M&A and Private Equity

  • 2007-09-05
  • From Sorainen
Golden share: relief or another quarrel?
The Estonian Privatisation Act (Amendment), which entered into force last fall, grants the state or a local authority a statutory special right preserving a minority privatising shareholder's right to veto and exercise control over essential management decisions and shareholders of the company. The 'Golden Share' is not new in privatisation practice. Indeed, it has existed in the articles of association of the following major Estonian companies: AS Eesti Telekom, AS Tallinna Vesi and AS Eesti Raudtee. The new privatisation procedure allows for the exercise of the special right arising from the Golden Share only to avoid "violation of legislation", "damaging the financial interests of a public limited company" or "damaging the public interest". Therefore, use of the Golden Share must be grounded.

The European Commission and the European Court of Justice (ECJ) have held that disproportionate magnification of State rights compared to its actual participating interest violates the freedom of establishment protected by the EC Treaty and inhibits free movement of capital. The shortcomings of the Golden Share referred to in the positions of the Commission and judgments of the ECJ, including the decision in case The Commission vs. the Kingdom of the Netherlands, are also characteristic of the amended Privatisation Act. These include potential unequal treatment of investors, ambiguous preconditions for exercise of the special right and doubtful appropriateness of the Golden Share in attaining a desired goal. This means that the amendment to the Privatisation Act may fail to provide the expected legal clarity, so that it is still recommended to specify the subject matter and preconditions of use of a privatising shareholder's special right in the articles of association of a public limited company or in relevant legislation.

Additional information: Toomas Prangli, e-mail: toomas.prangli@sorainen.ee

Sales of company shares may be taxed
On 17.05.2007 the Latvian Parliament passed a number of amendments to various laws as a part of the campaign to reduce the current rate of inflation in Latvia. The amendments became effective on 12.06.2007, except for the provision for sale of real estate where a transitional period is granted up to 01.07.2010 as explained below.

One of suggested causes of current inflation is the overheated property market allegedly caused by the personal income tax law allowing tax-free profit on the sale of real estate owned by individuals for more than 12 months. As a result, changes to the personal income tax law have been passed to restrict situations where the sale of real estate owned by individuals will be tax-free.

Thus, the previously used phrase "income from the sale of real estate" is changed by replacing the word "sale" with the word "disposal" (transfer of title to real estate). As a consequence, a wider range of transactions transferring title to real estate will be subject to income tax.

Moreover, due to the changes in the law the disposal of real estate is now defined also to include the sale of shares in a company 50% or more of whose assets in the year of disposal or the previous year directly or indirectly consist of real estate located in Latvia. This definition applies to qualifying share sales by both resident and non-resident taxpayers. As of the end of last year, a sale of real estate already included a sale of shares where real estate was contributed to the share capital.

Furthermore, income from disposal of real estate (land or qualifying shares) is now exempt, where the physical real estate has from the date the owner was registered in the Land Book Register been owned for 60 months and has for the 12 months prior to finalisation of the disposal agreement been declared as the primary residence of the registered owner and not as a supplementary address (the "5+1 rule").

The changes to the law also provide for transitional provisions to allow certain real estate to be sold up to 01.07.2010 (generally, if ownership of the property was registered in the Land Book Register on 12.06.2007) and still be treated as exempt under the law that existed prior to these changes (the "1-year rule").

Whilst the above will allow a deferral of application of the 5+1 rule to physical real estate, the transitional period does not allow a deferral date to be granted to sale of qualifying shares. Thus, sale of qualifying shares as of 12.06.2007 will generally be taxable.

Under the corporate income tax law, non-residents who sell Latvian real estate are subject to a 2% withholding tax on the total value of the sale proceeds. The 2% withholding tax now also applies to the sale of shares in a company more than 50% of whose assets in the year of disposal or the previous year directly or indirectly consisted of real estate located in Latvia.

Additional information: Uve Zosars, e-mail: uve.zosars@sorainen.lv

Revision of financial market regulation
On 18.01.2007 the Law on Securities (the Securities Law) and the Law on Financial Instruments (the Financial Instruments Law) were adopted. Both laws replaced the Law on the Securities Market. This major revision of financial market regulation was mainly caused by the necessity to implement a basket of secondary EU legislation regulating financial markets, in particular the Directive on Markets in Financial Instruments, the Transparency Directive and the Market Abuse Directive. Whilst both laws provide general rules regulating financial markets, the Lithuanian Securities Commission is in the process of issuing and updating secondary acts implementing both laws and relevant secondary EU legislation. The provisions of the Financial Instruments Law, which relates to requirements for brokers and other entities engaging in investment services, will come into force on 01.11.2007 when the Rules on provision of investment services and acceptance and operation of clients' commission and the Rules on organising brokers' activities issued by the LSC come into force.

Both the Securities Law and the Financial Instruments Law introduce a number of novelties in regulation of financial markets, each of them meriting a separate article at least. Therefore we may give a brief overview of some of them in the following issues of this update. As a short introduction to briefings on novelties in financial market regulation, below is an overview of some of the main issues from each of the two laws:

1.The Securities Law materially narrowed the concept of the accountable issuer, i.e. the definition of companies that are subject to securities market regulation. Under the Law on Securities Market, all companies that offered to issue or issued securities were considered to be accountable issuers and were subject to securities market regulation. Under the new Securities Law only the following issuers are deemed to be accountable issuers and will be obliged to comply with information disclosure and other requirements of the Securities Law:
1.1. Issuers whose securities are traded on the regulated markets of Lithuania and/or other Member States; or

1.2. Issuers whose securities were issued with a prospectus approved after 12.07.2005 and if securities were offered publicly or traded on a regulated market based on such prospectus; or

1.3.Issuers whose securities were offered publicly and if the general shareholders meeting decided to continue to offer securities publicly within 6 months after the Securities Law came into force.

2. The Financial Instruments Law abolished market concentration and, in line with MiFID, enabled multilateral trading facilities (MTFs) to operate.

It seems that the market quickly responded to the change. Vilnius Stock Exchange, a member of OMX Exchanges, intends to launch an alternative investment market by the end of 2007. Our firm advises the Vilnius Stock Exchange on various issues related to introducing an alternative investment market.

Additional information: Agne Jonaityte, e-mail: agne.jonaityte@sorainen.lt

For more legal news please check the latest Baltic Legal Updates by Sorainen at www.sorainen.com.

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