Topic 2 EU directives in the field of entrepreneurship

1. Topic 2 EU directives in the field of entrepreneurship 2011

2. The list of EU Directives • First – 68/151- About open information • Second – 77/91 + 92/101- about • Third – 78/855 (About merges) • Sixth – 85/891(About division) • Eleventh – 89/666 – about information of branches • Twelfth – 89/667 - about LLC with 1 founder • Fourth – 78/660 – annual accounts • Seventh – 83/349 – consolidated accounts • Eighth-84/253 – audits • 86/635 – bank reports • 89/117 – FI reports EU Code of accounting

3. SECOND COUNCIL DIRECTIVE of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent (77/91/EEC)

4. The most important business issues regulated in the Second Directive and national legislation of Latvia Article Commercial low of LR Other country Rules Directive Contribution to share capital Purchase of property from members of society Restriktions of loss-making companies Restrictions with substantial losses Creditor protections if share capital is reducing 9 10 15 17 32, 33 146 139.1 161, 182 271, 219 207, 264

5. Minimum of share capital • Article 6 from Directive • The laws of the Member States shall require that, in order that a company may be incorporated or obtain authorization to commence business, a minimum capital shall be subscribed the amount of which shall be not less than 25 000 European units of account. Section 225 from Commercial low. Equity Capital of a Stock Company (1) The equity capital of a stock company (hereinafter in this Division – company) may not be less than 25 000 lats.

6. Subscribed and paid-in share capital Article 9 from Dirrective 1. Shares issued for a consideration must be paid up at the time the company is incorporated or is authorized to commence business at not less than 25 % of their nominalvalue or, in the absence of a nominal value, their accountable par. 2. However, where shares are issued for a consideration other than in cash at the time the company is incorporated or is authorized to commence business, the consideration must be transferred in full within five years of that time.

7. Subscribed and paid-in share capital Section 146 from Commercial low of LR (3) Up to the submission of the application for registration, all of the equity capital of a stock company specified in the memorandum of association shall be subscribed. Up to the submission of the application for registration the amount of paid-up equity capital may not be less than the minimum equity capital specified in Section 225 of this Law, or lessthan 25 percent of the subscribed equity capital. (4) Up to the submission of the application for registration, the equity capital of a stock company shall be paid-up only in money. Example – next slide

8. Example to article 146 Х 25 000 25 000 Y 100 000 25 000 Z 200 000 50 000 Options Subscribed share capital Paid in before registration P.S. Remaining amount of subscribed capital must be paid in within 1 year (in cash or by property)

9. Article 10 from Dirrective 1. A report on any consideration other than in cash shall be drawn up before the company is incorporated or is authorized to commence business, by one or more independent experts appointed or approved by an administrative or judicial authority. Such experts may be natural persons as well as legal persons and companies or firms under the laws of each Member State.

10. Section 154. from Commercial low of LR Procedures for Valuation of Property Contributions (1) The valuation of property contributions and an opinion thereof shall be made by an expert who is included in the list approved by the Commercial Register Office. An expert may not be a relative of the owner of the property to be valuated up to the third degree of kinship, a spouse and brother-in-law or sister-on-law up to the second degree of affinity, as well as a person who may be otherwise interested in the evaluation of the property. (2) If, when founding a limited liability company, the total value of property contributions does not exceed 4000 lats, and the property contributions together are less than one-half of the equity capital of the company, the valuation of the property contributions and the submission of an opinion may be made by the founders. In this case, all founders shall sign the opinion.

11. Article 11 from Directive 1. If, before the expiry of a time limit laid down by national law of at least two years from the time the company is incorporated or is authorized to commence business, the company acquires any asset belonging to a person or company or firm referred to in Article 3 (i) for a consideration of not less than one-tenth of the subscribed capital, the acquisition shall be examined and details of it published in the manner provided for in Article 10 and it shall be submitted for the approval of the general meeting. Member States may also require these provisions to be applied when the assets belong to a shareholder or to any other person.

12. Section 139.1fromCommercial low of LR Acquisition of Property from Founders and Shareholders (1) If a company acquires a property within two years after foundation thereof from the founder, shareholder or a person with similar material interest (family member, affiliated undertaking, etc), the compensation for which exceeds the equity capital of the company by one twentieth, the transaction, on the basis of which the property is acquired, shall come into effect only after confirmation of such transaction by the meeting of shareholders. (3) The property referred to in Paragraphs one and two of this Section shall be evaluated in accordance with provisions of Section 154 of this Law.

13. Article 15 from Directive: prohibition on payment • (a) Except for cases of reductions of subscribed capital, no distribution to shareholders may be made when on the closing date of the last financial year the net assets as set out in the company's annual accounts are, or following such a distribution would become, lower than the amountof the subscribed capital plus those reserves which may not be distributed under the law or the statutes. Net assets < capital + undistributable reserve Equity

14. Section 161. From Commercial low of LR Dividends : prohibition on payment (4) Dividends may not be determined, calculated and paid out if it arises from the annual accounts that the own funds of the company is less than the total amount of the equity( share capital). Section 182. from Commercial low of LR Payment of Cash Funds of the Company to Shareholders (3) Payments may not be made to shareholders if the net value of the own funds of the company at the time of the closure of the accounting year is less, or as a result of this payment shall become less, than the total amount of the equity ( share) capital of the company. This condition shall not be applied in cases when the company is liquidated.

15. Net assets =Assets – Creditors =Equity (own fond) 100 000 90 000 - 50 000 30 000 170 000 • Share (subscr.) capital • Revaluation reservelong-term investments • Losses from previous years • Profit from the last yearTotal Equity (own fond): Directive: 170 < 100 + 90 Payments are prohibited Commercial lowLR: 170 > 100 Payments are allowed

16. SERIOUS DAMAGE Article 17 from Directive1. In the case of serious loss of subscribed capital is to be convened a general meeting of shareholders within the period fixed by the law of the Member States to consider dissolving the company or taking any other measures. 2. Legislation of a Member State may not prescribe the amount of loss recognized by a major within the meaning of paragraph 1, of more than half of the subscribed capital. • Share (suscr) capital • Revaluation reservelong-term investments • Profit / LossesTotal equity (own fond): • 100 000 • 90 000 • 60 000 • 130 000

17. Commercial Law in Latvia • Section 271. Meeting of Stockholders in Special Cases • If the losses of the company exceed half of the equity (share) capital of the company… • The meeting of stockholders shall decide • regarding submission of an application for legal protection proceedings or application for insolvency proceedings, • -termination of the operation and liquidation, reorganisation of the company, • -changes to the equity (share)capital or • -shall take another decision regarding improvement of the economic standing of the company.

18. Example of article 271 Commercial lowLR Reorganisation to Partnerships Share capital Share capital • 100 000 • 90 000 • 60 000 • 130 000 • 100+30 • 90 • 60 • 160 • Share capital • Reserves • ProfitTotal equity: • Own fond 40 90 0 130 40 90 0 130 There are other solutions (donation or capitalization of creditors' debts, etc.).

19. Reduction in capital • Article 32 from Directive • In the event of a reduction in the subscribed capital, at least the creditors whose claims antedate the publication of the decision to make the reduction shall be entitled at least to have the right to obtain security for claims which have not fallen due by the date of that publication. The laws of a Member State shall lay down the conditions for the exercise of this right. They may not set aside such right unless the creditor has adequate safeguards, or unless the latter are not necessary in view of the assets of the company. Article 33 from Directive - such a rule is missing in the Latvia 1. Member States need not apply Article 32 to a reduction in the subscribed capital whose purpose is to offset losses incurred or to include sums of money in a reserve provided that, following this operation, the amount of such reserve is not more than 10 % of the reduced subscribed capital. Except in the event of a reduction in the subscribed capital, this reserve may not be distributed to shareholders ; it may be used only for offsetting losses incurred or for increasing the subscribed capital by the capitalization of such reserve, in so far as the Member States permit such an operation.

20. Section 207. from Commercial lowLR • Protection of Creditors- for LLC • Within five days after a decision has been taken to reduce equity capital, the board of directors shall send a written notice regarding the reduction of the equity capital and the size of the new equity capital of the company to all known creditors of the company, who have a right to claim against the company prior to when the decision to reduce equity capital was taken. • Section 264. from Commercial lowLR • Protection of Creditors –for stock company • (3) The company shall provide security for creditors who have applied within the time periods specified (except the amount of secured claims of secured creditors).