Latvia, Law and Regulations, Legal Counsel, Legislation, Markets and Companies
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Wednesday, 09.10.2024, 03:33
Illegal deprivation of business is legal
There are many
examples, when a successful company lost its profitability, divided into small
firms and eventually stopped its activities due to the divergence of interests
between the members. Unfortunately, the latest tendencies show that the
internal risks are much more dangerous than commonly thought.
Shortcomings in the legislation
According to the
current version of Section 212 of the Commercial Law of the Republic of Latvia,
a meeting of shareholders is entitled to take
decisions if shareholders, who jointly represent not less than one half of the
equity capital with voting rights participate in it. If the shareholders
represent less than one half of the equity capital, the decision can’t be made.
If the lack of a quorum is the case, a reconvened meeting with the same agenda
has the right to take decisions irrespective of the number of votes represented
in it, even if the major shareholder is absent. The decision therefore can be
made by the minority on the legal basis.
The
Commercial Law does not regulate the procedure of sending a notice and holding
a meeting of shareholders properly, that’s why it’s possible for other members
to make a decision in a relatively short time, bypassing your legal interests.
This rule is applicable regardless of your share capital. If you hold the bulk
of the share capital, there’s still a risk to lose control of your company and
to lose the company completely in the foreseeable future.
The unfavorable judgment for the aggrieved party
In INLAT PLUS international practice there
was a case, when the shortcomings in the legislation were interpreted in
unfavorable way for the aggrieved party. After the death of the chairman of the
board, when the inheritance case (including shares of the equity capital) of
the late chairman was examined by a sworn notary, the other directors used the
shortcomings of the procedure of sending a notice in their own interests. Among
them were also the late person’s relatives, who were also his inheritors.
At the moment of
the chairman’s death the Articles of association implied that only under his
authority are most of the issues connected to company’s activities – concluding
deals related to company’s property, the flow of financial resources,
concluding and termination of employment contracts, operating the company’s
bank account, as well as signing documents on behalf of the company to apply
changes in the Commercial Register of the Republic of Latvia.
In order to
change the Articles of association and liquidate the position of the chairman,
an extraordinary meeting was organized. A notice regarding the convening of a
meeting was also sent to the address of the late chairman, who couldn’t
participate in it for obvious reasons. The chairman held the bulk of the share
capital and didn’t participate in the meeting, that’s why the necessary number
of votes hadn’t been achieved. The law, however, allows an opportunity to
reconvene meeting without any quorum. As the chairman had the buck of the share
capital, it was not possible to make a decision without his permission. A
notice regarding the meeting was sent to the address of the deceased person
once again to comply with the law, after which other directors, jointly representing less than one half of the equity
capital, held a meeting and made a decision to liquidate the position of
chairman and change the Articles of association in their favor. Subparagraphs,
regulating the chairman’s authority, were deleted from the Articles of
association, whereas the position of chairman was liquidated completely. In the
new version of the Articles, the authority of 3 directors, who previously
represented a minority of the equity capital and
decided to change the policy of the governance of the board, were
enshrined. All of this happened at the time the inheritance case was being
examined by a sworn notary.
After that, the
members of the board decided to realize the company’s property. By sending a
note to the dead person, who couldn’t participate in the meeting and make a
decision, the others fulfilled the requirements of the law, thus violating
legal interests of other inheritors of the deceased, who would oppose this kind
of changes in the governance of the board.
After the late chairman’s inheritor
initiated a court proceeding in order to challenge the decision of other
directors, the outcome of the process was quite controversial. In considering
the complainant’s case, the court was solely guided by the Section of the
Commercial Law without taking into consideration others factors, such as unsolved
inheritance case at a sworn notary, moral side of the question and possibility
to violate interests of the third persons (the inheritors). The inheritor also
didn’t ask a sworn notary to take measures to protect the inheritance, because
he trusted his relatives completely. The court’s argument, that only the
directors of the company have a right to consider their internal issues, is
formulated, without taking into account the fact that the shares of the equity
capital could be given to other persons as inheritance as a result of the
inheritance case. The court decided to dismiss the inheritor’s complaint.
It’s necessary to note, that
unfavorable decision in a specific
case means, that changes in the board are possible even during the absence of a
person, who controls the majority of the shares. For example, when you are
abroad or during a long-term illness other directors of the board can use the
right to organize a reconvened meeting and make
all changes they want. A person may initiate a court proceeding, but the case
law is not favorable. While a long-term court process is taking place, your
company continues to exist without you, which means, even if you will win in
court, there’s always a risk that during your absence the company will suffer
irreparable damage.
How not to lose your company?
In most cases of joint ownership of
the company, it’s crucial to consider possible risks. The Commercial Law
doesn’t allow bypassing the procedure of organizing a reconvened meeting, if during the previous one it was not possible to
make a decision due to the lack of quorum. That’s why INLAT PLUS international
developed a complex of preventive measures that allow you to minimize risk of
losing control of the company. One of them is a properly written power of
attorney, which provides for cases in which a trustee participates in the
meeting and represents the interests of the absent director. For a power of
attorney to be taken into an account by the other directors, it’s necessary to
make proper changes in the Articles of association. It is also recommended to establish
quorum that corresponds with your shares of the equity capital. Even with the
shortcomings of Latvian legislation, law firm INLAT PLUS international can help you protect your interests and
save your business.
Contact information
In order to get
a consultation and additional information you can contact us by phone, email or
coming to our INLAT PLUS international
office:
Office phone
number: (+371) 672 997 76
Mobile phone
number: (+371) 296 216 15
E-mail:
[email protected]
Address:
Krišjāņa Valdemāra iela 38-612, Riga, Latvia