Filips K Klavins February 5 2003 New Law Supersedes Privatization Regime Ellex | Corporate Finance/M&A - Latvia Filips K Klavins Corporate Finance/M&A Sale of State and Municipal SharesChange of Corporate StatusImplications On January 1 2003 the Law on State and Municipal Shares and Capital Companies took effect. This law regulates the establishment, operation, liquidation and reorganization of state and municipal capital companies registered in the Commercial Register. A state or municipal capital company is a company in which all shares are owned by the state or a municipality. Issues not regulated by the law are governed by the provisions of the Commercial Law.This law also regulates the procedure for the disposal of state and municipal shares, and for the reorganization of state and municipal capital companies into private capital companies.Sale of State and Municipal SharesA decision to sell state or municipal shares must be taken by the Cabinet of Ministers or the municipality, respectively. All further action after this decision has been made will be undertaken by the institution which is responsible for effecting the sale of state capital shares (currently the non-profit joint stock company the Privatization Agency), or alternatively by the municipality or its authorized institution.State and municipal shares must be sold at their market value, which is determined by an independent certified valuator in accordance with the evaluation standards recognized in Latvia.The procedure for the sale of such shares is specified in the terms of sale. In the case of state shares, the terms of sale are developed and approved by their seller (currently the Privatization Agency). The terms of sale for municipal shares are approved by the municipal council. Before the terms for the sale of state shares are approved, the Cabinet of Ministers is entitled to specify or amend them. The municipality enjoys a similar right in cases where shares it owns are to be sold. The law restricts the percentage of shares which may be sold to employees of capital companies to 20%.If the state is not the sole shareholder in the company whose shares are to be sold (a private capital company), then the other shareholders have a pre-emptive right to acquire the shares in the manner specified in the articles of association. When making the offer to the other shareholders, the seller of the shares must notify them of the following information: the sales price; the term for payment; andthe payment procedure.Any shares that are not acquired under this procedure must be sold at an open auction in accordance with auction regulations to be approved by the seller. These regulations must be made available to the public at least one month prior to the date by which interested parties should apply to acquire the shares. The law sets out special terms of sale for: the transfer of escheated shares to the state and the subsequent sale of such shares; the sale of shares transferred into the special state pension budget; and the sale of shares created as a result of the capitalization of tax debts.Change of Corporate StatusWith respect to capital companies which are wholly owned by the state or a municipality, the general provisions of the Commercial Law apply except where otherwise specified. If third parties acquire at least 25% of the shares in a state or municipal capital company, that company cannot retain its current status and must become a private capital company. To this end, the seller of state or municipal shares - or, upon delegation, the company's board of directors - is obliged to convene a shareholders meeting within three months of the date on which the third-party purchaser acquired title to the shares. The shareholders meeting must: approve the private capital company's articles of association; elect the company's management bodies; and decide other matters relating to the company's new status as a private capital company.A state or municipal capital company acquires the status of a private capital company once the amendments to the articles of association are registered in the Commercial Register. The company is then obliged to act in accordance with the Commercial Law. The provisions specified in the Law on State and Municipal Shares and Capital Companies will no longer apply to its activities, with the exception of those provisions which govern the management and disposal of state or municipal shares.ImplicationsPreviously, state owed shares were disposed of by transfer for privatization in accordance with the Law on Privatization of State and Municipal Properties. This law became null and void on January 1 2003, the date on which the Law on State and Municipal Shares and Capital Companies took effect. As of this date, state and municipal shares will no longer be transferred for privatization, but instead will be sold in the manner specified in the new law. The law's provisions do not apply to capital companies which are already being privatized, nor to the disposal of shares in state and municipal capital companies which have been established as a result of privatization. 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]).