Liberalization of Share Classes in Lithuania: Private Order from Start-Ups for Greater Freedom of Self-Regulation

In November 2022, quite numerous amendments to the Law on Companies were adopted in Lithuania. One of the fundamental changes, which can be called a reform, and which came into force on 1 May 2023, is related to the liberalization of share classes. According to the explanatory note, these changes, inter alia, were aimed at removing existing obstacles in the regulatory environment and creating favourable conditions for establishing start-ups, as well as attracting investments. It seems that the main initiators and ‘beneficiaries’ of this reform were precisely startups and their investors (private equity funds, venture capitalists, etc.). Lithuania has joined the group of EU Member States that have chosen the path of liberal company share class regulation based on greater freedom of contracts in statutes (eg, France, Ireland, Italy, Netherlands, Belgium, Nordic countries, etc.). Note that even in countries that are conservative in this regard, such as Germany, discussions have begun on allowing multiple-vote shares. This corresponds to trends observed in other studies, that startup law is changing European corporate law traditions, and there is a movement towards an American model of corporate law. The formation of a possibly more liberal approach in this area in Europe is also signalled by the Proposal for a directive on multiple-vote shares presented by the European Commission at the end of 2022.

The preference shares have existed in Lithuania since the Restoration of independence in 1990 and rules are the same for both public companies (AB) and private limited liability companies (UAB), unlike other Baltic states (Latvia and Estonia), where share classes in public companies are more strictly regulated. However, in Lithuania, share classes have rarely been applied in practice, possibly due to legal constraints and uncertainty. Until now, preference shares could constitute no more than 1/3 of the authorized capital. In practice, there was a belief that it is not allowed to issue preference shares with another set of rights, except for the four options mentioned in the Law on Companies: with cumulative or non-cumulative dividend, with voting rights or without voting rights. Thus, over the past 20 years, the number of companies that have newly issued preference shares has generally not exceeded 10 per year, and the most popular option was preference shares with a cumulative dividend without voting rights. In 2022, only one private company (UAB) issued such shares (for comparison, at the end of 2022, there were 129,023 UAB and 272 AB).

First, under the new reform, the maximum limit of preference shares in the authorized capital was increased quite significantly. Noting that in those Member States where such restrictions apply (eg, France, Germany, etc.) only the non-voting preference shares are restricted, a compromise was adopted that non-voting preference shares cannot constitute more than 1/2 share of the authorized capital. Looking at the nearest neighbours, there are no such restrictions in Latvia, while in Estonia there is a limitation of 1/3, but only in public companies (Part 2 of Art. 237 of the Estonian Commercial Code).

Another important change was that, alongside the aforementioned four options, a provision was added that companies (both AB and UAB) will be able to issue other preference shares according to the rights granted if such an option is provided for in the company's articles of association. The companies themselves were also allowed to determine the procedure for calculating the dividend of preference shares in their articles of association, and it can differ from the general rule provided by law, that the amount of the dividend of preference shares is determined as a percentage, calculated from the nominal value of the share. The preference shares themselves will continue to be issued in different nominal values. In addition, preference shares now can be convertible not only into ordinary shares but also into another class of preference shares.

However, some unanswered questions remain, for example, what will be the limits of the freedom of self-regulation of shareholders, ie, what rights-giving preference shares will they be able to issue? In this respect, attention should be paid to the general provisions of the Law on Companies, according to which only other non-property rights can be determined in the company's statute, and property rights cannot be determined other than those in the laws. Considering the existing provisions of the Law on Companies, it can be assumed that preference shares can give their owners the right of preference (or the right to a larger scope) concerning two property rights—the right to a dividend and the right to liquidation surplus.

However, the answers to some questions will have to be provided by court decisions, which until now have been very scarce due to the very low popularity of preference shares (only two cases at the Supreme Court of Lithuania were resolved). Lithuanian courts may have to solve the same questions that have already been solved in the case law of the courts of other Member States or discussed in the legal doctrine. One such example, which caused and continues to cause debates in foreign law doctrine, could be the permissibility or impermissibility of the so-called ‘leonine clause’. Also, Lithuanian courts should not forget the principle of equal treatment of shareholders, enshrined in Article 85 of the EU Codified Directive (EU) 2017/1132 and Article 3, Part 2 of the Lithuanian Law on Companies. In other words, different rights can only be attached to shares (class of shares), but not to a specific shareholder or shareholders. Perhaps in Lithuania, as in, for example, the Netherlands after the decision of the Dutch Supreme Court in the so-called DSM case (2007), there will also be a debate as to whether unequal treatment of shareholders can be allowed if there are reasonable and objective justifications.

Regarding the issue of multiple-vote shares, which is still controversial in Europe, it should be noted that, even now, in Lithuania, companies could actually have shares that grant more than one vote. The requirement of equal par value was stated only for ordinary shares. The law describes the formula for calculating votes when the company has shares of different par values. Thus, the company could issue preference shares of higher nominal value with voting rights, correspondingly granting greater voting rights. The wording of the provisions, which entered into force on 1 May 2023, states that the voting rights granted by the preference shares are determined in the company's statute. Therefore, there is reason to believe that in the absence of a clear and specific prohibition in the law, Lithuanian companies will be able to issue multiple-vote preference shares, which may not necessarily have a higher nominal value. However, due to the aforementioned general principle that different rights can only be associated with shares, but not with specific shareholders, and the absence of specific provisions in the Law on Companies, it can be stated that even after this reform in Lithuania, companies will not be able to issue so-called ‘loyalty shares’.

In conclusion, although the very idea of the liberalization of share classes is welcome, it can be assumed that the regulation will be further improved, considering the uncertainties arising during the application of the updated norms, as well as the evolving case law. There may still be a need to provide for a different regulation of preference shares for private and public or at least listed companies. The law does not discuss the issues of cancellation or redemption of share classes. Also, written reports by directors when dealing with share classes are not indicated, although Article 5.09 of EMCA (European Model Company Act) recommends this as good practice. The reform can create the illusion for companies (primarily startups) that they are free to ‘create’ any kind of preference shares. Such attempts will be verified both by the notary and the registry keeper, as well as by judicial practice. In turn, it will be necessary for the courts to better understand business needs, economic theories, and the peculiarities of startups.

Virginijus Bitė is a Professor of Law at the Law School of Mykolas Romeris University.