Latvia

Author: | Published: 9 Oct 2003
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Liability of the members of management and supervisory bodies of capital companies (the companies) in Latvia is regulated by the Commercial Law. If the company is a part of a group of companies, then the special provisions of the Group of Companies Law are also applicable to the management of such company. The company can be a part of the group of companies as a dominant undertaking or a dependent company. A dominant undertaking is defined as an undertaking that has decisive influence over the dependent company on the basis of participation or a group of companies agreement. Special provisions of the Group of Companies Law are also applicable to cases when the shareholders of the dependent company are held liable for losses caused to the company and other shareholders.

MANAGEMENT AND SUPERVISORY INSTITUTIONS

The board of directors is the management body of the company whose responsibility includes the management of the company and representation thereof in relations with third parties. The supervisory board is the supervisory body of the company that represents the interests of shareholders and supervises the activities of the board of directors. With regard to joint stock companies the establishment of the supervisory board is a mandatory requirement while in limited liability companies the establishment of the supervisory board is voluntary.

Obligations that could result in personal liability

Obligations of the members of the board of directors and the supervisory board (the members) that could result in personal liability for the relevant persons are regulated in a comparatively general manner. The Commercial Law only states the obligation of the members to act as honest and careful managers, it does not provide more specific criteria as to how their compliance with these requirements could be assessed. The meaning of the term honest and careful manager is to be determined on a case-by-case basis in legal proceedings related to the liability of the members. Currently there is almost no such court practice in Latvia as the provisions of the Commercial Law have only been in effect since January 1 2002 and they are applicable to companies which have registered or re-registered with the Commercial Register after this date (all companies which were established before the entering into force of the Commercial Law must re-registrater by December 31 2004).

The Commercial Law specifies only certain specific violations for which a member of the board of directors could be found liable. One of them is submission of false information. The other is violation of anti-competition provisions. In accordance with the anti-competition provision, a member of the board of directors may not: (i) be a general partner in a partnership, or a shareholder with supplemental liability in a capital company; (ii) conclude transactions in his or her own name or in the name of a third person; or (iii) be a member of the board of directors of another company if any of these activities apply to the same field of commercial activity in which the company itself is engaged without the consent of the supervisory board or, if a supervisory board has not been established, without the consent of the meeting of shareholders.

Liability

In situations where these obligations have been breached, the members are personally liable for compensation of losses caused as a result thereof. The law does not limit the amount of compensation, therefore all losses must be compensated in full. If the board of directors and the supervisory board have failed to act as honest and careful managers or the members of the board of directors have submitted false information then the liability of such members is joint and several. This means that compensation for losses caused by such breach can be claimed from any member not only for the losses caused by that specific member, but also for losses caused by other jointly liable members.

In case of a failure to comply with the anti-competition provisions, a member of the board of directors has the obligation to compensate any losses incurred by the company or recognise the agreements which are executed in his or her own name or in the name or on behalf of a third party as such that are executed in the name of the company and transfer the income acquired or the right to claim income to the company.

In the case of submission of false information to the Commercial Register, the members of the board of directors are liable not only for losses caused to the company, but they can also be called to administrative or criminal liability.

In case of failure to comply with the above obligations the members are liable for any losses caused to the company but not liable for losses incurred by individual shareholders of the company.

Bringing a claim

Claims against the members are brought based on a meeting of shareholder's decision. Such a decision is deemed to be adopted if a simple majority of shareholders who are present at the meeting vote in favour of such decision. The articles of association of a company may not require a larger majority of votes for adoption of such a decision.

Claims against the members regarding compensation of losses shall also be brought in cases when it is requested by a minority of shareholders who jointly represent not less than one twentieth of the share capital or whose participation in the share capital is not less than 50,000 lats ($87,850). However, this claim is brought in the name of the company and not in the name of the minority shareholders. Compensation for losses in these cases is payable to the company and not to the minority shareholders alone.

Claims of the company against board of directors members are brought and maintained by the supervisory board. If the company does not have a supervisory board then the meeting of shareholders that passed the decision on bringing the claim against the board of directors members also elects one or more representatives for the purpose of bringing and maintaining the claim. Claims against the members of the supervisory board are brought and maintained by the board of directors. However, the meeting of shareholders has the right to authorize other persons for performance of this task.

In order to bring a claim against the member, the minority shareholders shall apply to the relevant management body of the company (board of directors or supervisory board, depending on the person against whom the claim is brought). However, if there is an important justification the court will allow the persons selected by the minority shareholders to represent the company in court proceedings. The law gives only one example of such an important cause - if the relevant management body of the company does not bring a claim upon the request of the minority shareholders.

The claims shall be brought within three months from the date of adoption of the relevant decision of the meeting of shareholders or receipt of the request from the minority shareholders.

It must be noted that the creditors who cannot gain satisfaction for their claims against the company also have the right to bring claims regarding compensation for the company's losses against that company's members. However, as the creditor brings such claims in the name of the company, the company itself will receive compensation for losses. The creditor will thereafter be able to bring its own claims against the company.

The members are protected against the bringing of unjustified claims. The Commercial Law imposes joint and several liability for compensation of losses caused to the company as a result of unjustified claims by shareholders or minority shareholders who act with malicious intent or gross negligence.

Release from liability

The members may be released from liability for losses caused to the company. The rights to release a member from liability or enter into a settlement are vested in the meeting of shareholders.

However, these rights are not unconditional and the law provides for several exceptions. The release from liability can only be granted for specific activities that are actually performed and that are ruled on by the meeting of shareholders. This prohibits the meeting of shareholders from releasing the members from liability for unspecified future activities. A general release from liability granted to the members is not binding upon the shareholders if any new activities performed during the relevant period are revealed which were unknown at the time of granting the release. The Commercial Law specifically states that the decision of the meeting of shareholders approving the annual accounts does not itself release the members from liability for the actions during the relevant accounting year.

Secondly, the meeting of shareholders may not limit the rights of creditors and minority shareholders to bring claims against the members regarding compensation of losses in favour of the company. The creditors and minority shareholders may exercise these rights irrespective of whether the shareholders have adopted a decision on the release of the members from liability.

The Commercial Law states that members shall not be held liable in cases where they have acted in accordance with a lawful decision of the meeting of shareholders. This is a specific situation wherein the law exempts the member from liability and the members are not required to receive additional exemption from the meeting of shareholders. However, this circumstance does not limit the rights of a creditor to raise a claim regarding compensation for losses in favour of the company.

A company's articles of association may contain the provisions that, upon adoption of certain important decisions, the board of directors requires the consent of the supervisory board. However, such supervisory board consent does not release the members of the board of directors from liability for losses caused the company as a result of such decision. Therefore, in accordance with this legislation, the members of the board of directors must evaluate the possible consequences of their decisions in each separate case and they may not rely upon the opinion expressed by the supervisory board.

Of course, members may also defend themselves against claims regarding compensation of losses if they prove that they have acted as honest and careful managers.

Liability under Group of Companies Law

There are special regulations in effect regarding the liability of members applicable to companies that are part of a group of companies. These liability issues are described below.

SHAREHOLDERS

According to the general principle established by the Commercial Law, the shareholders are not liable for the obligations of the company and losses that are caused by use of their voting rights. The shareholders sole risk is to the extent of their investment in the share capital of the company.

However, the Group of Companies Law provides for exceptions from this general rule. The shareholder may become liable for compensation of losses to the company if he or she acquires decisive influence in the company and thereby becomes the dominant undertaking. Any of the following circumstances is deemed to be the decisive influence: (i) the undertaking has a majority of voting rights in the company; (ii) the undertaking as a shareholder of the company has a right to appoint or remove the majority of members of the board of directors or the supervisory board of the company; (iii) by exercising its rights as a shareholder, a person has appointed the majority of members of the board of directors or the supervisory board of the company during the accounting year; or (iv) the shareholder on the basis of agreement with other shareholders, has sole control over the majority of voting rights in the company.

Occurrence of liability

The Group of Companies Law states that if a dominant undertaking uses its influence in order to induce a dependent company to conclude a transaction disadvantageous to it or carry out another measure disadvantageous to it, the dominant undertaking must compensate for those losses incurred as a result thereof. An influence causing losses is not prohibited; however, the dependent company is protected by the granting of rights to such company to receive compensation for losses. The dominant undertaking has an obligation without notice from the dependent company to compensate losses caused as a result of the use of its influence or to grant the right to claim such losses during the accounting year.

If the obligation to compensate for losses or grant the right to claim is not complied with, then the dominant undertaking must also compensate for those losses caused as a result thereof. Furthermore, the dominant undertaking must not only compensate the losses of the dependent company but also the direct losses of its shareholders.

A dominant undertaking does not have an obligation to compensate losses caused as a result of using its decisive influence if it proves that an honest and careful manager of an independent company would have also concluded the disadvantageous transaction or taken the same act.

Besides the dominant undertaking, the lawful representatives of the dominant undertaking who have induced the dependent company to conclude a disadvantageous transaction or carry out another disadvantageous measure shall be liable as joint and several debtors. The dominant undertaking can be either a legal entity or a natural person. If the dominant undertaking is a limited liability company or joint stock company then the members of the board of directors are considered to be its lawful representatives.

The Group of Companies Law also provides for the specific case when members of the board of directors and the supervisory board of the dependent company can be held jointly liable together with the dominant undertaking. Members of the board of directors are jointly liable if they have not included the necessary information regarding the disadvantageous transaction or measure in a report on dependency. Members of the supervisory board are liable together with the dominant undertaking if they have failed to inform the meeting of shareholders regarding the disadvantageous transaction or measure.

Raising and withdrawal of claims

The dependent company or any shareholder thereof can raise claims against the dominant undertaking and its lawful representatives based on losses caused as a result use of its decisive influence. The shareholder may raise the claim in his or her own name and is not required to apply to the management bodies of the company. However, such indemnity is payable to the company and not the shareholder.

Creditors of the dependent company are also protected against the influence of the dominant undertaking. A creditor may bring a claim against the dominant undertaking regarding compensation, insofar as the creditor cannot receive satisfaction of his or her claim from the dependent company.

The dependent company has the right to waive the claim for compensation of losses or offer that this is set off. However, this right can only be exercised, provided that a three-year period from the moment when the claim arose has expired and more than 90% of the minority shareholders have adopted a special decision to that effect.

LIABILITY UNDER THE GROUP OF COMPANIES AGREEMENT

Not only the members of the board of directors or the supervisory board and the shareholders of the company, but also persons who have entered into the group of companies agreement can be held liable for losses caused to the company. A group of companies agreement is an agreement by which a company (dependent company) subjects its management to another person (dominant undertaking). This agreement allows the dominant undertaking to issue mandatory instructions to the board of directors of the dependent company insofar as such instructions comply with the interests of the dominant undertaking. Furthermore, unlike the instructions that are given by the shareholder with the decisive influence, these acts may cause losses to the dependent company without incurring liability.

Lawful representatives of the dominant undertaking when issuing management instructions shall act with the due care of an honest and careful manager. The law gives one example of such due care, stating that the lawful representatives may not give to the dependent company instructions, the performance of which may cause the insolvency, suspension of operations by administrative procedure or court-imposed liquidation of the dependent company. In case of failure to comply with the obligations of an honest and careful manager, the lawful representatives of a dominant undertaking shall be jointly and severally liable for losses caused to the dependent company. If the lawful representative believes that the instruction was given with the appropriate level of due care and that therefore there is no basis to hold him or her liable then the burden of proof lies with this lawful representative.

In a case where the group of companies agreement is entered into, the dominant undertaking itself is not held liable for the losses caused. Such liability is incurred by its lawful representatives. This is in contrast to the situation when the dominant undertaking has acquired the decisive influence in the dependent company on the basis of its shareholding, which was discussed earlier.

Raising and withdrawal of claims

The same provisions as described with regard to Shareholders: Raising and withdrawal of claims (above) are applicable to the claims in respect of compensation for losses caused by the dominant undertaking who has entered into the group of companies agreement.


Klavins & Slaidins
Kr Valdemaraiela 31
Riga LV 1010
Latvia
Tel: +371 703 5222
Fax: +371 703 5252