Significant changes in the regulation of share types and their accounting concerning public limited liability companies
To enhance transparency in the operations of public limited liability companies by providing access to information about the owners of public limited liability companies and to mitigate the risks of money laundering, terrorism, and proliferation financing, amendments to the Commercial Law (Amendments) were adopted this summer which came into effect on July 1, 2023. The Amendments introduce changes to share types and processes concerning the way shares are accounted for, along with several other obligations for public limited liability companies. In the event of non-compliance, the Commercial Register will have the authority to decide on the termination of the company’s activities.
Read about the changes related to the regulation of commercial companies’ operations here.
Changes in the Classification of Share Types
The Amendments stipulate that shares will no longer be classified as name shares (in Latvian – vārda akcijas) and bearer shares (in Latvian – uzrādītāja akcijas) but rather as:
- Registered shares (in Latvian – reģistrētās akcijas) (previously referred to in Latvian as vārda akcijas), which are to be recorded in the shareholder register, and
- Dematerialized shares (in Latvian – dematerializētās akcijas) (previously referred to as bearer shares, in Latvian – vārda akcijas), which are to be deposited in the central securities depository (CSD).
According to the Amendments, a public limited liability company can now only have one type of shares (either registered or dematerialized); it will no longer be possible to issue both types simultaneously.
The Amendments also remove the requirement for public limited liability companies to specify the form of shares in their articles of association (until now, the Commercial Law allowed shares to be in paper and dematerialized form) and information about share conversion (if provided for in the articles of association).
In light of these changes, public limited liability companies are required to make corresponding amendments to their articles of association.
What is the Deadline for the Changes in the Articles of Association?
If a public limited liability company currently has issued both types of shares, it must decide in favour of one share type and register the relevant changes in the articles of association by June 30, 2024 (starting from January 1, 2024, in conjunction with other article of association changes).
For companies that have already issued only one type of share but still reference the previous share names in their articles of association (vārda akcijas or uzrādītāja akcijas) or include references to the form of shares, the update should be done concurrently with other changes in the article of association but no later than by July 1, 2026.
What do Public Limited Companies Need to Consider Depending on the Chosen Share Type?
For public limited companies that will have registered shares:
- The record-keeping for registered shares will now be consistent with the current procedure for keeping the shareholder register of a limited liability company (SIA). In particular, the board will be responsible for maintaining the shareholder register, a file consisting of separate compartments. The shareholder register will have to be updated chronologically whenever there are changes. The Amendments extend the information to be entered in the shareholder register. Unlike the previous procedure, when the shareholder register was accessible only to the company itself or to persons to whom such rights were granted by laws and regulations, the up-to-date shareholder register will now have to be filed with the Commercial Register and the information about registered shareholders will be publicly available.
- The shareholder register must be drawn up in accordance with the new requirements and submitted to the Commercial Register by June 30, 2024. It should be noted that from 1 January 2024, if there are any changes to the articles of association or share capital of a public limited liability company, the shareholder register must be automatically registered with the Commercial Register.
For public limited companies that will have dematerialized shares:
- Dematerialised shares will have to be registered in a CSD, and public limited liability companies will have to follow specific steps in accordance with the conditions of the chosen depository to register the dematerialised shares. It should be noted that the Amendments require public limited liability companies to notify the Commercial Register about the CSD where the shares are deposited, and this information will be publicly available. This ensures that third parties are informed about the CSD where information on all shareholders of a public limited liability company is available. Under the Amendments, information on the holders of a company’s dematerialised shares will be available to the company and the competent authorities upon request from the CSD. Shareholders, on the other hand, will be able to obtain information on other holders of dematerialised shares from the company.
- Shareholders holding dematerialised shares amounting to more than 5% of the total amount of the company’s shares will be required to inform the company about this fact. The obligation also applies to each subsequent acquisition of shares in increments of 5%. Until the shareholder notifies the company of the increase in participation, it will not be entitled to exercise voting rights for the acquired shares. The obligation to inform the company also applies to a decrease in participation by 5%. The company, upon receipt of information from a shareholder regarding an increase or decrease in participation, is obliged to further inform the Commercial Register thereof. This requirement does not apply to companies whose shares are listed on a regulated market.
Public limited liability companies that will have dematerialised shares must submit an application to the Commercial Register by 30 June 2024, regarding the CSD where the shares are deposited, accompanied by the CSD’s certificate of share registration. It should be noted that as from 1 January 2024, any changes to the articles of association or share capital will automatically trigger the registration of the CSD in the Commercial Register.
Serious Consequences for Non-compliance with Legal Requirements
If a public limited liability company fails to submit the updated articles of association, shareholder register, or information about the CSD where the company’s shares are deposited to the Commercial Register by June 30, 2024, the Commercial Register has the authority to decide on the termination of the company’s activities, and the company may be subject to, inter alia, simplified liquidation.
Don’t Delay Changes Until the Last Minute!
Considering the consequences of non-compliance with the requirements imposed by the Amendments, we urge public limited liability companies not to postpone the preparation of articles of association and the organization of share record-keeping in accordance with the requirements of the Amendments. It’s essential to remember that both document preparation and convening shareholder meetings to decide on article of association amendments can take a considerable amount of time, especially if foreign shareholders are involved and there is a necessity to sign documents abroad in front of a public notary. For companies opting to issue dematerialized shares, additional time must be calculated for concluding a cooperation agreement with the chosen CSD, fulfilling other depository requirements, and obtaining the necessary certifications to be submitted to the Commercial Register.