The National Security Committee of the Latvian Parliament has drafted amendments to the National Security Law and the Commercial Law that plan to prohibit specific acts by companies that are significant for national security. The aim of the amendments is to preclude threats or potential threats to state security, governance or society.
The prohibition will apply to the following companies:
- electronic communications providers with significant influence in the market;
- national electronic mass media companies;
- companies that hold a licence for distribution or preservation of natural gas or that own natural gas equipment that is connected to the distribution system;
- producers of electricity or thermal energy whose installed capacity exceeds 250 megawatts or who own at least 500 km of thermal energy network.
If the draft amendments become law, consent from the Cabinet of Ministers will be required before the following acts by limited liability companies that are significant for national security:
- acquiring significant participation (10% or more of shares);
- acquiring a decisive influence (majority of shares);
- performing business transfer.
Consent from the Cabinet of Ministers will also be required before becoming a member in a partnership that is significant to national security or before acquiring significant participation or decisive influence in a limited liability company that is already a member of such a partnership.
The plan is that a request for consent should be filed by the person who wants to acquire shares in a limited liability company. The specific rules for the procedure will be set by the Cabinet of Ministers, but the respective regulations have not yet been drafted.
In the event of a change of the ultimate beneficiary of a company that is significant to national security, the respective shareholder in the company or member of the partnership will have to apply for the consent of the Cabinet of Ministers to retain the shares or member status in the partnership. A person disregarding a decision of the Cabinet of Ministers on the duty to dispose of shares will lose the right to use voting rights in the company.
Consent from the Cabinet of Ministers will also be necessary when another person acquires the business of a company that is significant for national security that contains assets that are being used for acquiring significant participation or decisive influence. A request to the Cabinet of Ministers should be filed by the company which is considered significant for national security.
The Cabinet of Ministers will have one month to issue decisions in these cases. However, if necessary, it will be allowed to extend this term to three months. It will be possible to file a complaint regarding a decision by the Cabinet of Ministers with the Administrative department of the Supreme Court of the Republic of Latvia. The Court`s decision will be final.
A company that has obtained the status of a company significant for national security will be required:
- to request the Company Register to make a specific entry in the commercial register and the shareholders register regarding its status,
- to notify the shareholders or members of the respective partnership and
- to inform the Cabinet of Ministers as to who are the shareholders (and ultimate beneficiaries, including natural persons) in the limited liability company.
The members of a partnership with this status must inform the Cabinet of Ministers about their shareholders and ultimate beneficiaries.
The Cabinet of Ministers will have three months to issue a decision requiring shareholders to dispose of their shares or members of a partnership to withdraw from the partnership. A person who is required to carry out the decision but fails to do so will lose the right to use voting rights, to represent and to act on behalf of the partnership.
Currently the plan is that companies conforming to the status of a company significant to national security on the day when the amendments enter into force will have to file the required information on or before 1 May 2017 and in this case the Cabinet of Ministers will have the right to require disposal of shares or withdrawal from the partnership until 30 December 2017.
The amendments are being considered urgent and therefore will be adopted by the Parliament in two readings. Taking into account that according to the draft law the information to the Cabinet of Ministers has to be provided on or before 1 May 2017, it is highly probable that these amendments will be adopted soon. Transactions with the companies concerned will be significantly burdened if the amendments are adopted, including significant impact on transaction timelines.
In our opinion, as regards companies conforming to the status of a company significant to national security on the day when the amendments enter into force, the draft law should provide for a transition period allowing companies and their shareholders to evaluate the consequences of the law and to prepare for its implementation, taking into account the material consequences of the new provisions especially with respect to ownership rights. However, currently the draft law does not provide for any transition period.