Mergers & Acquisitions (M&A) in Lithuania
Merger is one of the types of corporate reorganizations. Reorganization is the process which terminates the legal person without liquidation. It should be noted that reorganizations should not be confused with corporate restructurings. Restructuring is a change in the legal form of the entity whereby the legal entity in its new form becomes the successor of all rights and responsibilities of the restructured entity.
Merger is one of the two types of reorganizations, with the other being split up of the legal entity.
Civil code foresees two kinds of mergers in Lithuania:
Decision to reorganize the company (including merger) can be taken by the participants of legal entity (i.e. owners, shareholders) by majority set out in the articles of association but no less than 2/3 of all participants in shareholders meeting. In a merger when on legal entity is added to another (addition), decision to reorganize the company can also be taken by the governing bodies of the entity to which the other entity is added.
Prior to the merger, governing bodies of the companies participating in reorganization must prepare conditions for a merger. Conditions of a merger must contain details on the entities participating in reorganization, type of reorganization, timeframe for carrying out a merger and when the new entity takes rights and responsibilities of the reorganized companies. Conditions of the merger should be evaluated by independent expert if it is set in the laws regulating particular types of legal persons. In addition to conditions of reorganization, merged companies must prepare reports explaining goals of the merger, conditions of the merger, timeframe and economic grounds. However, under simplified reorganization procedure, evaluation by independent expert and merger reports are not required. Simplified reorganization (i.e. merger) procedure can be applied when the entity is added to the entity that is the sole participant (i.e. shareholder) of the reorganized entity.
Implications for Companies in Lithuania
Law on Companies further details reorganization procedures for joint stock companies. It identifies that decision on a merger must be taken by general shareholders meeting, outlines the requirements for preparing merger conditions and other procedures. For companies report on verification of merger conditions must be prepared by the audit company unless all shareholders agree that such report is not needed. Report of conditions of the merger must be prepared no later than 30 days prior to shareholders meeting which will decide on the merger. In addition to conditions of a merger new set of bylaws must be prepared. Conditions of a merger and their evaluation report must be submitted to state registry upon announcement of a merger. Conditions of the merger must be announced in the newspaper no less than 30 days prior to the shareholders meeting. A new set of articles of association for company continuing after the merger also has to be submitted to registry.
In addition to above documents, the boards of the companies participating in a merger must prepare a report outlining goals of a merger, explaining its conditions, timeframe, legal and economic grounds (especially share swap ratios and share distribution after the merger). Again, such report is not needed if all shareholders agree to that. For closed joint stock companies it is needed only if shareholders with more than 1/10 of votes ask for it.
General shareholders meeting which is convened no earlier than 30 days after announcement of the merger decides on the merger and its conditions. Decision has to be taken by no less than 2/3 of votes participating in the meeting. Decision of the shareholders meeting must then be submitted to state registry.
Certain simplifying conditions exist when the company is merged with another company that controls 100% or 90% of its shares.
Merger is complete when state registry registers all the new companies after the merger and their articles of association. The company is registered after its shareholders meeting elects all required governing bodies.
Merger Control in Lithuania
Mergers are subject to competition control in Lithuania, since Law on Competition defines mergers, when at least one of the merged companies ceases to exist, as concentration. This law further outlines procedures for concentration control for which mergers are subject to.
Competition council is the body responsible for merger control in Lithuania. According to Law on Competition council must be informed of a merger if aggregate turnover of the merged companies exceeds 50 million litas (app. 15 million EUR) and if turnover of each of the companies is more than 5 million litas (1.45 million EUR). In certain cases Competition council might request merger filing even for companies below those thresholds during 12 months after the merger, if it deems that such merger might limit competition.
If notification is required, all parties participating in merger should submit notification to competition council and receive approval. Notification document should include registration information of the merged companies, reasons for and description of the method of concentration, financial accounts of the companies, their sales and evaluation of market shares in certain markets, information on competitors and other descriptive information.
Receipt of notification must be announced by Competition council in its webpage including type of concentration and parties involved.
Competition council must evaluate merger notification and issue its opinion not later than 4 months after filling. However, no later than one month after receipt of merger filing council must either issue approval of the merger or decide that it will further evaluate it and inform the parties respectively.
After evaluating the merger filling, Competition council must issue one of the following decisions:
Failure to get the Competition council’s approval prior to completing the merger may result in a fine of up to 10 percent of the turnover of the participating companies.
Decisions of the Competition council may be challenged in administrative court no later than 20 days after receipt of decision or its publication in its webpage.
Very limited precedents exist of merger court cases. Since 1996 only 4 cases where started in the court against council decisions in mergers. However in 3 cases the plaintiffs withdrew their appeals before the hearings started. The Competition council has only once disapproved the merger – in 2007 it objected the intention of several road construction companies to form a consortium.
VAT in Lithuania
If the companies are merged and the acquirer overtakes all obligations of the acquired company, the VAT for the transfer of the property is not calculated. However the property itself must be shown in the accounting or in transfer of assets act where in both situations zero-VAT is applicable.
Cross-border Merger and Taxation in Lithuania
Lithuania has harmonized its’ legal system with the European Union legal system. One of the most important directives that regulate the cross-border mergers of limited-liability companies is directive 2005/56/EC. It fills an important gap in European company law by setting up a simple framework in which, as a general rule, each merging company is governed by the provisions of its national law applicable to domestic mergers.
As for the national law of Lithuania, a few acts of law have been passed regarding cross-border merger: Law on cross-border merger of limited liability companies (This law regulates the cross-border merger of undertakings whose legal form according to the laws of the Republic of Lithuania is a public or a private limited liability company).
During a cross-border merger one or several public limited liability companies merge with a public limited liability company corresponding in the legal form to a public limited liability company or one or several private limited liability companies merge with private limited liability companies corresponding in the legal form to private limited liability companies formed in accordance with the law of other EU Member States and having their registered office, central administration or principal place of business within the European Economic Area, Law on employees in the company following the cross-border mergers of limited liability companies (This law provides the rights and duties for the worker participating in one of the cross-border mergers of the limited liability company.)
With regard to taxation of cross-border mergers it shall be mentioned that Lithuanian laws with regard to taxation have also been harmonized with EU legislation as well in the area of company and tax law. In regarding of mergers the Council Directive 90/434/EEC of 23 July 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States has been implemented in Lithuanian tax laws.
It shall be noted that before merger – income tax shall be paid from all income gained in Lithuania; It means that Lithuanian company has to pay Corporate income tax (hereinafter- CIT) for the year 2010 (until 1st of October) and from 2010 Jan 1 – to the exact merger date. If Lithuanian company will not pay this particular CIT – after merger it will be other countries ‘companies’ obligation to pay it to Lithuanian budget. Therefore the way of tax payment and its subject is normally set within negotiations. CIT rate is currently at 15% rate.
In case if after merger Lithuanian company will not exist and other countries’ company will take over a Lithuanian company or new foreign company will be established – it will not be taxed in Lithuania, if the other country does not have any business activities in Lithuania.
If a foreign company will have business activities in Lithuania, permanent establishment of a foreign company might arise. It means a foreign company will pay tax of 15% in Lithuania from the profit gained by such permanent establishment.
According to the tax treaties, concluding rights and duties between Lithuania and a particular country, the permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. The term ”permanent establishment” includes especially: a place of management; a branch, an office; a factory; a workshop and a mine, an oil or gas well, a quarry or any other place of extraction of natural recourses.
With regard to Value added tax if the companies are merged and the acquirer overtakes all obligations of the acquired company, the Value added tax for the transfer of the property is not calculated. However the property itself must be shown in the accounting or in transfer of assets act where in both situations zero-VAT is applicable.
For questions, please, contact Valters Gencs, attorney at law at email@example.com
The material contained here is not to be construed as legal advice or opinion.