Every type of commercial activity is invariably fraught with risks. Price changes, demands for goods and services, and other similar things belong to the category of the external risks, some of which are not completely foreseeable. The internal risks, however, implies a conflict within the company. 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.
In order to get a consultation and additional information you can contact us by phone, email or coming to our INLAT PLUS international office:
Mobile phone number: (+371) 296 216 15
Address: Lāčplēša iela 41, 2.stāvs, Rīga, Latvija, LV-1011