The Parliament of the Republic of Lithuania has adopted amendments to the Law on Joint-Stock Companies of the Republic of Lithuania (the Law), which are expected to improve the conditions for businesses to grow and to attract more investment into the country. The amendments adopted by the Parliament aim to encourage the use of digital tools in decision-making, protect the interests of minority shareholders and allow companies to hold a wider range of share classes. It also removes the strict regulation of the limit on preferential shares in share capital and lowers capital requirements for new companies. ECOVIS ProventusLaw invites you to read a brief overview of the most important changes to the Law, which are expected to come into force when signed by the President.
Shareholders can vote through digital means
The current wording of the Law provides that the company has the right, at the request of the shareholders, to enable shareholders to vote by electronic means. Once the new amendments to the Law enter into force, companies will be obliged to provide for electronic voting if requested by shareholders whose shares represent at least 1/10 of the total number of votes (which may also be reduced by specifying a lower requirement in the company’s Articles of Association). In addition, if all shareholders of the company so wish, it will be possible to provide in the company’s Articles of Association that general meetings of shareholders may only be held by means of electronic communications, thus eliminating the need to hold meetings in person.
The amendments to the Articles of the Law to this effect ensure and specify the possibility for shareholders to vote by electronic means, e.g. by specifying that the minutes of the General Meeting of Shareholders may be signed by a qualified electronic signature.
Reduction of the mandatory share capital
From 1 May 2023, setting up a new company will become even easier. To make it easier to attract new investment and to set up a company, the mandatory authorised capital of the company to be set up will no longer have to be €2,500, but at least €1,000. According to the statistics on new companies established in the last 3 years, more than 75% of the companies established have opted for the minimum authorised capital, so it is reasonable to assume that with the reduction of the cost of incorporation, persons from Lithuania and other jurisdictions will be even more likely to consider setting up a private limited liability company.
Sell-out and squeeze-out rights
Along with the amendments to the Law, the institute of sell-out and squeeze-out rights of company shares in private limited liability companies also appears. This will give minority shareholders the right to withdraw from the company and large shareholders the right to buy out minority shareholders. If one shareholder acquires at least 95% of the shares in a company, this shareholder will acquire the right to compulsorily require the remaining small shareholders to sell their shares at a fair price. The redemption procedure itself will be initiated by the shareholders within 3 months from the date on which the shareholder acquires at least 95% of the shares in the company. A shareholder who has acquired at least 95% of the total number of shares in the company will now be required to notify the company in writing of the situation within 5 working days.
It should also be stressed that not only these deadlines are relevant, but also the entry into force of the amendments to the ABL is relevant for those shareholders who acquired the right to redeem shares or the right to be redeemed prior to the entry into force of the amendments. The latter shareholders will have the right to initiate a redemption within 1 year after the entry into force of the amendments to the ABA.
Small shareholders will also acquire the right to require the new shareholder to compulsorily redeem their shares on the same terms. The fair price, as defined in the new ABI, will be determined by an independent valuer and the shares will have to be paid for in cash. However, it is expected that questions will arise as to what constitutes a fair price, as the amendments to the ABI do not provide specific instructions on how the price of the shares to be redeemed is to be calculated, and it is therefore likely that certain disputes will not be avoided.
It should also be stressed that not only these deadlines are relevant, but also the entry into force of the amendments to the Law is relevant for those shareholders who acquired the right to redeem shares or the right to be redeemed prior to the entry into force of the amendments. The latter shareholders will have the right to initiate a redemption within 1 year after the entry into force of the amendments to the ABA.
Small shareholders will also acquire the right to require the new shareholder to compulsorily redeem their shares on the same terms. The fair price, as defined in the new Law, will be determined by an independent valuer and the shares will have to be paid for in cash. However, it is expected that questions will arise as to what constitutes a fair price, as the amendments to the Law do not provide specific instructions on how the price of the shares to be redeemed is to be calculated, and it is therefore likely that certain disputes will not be avoided.
Changes to preferential shares
One of the most important changes to the Law is the liberalisation of the regulation of classes of shares, allowing companies to issue different types of preferential shares, going beyond the preferential shares provided for in the Act, and allowing companies to define in their Articles of Association the type of preferential shares to be issued and the type of property and non-property rights they will be allowed to hold in their company.
Prior to this draft Law, preferential shares could only represent 1/3 of a company’s capital, but with the entry into force of these amendments, preferential shares will be able to represent a maximum of ½ of the company’s capital. Limiting preferential shares to no more than ½ of the company’s capital will ensure that decisions in the company are not taken solely by minority shareholders.
The new amendments also allow the company to issue different classes of preferential shares and to convert preferential shares into ordinary shares or other classes of preferential shares. The possibility to convert shares into ordinary shares or other classes of preferential shares will considerably simplify the conversion procedure compared to the pre-amendment requirement to first convert shares into ordinary shares and then to issue new shares in addition. The procedure introduced by the amendments would allow shareholders to deal with the conversion of shares in a single shareholders’ meeting, as the amendments provide for the possibility for the Management Board (or, in the absence of a Management Board, the chief director of the company), by its own decision, to change the number of shares in the event of a situation where not all the shares approved by the shareholders can be converted and to submit the new Articles of Association to the Registry. This regulatory change will allow shareholders of companies to diversify their holdings and the shares issued by the company, thus creating new opportunities for both existing and future shareholders.
From now on, companies will also have the right to define in their Articles of Association the procedure for determining dividends on preferential shares. This change will make it easier for companies to attract new investment by personalising the preferential share dividend depending on the investment attracted and other relevant circumstances.
On the specifics of the sale of shares in a private limited liability company
Another important amendment to the Law, which contributes to the liberalisation of corporate governance, is the clarification of the procedure for the sale of shares and, more specifically, of the pre-emptive rights to shares. Prior to these amendments, there was often a debate on the possibility of providing in the Articles of Association of companies for a different procedure for the sale of shares from that provided for in the Law and whether the provision of a different procedure in the Articles of Association included the right of pre-emption of shareholders. The amendments in force in this respect also implement the liberalisation trend and foresee that companies will be able to waive the right of first refusal altogether in their articles of association and to define a different procedure for the sale of shares.
Changes to the procedure for payment of shares
Under the previous provisions of the Law, the issue price of shares issued in a company had to be the same, and different issue prices of shares caused a lot of debate in practice. The amendments in force have also clarified this situation, allowing shares to be issued at different issue prices in the same share issue. This change will help companies to avoid a huge waste of time and costs when, for example, a capital increase in a company has to be raised several times due to the impossibility of using different issue prices for different shares in the same issue.
The amendments to the Law will also facilitate a situation that public limited companies often face in capital increase procedures – the payment of the excess of the nominal value of shares. Until now, shareholders were required to pay at least ¼ of the nominal value of all subscribed shares and to pay the amount of the excess of the nominal value of all subscribed shares when deciding to pay up the capital. This created considerable inconvenience as the amount of the excess could become a significant burden for the payment of the shares, especially if only ¼ of the subscribed shares were chosen to be paid up. The amendments will set a different amount to be paid by the subscriber in a public limited company – ¼ of the nominal value of all shares subscribed for and the sum of the excess of all shares. This change will give public limited liability companies considerably more flexibility to increase their capital and to organise the payment of shares issued.
Prepared by Loreta Andziulytė, Attorney and Partner at ECOVIS ProventusLaw, and Arminas Bijanskis, Junior Associate
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