Amendments to the Law on Joint Stock Companies in Lithuania
On 17 November 2022, the Seimas approved the long-awaited amendments to the Law on Joint-Stock Companies, which replace outdated provisions in the law of the Joint-Stock Company, which are no longer relevant and no longer meet the needs of the market, new rules, which will contribute to the creation of a more favourable business environment, attract foreign investment and create enterprises with added value in Lithuania. After the President signs the amendments made by the Saeima to the law of the Autonomous Community, some of them will enter into force on May 1, 2023.
Mandatory buyback or sale of shares of the company
In the legal practice of EU countries, the institution of share buybacks has long been known and applied. In Lithuania, similar provisions have already been applied to listing companies. According to the changes in the law of the Joint Stock Company, a shareholder acting independently or jointly with other persons acting in concert, acquiring at least 95% of the shares of a company providing the right to vote at the general meeting of shareholders (hereinafter – a majority shareholder)will have the right to require all other shareholders of this company to sell their shares (the right of redemption) and the last shareholder will be obliged to sell these shares to the majority shareholder. Conversely, the minority shareholder will have the right to demand that the majority shareholder buy out the shares of the company owned by the minority shareholder, and the majority shareholder will be obliged to repurchase those shares (the buyback obligation). These provisions will also apply to the redemption of convertible bonds that can be exchanged for the company’s voting shares.
The amendment to the AO Law will also establish a detailed order of who, when, what, and for how long must inform about the right / obligation of redemption etc. The buyback of shares will not be initiated at any time, but only within 3 months of the date, when the shareholder of a company acquires at least 95% of votes at the General Meeting of Shareholders. This term is a guarantee of the interests of the small shareholder when the majority shareholder is not allowed to manipulate time and wait for the decline in the value of the shares of the company. In addition, a shareholder who has not fulfilled the obligation to repurchase the shares and has not contested the price of the purchase of shares will be obliged to pay 10 per cent per annum of the amount by which the maturity has been missed.
For shareholders who have acquired this new regulated right of redemption / obligation prior to the entry into force of amendments to the AB Law, which are to be adopted, provides that such a majority or minority shareholder shall have the right to initiate the repurchase of the shares within 1 year after the entry into force of the changes in the law of the Joint Stock Company.
Under the current regulation, shareholders holding less than 5% of the company’s shares have no real influence on the management of the company (unless otherwise regulated by the shareholder agreement). In this way, the institution of the buyback of shares will help to protect the rights of minority shareholders, since the possibilities of leaving the company will be clearly regulated by law. On the other hand, this institution will also help the majority shareholder to eliminate «absent» shareholders, and also help to resolve long-standing or threatening conflicts between large and small shareholders.
At present, the law of joint-stock companies stipulates that privileged shares may be with accumulative or with no accumulative dividend, with or without voting rights, and may constitute only 1/3 of all shares of the company. This regulation is rather limited and does not meet the needs of the market, which is unfavorably perceived by investors and was often one of the most unattractive moments when investing in Lithuanian start-ups. After the entry into force of the amendments to the AB Law, the company will be able to issue not only the above classes of preferred shares, but also other preferred shares, varieties of classes whose property and non-property rights granted by them will be established in the charter of the company. It should be noted that preferred shares without voting rights will not be able to account for more than 50% of all shares.
Until 2023, on April 28, the Government is to adopt amendments to the implementing legislation, which will change the provisions in the Register of Legal Entities and improve the information system of participants of legal entities in order to create suitable conditions for registration of preferred shares.
Decision on reduction of authorized capital of CJSC
At present, a minimum authorized capital of 1,000 euros is required for the formation of a closed joint-stock company (CJSC). This minimum capital requirement ensures that companies are not formed by someone who has no serious intention of doing business. Even if the company does not carry out any activities, it is obliged to submit financial statements to the Centre of Registers, the relevant forms to the tax office and other obligatory data to the Lithuanian constituent bodies. Failure to provide data will result in an administrative fine for executives or responsible persons. Therefore, the minimum authorized capital requirement is a filter that helps to protect the business environment from non-functioning companies in Lithuania and to reduce the administrative burden on institutions.
Since the amendments to the law of the Joint Stock Company are aimed, inter alia, at increasing the attractiveness of the Joint Stock Company for the creation of small and medium-sized businesses and eliminating too stringent requirements of the given organizational-business legal form, after the entry into force of the amendments in the JSC Law, the minimum capital of UAB will be 1,000 euros. It is quite possible that this requirement, as before, will help to avoid driving «dormant» companies, but at the same time it is the optimal amount to start.
Adjustment of the share payment procedure
Currently, the JSC Law stipulates that the issue price of a share may not be lower than its nominal value. Following the adoption of the amendment, the AO Act adds this provision that shares may be issued at different issue prices. This applies to the situation where in one investment round investors are attracted at different prices to issue shares.
At present, the initial cash contribution of each signatory of the company’s new shares must be at least 1/4 of the face value of all the shares signed by him and the nominal value of all the shares signed. The amendment to the Law of the Joint-Stock Company distinguishes the procedure for payment of new shares of joint-stock and closed joint-stock companies, stating that the initial cash contribution of each person who signed the shares of a closed joint-stock company, must be at least 1/4 of the nominal value of all the shares it has signed. This means that after the entry into force of the amendment in the law the JSC will sign the new shares of the closed joint stock company will be able to postpone for 12 months not only the amount of 3/4 of the nominal value of the new shares, but also the entire remaining amount.
Right of pre-emption not applicable
So far, the shareholder intending to sell the shares of the company had to offer these shares to another shareholder of the company in accordance with the procedure established by the law of JSC (or in the manner prescribed by the charter of the company). If the last shareholder refuses to buy, only then the selling shareholder acquires the right to sell the shares at a price not lower than that specified in his notice of intent to sell the shares to any third party.
Although the charter of the company could provide for a different procedure of waiver of pre-emptive right of purchase, for example, longer or shorter term for shareholders to exercise pre-emptive right of purchase of shares of the company, etc. etc., In general, there was no pre-emptive right of purchase. Following the entry into force of the amendment of the AB Law, it will be possible to provide in the Statute that the right of pre-emption in the case of the sale of shares of a private limited liability company shall not apply.
More flexible organization of shareholders’ meetings
The pandemic, investments, global business development and strong growth of technology tools in business relations have altered the hitherto tradition of physical meetings and have created a need for company management meetings remotely.
Companies may now allow shareholders to attend and vote at the General Meeting of Shareholders by electronic means. This means that the shareholder has the right to request a presence at the meeting at a distance, but the joint-stock company is not obliged to comply with this request of the shareholder. After the entry into force of the amendments to the law of the Joint Stock Company, a shareholder or a group of shareholders whose shares give at least 10% of the total number of votes in a company (unless the charter provides for a smaller number of votes). The company shall have the right to require the company to form the right to participate in the shareholders meeting and to vote on it electronically, and the company shall be obliged to comply with this requirement.
In order to protect the interests of the shareholders of a minority company in the exercise of the rights of participation and voting at the Meeting of Shareholders it is also established that, with the approval of all shareholders, the charter of a company may provide, that participation and voting at the shareholders meeting shall be carried out only by electronic means. This rule does not prohibit shareholders to physically attend meetings on certain issues, if it is stipulated by the charter of a company. For example, it may be envisaged that the organization of a shareholders’ meeting only electronically is a standard way of organizing a shareholders’ meeting, but decisions on policy issues (e.g. reorganization, liquidation, etc.) are accepted only with the physical participation of shareholders.
It should be noted that at this time the minutes of the shareholders’ meeting should be drawn up and signed no later than 7 days from the date of the shareholders’ meeting. After the decisions of the shareholders are taken at a distance, the rule of the 7-day census protocol remains, but it is established that only a qualified electronic signature can be signed in electronic form.
It should be noted that when holding meetings of the shareholders at a distance the board of directors of a company, and in its absence, the head shall approve the description of the procedure of participation and voting at the general meeting of the shareholders by electronic means. Such a description should include a detailed discussion of the requirements for the identification of shareholders or their authorized persons and other persons involved, the requirements for ensuring the security of the transmitted information, as well as the necessary equipment, possible applications (Microsoft Teams, Google, Skype, Zoom, etc.) and other issues related to communication, registration, voting, secret voting, recording and/or protocol should be clearly specified, in cases of technical intervention, etc.
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