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In December 2007 the Government submitted proposed amendments to the Law on Companies to the Parliament (Seimas) for consideration. The amendments are aimed at implementing Directive 2006/68/EC amending Directive 77/91/EC as regards the formation of public limited liability companies and the maintenance and alteration of their capital (the Directive) and at addressing some of the questions that have arisen in practice under the existing law. Laimonas Skibarka, partner of Sorainen Vilnius office, participated in the working group which prepared the proposed amendments to the Law on Companies.
The two most significant novelties proposed in the draft amendments are based on the Directive and relate to relaxation of two notorious rules which were imposed on companies as a result of the Second Company Law Directive (i.e. Directive 77/91/EC). The current wording of the Law on Companies explicitly requires all non-cash contributions for newly-issued shares of a company to be evaluated by an independent expert. The proposed amendments relax the rule by permitting companies not to obtain an expert report where the following assets are contributed as consideration for allotted shares:
(i) transferable securities or money market instruments with a certain track record of trading on a regulated market;
(ii) assets which have been valued by an expert not less than six months before the date of contribution in accordance with the laws on valuation; and
(iii) assets whose value is derived from the audited financial accounts of the previous year.
The second relaxation relates to the possibility for companies to grant financial assistance (i.e. advance funds, make loans, or provide security) for the purpose of acquiring its shares. The blanket ban on granting financial assistance has been criticised for being unnecessary and for obstructing viable commercial transactions (especially leveraged buyouts). The proposed amendments would allow financial assistance provided that certain conditions are fulfilled:
(i) the decision to grant financial assistance must be adopted at the general meeting of shareholders upon receipt of a report to that effect from the Board;
(ii) the transaction must be made on an arms length basis,
(iii) after the transaction the net assets must still exceed the companys own capital;
(iv) a special reserve unavailable for distribution must be formed; and
(v) a certain level of ownership capital (equity) of the company must be maintained. In addition to the novelties resulting from implementation of the Directive, it is also proposed to remove the existing prohibition in respect of reducing a companys authorised capital when the company has long-term liabilities.
On 18.10.2007 the LSC provided clarification on Article 31 of the Law on Securities which imposes an obligation on a shareholder acquiring over 40% of all votes at the general meeting of an issuer to launch a mandatory tender offer (takeover bid) to acquire the shares of the remaining shareholders. The LSC went beyond the literal interpretation of Article 31 of the Law on Securities by opining that the obligation to launch a tender offer will apply even when control is acquired over a majority shareholder which holds more than 40% of all votes at the general meeting of the issuer. Thus, according to this clarification, indirect acquisition of over 40% of all votes at the general meeting of the issuer would also trigger the obligation to launch a mandatory tender offer. Besides, the obligation to launch a mandatory tender offer would apply even if a majority shareholder, whose control is taken over, had already exercised a takeover bid in the past.
On 04.10.2007 the LSC provided clarification on the scope of companies which are subject to takeover bids, squeeze-outs, and sell-outs as determined in Part IV of the Law on Securities. The LSC explained that this obligation applies only to companies that qualify as issuers under the Law on Securities and provided that their shares granting voting rights are traded on a regulated market or the shares are offered publicly. Thus, when a company qualifies as an issuer only due to issue to the regulated market of debt transferable securities, for example bonds, it will not be subject to a takeover bid, squeeze-out, or sell-out.
EU Directive 2005/56/EC on cross-border mergers of limited liability companies, which introduces a facilitative framework for mergers between companies in different Member States of the European Economic Area, has been transposed in Estonia and Lithuania. The Latvian Cabinet of Ministers has also adopted amendments to the Commercial Law, although these are not yet in force. Lithuania is the only one of the Baltic States to have chosen to implement the Directive by adopting a new law, while Estonia and Latvia decided in favour of amending the existing legislative framework. It is expected that the legislation will facilitate cross-border mergers between businesses currently operating or planning to operate in two or three Baltic States, but unable or unwilling to form a European Company (SE).
The purpose of the Directive and implementing legislation is to simplify the procedures and remove legal and administrative obstacles for mergers where at least one of the companies involved in a merger is registered in another Member State of the European Economic Area. Prior to implementation of the Directive, these cross-border mergers were impossible in the Baltic States, except through formation of a European Company (SE). Although the main steps and documents required for merger in general remain the same in all three Baltic States, the new legislation harmonises the process and implements some specific requirements set out by the Directive. For example, the merger documents drawn up and the main procedures carried out in the home state of a company taking part in a cross-border merger are verified by the authorities of that state. If all requirements have been complied with, the authority of the home Member State issues a certificate to that effect which must be submitted to the authorities of the Member State where the acquiring company is located and the merger may be finalised.
Since the amendments to the Latvian Commercial Law have not been adopted yet, the table below outlines the implementation of optional provisions of the Cross-Border Directive in Estonia and Lithuania. See the table on page 2 Additional information: Laimonas Skibarka e-mail: firstname.lastname@example.org
On 01.03.2008 a new version of the Law on Collective Investment Undertakings (the Law) will come into force. It addresses inadequacies that resulted from practice when applying the current version of the law.
The previous version of the Law was adopted in implementation of the UCITS Directive1 into Lithuanian law. Hence, the law only recognised and regulated the activity of open-ended collective investment undertakings established as companies or as common funds.
The new version of the law introduces a number of significant novelties relating to the form of a collective investment undertaking (CIU). Firstly, the Law allows formation of a closed-end investment company (CEIC) issuing a fixed number of shares or a closed-end investment fund issuing units, the shares/units of which are redeemable only on liquidation of the company/fund or at any other time established in its statutes/rules. Secondly, the Law introduces another categorisation of CIU: (i) CIUs established under the framework of the UCITS Directive (hence, combined CIUs); and (ii) specialised CIUs (including CIUs investing in Transferable Securities, Private Equity CIUs, Real Estate CIUs, Alternative CIUs and CIUs investing in other CIUs) to which the requirements of the UCITS Directive do not apply. Moreover, the Law also enables setting up a joint collective investment undertaking. This may take the form of an openend investment company or a common fund the assets of which are divided into separate subfunds.
These novelties also include other changes to the CIU regulatory framework. To start with, specialised CIUs may invest their assets in real estate as well as in securities of companies admitted to trading on a regulated market and in other alternative investment instruments.
Under the new version of the Law, only a public company holding a CEIC licence issued by the Lithuanian Securities Commission (the LSC) will be entitled to engage in CEIC activities. A public company seeking engagement in CEIC activities is required to apply to the LSC with its programme of intended activities and other information, on the basis of which the LSC would be able to decide if the company meets requirements for licensed activities.
Managers of management companies (i.e. companies engaged in managing investment companies or funds) will be subject to extremely strict standards of good repute, which were not emphasised in the previous wording of the Law.
The competence of the LSC has been extended by granting wider control in respect of use of financial derivatives by CIUs and assessment of related risks, merging common funds and distribution of units and shares of CIUs.
Issues regarding acquisition of a qualifying holding of a management company are considered separately. If a person wishing to acquire a qualifying interest in a management company is a licensed management company in another Member State of the European Economic Area, or a financial brokerage company, credit institution, insurance company, or a parent company or a controlling person of any of those entities, the LSC is required to seek an opinion from the regulatory authority of the respective Member State regarding that person.
According to the Law, a permit from the LSC is required for approval, change of or supplement to the digest of instruments of incorporation as well as for merging common funds administered by a management company.
This new version of the Law was intended to harmonise the existing law with Commission Directive 2006/73/EC of 10.08.2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive.
Additional information: Algirdas Peksys
Lithuanian Supreme Court clarifies issues on execution of shareholders' pre-emption rights in private limited companies
Two recent decisions of the Lithuanian Supreme Court have shed some light on uncertainties related to shareholders' pre-emption rights in private companies as established in Article 47 of the Law on Companies. In its rulings (Lithuanian Supreme Court Decision No. 3K-3-495/2007 dated 19.11.2007 and Lithuanian Supreme Court Decision No. 3K-3-464/2007 dated 14.12.2007) the Supreme Court addressed several important issues:
1. A shareholder who serves a written notice expressing its intention to sell shares in a private company but later decides to change the number of shares offered for sale and/or their price must serve a new written notice with the respectively revised number of shares and/or their price. This principle also applies to notices served by groups of shareholders.
2. The pre-emption right may not be assigned to another person. Only shareholders who hold shares of a private company on the day when a written notice on the contemplated sale of shares is served on the company may exercise their pre-emption right to buy shares offered for sale.
3. The shareholders of a private company retain pre-emption rights even in certain cases when the shares of the company are transferred during enforcement of a court decision. The Supreme Court applied a restrictive interpretation of Article 47 of the Law on Companies which provides that shareholders' pre-emption rights do not apply when shares are transferred under a court decision. According to the Supreme Court, the exemption applies only when shares are sold at public auction, but not when during enforcement of a court decision the shares are sold to a buyer which is offered by the debtor himself (rather than through public auction).
Procedure for forced sale of shares applied in practice
In UAB Kapitalo valdymo grupe v. UAB Penki kontinentai (Lithuanian Supreme Court Decision No. 3K-3-483/2007 dated 12.11.2007), the Lithuanian Supreme Court ruled that if a shareholder acts unfairly and unreasonably towards the company and other shareholders, these actions may be qualified as unlawful and give rise to the forced sale of shares. In this case, the Lithuanian Supreme Court stated that continuous conflicts between two shareholders of the company (e.g. a deadlock situation at general meetings, blocking access to information, actions resulting in deterioration of financial status of the company), which were not likely to change in the future, constituted grounds for the forced sale of shares of one of the shareholders (in this case, the respondent) in accordance with Article 2.115 of the Civil Code. This was one of the first important cases where the procedure for forced sale of shares in a private company as provided by the Civil Code was applied in practice. It is also a good example of how shareholders with 50/50 shareholdings in a company without a proper shareholders agreement may end up in a bitter deadlock and protracted litigation.
EU Directive 2007/63/EC amending Council Directives 78/855/EEC and 82/891/EEC as regards the requirement of an independent experts report on the occasion of merger or division of public limited liability companies was adopted on 13.11.2007. Under the Directive, neither an examination of the draft terms of a merger or division nor an expert report is required if all the shareholders of each of the companies taking part in the reorganisation have so agreed. This exemption will facilitate mergers and divisions of companies when all shareholders agree that there is no need for an expert examination. This principle was introduced in the Cross-Border Mergers Directive (discussed above) and has now also been extended to local mergers and divisions. The Directive must be transposed into national laws by 31.12.2008.
Additional information: Mantas Petkevicius e-mail: email@example.com