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On the official offer to purchase securities

Case No. 25/04

 

 

THE CONSTITUTIONAL COURT OF THE REPUBLIC OF LITHUANIA

 

RULING

ON THE COMPLIANCE OF PARAGRAPH 1 (WORDING OF 17 DECEMBER 2001) OF ARTICLE 19 OF THE REPUBLIC OF LITHUANIA’S LAW ON THE SECURITIES MARKET WITH THE CONSTITUTION OF THE REPUBLIC OF LITHUANIA AND ON THE PETITION OF THE PANEVĖŽYS CITY LOCAL COURT, THE PETITIONER, REQUESTING AN INVESTIGATION INTO WHETHER PARAGRAPH 2 (WORDING OF 17 DECEMBER 2001) OF ARTICLE 16 OF THE REPUBLIC OF LITHUANIA’S LAW ON THE SECURITIES MARKET IS NOT IN CONFLICT WITH THE CONSTITUTION OF THE REPUBLIC OF LITHUANIA

 

17 January 2006

Vilnius

 

The Constitutional Court of the Republic of Lithuania, composed of the Justices of the Constitutional Court: Armanas Abramavičius, Toma Birmontienė, Egidijus Kūris, Kęstutis Lapinskas, Zenonas Namavičius, Ramutė Ruškytė, Vytautas Sinkevičius, Stasys Stačiokas, and Romualdas Kęstutis Urbaitis

The court reporter—Daiva Pitrėnaitė

Inga Jarukaitienė, senior advisor of the Law Department of the Office of the Seimas, and Vilija Račkauskienė, the advisor of the said department, acting as the representatives of the Seimas of the Republic of Lithuania, the party concerned

The Constitutional Court of the Republic of Lithuania, pursuant to Articles 102 and 105 of the Constitution of the Republic of Lithuania and Article 1 of the Law on the Constitutional Court of the Republic of Lithuania, in its public hearing, on 16 January 2006, considered case No. 25/04 subsequent to the petition of the Panevėžys City Local Court, the petitioner, requesting an investigation into whether Article 19 and Paragraph 2 of Article 16 of the Republic of Lithuania’s Law on the Securities Market are not in conflict with Article 23, Paragraph 1 of Article 46 and Paragraph 1 of Article 48 of the Constitution of the Republic of Lithuania, and the constitutional principle of a state under the rule of law.

The Constitutional Court

has established:

I

The Panevėžys City Local Court, the petitioner, considered a civil case. By its ruling, the court suspended the consideration of the case and applied to the Constitutional Court with the petition requesting an investigation into whether Article 19 and Paragraph 2 of Article 16 of the Law on the Securities Market (hereinafter also referred to as the Law) are not in conflict with Article 23, Paragraph 1 of Article 46, Paragraph 1 of Article 48 of the Constitution, and the constitutional principle of a state under the rule of law.

II

The petition of the petitioner is based on the following arguments.

1. In Paragraph 1 of Article 19 of the Law it is prescribed that in case the person, acting either alone or together with other persons, acquires more than 40 percent of votes of the issuer at the general meeting of the shareholders, he must in 30 days transfer the securities that exceed this limit, or submit an official offer to buy up the remaining securities of the accountable issuer which grant the right to vote and the securities confirming the right to acquire the securities granting the right to vote. In the opinion of the petitioner, it means that the person must against his will transfer the property, while under Article 23 of the Constitution, the property may only be seized for the needs of society in accordance with the procedure established by law and shall be justly compensated for.

2. Under Paragraph 2 of Article 16, “the head of the issuer shall also have the votes of other heads of the issuer”. According to the petitioner, this provision may violate the right of private ownership, individual freedom of economic activity and initiative of other persons (Paragraph 1 of Article 46 of the Constitution), as well as the right to freely choose a job or business (Paragraph 1 of Article 48 of the Constitution).

III

In the course of the preparation of the case for the Constitutional Court’s hearing, written explanations from the representatives of the Seimas, the party concerned, who were Eglė Švilpaitė, senior advisor of the Law Department of the Office of the Seimas, and Vilija Račkauskienė, the advisor of the said department, as well as a letter from Inga Jarukaitienė, senior advisor of the Law Department of the Office of the Seimas, approving of the written explanations provided by E. Švilpaitė and V. Račkauskienė, were received. According to the representatives of the party concerned, the impugned provisions of the Law are not in conflict with the Constitution and their position is grounded on the following arguments.

1. A person, who transfers the securities that exceed the limit specified under the Law, gets a compensation for the shares—the equivalent of the held property and non-property rights in terms of money. Thus, the legal regulation established in Article 19 of the Law does not mean seizure of the property. Even though the provisions of this article restrict the right of ownership, they are in line with the provisions of the Constitution and the jurisprudence of the Constitutional Court.

2. In the opinion of the representatives of the party concerned, the restriction established in Paragraph 1 of Article 19 of the Law is in line with the requirement of lawfulness because the duty to transfer the shares that exceed the limit specified in this paragraph is stated clearly and unambiguously, and is established in a law published in the official gazette Valstybės žinios. This restriction is also in line with the requirement of necessity in a democratic society, because a person who acquired the shares entitling to more than 40 percent of votes can make all the crucial decisions on the management of the enterprise without an assent of other shareholders, he can also block the decisions offered by other shareholders, therefore, there must be a real possibility for these shareholders to withdraw from the appropriate activity; the duty established in Paragraph 1 of Article 19 of the Law is meant to ensure the protection of the rights of the minority shareholders.

3. According to the explanation of V. Račkauskienė and E. Švilpaitė, a person, who has purchased the controlling block of shares, has the possibility of choosing whether to transfer the securities that exceed the limit of 40 percent, or to buy up the remaining securities. In the first case he is compensated for the securities at the market price, while in the second case the lowest limit of the price is established having taking into account the market value of the shares for which the offeror has acquired the shares in the period of 12 months. Thus, the property interests of the said person are not violated, nor is the established restriction disproportionate.

4. In the opinion of the representatives of the party concerned, the legal regulation established in Paragraph 2 of Article 16 of the Law may not be assessed separately from the legal regulation established in Article 19 and other articles of the Law, as well as from the purposes of the Law. If a certain provision on counting the votes were not entrenched in Paragraph 2 of Article 16 of the Law, the heads of the enterprises who hold the controlling block of shares and act together, would be able to not let the rest of the shareholders to effectively control the enterprise, nor implement other rights. Thus, the purposes of the whole Law, inter alia, the purpose of Article 19 thereof, would not be achieved.

IV

In the course of the preparation of the case for the Constitutional Court’s hearing, written explanations from K. Daukšys, Minister of Economy of the Republic of Lithuania, R. Šarkinas, Chairperson of the Board of the Bank of Lithuania, V. Poderis, Chairperson of the Securities Commission of the Republic of Lithuania, D. Kriaučiūnas, Director General of the European Law Department under the Government of the Republic of Lithuania, and A. Čepas, Director of the Law Institute, were received.

V

At the hearing of the Constitutional Court, I. Jarukaitienė and V. Račkauskienė, the representatives of the Seimas, the party concerned, virtually repeated the arguments set forth in the written explanations of E. Švilpaitė and V. Račkauskienė.

I. Jarukaitienė also stated that the duty to submit the obligatory official offer to buy up the remaining securities has been applied in the European Union already since 1977 and it is consolidated in the Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids.

V. Račkauskienė also called attention to the fact that Paragraph 1 of Article 46 of the Constitution establishes the duty of the state to regulate economic activity so that it serves the general welfare of the Nation; thus, the state has the right to establish the restrictions of the economic activity if they are necessary to harmonise the interests of the persons engaged in the economic activity and to ensure the possibilities for all persons to engage themselves in business.

The Constitutional Court

holds that:

I

1. Article 1 of the Republic of Lithuania’s Law on Amending the Law on Public Trading in Securities, adopted by the Seimas on 17 December 2001, amended the then Republic of Lithuania’s Law on Public Trading in Securities, which was set forth in the new wording, also by changing its title—it was named the Law on the Securities Market. The Law on the Securities Market came into force on 30 December 2001. It was more than once amended and/or supplemented.

2. The Panevėžys City Local Court, the petitioner, requests an investigation into whether Article 19 and Paragraph 2 of Article 16 of the Law on the Securities Market are not in conflict with Article 23, Paragraph 1 of Article 46, Paragraph 1 of Article 48 of the Constitution, and the constitutional principle of a state under the rule of law.

3. At the time of the adoption of the ruling of the Panevėžys City Local Court, by which it applied to the Constitutional Court, Articles 16 and 19 of the Law were set forth in their primary wording, i.e. of 17 December 2001 (Official Gazette Valstybės žinios, 2001, No. 112-4074).

4. The petitioner grounds his doubt on the compliance of Paragraph 2 (wording of 17 December 2001) of Article 16 of the Law with the Constitution on the fact that the provision “the head of the issuer shall also have the votes of other heads of the issuer” of this paragraph may violate the right of private ownership and individual freedom of economic activity and initiative of other persons (Paragraph 1 of Article 46 of the Constitution), as well as the right to freely choose a job and business (Paragraph 1 of Article 48 of the Constitution).

5. It should be noted that the petitioner did not present any legal arguments in what manner and how the said provision of Paragraph 2 (wording of 17 December 2001) of Article 16 of the Law may violate the right of private ownership and individual freedom of economic activity and initiative of other persons entrenched in Paragraph 1 of Article 46 of the Constitution or the right to freely choose a job and business, entrenched in Paragraph 1 of Article 48 of the Constitution.

6. Under Item 5 of Paragraph 2 of Article 67 of the Law on the Constitutional Court, in the ruling of the court by which the court applies to the Constitutional Court with a petition requesting an investigation into whether the legal act is not in conflict with the Constitution, legal arguments presenting the opinion of the court on the conflict of a law or other legal act with the Constitution must be specified.

In its ruling of 12 December 2005 the Constitutional Court has held that “the requirement to indicate the legal arguments presenting the opinion of the court on the conflict of a law or other legal act with the Constitution arising from Item 5 of Paragraph 2 of Article 67 of the Law on the Constitutional Court, means that the courts that apply to the Constitutional Court with the petition requesting an investigation into whether the law or other legal act (part thereof) is not in conflict with the Constitution, while arguing their opinion presented in the petition that the law or other legal act (part thereof) is in conflict with the Constitution, may not confine themselves to general reasoning or statements that the law or other legal act (part thereof), in their opinion, is in conflict with the Constitution, but must clearly indicate which impugned articles (paragraphs, items thereof) and to what extent, in their opinion, are in conflict with the Constitution, and to reason their position on the compliance of every impugned provision of the legal act (part thereof) with the Constitution with clearly formulated legal arguments”.

7. Under Article 70 of the Law on the Constitutional Court, in the case that a petition or attachments thereto fail to comply with, inter alia, the requirements set forth in Article 67, the petition must be returned to the petitioner. The return of a petition shall not take away the right to apply to the Constitutional Court according to the common procedure after removal of the deficiencies thereof.

8. Taking account of the arguments set forth, the part of the case on the compliance of Paragraph 2 (wording of 17 December 2001) of Article 16 of the Law with the Constitution must be dismissed and the petition to this extent must be returned to the petitioner.

9. Even though the petitioner requests an investigation into whether Article 19 (wording of 17 December 2001) of the Law is not in conflict with the Constitution, it is obvious from the petition that he had doubts not on the compliance of the whole said article with the Constitution but only on the compliance of Paragraph 1 (wording of 17 December 2001) of this article with the Constitution to the extent that it entrenched the alternative duty of a person who, acting either alone or together with other persons, acquired more than 40 percent of votes at the general meeting of the shareholders of the accountable issuer, to either transfer the securities that exceed this limit, or submit an official offer to buy up the remaining securities of the accountable issuer that grant the right to vote and the securities confirming the right to acquire the securities granting the right to vote.

Thus, the petitioner virtually impugns the constitutionality of the institute of the obligatory transfer of securities and of the institute of submission of the obligatory official offer to buy up the remaining securities (to the extent by which these institutes are entrenched in Paragraph 1 of Article 19 of the Law (wording of 17 December 2001)).

10. It should be mentioned that the Seimas amended Paragraph 1 (wording of 17 December 2001) of Article 19 of the Law by Article 21 of the Law on Amending and Supplementing the Law on Public Trading in Securities, adopted on 23 June 2005 (which came into force on 12 July 2005) and stipulated that the said alternative duty is held by the person who, acting either alone or together with other persons, acquires more than 40 percent of votes at not any but precisely at the meeting of shareholders of the accountable issuer, founded in the Republic of Lithuania.

11. Even though the petitioner requests an investigation into whether Paragraph 1 (wording of 17 December 2001) of Article 19 of the Law to the specified extent was not in conflict with, inter alia, the entire Paragraph 1 of Article 48 of the Constitution, it is obvious from the arguments of the petition that it is doubted on the compliance (to the specified extent) of Paragraph 1 (wording of 17 December 2001) of Article 19 of the Law with the provision “each human being may freely choose <...> business” of Paragraph 1 of Article 48 of the Constitution.

II

On the compliance of Paragraph 1 (wording of 17 December 2001) of Article 19 of the Law on Public Trading in Securities with Article 23, Paragraph 1 of Article 46 and Paragraph 1 of Article 48 of the Constitution and the constitutional principle of a state under the rule of law.

1. In order to decide whether Paragraph 1 (wording of 17 December 2001) of Article 19 of the Law was not in conflict with the Constitution to the extent that it entrenched the alternative duty of the person who, acting either alone or together with other persons, acquired more than 40 percent of votes at the general meeting of the shareholders of the accountable issuer, to either transfer the securities that exceed this limit, or submit an official offer to buy up the remaining securities of the accountable issuer that grant the right to vote and the securities confirming the right to acquire the securities granting the right to vote, it is necessary to ascertain the purpose and essence of the institute of the obligatory transfer of securities and of the institute of the submission of official offer to buy up the remaining securities.

2. In a joint-stock company, a situation could occur where some shareholder, acting either alone or together with other persons, acquires such a number of the shares of the enterprise that he can control the activity of the enterprise and determine the decisions made. Thus, the possibilities of other shareholders, especially of the small ones, to influence the activity of the enterprise respectively decrease and the value of the shares they hold may decrease. The protection of the rights of such shareholders is a public interest. The legislature, in implementing, inter alia, the provision of Paragraph 2 of Article 23 of the Constitution that the rights of ownership shall be protected by law, also has the powers to establish such protective measure for the property rights of other shareholders as the obligatory transfer of securities when one of the shareholders (acting either alone or together with other persons) acquires the shares that grant more votes at the meeting of shareholders of the accountable issuer than the grounded and reasonable limit established in the law.

It should be held that there are no legal arguments allowing stating that the limit of 40 percent of votes at the meeting of shareholders of the accountable issuer established in Paragraph 1 (wording of 17 December 2001) of Article 19 of the Law is groundless, unreasonable or that the obligation to transfer the securities (by reimbursement) after that limit is exceeded is disproportionate to the objective sought, which is to protect property rights of other shareholders, especially the small ones, i.e. the value entrenched in Article 23 of the Constitution.

3. The institute of submission of the obligatory official offer to buy up the rest of securities is also meant to protect property rights of other shareholders, especially the small ones. In its ruling of 12 December 2005, the Constitutional Court held: the purpose of the institute of the submission of the obligatory official offer to buy up the rest of securities is to protect the rights of small shareholders, first of all rights of ownership, in cases when a certain subject (shareholder) either alone or together with other subjects acquires the portion of the joint-stock company which enables him (either alone or together with other subjects) to control the activity of the joint-stock company in question and due to this the opportunities of small shareholders to influence the activity of this joint-stock company decrease, thus, the value of shares belonging to them may decrease as well; the essence of the obligatory official offer is that the subject who has acquired (either alone or together with other subjects) the portion of shares of a joint-stock company that enables him to control the activity of the company must submit the obligatory official offer to buy up the shares belonging to the small shareholders, while the latter must be given an opportunity to sell their shares for not any but a fair price; the said rule of the fair price, as the institute of obligatory official offer in general, permits the small shareholders to choose whether to sell their shares and withdraw from the company after a certain subject (shareholder) either alone or together with other subjects acquires the portion of the joint-stock company which enables him (either alone or together with other subjects) to control the activity of the joint-stock company in question, or to remain small shareholders.

Thus, the institute of submission of the obligatory official offer to buy up the remaining securities is not in itself in conflict with Article 23 of the Constitution, but, on the contrary, it must help to protect the value entrenched in this article of the Constitution.

4. Both the institute of the obligatory transfer of securities and the institute of the submission of official offer to buy up the remaining securities as measures to protect the rights of small shareholders are entrenched in laws of various states of the world. It should also be noted that the institute of the submission of official offer to buy up the remaining securities is also entrenched in the legal acts of the European Union, as in the Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids.

5. While deciding whether Paragraph 1 (wording of 17 December 2001) of Article 19 of the Law was not in conflict with Article 23 of the Constitution to the extent that it entrenched the alternative duty of the person who, acting either alone or together with other persons, acquired more than 40 percent of votes at the general meeting of the shareholders of the accountable issuer, either to transfer the securities that exceed this limit, or to submit an official offer to buy up the remaining securities of the issuer that grant the right to vote and the securities confirming the right to acquire the securities granting the right to vote, the fact is also important that under the law, a person who, acting either alone or together with other persons, has acquired more than 40 percent of votes at the general meeting of the shareholders of the accountable issuer, had and has the right to choose himself whether to transfer the securities that exceed the specified limit or to submit the official offer to buy up the remaining securities of the accountable issuer that grant the right to vote and the securities confirming the right to acquire the securities granting the right to vote.

6. Taking account of the arguments set forth, the conclusion should be drawn that Paragraph 1 (wording of 17 December 2001) of Article 19 of the Law ,to the extent that it entrenched the alternative duty of the person who, acting either alone or together with other persons, acquired more than 40 percent of votes at the general meeting of the shareholders of the accountable issuer, either to transfer the securities that exceed this limit, or to submit an official offer to buy up the remaining securities of the accountable issuer that grant the right to vote and the securities confirming the right to acquire the securities granting the right to vote, was not in conflict with Article 23 of the Constitution.

7. Having held that, it should also be held that by means of the impugned legal regulation neither the provision of Paragraph 1 of Article 46 of the Constitution, stating that Lithuania’s economy shall be based on the right of private ownership and individual freedom of economic activity and initiative, nor the provision of Paragraph 1 of Article 48 of the Constitution, stating that each human being may freely choose a business, nor the constitutional principle of a state under the rule of law were violated.

Conforming to Articles 102 and 105 of the Constitution of the Republic of Lithuania and Articles 1, 53, 54, 55, 56, 67 and 70 of the Law on the Constitutional Court of the Republic of Lithuania, the Constitutional Court of the Republic of Lithuania gives the following

ruling:

1. To recognise that Paragraph 1 (wording of 17 December 2001; Official Gazette Valstybės žinios, 2001, No. 112-4074) of Article 19 of the Republic of Lithuania’s Law on the Securities Market, to the extent that it entrenched the alternative duty of the person who, acting either alone or together with other persons, acquired more than 40 percent of votes at the general meeting of the shareholders of the accountable issuer, either to transfer the securities that exceed this limit, or to submit an official offer to buy up the remaining securities of the accountable issuer that grant the right to vote and the securities confirming the right to acquire the securities granting the right to vote, was not in conflict with the Constitution of the Republic of Lithuania.

2. To dismiss the part of the case on the compliance of Paragraph 2 (wording of 17 December 2001; Official Gazette Valstybės žinios, 2001, No. 112-4074) of Article 16 of the Republic of Lithuania’s Law on the Securities Market with the Constitution of the Republic of Lithuania and to that extent to return the petition to the Panevėžys City Local Court, the petitioner.

This ruling of the Constitutional Court is final and not subject to appeal.

The ruling is pronounced in the name of the Republic of Lithuania.

Justices of the Constitutional Court:           Armanas Abramavičius

                                                                                Toma Birmontienė

                                                                                Egidijus Kūris

                                                                                Kęstutis Lapinskas

                                                                                Zenonas Namavičius

                                                                                Ramutė Ruškytė

                                                                                Vytautas Sinkevičius

                                                                                Stasys Stačiokas

                                                                                Romualdas Kęstutis Urbaitis