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. 

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:

Mobile
phone number: (+371) 296 216 15

E-mail:
info@inlatplusinter.lv<a target="_blank" href="http://www.inlatplusinter.lv">www.inlatplusinter.lv</a><a target="_blank" href="http://www.inlatplusinter.lv/eng/">http://www.inlatplusinter.lv/eng/</a> 

Address:
Krišjāņa Valdemāra iela 38-612, Riga, Latvia

Law Office “INLAT PLUS international”, juridiskais birojs

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