Recently, we reported that the Latvian parliament was reviewing significant amendments to the Commercial Law. These have now been adopted and published, so we are able to outline the most important changes.
The main amendments affecting both private (SIA) and public (AS) limited companies:
- Number of board members: from now on, company articles of association may set a variable number of board members (eg, one to three) or leave out the number entirely. This removes the need to amend the articles of association every time the number of board members changes. How the articles of association refer to the composition of the board will determine the mechanism for calculating a quorum for board meetings. Where the articles contain an exact number of board members but the actual number of board members is less than indicated, the quorum must be calculated by reference to the number set in the articles. However, if the articles set a variable number of board members or do not set the number at all, the quorum must be calculated by reference to the actual number of elected board members.
- Company liquidation:
- The term for filing creditors’ claims in liquidation is reduced to one month; the requirement to prepare the initial liquidation balance sheet is now abolished.
- As proposed by the Companies Register (CR), a simplified liquidation procedure against a company that cannot be reached at its registered address is introduced; the criterion of reachability depends on receipt of correspondence rather than actual presence at the registered address. If a company fails to correct the defect within two months after receiving the CR’s notification, the CR can end the company’s activities.
- The time limit for suing a company board or council member is restricted: under the amendments, any such claim is considered barred five years after damage was caused. Creditors whose claims against the company are not satisfied may bring a claim on behalf of the company against a member of the board or council within one year after the judgment enters into force.
- Definition of ‘related person’ and transactions with related persons:
- Under the amendments, a related person is a company shareholder with a direct decisive influence, a board or council member, their relatives, spouses, in-laws and persons who share a joint household with those individuals, as well as members of the board and council of a company shareholder that exercise a direct decisive influence, and legal entities in which a company shareholder, board or council member or their relatives, spouses or in-laws exercise a decisive influence.
- the procedure for concluding transactions with a related person is now unified: regardless of who should be considered a related person, the transaction must be coordinated with the council of the company (if the company does not have a council, then with the shareholders’ meeting). Before the council (or the shareholders’ meeting) reviews the transaction, the board must provide all information needed to assess the transaction. Anyone considered as interested in a particular transaction does not participate in decision-making.
The procedure set by law for concluding transactions with related persons applies to transactions not concluded within a company’s regular commercial activities or that do not comply with market conditions. If this procedure is not observed, the transaction is void if the related person knew or should have known that consent was required from the council or the shareholders’ meeting.
Among the most important amendments that apply only to SIAs are:
- Invalidation of a shareholders’ meeting decision: from now on, a claim for invalidation can be brought within three months from when the claimant received or should have received information about the decision concerned, but no later than a year after the particular shareholders’ meeting.
- Administrative liability of the board: the board of a SIA will be held administratively liable for not making an entry in the shareholders’ register or not filing the shareholders’ register section with the CR. These amendments enter into force simultaneously with related amendments to the Administrative Violations Code.
- Sale of shares by enforcing a commercial pledge or when a sworn bailiff or insolvency administrator is acting: in these situations, new provisions (to come into force on 1 January 2018) apply to exercise of shareholders’ pre-emptive rights; additionally, a decision to elect a board member is also in force if adopted by someone who is not registered in the shareholders’ register but who has acquired all the shares in the company. As for maintaining the shareholders’ register, in these situations the acquirer of shares can file a unilateral notice of acquisition of shares, and the acquirer can apply to the CR for a new shareholders’ register section if the company board has not made the necessary changes to the shareholders’ register based on the unilateral notification filed in line with legal requirements.
Among the most important amendments that apply only to AS are:
- Procedure for election of council members in AS with one shareholder: this is now simplified and will no longer require re-election of the whole council each time a council member resigns or is removed from post; in these cases a new council member can be elected for a term of not more than five years.
- The shareholders’ meeting can revoke shareholders’ pre-emptive rights. Additionally, the general deadline for exercise of pre-emptive rights is reduced from one month to 15 days, as is already the case for SIAs. The procedure for increasing the share capital of AS is now simplified by expanding the range of cases when shareholders’ pre-emptive rights to new shares are restricted, including on issue of convertible bonds and upon grant of shares from a new issue to employees, board and council members.
- Conditional share capital of AS will be a new institution in Commercial Law. A decision by the shareholders’ meeting to increase the share capital on a specific condition will be recorded in the commercial register after adoption but the share capital will be increased only when the condition is fulfilled. This mechanism can be used, for example, to issue convertible bonds, as well as to grant shares to employees.
- The institution of personnel share option will entitle employees, board and council members of an AS or a company in the same group as an AS to acquire personnel shares in the particular AS. Where, on exercise of the option, the shares are acquired free of charge or for a price lower than the nominal value of the shares, the AS will be obligated to issue shares by using retained earnings or a specially created reserve fund. The total nominal value of shares that can be acquired using personnel share options cannot exceed 10% of the paid-up share capital when the decision to grant personnel share options is adopted.
- Personnel shares: on 1 January 2018 new provisions on personnel shares enter into force. The amendments allow more persons to acquire personnel shares – not only employees and board members but also council members will be eligible to do so. Personnel shares can also be acquired for a premium, thus acquiring rights to liquidation quota. Articles of association can now indicate that personnel shares also grant voting and other rights. Under the new wording of the amendments, where an individual’s qualifying status ends, their personnel shares pass to the company and if the shares have been acquired for a premium, the company must compensate the shareholder concerned (or their heirs) with compensation being equal to the amount payable on liquidation of the company.
- Invalidation of a shareholders’ meeting decision: shareholders’ rights to bring such an action before the court are now restricted when information was unjustly denied to a shareholder, who will only be entitled to sue if their vote would have been decisive for the voting result. This precludes a situation where shareholders whose vote could not have affected the decision misuse their position to require a declaration that the respective decision was void just because some information was not available.