9986 of 07.11.2018) that the approval of a company's annual report is a formal act by which the company declares that its economic situation at the end of the financial year was exactly as noted in the report. The approved annual report also serves as the basis for dividend payments – the approved annual report shows whether and in what amount the company has distributable profits. The shareholders' meeting or the general meeting of shareholders of the company may simultaneously adopt resolutions on the approval of the annual report and the distribution of dividends or resolve the payment of dividends later.

As is the case with the adoption of resolutions in general, the requirements applicable to the resolution on the approval of the annual report for private limited companies and public limited companies are similar but somewhat stricter for the latter. For example, the shareholders of a private limited company may adopt a resolution on the approval of the annual report even without calling a meeting (by voting by mail), whereas a public limited company may only do so if it is permitted in its articles of association. Another important difference is that the notice calling the general meeting of the shareholders must specify a location and the procedure for the examination of the annual report and related documents. Complying with the requirements provided for in law and the articles of association of the company helps prevent the subsequent contestation by other shareholders of the resolution on the approval of the annual report because the above-mentioned resolution is void if the requirements of law or the articles of association are materially violated. Timely and correct compliance with such requirements also ensures that the company can submit its annual report to the Commercial Register on time to avoid being fined by the registrar or the compulsory dissolution of the company by the registrar.

Considering the restrictions imposed with regard to the spread of COVID-19 and the emergency situation established in Estonia and elsewhere, the Estonian legislator, as an exception, this year extended the time limit for the submission of annual reports until 31 October 2020. However, it is important to note that the above extension only applies to companies which would normally be required to submit its annual reports in the period from 12.03.2020 to 31.08.2020. The extended time limit gives companies more time to call and conduct the shareholders' meeting and the general meeting of shareholders because it may have been difficult or completely impossible to conduct such meetings during the emergency situation.

Legal advisers at Leinonen OÜ are ready to assist and advise clients with the preparation of resolutions on the approval of annual reports and the conduct of any related operations if needed.