Lithuania: Share purchase versus asset purchase in Lithuania

Author: | Published: 1 Apr 2012
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The Baltic M&A market enjoyed growth in 2011 as a result of the strengthening of the Baltic macroeconomic climate in general, and an increase in investor trust. In Lithuania, as with most of the Baltic region, foreign investors were at the forefront of the trend.

According to a study conducted by Mergermarket , the Baltic States saw a total of 53 deals worth a combined €675 million ($890 million) come to market in 2011, an increase from 22 deals worth €547 million in 2010. The largest deal of 2009 in the Baltic M&A market was the sale of the Lithuanian public company AB Sanitas to Canada's Valeant Pharmaceuticals International. Among the top 10 M&A transactions of 2011 in terms of their disclosed value in the Baltic States, Lithuanian deals have included the acquisition of UAB Mulga (the shopping centre Babilonas) by Finland's Pontos Oyj; and the acquisition of a stake in the refrigerator manufacturer AB Snaige by Polair, a Russian appliance manufacturer.

According to Mergermarket , private equity activity has rebounded from its lowest point in 2009, which saw only two deals valued at €37 million. In 2010 there was a slight increase to five deals worth €39 million, while 2011 saw a more significant rise to 13 private equity deals worth €411 million. This trend is due in part to support from the Joint European Resources for Micro to Medium Enterprises (JEREMIE) funds, and the exit of the Lithuanian private equity group AB Invalda from Sanitas.

Acquisitions have been a method of achieving corporate expansion and growth since the restoration of Lithuania's independence. There are various possible ways of conducting M&A transactions in Lithuania, and potential investors should be aware of the issues involved with some of them.

The choice of method of business acquisition will have an important impact on personnel issues, tax planning, the structure of the transfer of the business, the acquirer's responsibility to former creditors and other potential risk factors.

Modes of transfer

There are several different ways of taking control of a company under the provisions of Lithuanian law. First, the Lithuanian Civil Code provides for the possibility of acquiring a company through the sale of the company's enterprise (which would be a going concern) or its selected assets. Second, the Lithuanian Law on Companies provides for the sale of a company through the sale of its shares. Third, the Civil Code and the Law on Companies provide for two merger modes: merger by acquisition (the transfer of all assets and liabilities from one enterprise to another, where shares in the acquiring company are issued to members of the acquired enterprise); or merger by the formation of a new company (combining the assets and liabilities of all the merging enterprises in exchange for shares in the new enterprise).

Cross-border mergers are now allowed following the implementation of Directive 2005/56/EC into the 2011 Law on Cross-Border Mergers of Limited Liability Companies. Mergers are rare in Lithuania, however, given the relatively small size of the companies and the usual desire of one or more shareholders to acquire a controlling stake in the target.

Sale of shares

The predominant mode of business transfer in Lithuania is through the sale of shares. A public company's articles of association may stipulate the pre-emption rights of shareholders in the case of a sale of shares: shareholders have the pre-emption right to acquire the shares or convertible debentures issued by the company, except in a case where a general meeting of shareholders decides to withdraw the pre-emption right for all the shareholders. The Law on Companies provides that all shareholders in private companies are entitled to use the pre-emption right to acquire all the shares offered for sale, unless the articles of association provide otherwise.

Contractual restraints to share the transfer may result from agreements entered into by selling shareholders (such as shareholders' agreements, or put or call options) or a change of control provisions through the arrangements of the company being acquired.

At the same time, the transfer of shares is the only possible mode for a business transfer in cases where the possibility of the transfer of rights under an essential licence is not expressly stipulated by laws or the licence.

All liabilities attached to the acquired company remain with that company. Lithuanian company law protects the buyer of the shares as a shareholder from liability for the company's debts, with the exception of certain cases provided by the law or the company's incorporation documents.

Where a legal person fails to perform his obligations due to an act of bad faith made by a member of that legal person, the member of the legal person will, in a subsidiary manner, be liable for the obligations of the legal person with his property.

The Supreme Court of Lithuania has ruled that honesty in civil law should be evaluated in both objective and subjective terms. The objective test of dishonesty allows the dishonesty element to be inferred from the objective facts of the case, regardless of the actual intent of the respondent. The objective test aims to determine whether the respondent behaved as a reasonable person acting with due diligence. For instance, the Supreme Court has ruled that a financial scheme under which services performed by the previously established company were paid to the newly established company, thereby making it impossible to collect the awarded judgment against the former, constituted a dishonest act.

The Civil Code's statutory liability for defects is confined to defects relating to the shares themselves. Therefore, the common approach in larger deals is to replace the statutory liability and remedies with contract-based liability for breach of representations and warranties (relating to both shares and assets) and contractual remedies. Such remedies usually encompass restitution (if the breach took place before closing), compensation of damages and/or penalties for breaches of obligations and warranties.

Except for any arrangements made by the parties, the sale of shares does not affect the target's obligations towards the employees, or the terms of the employment or collective agreements. The Lithuanian Labour Code expressly states that the change of ownership of an enterprise may not constitute a legitimate reason to terminate employment relationships. The employment of the company's employees is deemed to be uninterrupted after a change of control over the target.

With respect to tax issues, the sale of shares is generally VAT-exempt in Lithuania, even if the target owns some real estate.

Capital gains on the sale of shares are generally subject to 15% personal income tax (for natural persons) and 15% profit tax (for legal persons). In the case of a legal person, the capital gains are exempt from profit tax if the seller controls the shares continuously for more than two years, and if such shares comprise more than 25% of all shares in the target.

The gain on the sale of shares is tax-exempt for an individual if: (i) he or she did not own more than 10% of the authorised capital during the preceding three years; (ii) he or she owned the shares for more than 366 days; (iii) and the shares are not sold to the issuer.

In the case of the sale of shares by a natural person, the income is subject to personal income tax; and in the case of sale by a legal person, the income is subject to corporate income tax, save for exceptions in the Law on Personal Income Tax and the Law on Corporate Income Tax, respectively.

As already mentioned, share transfer is the only possible mode of business transfer in cases where the possibility of the transfer of rights under an essential licence is not expressly stipulated by laws or the licence.

Sale of shares keeps employment issues simple, as obligations under employment and the terms of employment and collective agreements are not changed as the result of a shares transfer.

In contrast to the transfer of an enterprise, a shares deal is not subjected to the compulsory audit requirement. Such discretion of the buyer is particularly important in cases of management buyouts. In practical terms, the share purchase contract may not contain a list of the assets and liabilities of the transferred company. The trend, however, is that parties to the contract negotiate an extensive list of warranties, meaning that both forms of transfer will entail a large volume of contractual provisions.

The sale of an enterprise

Depending on the extent and nature of assets that are subject to transfer, the transaction may either represent the transfer of an enterprise (or a substantial part of it) or a transfer of its selected assets. The transfer of selected assets is rarely used in Lithuania as a mode of business transfer, due in particular to the ambiguity of the "substantial part of an enterprise" test under the Civil Code, which triggers the application of rules that govern the transfer of an enterprise.

Under Lithuanian law, an enterprise is defined as an object of property constituting the whole enterprise or a substantial part thereof, with the exception of its rights and duties, which the seller has no right to transfer to other persons. Overall, the transfer of an enterprise should be understood as the acquisition of an economic activity belonging to another entity. The Lithuanian Law on Value Added Tax provides for the transfer of individual economic activities without establishing a legal entity. Therefore, the transfer of an enterprise may apply to the transfer of economic activities within the context of self-employment or under a business certificate.

Indeed, it is difficult to determine whether a transaction qualifies as the sale of selected assets or the sale of an enterprise. Arguably, the structure of the relevant provision of the Civil Code means that the transfer of an enterprise (as opposed to the transfer of selected assets) may be distinguished by the transfer of the firm's name, trade name or service name, or by other marks identifying the seller or the goods or services supplied by him; the transfer of an enterprise may also be distinguished by the transfer of the rights of the enterprise under licence agreements.

The ambiguity is caused by the Civil Code's provision stating that the said intangible assets are transferred unless otherwise provided for by the contract. Therefore, even if the transaction does not extend to these intangible assets, the deal may still qualify for the transfer of an enterprise (or a substantial part of it).

Under the contract of the purchase–sale of an enterprise, the seller obliges himself to transfer to the buyer through the right of ownership the whole enterprise or a substantial part thereof as an object of property, with the exception of its rights and duties, which the seller has no right to transfer to other persons; while the buyer obliges himself to accept the said object and to pay the price.

The seller's rights that were acquired under licences will be transferred to the buyer only in cases where the possibility of such a transfer has been stipulated by laws or the licence. This transfer to the buyer along with the enterprise of obligations (which he cannot perform, since he does not have a licence to do so) must not release the seller from liability to creditors for the non-performance of these obligations. In such cases, the seller and buyer will be jointly liable to creditors for the non-performance of the obligations.

The Civil Code sets forth burdensome formal and substantive requirements for enterprise transfer deals. The contract must specify the composition of the assets of the enterprise being sold and the price of the enterprise, in addition to the person who will be paid and who will settle with the creditors of the enterprise.

A number of accompanying documents must be drawn up, agreed to and signed by the parties before the signing of the main contract can take place. These are: a deed with the inventory of the enterprise's assets; the enterprise's balance sheet; the opinion of an independent auditor regarding the composition and price of the enterprise's assets; and a list of the enterprise's debts (obligations), specifying the nature of the debts, the time limits for their performance, and any security obligations with regard to creditors and their addresses. Finally, an enterprise's contract of purchase must be certified by a notary.

An enterprise's contract of purchase may be invoked against third parties only in cases where it has been recorded in the public register in the manner established by law, and relevant amendments have been made in the register of legal persons. Non-compliance with the requirements of the form of the contract renders the contract null and void.

Particular attention should be paid to the Civil Code procedure on the notification of the creditors of the enterprise to be transferred. The buyer has the right to choose one of two alternative creditor protection mechanisms. The first option is to provide all the enterprise's creditors with acceptable security for the satisfaction of their claims. The second option is to give all the creditors who are named in the list of enterprise debts (obligations) advance notification of the intended sale of the enterprise, and to pay in cash a part of the price of the enterprise sufficient to settle with the creditors to a credit institution or an insurance company.

In the event that the creditor/creditors file objections to the deed of price distribution within 10 days of the receipt of the deed being drawn up by the institution charged with the settlement, the institution that has received the payment must apply to the court to determine the priority of creditors and the procedure for the satisfaction of claims.

If the buyer duly performs his duties relating to creditor protection, the creditors of the enterprise lose the right to raise claims to the latter or against the assets of the sold enterprise. The creditors retain the right to address their claims to the seller, however.

In the case of the buyer's failure to duly perform creditor protection duties, the fact of the sale of the enterprise may not be invoked against the creditors of the enterprise in cases where their right of claim arose before the conclusion of the contract for the purchase–sale of the enterprise, unless the buyer satisfies the creditors' claims by paying for the value of the assets of the purchased enterprise. The legal effects of the nullity of transactions, or the amendment or rescission of the transfer contract of an enterprise will arise only in cases where these do not essentially violate the rights and interests of the seller's and buyer's creditors that are protected by law, and where they are not contrary to public order.

The claims of creditors may be satisfied if they are submitted within a year of the day they found out, or should have found out, about the sale of the enterprise, provided that not more than three years have elapsed from the date on which the enterprise had been sold.

The seller and buyer of the enterprise will be jointly and severally liable for the actions of the person who received the payment and who had to settle with the creditors; however, the buyer will only be liable to the extent of the value of the purchased assets of the enterprise.

The creditors of the enterprise whose claims were secured by pledge (hypothec) and who were excluded from the distribution of the price, or whose claims were not fully satisfied, will retain their rights in any case. The seller of assets or an enterprise is subject to the Civil Code's statutory liability for any defects in the acquired company's assets or with regard to the quality of the enterprise, or other contractual requirements. Where the enterprise is transferred and accepted under the transfer–acceptance deed in which the defects of the enterprise or its assets are specified, the buyer will be entitled to demand a reduction in the price if, under the terms of the contract, he is not entitled to present any other demands in such a case.

The buyer will be entitled to demand a reduction in the price if he has been assigned any seller's debts (obligations) that were not specified in the contract or enterprise transfer–acceptance deed, except in cases where the seller proves that the buyer was aware, or could not be unaware, of the debts (obligations) at the moment of the conclusion of the purchase agreement.

Where the defects of the enterprise for which the seller is liable render the enterprise unfit for the use indicated in the contract, and the defects cannot be eliminated or the seller did not eliminate them within a fixed time period, the buyer will have the right to apply to the court for the dissolution or revision of the contract and for compensation for damages.

A number of employment issues may arise. The Lithuanian Labour Code sets forth that the transfer of a business or a part thereof may not constitute a legitimate reason to terminate employment relationships. As a result, the contract of employment remains with the transferor (the seller of the enterprise). This provision of Lithuanian law does not comply with Council Directive 2001/23/EC, as the latter sets forth that the transferor's rights and obligations arising from an employment relationship existing on the date of a transfer will, by reason of such transfer, be transferred to the transferee.

The current state of Lithuanian labour law is disadvantageous both in respect of the employees of the enterprise to be transferred and the transferor itself. The latter may terminate the employment relationship only on the general grounds provided for in the Labour Code. A possible solution to this problem is the transfer of employees by agreement of the employers (the transferor and the transferee). In this case, however, the consent of each employee is required for such a transfer.

On the one hand, this version of the Labour Code may cause difficulties in the transfer of an enterprise with its employees. On the other hand, the transferor and the transferee are entitled to freedom of contract in respect of their arrangements regarding the employees of the enterprise, subject to the consent of these employees.

As for tax issues, the sale of an enterprise is VAT-exempt. At the same time, the transferor may encounter a double taxation problem. First, capital gains on the sale of enterprise are subject to income tax. Second, a shareholder of the seller is subject to personal income tax or corporate profit tax upon several eventualities: the liquidation of the seller, a reduction of its authorised capital, the payment of dividends, or the acquisition of any remaining assets of the seller. Overall, the taxation of the sale of an enterprise is not entirely regulated by statutory law, and any sale of an enterprise's transactions should therefore be made in close cooperation with tax consultants and tax administrators.

In some situations, the transfer of an enterprise is the only option for the transfer of a business unit. Share transfer is impossible in cases of partnerships, individual enterprises, farms, or individual activities (including those exercised under a business certificate). As the vast majority of business enterprises are organised as private or public limited liability companies, such an advantage is only pertinent to small businesses.

Furthermore, the transferor and the transferee are entitled to freedom of contract in respect of their arrangements regarding the employees of the enterprise, subject to the consent of those employees.

It is noteworthy that both share and enterprise purchase deals require compliance with similar administrative procedures, particularly the merger notification procedure.

The effects on the structure of transactions

In sum, the sale of an enterprise is the only realistic option in cases of the transfer of a non-incorporated business or the transfer of a business without employees. Such a mode of business transfer has several significant downsides, however. These are: the double taxation problem (the applicability of VAT in certain cases and the taxation of capital gains both at the level of the transferor and its shareholders); a burdensome statutory creditor protection procedure that requires the identification of all creditors of the enterprise to be sold, which will depend on the seller's honesty and diligence; joint liability to the creditors of the enterprise in case of failure to comply with the creditor protection procedures (up to the value of the transferred enterprise); and the absence of an automatic employee transfer mechanism upon the sale of the enterprise (if the employees are to be transferred).

In turn, the commonly-used sale of shares under Lithuanian law certainly serves its purpose, and more significant deals are expected to come in 2012.

The future outlook

M&A activity in the Baltic region has proved resilient, despite global uncertainty. In 2011 Lithuania represented 63% of the value of Baltic M&A deals. Furthermore, aggregate deal volume in Lithuania has more than doubled since 2011, and its value has more than trebled.

According to Mergermarket data, there is strong pipeline for consumer and energy deals in Lithuania. The increased investor activity in the region allows for an optimistic view of the near future in the Lithuanian M&A market.

Giedrius Kolesnikovas
Giedrius Kolesnikovas is the head of the corporate and M&A practice of Motieka & Audzevicius in Vilnius. He possesses extensive experience in advising international and local clients on a wide range of issues related to M&A, corporate governance, restructuring and insolvency, and capital markets. He has supported a number of local and cross-border M&A transactions. He also regularly represents minority and majority shareholders in corporate conflicts. His clients range from leaders in the aviation sector (Avia Solutions Group), pharmaceutical (PELION, Limedika), renewable energy developers to large investment and private equity funds. His experience in corporate governance is also recognised among clients.

Giedrius sits on the management board of Dvarcioniu Keramika and supervisory board of He obtained an LLM from Duke University, School of Law (Fulbright Alumnus), an LLM in international and EU law from Riga Graduate School of Law, a postgraduate diploma in EC competition law from King’s College London, and a master’s degree in law from Vilnius University. He is a member of the Lithuanian Bar Association and International Bar Association, and his working languages are English, Russian, and Lithuanian.

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