What Do Foreigners, Thinking About Doing Business In Lithuania, Need To Know? Interview With Giedrė Čiuladienė, The Co-Head Of The Corporate And Transactions Group At TRINITI JUREX

Attractive investment and trade opportunities attract more and more foreign companies and businessmen from abroad willing to do business in Lithuania. However, in order to avoid mistakes at the beginning of any business, it is important not to only analyse the market and offer a good product or services, but to also choose the right legal form and assess the requirements related to it. The co-head of the corporate and transactions group at TRINITI JUREX Giedrė Čiuladienė advises on what to start with when it comes to the incorporation of a company in Lithuania and how to avoid the most common mistakes.

  • What are the most important aspects that need to be assessed when thinking of starting a business in Lithuania?

We have noticed that most often the entrepreneurs focus on the business environment – analyse the market, decide on what product or services should be offered, and what kind of employees will form the team. These decisions should be made at the second stage though after the most important questions, meaning those of the choice of the legal form and the taxes related thereto, the registration of the name and trademark, have been answered. In cases where a foreigner, willing to start a business in Lithuania, arrives from third countries, the issues of migration must be taken into consideration as well.
We always advise our clients to start from the legal and tax issues as this allows to save both time and financial expenses which is of high importance to early-stage companies.

  • What legal form would you recommend choosing if a foreigner, possessing a permanent residence permit, wishes to start a business in Lithuania?

Objectives are very important at this point. Let’s say funds are not sufficient for the initial capital but it is preferred to separate the personal and company liability. In such a case the small partnership is the best option.
However, if it is planned to attract investments, a small partnership is not a suitable choice because only natural persons can become members of small partnerships. Therefore, the form of a private limited liability company should be chosen.
If there are plans of a public offering of shares, the form of a public limited liability company should be considered.

  • What are the legal requirements for a foreigner wishing to start a business in Lithuania?

There are different requirements for incorporation and for carrying out a business in Lithuania. No additional requirements apply to foreigners willing to establish a business. However, certain limitations apply in terms of the procedures that can be used when incorporating a company. E.g., foreigners, who do not possess a temporary residence permit to live in Lithuania, are not able to use different electronic services, e.g., to incorporate a company online, to open bank accounts online, or to declare taxes in Lithuania.
In order to carry out business activities in Lithuania, a foreigner may either be physically present in the country or conduct business remotely. In the former case, a national type D visa or a temporary residence permit is needed while in the latter case such a requirement not always applies, e.g., if a company manager from a third country works remotely, a temporary residence permit is not needed. At this point, it is very important to prepare the employment contract properly, clearly indicating that the manager works remotely.

  • What are the most common mistakes related to the incorporation of a business in Lithuania? What are the main reasons for these mistakes?

The most common mistake is the wrong choice of a legal form. This does not come as a surprise because the regulations differ depending on the country so it’s natural that people may not know the differences between these forms and chose a form that turns out to be unsuitable for the objectives of the entrepreneur. We have also noticed that mistakes are made when assessing the market, competitors and risks and in some cases, migration requirements are not met, i.e., there are indications of illegal work when foreigners are being employed without complying with the employment procedures, e.g., no written employment contracts are entered into, foreigners work without work permits, foreigners carry out other activities without a permit, the employer does not inform the relevant authorities about the beginning or end of the employment relationship, etc. Such negligence of employers may not only lead to fines for each illegally employed person but also result in losing various rights such as state subsidies, which is extremely relevant during the lockdown.

  • What would be your advice to foreigners wishing to start a business in Lithuania?

First of all, the decision should be conscious and motivated. Therefore, it is important to consult with a lawyer and an accountant and to gather as much information as possible before initiating the incorporation procedure. And of course - believe in your product and make sure that the business model eases the launching procedure instead of causing problems.

 

What Is Control And Who Controls The Company? Control Provisions In The Term Sheet

Talking about control provisions in the Term Sheet or Investment Agreement, the first question which comes to our mind is what is control and who controls the company. We know that there are shareholders, the board, and the CEO of the company. Who of them are the most important? 

Maybe you know that several years ago in Uber, there were 11 board members. 7 of them were elected, while 4 board members were not elected yet but could be elected at any time, and it could be done by Travis, the CEO, and one of the company's founders. Through the persons close to him, he also controlled the other 3 board members. Thus, he had a majority on the board. Meanwhile, the company's funds were not satisfied with the CEO's activity and sought to remove its CEO. However, they had no majority on the board; therefore, they were unable to do that.

Consequently, processes were commenced involving both parties that finally were resolved by increasing the number of board members and the resignation of the company's CEO. Hence, while controlling the board, Travis was controlling the company. And, as you can see, changing this situation is not an easy task.

Here a question arises: how is a board formed? In Lithuania, one ordinary share confers one vote. So the biggest number of shares and votes implies the most significant number of representatives on the board. This is the usual situation. The Investment Agreement may provide, e.g., that the investors' and founders' interests are represented equally, and an independent board member is appointed who will help make such interests aligned.

An independent member is rarely appointed to the board; therefore, we can most often see that the board resembles the shareholders' composition. Such a situation is favorable and convenient and working as long as the company starts to participate in other investment rounds. What happens then? Let's go back to the beginning when the company's first investors paid a comparatively small amount of money for the block of shares. Meanwhile, with the increase in shares' price, subsequent investors need to pay a much higher price for the same block of shares. Thus, a euro invested now confers fewer votes than a euro invested earlier.

Consequently, the interests diverge. And it is not easy to align these interests. A compromise needs to be found in negotiations. It can be: agreed on the increase of the number of the board members (which is the case in Uber's story), or the threshold is set higher for the number of votes of the board members required to adopt a particular decision.

Here we come to the question – what does the board decide? The essential function of the board is the appointment and recall of the company's CEO. Besides this decision, the board also takes decisions about the company's commercial issues, e.g., acquisition or sale of the company's assets  (decisions on intellectual property are of particular interest because they can be the most valuable asset on the balance sheet) or entering into the material contracts. Hence, the company's board takes such choices that are of economic significance for the company and are of economic importance for the investors. Therefore, investors want to participate in the adoption of such decisions. There are provisions in the Investment Agreement that grant them the right to express their views or veto those decisions. All those provisions are called "protective provisions."

The protective provisions can be found in adopting the board's decisions and the shareholders' resolutions as well. E.g., the shareholders adopt one of the critical decisions in the company's life on issuing new shares. A company intending to attract new investors or increase the number of shares to be allocated to ESOP needs to issue new shares. Thus, the current shareholders, i.e., the investors and founders, experience the so-called dilution. Consequently, their share in the capital decreases. Naturally, they would certainly want to control and have a say in adopting such decisions. This can be ensured by the protective provisions stipulating that such decision may be adopted by, e.g., a 2/3 or 3/4 majority vote of all shareholders. In this way, investors protect their economic interests.

What do such protective provisions mean to the founders? In essence, such provisions imply loss of part of the control. It sounds very threatening, but it is worth keeping in mind what investors are. Usually, investors and funds having from several to tens of companies in their portfolio and active participation in such companies' boards require lots of energy and time resources. And the answer lies behind it, that the funds have an intention to invest funds entrusted to them and receive a high return. They have no interest in taking over the control. Therefore, it is worthy to assess this fact during the negotiations over these conditions and not seek the removal of such provisions, but rather seek alignment and representation of various investors' interests as one group. This would considerably facilitate the company's management and adoption of corporate decisions because decisions need not be negotiated with each investor individually. Thus, following these principles allows retaining the control, even though formally it may seem to be partially lost.

Many thanks to Rūta Armonė, M&A Lawyer at Ellex Valiunas, for sharing this with the startups’ community!

An Employee Share Option Is An Effective Way To Retain The Employee

In the past, companies expected job loyalty but today we hear stories of employees accepting other job offers only a few months after being hired. This is especially painful for start-ups that are building organizations and processes on the go and typically do not have sufficient resources to constantly train new people and rely significantly on the loyalty of employees to retain the knowledge. Competitive base salary is not the only mean of encouraging an employee to dedicate themselves to work required for fast-paced company growth. As employers are aggressively competing for the best talent by offering remote work opportunities, discounted meals, football tables, and many more short-lived excitement opportunities, the long-term solution is an employee share option scheme. This is an excellent tool to align the founder’s, management team’s, and employees’ interests and for everyone to have a collective investment in the company’s future.

  • What is the share option?

The share option is a right to buy a certain amount of the company’s shares after some time in the future at a pre-agreed price or free of charge. So the employees receive a right to exercise their share options, i.e., to buy the shares after a specified period of time at the price fixed at the date when the options were given to the employee regardless of the prevailing market price. The employer can make the granting and exercising of share options dependent on certain targets such as performance indicators, sales targets, i. e., the employee will have a right to exercise their share options provided that the set targets are met at the agreed rate for that period.

  • How share option is beneficial both for the employer and the employee?

By offering employee share options, employers typically see increased loyalty, longer employment tenure, and more active participation in the company’s success. Many international examples show that it is one of the best tools in building a motivated team. Some companies choose to offer share options to the key employees ensuring that the company’s strategy is executed by the team that has a long-standing history with the company while others offer share options to all employees. The common goal of both parties of the share options agreement is to motivate the employee to take a long-term approach, thus increasing the value of the employer as the company, and aligning the interests of the parties. The share options are of a purely personal nature and is inextricably linked with the employee as the employee of the particular company. The company is willing to have the employment relationship as long as possible, therefore, usually, the crucial condition is to set forth the long-term after which the employees may exercise their right to acquire the shares of the company.

Joining a newly created start-up can be a very fulfilling but risky career move. For early-stage start-ups that in most cases offer share options, it is the only way to attract top talents as some time later a new company may not be able to offer a competitive salary. The company’s benefit, in this case, is also evident – the possibility to attract various specialists while preserving their loyalty, real involvement in activities, and motivation is highly ensured.

Taxation

Share options are taxed as fringe benefits.

  • Applicable taxes are paid by the employer.
  • Applicable income tax and social security contributions - the same rates that are applied to salary, except tax exemption.
  • Applicable tax exemption is applied for income tax and social security contributions if a share option is held (but not exercised) by an employee for at least 3 years. The fringe benefits from share options are exempt from personal income tax provided that a share option agreement is concluded after 1 February 2020.
  • Taxation is applicable not at the moment of granting the share option but only when the share options are exercised.
  • Taxable value is a difference between the fair market value of the shares and the price paid by the employee for the shares.

Capital gain received by the employee after selling acquired shares is taxed.

  • Applicable taxes are paid by the employee.
  • Applicable personal income tax. Capital gain is taxed at 15/20% of the personal income tax compared to 20/32% applicable to the salary.
  • Taxable value is a difference between the sale price of the shares and the price paid by the employee for the shares. In case the employer has paid the applicable taxes for the shares upon exercise of the share options then the taxable base is the difference between the price at which the shares are further sold and the value of the shares from which the employer has paid the applicable taxes. For example, the employee received the shares for 1,000 EUR and later he/she sold them for 2,500 EUR, which means that the taxable value is 1,500 EUR.

Law firm ECOVIS ProventusLaw has over 10 years of experience in labor and corporate law consulting, dispute resolution among shareholders, drafting shareholder options. If you are considering introducing an employee option scheme and realising employee retention and motivation benefits associated with it, do not hesitate and contact us for advice on how to best structure and duly implement such scheme.

The content of this article is intended to provide a general guide to the subject matter. The expert’s advice should be sought about your specific circumstances.

Prepared by an attorney at law Mrs. Loreta Andziulytė and senior associate Ms. Milda Šlekytė.

Which Alternative To Choose: A Company Or A Branch?

Foreign companies seeking to develop their business in Lithuania very often have to decide on the most convenient legal form for their business. A subsidiary of a private limited liability company or a branch are two most common and efficient options. Before starting a business in Lithuania, it is essential to consider the key differences between a company and a branch and their legal and tax treatment, because this can significantly impact on their business in the future.

A company or a branch? Differences in formation, management and liability

It is essential for foreign companies thinking of starting a company or a branch to weigh the differences between the two legal forms. One relevant aspect is the establishment procedure, its complexity and duration. In both cases, the establishment procedure is quite similar. In either case the founder is required to submit the relevant founder’s documents, prepare and execute the documents of incorporation, have them notarised and registered with the companies’ register.

For a branch, the list of documents required from the founder is more extensive compared to a company (added to an extract from a foreign companies’ register and other documents of incorporation, there is a statutory requirement to submit copies of annual financial statements). Likewise, in the case of a branch, the authorised capital is not formed, so there is no requirement to deposit the amount of the authorised capital in the cumulative account. The requirement to form the authorised capital (the minimum amount of EUR 2500) and to open a cumulative account applies in the case of establishment of a company. Due to more stringent legal requirements, it can take more time to open a cumulative account for a founder who is a foreign entity, because the bank will need to complete special procedures to identify the beneficial owner of the foreign company.

Another relevant point for each founder to consider in choosing a legal form is management issues. In a branch, responsibility for its management rests with the head of the branch – general manager, whose status is equated to that of the company’s management body. Although under Lithuanian law a branch is not prohibited from appointing another management body – the management board, the procedure for the election of the management board or its powers are not governed by law. For this reason, it is advisable not to form the management board of a branch, because doing so can lead to difficulty in the conduct of the company’s own business. For instance, having the management board both in the company and its branch may lead to competition issues. Accordingly, in terms of management, a subsidiary is a more attractive option due to a broader structure and powers of the management bodies.

The key difference between a branch and a subsidiary lies in liability. From this perspective, a subsidiary is considered to be a more favourable legal form, because a subsidiary is a legal person with limited liability and is liable only to the extent of its assets, and only in highly exceptional cases enforcement may be levied against the shareholders/founders of the company. Meanwhile, the choice to establish a branch may be a risky one – if a branch has certain debts or outstanding liabilities, the person having the right of claim (creditor) would be entitled to enforce only against the assets of the branch or only against the assets of its founder (company), or firstly against the assets of the branch and if the claims cannot be satisfied in full, then against the assets of the founder, and vice versa. Enforcement against the assets of the branch and the founder can take place simultaneously. Thus, in the situation of a branch, the founding foreign company may be exposed to liability if the branch has debts.

Differences between tax treatment of a company and a branch

Apart from differences in legal liability, the legal form of a business also brings different tax implications. It is therefore necessary to consider the administrative burdens, prospective benefits, liability to pay value added tax (VAT), corporate income tax, and other obligations that each legal form entails.

Firstly, it is important to note that in the case of formation of a branch, both the branch and the founding company are required to register for tax purposes in Lithuania. Besides, the parent company is required to obtain a VAT identification number in Lithuania.

If a company is incorporated, it is automatically included in the Lithuanian Register of Taxpayers, and it becomes liable to register as a VAT payer only when its operating revenue generated (or anticipated) over the past 12 months is in excess of EUR 45 000, or if over the past calendar year the company acquired, or during the current calendar year anticipates to acquire goods from other Member States for an amount exceeding the threshold of EUR 14 000, also in other cases.

It is also noteworthy in the case of forming a subsidiary, if it itself arranges for the dispatch of goods to foreign countries, it may have to register for VAT and may be subject to VAT reporting obligations in foreign countries. In this respect, a branch would not incur additional obligations, because it is not a separate legal person and related obligations would be fulfilled on behalf of the company having established the branch.

One advantage of forming a company is that if the controlling company holds at least 10% of voting shares for a period of at least 12 months, dividends disbursed to the controlling company would not be subject to tax. Meanwhile, branches are not entitled to disburse dividends as they are not considered entities having their own separate legal existence.

In Lithuania, profit generated by a company is subject to corporate income tax at a rate of 15%, 5% or 0%. It should be noted that in Lithuania branches are deemed to be operating through a permanent establishment so that profit generated by branches is subject to corporate income tax at a rate of 15%. However, calculation of a taxable profit of a branch in Lithuania is not such an easy task to do, because there are many things to consider when determining revenue attributable to a branch: functions performed by the branch, risks assumed by it, the risk and capital ownership share.

A tax loss incurred by a company in Lithuania may be carried forward to the controlling company if certain conditions are met. Although the option of a tax loss carry-forward is not available for branches of Lithuanian entities under Lithuanian law, the founder can explore whether such option for a branch established in Lithuania is available under foreign tax laws.

Companies and branches are also subject to different accounting requirements. In Lithuania, companies are financially accountable entities and must therefore regularly file their financial statements with the manager of the registers of legal persons. Unlike companies, branches are not subject to such filing requirements. However, it is advisable for branches to keep their own accounting in order to simplify the recording of economic operations and events by the founding company.

To sum up, a subsidiary is recommended as a preferred form of business in Lithuania. The controlling company would be a separate legal entity with separate legal liability, enforcement against its assets would be greatly limited, also it would not be required to maintain separate accounts for the subsidiary, calculate corporate income tax payable in Lithuania. However, the best choice of legal form should be considered on a case-by-case basis.

The article is written by Martynas Bielskis and Giedrė Cesiulytė, Associates at COBALT.

Shareholders’ Agreement: Key Provisions To Include

It is often the case that when close friends decide to start a joint business, the only thing they lack is capital to bring a good idea to life. Before starting the business development process or involving investors (funds or independent investors – business angels) in a business, certain steps need to be taken to protect against potential future disputes. The most common way to start a business is to form a private limited liability company. Such form of a legal person provides the assurance that subsequently it will be easier to sell it or attract investors by offering shares in exchange for the invested funds.

One first step in setting up a private limited liability company is to enter into a shareholders’ agreement. A shareholders’ agreement is a legal instrument that enables company shareholders to regulate their mutual relations, especially those that do not fall under mandatory legal regulation. The following are some of the key terms (provisions) you should consider before signing a shareholders’ agreement.

Investments, business financing

In order for a shareholders’ agreement to be useful to the company and the shareholders, it is reasonable to include provisions on investing in the business developed by the company, i.e. how and in what proportions the shareholders will invest in the business, whether or not investments by the shareholders will be mandatory, etc. It is especially advisable to include such provisions when an investment fund (angel investor) acquires the shares in the company in exchange for its investment. In such cases, there is a need to include provisions on the size of investments the fund is required to make, the procedure for transfer of investments to the company, and provisions on how the existing proportion of the shares will be changed in certain scenarios, etc. It is also handy to include in a shareholders’ agreement provisions that enable to deal with situations when in the course of its business the company may reasonably lack funds to attain certain business goals. It can be provided in such cases that the company has a right to attract additional investors, for instance, by increasing the share capital. It should be noted that a fund that is already a shareholder and investor of the company may establish safeguards that additional investors may be attracted only with the written approval of the fund, etc.

Corporate governance, the competence of the management bodies

Shareholders are required to agree on the company’s management bodies and the scope of their competence. Any company is required to have the general manager and the general meeting of shareholders; however, when one of the shareholders is an investor (fund or angel investor), there can be proposals to form collegial management bodies – the management board and the supervisory board. These are non-obligatory company bodies in which the statutory supervisory functions are vested. For example, the management board oversees the activities of the key executive and may decide whether investments are used for the agreed purposes. Often professional investors seek to protect themselves, particularly in situations when the fund becomes a minority shareholder. In such cases specific guarantees in favor of the investor are included in a shareholders’ agreement, e.g. should the investor request to form the management board, the other shareholders undertake to vote for such resolution; one of the persons nominated by the fund is appointed to serve on the management board, or the general manager must be dismissed if the fund so requests. Thus, in the case of a professional investor joining a company, specific issues related to corporate governance are often covered in a shareholders’ agreement.

Transfer of shares

It is advisable to discuss the peculiarities of transfer (sale) of the shares in the shareholders’ agreement in case one or more shareholders decide to exit the business. Shareholders’ agreements often include provisions by means of which professional investors seek to gain certain control in the company in which they invest, e.g. it can be provided that throughout the term of the shareholders’ agreement the other shareholders will not be entitled to transfer (sell, exchange, gift) their shares to third parties. Also, shareholders’ agreements often contain provisions on the redemption of the shares which provide for precise time limits, prices, etc. It should be noted that specific provisions on the transfer of the shares may not be contrary to the mandatory (binding) statutory provisions and the articles of association of the company.

Distribution of profit and losses

In order to avoid disputes as the business is off and running, it is recommended to set in a shareholders’ agreement clear and precise guidelines along which the shareholders will distribute profit and losses. Most companies distribute a portion of their annual profit to the shareholders as dividends. However, in deciding on the distribution of dividends, companies may deviate from the standard model, because some companies tend to be more generous to their shareholders, while others choose not to pay dividends so that they can invest in business development, and in practice such cases are most common when the company has entered the stage of rapid business growth.

Venue and procedure of dispute resolution

Shareholders’ agreements frequently provide that in situations where shareholders fail to resolve disputes amicably, disputes are resolved by arbitration rather than litigation. Arbitration is considered to be a more attractive dispute resolution mechanism for elementary reasons: companies running a large and well-known business seek to retain their reputation and avoid publicity, so for the sake of confidentiality they select arbitration; besides, arbitration is preferred over litigation in order to avoid a dispute resolution process that may last for years. Also, there are other advantages to dispute resolution by arbitration: flexibility of the process because the parties may select arbitrators/mediators and the venue of dispute resolution; the binding nature of arbitral awards, etc. In any event, be it a court or an arbitral tribunal, it is a must to include dispute resolution provisions in a shareholders’ agreement.

To sum up, a shareholders’ agreement is a legal instrument which facilitates mutual relations between the shareholders and possibilities of attracting new investments. It also defines specific obligations of the shareholders towards each other and the company to help avoid or at least reduce the chance of disputes while growing the business.

The article is written by Giedrė Cesiulytė, Associate at COBALT

10 Reasons Why a Small Partnership (MB) Is Not Suitable For Startups

During the years, Startup Lithuania team has got various questions from startups, what legal entity is suitable for their new business. So today our partner TRINITI – Pan-Baltic business law firm, wants to share their insights why a small partnership (MB) is not suitable for Start-Ups.

First of all, only natural persons can be members of an MB, which means that legal persons are prevented from investing in MBs (Articles 2(1), 3(3) and 7(1) of the Republic of Lithuania Law on Small Partnerships (hereinafter – the Law)).

Second, the MB legal entity form is meant for small businesses, as well as for those who know each other well and want to participate in the management and activities of the MB (this is even specified on the website of the Ministry of Economy of the Republic of Lithuania). An MB can have a maximum of 10 members. This creates an obstacle for expanding and attracting more investors (Articles 2(2) and 3(3) of the Law).

Third, if it turns out at the end of the year that the MB operated at a loss, then the members of the MB are required to repay all amounts/advance payments that they had taken out of the MB prematurely or received as advance profits. The vast majority of start-ups are unprofitable for many years in a row, since they are initially looking for rapid growth rather than profit.

Fourth, members of an MB cannot be in an employment relationship with the small partnership itself (Article 7(4) of the Law). This means that an employment contract cannot be concluded between a member and the legal person itself. Employment contracts can only be concluded with employees who work for the small partnership, but who are not members of the MB. Therefore, it may be difficult to motivate employees by offering MB membership in the future (UAB equivalent – motivating employees by offering shares in the UAB).

Fifth, the MB is designed for people who want to create a small family business that does not require large investments. As well as for those who know each other well and want to participate in the management and activities of the MB.

Sixth, the disadvantage of an MB is that if you choose this type of legal form, it is not really possible to attract investors because an MB does not have shares, so the rights of the owners are equal. Each MB member has one vote in the MB membership meeting. And that is completely unacceptable for investors in start-ups. In order to attract additional funds, an UAB can issue new shares that shareholders pay a fixed amount of money to acquire; an MB does not have this option.

Seventh is that even though an MB is not required to have a minimum authorised capital, MB members pay contributions (the size and payment of which is established at the membership meeting), and the MB’s profit is distributed in proportion to the size of the member’s contribution (the articles of association may provide for a different distribution of profits).

Eighth, as a legal firm, the MB is not well known and understandable for the foreign investor because there are no known analogues in the world, and this becomes an obstacle/source of misgiving for foreign investors to invest in an MB.

Ninth is that since the MB does not have a clear procedure for voting and distributing profits, it may be more difficult to settle disputes between MB members.

Tenth, in terms of bookkeeping, an MB is only simpler than a UAB when the MB does not have any employees or is not a VAT payer.

Lithuania’s Crowdfunding Law: How Will It Work and What Does It Mean?

Some time ago, the Lithuanian Parliament passed the Law on Crowdfunding. Vytautas Šenavičius, Chairman of the Board at Lithuanian P2P and Crowdfunding Association and Partner at TVINS Law firm, says it is another step towards a startup-friendly jurisdiction. He has shared his insights on this legislation and explained its practical implications to Startup Lithuania’s readers.

According to the Bank of Lithuania, approximately 40 percent of SME loan applications are rejected in Lithuania, and 50 percent of Lithuanian residents hold their savings in cash. The number of rejected loans is even higher for the startups. Therefore during the last year the necessity for alternative financing and alternative investment opportunities in Lithuania was one of the top priorities of the Ministry of Finance and the Bank of Lithuania. With the ambition to become one of the most attractive FinTech destinations in Europe, this autumn Lithuania approved a number of regulatory changes: amended KYC regulation (enables non face-to-face identification), amended consumer credit rules related to peer to peer regulation. Finally last week the Parliament of the Republic of Lithuania passed the Law on Crowdfunding. The Law on Crowdfunding eliminates obstacles in Lithuania related to the crowdfunding business in Lithuania.

The Law on Crowdfunding entails the startups to raise funding in a new way. For the startup market alternative funding opportunity is extremely important given the funding from the credit institutions is not always possible and angel investors’ funding procedure could take a couple of months. Through the crowdfunding platform, the startup may get funding in a few weeks. Moreover, the opportunity to publish a startup’s business idea on a crowdfunding platform allows receiving prompt feedback on whether the crowd believes in your project. Startups who will decide to raise funding through crowdfunding platforms will, in general, have free marketing campaign in case their project will be funded – the knowledge about the startup and it’s idea will spread between investors, their friends, colleagues, media, etc.

In this article, we will briefly go through the key features of the Law on Crowdfunding which will come into force as of 1 December 2016 (the bank of Lithuania will draft implementing acts by 30 November 2016).

General requirements for crowdfunding

The law does not apply to crowdfunding based on non-financial considerations/incentives (donation and reward crowdfunding). A legal entity (though sometimes without such status) may be an operator of a crowdfunding platform. The operator of a crowdfunding platform must be domiciled in the Republic of Lithuania, save for the cases where entities established in the other Member States in accordance with the legal acts are entitled to act as intermediaries in forming transactions for financing without having registered their domicile in the Republic of Lithuania or with their branches established in the Republic of Lithuania. Funds can be granted through equity, non-equity, loan, other credit arrangements.

Requirements for the start of crowdfunding activities

The operator has the right to engage in crowdfunding activities after the operator is included by the Bank of Lithuania in the public list of crowdfunding platform operators. When applying to the supervisory authority for inclusion in the public list of crowdfunding platform operators, the operator must submit information related to members and managers (heads) of the platform operator, information on prudential requirements of the platform, a plan in case ongoing concern and other documents. In general, the supervisory authority makes a decision regarding inclusion in the list within 30 business days. Operators included in the list will in general be considered to be financial advisory firms.

The operator must also prepare the following information and documents:

  • the information on investment-related risks by providing their descriptions;
  • the information on organisational and administrative measures in place to prevent conflicts of interest;
  • a description of the procedure for using the crowdfunding platform;
  • rules for secondary trading in the crowdfunding platform provided the platform operator intends to engage in secondary trading;
  • the method of calculating the remuneration for the operator of crowdfunding platform paid by project owners and project investors;
  • the information on taxes applicable to a financing transaction and types of such taxes;
  • the terms and procedure of funds repayment to investors in the event the project owner does not raise a sufficient amount to develop the project;
  • the information on risk mitigation measures, if any;
  • rules for handling complaints of customers;
  • the procedure for implementing the rights of a personal data subject.

Restrictions and limitations

In the final draft, there are some amendments that boost competition for Lithuanian regulation. The project owner is not obligated to allocate its own funds to finance the project. Restrictions for the maximum amount to be invested do not apply to investors. Before providing an opportunity for an investor to enter into a financing transaction of a specific type (investment or lending) for the first time, the platform operator must carry out an assessment of the appropriateness of the specific type of financing transaction for that investor. When assessing the acceptability of the financing transaction for the investor, the platform operator must request from the investor to provide information on his knowledge and experience in the area of investments related to the type of anticipated financing transaction.

If the assessment of the appropriateness of the type of financing transaction to the investor reveals that a certain type of financing transaction is not acceptable to the investor, or if the investor refuses to provide information about his knowledge and experience in the area of investments or provides insufficient information, the platform operator may allow the investor entering into the financing transaction but must:

  • inform the investor that the type of financing transaction is not acceptable to the investor, or that non-provision of the required information prevents from determining whether the type of financing transaction is suitable to the investor;
  • provide the investor with information on investment-related risks.

The requirements listed above do not apply in the event the investor is an informed investor.

Conditions of raising funds through crowdfunding

No additional requirements related to raising funds apply to a financing transaction that is intended to raise an amount of less than EUR 100,000 in 12 months. The project owner wishing to enter into one or more financing transactions for the total amount ranging from EUR 100,000 up to 5 million euros in 12 months must draft a document specifying the information about the project owner and the proposed project, and submit it to the platform operator. The project owner wishing to enter into one or more financing transactions for the total amount of 5 million euros or more in 12 months can do so only by issuing securities in the manner established by the Law on Securities, i.e. by preparing a prospectus, and after obtaining approval of the supervisory authority.

Disclaimer:

The information provided herein is meant for information only in order to present future regulation in the Republic of Lithuania. The information contained in this document is not legal advice, and cannot be relied on as such; also it may be changed at any time without notice. Law firm TVINS does not accept liability for any losses incurred by a person acting in reliance on the information specified in this document. 

How to Ensure Intellectual Property Protection During the COVID-19 Pandemic?

COVID-19 makes a huge impact to the world`s economy and to each and every business, and it is hard to accurately predict consequences. In situations like these the most pressing issues precedes everything else - the safety and welfare of employees, sufficient cash flow, securing new orders and execution of existing ones; and the safety of intellectual property objects is pushed aside. Inadequate administration of intellectual property objects can lead to even larger damages later. 

Below we present the most important aspects of intellectual property protection during crisis:

  • Do not miss the deadlines to pay the fees – protection of the majority of intellectual property objects depends upon the paid fees, so it is crucial not to miss the deadlines to pay these. The majority of trademarks and patent offices extended the deadlines until the end of the quarantine. Also, if the deadline was missed because of important reasons, quite often the period to pay fees can be renewed. However, do not forget to pay the fees and do not postpone the payments as this can lead to the very end of protection of your intellectual property object, which will have an irreversible damage to your company.
  • Do not start to use your intellectual property object without properly protecting it. Quite often companies that face difficult financial situation decide that registration of trade marks, designs or inventions can wait for better times and start using them without protection. This leads to a complete loss of protection, because, for example, the invention that was used publicly cannot be patented any more.
  • Defend your rights. Despite of the fact that the dispute settlement institutions do not hold public meetings during quarantine, they are still working and reacting. So if your company`s rights to intellectual property objects are violated, do not hesitate to go to the police or court during the quarantine. This will help to stop the violation more efficient and to minimize the potential damage. 
  • If your company is going bankrupt, do not forget that intellectual property objects have their value that should be mirrored in the company`s balance sheet. The amount received after the sale of these possessions can cover quite a lot of company`s debts if they are properly assessed before selling.

TRINITI Managing Partner, Attorney, Patent Attorney Vilija Viešūnaitė

Can the Coronavirus be Considered as a Force Majeure?

The  coronavirus that has been lately spreading worldwide presents a number of challenges for business. To reduce the spread of the virus, Chinese and Italian companies have temporary suspended their operations. This resulted in the termination of a large part of contracts. These countries are very important business partners of Lithuania. Therefore, a question that many entrepreneurs are asking is: “Does the coronavirus can be considered as a force majeure?"

“The Civil Code of the Republic of Lithuania describes force majeure as a circumstance that was beyond the control of and that could not be foreseen by the party at the time of the conclusion of the contract. “Enterprise Lithuania”, as an organization promoting entrepreneurship, is asked everyday by business clients if this force majeure circumstance can be applied due to adverse business effects of coronavirus and due to emergency situation declared in Lithuania”, Daina Kleponė, the Managing Director “Enterprise Lithuania”, identifies a question that is frequently asked by the business entities of our country.

According to lawyers, the mutual agreement is the best way to determine when events can be considered a force majeure event: if one party claims being unable to fulfill the agreement by virtue of force majeure circumstance, and another party agrees with that, the event will be considered as force majeure. But what if the parties fail to reach an agreement?

“The courts have established that force majeure are unexpected events that neither party could have foreseen and has assumed no liability for them in the contract (for example, the increased price of meeting the obligation will not be considered as a force majeure event). The party wishing to take advantage of the fact of force majeure must also prove that there is no other way to fulfill its obligations and that it has taken all necessary measures in order to fulfill its contractual obligations. In each case, the fact of force majeure must be assessed individually”, explains Vytautas Kalmatavičius, the Partner of the law firm “Triniti Lithuania”.

 Kalmatavičius adds that in assessing whether the coronavirus outbreak and the state restrictions associated with it can be considered as a force majeure event, attention must be paid to how force majeure event had an impact over a failure to fulfill the contract and how force majeure circumstances are described in the contract. It is also necessary to assess whether the party has taken all necessary measures to fulfill its contractual obligations.

“Viral epidemics are usually not considered as a force majeure event. The Government of China has announced that, because of the restrictions imposed by it, the Government will issue the companies concerned with force majeure certificates that would help Chinese businesses in disputes with foreign entities. It is likely that, due to assessment of events by the Government of China and assistance to companies, Chinese companies will try achieving that failure to fulfill their contracts would be considered as a force majeure event”, comments V. Kalmatavičius.

It is important to draw attention to the fact that it is laid down by Lithuanian laws that cases where the goods needed to fulfill the obligation are not available on the market, the party to the contract does not have the necessary financial resources or the debtor's counterparties are in breach of their obligations are not considered as a force majeure event. It means that Lithuanian companies, whose product or service suppliers are companies based in China, usually will not be able to resort to force majeure as a reason for non-performance of the contract. In this case, the company must look for suppliers from other countries. Also, if in the future other countries, including Italy, will take security measures that are similar to those taken in China, they, probably, will not be considered as force majeure because, knowing the Chinese example, it is possible to predict in advance what measures governments can take to stop the spread of the virus and it is possible to prepare for that ahead of time.

In Lithuania, legal entities are issued with certificates attesting to force majeure circumstances by the Chambers of Commerce, Industry and Crafts of Vilnius, Kaunas, Klaipėda, Šiauliai and Panevėžys.

According to Jūratė Radzevičienė, the lawyer of Vilnius Chamber of Commerce, Industry and Crafts, force majeure certificates are issued after individually examining the resulting situation and if those circumstances occurred and existed in the territory of the Republic of Lithuania.

“For example, if force majeure circumstance occurred in China, we have no reason to issue the organization with this certificate. However, if, due to coronavirus, prohibitions or restrictions imposed by the Government of the Republic of Lithuania, that affect the business, cause business losses or other negative consequences, will be formulated, then organizations having experienced difficulties will be able to apply for a force majeure certificate”, explains J. Radzevičienė.

Specialists note that, in concluding contracts, it is necessary, as a general rule, not only specify a force majeure circumstance that would be applicable under the law of a particular country, but it is also very important to additionally discuss what actions and specific commitments will be taken in the event of force majeure. Prompt notice given to the other party on force majeure event is another important aspect. In the event of delay and after having missed the deadline specified in the contract, it is deemed that the terms of the contract were not implemented, and then liability and loss must be borne by the party has experienced a force majeure circumstance.

 More information for business in terms of COVID-19 you will find here

Business Relations between Startups and Investors. How to Distribute Intellectual Property Rights

Startups, as companies running a business in high value-added sectors, with their high potential for rapid growth but without a sustainable business model, are forced to look for investors in one form or another. Most of the times, only after finding one or more investors, startups can start realizing their business ideas. Standard possibilities for investments are debt or equity financing. Debt is defined as something, usually money, owed by one party (the borrower or debtor) to a second party, while equity financing is the method of raising capital through the transaction of shares and is a more suitable alternative for starting startups with little to no resources. Any other form of financing is a subsystem or a combination of either of these two.

 Unique ideas are the main driving force behind most of the startups, and for this reason, it is also the most valuable assets. This makes both equity and debt investors very concerned about the security of their investments by obtaining a protection interest in the intellectual property (IP) assets but in different kind of ways. By granting debt, investor most likely is going to use security measures where startups pledge their intellectual property. In comparison, equity financing investor is more concerned about proper security and quality of IP assets since he/she becomes a partial owner of it.

 It is expected that a startup will have full possession of all IP that is critical to the development and progress of the business. Even if an enterprise is not registered yet, all IP must be held by an entrepreneur. An investor will make sure that the business he plans to invest in owns the IP for its technology or business idea. In addition to this, not all IP assets are equal, and the value of IP assets depends on a combination of legal, economic, and technical factors. For this reason, it is also advantageous to obtain an unbiased assessment of these assets from a professional who understands the nature of IP assets.

 Collaborative activities that bring together the interests of investors, specialists of all kinds, young entrepreneurs, and other parties can often raise questions about who eventually ends up owning the intellectual property rights. Besides, there may also be experts who help startups with design, websites, programming, research, marketing materials or something else. Unless these people work under proper agreement, the startup company itself may not own the rights to the work of these people. Therefore, the first and foremost goal of a startup or entrepreneur is to determine on what intellectual property their business model is based on and identify who owns it.

 Our recommendation is to avoid co-ownership where two or more parties have shared ownership and control of the same intellectual property rights, especially with patents or trademark registry. Co-ownership very seldom delivers the desired purpose and only increase the odds of potential conflicts. Additionally, each co-owner decision is required for practically any or all disposal of the intellectual property rights, and this complicates possibility to use IP and to defend it as well. Alternative options, where all intellectual property is registered in the name of a startup or shared between founders or investors, most of the time, are better options at protecting even the collective interest. By ensuring ownership and protection of IP assets, collaborative projects have higher chances to be more efficiently implemented, and litigation between partners avoided. 

The ideal solution would be if a startup could understand and even register rights for its IP assets even before finding investments, so it would be more likely taken seriously by possible investors. The distribution of intellectual property at the starting point allows for proper IP assets allocation not only by finding investors but even upon the termination of the business relationship with them.

In summary, the goal of every startup is to protect and maintain its intellectual property base, which would allow it to continue operations. This achieved by registration of IP assets, entering into IP distributing arrangements and by well-designed confidentiality and non-disclosure arrangements. These tools will help to control IP privacy and protect the startup interest not only in theory but also in practice against any possible or actual investors, employees and/or partners. 

The article is written by Paulius Milkevičius, Lawyer at METIDA Law Firm Zaboliene and Partners.