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Attorney at Law Explains: What to Do if Shareholders or Partners Refuse to Approve the Annual Report?
Attorney at Law Explains: What to Do if Shareholders or Partners Refuse to Approve the Annual Report?
Estonian businesses are well aware of their obligation to submit an annual report to the commercial register. Nevertheless, just days before the 2024 reporting deadline, a large number of companies have yet to file their report. Annika Vait, Partner and Attorney at Law at RASK, explains what steps can be taken if shareholders or partners do not approve the annual report.
According to the e-Business Register, only about 40% of entities registered in Estonia have submitted their annual report to date. The reasons for non-compliance vary — from the heavy workload of accountants and auditors to the deliberate disregard of the obligation. In the latter case, it is often assumed that the state will quickly strike the entity from the register.
During an extensive register cleanup in 2024, the state removed over 31,000 entities from the commercial register. Fewer than 7% of these have since been reinstated, suggesting that for many, being struck off the register was an intentional and expected outcome.
However, relying on the state to terminate an entity may not be the cost-saving solution some expect. In 2024, the registrar has significantly increased the number of fines imposed. Last year alone, approximately 43,000 fines were issued for failure to submit the annual report on time. These fines may be levied not only on the entity itself, but also on management board members — and in some cases, even on shareholders.
A common issue that prevents approval of the report is disagreement among shareholders or partners. In such cases, the report prepared by the management board is not approved, placing the board in a situation where it cannot fulfill its legal obligation — as only an approved report can normally be submitted to the commercial register.
To address this, a legal amendment entered into force in 2023, allowing management boards of certain types of legal entities to submit an unapproved annual report to the register, accompanied by an appropriate note. This option is available for private limited companies, public limited companies, non-profit associations, political parties, commercial associations, land improvement associations, and trade unions. However, the regulation does not apply to, for example, apartment associations or foundations.
The new regulation thus provides management boards with a clear framework for action in exceptional circumstances. At the same time, it’s important to remember that the board remains obliged to submit the report for approval by the highest governing body and to convene a meeting for this purpose if necessary. If the report is ultimately not approved, the board may — in the case of most legal entity types — submit the report to the register in unapproved form with the relevant notation. This allows the company to avoid fines and the risk of being struck off the register.
It is also important to note that submitting an unapproved report does not release the board from its duties. The explanatory memorandum to the legal amendment emphasizes that if the report is approved at a later stage, the management board must resubmit it to the register as a revised report. From the standpoint of credibility and reputation, it should also be taken into account that the remark indicating the report was submitted without approval will be visible in the register to third parties.
According to the e-Business Register, only about 40% of entities registered in Estonia have submitted their annual report to date. The reasons for non-compliance vary — from the heavy workload of accountants and auditors to the deliberate disregard of the obligation. In the latter case, it is often assumed that the state will quickly strike the entity from the register.
During an extensive register cleanup in 2024, the state removed over 31,000 entities from the commercial register. Fewer than 7% of these have since been reinstated, suggesting that for many, being struck off the register was an intentional and expected outcome.
However, relying on the state to terminate an entity may not be the cost-saving solution some expect. In 2024, the registrar has significantly increased the number of fines imposed. Last year alone, approximately 43,000 fines were issued for failure to submit the annual report on time. These fines may be levied not only on the entity itself, but also on management board members — and in some cases, even on shareholders.
A common issue that prevents approval of the report is disagreement among shareholders or partners. In such cases, the report prepared by the management board is not approved, placing the board in a situation where it cannot fulfill its legal obligation — as only an approved report can normally be submitted to the commercial register.
To address this, a legal amendment entered into force in 2023, allowing management boards of certain types of legal entities to submit an unapproved annual report to the register, accompanied by an appropriate note. This option is available for private limited companies, public limited companies, non-profit associations, political parties, commercial associations, land improvement associations, and trade unions. However, the regulation does not apply to, for example, apartment associations or foundations.
The new regulation thus provides management boards with a clear framework for action in exceptional circumstances. At the same time, it’s important to remember that the board remains obliged to submit the report for approval by the highest governing body and to convene a meeting for this purpose if necessary. If the report is ultimately not approved, the board may — in the case of most legal entity types — submit the report to the register in unapproved form with the relevant notation. This allows the company to avoid fines and the risk of being struck off the register.
It is also important to note that submitting an unapproved report does not release the board from its duties. The explanatory memorandum to the legal amendment emphasizes that if the report is approved at a later stage, the management board must resubmit it to the register as a revised report. From the standpoint of credibility and reputation, it should also be taken into account that the remark indicating the report was submitted without approval will be visible in the register to third parties.