Latvia

Under the respective provision of the Commercial Law (Article 221) in Latvia, it is stated and confirmed by the Senate (see case No. C33594518, SKC-71/2022) that a board member has the right to remuneration corresponding to their duties and the financial condition of the company. The issue of the board members’ liability is a separate topic and shall be addressed in a separate article. Discussed herein are a few examples that can potentially lead to disputes between a board member and other participants or shareholders, or vice versa. In these rapidly changing economic circumstances, this risk can materialise in instances of board changes. Uncertainty regarding the board’s remuneration is a risk that affects not only relationships with third parties but also relationships with the tax authorities. The International Accounting Standard (IAS 24), specifically requires the disclosure of this matter in financial statements, covering not only remuneration, but also other income and benefits obtained from the company, including compensation upon leaving the position of a board member and options. Auditors should pay more attention to these issues in order to ensure it is clear from the financial statements whether this matter has been properly addressed or not. In general, there are several questions that can also affect or even provide grounds for a board members’ claims against the company where there is a concluded agreement: Whether the remuneration is fair? Whether the remuneration is determined for all of the duties the board member had to perform? Whether the financial condition of the company was directly related to the actions of the board member? Whether the personal risk of the board member is taken into account if the company’s operations or the actions of shareholders/directors are unlawful or otherwise immoral? What happens with unused vacation days if an employment contract with a board member is concluded (there are also situations that are a legal absurdity involving state/local government administration)? What are the financial capabilities of the company (e.g., significant equity or profit, reduction of losses, or consolidated results of the group), and can it be objectively determined by an expert? Situation 1: Board member without a contract with the company A classic situation for active companies or funds is when forming new holdings with multiple subsidiary companies, which are registered very often. Almost always, separate contracts with appointed board members are not concluded. Consequently, these board members may have rights to claim fair remuneration from the moment of their appointment to this new company. To address this risk, in M&A transactions, it is stipulated in the relevant transaction documents that the board member waives any claims against the company if the board member resigns (or is removed from office). If the board member continues to work after the sale of shares, it is recommended to mitigate the risk by removing the board member from office (so the board member’s remuneration risk remains with the seller) and appointing the same or another board member under the buyer’s defined terms for board member remuneration. Situation 2: Board member pays themselves remuneration As can be seen from the aforementioned Senate ruling, regular payment of remuneration is one of the criteria for assessing the compliance of a board member’s remuneration within the applicable legal provisions. It turns out, the absence of a shareholders’ resolution has not been a barrier to recognising this remuneration as lawfully paid if the shareholders’ intent can be determined in other ways. At the same time, it should be noted, regular payment of remuneration is not a guarantee that the board member will not demand additional remuneration which would be fair and justified based on the level of risk and responsibilities. In short, regular payments without a contract do not guarantee the absence of claims from the board member. Situation 3: The company does not pay remuneration to the board member This is the worst-case scenario as the board member is likely to demand remuneration at any time and in an unpredictable amount. The possible interpretation of the remuneration criteria in the Commercial Law (Section 221) is very broad, and they can be specified in each case, which can create an unnecessary risk for minority shareholders. If the majority shareholders have a good relationship with the board member, it does not mean the minority shareholders should not consider it as a potential risk. The minority shareholders should not be modest in demanding restrictions on board remuneration in the statutes or shareholders agreements. Typical examples include: 10% of annual net profit growth; Termination compensation amounting to 30% of the previous year’s remuneration; and Fixed annual remuneration and a percentage of EBITDA growth compared to the previous financial reporting period according to audited annual reports. Although the Senate (see Case No. C30474417, SKC-48/2022) has ruled in another case that the assumption of office itself does not create a de facto entitlement to remuneration: “[…] the Senate acknowledges the appellant’s argument that the appellate court did not establish that the claimant had actually and properly performed the work, and without such determination, the court could not conclude that the claimant had a right to remuneration.” However, this approach by the Senate is subject to critical evaluation on the understanding there is no provision in the Commercial Law permitting for the interpretation that board members must perform their duties without remuneration unless they have expressly waived such rights. Situation 4: A board member has a contract with only one company There are often situations where a board member has a contract with a company, which is properly executed in terms of form and content. However, after some time, the same individual holds multiple positions in new companies that are related to the initial company. The situation remains unchanged, and the board member has independent rights to claim compensation from each of these companies. Therefore, when entering into a contract (or in the context of the need to amend the contract) with a board member, consideration should also be given to these other new companies and the arrangement of contracts with them. The solution to all situations is simple – conduct a review of all positions held and duties performed by board members and enter into or amend and update contracts with them, obtaining the necessary approval of the shareholders’ meeting or board. At the same time, the question arises regarding the period (especially if it spans multiple years) prior to the conclusion of a contract, where the best solution is always negotiations and agreements between the parties. If dialogue does not progress, no one can prevent a board member from leaving their position by informing the Commercial Register of the Republic of Latvia (and, if possible, also the company and its shareholders). In any event, a company can remove a board member from their position at any time and appoint someone else, based on a properly prepared board member contract. May 16, 2023 by Gints Vilgerts, Managing Partner

Those arranging bond issuances in Latvia often have practical questions about the regulation of a collateral agent’s functions. Until 12 July 2024, this was a very complex question with several possible answers. Theoretical uncertainty contributed unnecessary worries amongst bond issuers and investors, however, these legal risks never became an insurmountable obstacle during the issuance process, nor were they risks that were “priced” into the interest rate increases or otherwise adversely affected the bond sales process. The amendments brought about on 4 July 2024 to the Financial Instruments Market Law (Finanšu instrumentu tirgus likums) are undoubtedly a positive development. Some of the known risks concerning the rights and obligations of a collateral agent have been resolved, however, not all of the risks have been fully covered by the recent amendments. A number of ambiguities still remain, for example, concerning the text of the terms of the issue and prospectuses, as well as the wording and the collateral agreements entered into. The respective amendments do not cover, for example, the issuer’s contract with the collateral agent, as well as the insurance of pledged assets, which is also an important aspect of bank financing. The most interesting text within the amendments to the Financial Instruments Market Law is contained under Article 91.2: “(1) in relation to the debtor, the collateral provider, or any other person, the information document, (2) In exercising the rights and obligations set out in the information document, the terms of issue or the prospectus and the collateral agreement,” Overall, this is a small but all important step for the development of the capital market in Latvia.  Including, the avoidance of confusing and ambiguous terminology, such as “parallel liabilities” or “parallel debt” and other terms that do not comply with the Civil Law (Civillikums) within the terms of the bond issuance and prospectus. The parties (the issuer and collateral agent) will have to agree on the terms of the collateral agent agreement, the pledge agreement and the insurance contract.  As the amendments now provide that the collateral agent acts “in the interests of the holders of the debt securities”, it is clear the role, rights and obligations of the collateral agent must be distinguished from the competence of the issuer’s advisors (who prepare the terms of issue or the prospectus) with the interests of the issuer as a primary consideration, in order to avoid a potential conflicts of interest. One question to note is whether any deviations from the market practice (for instance, compared to bank financing), is the need for the collateral to be disclosed in the terms of issue or prospectus. If the issuer does not want to insure the pledged assets or does not want the insurance indemnity to be paid to the collateral agent, this should, in our view, be disclosed in the terms of issue or in the prospectus as this is part of the risk the debt holders should be aware of as it affects, inter alia, the risk of debt repayment. The annotation to the amendments highlighting the lack of precedent before the Latvian courts is not entirely accurate, as there is although limited.  The Latvian courts are beginning to develop some experience in cases involving claims by the collateral agents. For example, in 2010 our law firm was authorised by an Estonian bank to enforce against Alta Capital Group, whereby the court of first instance fully recognised the claim of Swedbank” AS as a collateral agent under the applicable Latvian law. Civil proceedings were initiated and the claim was upheld. Finally, it should be recalled the collateral agent is a person specifically authorised by the creditors, whose liability will be assessed, inter alia, under the provisions of the Civil Law , taking into account the liability of the trustee, who is liable to the principal for any negligence caused. * * * VILGERTS law firm provides legal advice on bond issuances and collateral agent services. Since 2024, the firm has been providing collateral agent services in connection with a number of bond issues in Latvia, with total bond claims in excess of EUR 100 million. In connection with this article or the Firm’s services regarding bond issuances or collateral agent services, please contact Gints Vilgerts, Partner of the Firm ([email protected]), mobile. +371 29107768. August 27, 2024 by Gints Vilgerts, Managing Partner

In the business world, as well as in everyday life, there are options and opportunities. If in life options and choices are dependent on various coincidences and they coincide with human actions, then in the business world options to choose can also be strengthened contractually by closing options contracts. Options and option contracts have been known for a long time in the business world, although they have been utilised in a somewhat of a narrow scope of transactions; most frequently – in shareholder and member of the board agreements, real estate deals and trade of financial instruments. Options have become more popular as a tool to motivate and reward employees. Since the amendments to the Commercial Law and the Law On Personal Income Tax came into force at the beginning of 2021, the granting of stock options has also been facilitated for employees, management and supervisory board members of limited liability companies (“LLCs”) by providing tax exemptions. Taking into account that more and more employees are becoming minority shareholders in companies, it is important to note options and option contracts can also be used in other situations, applying practices from the financial and real estate sectors. Due to the fact that options contracts involve an “option” rather than an obligation, they are useful in contractual relationships that focus on future possibilities or events. Given that both parties to the contract are free to choose the settlement of their relationship, option contracts offer the possibility of adjusting the events, sequence, timing and price to the subject matter of the transaction. Under the Law of Obligations, an option is the contractual right and ability of one party to choose the manner and extent of performance of an obligation, creating corresponding obligations for the other party to the contract, or to refuse to perform it, subject to pre-agreed conditions. Option contract types partly derived from financial derivatives futures, which involve two types of options contracts or options: “Call options” provide the buyer with the right to buy a specific asset at a specific price; and “Put options” provide the buyer with the right to sell a specific asset at a specific Note, these options can also be sold – the seller of a call option commits to sell a certain asset at a certain price, while the seller of a put option commits to buy a certain asset at a certain price. In real estate, an option contract has some similarities with a pre-agreement or a contract of repurchase, where the owner of real estate may grant the buyer an option to buy a certain property (or even a property that does not yet exist in nature) at a certain price, at a certain time, with the owner being obliged to sell and the buyer having an option, rather than an obligation to buy or a subsequent option to sell the property back, at a certain time. Options are also used in board members’ and shareholders’ agreements where it is necessary to provide that members or shareholders may acquire or dispose of their shares between themselves when certain events occur or are reasonably likely to occur. Call and Put options in board members’ and shareholders’ agreements are used in situations where, for example, the owner agrees to sell part of the company to a new buyer while agreeing to remain a shareholder of the company for a fixed period and on agreed terms. The main reason for such terms is to give the buyer comfort and assurance that there will be an opportunity to learn from the existing shareholder and gain experience in managing the company. There are also situations where the minority shareholder is also the CEO of the company who wants to stay in his or her position, but the company is sold and the possibility for the minority shareholder to acquire additional shares in the company is agreed with the new buyer if favorable financial or other conditions arise. Such an agreement shall be documented in the members’ (shareholders’) agreement, which shall set out the following transitional provisions. In order to provide the participants with a guaranteed exit strategy, the agreement may contain provisions allowing the buyer to “call” the seller to sell their shares and allowing the seller to “put” his shares to the buyer after an agreed period that provides certainty for both parties. A call option allows the buyer to “call” for the shares to be sold at a future date agreed by the buyer. This can sometimes be set in the event of a significant event (new markets, authorisation, sales volumes, etc.) rather than at a fixed date. Alongside that, the buyer can also include the “nomination” in their call options contract to set forward a third-party as a buyer. A Put option allows the seller to encourage the buyer to buy the remaining shares at a certain price on a certain future date. To avoid potential disputes, it is advised to consider the following: A circumstance triggers the moment when the option is exercised (trigger); When the option expires or is no longer exercisable; Tax risks; Whether the option is exercisable all at once or can be divided into tranches; Whether the option competes with pre-emption rights or other prohibitions in the company’s articles of association; and Whether there must be a mandatory waiver of pre-emption or other rights of other participants. Similarly, there are also the following options contracts: “Cross option” – when the buyer acquires a call option in one company and the seller in return acquires a put option in another Such an option is exercisable when there are two companies that are financially or strategically linked to each other. A mutual option can be used to ensure the succession of a company if one of the participants passes away. Heirs may be granted call and put options in cooperation with another specified participant; “Reverse option” – more often applied in real estate transactions whereby the buyer is to receive a share of the resale value of the property. A reverse option ensures the seller would have the right to buy back the property when the buyer is unable to develop the property and sell it at a higher price; “Reverse vesting option” – typically used to motivate start-ups when attracting an As with employee stock options, the criteria are set for the acquisition of shares, but in a buyback option, the founder of a new company receives shares in the company immediately, with the condition that the investor can buy them back within a certain period of time if the criteria are not met. The investor’s repurchase options decrease in percentage with the passage of time or the fulfilment of the criteria. Option contracts provide flexible solutions in a changing business environment, additional options for sellers and buyers, opportunities to maximise financial benefits for investors and minority shareholders, and opportunities to incentivize counterparties. Options can also be useful in transactions where the expected outcome may not materialise. By exercising options effectively, corporate participants can achieve strategic objectives and plan for different exit scenarios. For more information on options and strategies on how to implement them, please contact Reinis Sokolovs, Partner and Head of Corporate Practice at VILGERTS ([email protected] ). May 20, 2024 by Reinis Sokolovs, Partner

Under the respective provision of the Commercial Law (Article 221) in Latvia, it is stated and confirmed by the Senate (see case No. C33594518, SKC-71/2022) that a board member has the right to remuneration corresponding to their duties and the financial condition of the company. The issue of the board members’ liability is a separate topic and shall be addressed in a separate article. Discussed herein are a few examples that can potentially lead to disputes between a board member and other participants or shareholders, or vice versa. In these rapidly changing economic circumstances, this risk can materialise in instances of board changes. Uncertainty regarding the board’s remuneration is a risk that affects not only relationships with third parties but also relationships with the tax authorities. The International Accounting Standard (IAS 24), specifically requires the disclosure of this matter in financial statements, covering not only remuneration, but also other income and benefits obtained from the company, including compensation upon leaving the position of a board member and options. Auditors should pay more attention to these issues in order to ensure it is clear from the financial statements whether this matter has been properly addressed or not. In general, there are several questions that can also affect or even provide grounds for a board members’ claims against the company where there is a concluded agreement: Whether the remuneration is fair? Whether the remuneration is determined for all of the duties the board member had to perform? Whether the financial condition of the company was directly related to the actions of the board member? Whether the personal risk of the board member is taken into account if the company’s operations or the actions of shareholders/directors are unlawful or otherwise immoral? What happens with unused vacation days if an employment contract with a board member is concluded (there are also situations that are a legal absurdity involving state/local government administration)? What are the financial capabilities of the company (e.g., significant equity or profit, reduction of losses, or consolidated results of the group), and can it be objectively determined by an expert? Situation 1 : Board member without a contract with the company A classic situation for active companies or funds is when forming new holdings with multiple subsidiary companies, which are registered very often. Almost always, separate contracts with appointed board members are not concluded. Consequently, these board members may have rights to claim fair remuneration from the moment of their appointment to this new company. To address this risk, in M&A transactions, it is stipulated in the relevant transaction documents that the board member waives any claims against the company if the board member resigns (or is removed from office). If the board member continues to work after the sale of shares, it is recommended to mitigate the risk by removing the board member from office (so the board member’s remuneration risk remains with the seller) and appointing the same or another board member under the buyer’s defend terms for board member remuneration. Situation 2 : Board member pays themselves remuneration As can be seen from the aforementioned Senate ruling, regular payment of remuneration is one of the criteria for assessing the compliance of a board member’s remuneration within the applicable legal provisions. It turns out, the absence of a shareholders’ resolution has not been a barrier to recognising this remuneration as lawfully paid if the shareholders’ intent can be determined in other ways. At the same time, it should be noted, regular payment of remuneration is not a guarantee that the board member will not demand additional remuneration which would be fair and justified based on the level of risk and responsibilities. In short, regular payments without a contract do not guarantee the absence of claims from the board member. Situation 3 : The company does not pay remuneration to the board member This is the worst-case scenario as the board member is likely to demand remuneration at any time and in an unpredictable amount. The possible interpretation of the remuneration criteria in the Commercial Law (Section 221) is very broad, and they can be specified in each case, which can create an unnecessary risk for minority shareholders. If the majority shareholders have a good relationship with the board member, it does not mean the minority shareholders should not consider it as a potential risk. The minority shareholders should not be modest in demanding restrictions on board remuneration in the statutes or shareholders agreements. Typical examples include: 10% of annual net profit growth; Termination compensation amounting to 30% of the previous year’s remuneration; and Fixed annual remuneration and a percentage of EBITDA growth compared to the previous financial reporting period according to audited annual reports. Although the Senate (see Case No. C30474417, SKC-48/2022) has ruled in another case that the assumption of office itself does not create a de facto entitlement to remuneration: “[…] the Senate acknowledges the appellant’s argument that the appellate court did not establish that the claimant had actually and properly performed the work, and without such determination, the court could not conclude that the claimant had a right to remuneration.” However, this approach by the Senate is subject to critical evaluation on the understanding there is no provision in the Commercial Law permitting for the interpretation that board members must perform their duties without remuneration unless they have expressly waived such rights. Situation 4: A board member has a contract with only one company There are often situations where a board member has a contract with a company, which is properly executed in terms of form and content. However, after some time, the same individual holds multiple positions in new companies that are related to the initial company. The situation remains unchanged, and the board member has independent rights to claim compensation from each of these companies. Therefore, when entering into a contract (or in the context of the need to amend the contract) with a board member, consideration should also be given to these other new companies and the arrangement of contracts with them. Conclusions: The solution to all situations is simple – conduct a review of all positions held and duties performed by board members and enter into or amend and update contracts with them, obtaining the necessary approval of the shareholders’ meeting or board. At the same time, the question arises regarding the period (especially if it spans multiple years) prior to the conclusion of a contract, where the best solution is always negotiations and agreements between the parties. If dialogue does not progress, no one can prevent a board member from leaving their position by informing the Commercial Register of the Republic of Latvia (and, if possible, also the company and its shareholders). In any event, a company can remove a board member from their position at any time and appoint someone else, based on a properly prepared board member contract. May 16, 2023 by Gints Vilgerts, Managing Partner