On May 10 2002 the Law on the Prevention of Conflicts of Interest in the Activities of State Officials took effect. The purpose of this law is to prevent the personal or material interests of state officials from affecting their activities as state officials.

The law's provisions are generally intended to apply to such state officials as the state president, parliamentary deputies of the Saeima and employees of state authorities. However, for the purposes of the law, members of the board of directors and the supervisory board of capital companies in which the shareholding of the state or a municipality, separately or jointly, exceeds 50% (state companies) are treated as state officials. Most of the largest enterprises in the strategically important sectors of the Latvian economy, such as telecommunications, air transport and energy, have a state shareholding of more than 50%.

The law restricts members of the board of directors and supervisory board of state companies from holding more than one office. They are only allowed to combine the state official's office with:

  • an office that they occupy in accordance with the law or regulations or instructions of the Cabinet of Ministers;

  • an office in a public, political or religious organization;

  • teaching, scientific, medical and creative work; and

  • other offices within a state or municipal institution (or a state company), as long as this creates no conflict of interest and written permission is obtained from a state or municipal official who has appointed, approved or elected such person to the office.

Consequently, the law rules out the possibility of being a member of a state company's board of directors or supervisory board at the same time as holding office in another capital company in which most of the share capital is held by private persons, unless this combination of offices is conducted in accordance with the law or on the instructions of the Cabinet of Ministers. The new law applies to many persons in Latvia who hold such positions concurrently. In order to comply with the law, these persons are forced to choose one office and resign from the other position.

One interesting issue presented by the new law is its application to foreigners who act as a member of the board of directors or the supervisory board in both a state company and a private company. The law does not answer the question of whether the law's restrictions also apply to offices in foreign companies that are not registered and do not operate in Latvia. Most foreign specialists who act on the boards of directors or supervisory boards of Latvian state companies also hold offices in other private foreign companies. The new law might thus oblige them to terminate their position in either the state company or the foreign private company.

With respect to state companies with foreign investment, the issue could be approached by invoking international treaties regarding the protection of foreign capital. Such treaties specify the principle of foreign investment management protection - that is, the state may not obstruct such management without reason or in a discriminating way. The new law's restrictions arguably narrow the range of persons who may be appointed or elected by foreign investors as members of the management or supervisory board in state companies in which they are shareholders. This would violate the rights of foreign investors to manage their investment as established under international treaties, and would thus render the law contrary to international treaties to which Latvia is bound. In such cases the provisions of international treaties would prevail, under which foreign investors would be entitled to appoint or elect persons who concurrently hold office in a foreign private company to manage their investment in the state company.

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]).