Corporate and M&A Legal Update - August 2016
  Dear clients and cooperation partners,

We hope this summer Corporate and M&A legal update finds you well – whether packing in a hurry for your well-deserved vacation or enjoying a relaxed return to your desk just after. 

Among other things, we are pleased to send you our “save-the-date” message regarding the main annual M&A event in the Baltic region – the Baltic M&A and Private Equity Forum 2016, which will be held in Riga on 27-28 October 2016 . This year the Forum will be centred on such “hot” areas as Robotics, FinTech, Life-Sciences and Agritech. Don’t miss it! 

We have also prepared for your reading several picks of main M&A/corporate-related news and developments in the Baltics and Belarus – from the impact of group interests on managing businesses in Estonia, or the ongoing startup- and venture capital-friendly changes in Latvian laws, to legislative changes that ensure more clear tax treatment of employee share options in Lithuania, and more selective approaches towards conclusion of investment agreements with the state in Belarus.

Enjoy the reading! And see you all in Riga in October, at the “M&A-must-attend-event”!

Yours sincerely,

Sergej Butov
Head of the SORAINEN Corporate and M&A Team in the Baltics and Belarus

  Save-the-date: Baltic M&A and Private Equity Forum 2016  
  ESTONIA: Group interests can be considered when managing a local subsidiary  

LATVIA: Advocating modernisation of Latvian Commercial Law

News on legal regulation for posted employees


LITHUANIA: More clarity in tax treatment of employee share options

New rules on employees’ non-competition


BELARUS: Amended Law on Commercial Companies introduces one-shareholder LLC, shareholders’ agreements

Introducing a more selective approach towards investment agreements


The special theme of the Baltic M&A and PE Forum 2016 will be exploring possibilities to increase PE and venture capital investment in the Baltics in globally highly topical areas such as Robotics, FinTech, Life-Sciences and Agritech. We will hear from investors, investment managers with recognized international experience and established companies with global reach with their experiences and views, as well as from the most important industry players and promising start-ups from the Baltic States. On the general M&A side we will look at post-acquisition disputes and how to mitigate related risks, plus the topic of the (so far) unrealized potential of M&A insurance in the Baltics. Last but not least, of course, we will also have war-stories from some of last year’s Baltic M&A champions plus a traditional review of the future outlook for the Baltic M&A and PE market. Read more

Estonia: Group interests can be considered when managing a local subsidiary

The Estonian Supreme Court recently ruled that group interests can be considered when managing a subsidiary. This means that the management board need not bear in mind exclusively the interests of the subsidiary but can consider the interests of the group as a whole. This allows the management board under certain conditions to enter into transactions that at first sight are detrimental to the subsidiary or follow instructions to that effect from the parent company. In practice, these conditions apply especially when making an intragroup loan or entering into a group-wide cash pooling agreement but also in the event of any intra-group transaction that may be detrimental to the subsidiary.

The Supreme Court listed the conditions below that must be fulfilled in order to ensure compatibility with considering group interests but did not explain what lies behind these conditions. A hint of what may be behind the concept is given based on foreign legislation and case law.

  • The transaction serves the interests of the group as a whole, ie it is not enough if the transaction serves only the interests of the parent company. But if a contract is entered into with a group company (eg the parent company) this may serve the interests of the group as a whole. For example, making a loan to a company suffering from liquidity problems is allowed if that company serves a function necessary to the group as a whole such as IT services.
  • The subsidiary bearing the negative consequences must receive some future positive counter-performance, ie benefit, gain or advantage from the group. The balance of rights and obligations in the group is observed as a whole, eg future counter-performance to the subsidiary may also come from another group company and not only from the borrower. A group-wide cash pool is one example: the subsidiary contributes to the cash pool, but may also use cash pool funds if needed.
  • The subsidiary is not insolvent and the transaction contributing to the group does not cause the insolvency of the subsidiary.
  • The management board member is not violating its loyalty obligation when entering into the transaction, ie the management board cannot justify transactions breaching the loyalty obligation by hiding behind the justification that the transaction is in the interests of the group as a whole.

In conclusion, it is essential to bear in mind that the subsidiary may not enter into a transaction in the interests of the group as a whole but detrimental to the subsidiary if the subsidiary is already insolvent, if the contribution to the group causes the insolvency of the subsidiary or if it is clear that the group as a whole or the majority of group companies are insolvent and for this reason the probability is high that the subsidiary will never receive any benefit, gain or advantage back from the group but only contributes to the group.

To ensure compliance with the duty of care by management board members when entering into transactions considering group interests, the back door must be left open for the subsidiary so that the subsidiary could resign from the cash pool, cancel the loan or other agreement if it is clear that counter-performance by the contract party or group cannot follow in the future because the contract party or majority of the group companies are becoming insolvent.

Additional information:

Toomas Prangli
Toomas Prangli
Co-Managing Partner
Karin Madisson
Karin Madisson
Triin Tigane
Triin Tigane

Latvia: Advocating modernisation of Latvian Commercial Law

Through our active participation in the legal committee of the Latvian Private Equity and Venture Capital Association, we are currently involved in the process of advocating amendments to Latvian Commercial Law. These, in turn, would help make the law more flexible and thus friendlier to startups and venture capital. Taking into account the current responsiveness of the authorities, we have good reason to believe that at least a substantial part of the proposals will be implemented in 2016.

The main changes which we are seeking concern regulation of private limited liability companies (SIA). The proposed changes are as follows:

  • Enable SIA to issue share options;
  • Enable SIA to issue shares of different categories (as to voting rights, rights to dividends, liquidation quota);
  • Allow SIA to re-purchase share options plus issue shares that it can re-purchase;
  • Allow SIA to issue preference shares and enable the company to choose to determine the preference up to a certain amount (sum) as to dividends;
  • To allow SIA to choose to keep its register of shares in the Central Depository (in turn, the shares would be held in security accounts);
  • To enable the Articles of Association of a SIA to require that the board should consist of a number of board members “from ‘x’ to ‘y’” (instead of the current requirement to fix a certain number of board members in the Articles of Association).

The Latvian Venture Capital Association believes that these proposed amendments to Latvian Commercial Law are necessary so that the relationship between the founders and the investors in a Latvian limited liability company can be regulated in line with current international practice in the private equity and venture capital industry. This would allow a decrease in the number of transactions where artificial special purposes vehicles outside Latvia are created because of unsuitable regulation for investing in a Latvian company, thus making transactions less transparent and far more complex and expensive. The proposed regulation would also ensure better protection of company creditors and employees. For example, current employee options are “issued” via simple contractual arrangements based on Civil Law. However, in practice it appears that, although it is generally recognized that these agreements are fully valid, in case of a dispute it is almost impossible to enforce them, which, of course, does not promote Latvia as a venture capital friendly jurisdiction.

In addition, the Latvian Private Equity and Venture Capital Association has initiated discussion on possible changes in the law that would allow efficient enforcement of call and put options granted in shareholders’ agreements.

We will keep clients and cooperation partners informed as to progress regarding the proposed changes.

Latvia: News on legal regulation for posted employees

On 9 June 2016, amendments to Latvian Labour Law came into effect. The amendments regulate conditions of posted employees. The aim is to strengthen practical application of the rules on posting employees. The amendments also focus on protecting posted employees of subcontractors by entitling those employees to require unpaid salary in the amount of a minimum wage from the company that attracted the subcontractor.

The requirements derive from Directive 2014/67/EC (the so-called “Enforcement Directive”) of the European Parliament. Previously, in relation to posted employees, general provisions of Latvian Labour Law applied. However, this was not enough to ensure the requirements included in European Union (EU) law.

EU law imposes a set of mandatory rules regarding the requirements and conditions of employment to be applied to posted workers.

Additional obligations of an employer who posts employees

For an employer who posts employees to work in Latvia, the amendments set, eg, an obligation to

  • inform the State Labour Inspectorate about the posted employee prior to posting in writing in the national language, indicating:
    • the name, surname, registration number and address of the employer (if an individual), or the business name, registration number and address, as well as other contacts of the employer (if a legal person);
    • the expected duration of posting, as well as the start and finish time of the work;
    • for whose benefit the work will be performed, as well as the type of service the employee is posted for;

  • appoint a representative in Latvia who is authorised to represent the employer before the Latvian national authorities and courts;
  • ensure safe keeping of the employment agreement, working time sheets, documents that show calculation of the salary and a document that confirms salary has been paid to employees. Those documents must be available during the posting and for two years after the posting.

Qualification of daily allowance of business trips

Contrary to previous legislation, from now on regulation of business trips applies to an employer who posts employees to perform work in another EU Member State, European Economic Area State or the Swiss Confederation. Under amendments to Latvian Labour Law, the daily allowance element of a business trip is considered as a part of salary only if this is provided under the regulation of the country to which employees have been sent.

Other employee expenses during a business trip are not considered as part of salary and therefore must be paid in addition to salary.

Liability for subcontractor’s employees

From 9 June 2016, a company that engages a subcontractor to perform the company’s own contractual obligations will be responsible for unpaid salary to the subcontractor’s employees. Therefore, if the subcontractor does not pay salary to its posted employees, then the employees will be entitled to claim their unpaid salary (in the amount of the minimum wage of the country where they were posted) from the company that engaged the subcontractor. The company will later be entitled to recover the money from the subcontractors.

Additional information:

Eva Berlaus
Eva Berlaus
Office Managing Partner
Māris Simulis
Māris Simulis

Lithuania: More clarity in tax treatment of employee share options

Recently adopted amendments to the State Social Insurance Law have introduced much welcome clarity in respect of tax treatment of benefits that employees receive from employee share options. Under the amendment, benefit received in the form of shares acquired for a reduced price or free of charge through the exercise of an employee share option is exempt from social insurance contributions if two conditions are met:

  • the shares are acquired not earlier than three years from the grant of the option
  • the option is exercised by acquiring shares rather than as mere compensation of the shares’ market value (or increase in their market value).

If these conditions are not met, the benefit received by the employee would be taxed under the same rules as employment-related income, with the overall tax burden being about 42%.

The amendments apply as of 1 January 2017. Note that from 1 January 2016 an analogous exemption in secondary legislation was available but potentially conflicted with primary law. This ambiguity is now resolved by transposing the same exemption to the State Social Insurance Law.

Lithuania: New rules on employees’ non-competition

The Supreme Court of Lithuania has recently ruled on important matters concerning employees’ restrictions on additional jobs during employment. As a result of this new court practice, we recommend reviewing existing employment contracts, non-competition agreements as well as internal HR documents with a view to evaluating whether they need amendment.

Employment contracts often contain an undertaking by the employee that, during their employment, they will not work for businesses that compete with the employer or even that they will have no additional job at all. Usually, such duty of the employee did not involve separate compensation, and non-competition during employment was taken for granted as part of an employee’s duty of loyalty during employment. However, the latest court practice has changed established market practice.

First of all, the Court has likened contractual restrictions on employees having additional jobs to non-competition agreements as these restrictions reduce an employee’s chances of earning extra income in the same way as non-competition agreements. This interpretation would operate irrespective of whether an employee’s additional job is with competitors or not.

Secondly, the Court has clearly stated that an employee’s duty of non-competition (as well as restrictions on additional jobs) during employment must be subject to additional compensation. Similarly to post-employment non-competition, compensation may not be included in remuneration. The contract should clearly define the purpose of compensation (ie for non-competition or restrictions on additional jobs during employment) and the amount.

Unfortunately, neither legislation nor court practice provides what amount of compensation would be sufficient. The compensation amount should be evaluated on a case-by-case basis considering the extent to which the restrictions applicable during employment reduce the employee’s chances of earning extra income.

We recommend treating non-competition during employment or restrictions on additional jobs similarly as non-competition after employment termination. This involves:

  • agreeing on restrictions not with all employees but only with those employees whose job position really requires it (eg managers, employees dealing with particularly sensitive information);
  • clearly defining the scope of restrictions;
  • clearly defining the amount of compensation to be paid in addition to remuneration.

Moreover, employees who breach similar obligations but who have not received additional compensation should be treated with care when applying disciplinary sanctions.

Additional information:

Algirdas Pekšys
Algirdas Pekšys
SORAINEN Lithuania
Agnietė Venckienė
Agnietė Venckienė
Senior Associate
SORAINEN Lithuania
Mantas Petkevičius
Mantas Petkevičius
Specialist Counsel
SORAINEN Lithuania

Belarus: Amended Law on Commercial Companies introduces one-shareholder LLC, shareholders’ agreements

In early 2016, substantial amendments to the Law “On Commercial Companies” came into effect.
The most important novelties are as follows:

  1. It is now possible to establish a commercial company with a single shareholder.
  2. For the first time, the law directly regulates shareholders’ agreements.
  3. Certain corporate governance issues are now regulated more specifically.
  4. Abolition of mandatory audit for companies with foreign investments.

Read more

Belarus: Introducing a more selective approach towards investment agreements

On May 2016 significant changes to Decree No. 10 of 6 August 2006 (Decree) regulating conclusion of investment agreements and provision of preferential regimes to foreign investors came into effect.

The changes concern investment projects implemented under investment agreements between investors and the Republic of Belarus after 12 May 2016. By way of reminder, an investment agreement allows investors to receive certain tax and customs benefits and exemptions from formalities related to development of an investment project. In return, investors should assume obligations as to the volume of investment, period of project implementation, and others.

Following the changes, a government body which is a prospective party to an investment agreement will have a maximum ten days to collect feedback from other interested state bodies regarding the proposed investment agreement. Additionally, land plots for implementation of investment projects will be assigned to investors via contests.

Another novelty is a selective approach towards conclusion of investment agreements.  From May 2015 investment agreements are concluded (and related benefits provided) only in respect of projects implemented in priority economy sectors identified by the Belarusian Government. Land plots for investment projects will be provided only from a special list.

Investors must now report to the authorities about changes in composition of their shareholders and selection of contractors responsible for project design and construction. The changes also introduce investor liability for failure to meet interim project deadlines. Finally, in the event of violation of investment agreements, investors will be obliged to compensate benefits received during implementation of the project and pay a penalty. With the President’s consent, the Government may wholly or partly exempt investors from this liability or agree to payment of compensation in instalments.

The new legal provisions allow the government to seize land plots in the event of breach of an investment contract by the investor and sell an incomplete construction via auction.

The new procedure for concluding, amending and terminating investment agreements under the Decree was clarified by Resolution No. 563 of the Council of Ministers of 19 July 2016. In particular, the Resolution imposed an obligation on every investor to provide local authorities with a recent audit report based on financial due diligence and confirming his investment opportunities, and other documents confirming financial standing of the investor.​

Additional information:

Maksim Salahub
Maksim Salahub


Several highlights of recent transactions:

For other recent transactions please click here.

The head of the SORAINEN Corporate and M&A Team in the Baltics and Belarus is Sergej Butov.
Local heads of the SORAINEN Corporate and M&A Team are:

Karin Madisson
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Toomas Prangli
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Eva Berlaus
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Algirdas Pekšys
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Laimonas Skibarka
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Sergej Butov
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Maksim Salahub
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Please note that SORAINEN legal updates are compiled for general information only, free of obligation and free of legal responsibility and liability. They do not cover all laws or reflect all changes in legislation, nor are the explanations provided exhaustive. Therefore, we recommend that you contact SORAINEN or your legal or tax adviser for further information. Electronic versions of SORAINEN legal updates and newsflashes are available on the SORAINEN website –

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