The Parliament of the Republic of Latvia has adopted amendments to the Commercial Law that went into force on July 20, 2005. There are a few issues that have changed, mainly those concerning acquisition of property from founders and shareholders, calling shareholders' meetings, the decisive vote of the chairman of the board and council and inheritance of shares. Of particular interest, however, is the decisive vote of the chairman of the board and the council in public limited liability companies.
Currently, the general rule is that decisions of the council and of the board are adopted with a simple majority vote of those present, unless the articles of association specify a larger majority of votes. Also, for the meeting to adopt decisions the required quorum is one-half of members. All votes are given equal weight.
By contrast, the new rule provides that the articles of association may set out that in cases of a tie, the chairman of the board has the decisive vote, and for such a rule to be applicable it should be stated in the articles of association of the company.
In practice, a tie may occur frequently, not only when the articles of association set out an even number of members of the board and council, but also when not all members are present in the meeting and an even number of members form the quorum.
Although the new rule will facilitate the decision making process in public limited liability companies, it creates a number of problematic issues if the chairman of the board is granted the decisive vote in the articles of association.
If, for example, there are only two board members, and on some particular issue they have different positions and cannot reach an agreement, the chairman will have the decisive vote. If such a disagreement between members occurs, the vote of the board member will not have any weight, and the chairman will be actually taking decisions unilaterally, which would compromise the principle of common management of the company by the board.
Furthermore, if, as a result of such a decision, losses were incurred by the company, the board members would be jointly and severally liable for such losses, unless the board member can prove that he or she has acted with the diligence of an honest and careful manager. So in order not to be liable for the losses, the burden of proof is placed on the opposing board member; that is why it is important for the board member opposing the decision to require making a note on the opposing vote in the minutes of the meeting.
The amendments to the commercial law have just come into force, and we would like to emphasize that although the possibility to grant the decisive vote to the chairman of the board is provided with an aim to facilitate the decision-making process, shareholders, when drafting the articles of association, should also consider the wide powers they grant to the chairman of the board or the council in public limited companies.
