Diāna Zepa

COBALT Latvia

Riga, Latvia

diana.zepa@cobalt.legal

Guntars Zile

COBALT Latvia

Riga, Latvia

guntars.zile@cobalt.legal

Vadims Zvicevičs

COBALT Latvia

Riga, Latvia

vadims.zvicevics@cobalt.legal

In Latvia, the Mobility Directive has been implemented into national law. It was mainly transposed by the amendments to the Commercial Law (Grozījumi Komerclikumā) of 11 May 2023 (“Latvian Implementation Act”) and some other related laws. The Latvian Implementation Act has come into force on 1 June 2023.

The Latvian Implementation Act provides for the following transitional period: any cross-border merger, division or conversion may still be carried out by the participating entities pursuant to the law in force before 1 June 2023 in case the application on the cross-border operation initiation and the draft terms of the cross-border operation been submitted for registration with the commercial register (the official name – the Register of Enterprises of the Republic of Latvia) until 31 May 2023 at the latest.

The Latvian Commercial Law had allowed cross-border mergers both by way of merger via acquisition and via incorporation already before the Latvian Implementation Act came into force. The Latvian Implementation Act has now also implemented the provisions of the Mobility Directive on cross-border conversions and cross-border divisions via incorporation as full division and partial division and as division by separation.

In addition, the Latvian Implementation Act goes beyond the scope of the Mobility Directive by also allowing the cross-border division via acquisition (i.e., where the company being divided transfers assets and liabilities to one or more pre-existing companies) and Latvian legislator has not limited such cross-border operation to any specific companies (although taking into account the general scope of application described at Section 3 below).

The scope of application of the provisions on cross-border operations under the Latvian Commercial Law (as amended by the Latvian Implementation Act) is limited to limited liability companies (sabiedrība ar ierobežotu atbildību), joint-stock companies (akciju sabiedrība) and partnerships (personālsabiedrība) – general partnership (pilnsabiedrība) and limited partnership (komandītsabiedrība). The legislator has not limited the application of these provisions by reference to certain criteria such as the number of employees of these entities, etc. Although the legislator has not expressis verbis prohibited cross-border mergers involving a cooperative society, the latter does not fall within the scope of the afore-mentioned entities.

In addition to the mandatory restrictions of the Mobility Directive and pursuant to the Latvian Commercial Law (as amended by the Latvian Implementation Act), cross-border operations are not allowed for companies:

• which are the subject of insolvency proceedings;
• activities of which are terminated on the basis of a resolution of the Commercial Register, tax administration or a court ruling;
• which are the subject of crisis prevention measures in accordance with provisions of the Law on Recovery of Activities and Resolution of Credit Institutions and Investment Firms (Kredītiestāžu un ieguldījumu brokeru sabiedrību darbības atjaunošanas un noregulējuma likums);
• the object of which is the collective investment of capital provided by the public, which operates on the principle of risk-spreading and the units of which are, at the holders’ request, repurchased or redeemed, directly or indirectly, out of the assets of that company.

The Latvian Transformation Act's standard procedure for cross-border operations generally aligns with the standard procedure prescribed by the CLD as amended by the Mobility Directive. However, the following deviations are worth noting:

• The shareholder resolution of a Latvian company participating in the cross-border operation which approves the cross-border operation requires a majority of at least 2/3 of the votes present at the meeting unless greater majority is required by the articles of association.
• Grammatical interpretation of the Latvian Commercial Law (as amended by the Latvian Implementation Act) would allow greater majority requirement than 90% if the articles of association state so. Based on the aforementioned interpretation, the Latvian legislator has implemented the Mobility Directive on the part on which it requires a majority of not less than 2/3 of the votes attached to the shares/subscribed capital represented at the shareholders meeting, but not implemented the maximum majority threshold of 90%.
• If the receiving company is a capital company to be incorporated within the cross-border operations, the following additional information must be provided in the draft terms: share capital, the number of shares, nominal value per share, identification details of the management board members and, where appropriate, the supervisory board members of to be incorporated receiving company.
• Certain further deviations are described in Section 6 to 9 below.

The Latvian Commercial Law (as amended by the Latvian Implementation Act) allows for a simplified procedure in case of intra-group cross-border operations generally in line with the provisions of the CLD (as amended by the Mobility Directive).

In case of any cross-border operation, the report section for shareholders of the report of the administrative or management body and the independent expert audit and report is not required, if all shareholders of all participating companies waive their right to receive such documents.

In case of a cross-border merger, the report section for shareholders of the report of the administrative or management body and the independent expert audit and report are not required:

• for the transferring company, if it is wholly owned by the receiving company; or
• no shares in the receiving company are issued as a result of the cross-border operations and all shares of the transferring company and the receiving company are directly or indirectly owned by the same shareholder.

In case of a cross-border division, the report section for shareholders of the report of the administrative or management body and the independent expert audit and report are not required:

• if all the shares of the receiving company are acquired by the shareholders of the transferring company;
• in case of a division by separation via incorporation (i.e. by way of transfer of assets and liabilities to a new subsidiary wholly owned by the transferring company).

In case of a cross-border merger, a shareholder resolution is not required:

• for the receiving company, if the receiving company holds at least 90% of the shares of the transferring company;
• for the transferring company, if:
  • the transferring company is wholly owned by the receiving company; or
  • no shares in the receiving company are issued to the shareholders of the transferring company and all shares of the transferring company and the receiving company are directly or indirectly owned by the same shareholder.

In these cases where no shareholder resolution is required, the following timing applies for the public disclosure of the draft terms of merger (i.e. the merger plan):

• if no shareholder resolution of the receiving company is required, the merger plan has to be submitted to the commercial register for publication and the shareholders of the receiving company must be informed of the intention to merge at the latest one month, if the receiving company is a joint-stock company, or two weeks, if the receiving company is a limited liability company, prior to the shareholders’ meeting of the transferring company deciding on the merger;
• if no shareholder resolution of the transferring company is required, the merger plan has to be submitted to the commercial register for publication at the latest one month, if the transferring company is a joint-stock company, or two weeks, if the transferring company is a limited liability company, prior to the shareholders’ meeting of the receiving company deciding on the merger.

A similar timing approach applies with respect to the delivery to the employees or employee representatives of the report section for the employees of the report by the management or administrative body:

• if no shareholder resolution of the receiving company is required, the report by the management or administrative body has to be delivered to the employees or employee representatives at the latest six weeks prior to the shareholders’ meeting of the transferring company deciding on the merger;
• if no shareholder resolution of the transferring company is required, the report by the management or administrative body has to be delivered to the employees or employee representatives at the latest one month prior to the shareholders’ meeting of the receiving company deciding on the merger.

In addition, in case of a cross-border division via acquisition, a shareholder resolution is not required for the transferring company, if the transferring company is wholly owned by the receiving companies.

Under the Latvian Commercial Law (as amended by the Latvian Implementation Act) the objecting shareholders of a Latvian transferring company (in case of merger or division) or Latvian converting company (in case of conversion) have the right to transfer their shares or demand that the receiving/converted company acquires the exchanged share for cash compensation as foreseen by the Mobility Directive if these shareholders would become shareholders of a company governed by the law of a different Member State as a result of the cross-border operation.

A cash compensation for the shares must be “fair and reasonable”. Therefore, the market value is used as a guideline for the amount of compensation. The company can choose how to determine what is fair and reasonable. This may be done by consulting an independent expert, by agreement between the shareholders themselves or by other means.

The following additional procedural aspects apply in this respect under Latvian law:

• The objecting shareholders have to declare their intention in writing to exercise their exit right within one month after the shareholder resolution of the transferring or converting company on the cross-border operation. The company must ensure that the objecting shareholders can submit their requests by means of electronic communication.
• The receiving or converted company or the new company resulting from the cross-border merger or division has to pay the cash compensation to the objecting shareholders within two months after the cross-border operation has taken legal effect unless a shorter period is specified in the draft terms or agreement. The receiving or converted company shall pay statutory interest on compensation payment not made in the prescribed amount and when due.
• Shareholders, who have declared their decision to exercise the right to dispose of their shares, are entitled to challenge the adequacy of the cash compensation within one month after submitting a respective request and ask for an additional cash compensation. Disputes related to the objecting shareholders’ right to a cash compensation and falling under Latvian jurisdiction are settled by a Latvian court, and such disputes do not affect the cross-board operations and the timeline thereof.  

Furthermore, under the Latvian Commercial Law (as amended by the Latvian Implementation Act) shareholders who consider the offered share exchange ratio not to be adequate have the right to request from the receiving company or converted company an additional cash compensation within one month after the deadline for requesting to exchange their shares for cash compensation has passed. Pursuant to Latvian law, it is not possible to dispute the share exchange ratio itself, because a binding ruling would require to adjust the share exchange ratio in relation to the remaining shareholders as well. Such an approach would be contrary to Latvian principles of civil procedure, which do not provide for the applicability of a judgment or ruling to non-parties to the case.

The Latvian Commercial Law does not provide a possibility to demand shares instead of a cash payment in case of an inadequate exchange ratio.   

The creditors of a Latvian transferring or receiving company (in case of a cross-border merger or division) and of a Latvian converting company (in case of a cross-border conversion) benefit from the ex ante protection foreseen in the Mobility Directive: those creditors who can demonstrate that their claims arose prior to the shareholder resolution on the cross-border operation and that these claims would be negatively affected by the cross-border operation are entitled to demand adequate collateral from the company within two months of the disclosure of the draft terms and notification to the creditors. The company must ensure collateral for such claims within one month after the deadline for creditors’ claims.

In addition, creditors are entitled to dispute inadequate collateral (within one month after such a collateral has been granted) or the company’s failure to provide collateral (within one month after the respective deadline has passed) before the competent court. The legislator has decided that these pending creditors’ claims are not an obstacle for the cross-border operation.

A requirement to submit a declaration of solvency as proposed as an option by the Mobility Directive has not been implemented into Latvian law. However, the members of the management board of a participating company filing the cross-border operation for registration with the commercial register have to declare that the distribution of the company’s assets has not been initiated (if the company is under liquidation proceedings).

In case of a cross-border division, the principle of joint liability of the transferring and receiving company for liabilities of the transferring company has been implemented in line with the Mobility Directive. The joint and several liability of the company to which the liability has not been allocated in the draft terms of division is subject to a limitation period of five years starting from the date when the division has taken legal effect.

The Latvian Commercial Law (as amended by the Latvian Implementation Act) has fully implemented the information and consultation rights of the employee representatives and employees foreseen under the Mobility Directive relating to the draft terms of the cross-border operation, the report by the administrative or management body and its content.

In principle, the employee section of the draft terms of the cross-border operation and the report by the administrative or management body (together with the draft terms of the cross-border operation, if available at that point in time) have to be made available in electronic form to the relevant works council (as competent employee representatives) or, if no works council exists, directly to the employees not less than six weeks before the date of the shareholders’ meeting of the company deciding on the cross-border operation. If, in case of certain intragroup restructurings no shareholder resolution is required, the delivery has to occur within the deadlines described above in Section 5.

The competent works council or, if no works council exists, the employees can submit comments (i) on the report by the administrative or management body to the company until two weeks prior to the shareholders’ meeting deciding on the cross-border operation and (ii) on the draft terms of the cross-border operation until five working days prior to the afore-mentioned shareholders’ meeting. Any comments received by the management of company until such deadline have to be brought to the attention of the shareholders before the deciding on the cross-border operation.

The consultation rights of employee representatives must be ensured under the Labour Law (Darba likums) and/or the Law on Informing and Consulting Employees of European Union-scale Undertakings and European Union-scale Groups of Undertakings (Eiropas Savienības mēroga komercsabiedrību un Eiropas Savienības mēroga komercsabiedrību grupu darbinieku informēšanas un konsultēšanās likums).  A Latvian company participating in the cross-border operation and intending to take organisational, technological or social measures in the company with respect to employees has the obligation to commence consultations with the employee representatives not later than three weeks in advance in order to reach an agreement on such measures and their procedures. This obligation applies irrespective of whether an employer is a participating company or an employer’s intra-group parent company participating in the cross-border operation. In addition, special informing and consulting provisions may apply in relation to the European Union-scale undertakings or European Union-scale groups of undertakings under the Law on Informing and Consulting Employees of European Union-scale Undertakings and European Union-scale Groups of Undertakings.

If the receiving company is incorporated or to be incorporated in Latvia and at least one of the companies involved in the cross-border operation has employee participation provisions in force, the laws and regulations governing the involvement of employees in decision-making in the cross-border operations of capital companies must apply to employee participation. In particular, employee participation must be ensured according to the provisions of the Law on the Involvement of Employees in Decision-Making in a European Company, a European Cooperative Society and in the Case of Cross-Border Merger of Capital Companies (likums “Par darbinieku iesaistīšanu lēmumu pieņemšanā Eiropas komercsabiedrībā, Eiropas kooperatīvajā sabiedrībā un kapitālsabiedrību pārrobežu reorganizācijas gadījumā”).

The following aspects of the Latvian laws regarding the employee participation are worth noting:

• The special negotiation body is able to take decisions by an absolute majority of its members and at the same time it must be provided that such a majority also represents an absolute majority of the employees. Moreover, special majority conditions are specified in certain cases.
• The members of a special negotiating body are appointed in proportion to the number of employees employed in each Member State where the participating companies are located, by allocating each Member State one seat per portion of employees employed in that Member State amounting to 10% of the number of employees employed in all the Member States taken together.
• If during the negotiation period, the number of employees of participating companies changes significantly or if there are structural changes in those companies and these changes affect the division of seats allocated for Member States, the seats must be reallocated.
• The negotiations between the special negotiation body and the company management must be completed within six months after the special negotiation body is appointed, which can be extended up to one year from the formation of the special negotiating body if the parties decide to do so by their joint decision.
• If the special negotiation body and the company management fail to agree on an employee participation regime within the above time period of six months or one year, and other specific requirements are met, a statutory representative body of employees is founded and standard rules for employee participation apply.
• The Latvian legislator has not decided to limit the proportion of employee representatives in the administrative body of the recipient companies resulting from the negotiation between the special negotiation body and the company management.

In Latvia, there are no procedural or substantive requirements for cross-border operations specific to Latvian law that go beyond the requirements of the Mobility Directive and require special attention to the timing of cross-border operations.

In Latvia, the commercial register (the official name – the Register of Enterprises of the Republic of Latvia / Latvijas Republikas Uzņēmumu reģistrs) is the competent authority responsible for reviewing the requirements for cross-border merger, division and conversion both in case where Latvia is the departure Member State or the destination Member State.

The documents for cross-border operations that are to be submitted to the commercial register and to domestic employees and creditors must be provided (at least) in Latvian language. Documents in a foreign language must be submitted to the registrar together with their translation into Latvian provided that the translator’s signature on the translation of public documents is certified by a notary public, whereas the translation of private documents is certified by the translator. Although Latvian is the authoritative language, the register provides a possibility to disclose translations into a foreign language besides the Latvian language.

Latvian law does not provide any further structuring options for cross-border operations as defined in the Mobility Directive. The Latvian Implementation Act also allows cross-border division via acquisition (as described in Section 2), which is left out of the scope of the Mobility Directive. For the avoidance of doubt, our answer herein does not include other possible options that do not fall under the definition of either merger, division or conversion as defined in the CLD as amended by the Mobility Directive but may have a similar ultimate effect as cross-border operations (e.g. Business transfers, non-monetary contributions etc.).