The introduction of share classes is a fundamental change. Why? At present, a company has the right to issue ordinary shares and preference shares.
The latter may represent no more than one third of the share capital and their dividend must be fixed as a percentage of the nominal value of the preference share. In practice, this leads to a general disuse of preference shares, in particular due to the inflexibility in setting the dividend.
Although ordinary shares remain as the basic shares of the company, following the amendment to the law, both private limited companies and public limited companies will be able to issue different classes of preference shares from 1 May 2023.
The classes, the rights granted, and the manner in which dividends are attributed to the preference shares will have to be determined in the company's articles of association. In other words, the dividend will no longer be required to be fixed as a percentage of the nominal value of the preference share.
Shareholders will be able to agree in the company's articles of association which set of shareholder rights are attributable to a particular class of preference shares. There is no limit to the number of classes of preference shares, so a company will be able to issue a number of preference shares with different sets of shareholders' rights, and they may be convertible from one class to another.
This year's amendment addresses one of the main shortcomings of the Law on Joint-Stock Companies relating to shares.
In Western Europe and the US, it is common for a company to issue different classes of shares and assign different shareholder rights to each class.
In Lithuania, the law does not allow this so far, so creative solutions have to be found and classes of shares have to be created on a contractual basis, where shareholders agree in contracts that different sets of shareholder rights are assigned to one share or another.
The new amendments are particularly important for start-ups attracting investment from venture capital funds. It is common for foreign venture capital funds to invest in preference shares, which have more important rights than ordinary shareholders and have priority to receive any payments from the company.
For now, funds have to be told that this is not possible in Lithuania and that these issues can only be regulated in the shareholders' agreement.
Another change is the possibility of redeeming shares.
Until now, majority shareholders have been able to buy back shares from minority shareholders only in listed companies. The amendment to the Law on Joint-Stock Companies provides that from 1 November 2022, this possibility will also be available in private limited companies.
Therefore, majority shareholders of a private limited company holding 95% of the voting shares will already have the right to buy back the remaining voting shares.
This right will work in the other direction as well: a minority shareholder will have the right to require its voting shares to be bought back by a majority shareholder who has acquired 95% of the voting shares.
This right will be exercisable within three months from the date of crossing the threshold, although a transitional period of one year will apply after the entry into force of the amendment. The redemption price of the shares will have to be determined by an asset valuer.
This amendment was not tabled by the Lithuanian Venture Capital and Private Equity Association and the association Unicorns LT. In practice, there are companies that have „dead souls“ among their shareholders. Therefore, this amendment is very important for them in order to eliminate shareholders who cannot be found.
However, I am cautious about the amendment itself, as it could open a Pandora's box and lead to a lot of litigation – especially when there is a risk that the market value determined by the valuers will not correspond to the actual market value of the shares.
And while in the case of listed companies, the interests of small shareholders are protected by the Bank of Lithuania, there is no „stewardship“ in the case of private limited liability companies. It is, therefore, likely that we will see a lot of disputes over both the fact and the value of the redemption.
Finally, the practical challenges arising from the issue and sale of shares are resolved.
Provision is made for the possibility to issue shares with different issue prices in a single issue. Until now, the law has not specifically stated this, which has led in practice to both notaries and the Centre of Registers refusing to approve or register an issue of shares with different issue prices.
The amendment is again important for the start-up community, as it is not uncommon to attract investors who invest at different share issue prices during a single investment round.
It also introduces a provision that in cases where the shares of a private limited company are acquired at an issue price higher than the nominal value, the initial contribution must be a quarter of the nominal value of the shares, the remaining amount can be paid later, by law within 12 months from the moment of conclusion of the share subscription agreement.
As the wording of the law has been unclear so far, notaries have taken the position that the full amount of the excess of the nominal value must be paid within the time limit for the initial contributions. This meant that the payment of the share in instalments was effectively impossible.
This amendment is important for all private limited companies as it explicitly allows for the possibility to pay shares with an issue price above par to be paid in instalments.
Moreover, the law expressly provides for the possibility for the articles of association of a private limited liability company to provide that a shareholder's right of first refusal to purchase shares sold by another shareholder may not apply at all.
Until now, the law has stated that the articles of association may provide for a different procedure for exercising the pre-emptive right. This has led to different interpretations of this provision of the law in practice, both in notarising or registering the articles of association and in court disputes. It has been argued that the law does not allow for the complete abolition of a shareholder's pre-emptive right to purchase shares.
The amendment removes this ambiguity. The amendment is important for all private limited companies, as shareholders often want to agree that the pre-emption right will not apply.
Looking at all the amendments adopted, it should be said that only a small part of the proposals put forward by the Lithuanian Venture Capital and Private Equity Association and the association Unicorns LT were accepted.
And the law could be more liberal because, in this respect, Lithuania is certainly lagging far behind its closest neighbours such as Estonia, as well as the United Kingdom and other Western countries.
These associations have repeatedly announced that the Law on Joint Stock Companies needs to be fundamentally rewritten and bureaucratic restrictions removed. Unfortunately, political will is lacking.
While it would be wise to approve many more amendments to the law, it is nonetheless encouraging that share classes will be introduced. In this respect, Lithuania will become a country in line with standard Western practice.
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