Recent company law changes impacting M&A deals
December 2015 | EXPERT BRIEFING | MERGERS & ACQUISITIONS
In recent years there have been a number of changes to the Law on Companies of the Republic of Lithuania (the Company Law) which have had a potential impact on concluding M&A deals in Lithuania. These changes relate to the legal form of a share purchase agreement as well as the new rules on prohibited financial assistance.
Notarial approval of a share purchase agreement
As of 1 January 2015, a share purchase agreement of a private company must be approved by notary if 25 percent or more of the shares of the company are sold, or if the price of the shares sold is higher than €14,500. Prior to this date, notarial form of a share purchase agreement was not required. This new requirement is now applicable even to intra-group transfers of shares.
The Company Law and the Civil Code were amended so that share deals meeting the established criteria are approved by the state representative (notary) for the prevention of sham transactions and related infringements of law. However, this new requirement to have the share purchase agreement approved by notary triggers a number of implications which must be considered when pursuing M&A deals in Lithuania.
Firstly, the notarisation means that the execution of the share purchase agreement will be more time consuming as all the transaction documents will have to be reviewed by the notary in advance. They will also have to be translated into the Lithuanian language.
Secondly, the notary fees will increase the costs of the deal. The notary fees are established by the Ministry of Justice and they are linked to the deal value (i.e., 0.4 to 0.5 percent). Luckily, the notary fees are capped at €5792.
Thirdly, representatives of the parties to the transaction will have to be present at the notary for signing a share purchase agreement. This can be avoided by issuing the power of attorney for the purposes of execution of the deal. However, the power of attorney still has to be approved by the notary.
There is one exception from the requirement of having a share purchase agreement to be approved by notary. According to the Company Law and the Civil Code, notarial approval is not required if the management of securities accounts of the shareholders of the company is handled by a third-party securities account manager (i.e., a financial brokerage company) but not by the company itself.
In practice, prior to the execution of a share purchase agreement, the management of securities accounts where the shares of the company are recorded can be transferred to a financial brokerage company.
Normally, the fees charged by a financial brokerage company for the transfer of shares will be lower than the otherwise applicable notary fees. Furthermore, they are negotiable, including a cap on fees. On the other hand, one must also consider the fees of a broker applicable for regular securities account management services following the transfer of shares.
Furthermore, the advantage of having the share transfer recorded by a financial brokerage company rather than approved by notary is that brokers, unlike the notary, do not have to formally approve the deal. If the share deal is complex (i.e., it involves a number of parties, etc.) it may be especially convenient to avoid notarial approval in this way.
Prohibited financial assistance
Before 17 June 2014, when the amendment to the Company Law came into effect, a Lithuanian-registered company was prohibited from either directly or indirectly advancing funds, making loans or providing a security with a view to the acquisition of its shares by a third party. The Company Law did not offer any exceptions to this rule. The amendment to the Company Law was designed to set the conditions under which financial assistance would be allowed.
Firstly, the prohibition on financial assistance does not apply if shares of the company are acquired by or for the company’s employees or the employees of the parent (subsidiary) company. In accordance with the amendment, not only shares of the company but securities entitling the acquisition of the shares of the company in the future (i.e., convertible bonds, options) may also be acquired by the employees.
However, the exemption from prohibited financial assistance is not applied if the employees are the members of the governing body of the company (parent company). This prohibition was not transposed from the EU Directive 2012/30/EU (the Directive) like rest of the amendment, but was established on the initiative of the Lithuanian legislators.
Secondly, after the amendment to the Company Law (as well as the Law on Financial Institutions), a financial institution may grant financial assistance for the acquisition of its shares by third parties if either such action could be attributed in the normal course of business of the financial institution or if the institution is an investment company as provided in the Directive.
In order to apply the exemptions mentioned above, the equity capital of the company after granting the financial assistance cannot be less than the amount of the paid authorised capital plus the statutory reserve and the reserve for acquisition of own shares.
As can be seen, this amendment to the Company Law deals with specific situations, such as the acquisition of shares by employees or the acquisition of shares of a financial institution, but does not facilitate leveraged buyouts.
To sum up, the new requirement of having the share purchase agreement of a private company approved by notary has aggravated the formal process of execution of share deals in Lithuania. But there is a practical solution to overcome this. With regard to prohibited financial assistance, despite the introduced exemptions the rules remain tight and any debt push-down structure requires profound consideration.
Robertas Degesys is a partner and Indrė Vickaitė is an associate at Tark Grunte Sutkiene. Mr Degesys can be contacted on +370 5274 2409 or by email: firstname.lastname@example.org. Ms Vickaitė can be contacted on +370 5274 2470 or by email: email@example.com.
© Financier Worldwide
Robertas Degesys and Indrė Vickaitė
Tark Grunte Sutkiene