Dear clients and cooperation partners,
In this SORAINEN Latvian Corporate Newsflash, we wish to tell you about recent amendments to the Commercial Law with regard to conflicts of interest, resulting in the need for management board members of companies to make a careful assessment of relations between a transaction partner and the company or the members of its management and supervisory board.
On 10 July 2012, Commercial Law amendments came into force stipulating stricter criteria for transactions with so-called stakeholders. The purpose of the amendments is to implement a principle of corporate governance that will decrease and control conflicts of interest in a company’s transactions, thus ensuring additional protection of the company’s interests and increasing the transparency of corporate governance.
Commercial Law recognises the following groups, whose transactions with the company will be subject to stricter control: the company’s founders, shareholders, members of the management and supervisory board, and related parties. Commercial Law defines a related party as follows:
- a relative of a founder, shareholder, or member of the management or supervisory board (to the second degree of relationship), or a spouse, brother- or sister-in-law, or a person having a common household;
- another limited liability company (private or public), where either:
a partnership (general or limited), where the majority of investments is owned by the respective founder, shareholder, or member of the management or supervisory board.
- the majority of shares is owned by the respective founder, shareholder, or member of the management or supervisory board; or
- the respective founder, shareholder, or member of the management or supervisory board is a member of the management or supervisory board of the other company;
Further, on entering into a transaction with any of the above parties, companies must meet several conditions, unless the transaction is one where the company is obtaining property:
- within the scope of regular business for the usual value;
- as a result of a transaction without compensation;
- in an auction;
- in a stock exchange transaction; or
- under a court order.
The conditions include gaining consent before a transaction or approval after it.
We recommend being especially careful when assessing whether a transaction, if concluded with any of the above parties, falls within the scope of the company’s regular business for the usual value. If there is any doubt, we recommend that the necessary consent or approval is prepared; since we expect that disputes may arise in these situations.
A. Transactions with a founder, shareholder or a party related to the founder or the shareholder will need approval or consent from a shareholders’ meeting:
- If within two years from the establishment of the company (unless the articles of association provide for a longer term) the company enters into a transaction with a founder, shareholder or related party to obtain property with a value exceeding 1/101 of the company’s share capital, a shareholders’ meeting must approve or consent to the transaction.
- If property is to be obtained from a founder or shareholder, the transaction will come into force only after a shareholders’ meeting has approved it. Thus, the transaction will not be in force before the approval.
However, a transaction between a company and a party related to the founder or shareholder will be in force if a shareholders' meeting has not consented to the respective transaction (since non-receipt of consent does not automatically invalidate the translation). Nevertheless, the transaction can be disputed by a claim at court on the basis of Section 1403 of the Civil Law because it cannot be considered as concluded in a permitted manner.
Approval or consent from a shareholders’ meeting will be required also in cases where the property is obtained as a result of several related transactions and where the value of each separate transaction does not pass the previously mentioned value threshold but the total amount qualifies.
A shareholder is not entitled to participate in voting when a decision is being made to conclude a transaction between the company and the respective shareholder or a person related to this shareholder.
If all (100%) shares of the company belong to one shareholder, then a transaction between the shareholder and the company does not need the approval or consent of a shareholders’ meeting. Instead, the transaction must be concluded in writing.
B. Transactions with a member of the management or supervisory board or a party related to this particular member will need the approval or consent of the supervisory board (if established) or of a shareholders’ meeting.
For a public limited liability company, the provision of consent or approval will be decided by the supervisory board. Also, for a private limited liability company, the supervisory board, if established, is responsible for granting consent or approval. If a private limited liability company does not have a supervisory board, a decision to grant approval or consent will be made by a shareholders' meeting. The articles of association of a private limited liability company may stipulate a procedure that is different from the above mentioned procedure for transactions. The Commercial Law also provides a procedure and regulates voting rights in situations where, for any of the members of a supervisory board or a party related to a supervisory board member, there is a conflict of interest upon revision of an issue on provision of consent/approval for the respective transaction.
If a transaction is concluded between a company and a member of its management or supervisory board, then this transaction will come into force only after approval is received from the supervisory board or – for a private limited liability company where no supervisory board is established – a shareholders’ meeting. However, a transaction between a company and a party related to a member of the management or supervisory board will come in force even if the supervisory board or shareholders’ meeting has not given consent to the respective transaction. The relevant transaction can be challenged, since it is not considered to be concluded in the permitted manner.
Together with these amendments to the Commercial Law, the range of concerns which can trigger an internal audit of a company has been extended. Also, transactions between a company and a member of its management or supervisory board, or a related party, are included as a separate range of reasons for conducting an audit.
If you have any questions about these matters of corporate governance, or if you need to prepare sample documents for decisions relating to entering into transactions with stakeholders, or you would like guidelines for the management board of your company to help understand and precisely apply the new provisions of the Commercial Law, please contact SORAINEN or your legal adviser.
1 With regard to the so-called low-capital companies the threshold for the shareholders’ meeting to approve or consent to a transaction is set at LVL 200 (approx EUR 285, that is 1/10 of LVL 2,000 (approx EUR 2,845)).