Mandatory Reserve
Representative Authority of the Board of Directors
Election of Directors and Supervisory Board Members
Liability
Registration of Individuals in Commercial Register
Payment Share Capital Prior to Registration
Shares and Share Capital
Registration and Documents of Incorporation
Shareholders Meetings
On February 14 2002 the Saeima (Parliament) adopted amendments to the Commercial Law which the state president had returned to the Saeima for a second review. Some amendments simply reword and develop existing articles of the Commercial Law, without changing their intended content, but there are also major amendments which relate to a company's share capital mandatory reserve and other issues.
The provisions regarding the mandatory reserve of a capital company have been deleted from the Commercial Law. The law will no longer require the establishment of a reserve, mandatory or otherwise.
At the same time, changes to other provisions which referred to the mandatory reserve have been made as follows:
- The amount of a capital company's mandatory reserve, and the procedures for its formation and use, have been deleted from the information which must be specified in the Commercial Register and the articles of association;
- The mandatory reserve is no longer included when calculating the ratio between equity capital and share capital in circumstances where the creation of any right or obligation depends on this ratio. For example, when calculating the difference that the company may transfer to the share capital for increasing the par value of shares, the mandatory reserve shall not be taken into account; and
- The mandatory reserve shall not be taken into account when calculating dividends, in proposals regarding the distribution of net profit by the board of directors, and in other cases specified in the law.
Representative Authority of the Board of Directors
Amendments have been made to the Commercial Law in respect of the representative authority of boards of directors of limited liability companies and joint stock companies. Joint representative authority of the board of directors and the proctor may now be specified in the company's articles of association. Other amendments do not change the representative authority of the board of directors in essence, but have merely been reworded to make legal regulation more clear and explicit.
Changes in representative authority are determined by a decision of the shareholders (limited liability company) or the supervisory board (joint stock company). With respect to such changes, an application must be filed with the Commercial Register, with the respective decision attached. This provision has been included in order to ensure that third parties are notified of changes to the representative authority of the board members.
Election of Directors and Supervisory Board Members
The amendments to the Commercial Law provide for the following new regulations in respect of members of the board of directors and supervisory board:
- The Commercial Law no longer regulates the re-election of members of the board of directors or supervisory board;
- No alternative members of the board of directors can be elected in a joint stock company in order to replace existing board members; and
- If a member of a joint stock company's supervisory board resigns or is dismissed from this position prior to the expiry of the supervisory board's term of office, arrangements must be made for the entire supervisory board to be elected anew.
The amendments to the Commercial Law specify a non-exhaustive, unified list of the grounds on which the shareholders meeting (joint stock company) and the supervisory board (limited liability company) may dismiss a member of the board of directors. The previous wording of the Commercial Law was not consistent, as the lists differed for limited liability companies and joint stock companies.
The following amendments have also been made with respect to liability issues.
Scope of liability
Third parties who persuade the members of a company's management bodies to conduct activities adverse to the interests of the company will be liable for losses incurred by the company's shareholders. In such cases, liability will be in respect of losses incurred by the company and its creditors. The same scope of liability is also specified for the members of the board of directors and the supervisory board (and for the proctor and the authorized representative, if they are jointly and severally liable together with the person who has exerted such influence).
Preconditions for liability
Liability of the board of directors, the supervisory board, a proctor or an authorized person arises from losses caused and liability in such cases is presumed. The amendments to the Commercial Law clearly state that these parties are obliged to prove that they have acted with the diligence of an honest and careful manager if they wish to be released from liability for losses. Consequently, persons who wish to claim damages need not prove the guilt of the person who is responsible for the damage.
The amendments to the Commercial Law exclude a number of activities in respect of which liability of members of the board of directors or supervisory board may arise. In such cases liability depends solely on whether these persons acted as an honest and careful manager.
The amendments also state that if the members of the board of directors or supervisory board can prove that they have acted with the diligence of an honest and careful manager, they are released from liability for losses suffered by the capital company.
Registration of Individuals in Commercial Register
The conditions in which an individual is obliged to register himself or herself in the Commercial Register have been reduced. In future, an individual must register himself or herself if (i) his/her yearly turnover exceeds Lats20,000, and (ii) he or she employs more than five employees. The previous provision whereby an individual had to have a permanent equipped place for the rendering of services or the sale of goods before being obliged to register has been deleted.
Under the amendments to the Commercial Law an individual is still required to register himself or herself in the Commercial Register if his/her annual turnover from business activities exceeds Lats200,000, irrespective of any other preconditions.
Payment of Share Capital Prior to Registration
The amendments to the Commercial Law have changed the amount of share capital that must be paid up prior to submission of the registration application when a limited liability company is established. Now, 50% of the share capital must be paid up before the application is submitted. The remaining portion of the share capital must be fully paid within one year of the date of the company's registration in the Commercial Register. Previously, the Commercial Law provided that the full share capital of a limited liability company had to be paid up before registration.
Further to the amendments, the share capital may now be increased only by way of (i) a sale of new shares or an increase of the par value of existing shares, in the case of a limited liability company, and (ii) the issue of new shares, in the case of a joint stock company.
The rules regarding employee shareholdings have also changed. Previously, employee shareholdings could not be disposed of or acquired through inheritance. However, the Commercial Law now provides that a change in ownership of employee shareholdings is allowed, unless any restrictions in this respect are specified in the articles of association. Where an employee or a member of the board of directors or the supervisory board terminates his/her employment with the company, the company has a pre-emptive right to his/her shareholding.
Similarly, the provisions regarding the inheritance of limited liability company shares have also been amended. In future, these shares will be transferred to the shareholder's heirs, unless the company's articles of association stipulate that they must be transferred to the company. In the latter case, the company is obliged to compensate the heir.
Registration and Documents of Incorporation
Detailed information on a company's representative authority must be submitted to the Commercial Register. In the case of a partnership, information must be provided on its members and the scope of their representative powers - for example, who is entitled to represent the general partnership, whether they may do so individually, jointly or jointly with a proctor, and who has been excluded from representing the partnership.
In the case of a capital company, similar information must be provided on the representative powers of the members of the board of directors.
In addition to the amount of share capital, the number and par value of the company's shares must be specified in the foundation agreement.
Information regarding mandatory and other reserves need no longer be specified in the Commercial Register or in the company's documents of incorporation.
Once the amendments to the Commercial Law take effect, the founding members must sign the company's documents of incorporation before a public notary or in the county court.
The amendments to the Commercial Law have altered the existing rules that require a participants meeting of a limited liability company to be convened in cases where the company's equity capital is less than three-quarters of the company's share capital. In future, the directors will be only obliged to convene such a meeting if the company's losses exceed one-half of its share capital.
Similarly, the board of directors of a joint stock company will be obliged to notify the supervisory board and to convene a shareholders meeting if the company's losses exceed one-half of the share capital, and not when the equity capital is less than three-quarters of the share capital as under the current wording of the Commercial Law.
In cases where such meetings must be convened, the Commercial Law no longer specifies the resolutions which must be made by the participants meeting of a limited liability company. However, the shareholders meeting of a joint stock company must take decisions on the following issues:
- how to cover the company's losses;
- granting of proper security to creditors;
- reduction of the share capital;
- termination of activities and liquidation or reorganization; and
- submission of an insolvency petition, where appropriate.
For further information on this topic please contact Filip Klavins at Klavins & Slaidins by telephone (+371 703 5222) or by fax (+371 703 5252) or by email ([email protected]).