A group of companies is regulated by a specially designed code of Group of Companies Law (Koncernu likums).
A group of companies is an aggregate of a dominant undertaking and one or several dependant companies. A dominant undertaking under the scope of Group of Companies Law can be any type of commercial or capital companies and a natural person. It is important to highlight that Group of Companies Law, except for provisions for the protection of creditors, shall not apply, if all the stocks (capital shares) of one company are held by a natural person. A decisive influence is the key factor, which forms a group of companies because a dominant company is a company with the decisive influence over one or more companies (Section 2, paragraph 2 of Group of Companies Law) and a dependent company is a company under the decisive influence (Section 2, paragraph 3 of Group of Companies Law). According to Section 3 of Group of Companies Law, decisive influence is established by a group of companies’ contract or participation.
A group of companies contract is a management contract, a transfer of profit contract and both contracts included in one (a management and transfer of profit contract). The management contract (pārvaldes līgums) determines that a company subjects its management to another company and shall be entered into writing. The transfer of profit contract (peļņas nodošanas līgums) determines that all or part of profits is transferred to another company and shall be entered into writing. The management and transfer of profit contract (pārvaldes un peļņas nodošanas līgums) determines that the company subjects its management to another undertaking and undertakes to transfer its profit to this other undertaking.
The decisive influence in participation stands, if at least one of these circumstances is present: majority voting; control over majority of votes; has the right to appoint or remove majority of members of supervisory or executive body; has exercised the right to appoint majority of members of supervisory or executive body during the accounting year.
Moreover, a group of companies can be created also by a take - over. The consequence of a take - over is that all stocks (capital shares), which are not owned by the principal company, shall devolve to the principal company. In the take - over, corresponding companies retain legal independence, thereupon is not analogue to reorganization in the general company law (Komerclikums) or amendments to the articles of association.
Centralised management
The group of companies are created to establish a centralised management and the most effective way to achieve this is by exercising the right to give instructions.
According to the Section 26 of Group of Companies Law a dominant undertaking has the right to give binding instructions to the executive body of a dependent company with respect to the management of the company, if a management contract or a management and transfer of profit contract has been entered into, a dominant undertaking. Instructions can be detrimental with the meaning of losses caused to the subsidiary, but still within the interests of the dominant undertaking or any dependant companies.
Based on the Section 41 of Group of Companies Law, in case of a take over of companies and if a management contract or a management and transfer of profit contract is concluded, a dominant undertaking has the right to issue binding instructions without considering disproportionality between the benefit of a group and prejudice of a subsidiary.
If a management contract has not been entered into, Section 29 of Group of Companies Law prescribe the dominant undertaking the right to give instructions, but these directions are not binding to the dependent company.
Protection of autonomous interests of a dependent company
In line with Section 20, paragraph 1 of Group of Companies Law, during the term of a group of companies contract a dominant undertaking has the duty to compensate the losses of an accounting year of a dependent company, insofar as such are not compensated by such payments of the dominant undertaking into the profit deductions (reserves) of the dependent company which have been made during the term of the group of companies contract. It is concerning whether Section 20, paragraph 1 of Group of Companies Law will cover losses from withdrawing assets and accounting manipulations.
As stated in Section 33, paragraph 1 of Group of Companies Law, if a dominant undertaking induces a dependent company with which a management contract has not been entered into to conclude a transaction disadvantageous to it or to carry out another measure disadvantageous to it and by the end of the accounting year does not in fact compensate the losses caused as a result of such transaction or measure or, also, does not grant the relevant right to claim compensation for such losses, the dominant undertaking has the duty to compensate the losses incurred by the dependent company as a result of such action. However, it is not always evident, whether a transaction or a measure will be detrimental, which explicit transaction and to what extent.
Creditor protection
Section 27, paragraph 5 of Group of Companies Law forms that a creditor can raise a claim for losses suffered, insofar as satisfaction of his or her claim is not covered by the subsidiary, if a management contract or a management and transfer of profit contract has been entered into. From the wording of Section 27, paragraph 5 of Group of Companies Law it is not clear whether a creditor can claim losses suffered only from the dominant undertaking’s lawful representatives or also from the dominant undertaking itself.
Section 33, paragraph 3 of Group of Companies Law institute, if a management contract has not been entered into, lawful representatives of a dominant undertaking, who have induced a dependent company to conclude a transaction disadvantageous to it or carry out another measure disadvantageous to it together with the dominant undertaking, shall be liable as joint debtors. Nevertheless, Section 33, paragraph 4 of Group of Companies law indicates that even though a group of companies contract has not been entered into Section 27, paragraph 5 of Group of Companies Law shall apply. It can be concluded that uncertainty of interpretation of Section 27, paragraph 5 of Group of Companies Law affects application of Section 33 of Group of Companies Law.
Section 40 of Group of Companies Law provide that principal company and taken – over company shall be liable as a joint debtor for the liabilities of the taken over company. Still Section 27, paragraph 5 of Group of Companies Law shall apply (also its interpretation problems).
Minority shareholder protection
Rules on indemnity are stipulated in Article 23 of Group of Companies Law. Minority shareholders shall receive appropriate indemnity annually, if a transfer of profit contract has been entered into. Minimum amount of indemnity is average profit from shares or the stock, which is calculated from profit before the entering into a group of companies contract and further profit prospects. Indemnity payment may as well be received as due share of the profit for stocks or shares of the parent company.
Compensation mechanism instituted in Article 24 of Group of Companies Law provides minority shareholders the exit right, if a group of companies contract has been entered into. Minority shareholders’ have the right to demand acquiring of his or her shares or the stock for appropriate compensation. The obligation to acquire minority shareholders shares or the stock liaise on the “other party” of the group of companies contract or in other words, correspond to the parent company. In respect of appropriate compensation in money, only the property situation and income level of a dependent company at the time when a decision on entering into a group of companies contract is taken shall be considered; further profit prospects of the subsidiary is not taking into account.
In the take - over of a company for excluded shareholders Article 38 of Group of Companies prescribes compensation as remedy. Compensation shall be in the form of a stock or shares of the parent company. In respect of appropriate compensation in money, only the property situation and income level of a taken over company at the time when a decision regarding the take-over of the company was taken shall be taken into account; further profit prospects of the taken over company is not taking into account.
Moreover, minority shareholders of a subsidiary may request a buy out in line with Article 47 of Group of companies, if a parent company has acquired (directly or indirectly) 90 % of shares or a stock of a subsidiary, but is not carrying out take –over.